van Houtte, Hans, Changed Circumstances and Pacta Sunt Servanda, in: Gaillard (ed.), Transnational Rules in International Commercial Arbitration (ICC Publ. Nr. 480,4), Paris 1993, at 105 et seq.


Hans van HOUTTE*

To what extent can arbitrators grant relief when the context which prevailed when the contract was concluded has substantially and unforeseeably changed so that contract performance has become more onerous? This question is obviously to be answered according to the national law chosen by the parties or the arbitrators, if they elect to do so. This contribution will attempt to determine the rules which would be applicable if the parties or the arbitrators, in the absence of a choice of law by the parties, have resorted to transnational rules.

The sanctity of contract is one of the most fundamental principles of law (I). However, the interaction between the sanctity of contract and changed circumstances has to be investigated. This paper will therefore focus an the hardship clauses which provide for a change in circumstances (II). It will then briefly consider to what extent arbitrators - amiabie compositeurs - may grant relief because of changed circumstances (III). It thereafter will examine whether arbitrators who are not amiable compositeurs and who cannot apply an hardship clause, are entitled to grant relief because of changed circumstances (IV). Finally, the remedies available in a case of changed circumstances will be analysed (V).


By nature the future is uncertain. In long-term contracts, prices may suddenly increase, inflation may rise, performance may become; more onerous. However, parties are expected to foresee. They can plan the future through contracts, especially through long-term contracts. In these contracts, they can fix the price and define the performance once and for all. A sales contract, for instance, guarantees the buyer that the purchased goods will be at his disposal at a given date (or at least that he will obtain compensation if the supplier fails to deliver them at that date); it guarantees the supplier payment of the specified amount at the agreed date. Contracts are thus "un îlot de sécurité face aux réalités mouvantes de l'avenir"1 . A contract will only guarantee performances when it does not yield to the pressure of unforeseen developments.

The sanctity of contract is, understandably, a paramount feature of the law of contract. Pacta sunt servanda: the contract has to be respected. As a matter of principle, parties must adhere to the terms of their contract. This explains, for instance, why economic hardship does not affect international sales under the Vienna Convention on International Sales2 .


Arbitrators have to apply the terms of the contract which parties have agreed upon . Arbitration treaty law3 , arbitration statutes4 as well as arbitration rules5 confirm that the arbitrator has to respect the contract terms. Arbitrators have frequently confirmed the sanctity of contract.

For disputes with a state or state entity as a party, arbitrators often rely an pacta sunt servanda6 . This may not surprise as contracts concluded with such parties are generally submitted to rules of international law, which includes the principle of pacta sunt servanda. In the Sapphire v. National lranian Oil Company award, for instance, the arbitrators expressly stated: "It is a fundamental principle of law, which is constantly being proclaimed by international courts, that contractual undertakings must be respected. The rule pacta sunt servanda is the basis of every contractual relationship."7

In the Liamco v. Libya award, the arbitrator also relied on pacta sunt servanda, emphasising "that a freely and validly concluded contract is binding upon the parties in their mutual relationship".8

Arbitrators often have recognized the sanctity of contract by reference to a specific national law9 . Pacta sunt servanda is indeed also a paramount principle in all municipal legal systems. As one arbitrator held:

The principle of the sanctity of contracts ... has always constituted an integral Part of most legal systems. These include those systems that are based an Roman law, the Napoleonic Code (e.g. article 1134) and other European civil codes, as well as Anglo-Saxon Common Law and Islamic Jurisprudence 'Shari'a'.10


Moreover, Pacta sunt servanda is considered a cornerstone of the lex mercatoria11 . Indeed, in some instances arbitrators have applied pacta sunt servanda as a transnational principle of private law12 . In ICC Award No. 5485 (1987), the arbitrators stated:

Whereas the rule pacta sunt servanda implies that the contract is the law of the parties, agreed to by them for the regulation of their legal relationship, and generates not only the obligation of each party to a contract to fulfill its promises, but also the obligation to perform them in good faith, to compensate for the damage caused to the other party by their non-fulfillment and to not terminate the contract unilaterally except as provided for in the contract ...13

More frequently, however, arbitral awards simply apply the contract terms to the dispute and thus impliedly recognize the binding force of the contract.


Parties, who are aware that the context of the contract may change, can agree on a hardship clause in their contract14 . Some of these clauses provide the contract will terminate when a specified change in circumstances has occured. Other clauses, such as indexation clauses or price revision clauses provide the contract terms will be automatically changed if such circumstances arise. Finally, some clauses, adaptation clauses, merely order the parties to adapt the contract terms to the new circumstances.

Some authors have argued that the widespread use of hardship clauses in long-term contracts has created a custom: the hardship clause must be implied in the contract even if it was not expressly included by parties15 . However, the fact that parties sometimes include a hardship clause in the contract may prove that no general customary principle exists16 . Moreover, there is such a variety in these hardship clauses with regard to their scope, application and remedy, that it is difficult to base a customary principle on them. In fact, arbitrators have consistently refused to read 110 customary hardship clauses into long-term contracts. Rather, they have ruled that hardship clauses should be interpreted strictly. Accordingly, a clause mentioning specific changes must be interpreted as meaning that no other changes should be taken into account17 . For example, a hardship clause on currency exchange rates did not allow price increases when the commodity price, rather than the exchange rates, increased18 . Similarly, a clause which allowed the renegotiation of the purchase price every 6 months excluded interim adaptations because of changed circumstances19 .

