Legal and Economic Considerations Concerning Insertion or Omission of Hardship Clauses in Long-Term Contracts

Camilla Elmelund Hansen & Tessa Emilie Kølle Dahlerup

Student thesis: Master thesis

Abstract

In Denmark, the use of hardship clauses seems to be relatively limited. Therefore, this thesis will, with a basis in a realistically constructed case, examine the significant legal and economic incentives of two contracting parties’ choice to insert or omit a hardship clause in a long-term contract. The thesis case concerns a situation in which Brexit prompts the implementation of customs procedures at the border of the United Kingdom. These procedures entail lengthy and inevitable delays for a shipping agency that must deliver goods from a company located in Denmark to the company’s client located in the UK. The legal analysis reveals that a hardship clause most likely may be invoked in a situation as the one which occurred in the case, and that the invocation of such a clause would have meant that the parties would be under the obligation to enter into a renegotiation concerning allocation of the additional costs arisen due to hardship. The unburdened party is moreover under the obligation to at minimum defray an in the clause determined percentage of the additional cost. In the absence of a hardship clause in the contract, it is, by application of the legal dogmatic method, found that the burdened party in all probability will successfully be able to invoke The Danish Contracts Act (Aftaleloven) section 36 in a case tried at the courts, which probably would carry out a change or a temporary disregard of the delivery terms and/or the liquidated damages terms. In the economic analysis it is found that when the parties at the time of the contract had to decide whether the contract should contain a hardship clause, they have, in case hardship occurs, completed an assessment of both parties’ strategies and the hereto connected payoffs. The parties’ decisions are taken with an objective of utility maximisation but are also affected by their reference points and loss aversion tendencies. Finally, an interdisciplinary analysis and assessment based on the legal and economic findings reveals that the parties’ decision to omit a hardship clause from the contract has shown inappropriate from a relationship-preservation point of view. A key element in the decision making may be the presence of a reference point.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages117