Romania: Force Majeure and Hardship – a parallel between the two exceptions to the binding force of the contracts

This Memorandum aims to provide an overview of the main differences between two legal institutions – force majeure and hardship – exceptions to the pacta sunt servanda principle, given their economic significance in the current context (in particular, the pandemic and post-pandemic economic impact, the war in Ukraine, with all the effects it has produced and continues to produce).

I. Preliminary considerations

In accordance with Article 1270 of the Civil Code[1] which regulates the principle of binding force, “a valid contract has the force of law between the contracting parties”. Therefore, given that the contract represents the law of the contracting parties, they are bound by their agreement and are obliged to fulfil their contractual obligations. This aspect is also reiterated by Article 1350 of the Civil Code under the marginal title “Contractual liability”, which provides for the principle to fulfil the contractual obligations and for the liability for damage caused by unjustified non-fulfilment.

Going back to the provisions of Article 1270 of the Civil Code, these state that the contract may be amended or terminated by the agreement of the parties, which is also an expression of the principle of binding force. Furthermore, the same legal text mentions the possibility of amending or terminating the contract in certain cases as authorised by law.

Thus, the principle of binding force is not absolute and there are mechanisms that mitigate its applicability, either implemented by the will of the parties or through the legal provisions in force.

In this respect, the Civil Code regulates two main legal mechanisms that are intended to mitigate the binding force of a contract: force majeure and hardship.

Thus, as presented above, the institution of force majeure is an exception to the pacta sunt servanda principle, and is defined by the provisions of Article 1351, para. (2) of the Civil Code as “that external, unpredictable, absolutely invincible and unavoidable event”.

In the case of force majeure, we are talking about the fortuitous impossibility of execution in the event of situations occurring after the conclusion of the contract, which could not have been foreseen and which the parties cannot control or overcome in any way. Classic examples in this regard are the state of war, earthquakes, terrorist attacks, lightning, tornadoes, floods, etc.

On the other side, the concept of hardship is also an exception to the principle governed by Article 1270 of the Civil Code and it is regulated by Article 1271 of the same normative act. This may be invoked in contracts whose performance has become excessively onerous due to an exceptional change in circumstances and which would make it manifestly unjust to oblige the affected party to perform the obligation. Article 1271 of the Civil Code also regulates the cumulative conditions that must be met for hardship to find its applicability.

II. The differences between Force Majeure and Hardship

Although force majeure and hardship are similar in terms of unpredictability, referring to the events/circumstances occurring subsequently to the conclusion of the contract, elements of contrast can be noticed between these two concepts, as presented below.

Firstly, in case of force majeure, we are talking about an event which leads to the fortuitous impossibility of performance of the obligation, such being absolutely impossible to fulfil. On the other hand, in the case of hardship, there is an exceptional change in the circumstances which were considered when the contract was concluded, however the change does not lead to an impossibility of execution of the obligation. In the case of hardship, the performance of the obligation is, therefore, possible, but at a disproportionate cost, leading to an overturning of the contractual balance.

Thus, an essential element attached to hardship is the excessive onerousness of the performance of the contract. Therefore, the onerousness of the execution of the obligation is not sufficient to invoke the hardship, but the performance of the agreement must have become excessively onerous. In other words, it is precisely the extent of the contractual imbalance that makes it possible to invoke the hardship; consequently, the institution does not apply in case the obligation is merely more onerous to perform, given that, when concluding an agreement, the parties undertake, within certain limits, a contractual risk, an aspect that can be found within the provisions of Article 1271 para. (1) of the Civil Code, which also reminds of the pacta sunt servanda principle.

It should be noted that the notion of “excessively onerous” was not defined by the legislator neither within the new Civil Code, nor within other normative acts dealing with the theory of hardship. Consequently, it is for the case-law to determine the limits of this concept, by providing certain indicators for assessing the degree of onerousness of the obligations, so necessary for the application, in concreto, of the theory of hardship.