However, the mere presence of a hardship clause should not in itself exclude the application of the general law on changed circumstances. It would be too cumbersome if parties were obliged to negotiate and draft hardship clauses covering all possible events which may affect performance. Consequently, the general law on changed circumstances remains applicable to all changes not covered by a hardship clause. This principle has been recognized by arbitrators from the Arbitration Court of the Japan Shipping Exchange, who stated:

The relation between this Article (renegotiation clause) and the principle of change in situation is such that the present article does not exclude the said principle, but provides for either one of the parties to request the other for consultation to amend the price, even in the instances where the principle of the change in situation does not need to be applied.20

Parties may specifically instruct the arbitrators to take account of the changed circumstances after the dispute has arisen. When the Iran-US Claims Tribunal was set up, the arbitrators were ordered "to decide all cases an the basis of respect for law, ... taking into account relevant usages of the trade, contract provisions and changed circumstances"21 . The Iran-US Claims Tribunal thus considered it had a duty to take into account changed circumstances22 .



Arbitrators may be vested with the powers of amiables compositeurs, i.e., they have to decide ex aequo et bono. Amiable composition can depart from the strict provisions of the contract an the grounds of equity. Thus arbitrators can grant relief whenever they feel it fair to restore the balance between both parties' obligations, which has been disturbed by a change in circumstances. For instance, the arbitrators in the famous S.E.E.E.-Yugoslavia arbitration, who acted as amiables compositeurs, could grant relief because of the depreciation of the Yugoslav dinar23 .


In general, national legal systems contain a rule that changed circumstances may affect the binding force of a contract. This possibility is known under the maxim rebus sic stantibus: the contract remains binding "provided that things remain as they are".

To limit the scope of the analysis, rebus sic stantibus will be interpreted restrictively. Express contractual conditions which have not been satisfied are excluded: such changes relate to the failure to satisfy the contractual condition for performance. The advent of an Act of God-Force Majeure, which makes performance totally impossible, is excluded24 . This paper will only focus on changes which make performance more onerous. Moreover, it does not encompass the hypothesis where a party discovers after the conclusion of the contract that the assumptions on which it concluded the contract were false. In such case, the factual circumstances have not changed; it was only their discovery which was delayed.

The principle of rebus sic stantibus, present in many national legal systems, is also a principle of international law. As the judges in the Iran-US Claims Tribunal recognized:

The concept of changed circumstances, also referred to as rebus sic stantibus, has in its basic form been incorporated into so many legal systems that it may be regarded as a general principle of law; it has also found a widely recognized expression in Article 62 of the Vienna Convention an the Law of Treaties25 .



Rebus sic stantibus is a principle of international treaty law26 . The 1969 Vienna Convention an the Law of Treaties, Article 62, states:

A fundamental change of circumstances which has occurred with regard to those existing at the time of the conclusion of a treaty, and which was not foreseen by the parties, may not be invoked as a ground for terminating orwithdrawing from the treaty unless: (a) the existence of those circumstances constituted an essential basis of the consent of the parties to be bound by the treaty; and (b) the effect of the change is radically to transform the extent of the obligations still to be performed under the treaty.

The wording of Article 62 demonstrates the exceptional character of rebus sic stantibus. It is subordinate to the more general principle of pacta sunt servanda, as set out in Article 26 of the Vienna Convention.

The change in circumstance has to be fundamental. It has to jeopardize the survival of the State 27 . Simple loss of economic gain28 or currency reforms29 are insufficient. As the International Court stated in the Fisheries Jurisdiction case, the changes must be vital: they have to "imperil the existence or vital development of one the parties"30 . Moreover, the change in circumstances has to be unforeseeable.

In fact, although parties have often invoked rebus sic stantibus before international tribunals, such parties have never been granted relief on these grounds. The International Court of Justice or other tribunals have always refused to apply rebus sic stantibus to a treaty31 .



In English law, the doctrine of "frustration of purpose" excuses performance when the circumstances have changed so much that the performance required by the contract is radically different from that which was initially undertaken by the parties. However, more recently, English judges have been generally reluctant to find that a particular contract has been frustrated32 .

In German law, the theory of Wegfall der Geschäftsgrundlage (disappearance of the Basis of the transaction) covers the effect of changed circumstances on the contract. Paragraph 242 of the German Civil Code (BGB) requires that the contract be performed in good faith. However, when the circumstances have unforeseeably and substantially changed, the foundations of the transaction have been destroyed and the parties are no longer bound to their original contractual commitments. Requesting the original performance of the contract would constitute bad faith. The Wegfall der Geschäftsgrundlage was quite easily applied in the years of galoping inflation after both World Wars33 . However, it has been less easily accepted with regard to commercial contracts concluded between businessmen34 . At present Wegfall der Geschäftsgrundlage is applied rather restrictively35 .

The Swiss Federal Tribunal has admitted that some long-term contracts may be terminated because of an unforeseeable and fundamental change of circumstances an the basis of Article 2 of the Code civil (good faith)36 . Only changes which would unjustly enrich one of the parties give rise to such relief. Rebus sic stantibus, however, has to be applied restrictively 37 . The change in circumstances has to be substantial, striking and excessive; it should be apparent to any unbiased third party that the contractual performances are completely unbalanced. Moreover it is not sufficient that the contract performance should lead to the ruination of the seller in question - since his subjective situation cannot affect contractual obligations; only factors which would objectively affect any seller are relevant. Furthermore, the buyer should intend to exploit the inequity between his payment and the seller's performance. Finally, the seller has to be in distress or unfamiliar with the type of transaction. In a Swiss arbitral award, the Swiss law on rebus sic stantibus has been summarized as follows:

According to these (Federal Court) judgments, conditions for the clausula rebus sic stantibus in Swiss law are:


the risk of changed circumstances should not have been distributed among the parties in the contract; if so, such a provision would prevail;


the change should not be due to the fault of the obligated party;114


changes should not have been foreseeable, nor have actually been foreseen by the parties;


the obligated party should not have recognized either expressis verbis or, e.g. by negotiations about the performance of its obligations, that the performance may be imputed to him;


the changes should objectively be extraordinary; in practice, strict requirements are applied;


the changes should have caused an extraordinary shift of the balance of obligations, making the performance appear objectively unacceptable;


the court intervention should not lead to results which are unacceptable for the creditor, i.e., the burden may not simply be shifted entirely from the debtor to the creditor.38

In Italian law, Article 1467 of the Codice civile provides relief when the performance of one party has become excessively onerous as a consequence of extraordinary and unforeseeable events and when the party has not assumed the risk for such changes.

