The Effects Of Financial Crises On The Binding Force Of Contract 2016

Ius Comparatum – Global Studies in Comparative Law

Başak Başoğlu Editor

The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision

Ius Comparatum – Global Studies in Comparative Law Volume 17

Series Editors Katharina Boele-Woelki, University of Utrecht, Utrecht, The Netherlands Diego P. Fernández Arroyo, Institut d’Études Politiques de Paris, Sciences Po, Paris, France Founding Series Editors Jürgen Basedow, Max Planck Institute for Comparative and International Private Law, Germany George Bermann, Columbia University School of Law, USA Editorial Board Bénédicte Fauvarque-Cosson, Université Panthéon-Assas, Paris 2, France Giuseppe Franco Ferrari, Università Bocconi, Milan, Italy Toshiyuki Kono, Kyushu University, Fukuoka, Japan Marek Safjan, Court of Justice of the European Union, Luxembourg Jorge Sanchez Cordero, Mexican Center of Uniform Law, Mexico Ulrich Sieber, Max Planck Institute for Foreign and International Criminal Law, Germany

More information about this series at http://www.springer.com/series/11943

Académie Internationale de Droit Comparé International Academy of Comparative Law

Başak Başoğlu Editor

The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision

Editor Başak Başoğlu Istanbul Kemerburgaz University Istanbul, Turkey

ISSN 2214-6881 ISSN 2214-689X (electronic) Ius Comparatum – Global Studies in Comparative Law ISBN 978-3-319-27254-2 ISBN 978-3-319-27256-6 (eBook) DOI 10.1007/978-3-319-27256-6 Library of Congress Control Number: 2016930394 Springer Cham Heidelberg New York Dordrecht London © Springer International Publishing Switzerland 2016 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Printed on acid-free paper Springer International Publishing AG Switzerland is part of Springer Science+Business Media (www. springer.com)

Preface

Growing interconnectedness of global economies facilitates the spread of the effects of the financial crises. Financial crises cause severe difficulties for persons to fulfill their contractual obligations. During the financial crises, performance of contractual obligations may become excessively onerous or may cause an extreme loss for one of the contracting parties and consequently destroy the contractual equilibrium and legitimate the interventions to the contract. But who will bear the risk arising from these circumstances? This question, asked during the uncomfortable economic climate, leads to one of the most controversial dilemmas of the contract law: whether the binding force of the contract is absolute or not. In other words, unstable economic circumstances impose the need to devote special attention to review and perhaps to narrow the binding nature of a contract. Principle of good faith and fair dealing motivate a variety of theoretical bases in order to overcome the legal consequences of financial crises. All these theoretical bases are analyzed in this book with special focus on the available remedies, namely, renegotiation, rescission or revision, and the circumstances that enable the revocation of these remedies. The legal approaches of various jurisdictions provide different answers and solutions to this problem. These differences seem to be determined predominantly by the frequency and intensity of financial crises in each jurisdiction and also by the influence of the financial, political, and social forces of the respective country. The chapters in this collection are based on papers originally presented at the XIXth Congress of the International Academy of Comparative Law, held in Vienna, July 2014. I am grateful to all reporters who were willing to reformulate and submit their reports considering the debates, which aroused great interest and appreciation during the session in the Congress.

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Preface

I would like to express my sincere gratitude to general reporter Prof. Dr. Rona Serozan who provided me the opportunity to edit this book. I also appreciate the unwavering support of my colleague Asst. Prof. Dr. Kadir Berk Kapancı. Also, I would like to thank the organizers of the conference, both at the Paris headquarters of the International Academy of Comparative Law and in Vienna. Last but not least, special thanks are due to Neil Olivier, Diana Nijenhuijzen, and their colleagues from Springer for their professional editorial efforts. İstanbul 2015

Başak Başoğlu

Contents

Part I 1

General Report and Original Questionnaire

General Report on the Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision............................................................................. Rona Serozan

Part II

National Reports

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From Crisis to Crisis: Weakness of Contracts in Argentina ............... Julio César Rivera

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Keeping the Balance: The Effects of Financial Crises on Contracts Under Brazilian Law ....................................................... Anderson Schreiber

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Les effets exercés par les crises financières sur la force obligatoire des contrats: certitudes et incertitudes du droit québécois en matière d’imprévision ....................................... Élise Charpentier and Nathalie Vézina Can Financial Crisis Lead to the Application of the Institute of Changed Circumstances Under Croatian Law? .............................. Maja Bukovac Puvača, Gabrijela Mihelčić, and Iva Tuhtan Grgić

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Elimination of the Impacts of Financial Crisis on Legal Relationships According to Czech Private Law ................................... 101 Marketa Selucká

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Financial Crises and Danish Contract Law: No Room for Hardship ........................................................................... 121 Mads Bryde Andersen and Joseph Lookofsky

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Contents

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Crises financières et contrats: le droit positif français refuse la révision d’un contrat devenu déséquilibré mais le projet de réforme entr’ouvre la porte à l’imprévision .................................... 137 Rémy Cabrillac

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Financial Turmoil as a Change of Circumstances Under Greek Contract Law ................................................................... 145 Nikolaos A. Davrados

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“All Roads Lead to Rome”: The Multiple Grounds Under Italian Law to Challenge a Contract Due to Supervening Changes of Circumstances .......................................... 163 Marco Torsello

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Effects of a Bubble Economy on the Binding Force of Contracts: The 1990s Experience of Japan and Its Implications .......................... 191 Shugo Kitayama

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The Effects of Crises on the Binding Force of Contracts: Polish Solutions ................................................................ 207 Wojciech Robaczyński

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Discussing the (Ab)Normality of Financial Crises as a Relevant Change of Circumstances Under Portuguese Law .............................. 221 Manuel Carneiro da Frada and Mariana Fontes da Costa

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L’imprévision dans le Nouveau Code Civil roumain enfanté par la crise économique mondiale............................................ 243 Dumitru Dobrev and Marilena Uliescu

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The Russian Federation Legislation on the Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision ........................... 255 Nataliya Georgievna Doronina and Natalia Gennadievna Semilyutina

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The Effects of the Global Financial Crisis on the Binding Force of Contracts: A Focus on Disputes over Structured Notes in Taiwan ....................................................................................... 265 Chang-hsien Tsai

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Certainty Over Clemency: English Contract Law in the Face of Financial Crisis................................................................ 285 Horace Yeung and Flora Huang

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Financial Crisis and the Remedy of Rescission in the United States ................................................................................. 307 Aditi Bagchi

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The Adaptation of the Contract in Turkish Law.................................. 313 Başak Baysal

Index ................................................................................................................. 331

Contributors

Mads Bryde Andersen Faculty of Law, University of Copenhagen, Copenhagen, Denmark Aditi Bagchi Law School, Fordham University, New York, NY, USA Başak Başoğlu Faculty of Law, Istanbul Kemerburgaz University, Istanbul, Turkey Başak Baysal Faculty of Law, Istanbul University, Istanbul, Turkey Rémy Cabrillac Faculté de droit, Université de Montpellier, Montpellier, France Élise Charpentier Université de Montréal, Montréal, Québec, Canada Mariana Fontes da Costa Law Department of the Faculty of Economics, University of Porto, Porto, Portugal Nikolaos A. Davrados Loyola University New Orleans, College of Law, New Orleans, Louisiana, USA University of Nicosia, Department of Law, Nicosia, Cyprus University of Athens, School of Law, Athens, Greece Dumitru Dobrev Legal Research Institute “Acad. Andrei Rădulescu” of Romanian Academy, House of Romanian Academy, Bucharest, Romania Nataliya Georgievna Doronina Private International Law Department, Institute of Legislation and Comparative Law, Moskow, Russian Federation Manuel Carneiro da Frada Faculty of Law, University of Porto, Porto, Portugal Iva Tuhtan Grgić Faculty of Law, University of Rijeka, Rijeka, Croatia Flora Huang School of Law, University of Leicester, Leicester, UK Shugo Kitayama School of Law, Seikei University, Tokyo, Japan

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Contributors

Joseph Lookofsky Faculty of Law, University of Copenhagen, Copenhagen, Denmark Gabrijela Mihelčić Faculty of Law, University of Rijeka, Rijeka, Croatia Maja Bukovac Puvača Faculty of Law, University of Rijeka, Rijeka, Croatia Julio César Rivera Faculty of Law, University of Buenos Aires, Buenos Aires, Argentina Wojciech Robaczyński Faculty of Law and Administration, University of Łódź, Łódź, Poland Anderson Schreiber Faculty of Law, Rio de Janeiro State University, Rio de Janeiro, Brazil Marketa Selucká Faculty of Law, Masaryk University, Brno, Czech Republic Natalia Gennadievna Semilyutina Private International Law Department, Institute of Legislation and Comparative Law, Moskow, Russian Federation Rona Serozan Faculty of Law, Istanbul Bilgi University, Istanbul, Turkey Marco Torsello School of Law, University of Verona, Verona, Italy School of Law, New York University, New York, NY, USA Chang-hsien Tsai Institute of Law for Science and Technology, National Tsing Hua University, Hsinchu, Taiwan Marilena Uliescu Legal Research Institute “Acad. Andrei Rădulescu” of Romanian Academy, House of Romanian Academy, Bucharest, Romania Nathalie Vézina Université de Sherbrooke, Sherbrooke, Québec, Canada Horace Yeung School of Law, University of Leicester, Leicester, UK

About the Authors

Mads Bryde Andersen graduated from the University of Copenhagen in 1981 and practiced law as a Danish advocate in the years thereafter. In 1991, he was appointed Professor of Law at the same university. His authorship comprises contract law, the law of obligations, pension law, IT law, intellectual property law, and the law of advocacy. He defended his Dr.jur. degree in 1989 on the basis of his doctoral dissertation on computer liability issues (1988). He is chairman of the governing board of the Danish Financial Supervisory Authority (FAS) and a frequent arbitrator in domestic Danish and international arbitrations. Aditi Bagchi is Professor of Law at Fordham University Law School. She teaches in the areas of contract and labor law. Her research concerns the nature of contractual obligation, contract interpretation, and questions in political and moral philosophy as they arise in contract. Professor Bagchi obtained her J.D. from Yale Law School, an M.Sc. in Economic and Social History from Oxford University, and an A.B. in Government and Philosophy from Harvard College. Başak Baysal is Associate Professor of Civil Law at Istanbul University Faculty of Law. She obtained both her bachelor degree in law and her doctorate in private law from Istanbul University and her LL.M. degree from Paris II Panthéon-Assas. She is member of Executive Committee of International Association of Legal Sciences and member of Association Henri Capitant des amis de la culture juridique française, Société de législation comparé, European Law Institute, and Freunde des Max-Planck-Instituts. Rémy Cabrillac is Professor at the Faculty of law of the University of Montpellier (France). He has published many books including Law of Obligations, The Codifications, General Introduction at Law, Dictionary of Law, Matrimonial Law, and more than 200 articles. He has participated at many conferences throughout the world about his specialities.

