Hardship clauses – Are they back? Should they be back?

The hardship clauses usually amount to little more than a promise to discuss changes, without any binding obligation.

In turbulent times hardship clauses tend to come to the surface. We have seen a few in recent weeks, and especially linked to uncertainty caused by the potential US tariffs on Chinese built ships.

When something new comes up we take a look in the mirror to see whether similar issues have come up in previous times, and our experience says that they often have. Searching 136 years of our Nordisk Circulars, we wrote quite a bit about hardship clauses in the 60s (Suez crisis) and late 70s (devaluations, yard crisis, shipping crisis).

In Nordisk Circular, Issue 476 (May 1967), we noted that they often have wording saying the parties “mutually affirm that on request of either party they will closely examine the situation with good will to ascertain whether it is possible to rectify or ameliorate the hardship”. Such clauses do not ensure consequences of the hardship will actually be ameliorated. Obligations are fulfilled when parties have “closely examined” the situation. As such, the clauses can give a false sense of security.

In Nordisk Circular, Issue 503 (March 1978), we wrote that hardship clauses (aka “be kind” clauses) were not very popular but did come to the surface from time to time in long term contracts. He noted that the highly respected Norwegian law professor Arnholm had said in a lecture that the hardship clause “probably amounts to no more than that – one cannot be thrown out of the other party’s office the first time one comes and asks for a change in the contract.”

A Nordisk case on the topic was mentioned: An owner asked a charterer for a rate increase under a hardship clause after costs rose sharply due to the Suez Crisis in 1956. The charterer was earning enormously in the high market and agreed to the request. The market then collapsed, and the charterer now requested a revision back to the original rate under the hardship clause. The shipowner refused, and the QC instructed laconically stated that the fact that the charterer had been kind and foolish in a given case did not imply any obligation for the other party to be equally kind and foolish.

This generally remains the position still. Hardship clauses can perhaps serve as a sign of trust between the parties, but if that trust is there the clause might be unnecessary because they could always sit down to discuss if the situation changed. And if the trust is not there, then the clause does not help because it will not ensure an actual adjustment of contract terms if hardship strikes. This is so under both English law and Norwegian law.

Under Norwegian law, the Contracts Act § 36 allows the courts to adjust the parties bargain in some cases, and to a larger extent than the English law doctrine of frustration. But it does not matter to the application of § 36 whether a hardship clause is included in the contract. And the Norwegian Supreme Court just reconfirmed in HR-2025-251a (Red Rock) that the threshold for using § 36 is indeed very high between professional parties. Hence, the hardship clause remains at best a promise to meet to discuss a change in circumstances, with no obligation to agree to any actual amendment of the contract. 

One idea that has been used from time to time is to include a mechanism where external arbitrators will decide an adjustment, if the balance of the contract has become very different from what was intended. The Nordisk May 1967 article said that if a hardship clause is to have any actual effect, then one must incorporate a form of arbitration language. This would say that the decision on changes in contract terms should be left to one or more independent persons. In such case, this should be done through a relatively simple and expedient procedure. Such wording was sometimes added to hardship clauses at the time, and especially regarding currency devaluations. The decision would typically be left to “three commercial men” in London. Such a simple arbitration mechanism is of course risky, as one never knows what independent commercial representative might decide.

The Nordisk 1978 article similarly mentions the rare hardship clauses that include wording stating that if the parties do not agree on a revision of the contract, this should be left to an expert tribunal. However, the article highlighted how the uncertainty this entails is an obvious disadvantage. We had seen agreements where the tribunal was to adjust the terms so that the economic outcome for the parties should be largely the same as if the circumstances had not changed. That this can be very difficult practice is beyond doubt.

In conclusion, we do not think hardship clauses are very useful. One should take into account what the clauses do and what they do not do, and consider whether better options might exist. We would generally recommend instead to try to regulate precisely what should happen to the charterparty or other contract if circumstances change, including if new US tariffs are introduced on Chinese built vessels or those operating them are introduced. We have seen one version in the form of what someone called a “Trump clause”, which simply places all responsibility on the other party.

It will be interesting to see in coming months and years how this develops, as the sun appears to be setting on the era of globalisation and potentially taking us back to a world of superpower rivalry and trade wars.

No matter what the future brings, the Nordisk team is at your service for discussions and drafting support, as we have been for the last 136 years.