In Dutch law, Article of the New Civil Code (Nieuw Burgerlijk Wetboek) provides for the adaptation of the contract when circumstances have unforeseeably and substantially changed. However, the travaux préparatoires show that this possibility is exceptional and has to be applied with much restraint39 .

Japanese law has a theory of changed circumstances, but applies it quite restrictively40 .

Lybian law, so it was stated in an award, also contains the rebus sic stantibus -principle41 .

French contract law, an the contrary, does not provide relief for changed circumstances which make contract performance more onerous but not impossible. The often quoted French doctrine of imprévision is only applied by French administrative courts to contracts concluded with public entities. In commercial contracts, the agreed contract price is not affected by increased costs42 or currency depreciation43 .

Under Belgian law, even under Belgian administrative law, no general theory of imprévision is recognized44 .



Rebus sic stantibus is also said to be a principle of lex mercatoria45 .


The Impact of rebus sic stantibus in international arbitration has not been explored into great detail. Some awards have recognized an overall principle that contracts have to be adapted to changed circumstances. For instance, an arbitrator stated:

Toute transaction commerciale est fondée sur l'équilibre des prestations réciproques et nier ce principe reviendrait à faire du contrat commercial un contrat aléatoire, fondé sur la spéculation ou le hasard. C'est une rèple de la lex mercatoria que les prestations restent équilibrées sur le plan financier et c'est pourquoi, dans presque tous les contrats internationaux, le prix est donc fixé en fonction des conditions existant au moment de la conclusion du contrat et il variera en fonction de paramètres qui reflètent les variations des valeurs des différents éléments qui composent le produit ou la prestation.46

In general, however, arbitrators have been rather strict in applying rebus sic stantibus:

Considérant au surplus que le principe rebus sic stantibus invoqué par X ne peut recevoir son application en l'espèce. Il convient en effet de ne retenir cette notion qu'avec réserve et prudence, surtout lorsque l'intention des parties a été clairement exprimée dans un contrat. La précaution s'impose d'autant plus lorsqu'il s'agit de transactions internationales où en général les parties ont conscience des risques qui peuvent survenir et sont ainsi à même 116 de les formuler de manière précise (Journal du droit international, 1974, Cour d'Arbitrage de la Chambre de Commerce Internationale, p. 907).

Et que d'ailleurs, "les praticiens du commerce international sont présumés s'engager en connaissance de cause dans les opérations qu'ils traitent et ne sauraient prétendre qu'ils n'ont pas été en mesure de se rendre compte de l'importance des obligations à leur Charge" (op. cit. p. 900).47

Or as they concluded in another case: "Otherwise, any Business transaction would be exposed to uncertainty, or even be rendered impossible altogether, whenever the mutual covenants are not performed at the time at which the contract is concluded."48

As still another I.C.C. arbitrator stated, rebus sic stantibus has to be interpreted very strictly:

The principle Rebus sic stantibus is universally considered as being of strict and narrow interpretation, as a dangerous exception to the principle of sanctity of contracts. Whatever opinion or Interpretation lawyers of different countries may have about the "concept" of changed circumstances as an excuse for non-performance, they will doubtless agree on the necessity to limit the application of the so-called "doctrine rebus sic stantibus" (sometimes referred to as "frustration", "force majeure", "imprévision", and the like) to cases where compelling reasons justify it, having regard not only to the fundamental character of the changes, but also to the particular type of the contract involved, to the requirements of fairness and equity and to all circumstances of the case.49

Not all changes in circumstance may affect the contract. Only changes in circumstances which are known or should have been known by both parties to be an assumption upon which the contract is concluded are relevant. It is only if these circumstances no longer exist that the common Basis for the transaction disappears.

The changes should have been unforeseen. It has been argued that a certain Balance between the respective performances should be maintained during the lifetime of the contract. Parties who intend to maintain the Balance of mutual obligations are said to especially choose arbitration as an arbitrator will be more likely to restore this Balance if necessary50 . Such view would, however, lead to legal uncertainty. Arbitral decisions confirm that rebus sic stantibus only concerns unforeseeable changes. Consequently arbitrators denied relief for shortage on the crude oil market and for the rise in oil prices after the outbreak of the Israeli-Egypt war in Autumn 1973 as its consequences could have been foreseen when the contract was concluded in February 197451 .


The changes, furthermore, should be substantial. Arbitral practice shows that arbitrators have been rather strict in accepting that a given change in circumstances - be it a depreciation of currency, a more onerous performance or a change in legal environment - has been substantial enough to affect the contract.

Inflation and currency depreciation are generally considered to be irrelevant. In the absence of a depreciation clause52 , the amount stipulated in the contract most often has to be paid. "A pound is a pound" - however depreciated53 . Fluctuations in value do not lead to contract rescission or adaptation. Awards have very often confirmed the monetary nominalism. As Hamburg arbitrators stated:

"As a matter of principle, every money debt is a debt in value with the result that only the nominal value of the currency is due and payment of the depreciated money releases the debt." Indeed, "The foreseeable risk of further depreciation of the British pound could have been minimized by obtaining a guaranty against exchange rate fluctuations... A domestic creditor is expected to hedge himself against the risk of the exchange rate."54

Arbitrators do not easily accept that the performance has become more onerous or less profitable. In the Alsing arbitration, the arbitrator did not apply rebus sic stantibus when for a few years, Profit was not as great as expected55 . A cost increase of 13% was considered no ground for relief by I.C.C. arbitrators56 . Arbitral decisions thus follow domestic Courts57 .

