11 Hardship, Impracticability, Unconscionability, Unforeseeability
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund


Fluctuations in exchange rates can have disturbing and even catastrophic effects on contracts, particularly if performance is necessary over a long period or at a time far ahead. As a consequence, what are known as hardship clauses have become common.1 A hardship clause can be described as a term of a contract under which the contract can be reviewed if a change in circumstances occurs that fundamentally modifies the initial balance between the obligations of the parties, so that performance, though not impossible, becomes unusually onerous for one party.

Hardship Clauses

Fluctuations in exchange rates can have disturbing and even catastrophic effects on contracts, particularly if performance is necessary over a long period or at a time far ahead. As a consequence, what are known as hardship clauses have become common.1 A hardship clause can be described as a term of a contract under which the contract can be reviewed if a change in circumstances occurs that fundamentally modifies the initial balance between the obligations of the parties, so that performance, though not impossible, becomes unusually onerous for one party.

The clause defines hardship for the purpose of the contract in which it appears and provides a procedure for adapting the contract if hardship as defined occurs. Hardship clauses can be distinguished from doctrines familiar to the law that can be subsumed under the heading of imprévision or frustration. These doctrines apply to situations in which a fundamental disturbance occurs in the economic balance of a contract as the result of supervening events that were unforeseeable, or that were not foreseen, when the contract was made. Hardship clauses, by contrast, can apply, if the parties wish, to supervening events that were foreseen as possible when the contract was made, but the term is applied also to clauses that deal with supervening events whether or not the parties thought the events might occur. Both hardship clauses and the doctrines to which the words imprévision and frustration have been applied are inspired by the thought that the supervening events are beyond the control of the contracting parties. The contract is terminated if such a doctrine applies or if a force majeure term in the contract comes into operation. Hardship clauses, however, assume that the contract continues in force, but possibly with modified provisions.

The International Chamber of Commerce (ICC) has issued a brochure entitled Force Majeure and Hardship,2 which casts some doubt on the scope of hardship clauses. The brochure states that the event giving rise to hardship must be one that was not contemplated when the parties made their contract, although the event need not be one that the parties could not have taken into account. The first part of this statement would cast doubt on the ability of a party to invoke a hardship clause as the result of a change in exchange rates, because in these days all parties must know that exchange rates are fluctuating. However, the brochure declares also that the parties may specify the contingencies entitling a party to invoke the clause in their contract.3 Although it would be unrealistic and highly inconvenient to provide that any change in exchange rates might be examined to see whether it had produced hardship, the same objection might not apply to a specified change of substantial amount that persists for a specified length of time or a similar change in average exchange rates over a defined period.

Hardship clauses must be distinguished also from clauses that provide for the automatic modification of a specified term or terms of a contract in certain specified circumstances, such as changes in costs, prices, or exchange rates. Index or maintenance of value clauses fall into this category. They can apply whether or not the changes create what would be considered hardship.

It may be necessary in determining the protection a contract affords to a party to distinguish not only between hardship clauses and clauses that provide for the adaptation of contractual terms if certain developments occur but also, in relation to the latter clauses, between higher operating costs and changes in exchange rates as the development that increases contractual burdens. The necessity to make this latter distinction is illustrated by an English case4 in which the German owner of a vessel chartered it to an American corporation under a time charterparty entered into on January 9, 1969. The original period of three years for the charterparty was extended to five years.

The charterer was to pay hire at the rate of 23.5 U.S. cents per bale cubic foot per 30 days. Payment was to be made in U.S. dollars in New York, monthly in advance. Clause 10, entitled Escalator Clause, provided that the original rate of hire was based on wages, including social insurances, and working conditions in force, at the time of delivery of the vessel, under an agreement between the German Shipowners’ Association on one side and the Officers’ and Crew’s Unions on the other side in respect of the trade for which the vessel was chartered (“the crew agreement”).

The rate of hire was to be increased or decreased if the wages payable by the owner were raised or reduced under the crew agreement. The payments by the owner to the crew of the vessel were largely in deutsche mark. It was accepted by both parties to the action that to make the contract workable, the increase or decrease in the owner’s wage bill had to be translated into U.S. dollars. All the changes in the crew agreement and in the wage bill involved in the action were made yearly and were increases.

The issue in the case was the selection of the exchange rate at which deutsche mark had to be translated into dollars for the purpose of arriving at the monthly payment of hire. For a time there had been no problem because fluctuations in the exchange rate between the two currencies had been insignificant, but in 1971 the deutsche mark began to appreciate against the dollar. Then, as one member of the English Court of Appeal said:

Once again we are faced with having to consider the consequences of the present chronic instability of currencies in relation to a contract made some seven years ago in happier financial days, when the problems to which this case gives rise were not problems against which these parties thought it necessary expressly to guard themselves.5

The owner contended that the translation of deutsche mark into U.S. dollars had to be made at the exchange rate prevailing when each monthly payment of hire was due. The charterer argued that the appropriate exchange rate was the one prevailing when agreement was reached on revision of the crew agreement, and that this exchange rate continued to be applicable to subsequent monthly payments of hire until agreement was reached on the next revision of the crew agreement. The issue was one of construction of the charterparty, and of Clause 10 in particular.

The court accepted the charterer’s argument. Clause 10 was not intended to protect the owner against changes in the exchange rate as such. Some evidence of this interpretation was found in the fact that the rate of hire was fixed in U.S. dollars and did not vary with fluctuations in the exchange rate before the date of the first revision of the crew agreement. Clause 10 was intended to protect the owner solely against increases in the wages paid under the crew agreement. The dollar equivalent of such an increase had to be calculated on the basis of the exchange rate prevailing at the date of agreement on the increase and that dollar equivalent was added to the rate of hire until agreement was reached on the next revision of the crew agreement.