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About the Authors

Élise Charpentier is Professor at the Faculté de droit of Université de Montréal. She holds bachelor degrees in civil (LL.B.) from Université de Sherbrooke, a Diplôme d’études approfondies (D.E.A.) in private law from Université Paris 2, and a doctorate (D.C.L.) from McGill University. Her ongoing areas of research include contracts, property, and secured transactions. Mariana Fontes da Costa is Assistant Lecturer at the Law Department of the Faculty of Economics at the University of Porto and lectures also in postgraduate courses at Porto Business School. She is also a member of the Legal and Economic Centre of the Faculty of Law at the University of Porto (CIJE), researching mainly in the area of contract law. Nikolaos A. Davrados is Visiting Professor of Law at Loyola University New Orleans College of Law. He also holds a Teaching Fellowship in Law at the University of Athens, Greece, and is Assistant Professor of Law at the University of Nicosia, Cyprus. He teaches and writes in the areas of civil law, conflict of laws, immigration law, and international business transactions. Dumitru Dobrev is Researcher at the “Andrei Rădulescu” Law Research Institute attached to the Romanian Academy. In 2014, he received his doctoral thesis in private law “Legal Means to Preserve Debtor’s Patrimony” at the same institute. Since 1999 he is barrister and IP counsel from 2006. His areas of research include law of obligations, bankruptcy law, commercial law, and intellectual property law. Nataliya Georgievna Doronina is Vice Director of the Center for Economic and Legal Studies at Private International Law Department of the Institute of Legislation and Comparative Law under the Government of Russian Federation. She obtained her bachelor degree from Moscow State Institute of Foreign Relations (Faculty of Economy) in 1967 and her doctor of law degree from Moscow State Institute of Foreign Relations upon completion of her postgraduate degree in 1996. She worked as a researcher, senior researcher, leading researcher, Chief of Department of Private International Law, and Deputy Director of the Center for Economic and Legal Studies of the Institute of Legislation and Comparative Law under the Government of Russian Federation. Her research focuses mainly on the problems of investment law, foreign investments, private international law relating to the foreign investments regulations, and comparative law. Manuel Carneiro da Frada is Professor of Law at the Law Faculty of the University of Porto. He has published numerous articles and several books in the fields of civil and commercial law, as well as legal theory, areas in which he mainly focuses his teaching and research activities. Iva Tuhtan Grgić was born in 1977 in Rijeka. Since 2001, she has been working as a research assistant at the Department of Civil Law within the University of Rijeka Faculty of Law. She defended her doctoral dissertation “Contract of Inheritance” in

About the Authors

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2014 at University of Zagreb Faculty of Law. She has published several scientific papers in the field of civil law and presented papers in various national and international conferences. Flora Huang is Lecturer in Commercial Law at the School of Law, University of Leicester. Prior to that, she was Lecturer in International Business Law in the University of Hull. She completed her doctorate at the School of Oriental and African Studies (SOAS), University of London. She has worked in international organizations such as the Basel Convention in Geneva and the Office of Legal Affairs of the United Nations Headquarters in New York. She was also a legal consultant in a Chinese bank. Shugo Kitayama is Professor of Law at Seikei University Law School in Tokyo. He teaches in the areas of contract law and other law of obligations. His research concerns especially the practical and philosophical problems of the revision of longterm contracts after the conclusion of contracts and the area of medical law. Professor Kitayama obtained his M.L. from University of Tokyo, an M.A. on International Relations from International University of Japan, and a B.L. from University of Tokyo. Joseph Lookofsky first studied law at New York University (J.D. 1971). He is a Member of the New York State Bar and was in-house legal counsel for United Artists Corporation. He later studied Danish law at the University of Copenhagen (Cand.jur. 1981; Dr.jur. 1989) and joined the Law Faculty there in 1981. His principal areas of research and teaching are contractual obligations, sales law (domestic and international), comparative law, and private international law. He serves as Denmark’s Correspondent for UNCITRAL and is a Titular Member of the International Academy of Comparative Law (Académie Internationale de Droit Comparé). Gabrijela Mihelčić is Assistant Professor of Civil Law at the Faculty of Law, University of Rijeka. Her principal research interest is property law. She has published several scientific papers and chapters in books in the field of civil law. She presented papers in various national and international conferences in Croatia and neighboring countries. Maja Bukovac Puvača is Associate Professor of Civil Law at the Faculty of Law, University of Rijeka. Her principal research interest is tort law. She has published several scientific papers and chapters in books in the field of civil law. She presented papers in various national and international conferences in Croatia and neighboring countries. Julio César Rivera is a regular member of the Academia Nacional de Derecho de Buenos Aires as of November 1999; correspondent member of the Academia Peruana de Derecho; former president of the Argentine Comparative Law

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About the Authors

Association; former president of the Capítulo Rioplatense del Club Español del Arbitraje and member of the ICC Latin America Group; vice-president at Centro de Mediación y Arbitraje Comercial (CEMARC) – (Commercial Arbitration Centre); correspondent member of the International Institute for the Unification of Private Law (UNIDROIT – Rome); and member of the Asociación Internacional de Juristas Andrés Bello (París). Wojciech Robaczyński is member of Faculty of Law and Administration of University of Lodz. He is the author of numerous publications on the civil, commercial, and financial law. He is particularly interested in the change of contractual relations and public procurement. He gives several lectures and seminars, also on the contractual law. Anderson Schreiber is Professor of Civil Law at the State University of Rio de Janeiro (Brazil). He is a Doctor (Ph.D.) in Comparative Private Law at the Università degli studi del Molise (Italia); master in Civil Law at the State University of Rio de Janeiro. He is Public Attorney for the State University of Rio de Janeiro and Partner of the law firm Schreiber Domingues Cintra Lins e Silva Advogados. He is author of The Prohibition of Contradictory Behaviour (Venire Contra Factum Proprium), 2005, New Paradigms for Civil Liability (2007), Rights of Personality (2011), and Civil Law and Constitution (2013). He is also a legal expert and arbitrator in judicial and arbitration proceedings in Brazil and abroad. Marketa Selucká is Associate Professor at the Department of Civil Law, Faculty of Law of Masaryk University in Czech Republic. She focuses mainly on consumer protection and lease. She has published many articles and textbooks on consumer protection, leases, and other civil law issues. Natalia Gennadievna Semilyutina is Director of the Center of Comparative Legal Studies at the Private International Law Department of the Institute of Legislation and Comparative Law under the Government of Russian Federation. She obtained her bachelor degree in Law (with honors) in 1987, her postgraduate degree in 1989, and her doctorate of law degree in 2005 from Moscow State Institute of Foreign Relations. She worked as a lecturer at the chair of private international law in the Moscow State Institute of Foreign Relations. Between 1994 and 2010, she worked as an adviser, vice-chief of the Law Department of the Moscow Interbank Currency Exchange. In 2010, she joined the Institute of Legislation and Comparative Law under the Government of Russian Federation and she is working as chief of the Foreign Legislation Department – director of the Centre for Comparative Legal Studies since 2015. Her main area of research is the problems of investment law, foreign investments, financial market regulations, private international law relating to the foreign investments regulations, and comparative law. Rona Serozan is Professor of Civil Law at Istanbul Bilgi University School of Law since 2007 and emeritus Professor of Civil Law at Istanbul University School of

About the Authors

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Law. He holds his bachelor degree in law from Istanbul University and his doctorate degree from Tubingen University. He published several books and articles in Turkish, German and English. Marco Torsello is Professor of Comparative Private Law at Verona Law School and currently Hauser Global Visiting Professor at NYU, School of Law. His previous appointments include the Research Professorship at Bologna Law School and Visiting Professorships at NYU, Sciences Po, Fordham, Columbia University, University of Pittsburgh, and several others in Italy and abroad. His research interests and teaching activities focus on comparative business law and international business transactions, and he is the author of several books and articles in English and Italian. Chang-hsien Tsai, LL.B., LL.M. (National Taiwan University), LL.M. in Corporate Law (New York University), J.S.D. (University of Illinois), is an Associate professor of Law and Business at Institute of Law for Science and Technology, College of Technology Management, National Tsing Hua University, Taiwan (NTHU). His research interests are in the areas of corporate law, securities regulation, and financial market regulations. Many of his research results have been published in renowned academic journals in Taiwan and the United States, such as National Taiwan University Law Journal, Academia Sinica Law Journal, and Syracuse Journal of International Law and Commerce. He joined the NTHU faculty in 2010 and was granted New Faculty Research Award in 2013. Marilena Uliescu is Professor and Honored scientific researcher, former head of the Private Law Department of the Legal Research Institute within the Romanian Academy, former head of the National Institute of Magistracy and associated member of the International Academy of Comparative Law. Nathalie Vézina has been a Professor at the Faculté de droit of Université de Sherbrooke, Québec, Canada, since 1992. She holds bachelor degrees in civil and common law (B.C.L., LL.B.) from McGill University, a Diplôme d’études approfondies de droit privé from Université Robert Schuman – Strasbourg III, and a Doctorat de droit comparé from Université Panthéon Assas – Paris II. She specializes in the fields of obligations and civil liability, comparative law, and higher education pedagogy. Horace Yeung is Lecturer in Commercial Law at the School of Law, University of Leicester. He was Lecturer in Law at the School of Law, University of Exeter between 2010 and 2012, after reading accountancy and law at the Chinese University of Hong Kong, Lancaster, and Oxford. He is author of Chinese Companies and the Hong Kong Stock Market (Routledge, 2014, with Flora Huang). He was a Sir Edward Youde Scholar and recipient of the Confucius Institute Highly Commended Prize.

Abbreviations

ADR AJDA Art. Art. BAROC B.R. Bs. As. c. C.A. CC C.c.B.C. CCP C.c.Q. C. de D. CE ch. CNCiv. CNCom. CNFed. CPA C.Q. C.S. CSN D DL Doc. Jud. ED

Alternative Dispute Resolution Actualité juridique de droit administrative (France) Article Article (s) The Bankers Association of the ROC Cour du Banc du Roi du Québec OU/OR Recueil de la Cour du Banc du Roi City of Buenos Aires Contre Cour d’appel du Québec OU/OR Recueil de la Cour d’appel (Soquij) Civil Code Code civil du Bas Canada The Taiwanese Code of Civil Procedure Code civil du Québec Cahiers de droit (Québec) Conseil d’etat (France) Chapter/Chapitre National Civil Court of Second Instance (Argentina) National Commercial Court of Second Instance (Argentina) National Federal Court of Second Instance (Argentina) The Consumer Protection Act Cour du Québec Cour supérieure du Québec OU/OR Recueil de la Cour supérieure (Soquij) National Supreme Court of Justice (Argentina) Recueil Dalloz Decreto-Lei Judicial Doctrine Magazine [Revista Doctrina Judicial] El Derecho Magazine [Revista El Derecho]

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éd. EU EUR FCPA FSC GBP GDP GFC HBOS JA JCP J.E. Lehman Bros. LL L.R.C. MOF no. NTD QCCS RBS R.C.S. RDC R.D.I. R.D. McGill RDPyC R.G.D. RIDC R.J.Q. R.L. / R.L.n.s. RLDC RLRQ ROC RTDCiv. SCJ Mendoza SFIPC Soc. lég. comp. STJ t. TRC TRG TRLx

Abbreviations

Édition European Union Euros The Financial Consumer Protection Act (Taiwan) The Financial Supervisory Commission (Taiwan) British sterling pounds Gross domestic product The Global Financial Crisis Halifax Bank of Scotland Jurisprudencia Argentina Magazine [Revista Jurisprudencia Argentina] Juris-Classeur périodique (Semaine juridique) Jurisprudence Express (Soquij) Lehman Brothers Holdings Inc. Argentine Legal Magazine La Ley [Revista Jurídica Argentina La Ley] Lois révisées du Canada The Ministry of Finance Number New Taiwan Dollar Décision de la Cour supérieure du Québec en libre accès (www. jugements.qc.ca) Royal Bank of Scotland Recueil de la Cour suprême du Canada Revue Des Contrats Recueil de droit immobilier (Soquij) Revue de droit de McGill (Université McGill) Communitarian and Private Law Magazine [Revista De Derecho Privado y Comunitario] Revue générale de droit (Université d’Ottawa) Revue internationale de droit comparé Recueil de jurisprudence du Québec (Soquij) Revue légale / Revue légale nouvelle série (Wilson et Lafleur) Revue Lamy Droit Civil Recueil des lois et des règlements du Québec Republic of China (Taiwan) Revue Trimestrielle de Droit Civil Supreme Court of Justice of the Province of Mendoza (Argentina) The Securities and Futures Investors Protection Center Société de législation comparé Portuguese Supreme Court of Justice Tome Coimbra Court of Appeal Guimarães Court of Appeal Lisbon Court of Appeal