The change in circumstances may also concern change in the legal environment. As already indicated, the Iran-US Claims Tribunal was ordered not only to apply the law and the contract terms, but also to take into account changed circumstances. In the Iranian Forum Clause cases, it was argued from the American side that jurisdiction clauses in favor of Iranian Courts were no longer valid after the Khomeini revolution as "the designated forum had changed in nature so fundamentally that it cannot be said to have been within the contemplation of the parties at the making of the contract". The Tribunal sidestepped the issue and did not rule on the question. The U.S. arbitrators Holtzmann and Mosk, who criticized the majority for not addressing the argument, concluded however, that the fundamental and far-reaching changes in 118 the Iranian legal system had constituted changed circumstances such as to free the claimants from the provisions of the forum clauses58 . Judge Holtzmann stated that: "a contractual choice of forum is no longer binding if conditions have changed fundamentally since the contract was written that the forum chosen in the contract is no longer the same kind of forum as the parties expected when they signed the contract."59

Judge Mosk concurred with the Holtzmann view: "The choice of forum clauses at issue are unenforceable because of the application of two related but independent principles - there were "changed circumstances" and the designated forum does not provide claimants a meaningful opportunity for effective relief."60

In another decision from the Iran-U.S. Claims Tribunal, the Questech case61 , Iran successfully invoked the radical political change for a contract involving the sensitive area of national security. The Arbitral Chamber decided:

The fundamental changes in the political conditions as a consequence of the Revolution in Iran, the different attitude of the new Government and the new foreign policy especially towards the United States which had considerable support in large sections of the people, the drastically changed significance of highly sensitive military contracts as the present one, especially those to which the United States companies were parties, are all factors that brought about such a change of circumstances as to give the Respondent (the Iranian government) a right to terminate the contract. When the Ministry of Defense decided not to go on . . . it opted for the termination of a contract which the parties probably would not have entered into had it been known that such fundamental changes would occur.62

In later cases, other Chambers of the Tribunal took a more narrow view. In the Mobil case, it was decided that the change in circumstances could only set aside the choice of Iranian law, but could not otherwise affect the substance of the contract. Moreover, the judges decided that a radical change of political and legal climate in 119 itself was not enough to grant relief because of changed circumstances, as long as no specific measures have affected the contract63 . In more recent decisions, the political and social changes brought by the Iranian revolution have not been considered as "changed circumstances" which could give rise to relief64 .

A contract allocates risks among the parties. When the contract is drafted in precise terms but does not provide for a remedy when circumstances are changed, it may be assumed that the party, who is supposed to assume this risk, has taken such risk. As stated by an I.C.C. arbitrator:

As a general rule, one should be particularly reluctant to accept it when there is no gap or lacuna in the contract and when the intent of the parties has been clearly expressed . . . . Caution is especially called for, moreover, in international transactions where it is generally much less likely that the parties have been unaware of the risk of a remote contingency or unable to formulate it precisely65 .

The decision on whether or not performance has become so onerous that relief should be granted depends on the risks assumed by each of the parties. In this context arbitrators sometimes distinguish between speculative and non-speculative contracts66 . When parties did not enter into a contract with speculative intentions, relief for changed circumstances should be more easily granted. The arbitrators in S.E.E.E. v. Yugoslavia, for instance, stated: "As regards an international contract concluded without speculative intention, it ought to be admitted, as it has been judged, that the devaluation guarantee was meant by the parties, save express convention . . ."67

Similarly, I.C.C. arbitrators have based their relief for changed circumstances on the non-speculative nature of the contract: "C'est une règle de la Lex Mercatoria que les prestations restent équilibrées sur le plan financier et hier ce principe reviendrait à faire du contrat commercial un contrat aléatoire fondé sur la spéculation ou le hasard."68 .

Arbitrators of the Japan Shipping Exchange similarly stated: "In contracts such as the present one, of a commercial base, where the cost may be set arbitrarily and which has a speculative nature to a degree, it is not possible to decide that there existed a situation to which so-called change in situation principle could be applied."69

However, even when the contract is speculative by nature and the parties have contemplated certain risks, good faith prevents a party from insisting on contract 120 performance as originally agreed when such claim would be abusive in the light of the change in circumstances. Such was the decision reached in an I.C.C. arbitration under Swiss law70 . A party should not be obliged to perform beyond its Opfergrenze71 .

Moreover, the arbitrator has to balance the respective interests of the parties. Some of following questions may be useful to assess the respective interests of the parties:


Should the parties have been aware of the respective risks? How did they allocate them? Is there any fundamental reason to reallocate these risks72 ?


What will happen if the originally agreed performance is delivered?


Would one of the parties be unjustly enriched73 ?


Does the change in circumstances affect both parties or only one 74 ?


Have the circumstances, which at one point: in time changed to the detriment of one party, since then not reversed to the detriment of the other party75 ? 121


Did the party who invokes the changes provoke them76 ?


Can a party in good faith request performance as was agreed in the contract77 ?



If circumstances have sufficiently changed to apply rebus sic stantibus, the contract can be suspended or terminated. Under international law, termination and suspension are in fact the only remedies available.


Sometimes the contract obliges parties to renegotiate when circumstances have changed. If these negotiations are successful, the contractual relationship is rearranged.

However, what happens when these negotiations fail? Most renegotiation clauses are silent on this point. Arbitral practice is very scarce. For instance, arbitrators of the Arbitration Court of the Japan Shipping Exchange refused to terminate the contract in such event78 . Similarly, an I.C.C. award, rendered in 1974, indicated that a clause to renegotiate does not give a party the right to terminate the contract when negotiations fail. Termination would only be possible if the other party unreasonably refused to accept the proposal to adapt the contract. Eventually, arbitrators would have to decide whether such refusal was unjustified and constituted a breach of contract giving rise to its termination79 . Arbitrators thus decided that a Lybian general contractor committed a breach of contract when he failed to participate in the renegotiations on price increases with his Italian subcontractor in spite of his contractual commitment to do so80 .

