Contract Enforceability During Economic Crisis: Legal Principles and Drafting Solutions

Abstract

The recent economic crisis, now commonly called the Great Recession, has caused huge financial dislocations. One aspect of the crisis is the effect on contractual obligations: Can a contractual obligation be avoided because of fundamental disruptions in the relevant market? This paper first looks at the common law; there, major market changes are rarely, if ever, the basis of avoidance of a contractual obligation. Restatement and UCC provisions also reflect this “principle of market risk.” While case law dealing with the effect of the economic crisis on contracts is thin, the few reported decisions are quite uniform in applying the market risk principle to deny relief.The second part of the paper considers the extent to which international contract law as reflected in the Principles of International Commercial Contracts (the UNIDROIT Principles) and the Convention on the International Sale of Goods (CISG) provides relief from fundamental market disruptions. Article 6.2.1 of the UNIDROIT Principles recognizes that when supervening circumstances lead to a fundamental change in the equilibrium of the contract, relief on the ground of hardship may be available. A few cases have granted relief under this provision, but they are rare. In addition, arbitration panels are divided on the question of whether hardship is part of the general commercial law, the lex mercatoria.Article 79 of the CISG provides for relief due to an “impediment” beyond the control of a party that the party could not reasonably have been expected to take into account. Controversy exists as to whether the concept of impediment encompasses economic hardship due to market change. The paper examines the contending arguments and case law on this issue.Because both common and international law rarely provide relief from market change, a party who wishes to have protection against market disruptions should provide for this contingency by contract. The final section of the paper, with no intent of being complete, suggests various types of clauses for the parties to consider incorporating into their contracts to deal with market change: whereas clauses; express conditions; MAC (market adverse condition) clauses; expanded force majeure clauses; hardship clauses; renegotiation and adjustment clauses; choice of law, forum, and arbitration clauses; Take-or-Pay and Hell-or-High-Water clauses. The fundamental message of the paper is that the parties should address relief from market changes in the negotiation of the contract. If they choose not to do so, they cannot expect to obtain relief from courts or arbitrators.