A hardship clause in a contract allows the parties to modify or excuse their contract obligations when one of the parties experiences a hardship. Such a hardship must be more than a mere inconvenience. Typically, it has to be an event that causes one party’s circumstances to change to such a degree that the party is unduly burdened and cannot meet the contractual obligations.
Some contracting parties have asserted that the COVID-19 pandemic and the related government-ordered lockdowns are such a hardship. Those conditions have made it difficult and, in some cases, impossible for many businesses to render performance under their contracts. If the contract has what is called a “force majeure” clause, the parties will likely be able to invoke it to excuse performance due to the COVID-19 pandemic and related government actions and public reaction.
Usually, a hardship clause will not relieve a party from all of its contractual obligations. Instead, the hardship clause usually provides an opportunity to renegotiate some part of the contract to enable the burdened party to perform.
Common Uses Of Hardship Clauses
If a contract includes a hardship clause, it may help the parties manage their contract obligations in light of the COVID-19 pandemic disruptions and related government actions.
Before relying on the hardship clause to change the contract obligations, the party seeking to modify must recognize that to succeed, the party must be able to prove that it experienced a change in circumstances that materially altered the balance between that party and the other parties to the contract. The change must be dramatic and performance potentially ruinous for one of the parties.
A common example of a change in circumstances is an increase in one party’s costs. To meet the conditions of the clause, the increase in cost must be significant enough to impair that party’s ability to perform an action required by the contract. The COVID-19 environment has increased the costs of doing business for many industries and may satisfy the hardship conditions of your contract.
Another type of change in circumstances that could amount to a hardship is when one party is no longer receiving the value that was promised in the contract. An example could be where a government action or new law prevents a contracted-for building project. The government actions related to COVID-19 could meet this condition.
Requirements For Successfully Asserting A Hardship
If one party wants to rely on the contract’s hardship clause to modify its performance obligations, consult with legal counsel to have the agreement reviewed in its entirety. In most cases, the attorney will review the language that defines what is or is not a hardship and make sure any such hardship clause is not inconsistent with any other wording in the contract. Additionally, the attorney can provide guidance to the party burdened by hardship in following the contract’s language notice and procedural requirements.
In addition to the contract requirements, the burdened party will need to satisfy applicable state laws that define hardship, follow any state law procedures necessary to properly assert it, and recognize whether the contract language has modified or waived any parties’ rights under those laws.
In general terms, most states’ laws pertaining to hardship require the burdened party to prove several facts for a hardship condition to exist under contract law:
- The change in circumstances was not foreseen by the burdened party before entering into the contract
- There would have been no way for the burdened party to anticipate the change of circumstances at the time of entering the contract
- The change in circumstance cannot be controlled by the burdened party
- The burdened party did not assume the risk of the change in circumstances. The burdened party has not completed performance under the contract
- The burden of proof is on the party asserting the hardship
How Are Disputes In Hardship Clauses Resolved?
In disputes arising out of a hardship, the best resolution is usually through skillful negotiation. Parties should attempt to renegotiate the contract terms and performance obligations affected by the hardship. In many cases, getting help from an experienced contracts counsel is the best way to ensure that the parties understand the business risks of not achieving a resolution and to ensure that all issues are fully addressed.
If the dispute concerns whether a hardship exists at all, or if renegotiation fails to resolve matters, the consequences of failure to work things out vary and are dependent on the contract language and the business risks. Many business contracts have a dispute resolution process that involves mediation or arbitration. Those clauses will surely become operative.
In some cases, the disadvantaged party may be left with only one option: Terminate the contract if the other party has no obligation or incentive to renegotiate.
Finally, the contract language may specify a remedy that applies in the event of a hardship or contract termination such as some form of a liquidated damages provision.
Hardship Clauses Distinguished From Force Majeure And Hell Or High Water Clauses
Over centuries of commerce, customary business practices in the face of unexpected disruptions to contract performance have emerged. Those practices are usually embedded into business contracts. They spell out the parties’ rights and obligations when circumstances arise that make contract performance impossible or nearly impossible. The hardship clause is one of those. Two others are the force majeure clause and a clause known as the “hell or high water” (HOHW) clause. They each differ from the hardship clause, as explained below.
Hardship Clause vs. Force Majeure Clause
The primary difference between a hardship and a force majeure event is the effect on the burdened parties ability to fulfill the contract. In a hardship situation, the parties can fulfill all or some of the contractual obligations with some modification needed to address a hardship. It could be a change in pricing or a change in the performance schedule.
On the other hand, a force majeure event may render performance impossible and may require suspension or termination of the contract. In such cases, the burdened party will not be liable for breach of contract but may be responsible for returning payment for not-yet-performed services or pay other amounts if the terms of the contract outline such.
In both hardship and force majeure circumstances, the triggering event must be beyond the control of either party.
Hardship Clause vs. Hell Or High Water Clause
As has been noted, the hardship clause provides the parties an opportunity to renegotiate some part of the contract necessitated by a hardship event.
The HOHW clause permits no excuse for non-performance. The HOHW clause clarifies that the contract obligations (or payments) must continue regardless of any hardship, force majeure event, or other frustration of purpose.
Reach Out To KPPB LAW For Advice On Your Contracts
If COVID-19 and its fallout have created challenges for your business in fulfilling your contract obligations, get help from the contract law attorneys at KPPB LAW. They are well-versed in reviewing and analyzing contracts, negotiating new terms, and providing representation before a variety of third-party tribunals to resolve disputes. Getting their help may be the most important step you can take to protect your business interests. Contact KPPB LAW today to discuss your situation.