Abbreviations

TRP UK US USD vol. WWII

xix

Porto Court of Appeal United Kingdom United States United States dollars Volume The Second World War

Part I

General Report and Original Questionnaire

Chapter 1

General Report on the Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision Rona Serozan

Abstract Upon the outbreak of financial crises, financial assets suddenly lose a large part of their value. The collapse of financial institutions, insolvencies of companies, liquidity bottlenecks, not repaid credits, immensely rising interest rates cause severe difficulties for persons to fulfill their contractual obligations and destroy the equilibrium of the mutual obligations established initially in the contract. The frequency and intensity of financial crises and their negative repercussions on the traditional binding force of contracts are really immense. They evidently motivate the search for juridical solutions of the problem. While the economists search for economic precautions against and solutions for the financial crisis, the jurists look after juridical precautions and solutions. There are two dominant respective golden rules on the legal ground to be applied during financial crises. These rules are “pacta sunt servanda” and “nominalism”. The difficult mission of the jurist is to find the ideal proportion between two extreme poles. The options are whether to stick on the principles of “pacta sunt servanda” and “nominalism” or to respect the principle of loyalty (fairness), which is also considered as sacred. This chapter aims to analyze 20 impressive national reports from Argentina, Brazil, Canada (Québec), Croatia, the Czech Republic, Denmark, France, Germany, Greece, Italy, Japan, Poland, Portugal, Romania, Russia, Singapore, Taiwan, the United Kingdom, the United States and Turkey with regard to the effects of financial crises on the binding force of contracts: renegotiation, rescission or revision.

This article is also published in the book “Turkish National Reports to the XIXth Congress of the International Academy of Comparative Law” edited by Rona Serozan and Başak Başoğlu, and published by Vedat Kitapçılık upon whose approval, was updated later by the author. R. Serozan (*) Faculty of Law, Istanbul Bilgi University, Istanbul, Turkey e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_1

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1.1

R. Serozan

Introduction: The Weight of Financial Crises and Their Legal Repercussions

A financial crisis means in concreto the collapse of financial institutions, the tightening of access to credit, insolvencies of companies, liquidity bottlenecks, devaluation of the purchasing power of money, increase of product costs, uncovered credits, suddenly and extremely rising interest rates on loans. These unfortunate manifestations of financial crises cause severe difficulties for persons to fulfill their contractual obligations and disturb the equilibrium of the obligations established initially in the contract. The frequency and intensity of financial crises and their negative repercussions on the traditional binding force of the contracts evidently stimulate the search for juridical solutions of the problem. While the economists search for economic precautions against and solutions for the financial crisis, the jurists look after juridical precautions and solutions. The fact that explicit contractual “force majeure” and “hardship” – clauses of adjustment like resolutory and suspensive conditions or ad hoc indices like “echelle mobile” provisions as a remedy against such unexpected crises are not so often taken into account, intensifies the problem even to a higher degree. Recently, the problem and its possible alternative means of solution are literally booming. Thus, the choice of “the effects of financial crises on the binding force of contracts” as a topic for the 19th Congress of the International Academy of Comparative Law is meaningfully important. Within this framework, the “Questionnaire” presented to the national reporters exposes the actually booming problem in detail. The national reporters were invited to answer in their reports, as far as possible, the listed questions, within the understanding, that they, if they wish, may address also additional issues linked to the theme.

1.1.1

Questionnaire

1. Does your national law take into consideration the effects of financial crises on the contracts or does it strictly adhere to the principle of “pacta sunt servanda”? 2. If the effects of financial crisis on the contracts are taken into consideration, what is the theoretical basis for the acceptance: (1) the principle of loyalty and good faith? (2) the “clausula rebus sic stantibus” theorem? (3) complementary interpretation of the contract based on the hypothetical intentions of the parties? (4) the doctrine of the cessation of the basis of the contract “Wegfall der Geschäftsgrundlage”? (5) the idea of frustration of the contract? (6) the theory of unpredictability (imprévision)? 3. According to your national law what are the conditions in order to accept such an exceptional fact: (1) extraordinariness? (2) unforeseeability? (3) not being

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General Report on the Effects of Financial Crises on the Binding Force…

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obliged to carry the burden of risk of crisis according to the legal or contractual risk allocation? (4) not having caused the unfavourable circumstances? (5) not having performed the obligation yet or at least performed it with reservation? 4. What are the appearances of exceptional circumstances, which could justify an intervention on the frustrated contract according to your national law: (1) excessive onerousness (hardship)? (2) distortion of the equivalence of exchange? (3) any other appearance? 5. What would be the legal consequence in such a case under your national law: (1) revision (adjustment) of the contract? (2) termination of the contract? (3) renegotiation? (4) any other remedy? (5) is there any priority between these remedies? (6) is it necessary to apply to the court in order to benefit from these remedies or not? 6. In case the contract is adjusted or terminated can the counter-party who is injured by these measures claim any indemnity of equity (Aufopferungsanspruch) according to your national law? Briefly, the Questionnaire was focused on (1) searching the means for harmonizing the contradictory principles of “pacta sunt servanda” and “fairness”, (2) listing the theoretical instruments for intervention into the contract, (3) framing the typical appearances of the exceptional circumstances, (4) classifying the conditions and (5) finally determining the legal consequences (remedies) for contracts, destabilized due to financial crises. Upon this questionnaire, we have received 20 impressive national reports from Argentina, Brazil, Canada (Québec), Croatia, the Czech Republic, Denmark, France, Germany, Greece, Italy, Japan, Poland, Portugal, Romania, Russia, Singapore, Taiwan, Turkey, the United Kingdom and the United States. Here, once more, we would like to express our deepest gratitude to the authors for their excellent reports comprising illuminating contributions for the solution of the actually booming problem. A sincere thanks goes to my young colleague, Assistant Professor Dr. Başak Başoğlu who assisted me during the most difficult task to synthesize the reports. Nota bene: It must be acknowledged that if the farsighted parties include in their contracts an explicit clause of adaptation like resolutory and suspensive conditions or ad hoc indexes, the problems to be discussed will not arise; they will be solved peacefully according to the voluntary clauses of adaptation.

1.2

Essential Rules Related to the Problem: Principles of Pacta Sunt Servanda, Nominalism and Guarantee Liability for Money Debts

During financial crises, one of the most controversial problems arising in the framework of the Law of Contract is whether this Law can still be governed by the three respective golden rules: (a) pacta sunt servanda, (b) nominalism and (c) guarantee

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liability of the debtor of monetary obligations or can an intervention into the contract be approved according to the general rules of discretion referring to contractual solidarity, reasonableness and good faith. While adding nominalism and guarantee liability to the golden rule of pacta sunt servanda, we assume that financial crises have their negative effects mostly on the debtor of “monetary” obligations. The classic principle of pacta sunt servanda means that the provision of the agreements must be kept. In other words, obligations arising from a contract must be performed at any cost. This principle insists on the literal performance of contracts in spite of the fact that events occurring after the conclusion of the contract have caused heavy burdens for one party to fulfill his/her obligations or disturbed the initial equivalence of the mutual obligations. The principle of pacta sunt servanda is based on the view that once the risks have been allocated by the parties during the conclusion of the contract, they should, as a general rule, not be reallocated in a different manner later. The allocation of the risk that the financial basis may change in the future, burdens on the obligor. With a French proverb expressed; “contracter c’est prévoir.” The principle is strict: The contract is binding and it must be performed in accordance with its terms. Performance must be rendered as long as possible, regardless of the burden that may impose on the performing party. Unless an impossibility of performance in the true sense of the word occurs, no obligor may refuse to fulfill its obligations invoking the subsequent change of financial circumstances. The sanctity of this “contract strictness” (stare pactis) is emphasized in the French Civil Code in a well-known formula: “Les conventions légalement formées tiennent lieu de loi à ceux qui les ont faites. Elles ne peuvent être révoquées que de leur consentement mutuel, ou pour les causes que la loi autorise.” The well-known formula of the Code Civil. As in its English translation: “Lawfully formed contracts have the force of law as between the parties. They may be revoked only by mutual consent, or for causes authorized by law.” Besides the French Civil Code, the same wording appears in the article 1372 of the Italian Civil Code, and with similar statutory formulation in Croatia (article 9 of Civil Obligations Act), Denmark (section 1 and DL 5-1-1- Contracts Act), Japan (article 9 of Civil Code), Poland (article 354 of Civil Code), Portugal (article 406 of Civil Code), Romania (article 1271 of Civil Code), Russia (article 309 of Civil Code) and Québec (article 1439 of Civil Code). Even in jurisdictions where there is no explicit statement in connection with the principle of pacta sunt servanda, it is recognized as a judicial tradition in those jurisdictions, such as Argentina, Brazil, the Czech Republic, Germany, Taiwan and Turkey. Likewise, in common law countries (the United Kingdom, the United States and Singapore), the principle of pacta sunt servanda is accepted as a judicial tradition that is recognized as the principle of “sanctity of contracts”.

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The second golden rule is the principle of nominalism. According to this principle, the contractually fixed amount of debt remains constant despite of the change of the purchasing power of money. This principle rooted in common usage is equally regarded as sacred. The principle of nominalism is based on the denomination of the currency, but not on its value. Simply, the principle of nominalism disregards the change of value of the currency. The Code of Québec formulates the principle of nominalism succinctly in art. 1564: Where the debt consists of a sum of money, the debtor is released (only) by paying the nominal amount due in money which is legal tender at the time of payment.

The third golden rule refers to the rigid guarantee liability of the debtor of monetary obligations which burdens all the risks arising from financial turbulences on the debtor. In other words, a debtor of money guarantees “ex lege” the payment. According to this strict guarantee liability, money, as a subject of an undetermined “obligation in kind”, cannot perish. Genus non perit! For the debtor of money there is no excuse of impossibility. Money has to be obtained at any cost. According to a German proverb: “Geld muss man haben!” As mentioned in the German report, the principle according to which “one has to possess money” implements that every debtor is responsible for his financial means to be sufficient in order to fulfil his obligations. Noticeably and consequently, in many countries an obligation for the debtor of money to pay an interest is provided even in case of excused delay. As emphasized in almost all national reports, all these principles are fundamental principles of the Law of Contracts that are rooted lastly in the basic idea of legal security. Even though, these three golden rules may very well be outshined by the general rules of discretion regarding contractual solidarity, good faith, fairness and reasonableness, which are referred to an equally important basic idea of the Law of Contracts, namely the idea of justice, equity and solidarity, as we shall acknowledge soon.

1.3

Concessions from the Golden Rules for the Sake of Loyalty and Fairness

During the financial crises, although no fault falls on his part, one of the contracting parties may find himself bound with a contract, which has become entirely disadvantageous or even burdensome for him. Thus, compromising solutions and respectively exceptions to the principles of pacta sunt servanda, nominalism and guarantee liability seem necessary as a result of the financial crisis in the light of the overwhelming general rule of good faith and fairness.

