Hardship clauses
The hardship clause is a type of renegotiation clause that usually requires the parties to enter into renegotiations when unforeseen circumstances that are beyond the party’s reasonable control, and that cannot reasonably be avoided or overcome, have rendered the continued performance of the contract excessively onerous. Unlike a force majeure clause, the traditional hardship clause does not require that performance is hindered or impossible, nor relieve a party from its liability for non-performance of the contract. Instead, the hardship clause places upon the parties a duty to renegotiate the contract in the event of hardship, the purpose of which is to restore the balance of the contractual rights and obligations between the parties. In the event the parties do to not come to an agreement, the hardship clause usually contains a subsidiary mechanism that stipulates either that (i) the contract shall be revised by a given arbitral tribunal or court of law, (ii) the contractual relationship shall continue as is, or (iii) the contract shall terminate. Hardship clauses may therefore be a tool to mitigate the risks of non-performance and the subsequent legal consequences of breach of contract in markets with increased sensitivity to geopolitical, economic or regulatory changes. The clause is most commonly found in extensive and long-term contractual relationships in the energy-, and construction industry (typically within shipping, and offshore).
Duties under a hardship clause
When the parties have incorporated a hardship clause and hardship occurs, the question becomes: what actions are the parties required to take, to fulfil their duty to renegotiate under the clause. Renegotiations can be costly and time consuming, and it will normally be in the parties’ interests to limit the costs of renegotiations, especially if one of the parties consider it a better option to have a subsidiary mechanism in the clause take effect.
The duty to renegotiate under the hardship clause will, in large part, be determined by the governing law. As English law is not an uncommon choice for contracts between parties from different jurisdictions, the parties should be aware that a contractual duty to renegotiate in Norwegian and English law is not necessarily the same.
Hardship clauses under Norwegian and English law
In Norwegian law, vague or unclear contract wording may generally be supplemented with the background law, case law, and a broader range of considerations including reasonableness and public policy. Norwegian law could therefore allow for a rather wide range of additional rights or obligations being interpreted into the hardship clause. English law favors party autonomy and predictability, therefore placing greater emphasis on the wording of the contract, allowing only a narrow access to supplement the contract. In English law, for a term to be implied in fact (i.e. not by statute), it must either be necessary for the business efficacy of the contract or be so obvious that it goes without saying.[1] Terms that can readily be implied into the hardship clause are therefore generally limited to certain minimum requirements necessary for negotiations, such as a duty to participate in meetings and to reply to the other party’s offers or requests.
Under Norwegian law, the duty of good faith (nw. lojalitetsplikten) constitutes mandatory background law and applies as a general principle to contracts between commercial parties. It is generally assumed that the Norwegian duty of good faith cannot be derogated from in the contract.[2] The duty to renegotiate under the hardship clause will therefore be supplemented with a duty of good faith under Norwegian law.
Conversely, as a general rule, English law does not recognize good faith as a general principle.[3] While a duty of good faith may be more readily implied into so-called relational contracts (i.e. contracts which form a long-term relationship), English case law shows that the threshold to imply a duty of good faith into a commercial contract is high. The duty to renegotiate under the hardship clause will therefore as a main rule not be supplemented with a duty of good faith, unless the parties have expressly agreed on such a duty (described with certain periods or alternative solutions) in the contract.
Hardship clause and the duty of good faith
This difference between English and Norwegian law may have an impact on the effectiveness of the hardship clause. An apparent problem of the clause is that a party who has little or no intention of agreeing to an amendment to the contract, may still outwardly give an impression of a willingness to negotiate, making breach of the clause hard to assess. Negotiations primarily comprise commercial assessments by the parties. Both Norwegian and English courts are quite reluctant to overrule commercial assessments made by the parties.[4] Supplementing the hardship clause with a duty of good faith may aid in mitigating these issues, as a duty of good faith places upon the parties additional obligations, making the duty to renegotiate more effective and arguably easier for a court of law to assess.
However, as we have explained, the content of a duty of good faith differs in Norwegian and English law. Pursuant to Norwegian law, good faith constitutes a duty of loyal and mindful conduct.[5] Generally, this means that the party must take the other party’s interests into account.[6] A party who has no intention of amending the contract but fails to notify the other party may be in breach of the duty of good faith, because they are effectively wasting the other party’s time and resources on renegotiations that have no prospect of being successful. Furthermore, the Norwegian duty of good faith places upon the contracting parties a duty to inform in the pre-contractual stage,[7] which generally involves an obligation to inform the other party of significant conditions that the party knew or should have known of, and that is considered have affected the other party’s decision to enter into the contract. As a renegotiation pursuant to a hardship clause has similarities with the pre-contractual negotiations, the parties can be also expected to have a duty to disclose such information to the other party during the renegotiations.
English case law has established that a duty of good faith places on the parties a duty to refrain from conduct that is “commercially unacceptable to reasonable and honest people, albeit that they would not necessarily regard it as dishonest”.[8] The Court of Appeals has expressed that “opportunistic, underhand and exploitative” conduct, would be a breach of the duty of good faith.[9] The threshold for a breach of duty of good faith is therefore higher in English law than in Norwegian law. No apparent general duty for parties to a commercial contract to place the other party’s interests ahead of their own stems from the English duty of good faith.
Conclusion
In conclusion, the hardship clause can offer the parties an added comfort that the parties will make an effort to rebalance the contractual relationship in the event of hardship. The parties should however be aware that the contractual obligations under the hardship clause are more extensive under Norwegian law than under English law.
[1] Marks & Spencer Plc v BNP Paribas Securities Services Trust Co. (Jersey) Ltd [2015] UKSC 72, para. 15-31.
[2] Nazarian, Henriette. Lojalitetsplikt i kontraktsforhold, Oslo: Cappelen Akademisk Forlag, 2007, page 136.
[3] Mid Essex Hospital Services v Compass Group [2013] EWCA Civ 200, para. 105.
[4] Astor Management AG v. Atalaya Mining Plc [2017] EWHC 425 (Comm,) para. 71, HR-2018-2371-A para. 122.
[5] Rt. 2002 s. 173 page 179.
[6] Haaskjold, Erlend. Kontraktsforpliktelser, 2. ed., Oslo: Cappellen Damm AS, 2013, page 78.
[7] HR-2025-251-A para. 79.
[8] Compound Photonics UK Ltd, Re, Faulkner v Vollin Holdings Ltd [2022] EWCA Civ 1371, para. 241.
[9] Health and Case Management Ltd v Physiotherapy Network Ltd [2018] EWHC 869 (QB), para. 129.