In long-term contracts, it is impossible to foresee all situations that may destabilize the contractual balance and affect the legal relationship in a way that harms the parties. Although legal instruments provide mechanisms to anticipate scenario changes, it is impossible to predict all types of crises that could occur.
Given this instability, legal systems use the concept of Force Majeure, providing solutions for such situations.
Another mechanism to deal with these scenarios is the Hardship Clauses, which is not explicitly provided for in Brazil’s legal system. However, the International Chamber of Commerce (ICC), along with other international organizations, recommends this clause in contracts, contributing to its growing recognition in Brazil. Although there is no specific regulation addressing Hardship Clauses, the constant negotiations of Brazilian companies in international contracts have driven the study and understanding of this clause within the national context. The interaction of local companies with global markets requires an adaptation to international contractual practices, making the Hardship Clause a well-known and increasingly utilized tool by legal professionals. As a result, lawyers and contract specialists have dedicated themselves to investigating its implications, interpreting its applicability, and seeking ways to incorporate it into national negotiations. This familiarity not only enriches legal knowledge in Brazil but also enables national companies to be in line with global best practices, ensuring greater security and flexibility in their contractual relationships.
A hardship event is defined as a situation that causes changes in the political, economic, financial, legal, or other sectors that directly impact a company’s business.
Based on this definition, a Hardship Clause establishes the possibility of readapting the contract’s terms when they become too onerous for one of the parties due to a hardship scenario.
The purpose of such Clauses is to promote greater security and effectiveness in contracts by maintaining the Principle of Conservation of Legal Business. The Hardship Clause aims to preserve and maintain the contract while causing the least possible damage to all parties involved. That said, the Hardship Clause promotes contractual readjustment, ensuring that performance is not rendered impossible for the party most harmed.
It is also important to point out that the two key elements in a Hardship Clause are: (i) the events that will be considered Hardship and their unpredictability; and (ii) the manner in which the readjustment will occur.
Considering the definitions of the two topics, the main difference is that Force Majeure arises in exceptional situations where it becomes impossible for one of the parties to fulfill their obligations, leading to contract termination. Hardship Clauses, on the other hand, allow the contractual relationship to be maintained, under revised terms.
However, Hardship Clauses are not legally provided for in Brazil’s legal system, raising discussions about their applicability, which depends on local laws in contractual disputes.
This debate revolves around the Principle of Excessive Burden, found in the Brazilian Civil Code, which can be invoked to terminate a contract. By establishing Hardship Clauses in advance, it is possible to prevent the subjective application of this principle, promoting renegotiation and ensuring the contract’s execution.
A practical example of the application of these Clauses can be seen during the COVID-19 pandemic.
When the pandemic hit, Force Majeure Clauses were often invoked, as companies claimed it was impossible to fulfill their contractual obligations under the unprecedented circumstances.
In contrast, industries such as food supply, which operate under continuous supply contracts, faced drastic cost increases due to product shortages and disruptions in global supply chains. Rather than terminating these contracts, some companies sought to renegotiate the terms under Hardship Clauses, to ensure the contract’s continued execution. The use of these clauses in such cases helped preserve contractual relationships, allowing the parties to fulfill their obligations under revised conditions.
In conclusion, both Force Majeure and Hardship Clauses play critical roles in protecting parties involved in long-term contracts from uncontrollable events. While Force Majeure addresses scenarios where performance becomes impossible, Hardship Clauses allow for contractual adjustments in cases of excessive burden. Despite the lack of explicit legal provisions for Hardship in Brazil, its constant use in international contracts highlights its practical relevance. By carefully incorporating these clauses into contracts, parties can better navigate uncertainties, ensuring legal certainty and continuity in their business relationships.