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Like many other legal principles, the principles of pacta sunt servanda, nominalism and guarantee liability are not taken into consideration as an absolute value against the principles of good faith, fairness and reasonableness. After all even the French Civil Code stipulates the fact that “Les conventions doivent être exécutées de bonne foi” (The contracts must be performed in good faith) in the same provision, where it sanctifies the principle of pacta sunt servanda. Three reform projects (Catala - art. 1135 -, Terré - art. 92 -, Chancellerie - art. 136 -), interestingly in France, where the most conservative attitude towards the possibility of intervention into the contract due to financial crises was asserted, show clearly the change of course towards the possibility of intervention into the contract. Also in Québec, which has so far been overly conservative in this matter, many jurists argue forcefully in favour of admitting a pragmatic intervention into the contract. Undoubtedly, it is a difficult task for the jurists to find the ideal balance and harmony between the necessity of sticking to the principles of “pacta sunt servanda”, “nominalism” and “guarantee liability” on one hand and respecting the principles of “contractual solidarity”, “good faith”, “fairness” and “reasonableness”, on the other hand. Essentially, the topic of this report is concerned with the struggle of finding such a middle course; in other words to reach the golden medium (aurea mediocritas).

1.4

Appearances of Subsequent Impairments Justifying an Intervention into the Contract

The jurists, both in national and international level, have sought to find a balance between the binding force of contract and the necessity to protect reasonableness in the process of performing contractual obligations. In extreme situations where the financial crisis fundamentally alters the equilibrium of the contract in an unacceptable measure or oversteps the limits of foreseeable sacrifice for the debtor, an intervention into the binding force of the contract appeared inevitably on the agenda of the jurists. It is difficult to reach to a compromising solution between the two contradictive poles, namely “pacta sunt servanda” and “fairness”. The generally accepted criterion while searching for a compromising solution between the contradictory poles can be underlined as follows: When a financial crisis reaches up to an extent at which: (a) the performance of the contract goes over the limit of foreseeable sacrifice and causes an excessive onerousness on the debtor, or, (b) the equivalence of the reciprocal accomplishments of the contracting parties is destroyed in an extremely high degree,

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Only then an intervention into the contract (namely an adjustment or termination of the contract) may be taken into consideration. Particularly, to insist on the binding force of contract in such extreme situations, which may cause several difficulties on the disadvantaged party is judged as obviously unfair. These “shocking cases”, to use the wording in the American report, which justify an intervention, correspond in last instance to the severe cases (cas criant) qualified as “a manifest abuse of a right”. In this sense, the contract is considered as binding only as long as the initial circumstances remain reasonably similar. But whenever a fundamental change in the recent circumstances alters the essential basis of the contract and radically transforms the scope of the parties’ performances, then an intervention into the contract is justified. The harmonic balance between the antagonistic principles of “pacta sunt servanda at any cost” and “performance only in the limits of equity” is herewith successfully established. Nota bene: Exceptional circumstances which could justify an intervention into the contract may also arise due to non – financial reasons: (a) The case of excessive onerousness due to moral reasons. (For example the difficulty to cohabit with a partner after separation.) (b) The cease of the main purpose of a contract (For example the cancellation of an event exclusively for which a tenancy agreement was concluded.). These cases however were not treated here, because they could not be related to financial crises.

1.5

Theoretical Instruments Activated for an Intervention into the Contract on the Ground of Fairness

Various juridical concepts evolved in favour of the disadvantaged party reveal how different, difficult and simultaneously sophisticated jurists establish their concessions from the principles of pacta sunt servanda, nominalism and guarantee liability. The sophisticated theoretical instruments mobilized for achieving an ideal compromise about the critical balance between the binding force of contract and fairness, respectively for justifying an exceptional intervention to the contract can be lined up in an overall view as follows: Right at the beginning it must be pointed out that all the theoretical instruments overlap with each other. It is difficult to make a clear distinction between these overlying implements. (a) Principle of loyalty and good faith, (b) Clausula rebus sic stantibus,

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(c) Assumption of such a clause by the means of complementary interpretation of the contract, (d) Theory of the cessation (lapse) of the basis of the contract (Wegfall der Geschäftsgrundlage), (e) Idea of frustration of the contract, (f) Théorie de l’imprévision. Undoubtedly, the principle of loyalty and good faith or fairness well reasoned placed at the top is the fundamental point of origin, in other words, the umbrella of all the legal instruments activated to justify an intervention. The British concept of “reasonableness (appropriateness) and the German concept of “Zumutbarkeit” of the fulfilment of the obligation correspond widely with this concept of loyalty, good faith and fairness. The constitutional dimension of the omnipotent principle is unmistakable. It is after all rooted in the basic principles of almost all the Constitutions. This is a good example for the influence of human rights and basic constitutional rights on private law. The overwhelming role of the principle of loyalty and good faith is underlined in the national report of Canada (Québec) as the rationale invoked by those who favour the recognition of an obligation to cooperate and to renegotiate as a way to curtail the traditional application of pacta sunt servanda. Moreover the Taiwanese national report emphasizes that prior to incorporating a special provision on changed circumstances to the civil code in 1999, the courts applied the rule of loyalty and good faith without any reservation. It is interesting to observe that according to the Greek report, the judges sometimes prefer to apply directly the general principle of loyalty and good faith, although there exists a special and detailed provision dealing with the unforeseeable change of circumstances. Evolving from the principle of loyalty and good faith, the classic theorem of “clausula rebus sic stantibus” seems to be the most popular instrument and in the meantime the final resort for an intervention into the contract due to changed circumstances. “Clausula rebus sic stantibus” is in reality an assumed (implied) tacit clause according to which the contract is binding as long as the circumstances existing at the stage of the conclusion of the contract remain substantially the same. If the assumption fails the contract is to be revised. It is constructed upon the basic idea that a contract is legally binding unless there is a fundamental change in the circumstances considered by the parties at the time of the conclusion of the contract. In other words the binding force of contracts persists only to the extent that the basic presuppositions of the contract remain unchanged. Thus, if in case of a fundamental change in circumstances after the conclusion of the contract, the essential basis of the parties’ consent to be bound by the contract is totally altered and the extent of the parties’ performances under the contract is radically transformed, the contract can be adjusted or terminated.

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The doctrine of clausula rebus sic stantibus, originally produced in connection with the conflicts in the sphere of International Law of Treaties focuses on extraordinary and unforeseen circumstances that may arise after the formation of the contract. This doctrine is especially applied in cases where the performance of the contractual obligation has become extremely burdensome or where the balance of mutual obligations has been fundamentally disturbed. The concept of assumed (implied) clausula rebus sic stantibus, after all the product of the rule of loyalty and good faith, is, as mentioned before, the mostly favoured and mobilized theoretical instrument to justify an intervention into the contract. Almost all national reports refer to this theorem as a final resort of justification for intervention. “Complementary interpretation of the contract” on the basis of hypothetical intention of the parties in favour of the disadvantaged party is, as a matter of fact, a modern version of the theorem of clausula rebus sic stantibus. In Japan and Turkey, the technique of complementary contract interpretation replaces the clausula rebus sic stantibus doctrine. Particularly, the Turkish doctrine follows this sophisticated way of interpretation obviously influenced by the closely related Swiss doctrine and jurisdiction. The jurists choosing this technique of interpretation admit frankly that they operate in reality with a fiction of intention just like the “clausula rebus theoreticians” do. Nota bene: In Inheritance Law the unforeseeable change of circumstances occurring after the testamentary disposition are considered exclusively in the framework of complementary interpretation on the basis of the implied (fictitious) intention of the testator. According to this approach, the precise content of the contract is to be determined in line with the rules of interpretation, which refer to the parties’ mutual wills to be found implicitly. If the mutual wills cannot be derived from the contract, the contractual gaps (loopholes) shall be filled (completed) upon reconstructing their hypothetical wills in the light of the principle of good faith by complementary interpretation. Nota bene: If it is assumed that the possibility of intervention is founded on the complementary interpretation, that is on the parties’ intention, then this possibility may be voluntarily excluded in the framework of free disposal, derived from the freedom of contract. In legal alternatives founded on the violation of imperative principles like loyalty and good faith however, such a voluntarily exclusion shall inevitably not be admissible. A concept developed in Germany also from the theorem of clausula rebus sic stantibus is the doctrine of the cessation (the lapse) of the basis of the contract (Wegfall der Geschäftsgrundlage), which was first introduced by Oertmann, afterwards developed by Larenz, then accepted by the legal doctrine as well as the jurisdiction and finally regulated under § 313 BGB upon the reform of German Law of Obligations in 2002.

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“Geschäftsgrundlage” is constructed by perceptions of the parties relating to the existence of the future occurrence of certain facts. The contractual intention of the parties is assumed to be built on this perception. The basis of contract (Geschäftsgrundlage) may be considered as a premature, secret and implied (assumed) “condition” (condicio tacita) of the contract; in other words as a presupposition (Voraussetzung). As a matter of fact, Italy and Portugal prefer to work with the concept of “Voraussetzung” (precondition/presupposition), a concept that we owe to Windscheid. Concisely, the doctrine of the cessation of the basis of the contract provides the court to adjust or terminate the contract in case of a subsequent change in circumstances which makes an obligation substantially more onerous to perform or results in a profound alteration of the economic equilibrium of a contract. This doctrine is generally accepted in Brazil, Italy, Portugal, Greece and Turkey. Parallel to § 313 BGB, Brazilian, Italian, Portuguese, Romanian, Greek and Turkish laws introduced special provisions: article 478/479 of the Brazilian Civil Code, articles 1467–1469 of the Italian Civil Code, article 437 of the Portuguese Civil Code, article 1271 of the Romanian Civil Code, article 388 of the Greek Civil Code, article 138 of the Turkish Code of Obligations. The concept of “failed assumptions” which is widely applied in Scandinavian countries and masterly developed in Denmark resembles the idea of the implicit basis of the contract (Geschäftsgrundlage), and its predecessor, the concept of “Voraussetzung”, evidently, last not least the hypothesis of clausula rebus sic stantibus. In light of the concept of “failed assumptions”, a party may be relieved from its contractual obligations if the contract has unexpectedly become burdensome. While the doctrine of the cessation of the basis of the contract was introduced in Germany and the concept of failed assumptions was developed in Scandinavia and especially in Denmark, another similar approach was adopted in English Common Law; the doctrine of “frustration of the contract”. The doctrine of frustration was established to mitigate the rigour of Common Law’s insistence on literal performance of promises. According to this doctrine a contract may be discharged on the grounds of frustration if an unexpected event occurs after the formation of the contract, which renders it impossible to fulfil the contract or even transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. The obligor revolts, “it was not this that I promised to do”. The idea of frustration of the contract sets the contract aside if factual or legal circumstances have changed to such an extent that the performance of the contractual obligations of the parties has turned out to be drastically different from what they had initially intended. As a matter of fact, the doctrine of frustration was born and applied as a theory of impossibility. Only later, this theory was extended to the cases where the contractual purpose was frustrated, namely in the renowned “Coronation Cases”.

