The legal concept of hardship is particularly applicable in the context of the present COVID-19 pandemic situation and the control measures imposed. The current circumstances meet the requirements for an unforeseeable event within the meaning of the law, and many sectors are expected to be so heavily affected by the pandemic that it would actually violate the adequacy of considerations under contracts concluded prior to declaring the state of emergency.
Hardship entitles parties to a contract to request the court to amend or terminate the contract concluded between them. A party may resort to this remedy in the occurrence of such circumstances which the parties could not and were not obliged to foresee and whereas the preservation of the contractual obligations would be contrary to fairness and good faith.
Is the concept of hardship actually applicable? Could it be that due to the specifics in the legal framework, in many cases parties to a contract would not be able to rely on the concept of hardship?
The short answer is yes. The analysis of the various legal aspects of the concept, as well as the case law interpretation show that the possibilities to actually apply this legal concept are quite limited.
- Constitutive court claim
Under the current legislation, hardship can only be exercised through a court claim which is by its nature constitutive and amendments to the legal and property status of the parties will have only future effect. In general practice this means that such claim would be inapplicable in any situation where the party making the claim has already failed to perform its obligations under the contract and/or the contract has been terminated, rescinded or its performance has already been completed. For instance, if a lease contract has been concluded at a pre-state of emergency price levels, it may turn out that the lessee is no longer able to pay the agreed price in the new economic situation. In order to be able to file a claim for amending the contract on the grounds of hardship, the lessee will have to make all rental payments in a timely manner and within the agreed terms, otherwise there is a risk of the contact being rescinded by the lessor due to non-performance. What is more, the lessee will have to continue to pay the rental price even after the claim has been filed until the final court decision on the dispute is issued and only then the rental price could be eventually amended.
Owing to its specificities, hardship cannot serve as grounds for filing an objection to a pre-existing claim against the respective party. Taking the example provided above, if the lessee delays the payment of the rental price and the lessor files a claim for payment of the due rental price, the lessee may not object to this stating that such price has become excessive, nor may the lessee request a reduction in the course of the lawsuit against the latter. Given the constituent nature of the claim for amending the contract, the claim may not be executed in the form of an objection. This specific characteristic in fact seriously limits the options for protection for the party concerned in case the adequacy of consideration has been violated.
- The claim does not suspend the performance of the contract
Filing the claim does not suspend the performance of the contract and each of the parties shall fulfill all its obligations until the court decision becomes enforceable. For contracts with a shorter duration, this means that during the time of the lawsuit, the contract shall be performed (or terminated) and its performance will eliminate one of the prerequisites for filing a claim (i.e. contractual obligations subject to amendment) and the claim will therefore be rejected.
Based on the foregoing, the hardship concept may be difficult to apply in case of one-off contracts where one of the parties shall fulfill its obligation as a single stage process. Typically, the parties also agree in advance on the timeframe for its performance which rarely exceeds a year, for example, in real estate purchase and sale contracts, construction contracts, construction contracts, certain supply contracts, etc. In these cases, the parties shall perform their obligations under the contract, regardless of the inadequacy of consideration resulting from the economic situation, as their obligations will become due before the court upholds a decision on the amendment or termination of the contract. In other words, hardship would be hard to apply to a preliminary contract for sale of real estate and agreed three-month period for transfer of ownership. Until a decision in favour of the buyer is taken, the term for completion of the performance of the contract (as well as payment of the price for the property) would be reached, the contract would be either completely executed or terminated and the parties would therefore be no longer able to amend the contract referring to hardship as there would be no contractual obligations to be amended by the court.
Parties to one-off contracts have a chance of solving the case before the performance of the contact is completed, but only where the duration of such contracts is relatively long – several years. Final settlement of the dispute before the expiry of the duration of the contract is rather theoretical given the current situation with three-instances proceedings and the heavy caseload of the courts.
Applying hardship concept to long-term contracts (such as lease contracts) might be equally problematic. Proceedings before several instances for a period of several years, forces the parties to fulfill inadequate and unfair obligations under the contact for a long period of time. A possible favourable dispute resolution might turn out to be late. Amending or terminating the contract after some years when the economic situation would also be significantly different, is unlikely to result in the protection sought through the claim. Based on the above, it is quite evident that although the concept of hardship can be applied only to long-term contracts, parties are often unwilling to file a claim as bringing proceedings on the grounds of hardship would not actually lead to suspension of the the performance of the contract.
- A claim hard to secure
The party which has filed a hardship claim may secure such a claim. The specific nature of hardship poses the question whether a party to a claim may secure it by suspending the performance of the contract. Under this scenario, the claimant would be able to stop paying the rental price for the time the claim is being considered. Apparently, this option is not applicable due to the specifics of the legal framework. Since the claim does not suspend the performance of the contract, suspension is not possible by securing the claim. The rationale behind the arguments is that a potential suspension may affect the ability of the other party to claim performance under the contact over the period prior to the effective date of the decision. Given that even a decision in favour of the claimant would have a future effect only, seeking earlier amendment to the considerations under the contact through security, is inadmissible. In view of the above arguments, a possible request for securing a claim by suspending performance would most likely be rejected.
Taking into account that hardship arises from circumstances which would rarely last for many years, suspension of the performance of the contract and a timely consideration of the case are the only factors that could help overcome the adverse effects of hardship. The absence of those factors makes the application of this concept in practice difficult as evidenced by the scarce case law on its application. Legislative changes are therefore required to facilitate and accelerate the procedure of filing a claim in order to make it applicable to the current economic situation. A possible legislative reform would be considering hardship cases under an expedited procedure. In addition, introduction of a special precautionary measure may also be considered regarding hardship claims, which would allow the performance of the contract to be suspended for the duration of the proceedings. Such measures would facilitate the application of the concept and would actually enable the parties experiencing hardship to quickly achieve the result stipulated by the legal provisions.
Pavlina Ivanova is a senior associate at Dimitrov, Petrov & Co. Law Firm. The above text does not constitute legal advice or consultation and should not be considered sufficient for resolving specific legal issues, cases, etc. For more information, please contact Dimitrov, Petrov & Co.