• <i>Force majeure</i>

• <i>Frustration</i>

'C. Frustration of Contract Performance

8.9 Legal certainty and stability require that a party to a contract is responsible for its performance. This traditional rule of contract law is known as sanctity of contract or "pacta sunt servanda", and is generally respected in all legal systems of the world. In principle it states that the parties must adhere to the terms of their contract and therefore be excused from non-performance only to the extent such is provided for in the contract.

As a consequence, parties to a long-term contract are expected to foresee to a reasonable extent the developments, including changes, which may occur. This explains, for instance, why economic hardship of one contracting party does not affect the binding effect of international sales agreements under the United Nations Convention on Contracts for the International Sale of Goods ("CISG"; CISG Article 79). The sanctity of contract is applicable by reference to both specific national law and international (private) law. . . .

8.10 Under the laws of contract in all municipal legal systems exceptions to the basic notion of pacta sunt servanda have been developed on the ground that in particular circumstances fairness and justice require the making of a legal excuse for non-performance of contractual promises. While the excuse concepts in different legal systems vary to a great extent, they are all based on largely the same premise; namely, that some unforeseen development has occured [sic] affecting the contractual performance without the fault and beyond the control of the parties. For instance, Subsec. 4 of the UNIDROIT Principles Art. 6.2.3 setting out the legal consequences of hardship states that

"If the court finds hardship it may, if reasonable

(a) terminate the contract at a date and on terms to be fixed, or

(b) adapt the contract with a view to restoring its equilibrium."

Moreover, from the covenant of good faith and fair dealing which is implied in each contract follows that in a case in which the circumstances to a contract undergo said fundamental changes in an unforeseeable way, a party is precluded from invoking the binding effect of the contract. The idea that a change in circumstances may affect the binding force of a contract is known under the maxim clausula rebus sic stantibus: the contract remains binding provided that things remain unchanged. It is understood, however, that due to the fundamental principle of pacta sunt servanda not any change of circumstances can be sufficient. Due to its exceptional character, its application is only justified if the change in circumstances was fundamental and unforeseeable. In such restrictive and narrow form this concept has been incorporated into so many legal systems that it is widely regarded a general principle of law. As such, it would be applicable in the instant arbitration even if it did not form part of [State X] law . . .

. . . . . . . . .

8.17 In this situation which was characterised by the transfer of sensitive military equipment from one country to the other, the political relationship between the countries concerned was of utmost importance. Such relationship had worsened in . . . to an extent that it had become highly improbable that [Respondent] would obtain, after the expiration of its original export licence, an unrestricted renewal. In fact, . . . the new export licence showed an amount of only US$ . . . instead of the original amount of US$ . . .

8.18 This leads the Tribunal to conclude that (i) regardless of whether Claimant was objectively still capable - despite the revolutionary turmoil in its home country - to make payment through a representative in the U.S.A. when Milestone 3 was completed and (ii) regardless of whether the Parties were actually aware of the quasi-cancellation of the needed export license, the fulfilment of the Contracts was undoubtedly on the verge of being frustrated due to the changed political relationship between the countries (Gould Marketing, Inc. v. Ministry of National Defense, 3 Iran-U.S. C.T.R., at 154). Applying the principles referred to in the Questech case . . . mutatis mutandis, the Arbitral Tribunal concludes that the fundamental change of circumstances entitled each of the Parties to unilaterally request, if not the termination of the Contracts, then at least an adaptation of its [sic] terms, in particular the postponement of the contractual dates by a reasonable period of time.'