Change in Circumstances in Long-Term Commercial Contracts

Abstract

This Master’s Thesis study the use of hardship clauses in long-term contracts under Danish and English Law. The focus is to analyze as to which extend the use of hardship clauses will enhance the parties’ chances of regaining the contract balance, where unforeseen changes in circumstances has resulted in a considerable increase of the burden to fulfill one or both parties’ contractual obligations. The comparative analysis of Danish and English law examines how Danish rules provides some possibility of contract adjustment by the courts, whereas this is not the case under English law. Although Danish courts recognize the need for contract adjustment under certain circumstances the courts are overall reluctant to make contract adjustments in commercial contracts. Under English law the only remedy for change in circumstances is provided by the doctrine of frustration, and therefore the only possibility for the English courts is to terminate the contract. The use of a hardship clause will enhance the parties’ chances of regaining the contract balance in the events of unforeseen changes in circumstances. However, under both Danish and English law there is somewhat uncertainty as to when the clause will be put into force by the courts. From a deductive perspective this thesis examines, how the use of hardship clauses can serve as a safeguard against changes in circumstances from a transaction cost economics perspective, and through the application of a game theory setup. The study argues that the parties will not be inclined to enter into renegotiations if it is ambiguous whether the hardship commitment will be enforced by the courts. This thesis argues that the rules under both Danish and English rules should be put under evaluation. The rules, as per now, does not provide the sufficient basis for economic efficiency to occur. For economic efficiency to occur, the legal rules should provide for clearly established rules for the use of hardship clauses and there must be no opportunity for contract adjustments, besides whenever a hardship clause is agreed by the contracting parties