An example, in this regard, is given by Civil Sentence no. 2826/2021 of the District 3 Bucharest Court, in which the court referred to excessive onerousness stating that “The effect on the contract must consist of a serious disturbance, a disruption of the ratio of the benefits so that the disadvantaged contractor ends up in the situation of refusing to perform the contract. The effect must consist of a major, excessive difficulty in the debtor’s performance of obligations due to the exceptional change. A mere aggravation is not sufficient to justify the intervention of the court in order to adapt the contract. The radical change of obligations/severe contractual imbalance may take the form either of an excessive increase in the cost of the debtors obligations or of a considerable decrease in the value of the consideration which makes the debtors performance of the obligation manifestly unjust, and the contract loses its social utility”.

Similarly, by Civil Decision no. 325/2018 of the Gorj Court, it was ruled that “a possible contractual imbalance could occur only for what exceeds the limit of onerousness of the obligation, that is, only for what can be considered as excessively onerous”.

The intervention of the mechanism for redressing the contractual imbalance by invoking hardship also recalls, in this way, the principle of equity.

An element of similarity between the two institutions that needs to be mentioned is that, in the case of force majeure, we are talking about an event which was not foreseeable, the element of unforeseeability being present also in the case of hardship (which is reflected in the name of the institution itself). Therefore, in the event of hardship, “the change of circumstances and its extent were not and could not reasonably have been foreseen by the debtor at the time of the conclusion of the contract”, according to the provisions of Article 1271 para. (3) (b) of the Civil Code.

Further, another aspect to be considered is that, from the provisions of Article 1351 para. (1) of the Civil Code, we note that there are situations of legal or conventional nature in which force majeure does not remove contractual liability. At the same time, hardship may be invoked if the debtor “did not take the risk of the change in circumstances and could not reasonably be considered to have taken that risk”.[2]

In other words, in case the parties have stipulated within the contract that the occurrence of an event classified as force majeure does not remove liability, the debtor is still bound to perform the contract. Similarly, in the case of hardship, the undertaking of the change of circumstances makes it impossible to invoke it.

Going further in our analysis, mention should also be made of the existence of a procedural precondition for hardship, according to which the debtor must have attempted, within a reasonable time and in good faith, to negotiate a reasonable and equitable adjustment of the contract. It goes without saying that there is nothing to prevent the parties from adjusting or amending the contract in accordance with the provisions of Article 1270 para. (2) of the Civil Code.

Likewise, in the event of force majeure, the debtor is obliged to notify the creditor of the occurrence of the event in question. In this regard, the provisions of Article 1634 para.  (5) of the Civil Code stipulates that the debtor is liable for the damage caused if the notification “does not reach the creditor within a reasonable time from the moment when the debtor knew or should have known of the impossibility of performance”.

Moreover, another mention should be made that, as regards the hardship, the parties may not only derogate from its applicability, but may even modify the conditions under which it applies, by means of a contractual clause setting a certain value threshold from which the hardship would apply.

Furthermore, in case the parties choose not to mention the hardship within the contract, in the event of a dispute arising between them, the court will have to settle the dispute as to whether or not hardship has occurred in their legal relation – in other words, to adjust or terminate it.

In this respect, through the Civil Decision no. 210/R/2021 of the Timisoara Court of Appeal, which decided the adjustment, for the future, of the contracts which were the subject of the dispute in question, it was stated that “As regards the defendant’s references to the provisions of Article 969 of the old Civil Code and to the principle pacta sunt servanda – the principle of the binding force of contracts – the Court points out that the theory of contractual hardship, developed in the past on the principle of equity and contractual good faith, is an exception to that principle, which allows the contractual terms to be readjusted when, due to the intervention of extrinsic and unforeseeable factors, the contract becomes unjustly unbalanced in favour of one of the parties and to the detriment of the other, losing, at least for one of the contracting parties, its social utility”.

Another distinction that should be noted is that, under the provisions of the Civil Code, the fortuitous impossibility of execution cannot be invoked, as a rule, in cases where the obligation relates to goods of the same kind (Romanian: bunuri de gen – goods that can be substituted for each other), this limitation not being applicable in the case of hardship.

With regard to the effects that each of the two institutions has on the contract, there are several differences to be taken into consideration.