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Within the factual framework of these cases, numerous contracts were concluded in order to provide rooms, seats and even windows for a specific date to watch the coronation parade of Edward VII. However, the coronation was postponed due to the illness of the King and the route of the parade was revised. Furthermore, in the Krell v. Henry case, being the first and the most significant of the coronation cases, the Court of Appeals ruled that the coronation parade constituted the foundation of the contract and was essential for its performance. Consequently, its frustration discharged the contract and accordingly, the defendant was released from his contractual obligation to pay the agreed lease. However, the British courts rejected the application of the doctrine of frustration in the well-known Suez Canal dispute. In the course of these series of disputes, it was discussed whether the blockage of the Suez canal due to a war has led the contracts for the sale of goods to be frustrated since the carriers were obliged to carry the goods via Cape of Good Hope. According to the courts, the blockage of the Canal did not fundamentally alter the contractual balance since the sellers still held alternative routes though the cost and the time of the carriage increased significantly. Consequently, these cases were not considered to suffice the frustration of the contract. The well-known French theory trying to justify the intervention into the contract is the “theory of unpredictability” (la théorie de l’imprévision). When compared with the above-mentioned theories, it is relatively uncomplicated. If an unpredictable event occurs which renders the claim of performance unjust, the victim may according to this theory request termination of the contract. “La théorie de l’imprévision” has been generally recognised in Administrative Law since the well-known “Gaz de Bordeaux” decision. Contrary to the administrative courts, the civil courts have consistently refused to recognise a revision on the basis of unpredictability. “Révision pour imprévision” was regularly rejected. As clearly expressed in the “Canal de Craponne” case, the Cour de Cassation decided that the Court of Appeals of Aix-en-Provence had violated the absolute principle of pacta sunt servanda stipulated in article 1134 Code Civil by adapting the contract regarding the maintenance costs of the Craponne Canal in favour of the disadvantaged entrepreneur. This decision is the best example for the restrictive approach of the French courts regarding the intervention into the contract. An interesting observation: While the French Cour de Cassation consistently refused to apply the simple “théorie de l’imprévision”, viewing the contract as something untouchable (intangibilité du contrat), the Supreme Court for administrative justice (Conseil d’Etat) approved this doctrine, enabling adjustment for the sake of the public. “La souplesse contractuelle” seems to have overwhelmed “l’intangibilité du contrat”. In fact, in the famous “Gaz de Bordeaux” case of 1916 where the adjustment of a gas supply contract was acknowledged in order to prevent the disconnection of the gas supply to Bordeaux due to the bankruptcy of the debtor (Compagnie Générale de Gaz).

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The difference between the approaches of private law and public (administrative) law can probably be put down to the fact that public interest overwhelms in the public transactions where such a rationale obviously finds no consideration in private transactions. The rigorous approach of the French jurisdiction in the field of private law towards the theory of unpredictability seems to be comparable with the strict approach of the British jurisdiction towards the theory of frustration. The rejection of the possibility to intervene into the contract in French law led the parties to find solutions within their contracts. Explicit contractual clauses for adaptation like resolutory and suspensive conditions, indices or mobile scales (échelle mobile) spread all over the country. Nevertheless, three drafts (rapports Catala, Terré and Chancellerie) have admitted that an excessive onerousness due to an unpredictable change of circumstance may very well lead to a duty to renegotiate on the premise of good faith. The restrictive Common Law and French tradition seems recently to give way to a more generous approach. Argentina is also a country which is on the way to approve a much more flexible approach towards the limits of the French theory of unpredictability and to recognize a wider application of this theory in favour of the impaired party.

1.6

Interesting Overlaps within the Theoretical Bases for an Intervention into the Contract

Looking globally at the total picture, we can note that all the different theoretical instruments activated to justify an intervention into the contract overlap in many aspects. Consequently, it is difficult to make a clear distinction between these overlying instruments. Besides the overlaps of theoretical instruments with each other, there is also a most interesting interaction between these instruments mobilized for subsequent impairments and some initial invalidity facts like error, usury and immorality at the stage of conclusion of the contract. On the other hand, it can be observed that some subsequent impairments of performance like impossibility and frustration are treated symmetrically likewise. Let us start with the close relation between initial and subsequent impairments. Especially the French and German reports proposing for subsequent impairments an analogy to the initial conditions of validity of the contract like error, usury and immorality indicate clearly the interaction between subsequent and initial impairments. Some jurists describe the cases for which an intervention due to suddenly changed circumstances is justified, as cases of “subsequent immorality” or “subsequent usury”, whereas some other jurists evaluate the subsequent cessation of the contract basis respectively as a mistake.

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An interesting overlapping is met in German report in which the usury (lésion antérieure) and the subsequent disproportion (lésion postérieure) is symmetrically placed together although in usury (lésion), the discrepancy occurs at the conclusion of the contract, while in subsequently changed circumstances, it appears at the stage of performance. This is the reason why Québec law treats separately “lesion” and “imprévision”. Likewise, there are many jurists in France who resort also to “lésion” instead of “imprévision” to justify the intervention into the contract. Although the principle of “lésion” allows the contract only to be avoided when there is a profound imbalance between the values of the respective obligations at the time when the contract is concluded, still these jurists apply the principle of lésion also in the case of unexpected circumstances (imprévision) in order to justify the termination of the contract. The remarkable allegory pointing out the similarity between usury and frustration sounds like this: “Lésion postérieur à la conclusion du contrat”! Expressed in Latin: “laesio superveniens”! Similar to this approach is the application of the rules regarding the “initial error (mistake) in motivation” on the subsequent frustration. As well known, normally an intervention into the contract can only be applied when the changed circumstances occur unexpectedly after the conclusion of the contract, while the parties’ errors regarding the circumstances before conclusion are governed by the concept of error (mistake) as to motivation. It is evident, that if the erroneous predictions regarding future facts are submitted under the initial error as to the motive, then the scope of application of error (mistake) will expand on the account of the scope of application of frustration. This point will be discussed in detail at a later stage in the framework of the conditions for intervention into the contract. Remarkably, in the German doctrine of the cessation of the basis of the contract (Wegfall der Geschäftsgrundlage) and in the Danish concept of “failed assumptions”, initial error is considered as a ground for the subsequent cessation of the contract basis. It is interesting to read in the Greek report, that many jurists evaluate the general provision on the unforeseeable change of circumstances as a subtle counterpart to the provision on error. Nota bene: The distinction between initial error (mistake) and subsequent frustration has practical consequences: (1) In the framework of error (mistake), the strict conditions for intervention due to frustration can be ignored. (2) On the contrary, the remedies regarding frustration are much more flexible than the ones regarding error (mistake). (3) Also the time limits for intervention due to frustration are not as strict as the time limits for invoking error (mistake). A similar overlapping is also met in the framework of immorality, a fact that comes regularly into application if the contract is initially burdensome for one of the parties who had no free contractual choice due to his/her inadequate bargaining position.

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This specific concept of initial immorality is most interestingly mobilised actually in cases of subsequent changes of circumstances and thereby transforms the claim of performance into an immoral claim. With the French wording; one speaks of “atteinte postérieure aux bonnes moeurs”. Interestingly, in the German report, following cases constituting immorality and as a result nullity at the stage of conclusion of the contract are presented as examples for limits of the principles of pacta sunt servanda, nominalism and guarantee liability of the debtor of monetary obligations due to a financial crisis. – The interest rate is inappropriately high. As a thumb rule, this is the case if the contractual interest rate is 100 % above the market rate in relative terms or 12 % above the market rate in absolute terms. – The creditor (guarantor) has, in connection with a guarantee signed e.g. by one spouse for a loan of the other or by a child (a “young adult”) for a parent, inappropriately taken advantage of the emotional bond between debtor and guarantor to induce the signature of the guarantee. – The creditor has inappropriately trivialized a significant and burdensome contractual risk. – It is foreseeable for the creditor that the debtor is not able to honour his credit. The fact that at the end all the exemplary cases of initial immorality have landed before the Constitutional Court in Germany shows the constitutional background of the juridical interference in favour of the weak contracting party. This observation leads us to the conclusion that the judicial interference in case of severe subsequent imbalance overlaps even with constitutional ethics. Summa summarum: The chronological distinction between initial and subsequent impairments, consequently seem to have lost their logical significance in legal considerations. A different interaction attracts our attention in the frame of the concurrence between subsequent impairments, namely the interaction between frustration and impossibility. In the framework of “impairments of performance” the difference between frustration and impossibility is expressed usually only in degrees. It is difficult to draw the borderline. Thus, in some countries, like Britain, frustration overlaps mostly with impossibility. The bold and interesting proposal to submit frustration concisely under the term of impossibility brought up in the Greek report is parallel to this approach, identifying frustration with impossibility. This trend to cross over different chronological and logical impairments leads us to the conclusion that the jurists mostly look friendly and warm towards the possibility of intervention into the contract in favour of the impaired party. The discussion around the article 79 of the Convention on International Sales of Goods (CISG) whether frustration can be submitted under impossibility may also be mentioned as an example of the close relation between impossibility (force majeur/hardship) and frustration. The recent opinion accepts hardship as a fact which may be submitted under article 79 CISG.

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1.7

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General Rules and Special Regulations in Legislation and Jurisdiction Authorizing Expressly an Intervention into the Contract

In many national reports we meet specific rules dealing with the unexpected change of circumstances arising from financial crises. The soft law instruments, namely Principles of European Contract Law (PECL), Unidroit Principles on International Commercial Contracts (PICC) and Draft Common Frame of Reference (DCFR) seem to build a milestone regulating the intervention into the contract in case of fundamental and extraordinary change of circumstances in the frame of general rules. Soft law materials prefer obviously to stipulate the intervention into the contract in a general provision. Under the heading “Change of Circumstances” in article 6:111 “the Principles of European Contract Law”, as well as under the heading “Hardship” in Section 6.2 “the Unidroit Principles on International Commercial Contracts”, moreover under the heading “Variation or termination by court on a change of circumstances” in Section III-1: 110 “the Draft Common Frame of Reference” show clearly this trend. The Unidroit Principles have regulated hardship explicitly as a case of frustration: If a situation occurs which alters fundamentally the equilibrium of the contract, then the burdensome party may request renegotiation.

The Principles of European Contract Law enclose a similar regulation with the additional sanction that the party rejecting renegotiation may be condemned to pay compensation. In recent years, there is an obvious trend towards the codification of general rules authorizing an intervention into the contract. For instance, there are “general provisions” in the Civil Codes of the Czech Republic, Russia, Brazil, Greece, Denmark, Germany, Italy, Portugal and Turkey. Also in Argentina, we can observe a draft general provision anticipated for the Civil Code. According to the recent project CO 2020 Art. 19 in Switzerland “the court may adjust or avoid the contract if according to the principle of good faith the performance of an obligation becomes unreasonable due to an unforeseeable change in circumstances. Recently, even the jurisdictions under the influence of the French Code Civil have introduced provisions related to the change of circumstances in their legislations; for instance article 1271 of the Romanian Civil Code and article 1467 of the Italian Codice Civile. The article 388 of the Greek Civil Code is probably the best example of a general provision on unforeseeable change of circumstances. It combines and formulates the established theoretical roots and legal prerequisites for an intervention into the contract in a very successful manner:

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This national codification – trend moves closer to the globally recognized rules as it follows the examples of the soft law instruments. For instance, all the soft law instruments have been taken into consideration during the last stages of the reform of German BGB. The Principles of European Contract Law has set an example for Polish rules on changed circumstances while Czech rules are influenced by Unidroit Principles on International Commercial Contracts. Besides all these “general rules” there are also several specific regulations referring to particular situations mentioned in different national reports, especially in the Canadian, Romanian, Polish and Turkish reports. These special provisions render evidently both the theoretical instruments and the general national provisions regarding the intervention into the contract unnecessary. On the other hand, also various practices of the courts have adopted specific rules dealing with the change of circumstances in certain situations. Let us have a glance on some of the interesting examples that we have selected from different national reports: (a) The employee is allowed to terminate the labour contract when his/her material interests have fundamentally changed. (b) The subsequent financial difficulty, mainly the insolvency of the obligor, entitles the creditor to rescind from the contract, if the obligor does not offer a sufficient guarantee. (c) The donor who has unexpectedly fallen into financial difficulties may revoke the promise of donation. (d) If a trust has ceased to meet the intention of the settlor as a result of unforeseeable circumstances which make the pursuit of the purpose of the trust too onerous a closely related another purpose may be substituted. (e) If the execution of a charge becomes too burdensome for the legatee, for the donee or the trust (in Turkey also for the donor) a cancellation or alteration of the charge may be invoked. (f) The disturbance of the equivalence of accomplishments in the contract for work invokes termination or adjustment in favour of the disadvantaged party. (g) In many countries the maintenance (alimony) is always adapted to the changed circumstances in certain intervals according to a mobile scale (échelle mobile). (h) In many countries also a significant change of flat rates invokes the possibility of adaptation of the rate.