Most often, cases deal with problems of the exchange rate between a foreign currency and the currency of the forum, as will be seen from later sections of this monograph. The case discussed above illustrates a problem of determining the appropriate exchange rate between two currencies when neither of them is the currency of the court.

An advantage of hardship clauses is that they do not specify in the contract the adaptations that are to be made in contractual terms, and there is no need to attempt to define the adaptations. Agreement on adaptations is left to future review and negotiation. A hardship clause defines not the adaptations but the procedure to be followed if the clause is invoked. The procedure may be arbitration, the involvement of experts, negotiation between the parties themselves, or something else. A further advantage of hardship clauses is that they may be less likely than, say, index clauses to raise problems of validity under national law. However, there may be difficulties of interpreting a hardship clause to determine whether it applies to the events or the changes in circumstances that have occurred.

Contracting parties are free to renegotiate their contract at any time after entering into it. An advantage of a hardship clause is that it compels the parties to consider the modification of their contract if the existence of hardship is not disputed. There is no such compulsion in the absence of a hardship clause. It is assumed, of course, that the hardship clause is drafted with sufficient precision to be enforceable.

Hardship clauses do not exclude the right of a contracting party to plead imprévision or frustration. A party against whom a claim based on nonperformance is brought may prefer to rely on this kind of defense if the party wishes to escape from the contract and not to adapt it by negotiation.6

The ICC brochure sets forth drafts of some possible hardship clauses and comments on them. The drafting suggestions deal in broad language with the circumstances in which the particular hardship clause can be invoked by a party, or rather the criterion that would justify invocation of the clause, and the procedure that is to be followed for revision of the contract. For example:

Should the occurrence of events not contemplated by the parties fundamentally alter the equilibrium of the present contract, thereby placing an excessive burden on one of the parties in the performance of its contractual obligations, that party may proceed as follows: …

The parties shall then consult one another with a view to revising the contract on an equitable basis, in order to ensure that neither party suffers excessive prejudice.7

It is obvious that such words and phrases as “fundamentally,” “alter the equilibrium,” “excessive burden,” “excessive prejudice,” and “equitable basis” can provoke controversy between the parties. This language may make the argument stronger for a procedure involving the intervention of arbitrators or experts and perhaps eventually the courts.

The ICC brochure, in discussing the drafts it puts forward, makes the following comments that are of particular interest. Hardship may come into play not only when the party providing performance is excessively burdened, but also when the value of the performance to the party receiving the performance becomes “so minimal” that it is “utterly disproportionate”8 to the benefit that will be gained by the other party. Hardship, however, cannot be invoked by a party because the contract turns out to be unprofitable for him or because the profits flowing from it become considerably smaller than he had expected at the time the contract was concluded. Furthermore, the alleged hardship must be evaluated in the context of the contract as a whole, and not simply in relation to the part of the contract that has been performed.

The ICC brochure points out that hardship clauses are relatively recent and still in the course of development. The drafts are not offered as a single standard clause that can be incorporated in contracts by reference. They are not adapted to particular needs or circumstances and therefore contain no mention of monetary developments. Other works, however, mention hardship clauses that refer to such developments as serious distortions in the relations between the currencies referred to in the contract, monetary manipulation, disturbances in the present international monetary system, changes in monetary values, and so on.9

A clause along these lines, whether regarded as a hardship clause or not, has been involved in litigation before the Argentine courts.10 Citibank, Bahamas, made a loan of US$1 million to the defendants, the Narbaitz firm and the partners in it, who were residents of Argentina. Citibank received a promissory note under which the loan was repayable in New York City according to a schedule of installments and dates of payment. The loan agreement was to be construed according to, and governed by, the law of the State of New York. The defendants submitted to the jurisdiction of the courts of that State or to Federal courts sitting in the State. Payment was guaranteed jointly by the defendants, but they failed to pay. Citibank brought proceedings in a Federal court sitting in New York State and obtained judgment. Citibank then instituted proceedings in Argentina for exequatur of the judgment and succeeded.

To guarantee repayment of the loan, the defendants gave Citibank a mortgage on real property and a chattel mortgage for an amount in Argentine currency equivalent at the time, toward the end of 1980, to the U.S. dollar amount of the loan. This contract contained a clause that is pertinent to the present discussion: the amount of the guarantee was to be adjusted in accordance with any future changes in quotations for the U.S. dollar in the domestic exchange market. The clause would probably be considered an index rather than a hardship clause, but it will be seen that the guarantors have claimed that the clause is more in the nature of a hardship clause in the circumstances that developed. The parties also agreed that in matters relating to the guarantee, the courts of Bahía Blanca in Argentina would have jurisdiction.

The defendants in the suit referred to above instituted separate proceedings in Bahía Blanca as petitioners against Citibank as defendant. The aim of the Narbaitz partners in their suit was review of the amount of the guarantee, alleging that as a result of the sharp appreciation of the U.S. dollar in 1981, the agreed adjustment would lead to an amount in Argentine currency that would constitute a confiscation of the guarantors’ assets and an unjustified enrichment for Citibank. The implication of this suit may be that Citibank would have to rely on the guarantee to obtain satisfaction of the New York judgment and the judgment of the Argentine court granting exequatur of it.