In the case of force majeure, as the impossibility of performance of the obligations is temporary or definitive, a distinction can be made on the measures to be taken, as follows: if the impossibility of execution of the obligations is temporary, its performance will be suspended during the period in which the event classified as force majeure occurs, and if the impossibility is total and definitive, the contract can be terminated.

As for the hardship, once it has been established that it has occurred, the alternative solutions which may be adopted are either to adapt the contract so as to distribute the losses and benefits between the parties in an equitable manner (in such a way that the risk of the contract will be borne by both parties) or, as the case may be, to terminate the contract at a certain time and under certain conditions, which the court may decide. It follows, therefore, that hardship can only be established by the court. On the other hand, force majeure intervenes de jure.

III. Examples of the application of the two legal institutions

In terms of the crisis situations (health, followed by humanitarian and economic) to which the world has been subjected over the last two years, the theory of force majeure and hardship have found constant application, and the case law in this respect is far from negligible.

Concerning the Pandemic Covid-19, in Civil Judgment no. 2151/2021 of the Court of Brasov, it was ruled that “The mere invocation of economic difficulties caused by the effects of the establishment of the state of emergency, without proof of other elements, does not constitute a ground of hardship. The classification in abstracto of the COVID-19 pandemic in the category of force majeure, unforseeable circumstances or hardship does not have an adequate legal basis, but, on the contrary, the legal effects on each individual contractual relation impacted by the measures taken by the authorities to prevent the spread of the SARS-CoV-2 coronavirus infection must be assessed”.

Given the humanitarian crisis that has produced and continues to produce effects on the entire European continent (and not only), generated by the Russian-Ukrainian war, it is relevant to mention the existence of a case of force majeure. In this regard, on 14 March 2022, the Chamber of Commerce and Industry of the Municipality of Bucharest informed that it promptly issues certificates confirming the existence of force majeure with regard to business relations conducted by companies affected by the military conflict.

IV.Examples of the incidence of Force Majeure and Hardship in Romanian legislation

IV.1. Law no. 77/2016[3]

In order to increase consumer protection in a situation of hypothetical contractual imbalance, the legislator has established, through Law no. 77/2016, the possibility of applying the theory of hardship in credit agreements concluded between consumers and banking institutions.

Thus, this law provides an absolute legal presumption of the existence of hardship in the consumer’s favour, should the thresholds provided for by Law no. 77/2016 be reached, i.e. the occurrence: a) during the performance of the agreement, of an increase of more than 52.6% in the exchange rate applicable to the purchase of the currency of the credit, registered on the date of the notification of giving in payment, compared to the date of the conclusion of the credit agreement, b) an increase of more than 50% in the monthly payment obligation during the performance of the credit agreement as a result of the increase in the variable interest rate. At the same time, the value thresholds set out above must be maintained for the period of the last six months preceding the notification of giving in payment.

One aspect to be mentioned is that, according to the provisions of Law no. 77/2016, the balancing and continuation of the contract have priority over its termination, which could be ordered only in case of manifest impossibility to continue its performance.

IV.2. Government Ordinance no. 15/2021[4]

The theory of hardship also applies to contracts concluded in the construction sector, through the provisions of the Government Ordinance no. 15/2021. It produces its effects through the concrete modality of “price adjustment”, as presented in the normative act.

IV.3. Emergency Ordinance no. 29/2020[5]

It is also relevant to mention the legal presumption of the existence of a case of force majeure, established by Emergency Ordinance no. 29/2020, which came into force with the outbreak of the Covid-19 pandemic. This relatively presumes to constitute a case of force majeure the unforeseeable, absolutely invincible and unavoidable circumstance “resulting from an action by the authorities in implementing the measures required to prevent and combat the pandemic caused by infection with the COVID-19 coronavirus, which has affected the activity of small and medium-sized enterprises, an effect attested by the emergency situation certificate”.

 

[1] Law no. 287/2009 on the Civil Code

[2] Article 1271 para. (3) of the Civil Code

[3] Law no. 77/2016 on giving in payment of immovable property for the settlement of credit obligations

[4] Government Ordinance no. 15/2021 on the regulation of fiscal-budgetary measures for the adjustment of public procurement contract prices

[5] Emergency Ordinance no. 29/2020 on the regulation of economical and fiscal budgetary measures

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