The contemporary economic situation in Lithuania (as well as worldwide) increasingly often creates difficulties for businessmen to fulfill their contractual obligations, especially with respect to the contracts concluded a number of years ago. Many businesses are currently seeking to renegotiate their agreements and to adapt them to the changed economic circumstances. For example, the media recently wrote about the (unsuccessful) attempts of the tenants of the Kaunas shopping and entertainment center "Akropolis" to collectively press the owners of the premises to renegotiate the lease agreements and to reduce the lease payments.
Attempts to seek contract renegotiation/adaptation raise both business and legal problems. To excuse non-performance and to adapt the contract for just any reason would encourage future uncertainty and possible violation of the basic contract law principle pacta sunt servanda, which means that the party must keep its promise to perform. On the other hand, an absolutely strict non-adjustment model may be also undesirable for a number of reasons. Firstly, the contracting parties may never foresee all the potentially disruptive effects of future events that may fundamentally alter the equilibrium of the contract. Secondly, it often happens that once the initial investment is made it becomes complicated to terminate the contract because it is difficult to transfer the invested capital. Because of these and other reasons the adjustment model is gaining confidence in both legal and business areas.
The least complicated way for the parties to deal with future contingencies is to stipulate special provisions in the contract that allow renegotiation and adaptation in cases of changed circumstances. Various legal techniques are available in this respect. For example, the parties may insert automatic price indexation clauses, special tax clauses, clauses ensuring against future changes in the law or general hardship clauses dealing with unforeseen events. However, contract negotiation and drafting practice shows that parties rarely tend to include general hardship clauses in the contract. This is partly because a lawyer attempting to include a general hardship clause often encounters reluctance from the parties: in the negotiation stage the parties have a positive attitude and are not willing to deal with the circumstances they neither wish, nor foresee to occur.
In case there is no special hardship provision in the contract the parties may attempt to rely on the statutory hardship rule set forth in Article 6.204 of the Civil Code of the Republic of Lithuania. This provision has been transplanted from the UNIDROIT Principles of International Commercial Contracts. Article 6.204 of the Civil Code defines hardship as a situation where performance of a contract shall be considered obstructed under such circumstances that fundamentally alter the balance of the contractual obligations, i.e. either the cost of performance has essentially increased, or the value thereof has essentially diminished. Four main conditions must be fulfilled to prove hardship:
1) the event must occur or become known after the conclusion of the contract;
2) the event could not reasonably have been taken into account at the time the contract was entered into;
3) the event is beyond the control of the party claiming hardship; and,
4) the risk of the event was not assumed by that party.
In case of hardship the party may request renegotiation. Nevertheless, the request for renegotiation does not entitle the party to withhold performance. If renegotiation fails a party may resort to the court, which may adapt or terminate the contract. However, a study of the recent case law confirms that courts are very strict while applying hardship statutory provisions and there are only a few precedents in Lithuania when a contract has been adapted on this basis. For example, the Supreme Court of Lithuania held that lower than planned natural gas consumption because of the unexpectedly mild climate did not constitute hardship because the party was supposed to foresee and anticipate such an event 's therefore, the Supreme Court refused to modify the contract.
Considering the contemporary economic environment it is very likely that the role of contractual hardship provisions will increase and so will the number of attempted renegotiations.
Paulius Zapolskis is an associate advocate at Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality "one-stop shop" approach to clients' needs in the Baltics.
