Difference between force majeure events and hardship in contracts

The process of executing contracts can be affected by numerous unforeseen objective factors that the parties involved cannot anticipate. Among these, “Force Majeure Events” and “Hardship” are both undesirable events that the contracting parties cannot foresee, making contract performance exceedingly difficult, even though the affected party has taken all necessary measures within their capacity. However, distinguishing between Force Majeure and Hardship is essential, as it leads to different consequences in contract execution along with changes in the rights and obligations of the parties involved. 

According to the definition in Clause 1, Article 156 of the Civil Code 2015, an event may be identified as a Force Majeure Event if it (i) occurs objectively, (ii) is unforeseeable, and (iii) despite having applied all necessary measures, it cannot be remedied. In contrast, Hardship as defined in Clause 1, Article 420 of Civil Code 2015 is identified when it meets the conditions (i) arising from objective causes occurring after the contract’s conclusion, (ii) which could not have been foreseen at the time of contract formation, (iii) otherwise, the parties would not have entered into the contract or would have done so with entirely different terms, (iv) if the contract is not amended, continuing performance would result in serious harm to one party, even though (v) the affected party has taken all necessary measures within their capacity but cannot prevent or mitigate the impact on their interests.  

While these two events may seem similar, Force Majeure Events and Hardship fundamentally differ in nature. This article will only analyze the key points to differentiate these two events, particularly focusing on the extent of influence the event has on contract performance and the resulting consequences when these events occur. 

Regarding Force Majeure Events, when such an event occurs, the affected party cannot remedy the situation despite having taken all necessary measures within their capacity, at least for a certain period. At this point, the affected party cannot continue to fulfill their obligations under the contract. Civil Code 2015 in Clause 2, Article 351 stipulates that if a party fails to perform their obligations due to Force Majeure Events, they shall not be liable for civil responsibility (unless otherwise agreed or provided by law). The occurrence of Force Majeure Events is also one of the cases exempting liability for violations as stipulated in Point b, Clause 1, Article 194 of the Commercial Law 2005, after the violating party promptly notified the other party about the situation and potential consequences as per Clause 1, Article 295 of Commercial Law 2005. Therefore, invoking the force majeure clause is often presented as an explanation for the inability to continue contract performance, typically aiming to terminate the contract and be exempt from liability or to reasonably extend the performance period until the Force Majeure Events cease and the contract can be resumed.  

Conversely, in the case of Hardship, the circumstances of contract performance have changed so significantly that if the contract continues without amending its terms, it would cause severe harm to one party. This means that the parties can still continue contract performance; however, the damages would be excessively burdensome for the affected party, disrupting the balance of interests that the parties agreed upon when signing the contract. The Civil Code 2015 also provides that in the case of hardship, the party whose interests are affected has the right to request the other party to renegotiate within a reasonable timeframe, or if that is not possible, the parties may seek court intervention to terminate the contract or amend the contract terms to restore the balance of rights and interests. However, the negotiation to amend or terminate the contract, or awaiting court resolution, does not serve as grounds for temporarily suspending contract performance, and the parties still have obligations to continue performance (unless otherwise agreed) as stipulated in Clause 4, Article 420 of the Civil Code 2015. Thus, parties referencing hardship typically aim to maintain the established contractual relationship by renegotiating terms. In such cases, parties usually sign a contract addendum or participate in another agreement to change, adjust, or supplement one or more terms of the signed contract to continue execution while ensuring the rights and interests of the parties are preserved, rather than terminating the contract. If the parties cannot reach an agreement on amending the contract, one party may also request the court to make a decision to terminate or amend the contract. However, such amendment is quite limited, as the court can only decide to amend if terminating the contract would result in greater harm than the costs of fulfilling the contract if amended.  

To clarify further, the following examples may be considered. The parties sign a lease agreement for a duration of one year for the purpose of leasing premises for a food service business. The business is operating normally; however, due to an unexpected outbreak of an epidemic, the competent governmental authority has ordered all food service establishments to close for several months to prevent the spread of the disease. This event can be identified as a Force Majeure Event because it occurs objectively, is unforeseeable, and the Lessee cannot do anything other than close the premises and cease business, despite taking preventive measures such as disinfection, maintaining distance, or any other precautionary measures. In this case, the Lessee may request to terminate the lease agreement with the Lessor ahead of schedule without being considered a breach of contract and is exempt from liability due to the force majeure situation after duly fulfilling the obligation to notify and mitigate (if applicable). 

In a similar situation, but not due to the epidemic, if a brawl arises from personal grudges among customers dining at the restaurant, resulting in damage to life and negatively impacting the restaurant’s reputation, as well as causing a significant drop in customer traffic, this event can be identified as Hardship because it occurs objectively after the lease agreement, the parties could not foresee this change at the time of contract formation, and if the Lessee continues to rent the premises at the same high monthly rent, they would suffer serious harm due to the lack of customers. Despite the Lessee taking numerous measures to mitigate the impact during the brawl and through advertising and deep discounts to attract customers after the incident, they still cannot prevent the damage. In this case, the Lessee may invoke the provisions regarding hardship to request the Lessor to adjust the contract terms, such as signing an addendum to reduce the rental price, to balance the interests of both parties. The Lessor may agree or disagree with the Lessee’s request, and if negotiation fails, either party may seek the court to terminate or amend the contract to balance the rights and interests of the parties. Of course, during the negotiation for amendment or while awaiting the court’s resolution, both parties must continue to fulfill their rights and obligations under the original lease contract unless agreed otherwise. 

In conclusion, both Force Majeure Events and Hardship are unforeseen events beyond the control of the parties at the time of contract formation and execution. Nevertheless, clearly distinguishing these situations is crucial, as despite some similarities in their defining conditions, the essence of Force Majeure Events and hardship differs significantly, and the legal consequences arising from these two events are also distinct. 

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