1. Introduction

A hardship clause is a contractual provision dealing with extraordinary changes in circumstances that make performance substantially more difficult or economically burdensome, even though performance has not become impossible.

Hardship is particularly relevant to long-term banking agreements such as syndicated facilities, project finance, acquisition finance, long-term credit facilities, Islamic financing, derivatives-related financing arrangements, and restructuring agreements.

Under Kuwaiti law, contractual hardship has an especially important statutory background because Article 198 of Kuwait Civil Code, Decree-Law No. 67 of 1980, establishes the doctrine of exceptional or unforeseen circumstances. If extraordinary general circumstances arise after a contract is made, were not reasonably foreseeable, and make performance seriously burdensome so that the debtor faces grave loss, the court may restore the burdensome obligation to a reasonable level after balancing the parties' interests. An agreement excluding this statutory protection is invalid.

Accordingly, in Kuwait:

Contractual hardship clause + Article 198 Civil Code + good faith + mandatory law

must normally be considered together.

2. What Is a Hardship Clause?

A hardship clause determines what happens when circumstances change fundamentally after the banking agreement has been executed.

For example, assume a bank enters into a ten-year financing arrangement with a corporate borrower.

After execution, an extraordinary event produces a drastic and unforeseeable increase in the cost of performing a continuing contractual obligation.

Performance remains legally and physically possible, but fulfilling the obligation on its original terms could cause an exceptionally serious loss.

The basic hardship situation is therefore:

Contract concluded

↓

Unexpected extraordinary event

↓

Performance remains possible

↓

Performance becomes excessively burdensome

↓

Serious financial loss

↓

Renegotiation / contractual adjustment / Article 198 relief

This differs significantly from force majeure.

3. Article 198 of the Kuwait Civil Code

Article 198 is the central statutory provision.

It applies where, after the conclusion of a contract but before completion of its performance:

1. exceptional circumstances of a general character arise;
2. those circumstances could not reasonably have been foreseen when the contract was concluded;
3. performance remains possible;
4. performance becomes excessively burdensome; and
5. the debtor is threatened with grave loss.

The court may then, after balancing the interests of both parties, restore the burdensome obligation to a reasonable level by reducing its extent or increasing the corresponding consideration. Article 198 further provides that an agreement contrary to this rule is invalid.

This final element is particularly significant for banking contracts.

4. Pacta Sunt Servanda — Contracts Must Normally Be Performed

Hardship is an exception to the fundamental rule that contracts are binding.

Article 196 of the Kuwait Civil Code establishes, in substance, the principle that:

the contract is the law of the contracting parties.

A party cannot ordinarily revoke or modify the contract unilaterally except where the agreement or law permits it.

Article 197 additionally requires contracts to be performed according to their terms and consistently with good faith and honourable dealing.

The basic structure is therefore:

Article 196 → contractual stability

Article 197 → good-faith performance

Article 198 → exceptional judicial adjustment.

5. Why Hardship Clauses Matter in Banking

Banking agreements frequently continue for several years.

During that period, circumstances can change dramatically.

Potential events include:

• exceptional economic disruption;
• extraordinary governmental measures;
• severe market dislocation;
• major currency restrictions;
• extraordinary regulatory changes;
• unexpected legal restrictions;
• major international crises; or
• other general exceptional circumstances.

However, the existence of economic difficulty does not automatically establish statutory hardship.

The Article 198 threshold is considerably higher: the circumstances must satisfy the statutory requirements and make performance so burdensome that the debtor is threatened with grave loss.

6. Ordinary Commercial Risk Is Different

Suppose a borrower obtains KWD 20 million to operate a business.

Its revenues later fall by 8% because a competitor enters the market.

That is normally an ordinary commercial risk rather than the type of exceptional general circumstance contemplated by Article 198.

Compare that with an extraordinary event affecting an entire market and fundamentally increasing the burden of performing a long-term obligation.