The issue raised by the Narbaitz partners has not yet been decided. So far, in the suit on the guarantee only the question of jurisdiction has been settled. Citibank argued that only the courts in New York had jurisdiction over all matters relating to the loan, including the guarantee, and that the New York court had delivered its judgment. The Narbaitz partners contended that the loan agreement and the guarantee agreement were separate contracts, as was demonstrated by the different jurisdictional clauses, and that the two agreements should not be consolidated. The Federal Supreme Court of Argentina accepted this contention. It has not yet decided what effect must be given to the adjustment clause in the guarantee or by what law that question would be settled under the private international law of Argentina.

The decision means that the accessory character of a guarantee agreement does not prevent recognition of the agreement as a contract distinct from the principal agreement. What, if any, force must be given to the fact that a mortgage of Argentine real property was involved is not clear. The decision must be taken to reject the proposition that adjustment of the principal amount of the loan was necessarily subject to the jurisdiction of the court that had exclusive jurisdiction over the principal amount, but it does not follow that the Argentine court has decided by which law the effect, if any, of the adjustment clause on the principal amount will be determined.11 The latter question of the governing law would be settled in accordance with the private international law of Argentina.

An aspect of the case relevant to this study is that the private international law of the lex fori may interpose complications when a party seeks to enforce a hardship clause designed to give protection against the fluctuation of exchange rates. The clause will be ineffective if the Argentine courts hold that New York law governs the influence of the adjustment clause and that reduction of the principal amount of the loan is not recognized by that law.

The Commissioners on Uniform State Laws have adverted to the problem of the effect of private international law on issues within the scope of their proposed Uniform Foreign-Money Claims Act. Section 2(b) provides that the Act applies to “foreign-money issues” even if other law under conflict of laws rules of the enacting State applies to other issues in the action or distribution proceeding. A comment states that the provision removes any doubt that the determination of when a foreign currency is to be translated into U.S. dollars is decided by the lex fori. The full effect of Section 2(b), however, might need to be investigated.

Impracticability and Unconscionability

Bernina Distributors, Inc. v. Bernina Sewing Machine Co.,12 decided by the United States Court of Appeals for the Tenth Circuit, is the first American case to consider the question whether a contracting party can claim relief from a contract on the ground of impracticability attributed to changes in exchange rates.13 The case dealt also with the question whether relief from contractual obligations could be justified under a doctrine of unconscionability because of the depreciation of a currency.

The defendant, a Utah corporation, imported sewing machines from Switzerland and supplied them to the plaintiff, a California corporation. The plaintiff paid Swiss francs for the machines. The contract between the plaintiff and the defendant in issue in this case was made in 1971 and was to run for seven years and longer in some circumstances. The contract prescribed what were, in effect, fixed dollar prices for existing, replacement, and new models, although there was provision for passing on to the plaintiff increases or decreases in the Swiss manufacturer’s invoice costs to the defendant, as well as provision for a surcharge of 10 percent on increased prices charged by the manufacturer on replacement models.

With the steep decline in the exchange rate for the U.S. dollar against the Swiss franc, the defendant began to impose a 10 percent surcharge on invoices for existing and replacement models as compensation for the increased cost of purchasing Swiss francs. The plaintiff objected to this practice and also to the defendant’s method of using the current (instead of the 1971) exchange rate to calculate the price for new models. The plaintiff brought this action to get an interpretation of the contract. The trial court upheld the plaintiff’s objections.

The defendant appealed and argued that, although the exchange rate had fluctuated mildly before the contract was entered into, by the time of trial the decline in the exchange rate for the dollar had almost halved the defendant’s rate of return per dollar invested. The defendant argued that the continuous and substantial depreciation of the dollar had not been foreseen when the contract was entered into, and as prices were open under the contract, the court should establish a reasonable price in the circumstances, which the defendant alleged the court could do under Utah’s enactment of the Uniform Commercial Code of the United States (UCC).14 The court rejected this argument on the ground that the contractual terms on basic prices and modifications in them were comprehensive. The modifications provided for passing on to the defendant increases in the manufacturer’s billings to the plaintiff, plus a 10 percent surcharge on these increases for replacement machines, but these provisions did not include the defendant’s increased cost of purchasing Swiss francs. The court held that the defendant had accepted the risk of a diminishing profit margin because of increasing costs not included in the prices chargeable to the plaintiff in accordance with the contract.

The defendant also argued that the lower court’s interpretation made the contract impracticable under Utah’s enactment of the UCC. The law provides that a party is excused from performance of his contract, “[e]xcept so far as a seller may have assumed a greater obligation,” when performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made. . . .”15 The court refused to hold that the contract had been made “impracticable” by the contingency of the substantial depreciation of the U.S. dollar, because the contract always allowed a margin of gross profit, even though the return on capital investment had been greatly reduced because of the depreciation. In addition, there was evidence that depreciation had been within the defendant’s contemplation and that the defendant had accepted the risk. Comment 8 attached to the provision in the UCC states:

[T]he exemptions of this section do not apply when the contingency in question is sufficiently foreshadowed at the time of contracting to be included among the business risks which are fairly to be regarded as part of the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances.16

Furthermore, Comment 4 on the provision in the UCC declares that increases in cost, though great in extent, do not come within the concept of impracticability. In one case, it had been held that the doctrine of impracticability was not available unless the party invoking it could show that he could perform only at a loss and that the loss would be especially severe and unreasonable.17 The court held that this test was not met in the instant case.

Next, the defendant contended that the contract was unconscionable within the meaning of another provision in the Utah Code,18 because of the cumulative effect of the following circumstances: the defendant had been unaware of the risk of exchange rate fluctuation; the defendant had been unaware of the construction the court would put on the contract; and the Swiss manufacturer had put pressure on the defendant to enter into a contract with the plaintiff. A Comment on the UCC states that the principle of the provision is one of “prevention of oppression and unfair surprise … and not of disturbance of allocation of risks because of superior bargaining power.”19 It must be proved that the contract is “so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.”20 The court emphasized the clause that specified the relevant time in this formulation.

