Change of circumstances

What it means

A change of circumstances, known internationally as hardship, is a situation where, after a contract is concluded, the conditions on which the parties built it change unforeseeably and fundamentally. Performance remains possible but becomes disproportionately costly for one party, for example after a sharp rise in energy or material prices or the introduction of new regulations.

Slovak law has no general rule allowing parties to change a contract because circumstances have changed. The Commercial Code allows a fundamental change to be taken into account only in limited cases, such as an agreement to conclude a future contract. The principle is that contracts must be honoured and the risk of price changes lies with the party that committed to perform.

A change of circumstances must be distinguished from force majeure. Force majeure is an obstacle that makes performance temporarily or permanently impossible and excludes liability for damages. With a change of circumstances performance is possible, only much more expensive. The difference is decisive when assessing claims in a dispute.

How it works in practice

Since the law helps only exceptionally, the solution is a contract clause. A hardship clause describes what counts as a fundamental change, for instance a certain index rising by more than an agreed percentage, and sets the procedure: a duty to negotiate a price adjustment, a deadline for agreement and what happens if the parties fail to agree, such as a right to withdraw or a decision by a third party.

A simpler alternative is an indexation clause that adjusts the price automatically by the consumer price index, energy prices or an exchange rate. It suits long-term supply and framework agreements, where repeated negotiation would be inefficient. The index, period and method of calculation must be defined precisely.

For long-term fixed-price contracts we recommend considering at signing which costs could rise unexpectedly and either covering them with a clause or building a risk premium into the price. In disputed situations mediation can also help reach agreement without lengthy court proceedings.

What to watch out for

Do not invoke changed circumstances without a contractual or legal basis, and do not stop performing. Unilaterally halting deliveries because prices have risen is usually a breach of contract and can lead to a contractual penalty and damages. Start negotiations first and document the impact of the change in writing.

Clauses must be worded precisely. A general sentence that the parties will agree a price adjustment if circumstances change, with no criteria or procedure, is of little help in a dispute. A court will not invent for the parties a mechanism missing from the contract. For large contracts it is worth having the wording reviewed by a lawyer.