Thus:

ordinary loss ≠ hardship

reduced profitability ≠ automatically hardship

bad commercial decision ≠ hardship

exceptional general unforeseeable event + grave burden = potential Article 198 case.

Kuwaiti case law treats the assessment of foreseeability, impact and grave burden as matters falling substantially within the trial court's assessment of the facts.

7. Hardship Versus Force Majeure

This distinction is fundamental.

Kuwaiti legal analysis distinguishes exceptional circumstances under Article 198 from force majeure principally according to the effect of the event on performance.

A borrower therefore cannot automatically invoke force majeure simply because repayment has become expensive.

8. Example

Assume:

Bank A → KWD 50 million facility → Company B

Company B must perform a continuing contractual obligation over ten years.

An exceptional general event occurs after execution.

Performance costs increase dramatically.

If Company B can still perform but doing so threatens it with grave loss:

possible performance + severe burden

may raise Article 198.

If the obligation has genuinely become impossible because of an external cause:

impossible performance

raises a different analysis involving force majeure.

9. Contractual Hardship Clauses

Sophisticated banking documentation may contain an express hardship or change-of-circumstances mechanism.

A conceptual provision may require:

Hardship event

↓

Notice

↓

Evidence

↓

Negotiation

↓

Temporary measures

↓

Adjustment

↓

Termination or dispute resolution if no agreement is reached.

The exact legal consequences depend on the wording of the contract and mandatory Kuwaiti law.

10. Mandatory Nature of Article 198

This is one of the most important features of Kuwait law.

Article 198 expressly states that an agreement contrary to its rule is invalid.

Therefore, parties should be cautious with wording such as:

“The borrower absolutely and irrevocably waives every right arising from unforeseen exceptional circumstances.”

Where Article 198 applies, contractual wording cannot necessarily eliminate the statutory judicial power provided by that article.

This distinguishes the Kuwaiti position from legal systems where sophisticated commercial parties may have considerably greater freedom to allocate hardship risk contractually.

11. Role of Good Faith

Article 197 requires contractual performance in accordance with good faith and honourable dealing.

Good faith can therefore be relevant when interpreting a hardship mechanism.

Suppose a clause requires the parties to negotiate after a qualifying event.

One party should not treat the contractual procedure merely as an opportunity to obstruct performance.

At the same time, good faith does not automatically entitle a borrower to obtain whatever financial concession it requests.

The contractual terms and Article 198 requirements remain important.

12. Hardship and Loan Repayment

The fact that repayment has become financially difficult does not by itself mean that a court will rewrite a bank loan.

Borrowers normally assume substantial commercial risks.

For statutory hardship, the debtor needs to establish the exceptional circumstances and their serious impact.

The Kuwait Court of Cassation has emphasised that whether the event was foreseeable, what effect it had, and whether performance became so burdensome that grave loss was threatened are factual matters for the trial court to assess.

This gives courts an important gatekeeping function.

13. Hardship and Interest/Profit Obligations

A hardship claim could theoretically arise in relation to continuing payment obligations, but Article 198 should not be confused with ordinary disputes about interest rates or financing costs.

A borrower cannot simply argue:

“The financing became expensive, therefore Article 198 applies.”

Instead, it would need to establish the statutory elements.

For Islamic banking, similar reasoning applies to the contractual obligations created through the relevant Sharia-compliant financing structure, although the legal form and Sharia requirements of the transaction also need consideration.

14. Regulatory Change

A long-term banking agreement may also address changes in banking, capital, tax or other regulation.

This produces an important distinction between:

Hardship clause

and

Change-in-law clause.

A change-in-law clause may specifically allocate the consequences of new legislation.

A hardship provision usually addresses a broader category of extraordinary circumstances that fundamentally disturb contractual performance.

Depending on the facts, one event could potentially interact with both.

15. Material Adverse Change Clauses

Hardship should also be distinguished from a Material Adverse Change (MAC) clause.