This Court has previously held that an increase in price has nothing to do with unconscionability. Bradford v. Plains Cotton Cooperative Ass’n, 539 F.2d 1249, 1255 (10th Cir. 1976). Lack of oppression is particularly clear in this case because Importer is guaranteed a gross profit. Exchange rate fluctuations before the date of the contract were relatively small, and a provision limiting price increases to cost was not so one-sided as to be oppressive at the time of the contract’s making. In addition, Importer was aware of the possibility of a reduction in profits due to exchange rate fluctuations and could have guarded against this contingency. Indeed, Distributor several times suggested that a cost-plus formula be utilized, (Ex. 7) but Importer refused, insisting on a fixed profit scheme. (Ex. 8) Importer was represented by counsel throughout and should have known that the contract provided for price increases only to the extent of actual cost increases. We cannot agree that Importer was forced by the manufacturer to conclude whatever deal Distributor demanded; there is no significant imbalance in the financial strength of these parties. To grant relief on this issue would be to disturb an agreed-upon allocation of risk between commercial equals.21

A commentator22 on the Bernina case has suggested that the decision leaves open the possibility that exchange rate variations may make nonperformance of a contract excusable because of commercial impracticability under established legal doctrine. According to the commentator, this possibility may exist if changes in exchange rates have gone beyond the normal or predicted range and were not foreseeable. That changes beyond this range would not occur might be considered a basic assumption of the parties when the contract was made. The collapse of the par value system and resort to a floating exchange rate system was only remotely foreseeable when the contract was made. (It is not clear from the report of the case when in 1971 the contract was made. If it was entered into before August 15, 1971, it would be unreasonable to assume that the President’s action on that date to abrogate the official convertibility of the dollar could have been foreseen. Even foreign monetary authorities and most U.S. Government departments were astonished.) The commentator makes the further point that, whatever the prospects may be for succeeding on the ground of impracticability in the future, success is unlikely if, as in the Bernina case, the contracting party trying to establish the excuse is suffering a reduction in profit but not a financial loss.

An Australian author has written that much received wisdom and a good deal of law are based on the assumptions that contracts are agreements voluntarily made by parties of roughly equal strength and that the primary object of the law of contract is to achieve predictability and certainty in transactions, particularly commercial transactions.

[T]hese assumptions are the basis for most of the concern about any expansion of rules relating to “unconscionability” or any other rules which may depart from the notion that once a person has made an agreement, or has done some act which the law recognises as giving rise to some legally binding contractual obligation, that person is inescapably bound by that contract. Both the courts and legislatures in various parts of the common law world have, in recent years, moved away from an approach which places supreme value on the absolute certainty of contract to one which accepts both that there may be some notions (such as “justice” or “fairness”—or even “equity” in some sense), upon which society places a higher value than it does upon certainty—though certainty and predictability are, to some extent, inherent in what is ordinarily meant by “justice.” They have also accepted the reality that in substance, the parties to the vast majority of legally binding contracts which are made in modern society are in no sense equal or even free. This is the rationale for most consumer protection legislation, of which the Trade Practices Act 1974 (Cth.) is the most important Australian example.23

Persuasive though these views are, they do not, as the author recognizes, make a case for a doctrine of unconscionability or the like in contractual relations when the parties are of substantially equal economic strength or when there is no great imbalance in bargaining power between them.24


The Bernina case illustrates a disposition of courts or arbitrators to deny relief to a party disadvantaged by a change in exchange rates because he should have foreseen the instability of rates. Tribunals do not take the position that a party should have foreseen the emergence of a particular exchange rate, or the path along which the exchange rate moves, or even the fact of appreciation or depreciation. Instead, tribunals rely on the view, expressly or tacitly, that reasonable men should take into account the fact that exchange rates fluctuate under present international arrangements. As a consequence, it is held that reasonable men must bear the burden of fluctuation if they have not taken steps to protect themselves against this behavior of exchange rates either by terms of the contract or by forward exchange contracts.

Two cases are instructive examples of the tendency noted above. Both were decided in the earlier years of fluctuating exchange rates and before the Second Amendment was negotiated. It is likely that the tendency would be even more pronounced now.

The first case,25 decided by an arbitrator in New York City on April 25, 1973, is particularly interesting because it involved both a hardship clause and the argument of impracticability. A dispute arose between the owner and the charterer of two vessels under two charterparties entered into on June 12, 1968 for a period of approximately five years. The dispute centered on two clauses, one of which, Clause 53, provided that if the U.S. dollar should be devalued in relation to the official price of gold of US$35 per fine ounce, the owner, upon six months’ notice to the charterer served not later than 90 days after each such devaluation, would have the right to renegotiate the rate of hire. If agreement was reached on a new rate of hire, it would come into force six months after the date of notice but not earlier than July 1, 1969. Clause 54, the hardship clause, was drafted as follows:

If conditions which are unforeseen today should arise during the tenure of the Timecharter Party whereby undue hardship should be inflicted on either Owners or Charterers, they mutually affirm that on request of either party they will closely examine the situation with goodwill to ascertain whether it is possible to rectify or ameliorate such hardship. This clause only to come into effect from October 1st, 1970.

In the latter half of 1971 and through 1972, the owner pressed for renegotiation under Clause 54 on the ground that circumstances unforeseen when the charters were entered into had made performance of them economically impracticable. Among these circumstances were the increased costs of wages and of provisioning the vessel because of devaluation of the U.S. dollar. The owner did not succeed in his efforts to renegotiate the rate of hire.

