Hardship-clauses: An Economic and Legal Analysis of Whether an Hardship-clause Can be Used as an Alternative to the General Basis of Interpretation and Gap-filling in Danish Law in the Event of Unexpected Circumstances

Abstract

The purpose of this master thesis is to investigate whether a hardship clause can be used as an
alternative to the general starting point of interpretation and gap-filling in the case of unexpected
circumstances. In order to assess this, a transaction cost theoretical point of view is taken, as a
hardship clause may involve excessive transaction costs on the basis that contracting parties may
have problems foreseeing all future circumstances.
This thesis is based on assumptions that economic agents are limited rational as well as opportunistic,
which is the basis for incomplete contracts and hence the background to the vague nature of the
hardship clause. Transaction costs are assessed according to whether they are held ex ante or ex post.
The distribution of ex ante and ex post transaction costs will be the focus of the economic part of
the thesis as to assess the extent to which transaction costs should be distributed optimally before a
hardship clause should be applied. The economic part denotes the circumstances that should be
taken into consideration when contracting parties assess the extent to which they should specify their
hardship clause. It is estimated that the parties may leave their hardship clause vague when the parties
communicate, share a common belief and can be sure that a court is competent enough to verify the
parties’ intentions with the clause. If this is possible, the parties may let their hardship clause appear
vague and not exert excessive transaction costs ex ante but instead incur them in the event of an
unexpected circumstance materializes ex post.
The hardship clause is not prevalent in Danish contract law, so it is doubtful how a court will interpret
a dispute, based on a hardship clause. The legal part of the thesis highlights the extent to which a
hardship clause may be an alternative to the general regulatory contractual supplementation regarding
unexpected circumstances. This is done by means of a selected hardship clause, where it states that
it has a scope of application with The Sale of Good Act, section 24, the Danish Contract Act, section
36, the Doctrine of Assumptions and Closest to carry the risk. In addition to this, it is illustrated to
what extent there are differences and how a hardship clause may act as a proactive contract
adjustment mechanism, as opposed to the legal effects of the used legal figures, which include
invalidity or breach to a greater or lesser extent. The thesis concludes that a hardship clause can both
serve as an alternative and a supplement to the general starting point for interpretation and gap-filling
in the case of unexpected circumstances