A MAC clause generally protects the lender where there has been a sufficiently serious adverse change affecting matters defined in the facility agreement, such as the borrower's financial condition or ability to perform.

Hardship, by contrast, is generally concerned with extraordinary changes making an obligation excessively burdensome.

Thus:

MAC → lender protection

while

hardship → adjustment of excessively burdensome performance.

The two can overlap factually but are legally different concepts.

16. Financial Covenant Breach

Hardship is also different from breach of a financial covenant.

Suppose the agreement requires:

Debt/EBITDA ≤ specified ratio.

An economic crisis causes the ratio to exceed the contractual limit.

The first question is whether an event of default or covenant breach has occurred according to the agreement.

The separate question is whether the circumstances satisfy Article 198.

A covenant breach therefore does not automatically establish hardship.

17. Renegotiation

A well-designed hardship mechanism may require negotiation before litigation.

For example:

Borrower gives notice

↓

Borrower provides evidence

↓

Bank examines financial impact

↓

Parties negotiate

↓

Possible outcomes:

maturity extension

or

payment rescheduling

or

temporary modification

or

other agreed adjustment.

However, contractual renegotiation should not be confused with the court's statutory power under Article 198.

18. Judicial Power Under Article 198

If the statutory requirements are satisfied, the court has discretion after balancing the parties' interests.

The court may restore the burdensome obligation to a reasonable level.

Article 198 expressly refers to mechanisms such as:

reducing the scope of the obligation

or

increasing the corresponding consideration.

Kuwaiti authority also stresses that applying Article 198 is discretionary rather than automatic, even where a party invokes exceptional circumstances.

Therefore:

Hardship does not automatically mean cancellation of the contract.

Its primary function is restoration of reasonable contractual balance.

19. Evidence

A borrower relying on hardship should normally be prepared to establish:

Event

↓

Exceptional/general character

↓

Unforeseeability

↓

Causal connection

↓

Continuing possibility of performance

↓

Serious burden

↓

Threat of grave loss.

Relevant evidence in a banking dispute might include financial statements, cash-flow information, expert evidence, regulatory measures, market evidence, transaction documents and evidence concerning the effect of the event.

Merely asserting that “economic conditions are difficult” is insufficient.

20. Case Law

The Kuwait Court of Cassation has developed principles concerning Article 198 and exceptional circumstances. Not all reported cases arise specifically from bank loan agreements. They remain highly relevant because Article 198 is a general Civil Code doctrine capable of affecting contractual relationships, including banking agreements where its requirements are satisfied.

Case 1 — Kuwait Court of Cassation, Commercial Appeal No. 499/1996

Judgment of 13 October 1997

This is an important authority on Article 198.

The Court explained that where an exceptional general event occurs after conclusion of the contract and before completion of performance, was unforeseeable at contracting, and makes performance—although still possible—so burdensome that the debtor faces grave loss, the judge may, at the debtor's request and after balancing both parties' interests, restore the obligation to a reasonable level.

Principle

The essential elements are:

post-contract event + general exceptional character + unforeseeability + severe burden + grave loss.

Banking relevance

A borrower seeking modification of a financing obligation must establish more than financial inconvenience.

The circumstances must reach the statutory threshold.

Case 2 — Kuwait Court of Cassation, Commercial Appeal No. 315/1996

Judgment of 16 November 1997

This authority applies the same general Article 198 doctrine.

The Court treated the questions of:

• whether the event was foreseeable;
• how it affected performance; and
• whether performance became excessively burdensome

as matters substantially falling within the trial court's factual assessment.

Banking relevance

This means hardship disputes can be highly evidence-dependent.

Two borrowers affected by the same economic event may not necessarily obtain the same result because the actual effect on their respective obligations may differ.

Case 3 — Court of Cassation Principle on Governmental Measures Affecting Contractual Performance

Kuwaiti jurisprudence recognises that measures taken by public authorities can constitute an external cause affecting contractual performance where the legal conditions are satisfied.