The owner then argued that it was released from the charters. The arbitrator treated the owner’s argument as based on the common law doctrine of frustration and not on Clause 54. He found that the criteria for applying the doctrine were not satisfied. The devaluation was foreseeable, and the owner had not proved that the increased costs had made performance economically impracticable. The total percentage change in the operating expenses of the two vessels between 1969 and 1972, resulting from all economic factors, was an increase of 48.9 percent. But only 40 percent of the owner’s expenses were incurred in foreign (non-U.S.) currencies. In addition, the owner’s expenses in Chilean escudos were reduced by the devaluation of that currency between August 1971 and May 1972. Mere increase in cost alone was not a sufficient excuse for nonperformance. The increase had to be extreme and unreasonable to justify nonperformance. The award does not answer the question whether the owner’s increase in costs would have been a sufficient justification for invoking Clause 54.

The other case of the two mentioned above was decided by the Karlsruhe Oberlandesgericht.26 The United States entered into an agreement with a German company, the Indus Corporation, on April 14, 1969 and supplementary agreements on April 1 and April 11, 1972. Indus undertook to have several apartment houses built on its land, with a total capacity of 175 apartments, and to let them to personnel named by the United States, at a specified uniform rent based on space. The contract provided for a revision of the rents after two years if taxes and insurance premiums rose or fell, but the rent was never to exceed the equivalent of US$185 a month per apartment as an average of the rents for all apartments. The United States guaranteed that for ten years it would make up the difference if the total rents received by Indus in each half year were less than 97 percent of the potential rents for all apartments. On April 30, 1974, after the United States had rejected various proposals for an increase in rent, Indus declared that the contract was canceled on the ground that the basis for the contract had disappeared.

Part of the company’s case rested on the depreciation of the U.S. dollar. The maximum average rental of $185 resulted in reducing the value of the guarantee by the United States from 97 percent to 60 percent of possible loss. The depreciation also deprived Indus of the margin for increasing rents up to the maximum that existed when the agreement was concluded and when the exchange rate was DM 4 per dollar. When the agreement was made, Indus argued, both parties had assumed fixed exchange rates and relative stability of the U.S. dollar. This assumption had been an essential basis of the agreement. The argument was the same as the one advanced by the commentator on the Bernina case in relation to the collapse of the par value system.

The Karlsruhe court held, however, that the basis for the contract had not disappeared and that the contract was binding. To support a claim that the basis of a contract has disappeared, a party suffering disadvantage must prove that a shift has occurred in the balance between performance and compensation that was not foreseen when the contract was made and that was so fundamental that the party could not reasonably be expected to perform.

The court held that there was no such unforeseen and unreasonable shift in balance in this case. The depreciation of the U.S. dollar had affected the return to Indus but not to such an extent that it could not accept the reduction as part of its bargain. When the agreement was entered into, the parties could have foreseen fluctuations in the exchange rate, even if not the magnitude of the changes that had occurred. Indus must be taken to have foreseen the risk posed by fluctuations and to have accepted it. The company had no right to release itself from the contract even if observance threatened to be ruinous. This dictum is hard to reconcile with the earlier criterion of a fundamental shift in the balance between performance and compensation that made it unreasonable to expect continued performance. The dictum treats reduced profit and loss in the same way.

As suggested above, it is now more difficult for a defendant to argue successfully that his failure to perform contractual obligations or the frustration of the contract is justified by a change of circumstances if the change he alleges is in exchange rates. The judicial denial of justification is even more likely if the legal doctrine or the contractual term on which the defendant relies explicitly or implicitly refuses relief when the possibility of changes in circumstances was reasonably foreseeable. According to any test of reasonableness, the fact that exchange rates may change, even in the short term, is now foreseeable.27

An exception might be made to the assumption of the reasonable foreseeability of changes in exchange rates if the rate that is relevant in a case is between one currency and another pegged to it. The possibility of a change in the peg in the discretionary system of exchange arrangements cannot be dismissed, but it is a less frequent event than the fluctuation of exchange rates between currencies when there is no peg between them. If the exception is recognized, courts might have to take account of exchange arrangements as well as exchange rates when considering issues of foreseeability.

The volatility of exchange rates and the wide swings in them are a further reason why it might be difficult to grant relief to a defendant seeking to justify the nonperformance of contractual obligations. A development in exchange rates that is unfavorable to a defendant can be followed, even after a moderate interval, by a favorable development. An unfavorable trend over a prolonged period, or an averaging of exchange rates over such a period to show an unfavorable result, might possibly help the defendant’s cause. It might also strengthen his case if the effect of changes in exchange rates has been to produce a loss for him rather than a reduction in profit. A defendant cannot be confident, however, that either argument will help him to succeed in establishing a defense.

A defendant may face a further difficulty if he can protect himself against the exchange risks inherent in a contract. The reference here is not to protection by means of the inclusion of exculpatory terms in the contract itself, although courts have sometimes regarded the absence of such terms as evidence of the defendant’s acceptance of risks. It may be possible for a defendant to negotiate protection, for example, by forward exchange contracts. If he fails to negotiate possible protection, the court may conclude that he had decided to absorb the risk of changes in exchange rates.

A New Zealand case, Isaac Naylor & Sons Ltd. v. New Zealand Co-operative Wool Marketing Association Ltd.,28 illustrates some of these propositions. Under the five contracts involved in the case, Naylor, an English company, purchased wool from the Co-operative, a combination of New Zealand wool farmers, at prices expressed in sterling. The wool was to be delivered in the last two quarters of 1974 on timely shipping instructions by Naylor. Payment was to be in cash against documents when the wool arrived. The Co-operative’s practice, known to Naylor, was to have sterling receipts converted immediately into New Zealand currency and transferred to New Zealand. At the request of Naylor, shipments were delayed until June 1975 subject to reservation by the Co-operative of its rights resulting from the delay. Payments were made at the contract price, but the Co-operative asserted that the delays under the contracts had caused them various losses, including loss resulting from the depreciation of sterling against the currency of New Zealand, for all of which the Co-operative claimed damages.

