A contract is made on the basis of an economic balance the parties assess at the time of contracting. But what if that balance collapses afterwards through an event outside their control: a sudden sharp rise in material prices making a construction contract ruinously loss-making, or a break in a global supply chain doubling import costs? Performance here is not impossible. The contractor can still build and the supplier can still buy at the new price, but performance has become so onerous as to threaten insolvency. The governing rule is that a contract is the law of the parties and may not be revoked or varied, yet Kuwait Civil Code No. 67 of 1980 introduces an important exception, the doctrine of unforeseen circumstances. This article explains its conditions and effects.
The Rule and the Exception
The contractual system rests on a settled principle subject to a narrow exception:
- The rule: a contract is the law of the parties and may not be revoked or varied save by their agreement or for reasons the law provides. This principle is the foundation of confidence in dealings.
- The exception: where exceptional general circumstances that could not have been foreseen arise, with the result that performance becomes so onerous for the debtor as to threaten them with ruinous loss, the judge may reduce the onerous obligation to a reasonable level.
- Its purpose: not to release the debtor from their obligation or protect them from poor commercial judgment, but to distribute the burden of the exceptional event between the parties rather than loading it on one alone.
- Its narrow character: given the exception's implications for the stability of dealings, its conditions are applied strictly and are not construed expansively.
Conditions for Application
The doctrine applies only where four conditions combine, and the absence of any one defeats it:
- A contract of deferred performance: the contract must be one whose performance extends over time, such as construction, supply, or long-term lease. A contract performed immediately leaves no room for the doctrine.
- An exceptional general event: an event of a general character affecting a class of persons rather than the debtor alone must occur after contracting. A general economic crisis, a break in a global supply chain, or a significant sovereign decision may qualify, whereas the debtor's illness, personal difficulty, or loss on another transaction does not.
- Unforeseeability: the event must have been unforeseeable at the time of contracting judged by the standard of a reasonable person rather than the debtor themselves. Ordinary price fluctuation is inherently foreseeable in trade, so a price rise alone does not suffice.
- Hardship, not impossibility: performance must have become onerous so as to threaten ruinous loss rather than impossible. Ruinous loss is assessed by reference to the contract itself rather than the debtor's overall wealth and exceeds the loss ordinarily encountered in commerce.
The Essential Distinction from Force Majeure
The two are commonly confused, and the difference changes the outcome entirely:
- Force majeure: renders performance absolutely impossible, so the obligation is extinguished, the contract dissolved, and the debtor wholly released.
- Unforeseen circumstances: render performance onerous rather than impossible, so the obligation subsists and the contract continues, but the judge varies the onerous obligation.
- Who benefits: under force majeure the debtor is released, whereas under unforeseen circumstances they remain bound to perform after variation.
- The judge's role: under force majeure the judge declares the obligation extinguished, whereas under unforeseen circumstances they exercise a discretion to restore balance.
- Practical effect: a party pleading force majeure who proves only hardship will fail, so the correct legal basis must be chosen from the statement of claim onwards.
The Court's Power to Rebalance
Here lies the distinctive feature of the doctrine. The judge neither cancels nor leaves matters as they are but varies:
- Reduction to a reasonable level: the judge may vary the onerous obligation so as to relieve the hardship, having regard to the interests of both parties.
- Means of variation: increasing the agreed consideration, reducing the counter-obligation, granting time for performance, or temporarily suspending part of the obligation.
- Distributing the loss: the purpose is not to transfer the whole loss to the other party but to share it between them as justice requires.
- No rescission on this ground: the doctrine is an instrument of variation rather than rescission, so a debtor may not seek rescission relying on it alone.
- Discretion subject to reasoning: the judge's assessment is reviewable by the Court of Cassation as to whether the conditions were satisfied and whether the reasoning is adequate, though not as to the extent of the variation itself.
Nullity of Contrary Agreements
This point is among the most practically significant features of the doctrine:
- A mandatory rule: any agreement contrary to the doctrine is void, so a debtor may not waive in advance the right to seek variation.
- Rationale: preventing the stronger negotiating party from imposing an advance waiver on the weaker, particularly in standard-form contracts.
- Effect on contract terms: this does not prevent agreeing contractual mechanisms addressing changed circumstances, which facilitate application without diminishing the right.
- Burden of proof: the party relying on the doctrine must establish the occurrence of the event, its general character, its unforeseeability, and the extent of hardship, making technical and accounting reports decisive.
Drafting Change-of-Circumstances Clauses
Contractual prevention is better than litigation, and the matter can be addressed in advance:
- Renegotiation clause: obliging the parties to negotiate in good faith to vary the contract where a defined element changes beyond an agreed threshold.
- Objective criteria: tying variation to a measurable index such as a materials price index or exchange rate rather than general wording inviting dispute.
- Price adjustment clause: a published formula applying automatically once a threshold is exceeded, the clearest solution and the least contentious.
- Defining force majeure: defining it precisely in the contract with its consequences, clearly separated from cases of hardship.
- Notification mechanism: requiring written notice within a short period of the event, with the financial effect evidenced by documents.
- Failed negotiation: providing what happens if negotiation fails, whether reference to a neutral expert, arbitration, or a conditional right to terminate.
Practical Guidance
- Do not suspend performance unilaterally when the event occurs. Suspension is a breach justifying rescission against you whatever your circumstances.
- Give written notice immediately on the event occurring, setting out its expected effect. Prolonged silence weakens your position.
- Document the financial effect: earlier and current purchase contracts, invoices, price reports, and supplier correspondence.
- Establish the general rather than personal character of the event. This is the most common ground on which such claims fail.
- Choose precisely between force majeure and unforeseen circumstances. Confusing them destroys the claim.
- In long-term contracts, do not rely on the general doctrine alone but include a clear contractual mechanism for changed circumstances.
The doctrine of unforeseen circumstances is a safety valve for long-term contracts, but it is an exception granted only to those who satisfy its conditions and document their position. Yamnak Law Firm advises on drafting change-of-circumstances and renegotiation clauses and conducts and defends contractual rebalancing claims before the civil and commercial courts.