It has been argued that even in the absence of a renegotiation clause, parties to a long-term contract should renegotiate when faced with unforeseen difficulties81 . However, even when a contract has been terminated or is threatened to be 122 terminated because of changed circumstances, in practice, parties may also renegotiate if they consider it worthwile to maintain their contractual relationship.


Under certain legal systems, such as public international law82 or English law83 , a judge or an arbitrator does not have the power to adapt contract terms to changed circumstances or to substitute new terms more suitable for the changed situation. However, under some legal systems, such as the German84 , the Dutch85 or the Japanese86 , the judges or arbitrators are empowered to adjust contracts to take into account the changed circumstances.

Further, some renegotiation clauses state that arbitrators have to adapt the contract to changed circumstances in the event that the parties are unable to reach an agreement on contract amendment87 . Such clauses sometimes provide rather vague standards that the arbitrator has to apply: he should have "due regard for the interests of the other party"; he should respect "l'esprit de collaboration et de répartition équitable des résultats"; he should do whatever is possible "pour rétablir la position relative des parties"88 . Such clauses sometimes specify the binding force of the arbitrator's decision: it may either be finally binding or subject to both parties' approval (In the latter case, the contract is terminated when both parties do not agree with the arbitrator's proposal).

It may be questioned whether the third person, who adapts the contract, is really an "arbitrator", in the legal sense of this term. Indeed, an arbitrator is supposed to solve legal disputes, i.e., disputes over existing rights and duties. The person who adapts contract terms, merely rearranges the contractual relationship an behalf of the parties. In the strict sense of the term, adaptation is not arbitration. Consequently, the law on arbitration does not apply; the adaptation of the contract cannot, on this Interpretation, constitute an arbitral award which could be enforced or challenged. However, since much has been written on this question89 , it will not be explored any further.

The International Chamber of Commerce has published rules an contract adaptation in 197890 . These rules organise the procedural framework whereby a third party may adapt the contract terms. Under these rules, parties have the choice of having their contract adapted either by a single person, or by a panel of three members. In addition, the parties can provide that the adaptation take the form of a binding decision or opt for a mere recommendation.



In many long term-contracts, time is of the essence and delays in performance are sanctioned heavily by substantial penalty clauses. When a change in circumstances affects contract performance, the contract will often not be suspended or terminated. The party continues performance but notifies the other side that compensation for additional performances or for unjust enrichment will be claimed after the work is finished. Compensation thus has been granted in arbitration to an Italian subcontractor who had continued to perform for a Lybian general contractor in spite of more difficult performance91 . It has been doubted whether the person who adjusts contract terms, still can be considered to be an arbitrator. However, delicate questions as to the nature of contract adjustment are avoided when arbitrators do not adapt the contract terms, but grant a posteriori compensation.

Furthermore, arbitrators can also take into account changed circumstances to reduce a claim for compensation because of lost Profits92 .