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(i) The Greek legislation has recently enacted special laws on commercial leases, which allow the parties to terminate the contract in case of unforeseen financial hardship. (j) Furthermore, by virtue of special legislation intended to relieve heavily indebted debtors of loans, the Greek Law widened the possibility of bankruptcy in favour of non – commercial persons in cases of financial crisis.

1.8

Conditions for Intervening into the Contract

The conditions aiming to justify an intervention into the contract may arise from general or special provisions. However, they are roughly the same in all legal instruments. (a) (b) (c) (d) (e)

Occurrence of the unexpected event after the conclusion of the contract. Fundamentality of the change of circumstances. Extraordinariness. Unforeseeability (impévisibilité). Not being responsible for the fundamental, extraordinary and unforeseeable event (the disadvantageous development being beyond the control of the disadvantaged party). (f) No compulsory obligation to carry the burden of risk (such an obligation exists for example in the frame of warranties, insurances and stock market transactions). (g) Not having performed the obligation yet or at least performed it with an explicit reservation. (h) Unreasonableness (Unzumutbarkeit) of the present performance. Let us point out right at the beginning that the separating border between these objective and subjective requisites for intervention are quite fluid. For example, an extraordinary event is at the same time unforeseeable and vice versa. These requisites are altogether clearly formulated in the Italian Codice Civile (Article 1467/1469): (a) The transaction must have been affected fundamentally. (b) The extraordinary event affecting the transaction must not have been foreseen by the disadvantaged party. (c) The burden resulting from the event must not be attributed to one party by any particular legal or contractual rule. Let us now try to clarify the requisites for intervention into the contract in detail: At the first stage, the unexpected event must have occurred after the conclusion of the contract. Otherwise the negatively affected party may only be able to avoid the contract on the ground of mistake. If a party had an erroneous perception of the already existing burdensome circumstances while concluding the contract, that party may only invoke the provisions of error. İn this case there is anyway no place for intervention.

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An erroneous forecast regarding future facts at the stage of the conclusion of the contract is generally submitted under the cessation of the contract bases but not under initial error as to the motive. If the existence of an initial error as to the motive is also approved for the case of such erroneous prediction, then the scope of application of the provisions regarding error shall inevitably expand on the account of the scope of the application of the provisions regarding subsequent frustration. This would lead to different legal consequences as pointed out before. The other condition for the intervention is the essential (fundamental) change of circumstances. It should be noted that only basic and important changes might lead to an excessive onerousness and considerable destruction of the reasonable equilibrium of mutual obligations. In other words, the change must have caused severe consequences (Article 1467/1469 of the Italian Codice Civile). Another requirement for intervention into the contract is the “extraordinariness” regarding the changed circumstances. Indicating that the changed circumstances must be highly unlikely to occur. This requirement is stressed in many national reports while it is not sought under the Principles of European Contract Law and Unidroit Principles on International Commercial Contracts. The Draft Common Frame of Reference, however, sets out the condition of an exceptional change of circumstances. An additional condition is “unforeseeability”. It means that supervening extraordinary circumstances and respectively their effects must be unforeseeable at the time of the conclusion of the contract. At the stage of conclusion of the contract, the parties have a narrow vision on the future circumstances. Their prospect to a supervening event is usually limited with the ordinary course of their businesses. Accordingly, while the parties allocate the contractual risks on the basis of certain shared assumptions, there are certain supervening risks that are usually not anticipated and respectively allocated at the conclusion of the contract. The condition of unforeseeability, determines exactly whether a reasonable person in the same circumstances as the debtor would have foreseen the occurrence of these events or not. The requisite of unforeseeability is referred with different formulations in almost every national report, as well as in the Principles of European Contract Law, Unidroit Principles on International Commercial Contracts and the Draft Common Frame of Reference. Significantly, the Draft Common Frame of Reference highlights unforeseeability of the circumstances together with their effects in its remarkable formulation: “The debtor did not at that time take into account, and may not reasonably be expected to take into account, the possibility or scale of the change of circumstances”. Nota bene: Unforeseeability is in the meantime and contradictorily utilized as an item for limitation of damage compensation in many soft law sources. An unforeseeable damage cannot be compensated.

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On the other hand, “unforeseeability” is also a hindrance for security transactions. An unforeseeable obligation can neither be secured through surety nor be secured through pawn. Moreover, the event must have occurred beyond the control of the disadvantaged party. The disadvantaged party can only rely on the possibility of intervention if these extraordinary circumstances are not self-induced or originated from the disadvantaged party’s sphere of impact. In short, the event must not fall within the disadvantaged party’s sphere of responsibility. Among the soft law instruments, Unidroit Principles on International Commercial Contracts enclose this condition in its article 6.2.2. In addition to these conditions, the specific risk should not belong to the contractual or statutory risk typically allocated to the disadvantaged party. In aleatory contracts the authorisation for intervention into the contract is excluded according to the risk allocation resulting from the contract or from the law. For instance in warranties, insurances and stock market transactions, each party carries his own risk due to the typical contractual risk allocation. The condition of “risk allocation” is also emphasized in British, Danish, Italian, Russian and Romanian reports, where the lack of express or implied assumption of risk is considered as a basic prerequisite for intervention. For example, the Italian Codice Civile underlines in article 1467 the fact that the subsequent onerousness ought to be beyond the contractual risk allocation. A further condition attracts attention: In order to invoke the remedies for intervention into the contract, the disadvantaged party must not have performed his obligation yet or at least must have performed it under reserve. This condition is sought expressly in Croatian and Turkish laws but interestingly not in the soft law instruments. In fact, it would be highly controversial to claim for an intervention into the contract due to the excessive onerousness of the performance after the fulfilment of the contractual obligation without any reservation. Finally, the performance under the changed conditions must seem unreasonable (unzumutbar). In a different wording expressed; the creditor’s claim of performance against the debtor must appear as an offend against the principle of loyalty and good faith. It must be emphasized that the last yet not least requisite of unreasonableness (Unzumutbarkeit) has an overweight compared with the weight of the other requisites. Thanks to its constitutional weight this principle of unreasonableness determines at long last the final approval for intervention into the contract. Similar to the legal instruments, the requisites also overlap with each other. Almost all the requisites can substitute each other.

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1.9

R. Serozan

Flexible Approach towards the Conditions Justifying an Intervention

It is not always regarded as necessary that all the conditions are fulfilled altogether. The lack of a condition can very well be compensated by the overweight of another condition. In other words, both objective and subjective conditions are evaluated collectively with a far-sighted and global vision. This sophisticated approach is developed from the Austrian “interactive system” (bewegliches System) or “sand-heap theory” (Sandhaufentheorem), which was originally accepted in the cases of deficiency of intention (Willensmangel) and usury (Wucher). An example for the application of this interesting theory can be found in the Turkish report. Although inflation and devaluation is a common disaster of the country which ought to be foreseen by the parties, the effect of this foreseeable disaster may take on such huge measures that the lack of the condition of unforeseeability can be considered as compensated through the overweight of the other conditions of extraordinariness of the event and unreasonableness of the performance; in other words, the requisite of unforeseeability may still be considered as fulfilled. A similar tolerance is shown towards the requisite of the lack of performance or at least a performance with reservation in Turkey. If the debtor has performed his/ her burdensome obligation in good faith, then he may still be found worth being protected in the frame of a special constellation of facts. Also the Greek report emphasizes the fact that there may be cases where the rigid requisites are not fulfilled entirely and yet it would seem unfair to deprive the debtor of protection against the harsh effects of the pacta sunt servanda principle. At this point, the overweight of the requisite of unreasonableness of the actual performance comes clearly to light. Besides the flexible and tolerant approach towards the requisites of intervention into the contract by the means of the sand-heap (Sandhaufen) theory, the refining of the acquirements for intervention by means of a “social component” attracts special attention. Corresponding to the needs of a special social protection of economically, socially and (or) intellectually weak persons the acquirements for intervention in favour of them are vigorously lowered. At the last instance, the social component reduces the acquirements regarding the intervention and achieves herewith a wide application of exceptions to the rules of pacta sunt servanda, nominalism and guarantee liability. A special provision grounded on a social rationale in favour of the lessee in Québec is remarkable: A lessee who has suffered a reduction of income or a change in the composition of his own household may reduce his flat rate. In Denmark the general provision which predicts that a contract may be modified or set aside in whole or in part, if its enforcement would be unreasonable or contrary to the principle of good faith and fairness was in fact designed mainly to protect consumers on the ground of social considerations.

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The revision of the terms of automatic rent increase in sub-lease contracts and the acceptance of claims to return the excessive deposits paid for country club rights in Japan lies on a similar social line. Under Brazilian consumer law, the condition of unforeseeability is not required for consumers (Law 8,078/1990, article 6, V). This indicates a clear choice for consumer’s benefit in Brazilian law. Also in Taiwan, the Financial Consumer Protection Act of 2011 constitutes an important basis for the protection of the financial benefits of the consumers. According to article 7 of the Financial Consumer Protection Act, unfair contractual provisions are not valid against a financial consumer. This article is also mobilized on behalf of the consumer for subsequent impairments. The flexible attitude towards the conditions in favour of the socially weak consumer and tenant in Québec, Denmark, Japan, Brazil and Taiwan is worth to be considered as a guiding example. This approach develops in a most interesting way the social dimension of intervention in favour of the socially weak person who is worth to be protected. This partisanship is also an imperative of the constitutional principle of “social justice and welfare state”. This is an important point which is usually and unfortunately ignored while determining the scope of intervention. Nevertheless, in some jurisdictions where the grand banks activate an efficient lobby, the courts regularly reject the claim of the borrowers to reduce the extremely increased interest rates on loans.

1.10

Legal Consequences and Available Remedies

The legal remedies provided in light of the theoretical instruments justifying an intervention in cases of unexpected and burdensome financial developments are as follows: (a) invitation to renegotiate, regarding the possible means in order to find a compromising solution against the suddenly changed circumstances, (b) adjustment of the contract according to the unexpectedly changed circumstances or, (c) the termination of the contract, as an ultimate remedy, probably combined with a compensation of equity for sacrifice (Aufopferungsanspruch) in favour of the party who endures the termination of the contract. From the other perspective; the party who is released from the binding force of the contract has to compensate his relief. Renegotiation is the most efficient remedy for the change of circumstances since it enables the parties to find a mutual resolution. Renegotiation is not an all-ornothing remedy like the termination of the contract since it provides the parties with the full discretion of reallocating the risk and regenerating the contractual balance.

