Hardship clause
Hardship clause is a disposition according to which the tax administration has discretionary powers to mitigate any harsh results of tax, such relief being granted because the taxpayer has insufficient means to pay, or because the incidence of tax has worked inequitably in his particular circumstances[1].
If many long-term contract, usually international but sometimes domestic, a so-called hardship clause is often included to deal with problem. The clause provides that in cases where an event has caused substantial economic hardship or substantial and economic disadvantage to one of the parties, then the party affected may call for renegotiation.
An example would be: If during the course of the contract either party considers that it has suffered undue prejudice or obvious hardship, that party shall have the right to require the other party to participate in a joint examination of the position with a view to determining whether revision or modification of the provisions hereof is required and if so what revision or modification would be appropriate and equitable in the circumstances[2].
Advantages of hardship clause
There are several advantages of hardship clause[3]:
- The first is the provision of a degree of certainty. It is often difficult to know whether or not a contract has been frustrated. To an extent this uncertainty can be reduced by the parties agreeing a list of events which are to constitute force majeure or hardship events.
- The second is that frustration operates within very narrow limits (both in terms of the events which constitute frustrating events and the width of doctrines such as self-induced frustration which deny to a party the ability to argue that the contract was frustrated).
- The third advantage is that the parties can make provision for the consequences of the occurrence of a force majeure or hardship event. Frustration operates too drastically because it terminates the contract, irrespective of the wishes of the parties. Very often the parties want to continue their relationship but to adapt the terms to meet the new situation. This cannot be done under the doctrine of frustration.
Hardship and Force Majeure
The substantial change of circumstances, which the typical hardship clause encounters, is connected with the occurrence of events that upset the economics of a contract, with the result that its performance becomes unusually onerous or devoid of purpose for one of the parties, but without rendering such performance impossible. On the other hand, for force majeure, there has to be an event that totally prevents the performance of the contract, whether temporarily or permanently. Whereas the change of circumstances may lead to the amendment or termination of the contract, force majeure brings about its suspension (in the event of temporary impossibility) or termination (in the event of complete impossibility). The common link between the two concepts is he occurrence of unforeseeable and unavoidable events[4].
Examples of Hardship clause
- In some countries, taxpayers can apply for a hardship clause if they experience a significant decrease in income due to factors outside of their control, such as a natural disaster, illness, or job loss. In this case, the taxpayer may be allowed to pay a reduced amount of taxes or have their taxes deferred until their financial situation improves.
- In some jurisdictions, a hardship clause may be available for taxpayers who have faced a significant increase in taxes due to a change in the law. In these cases, the taxpayer may be allowed to pay the amount of taxes due prior to the law change, rather than the increased amount due under the new law.
- Some jurisdictions also have hardship clauses that allow taxpayers to pay a reduced amount of taxes in cases where the taxpayer is elderly, disabled, or facing other special circumstances that would make it difficult for them to pay the full amount of taxes due.
Limitations of Hardship clause
Hardship clauses are designed to provide relief from the burden of taxation in certain circumstances, but they are subject to certain limitations. These limitations include:
- Financial hardship: The hardship clause is intended to alleviate the financial strain of taxation for individuals who cannot afford to pay their taxes. However, this relief is limited to those individuals who have demonstrated financial hardship.
- Discretionary powers: Even if a taxpayer demonstrates financial hardship, the tax administration has the discretion to determine whether or not to grant relief. This discretion may be based on the individual's income, assets, and other factors.
- Inequitable results: The hardship clause is intended to mitigate the inequitable results of taxation in certain circumstances. However, the relief is limited to those cases where the taxpayer can demonstrate that the incidence of tax has caused inequitable results.
- Limited scope: The scope of the relief available under the hardship clause is limited to those cases that fall within its criteria. For instance, it may not be available to those who have only recently fallen into financial hardship.
A Hardship Clause is a provision in a tax law that enables the tax administration to mitigate harsh results of taxes on taxpayers. In addition to this, other approaches to providing relief from the impact of taxes include:
- Tax deductions: Tax deductions, such as the Standard Deduction, reduce the amount of income subject to taxation. Deductions also may be available for certain expenses, such as charitable donations, medical expenses, and retirement contributions.
- Tax credits: Tax credits are directly subtracted from the amount of taxes owed. Tax credits may be available for activities such as making energy-efficient home improvements, taking college classes, or adopting a child.
- Tax deferrals: Tax deferrals allow taxpayers to delay paying taxes until a later date. This can be beneficial for taxpayers who are temporarily unable to pay their taxes due to financial hardships.
- Tax exemptions: Tax exemptions are amounts of income or assets that are not subject to taxation. Taxpayers who meet certain criteria may be eligible for exemptions, such as those available to veterans, senior citizens, and people with disabilities.
In summary, the Hardship Clause is just one of several approaches to providing relief from the impact of taxes. Other approaches include tax deductions, credits, deferrals, and exemptions.
Footnotes
| Hardship clause — recommended articles |
| Ex Gratia Payment — First party insurance — Period of indemnity — Illegal work — Residual disability — Statute barred debt — Discharge of contract — Retroactive date — Tenancy at Will |
References
- Dictionary of Taxation Terms, (2000), Bukupedia, London.
- Fontaine M., De Ly F., (2010), Drafting International Contracts, BRILL, New York.
- Marsh P.D., (2010), Contract Negotiation, Gower Publishing, Burlington.
- McKendrick E., (2015), Contract Law, Macmillan, Chennai.
Author: Adam Jawor