Naylor argued that recovery for exchange losses was prevented by the principle of nominalism in monetary law. A debt expressed and payable in a particular currency may be discharged by payment, though late, of the same number of units of the currency as is called for by the contract, notwithstanding depreciation of the currency during the period of delay. The court pointed out that this principle did not apply to the case, because it was not one of delay in payment after shipment but of Naylor’s delay in giving shipping instructions. All three members of the New Zealand Court of Appeal agreed that the principle of nominalism did not apply.

The court considered the effect of forward exchange contracts on the claim to damages. Naylor argued that it expected the Co-operative to protect itself with forward exchange contracts, and to roll them over when they expired, in the event of delays. Naylor and other firms in the trade followed this practice. Any loss suffered by the Co-operative, Naylor argued, was too remote to justify the recovery of damages. The Co-operative had entered into forward exchange contracts for some deliveries and for part of the period before payment by Naylor, but the Co-operative contended that these contracts were res inter alios and irrelevant to its claim. The contracts resembled contracts of insurance, which traditionally are disregarded in assessing damages. The court rejected this argument. Forward exchange contracts are not contracts of insurance, because they do not provide for payments on the happening of uncertain events. The obligation of the bank to buy at the specified exchange rate under the forward exchange contracts was the same whether or not exchange rates fluctuated, and the obligation had nothing to do with any breach of contract by Naylor. Nevertheless, the effect of forward exchange contracts should not be disregarded on principle:

If the floating currencies of recent times have led to developments in the law regarding exchange variations in the interests of realism and justice, I think that the Courts should be consistent and not shut their eyes to covering contracts of this kind. But whether the result of any particular case is affected by taking them into account will depend on the facts. Here, for reasons to be given, I do not think they make any difference.29

One of the reasons was that it was not enough for Naylor to allege that it had expected the Co-operative to protect itself by means of forward exchange contracts. The criterion was whether a reasonable man in the position of the Co-operative was so likely to enter into such contracts that its failure to do so could be treated as the acceptance of risk. Naylor had not shown how common the practice of buying and selling forward exchange was at the material time among exporters and importers in the wool trade. The Co-operative could not be denied damages on the ground that there was an implied term in the contracts with Naylor that the Co-operative had to protect itself against delays by forward exchange contracts. The court was equally unwilling to deny the claim to damages by accepting Naylor’s argument that the Co-operative’s failure to protect itself by forward exchange contracts meant that its losses were too remote a consequence of Naylor’s delays.

Naylor made the further argument that most of the Co-operative’s loss had to be attributed to the forward exchange contracts the Co-operative had entered into and not to Naylor’s breach of contract. Naylor contended that if damages were awarded they should be equivalent to the sum by which the total New Zealand dollars the Co-operative had received under forward exchange contracts fell short of the amount it would have received under forward exchange contracts had there been no delays.

The member of the Court of Appeal who dealt with this argument distinguished between the periods before and after the due date for payment. For the period before the due date, the amount that the Co-operative would have received under forward exchange contracts was not the criterion. The reason was that although the bank as a party to these contracts was bound to buy sterling at a fixed rate, the Co-operative as the bank’s customer was not bound to sell. The customer might decide not to sell because the exchange rate in the market was more favorable to him than the rate available under the forward exchange contract. It was incorrect to assume, therefore, that the Co-operative, by entering into forward exchange contracts, had committed itself to accept the exchange rate it would have received under such contracts had shipment not been delayed. Losses because of unfavorable exchange rates under forward exchange contracts during the period after breach could not be calculated because none of the contracts or rollovers ran precisely from the due date of payment. No evidence had been given of the difference in exchange rates prevailing on the due dates and those prevailing at the actual dates of payment.

The decision is not as illuminating as it might have been because Naylor had failed to introduce evidence on the practice of entering into forward exchange contracts in the New Zealand wool trade. The issue whether there is a duty to mitigate damages by negotiating forward exchange contracts was not resolved. A further issue necessarily remains open. It is not clear what the effect is of forward exchange contracts on claims for damages resulting from fluctuations in exchange rates when there has been a breach of contract. On this question, it is interesting to observe that the Co-operative had suffered more loss with the forward exchange contracts that it had entered into than it would have suffered without them and by recovering damages. The exchange rate had depreciated by the time of a rollover of these contracts, and the new rate was substituted for the preceding rate. In addition, the Co-operative incurred costs in negotiating the forward exchange contracts. The Co-operative did not claim the losses sustained in this way.

Foreseeability and International Developments

Attitudes to the foreseeability of fluctuation in exchange rates may be responsible for some features of recent international developments. The Convention Establishing the Multilateral Investment Guarantee Agency (MIGA) lists the losses against which the Agency may give guarantees to investors as those that result from the host government’s restrictions on transfers, expropriation and similar measures, and breach of contract, as well as war and civil disturbance in the territory of the host government.30 The Convention then provides as follows:

Upon the joint application of the investor and the host country, the Board, by special majority, may approve the extension of coverage under this Article to specific non-commercial risks other than those referred to in Section (a) above, but in no case to the risk of devaluation or depreciation of currency.31

The explanation of the exclusion of exchange rate risks may be that they were considered commercial risks and therefore beyond the scope of the Convention. It is not obvious, however, why restrictions on the transfer of funds are so different in character from a “devaluation” that the one governmental action is commercial and the other noncommercial. Both are exercises of sovereign power. (“Depreciation,” in contrast to “devaluation,” should be understood to mean a decline in the external value of a currency as the result of market forces.)