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As a matter of fact, the duty to renegotiate is based on the principle of pacta sunt servanda as well as on the principle of loyalty or fairness. After all a faithful partner has to take all efforts to settle the dispute fairly. Although most jurisdictions are reluctant to provide a duty to renegotiate in good faith, soft law instruments have set up the duty to renegotiate as a primary remedy. The disadvantaged party is entitled to request such renegotiations according to art. 6.2.3 1 PICC; art. 6:111 2 PECL and Section III-1:110 DFCR. Other remedies may only be invoked in case of failure of the parties to find a solution within a reasonable time. Surprisingly, the French Cour de Cassation, which categorically refused the theory of “imprévision”, has (in the case “Huard” and in some other cases) recently accepted the obligation to renegotiate contracts to rebalance disproportionate contractual duties between the parties. Even before this “nouvelle vague” in the French jurisdiction, many French jurists had accepted the duty to renegotiate as a reflection of the principle of loyalty, good faith and contractual solidarity. The opening of the possibility of renegotiation means at the same time the opening of the opportunity to revise the contract. In fact, the process of renegotiation will in most cases lead inevitably to the revision of the contract. This recent approach, arising from the general principle of loyalty and good faith, is also observed in the United Kingdom. In Quebec, the principle of good faith is generally recognized and although it has not yet been applied to change of circumstances cases, some authors have suggested it as a tool to enable the courts to temper the principle of pacta sunt servanda. The possibility of such a duty to renegotiate is also stated in the Turkish report. According to the Turkish reporter, such duty deduced from the general principle of good faith and the duty of cooperation, would be more consistent with the economic reality, since application to the court in order to invoke other remedies is more expensive and time consuming for both parties. Moreover, in the United States, there is an increasingly liberal attitude towards the way of renegotiation depending on good faith as stated in the national report. This attitude most probably originates from the effects of frustration in the Common Law tradition. Frustration causes namely an automatic (eo ipso) release of the parties from the contract and this fact makes it necessary to renegotiate about a new contract with different terms. Furthermore, it is emphasized that the violation of the duty to renegotiate in good faith should not lead to compensation, but to the loss of the right to adjust and terminate the contract. In other words, the duty to renegotiate is generally not evaluated as an obligation in a strict sense, but merely as an “Obliegenheit, incombance”. Nevertheless there are some regulations or jurisdictions, which attach a compensation for the violation of this obligation. The Principles of European Contract Law and the Québec Law constitute such examples.

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The adjustment (revision) of the contract in order to restore its disturbed equilibrium is anyhow the more likely remedy in the majority of disputes. The ideal remedy specified for the change of circumstances is indeed the adjustment of the contractual balance. The adjustment of the contract is available in Argentina, Brazil, Croatia, the Czech Republic, Denmark, Germany, Japan, Poland, Portugal, Romania, Taiwan and Turkey while it is still debated in Québec. Revision of the contract requires strong court interference to the contract as the courts benefit an extensive discretion in allocating the risk in accordance with the principle of loyalty. Looking by the perspective of the parties, revision of the contract is a remedy, which does not provide much certainty since it is up to the court to judge on the new allocation of the contractual risk. Probably due to this reason, Common Law jurisdictions are reluctant to accept the revision of the contract as a remedy. The most common remedy and radical against the change of circumstances is the termination of the contract. It is however an unyielding “all-or-nothing” remedy, which lets us miss the desirable flexibility and the mutual concession. By the way, its utilization leads to the most severe breach of the principle of pacta sunt servanda. That is why it is considered as an “ultima ratio”. The all or nothing approach of termination as being the ultimate remedy can be avoided when and if the terms of the contract are adjusted. Termination of the contract as a consequence of changed circumstances does not apply ipso iure, but requires the express declaration from the side of the burdensome party. Until then the contract remains binding as it is. However, in Common Law the legal consequence of the doctrine of frustration is an automatic (eo ipso) release of the parties from the contract as far as frustration is identified with impossibility. Nota bene: In continuous obligations (Dauerschuldverhältnisse) the right of ex tunc rescission of the contract is to be substituted by the right of ex nunc termination (§ 313 BGB). As a matter of fact, in contracts to be performed in short terms such as most simple sales contracts, the short period between agreement and performance will as a rule not make an unforeseeable change of financial conditions possible. Therefore, the “ex nunc” termination of the continuous contracts with performances over a long period of time such as lease contracts will constitute the general rule. The “ex tunc” rescission will remain as an exception. It is rather uncommon to claim for an indemnity of equity for sacrifice (Aufopferungsanspruch) in favour of the party who endures the termination of the contract. However, it is expected from the party who is released from the binding force of the contract to compensate his relief. The compensation for the sacrifice of his/her partner (Aufopferungsanspruch) is especially provided in Turkish Law in different legal provisions. These provisions may be developed to a general principle on a ground of a global analogy (Analogia iuris).

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It is further acknowledged in the Brazilian report that the termination of the contract is combined with a claim of compensation for the party who would have benefited from the contract. Similarly, it is an available remedy under British Frustrated Contracts Act 1943 and Article 2.2 of the Singapore’s Frustrated Contracts Act to claim an equitable compensation for the expenses incurred in regard of the possible performance of the contract. Furthermore, the possibility of such a remedy is discussed in the national reports of Croatia and Portugal. Accordingly, at the request of a party, the judge who decides on the termination or adjustment of the contract may further decide on such an indemnity of equity for the damage suffered.

1.11

Priority Between Remedies

As stated in the foregoing explanations; renegotiation has recently become a prominent remedy accepted in soft law instruments and in jurisdictions following these instruments. Where available, renegotiation is the primary remedy. For instance in the Czech Republic, in Québec and in Romania, the parties ought to renegotiate prior to requesting the adjustment or the termination of the contract. However, if the parties are unable to find a solution within a reasonable time, the legal instruments may either provide for a termination of the contract at a date and on terms to be fixed by the court or alternatively, for an adjustment of the contractual equilibrium by the court. In such a case, soft law materials do not set priority between these options. In jurisdictions where only adjustment and termination of the contract are available, usually the priority issue between these remedies is left to the courts’ discretion. But usually, the courts shall provide adjustment of the contract and only if an adjustment is in concreto not appropriate, the contract shall be terminated. This approach is accepted in Germany, Taiwan and Turkey where priority is given to the adjustment since termination is considered to be an ultimate remedy, which contradicts with the principle of pacta sunt servanda even more violently than the remedy of adjustment.

1.12

Role of the Courts

If the parties fail to reach an agreement regarding the adjustment or termination of the contract on the framework of the duty to renegotiate or if there exists anyhow no such duty in the legal system, then the party who is the victim of the financial crisis may generally use his alternative rights to adjust or terminate the contract without applying to the court.

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As a matter of fact, these two alternative rights constitute typical “Gestaltungsrechte” (droits formateurs) authorising the holder to alter and end the contract with a unilateral declaration. Nevertheless, there is no hindrance to apply to the court for such a unilateral declaration. In this case the unilateral right to alter or end the contract will be declared in the application for relief. The following judgement will merely be a declaratory judgement. On the other hand the addressee (recipient) of a unilateral declaration of adjustment or termination may also apply to the court in order to revoke a negative declaratory judgement about the unjust declaration of his contract partner. The application to court in general seems as a waste of time and money as long as the parties complete their necessary or voluntary renegotiations with a successful agreement. Only in cases where the parties cannot solve their problem by themselves the court shall inevitably be obliged to end the dispute by itself with different scopes of authorization in each country.

1.13

Summary and Conclusion

It is highest time to draw conclusions. Let us now try to summarize our essential conclusions: – One of the most controversial dilemmas of contract law is whether the unexpected change of circumstances after the conclusion of the contract may under certain conditions be taken into account and if so, which legal consequences can be attached to this alteration of circumstances. – The difficult task of the jurists is to harmonize the principles of “pacta sunt servanda”, “nominalism” and “guarantee liability of the obligor of monetary obligations” with the principle of “fairness and reasonableness”. – The generally accepted compromising rule is well-known: A contract is binding and it must be performed in accordance within its terms. But if the equilibrium of the contract was fundamentally altered or the fulfilment of an obligation became excessively onerous, then the disadvantaged party is entitled to request intervention into the disturbed contract. – The legal approaches of various jurisdictions provide different answers and solutions to the problem if, under which conditions and how existing contracts can be renegotiated, adjusted or terminated as in response to unexpected circumstances. – The national approaches differ not only towards the matter of theoretical basis, but also in the matter of conditions as well as remedies. It is distinctly observed that some jurisdictions are restrained to the intervention into the contract while others are on the contrary progressive.

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– The reluctant or cautious attitude of many jurisdictions to the codification of special provisions despite the long-lasting discussions, originates from their different respect towards the principle of “pacta sunt servanda”. – A distant attitude is clearly observed in France where the provisions of the contract have the force of law as between the parties. It is a common fear that a concept of intervention into the contract due to changed circumstances would weaken the sanctity of the contract. – On the other hand, a tolerant approach is ascertained in Italy, Greece, Turkey, the Czech Republic, Portugal, Russia, Argentina and Brazil. – These differences seem to be determined predominantly by the different frequency and intensity of financial crises in these countries and probably also by the influence of the financial, political and social forces of the respective countries. – In the last analysis, it is acknowledged that the principle of good faith and fairness, which accompanies the jurists in all countries as a “leitmotiv” has priority over the principles of “pacta sunt servanda”, “nominalism” and “guarantee liability”. The idea of “contractual morality as a leading guide is determining the new way and wave. – The far-reaching, pragmatic, flexible, tolerant application of intervention into the contract can be verified by the fact that among the legal instruments “good faith” and among the requisites “unreasonableness” (Unzumutbarkeit), both items of discretion, have gained priority over the relatively strict other instruments and requisites. – Good faith as an overwhelming principle is especially emphasized in the Greek report where we can read that the judge is authorized to revise or even terminate the contract directly by applying the general principle of good faith without being obliged to recourse to the special provision of “rebus sic stantibus”. – The terms of equitable discretion like contractual justice, contractual morality, loyalty, fairness, reasonableness and good faith which are invoked to determine the limits of intervention have transformed the traditional strict approach towards the binding force of contract into a pragmatic, flexible, tolerant and liberal approach towards interventionism. – All the prerequisites considered for intervention are after all determined according to an equity criterion. – It is evident that it was the basic idea of contractual justice (iustitia commutativa), which influenced this generous approach in favour of interventionism. – It is remarkable that in the last decade a tolerant and generous approach in favour of interventionism overwhelms perpetually the traditional approach on behalf of the principles of pacta sunt servanda, nominalism, guarantee liability and the classical one-sided risk allocation. – The frequency of financial crises and their devastating consequences for the contracting parties needing urgent protection must have accelerated this process of interventionism.

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– The special protection of the socially weak party is indicated through reducing the rigid conditions for intervention in favour of the employee, consumer, lessee and maintenance creditor. This social protection cited in many national reports, is to be generalized and developed in light of the basic idea of contractual equity. – The unfortunate contrary approach in favour of the banks and against the borrowers rejecting their claims for intervention obviously caused by lobbying activities of the banks is to be regretted. – The main idea of “the duty to renegotiate” is an interesting and desirable appearance of a successful compromise between “the obligation to perform the contract at any cost” and “the duty of loyalty”. – Renegotiation compromises and harmonizes the two contradictory poles of pacta sunt servanda and the right to intervene into the contract in a sophisticated manner. – Even if renegotiation is considered as a concession from the principle of pacta sunt servanda, it must be admitted that it is at the same time a strong supporter of the same principle. – In the light of this dialectical interaction the progress of the idea of renegotiation is to be supported at any rate. – The termination of the contract should be considered as an ultimate remedy (ultima ratio), to be applied only if the remedy of adjustment fails. – Consequently, for the sake of legal security, it is advisable to codify the special matter of the binding force of a contract and its exceptions with all its dimensions within the framework of legal provisions. Such an approach shall maintain the legal certainty and security and further will motivate the parties to reach to a mutual agreement in order to avoid the intervention of the court into the contract. Italy, Germany, Greece, Turkey, the Czech Republic, Portugal, Russia, Argentina, Brazil, Unidroit Principles, Principles of European Contract Law and the Draft Common Frame of Reference have already traced this positive track. It must though be admitted that there are opposing votes pleading for a judge made “case law” reasoning from case to case. The scope of discretion referring to the concepts of good faith, fairness and contractual solidarity and determining nearly all the prerequisites of intervention is extremely broad and flexible. This fact supports evidently the “case law” – approach.