* Professor University of Leuven, Belgium; Avocat, Stibbe, Simont, Monahan, Duhot, Brussels; Corresponding Member, ICC Institute of International Business Law and Practice; Secretary-General Société Belge de Droit International
1 D. PHILIPPE quoted by F. DASSER, Internationale Schiedsgerichte und Lex Mercatoria, Schulthess Zürich, 1989, 111 .
2 Article 79 of the Vienna Convention, which deals with force majeure, excludes "economic hardship". Besides, as article 78 addresses general difficulties of performance, recourse to domestic law to deal with these difficulties is equally barred (article 7 (1)).
3 European Convention on International Commercial Arbitration (1961), art. VII.
4 E.g. UNCITRAL Model Law art. 28(4) , already incorporated in many countries.
5 E.g,. I.C.C. Arbitration Rules art. 13.5; UNCITRAL Rules art. 33.3.
6 E.g. I.C.C. award No. 2321 (1974), Yb. Comm. Arb., 1976, 133; Ad hoc award January 19, 1977, Texaco v. Libya, Yb. Comm. Arb., 1979, 177 at 182; J.D.I., 1977, 350; Ad hoc award January 14, 1982, Yb. Comm. Arb., 1986, 97 at 101, Rev. Arb., 1984, 401; Ad hoc award April 1982, Yb. Comm. Arb., 1983, 94 at 114; I.C.C. award No. 3493 (1983), Yb. Comm. Arb., 1984, 111 at 117; ICSID award November 27, 1985 and April 14, 1988, Yb. Comm. Arb., 1991, 16.
7 Arbitral award March 15, 1963, I.L.R., 1967, 136 at 181.
8 Ad hoc award Liamco v. Libya, April 12, 1977, Yb. Comm. Arb., 1981, 89 at 101.
9 E.g. under - Egyptian law (I.C.C. award No. 3493 (1983), Yb. Comm. Arb., 1984, 111 at 117); - Spanish law (I.C.C. award No. 5485 (1987), Yb. Comm. Arb., 1989, 156 at 168 ); - Arab law (Ad hoc award, November 20, 1987 and February 20, 1988, Yb. Comm. Arb., 1989, 47 at 51).
10 Ad hoc Award Liamco v. Libya, April 12, 1977, Yb. Comm. Arb., 1981, 89 at 101.
11 E.g. F. DASSER, o.c., 109-110; M. MUSTILL, "The new Lex Mercatoria : The First Twenty-Five years", Arbitration International, 1988, 86 at 110-111 ; B. GOLDMAN, "La Lex Mercatoria dans les contrats et l'arbitrage internationaux : réalité et perspectives", J.D.I, 1979, 471, at 493-495; B. GOLDMAN, Lex Mercatoria, Forum Internationale, Kluwer, Deventer 1983, 19; O. LANDO, "The Lex Mercatoria in international commercial arbitration", I.C.L.Q., 1985, 750; R. VAN DELDEN, Lex Mercatoria or lus Commune, Kluwer, Deventer, 1986, 11.
12 I.C.C. award No. 3383 (1979), Yb. Comm. Arb., 1982, 119 at 129; J.D.I., 1980, 978 at 981; I.C.C. award No. 5485 (1987), Yb. Comm. Arb., 1989, 156 at 168 .
13 I.C.C. award No. 5485 (1987), Yb. Comm. Arb., 1989, 156 at 168.
14 See e.g., M. FONTAINE, Droit des contrats internationaux, Analyse et rédaction de clauses, FEC Paris, 1989, 649 ss.; B. OPPETIT, "L'adaptation des contrats internationaux aux changements de circonstances: la clause de "hardship"", J.D.I. , 1974, 794 ; P. VAN OMMESLAGHE, "Les clauses de force majeure et d'imprévision (hardship) dans les contrats internationaux", Rev. Dr. Int. Dr. Comp., 1980, 7.
15 A. KASSIS, Théorie générale des usages de commerce" L.G.D.J. Paris, 1984, 367-369; Ph. KAHN, "L'interprétation des contrats internationaux", J.D.I., 1981, 5 at 21 .
16 I.C.C. award No. 5953 (1989) , J.D.I., 1990, 1056 at 1059.
17 I.C.C. award No. 2216 (1974), J.D.I., 1975, 917; I.C.C. award No. 2291 (1975) , J.D.I., 1976, 989; Arbitration Court of the Japan Shipping Exchange, award September 20, 1975, Yb. Comm. Arb., 1983, 153 at 154.
18 I.C.C. award No. 2478 (1974) J.D.I., 1975, 925 at 926.
19 I.C.C. award No. 5953 (1989) , J.D.I., 1990, 1056.
20 Arbitration Court of the Japan Shipping Exchange, award September 20, 1975, Yb. Comm. Arb., 1983, 153 at 154.
21 Claims Settlement Declaration, art. V., I.L.M., 1981, 230 at 232.
22 See the Questech decision, 9 Iran-US C.T.R., 122-123: "[T]he consideration of changed circumstances in the present context is warranted by the express wording of Article V of the Claims Settlement Declaration. That Provision not only lays down the law to be applied by the Tribunal, but it also mandates the Tribunal to take into account relevant usages of the trade, contract provisions and changed circumstances when deciding "all cases", thereby mentioning "changed circumstances" on the same level as "contract provisions". In the context of the Algiers declarations the inclusion of the term "changed circumstances" means that changes which are inherent parts and consequences of the Iranian Revolution must be taken into account".
23 Award July 2, 1956, J.D.I., 1959, 1075. It has, however, been argued that the arbitrators also were entitled to grant relief in law: A. KASSIS, o.c., 356 ss.
24 However arbitrators sometimes bring the former also under the heading of "changed circumstances - rebus sic stantibus". E.g. Court of Arbitration at the Polish Chamber of Foreign Trade, award February 11, 1958, Yb. Comm. Arb., 1981, 147 at 148.
25 Questech decision, 9 Iran - US C.T.R., 122-123.
26 See moreover i.a. G. HARASZTI, "Treaties and Fundamental Change of Circumstances", R.C.A.H., 1975 III, 7.
27 See e.g. Permanent Court of International Arbitration: The Russian Indemnity case, A.J.I.L., 1913, 178; International Court of Justice: The Fisheries Jurisdiction case, ICJ Reports, 1973, 4 at 20 and 64: Helenic Electric Railwavs v. Greece (1933), Brit. Yb. I.L., 1964, 206-207.
28 Bremen (Free Hansa) v. Prussia (1925), Annual Digest, 1925-1926, No. 266.
29 See Swiss Federal Tribunal June 22, 1955, A.T.F. (81), 1955 I, 222 at 231-232 concerning Impact of 1953 Czechoslovakian currency reform on 1949 agreement between Switzerland and Czechoslovakia concerning compensation for nationalized assets in Czechoslovakia.
30 ICJ Reports, 1973, 21.
