Key Takeaways

  • A hardship clause allows for contract renegotiation when unforeseeable and uncontrollable events severely alter a party’s ability to fulfill obligations.
  • The clause often outlines procedures such as written notification and possible mediation or renegotiation before termination.
  • Common hardship triggers include economic crises, regulatory changes, wars, or pandemics.
  • Carefully drafted hardship clauses define scope, thresholds, procedures, and remedies to reduce ambiguity and disputes.
  • Sample language should reflect clarity and cover essential terms such as notice requirements and renegotiation attempts.

A hardship clause is a provision in a contract that provides for the contract to be changed when circumstances have changed and one of the contracted parties is unduly burdened.

What Are Hardship Clauses?

Hardship clauses are included in contracts to help keep the obligations of the listed parties balanced. If circumstances change and one party is now unequally obligated, a hardship clause allows the terms of the contracts to be changed. Hardship clauses are most frequently included in international commerce agreements. Their purpose is to make sure that the contract continues when one party's circumstance have been altered and they are no longer able to meet their contractual obligations.

In terms of a contract, hardship means that the balance between two contracted parties has been altered. For instance, the costs that one party must cover to meet their obligations may have increased. There are several other requirements that must exist for hardship to occur:

  1. The change in circumstances was only revealed after the burdened party entered the contract.
  2. There would have been no way for the burdened party to anticipate this change when entering the contract.
  3. The changes in circumstance cannot be controlled by the burdened party.
  4. The burdened party did not assume the risk of the changes.

Generally, altered circumstances do not eliminate the obligation to fulfill contractual duties. This means that hardship cannot be claimed unless the events that altered the balance between the two parties could be considered fundamental to the contract.

There are several ways that a change in circumstance could be considered fundamental. For example, if one party's costs increase in a substantial way, this can be considered a fundamental change. Usually, the party affected in this circumstance is the one obligated to perform an action instead of making a monetary payment.

The other type of fundamental change that would prove hardship is when one party is no longer receiving the value that they were promised in the contract. For example, if one party hired another to build on a piece of property and a new law prevents building on that property, then the first party would not be receiving value from the second party's performance.

When hardship is claimed because of the loss of value related to performance, this loss must be able to be objectively measured. Your personal opinion that value has decreased is not relevant. If you cannot demonstrate that a decrease in value has taken place, you will not be able to claim hardship.

As you might expect, hardship can only be claimed if the performance promised by the contract has not yet been provided. After a party has performed their duties, they no longer have the ability to claim that an increase in costs or decrease in value has caused them hardship. This clause can only be invoked before contractual obligations have been performed. However, if the fundamental change occurs and the performance is only partially complete, then hardship may be claimed.

Common Triggers for a Hardship Clause

Typical circumstances that may trigger a hardship clause include:

  • Economic Disruption: Sudden inflation, currency devaluation, or a significant spike in commodity prices.
  • Legal or Regulatory Changes: New laws or government measures that affect the feasibility of contract performance.
  • Natural Disasters or Pandemics: Events such as hurricanes, earthquakes, or global health crises like COVID-19.
  • Geopolitical Events: War, civil unrest, or trade embargoes that alter the market or ability to supply goods or services.

These events must be unforeseeable, unavoidable, and beyond the control of the affected party. The clause often requires the party invoking hardship to act in good faith and attempt to renegotiate before terminating the contract​​.

Key Elements of an Effective Hardship Clause

To function properly, a hardship clause should include:

  1. Definition of Hardship: Clearly define what constitutes a hardship situation (e.g., cost increases exceeding a specified threshold).
  2. Notice Requirement: State that the impacted party must notify the other party in writing within a set timeframe.
  3. Renegotiation Obligation: Require parties to engage in good-faith negotiations to adjust terms or resolve the issue.
  4. Time Limits: Establish a reasonable period for renegotiation before further legal remedies are sought.
  5. Dispute Resolution: Outline preferred methods, such as mediation or arbitration, before resorting to litigation.
  6. Termination Rights: Specify whether the contract can be terminated if negotiations fail.

Well-drafted hardship clauses reduce ambiguity and improve enforceability by courts or arbitrators​​.

Hardship Clause Example

Hardship clauses are sometimes difficult to understand, making it a good idea to check out an example. It is possible, for instance, for cities to include hardship clauses related to taxes. A city could provide a tax exemption based on hardship for citizens who are too old, ill, or impoverished to meet their tax obligations. In many cases, these tax-related hardship exemptions also apply to citizens who experience a change in their active military status.

However, these hardship exemptions usually have requirements that must be met before they apply. For example, the town may require that a person applying for the exemption own and occupy property before a certain point in the fiscal year. The town may also require that the person requesting the exemption be an individual, meaning that businesses are not eligible.

In terms of taxes, hardship clauses will function differently than deferral clauses. For example, if the hardship clause is for property taxes, there will not be a lien placed on the applicant's property, which is usually a requirement for deferral clauses. When the exemption is granted, the taxpayer will be able to defer paying their property taxes for a certain period of time.

Hardship Clause Sample (Commercial Contract)

Here is a hardship clause sample that may be used in commercial contracts:

Sample Clause:“If during the term of this Agreement, a party experiences a substantial increase in the cost of performance or a significant decrease in the value of performance due to events beyond its reasonable control, and such hardship fundamentally alters the balance of this Agreement, the affected party may request renegotiation.

The party invoking this clause must notify the other party in writing within 10 days of becoming aware of the hardship. Both parties shall then enter into good faith negotiations to amend the Agreement. If no resolution is reached within 30 days, either party may submit the matter to mediation or terminate the Agreement upon 15 days’ notice.”

This hardship clause sample balances flexibility and legal certainty, ensuring contractual fairness when unexpected events arise​​.

Practical Tips for Drafting a Hardship Clause

When drafting a hardship clause, consider the following best practices:

  • Be Specific: Avoid vague language; define “substantial change” using measurable thresholds (e.g., a 25% cost increase).
  • Limit Scope: Identify specific events (e.g., “war,” “natural disaster,” “export bans”) rather than overly broad terms like “unforeseen events.”
  • Maintain Balance: Ensure the clause does not unfairly favor one party over the other.
  • Ensure Compliance: Verify that the clause aligns with governing law, particularly in jurisdictions where courts may be reluctant to enforce broad hardship claims.
  • Document Attempts: Keep records of all renegotiation and mitigation efforts to support your claim if disputes arise.

Including a hardship clause upfront, especially in long-term or cross-border contracts, helps manage risk and preserve business relationships​​.

Frequently Asked Questions

  1. What is the purpose of a hardship clause in a contract?
    A hardship clause allows parties to renegotiate or terminate a contract when unforeseen and uncontrollable events significantly impact a party’s ability to fulfill its obligations.
  2. Is a hardship clause legally enforceable?
    Yes, if it is clearly drafted and aligns with applicable contract law. However, courts often expect good faith efforts at renegotiation before termination.
  3. What are examples of events that trigger a hardship clause?
    Common triggers include inflation, natural disasters, war, pandemics, or regulatory changes that significantly increase costs or obstruct performance.
  4. Can a hardship clause be invoked after a party has performed?
    No. Generally, the clause must be invoked before full performance. However, partial performance followed by a hardship event may still qualify.
  5. How does a hardship clause differ from a force majeure clause?
    A hardship clause permits renegotiation due to increased difficulty or cost, while a force majeure clause excuses performance entirely when it becomes impossible.

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