The explanation of the exclusion of devaluation and depreciation, therefore, must be different. It may be that governments do not lightly or frequently impose exchange restrictions, and, in addition, restrictions on payments and transfers for current international transactions are subject to approval by the IMF, while governments are free to choose their exchange arrangements and to determine the external value of their currency by direct action or by not interfering with market forces. A more persuasive explanation, however, may be that in such an international monetary system, if guarantees were given against the fluctuation of exchange rates, the cost would be prohibitive and the volume of work for the Agency would be overwhelming. Precedent also may have had an influence: it is the tradition of national guarantee and insurance arrangements to exclude exchange rate risks from the coverage that is offered.

Relief against these risks is not denied under all international arrangements. For example, it has been seen that the World Bank’s Currency Pooling System shares exchange rate risks among borrowers from the Bank and that financial management has been modified to reduce the risks of this kind that will continue to be shared in accordance with the System.

On August 23, 1988, the IMF established a compensatory and contingency financing facility32 in which the novel feature is provision, on the request of a member, for additional financing under a stand-by arrangement if unfavorable external contingencies occur during the period of the arrangement, or for reduced financing if the contingencies are favorable. The broad approach is that “baseline projections” are made of “key external variables that cover a substantial proportion of the exogenous components of the member’s current account and that relate to the specified external contingencies during the period of the projections.”33 The deviations from the baseline projections must be “unanticipated,” which perhaps means unforeseen although probably not unforeseeable in character, because the external contingencies taken to be relevant in the individual case are specified. Among the conditions that must be met is that the deviations must be outside the member’s control.

When the IMF approves a stand-by arrangement, the IMF specifies the external contingencies that will be taken into account and the maximum amount of resources that may be available if external contingent deviations of an unfavorable character occur. Access to contingent resources will usually be permitted only if the net sum of deviations (namely, the net aggregate effect of the deviations on the member’s balance of payments) exceeds 10 percent of the member’s quota in the IMF.34

The decision is complex and notable therefore for the absence of any indication, subject to one exception, of the external contingencies to which the decision can apply. The indicated contingency is an increase in net interest costs that the member would have to pay, to foreign lenders one must assume.35 It would seem, therefore, that there is no legal objection in principle to the treatment of changes in exchange rates as external contingencies for the purposes of the decision, but the contingencies are likely to relate to three leading external variables: export earnings, import prices, and interest rates. All three of these contingencies could be taken into account in cases covered by the policy. The condition that deviations from the baseline projections must be beyond the member’s control might mean that at least some changes in the exchange rate of the member’s own currency are beyond the scope of the decision. In this respect, it should be noted that another condition of the availability of external contingency financing is that the member’s performance under the stand-by arrangement is satisfactory.36


Bruno Oppetit, “L’adaptation des contrats internationaux aux changements de circonstances: la clause de ‘Hardship’,” Journal du Droit International (Paris), No. 1 (1974), pp. 794–814; “Contrats économiques internationaux: Les Hardship clauses,” Droit et Pratique du Commerce International (Paris), Vol. 1, No. 3 (September 1975), pp. 512–17; “Hardship Clauses,” Droit et Pratique du Commerce International (Paris), Vol. 2, No. 1 (March 1976), pp. 51–88; Harold Ullmann, “Droit et Pratique des Clauses de Hardship dans le Système Juridique Américain,” Revue de Droit des Affaires Internationales, No. 7 (1988), pp. 889–904.


Paris, March 1985


Ibid., p. 20.


W. Bruns & Company of Hamburg v. Standard Fruit and Steamship Company of New Orleans (The “Brunsrode”) [1976] 1 Lloyd’s Rep. 501.


Ibid., p. 507.


See In the Matter of Arbitration of Disputes Relating to the Charters of M.S. John Wilson and M.S. Chilean Nitrate, etc., 1973 A.M.C. 1489.


International Chamber of Commerce, Force Majeure and Hardship (Paris, March 1985), p. 18.


Ibid., p. 21.


See the works referred to in footnote 1 above.


Narbaitz, Guillermo y otra v. Citibank N.A., Citibank N.A. v. Narbaitz Hnos. y Cia. S.C.A., 86.598 and 86.599, La Ley (Buenos Aires), 1988, pp. 380–89.


The Montevideo Treaties on International Civil Law of 1889 and 1940 provide that accessory contracts shall be governed by the law that governs the principal contract, but the treaties did not apply to the instant case.


646 F.2d 434 (10th Cir. 1981).


Laura Stevenson Conrad, “Bernina Distributors, Inc. v. Bernina Sewing Machine Co.: New Grounds for Commercial Impracticability Based on Currency Exchange Rates under Uniform Commercial Code Section 2-615,” North Carolina journal of International Law and Commercial Regulation, Vol. 8 (Winter 1982), pp. 117–29.


Utah Code Ann. § 70A-2-305(1) (1980).


Ibid., § 70A-2-615 (1980): “Excuse by Failure of Presupposed Conditions.”


Ibid., § 2-615 (1978), Official Comment 8.


Gulf Oil Corp. v. F.P.C., 563 F.2d 588, 600 (3d Cir. 1977).


Utah Code Ann. § 70A-2-302 (1980).


Uniform Commercial Code, § 2-302, Unconscionable Contract or Clause, Official Comment 1.




646 F.2d, at p. 440.


See p. 128 of the article cited in footnote 13 above.