31 Yearbook ILC, 1963, II, 208; Yearbook ILC, 1966, II, 257. Moreover, B. RÖLING, "De clausula rebus sic stantibus in het volkenrecht", Rechtsgeleerd Magazijn Themis, 1972, 582, R. VAN MEHREN and P. KOURIDES, "International arbitrations between state and foreign private parties: the Libyan nationalisation cases", A.J.I.L., 1981, 475 at 532. See also International Court of Justice, Fisheries Jurisdiction case, ICJ Reports, 1973, 4 at 20.
32 See i.a. J. Lauritzen A.S. v. Wijsmuller B.V., "The Super Servant Two", 1 Lloyd's Rep., 1990, 1. Moreover, E. McKENDRICK, Force Majeure and Frustration of Contracts, Lloyds Londen 1991.
33 See e.g. J.P. DAWSON, "Judicial Revision of Frustrated Contracts: Germany", Boston Univ. L.R., 1983, 1039 at 1987.
34 J. DAWSON, l.c., 1080-1083.
35 R. Köbler, Die "Clausula rebus sic stantibus" als allgemeiner rechtsgrundsatz, J.C.B. Mohr, Tübingen, 1991, 16.
36 Swiss Federal Tribunal July 3, 1919, A.T.F. (45). 1919, II, 351 at 355.
37 Federal Tribunal October 10, 1933, A.T.F. (59), 1933, II, 372. See moreover Federal Tribunal January 13, 1975, A.T.F. (101), 1975, II, 17, 19; Federal Tribunal September 26, 1974, A.T.F. (100), 1974, II, 345; Federal Tribunal December 7, 1971, A.T.F. (97), 1971, II, 390; Federal Tribunal September 18, 1981, A.T.F. (107), 1981, II, 343.
38 Ad hoc award September 9, 1983, Yb. Comm. Arb., 1987, 63 at 66-67. See moreover I.C.C. award No. 4145 (1986), Yb. Comm. Arb., 1987, 97 at 109 .
39 See Memorie van Toelichting p. 228, 772-773; C. VAN ZEBEN, J. DU RON and M. OLTHOF, Parlementaire geschiedenis van het nieuwe burgerlijke wetboek, Boek 6, Algemeen gedeelte van het verbintenissenrecht, Kluwer, Deventer, 1981, 967 at 972.
40 J. SAWADA, Subsequent conduct and supervening events, Tokyo, 1968, 134-135.
41 I.C.C. award No. 4761 (1987) , J.D.I., 1987, 1012 at 1015.
42 See e.g. Cass. January 18, 1950, Dalloz, 1950, In, 227; Cass. December 18, 1979, Gaz. Pal., 1980, I, 232; Cass. June 3, 1981, Droit du Travail, 1981, 923. Moreover, I.C.C. award No. 2708, (1976) , J.D.I., 1977, 943.
43 Cass. December 31, 1924, Gaz. Pal., 1925, I, 284; Cass. February 25, 1929, J.D.I., 1929, 1306 ; Cass. March 20, 1956, J.C.P., 1956, II, 9646.
44 See e.g. Cass. October 30, 1924, Pas. 1924 I 565; Cass. February 3, 1950, Pas. 1950 I 380. Moreover M. HUYS and G. KEUTGEN, L'autonomie de la volonté face à l'imprévision in L'évolution récente du droit commercial et économique, Brussels 1978, p. 348-351; P. VAN OMMESLAGHE, Les clauses de force majeure et d'imprévision (Hardship) dans les contrats internationaux, Revue de droit international et de droit comparé 1980, 27 at 28. An unpublished ad hoc award dated June 30, 1992 refused to adapt the contract price to changed circumstances under Belgian law: The arbitrators stated: "Claimant does not argue that the theory of "imprévision" is supported by a majority of Belgian court decisions. It does however quote certain lower court judgments where the theory of "imprévision" seems to have been applied under good faith and force majeure principles. It does refer furthermore to opinions expressed mainly by Flemish legal writers. However, these decisions and opinions, although indicating possibly a tendency in Belgium to recognise the theory of "imprévision", are not changing the legal situation existing at present and confirmed by the Cour de Cassation, by the Courts of Appeal and the majority of Belgian legal writers".
45 See e.g. F. DASSER, o.c., 110-112 and the references, quoted in note no. 11.
46 I.C.C. award No. 2291, (1975) , J.D.I., 1976, 989, which referred i.a. to Ph. KAHN, "Lex mercatoria et contrats internationaux", in Le contrat économique international, Brussels, 1975, 195 and to the award published in J.D.I., 1959, 1075. On the basis of these principles the arbitrator increased the transportation price for products not mentioned in the contract. However, one could wonder whether the price increase because of transportation of extra items, is a price adaptation because of changed circumstances or an extra payment for an additional contractual performance.
47 I.C.C. award No. 2404 (1975), J.D.I., 1976, 995.
48 I.C.C. award No. 6281 (1989), Yb. Comm. Arb., 1990, 96 at 98 .
49 I.C.C. award No. 1512 (1971), Yb. Comm. Arb., 1976, 128 at 129 .
50 See e.g. A. KASSIS, o.c., 360-367; Ph. KAHN, "L'interprétation des contrats internationaux", J.D.I., 1981, 5 at 19.
51 Ad hoc award July 6, 1983, Yb. Comm. Arb., 1984, 69 at 70.
52 See I.C.C. award No. 2216 (1974) , J.D.I., 1975, 917; I.C.C. award No. 2478 (1974) , J.D.I., 1975, 925.
53 See i.a. F.A. MANN, The legal aspects of money, Clarendon, Oxford (4th ed.) 1986, at 282.
54 Arbitral Tribunal Hamburg, award May 2, 1977, Yb. Comm. Arb., 1979, 202.
55 Alsing Trading Co. and Swedish Match Co. v. Greece, I.C.L.Q., 1959, 320.
56 I.C.C. award No. 6281 (1989), Yb. Comm. Arb., 1990, 96 at 98 .
57 See e.g. - For the U.S.: Bernina Distributors Inc. v. Bernina Sewing Machine, 646 F.2d 434 and 689 F.2d 903 (10th Cir. 1981): relief denied when costs nearly doubled; Schafer v. Sunset, 474 P.2d 529 (1970) and Eastern Air Lines v. Gulf Oil Corp., 415 F. Supp. 429 (S.D. Fla 1975) no relief in spite of 133 - 400 % cost increase; Westinghouse Elec. Co. Uranium Contracts Litigation, 517 F. Supp. 440 (E.D. Va 1981): no relief in spite of 550% cost increase. The U.S. Restatement of Contracts, Paragraph 454 considers that costs have to have increased by more than 1,000% before relief becomes possible. See however Aluminium Co. of America v. Essex Group. Inc., 499 F. Supp. 53 (W.D. Pa 1980), where relief was granted because of 500% cost increase. See J. DAWSON, "Judicial Revision of frustrated contracts: the United States", Boston Univ. L.R., 1984, 26. - For England, see E. McKENDRICK, l.c., 37-38.