Reported Kuwait commentary discussing established Cassation principles explains that public-authority measures that deprive a contracting party of contractual benefit can, depending on their severity, engage force-majeure principles.

Banking relevance

Suppose an extraordinary government measure affects a financed project.

The legal analysis should ask:

Did performance merely become more burdensome?

If yes, hardship may be relevant.

Did performance become impossible?

If yes, force majeure may be the more appropriate doctrine.

The classification depends on actual impact rather than merely the name of the event.

Case 4 — Cassation Principles on Unforeseeability

Kuwaiti jurisprudence places significant importance on whether the relevant event could reasonably have been foreseen when the parties entered into the contract.

The Article 198 authorities make foreseeability a factual matter for the trial court.

Banking relevance

Assume a borrower enters a long-term facility while a particular economic disruption is already publicly known.

It may be difficult subsequently to argue that the same disruption was wholly unforeseeable.

Therefore:

Known risk at signing → weaker hardship argument.

Genuinely extraordinary later development → potentially stronger argument.

Case 5 — Cassation Principles on Grave Loss

The Court of Cassation's interpretation of Article 198 requires more than increased cost.

The obligation must become sufficiently burdensome to threaten the debtor with grave loss.

Banking relevance

Consider three borrowers:

Borrower A: cost increases 3%.

Borrower B: profitability falls moderately.

Borrower C: extraordinary general circumstances fundamentally increase the burden of performance and threaten exceptionally serious loss.

Article 198 is principally directed toward the third type of situation, assuming the other statutory requirements are also satisfied.

Case 6 — Cassation Principles on Judicial Discretion

Commercial Appeals 499/1996 and 315/1996 are also important for a distinct proposition: even where Article 198 is invoked, application of the statutory power is a matter of judicial discretion based upon the evidence and the balancing of the parties' interests.

Banking relevance

A borrower cannot treat Article 198 as an automatic statutory payment holiday.

The court must consider:

borrower's hardship

against

bank's contractual and financial interests.

This balancing requirement is particularly significant in banking because altering payment obligations can affect both parties materially.

21. Important Note About the Case Law

For academic accuracy, the authorities should not be represented as six separate Kuwait Supreme Court judgments specifically concerning hardship clauses in banking agreements.

The strongest publicly verifiable direct authorities identified here are Commercial Appeals Nos. 499/1996 and 315/1996, which establish important Article 198 principles. The remaining propositions above reflect related Kuwaiti Cassation doctrine concerning unforeseeability, grave loss, judicial discretion and the distinction between exceptional circumstances and force majeure.

It is preferable to state this limitation than to invent case numbers merely to satisfy a numerical requirement.

22. Hardship During a Major Economic Crisis

Assume a Kuwaiti corporate borrower enters a seven-year facility.

Three years later, an extraordinary general crisis causes severe disruption.

The correct legal analysis would not simply be:

“There is a crisis, so payments stop.”

Instead:

Was the event exceptional and general?

↓

Was it unforeseeable when the agreement was signed?

↓

Did it occur before performance was complete?

↓

Is performance still possible?

↓

Has performance become seriously burdensome?

↓

Does the burden threaten grave loss?

↓

What does the contractual hardship mechanism provide?

↓

What relief is appropriate under Article 198?

This case-by-case approach is consistent with the Kuwaiti jurisprudential treatment of Article 198.

23. Hardship and Force Majeure Compared Through a Banking Example

Suppose a bank finances construction of infrastructure.

Situation A

Materials remain obtainable but an extraordinary general event makes performance drastically more expensive.

Potential issue:

Article 198 hardship.

Situation B

A binding government measure makes performance legally impossible.

Potential issue:

force majeure / impossibility.

Kuwaiti law distinguishes the doctrines according to whether performance is merely oppressive or actually impossible.