John Goldring, “Certainty in Contracts, Unconscionability and the Trade Practices Act: The Effect of Section 52A,” Sydney Law Review (Sydney), Vol. 11, No. 3 (March 1988), pp. 514–36, at pp. 514–15. A French court, however, may take account in some circumstances of clearly excessive consequences (“conséquences manifeslement excessives”) that would result from the application of an exchange rate. In National Bank of Pakistan v. BNP-España, the Pakistan bank ordered the transfer of a U.S. dollar amount to a Spanish bank. An intermediary bank made an erroneous transfer to a Swiss bank. The Spanish bank obtained an order for provisional execution oil a judgment requiring payment of the dollar amount translated into French francs at the exchange rate prevailing on August 23, 1984, the date on which payment should have been made. When the Spanish bank sought payment in 1987, the Pakistan bank appealed. By this date, the dollar had depreciated substantially against the franc. On appeal, it was held that the original judgment for execution should stand, but should be confined to the dollar amount. The effect would be that the Pakistan bank could pay at once in dollars or in francs at the depreciated rate for the dollar prevailing on the date of actual payment. The court took this decision under Article 524 of the New Code of Civil Procedure, under which provisional execution ordered by a lower court can be stopped if the result would be clearly excessive. The Pakistan bank, it will be noted, was not at fault, and the Spanish bank waited three years before seeking payment of the funds owed to it.—Recueil Dalloz Sirey (1989), No. 35, Sommaires Commentés, p. 329.


An Argentine case decided on May 10, 1989 may illustrate the reluctance of courts to give relief to a debtor who alleges that changes in exchange rates have made performance impracticable, although there was a special circumstance in the case that makes generalization doubtful. The Argentine borrower had applied to an Argentine bank for a loan denominated in U.S. dollars and had signed promissory notes in that currency. The borrower had been credited, however, with Argentine currency. The borrower sought judicial review of the contract, alleging that the loan was of Argentine currency and that reference to the dollar was intended to be an escalator clause tied to the exchange rate so as to stabilize the economic balance of the contract and preserve it against purely local developments. The borrower then argued that, because of the subsequent steep and unforeseen depreciation of the Argentine currency, the escalator clause would totally distort the intent of the parties and make the repayment obligation impracticable. The court was asked to allow the borrower to discharge its obligation by repaying the original equivalent in Argentine currency, adjusted for local inflation plus interest.

The legal basis of the suit was Article 1198 of the Civil Code, which establishes the so-called teoría de la imprevisión. If a party to a contract under which there are reciprocal and fixed (i.e., non-aleatory) obligations alleges that performance by him has become excessively onerous because of extraordinary and unforeseeable events, he may request judicial termination of the contract. The other party may avoid termination by offering an improvement in the terms of the agreement considered fair by the court.

The court held that the obligation was in dollars and that the credit of the Argentine equivalent was irrelevant to characterization of the obligation. The court found that the loan to the borrower and the Argentine lender’s U.S. dollar-denominated credit facility extended to the lender by a foreign bank were part of the same economic transaction. The court therefore rejected the argument that the reference to the dollar was an escalator clause, and held that it would be unfair to the lender to allow the borrower to discharge its obligation without reference to the subsequent exchange rate because the lender would remain liable to its foreign creditor for the full amount of dollars. In such circumstances, the borrower was deemed to have received dollars, and Article 1198 did not apply to such a case.—Mediterránea SA v. Banco Exterior SA, journal of International Banking law (Oxford), Vol. 5, No. 3 (1990), p. N-61; La Ley (Buenos Aires), 1989-D:240.


See the case referred to in footnote 6 above.


United States of America v. Indus C.m.b.H., 10 U 94/75 (February 13, 1976).


See Glafki Shipping Co. S.A. v. Pinios Shipping Co. No. 1 (The “Maira”) (No. 2) [1985] 1 Lloyd’s Rep. 300.


[1981] 1 NZLR 361.


Ibid., p. 366.


Article 11(a) (MIGA)


Article 11(b) (MIGA).


Executive Board Decision No. 8955-(88/126), August 23, 1988, as amended by Decisions No. 9101-(89/30), March 7, 1989, and No. 9391-(90/43), March 22, 1990, Selected Decisions, Fifteenth Issue, pp. 133–63, 383.


Ibid., paragraph 18.


For the calculation of the amount that may be made available, see paragraph 19(b) and (c).


See references to net interest costs in paragraphs 19(b) and 21(a).


Paragraph 18(b). The finding would be made by the IMF. Conditioning the availability of resources on the subjective judgment of the IMF appears to depart from the traditional concept that resources subject to a stand-by arrangement cease to be available only if the member fails to observe a performance criterion (or if ineligibility proceedings are invoked). Performance criteria have to be objective, so that a member has the assurance of the availability of resources that is the rationale of the stand-by arrangement. (See Joseph Gold, Conditionality, IMF Pamphlet Series, No. 31 (Washington: International Monetary Fund, 1979), pp. 30–34.) The explanation may be the assumption that if an external contingency arises and has the necessary impact on the balance of payments, the member will be unable to observe performance criteria. This assumption is perhaps implicit in paragraph 18(c), under which it is a condition that “the member is prepared to adapt its adjustment policies as may be necessary to ensure the viability of the program supported by the associated arrangement through a mix of adjustment and financing appropriate to the circumstances of the member.” Another, but weaker, explanation might be that only the basic amount is considered to be properly within the scope of the stand-by arrangement, while the external contingency amount is, in effect, extrinsic to the arrangement. This approach would not explain the reduction in the basic amount when the external contingencies are favorable.