58 J. WESTBERG, "International Transactions and Claims involving Government parties", International Law Institute Washington, 174.
59 H. HOLTZMANN, Forum selection cases, Opinions, 1 Iran-U.S. C.T.R., 284 at 288 ss.
60 1 Iran - U.S. C.T.R., 304 at 312-313. See also A. GEORGE, "Changed circumstances and the Iranian Claims Arbitration: Application to forum selection clauses and frustration of contract", Geo. Wash. J. Int'I. L. & Econ., 1982, 335.
61 9 Iran-U.S. C.T.R., 122-123.
62 9 Iran-U.S. C.T.R., 123 with dissenting opinion from H. HOLTZMANN: "The award's finding that the doctrine of changed circumstances applies in this case is flawed in two critical respects. First, the new circumstances cited by the award as grounds for lessening the Respondent's liability were in fact changes for which the Respondent itself is responsible. As a matter of law, a party cannot avoid contractual obligations because of circumstances that it created or that are within its own control. Second, the characterization in the award of the political circumstances in Iran in 1979 is insupportable as a factual matter. The award cites no record evidence upon which it bases its finding of supposedly changed circumstances ... Moreover, public documents, and awards and filings in other cases, in fact show that at the time the Respondent terminated this contract there was nothing in the post-revolutionary environment that made it unreasonable to continue this contract, and that the Government of Iran in 1979 continued numerous similar military contracts with Americans when it found them military or strategically justified" (9 Iran U.S. C.T.R., 123 at 138-139)
63 16 Iran-U.S. C.T.R., 3 at 39-40.
64 See the Amoco International Finance decisions, 15 Iran-U.S. C.T.R., 189 at 217-218; the Phillips decision, 21 Iran-U.S. C.T.R., 79 at 111.
65 I.C.C. award No. 1512 (1971), Yb. Comm. Arb., 1976, 128 at 129.
66 See e.g. I.C.C. award No. 3267, (1984), Yb. Comm. Arb., 1987, 87 at 109.
67 See for the original French text J.D.I., 1959, 1075 at 1080; moreover, Ph. FOUCHARD, L'arbitrage commercial international, Dalloz, Paris, 1965, 428 ; E. LOQUIN, "L'application des règles nationales dans l'arbitrage commercial international", in L'apport de la jurisprudence arbitrale, I.C.C. Paris, 1986, 87 at 99.
68 I.C.C. award No. 2291 (1975) , J.D.I., 1976, 989; also I.C.C. award No. 1512 (1971), J.D.I., 1974, 905
69 Arbitration Court of the Japan Shipping Exchange, award September 20, 1975, Yb. Comm. Arb., 1983, 153 at 155.
70 I.C.C. award No. 3267 (1984), Yb. Comm. Arb., 1987, 87 at 109.
71 See for German law: R. KÖBLER, o.c., 203-233.
72 I.C.C. award No. 1512 (1971), J.D.I., 1974, 905 at 907; also I.C.C. award No. 2404 (1975), J.D.I., 1976, 995.
73 In S.E.E.E. v. Yugoslavia, the arbitrators stated e.g.: "Il sera contraire à la bonne foi que le gouvernement d'un Etat qui a commandé et reçu des prestations refusât d'en payer de vraie valeur et entendît tirer un profit de la dévaluation considérable de la monnaie de paiement (J.D.I., 1959, 1075 at 1080). See also Alsing award, where rebus sic stantibus would only have been considered when the preservation of the contract should involve the debtor's ruin, the creditor's correlative enrichment or at least a misuse of law akin to usery from the creditor's side (I.C.L.Q., 1959, 320).
74 See ad hoc award July 6, 1983, Yb. Comm. Arb., 1984, 69 at 70: "The meaning of the rebus-sic-stantibus clause cannot possibly be to let only one contracting party feel the consequences of the changed circumstances".
75 See Arbitration Court of the Japan Shipping Exchange, award September 20, 1975, Yb. Comm. Arb., 1983, 153 at 155: "The present dispute was started by the shipbuilder's termination of the contract; however if Respondents were allowed to apply the change of situation principle as they assert, then at the present stage where the shipbuilding costs has radically dropped compared with the high prices during the boom of the shipbuilding this would allow the shipowners to freely terminate the contract and therefore would pose a threat to the grand principle of an obligation to honor the contracts. This therefore is not at all recognized".
76 R. KÖBLER, o.c., 6-13; 231-233.
77 Even if parties could have foreseen the event, "it would be abusive for claimant to insist on getting an extremely high compensation disproportionate to the real profit". (I.C.C. award No. 3267 (1984), Yb. Comm. Arb., 1987, 87 at 109).
78 Arbitration Court of the Japan Shipping Exchange, award September 20, 1975, Yb. Comm. Arb., 1983, 153 at 154.
79 I.C.C. award No. 2478 (1974) , .J D.I., 1975, 925.
80 I.C.C. award No. 4761 (1987) , J.D.I., 1987, 1012.
81 See I.C.C. award No. 2291 (1975) , J.D.I., 1976, 989; F. DASSER, o.c., 112; T. CARBONNEAU, "Rendering arbitral awards with reasons; the elaboration of a common law of international transactions", Columbia J. Trans. L., 1985, 579 at 593. See W. PETER, Arbitration and renegotiation of international investment agreements, Dordrecht, 1986.
82 Vienna Convention on the law of treaties, art. 62 .
83 E. McKENDRICK, l.c., 38-38.
84 See e.g. R. KÖBLER, o.c., 273.
85 New Civil Code, article
86 J. SAWADA, o.c., 136.
87 M. FONTAINE, o.c., 271.
88 M. FONTAINE, o.c., 275.
89 E.g. G. BERNINI and H. HOLTZMANN, "Les techniques permettant de résoudre les problèmes qui surgissent lors de la formation et l'exécution des contrats à long terme", Rev. Arb., 1975, 18; J. PAULSSON, "L'adaptation du contrat", Rev. Arb., 1984, 249; C. SCHMITHOFF, "Hardship and Intervener clauses", J. of Bus. Law, 1980, 82.
90 I.C.C. Publication, No. 326.
91 I.C.C. award No. 4761 (1987) , J.D.I., 1987, 1012.
92 I.C.C. award No. 3267 (1984), Yb. Comm. Arb., 1987, 87 at 109.

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