24. Cross-Border Banking Agreements

Large Kuwaiti financing agreements may select foreign governing law.

For example:

Kuwaiti borrower + international banking syndicate + foreign governing law.

That creates several separate questions:

1. What law governs the facility agreement?
2. What mandatory Kuwaiti rules remain applicable?
3. Where will disputes be heard?
4. Where are assets located?
5. Would a foreign judgment or award require enforcement in Kuwait?
6. Does Article 198 become relevant at the enforcement or mandatory-law stage?

Therefore, parties should not assume that inserting a foreign governing-law clause automatically resolves every Kuwait-law hardship issue.

25. Islamic Banking Agreements

Hardship can also arise in Islamic financing.

Potential structures include:

• Murabaha;
• Ijara;
• Musharakah;
• Mudarabah; and
• other Sharia-compliant arrangements.

The exact consequences depend on the transaction's legal form, contractual documentation, applicable Civil Code provisions and relevant Sharia governance requirements.

The fact that financing is Islamic does not make extraordinary contractual circumstances legally irrelevant.

26. Hardship Clause Versus Other Banking Clauses

A banking agreement can contain several clauses addressing different risks:

These provisions should not automatically be treated as interchangeable.

27. Practical Drafting Structure

A comprehensive hardship mechanism in a banking agreement may conceptually address:

Definition of hardship event

↓

Unforeseeability

↓

Material impact

↓

Notice requirement

↓

Supporting evidence

↓

Duty/process to negotiate

↓

Temporary treatment during negotiations

↓

Adjustment mechanism

↓

Failure to agree

↓

Dispute resolution

↓

Mandatory Kuwait law preserved.

Because Article 198 declares contrary agreements invalid, drafting should be coordinated carefully with the mandatory statutory framework.

28. Borrower Cannot Simply Stop Paying

One particularly important practical point is that invoking hardship does not itself mean:

“The borrower can stop performing immediately.”

Article 198 gives the judge a discretionary power to restore an excessively burdensome obligation to a reasonable level when the legal conditions exist.

Consequently, unless the contract itself provides otherwise or legally effective relief is obtained, unilateral suspension may expose a borrower to default-related consequences.

29. Burden of Proof

In practical litigation, the party relying on hardship needs convincing evidence.

The relevant factual chain is:

Extraordinary event

unforeseeability

general character

causal connection

exceptional burden

grave threatened loss.

The Kuwait Court of Cassation's Article 198 jurisprudence demonstrates why evidence matters: determining foreseeability and the degree of hardship falls within the trial court's factual assessment.

30. Conclusion

Hardship clauses in Kuwaiti banking agreements operate against the mandatory background of Article 198 of the Kuwait Civil Code. Kuwaiti law begins with contractual stability under Article 196 and good-faith performance under Article 197, but Article 198 provides an exceptional mechanism where unforeseen, general and extraordinary circumstances make an obligation—although still possible to perform—so burdensome that the debtor is threatened with grave loss.

The core formula is:

Valid banking agreement

↓

Exceptional general event after contracting

↓

Event genuinely unforeseeable

↓

Performance remains possible

↓

Performance becomes excessively burdensome

↓

Debtor threatened with grave loss

↓

Court balances both parties' interests

↓

Possible restoration of the obligation to a reasonable level.

The leading publicly identifiable Kuwait Court of Cassation authorities, particularly Commercial Appeal No. 499/1996 (13 October 1997) and Commercial Appeal No. 315/1996 (16 November 1997), confirm that foreseeability, severity and the actual effect of the event are central factual questions and that Article 198 relief is discretionary rather than automatic.

For banking agreements, the most important distinction remains: ordinary commercial difficulty is not hardship; hardship is not the same as force majeure; and invocation of hardship does not automatically cancel a loan or suspend repayment. The statutory mechanism exists to restore an exceptionally burdensome obligation to a reasonable level while balancing the legitimate interests of both borrower and bank.