Part II

National Reports

Chapter 2

From Crisis to Crisis: Weakness of Contracts in Argentina Julio César Rivera

Abstract By the end of the nineteenth century and the beginning of the twentieth century, Argentina was the destination of hundreds of thousands of immigrants who considered it was a land full of opportunities, with an extraordinary future (The Royal Spanish Academy Dictionary in its 1913 Edition stated: It all leads to believe that Argentina is called to compete with the United States of America, due to the wealth and extension of its land as well as for the activity of its inhabitants and the development of its industry and commerce, which progress could not be more noticeable.). The reasons of its decline are hard to find, and even harder to explain. Some people state that the legal and judicial answers to those crises, which weakened the contractual nexus, legitimated the governmental interventions regarding private contracts and even abandoned nominalism, contributed not little to speed up said process of decline, which frustrated such hope.

2.1 2.1.1

Chronology of Argentine Crisis and Judicial and Legislative Solutions The Civil Code and the Pacta Sunt Servanda Principle

The Argentine Civil Code, enacted in 1869 and in full force and effect since the 1st of January, 1871, until the 1st of August, 2015, set forth as a general principle that contracts are law with binding force between parties (Section 1197), and that there were no explicit exceptions to such principle. Thus, our Civil Code did not foresee the possibility to terminate or review the contract based on the changing of the circumstances existing at the time of execution.

J.C. Rivera (*) Faculty of Law, University of Buenos Aires, Buenos Aires, Argentina e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_2

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J.C. Rivera

Reactions in View of the Successive Economic Crisis

During the twentieth century Argentina suffered severe economic and financial crises, which caused specific legislation and case law to moderate the effects of the pacta sunt servanda principle. This even lead the 1968 amendment to the Civil Code to include the so called “theory of unforeseen contingencies”. These facts will be examined chronologically.

2.1.3

Repercussions of World War I

At the beginning of the twentieth century, Argentina was a country in marked expansion, which sheltered tens of thousands of immigrants from all over the world, based its economy on an agro-export model, and which currency was convertible into gold. The Great War caused some effects in general economy, not only for the difficulties in collecting from exportations, but also for the limit to importation of industrial goods. Hence, legislation intervened creating some palliatives to the situation of debtors, and also eliminating convertibility of the Argentine peso.1 Thus: – Law No. 9478, dated 9th August, 1914, was enacted, which set forth an extension of 30 days to fulfill monetary obligations; – Upon expiration of the term, “obligations in gold” were extended, while conversion of cash into gold was suspended, save for those cases in which creditors accepted payment in cash at the conversion rate set forth in Law No. 3871, Section 1. On the other hand, massive immigration caused a severe crisis in urban housing. As a consequence, in 1921 Laws Nos. 11156 and 11157 were enacted, which set a minimum term for agreements for renting urban real property, froze for 2 years the price of rents in force as of the 1st of January, 1920 (Law No. 11157 stating so was enacted on 19th September, 1921) and authorized dismissal of legal actions for eviction due to lack of payment if defendants settled the amount owed (pursuant to the frozen price), plus interest and an additional sum for expenses.

1

Robledo (2002), p. 541.

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The Argentine Supreme Court of Justice declared the constitutionality of the aforementioned laws,2 stating – among other reasons – that Congress had the power to limit the rights of individuals, if the measure is temporary and of emergency.3

2.1.4

Some Effects of 1929 Crisis

The 1929 global financial crisis seriously affected Argentine economy. Again, both legislation and case law acted to shelter the weaker portion of the population. Law No. 11741, enacted in 1933, stated a mortgage extension, which was implemented by a reduction of interest and a deferral period of 3 years for capital payable and of 6 months for yields. The unconstitutionality of the captioned law was brought to the Argentine Supreme Court, which confirmed its full force.4 The Court was inspired by the U.S. Supreme Court of Justice case law, which had declared the constitutionality of a law in the State of Minnesota which authorized recovery of estates sold in foreclosure auctions for the term the Courts considered fair and equitable, limited to the 1st of May, 1935.5 To sum up, the Argentine Court, also following the U.S. case law, acknowledged the existence of a power of the State, implicit in all contracts, to intervene in them when exceptional emergency reasons allow so, in case the limitation is reasonable and temporary. Subsequent case law of the Argentine Supreme Court which has validated almost inexorably all legislative and judicial interventions in contracts is inspired by this foundational precedent which has set forth the bases of the so called emergency doctrine. Other inferior courts also ratified the constitutional validity of the laws which authorized fulfillment in national currency of the obligations which had been fixed in gold at the time the convertibility was in force.6

2

National Supreme Court, 28.4.22, Decisions 136–164. In the same paragraph stating so, the National Supreme Court recalls that a similar law enacted by the District of Columbia was declare unconstitutional by the U.S. Supreme Court in the case “Block”, decision 18.4.21. 4 National Supreme Court, 7.12.34, Decisions 172:21. 5 The cited resolution of the U.S. Supreme Court of Justice is entitled Home Building, dated January 8, 1934. Other precedents of U.S. Courts are invoked, which ratified emergency laws regarding rents which avoided evictions and authorized the courts to fix the price of rents. 6 Civil Court of Second Instance, 30.12.38, LL 13-408. This court order adopted the idea that it was necessary to avoid “economic bankruptcy of debtors”, as done by German case law further to both wars. 3

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2.1.5

First Court Decisions and the Evolution of the Authors’ Opinion regarding Inflation Effects

Argentina started suffering the relatively constant inflation processes as from 1946, thus since 1950 the first authors’ opinions7 and some judicial decisions addressing the effects of inflation upon contracts appeared.8

2.1.6

1968 Amendment to the Civil Code: Introduction of the “Theory of Unforeseen Contingencies”

In 1968 the most important amendment to the Civil Code was passed; it only comprised a 10 % of the sections, however, the basic principles upon which the nineteenth century codification had been based were modified. Thus, as aforementioned, the 1871 Code was based on principles such as the absolute force of the word given (pacta sunt servanda), negligence as ground for civil responsibility, the absolute nature of property law and the family organized upon an indissoluble marriage and paternal authority. The 1968 amendment significantly moderated the pacta sunt servanda principle by establishing the general principle of good faith governing the execution, interpretation and enforcement of contracts; the theory of unforeseen contingencies, the abuse of law (“l’abus du droit”), and the gross disparity as a vice of contracts. In the other fields, the strict liability was adopted and the absolute nature of ownership was restricted; therefore, pursuant to scholars’ opinion, as from 1968, in fact, “a new Civil Code” was in force. Regarding the matter in review, the “theory of unforeseen contingencies” was included in section 1198, namely: All contracts must be executed, interpreted and enforced in good faith and according to what the parties have or could have credibly understood, acting with care and precaution. In the case of bilateral commutative contracts and of unilateral contracts for consideration and commutative contracts of continuous or deferred execution, if consideration of one of the parties becomes excessively onerous due to an extraordinary and unpredictable event, the detrimented party may request termination of the contract. The same principle shall be applied to aleatory contracts when excessive onerousness is caused by reasons beyond risks inherent to the contract.

7

Spota (1953) and Rezzónico (1954) claimed the unenforceability of contracts affected in their commutativeness, based on the abuse of law doctrine. The abuse of law was not stated in the Civil Code; however, the 1949 Constitution had introduced a concept which expressly prohibited it (section 35), which was the basis of the authors’ opinion and some court orders stating that the intention to fulfill a contract affected by inflation constituted an abusive conduct. 8 Thus, some court decisions revised the prices fixed in some contracts based on the principle of good faith (LL 75-255; ED 17-606), equity (LL 104-555), presupposition doctrine (National Court of Second Instance, chamber I, 2.10.51, ED 18-97, summary 8), unforeseen events (National Court of Second Instance., 25.8.65, LL 121-645).

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In the case of contracts of continuous execution, termination shall not affect effects already satisfied. Termination shall not be applicable if the detrimented party acted with negligence or if he/she is in arrears. The other party may prevent termination by offering an equitable improvement of the effects of the contract.9

Implementation thereof by case law has been frequent, since subsequent economic crises have been deeply serious.

2.1.7

1975 Hyperinflation: Revaluation of Monetary Obligations

In June 1975 an exceptionally deep hyperinflation process erupted, which gave rise to a vast authors’ activity in favour of revaluation of all obligations, including monetary obligations, as made by German case law in 1923. This concept was adopted by the Supreme Court case law in 1976. The Supreme Court stated that considerations should necessarily be equitable in those conditions governed by commutative justice, and particularly incorporated a criterion regarding money itself. In a first precedent, the Supreme Court anticipated that, if creditors should accept payment of a depreciated currency which purchasing value is inferior to the one it had at the time the loan was arranged, there would be an unconstitutional infringement to the right of ownership.10 In subsequent pronunciations, the Court resumed the matter of the purchasing value of money, stating as follows: “Since money is not a purpose or a value itself, but a means which permits measurement of very dissimilar actions and property for exchange, such equality demands that equivalence of reciprocal considerations responds to the real values and the purpose of each one of them.” Furthermore, the court stated that: “…such equitable situation is modified when, due to the negligence of a delinquent debtor, his/her nominal consideration has considerably lost its real value, its purchasing power, for reasons beyond the creditor’s control.”11 Reassessment or revaluation of monetary obligations was accepted by inferior courts, and some laws set forth the re-potentiation of certain obligations. For example: labor (law No. 20695); loans acknowledged in bankruptcy proceedings (law No. 21488), rental fees accrued in extended rentals (law No. 21342), attorneys’ fees (law No. 21839), expropriations (law No. 21499). Furthermore, adjustment clauses,

9

Section 1198 of the Civil Code, arisen from a recommendation of the III National Congress of Civil Law which took place in Córdoba in 1961 which, under a formula similar to the one of the 1942 Italian civil code, gathered the proposals of the authors who attended such important meeting. 10 National Supreme Court, 21.5.76, ED 67-410. 11 National Supreme Court, 23.9.76, ED 69-189.

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even in loans with real property warranties, were expressly legitimated (law No. 21309). Case law moved forward and the update of obligations with no delinquent debtors and even with delinquent creditors was acknowledged. The request for the update was granted in second instance and the amounts set forth by means of a final court resolution were adjusted, since it was concluded that revalorization did not imply any modification whatsoever of a matter already judged, but only its reexpression with adjusted values. Therefore, revalorization reached all obligations.

2.1.8

1981 Devaluation: The Theory of Unforeseen Contingencies in Practice

In 1981 another serious crisis took place, as a result of a more sudden and accelerated devaluation process than the one officially foreseen. This situation lead the authors and case law to reestablish equivalences of considerations by implementing the theory of unforeseen contingencies as set forth in the Civil Code, section 1198, as amended in 1968. This measure was aimed at preventing bankruptcy of debtors who had undertaken obligations in foreign currency (or in domestic currency with a “foreign currency adjustment clause”), since they were affected by the abandonment of governmental policies regarding exchange rate. In sum, such sudden abandonment of an exchange policy which had been guaranteed by the State was considered an extraordinary and unforeseen contingency. In this case, the courts acted subtlety, since they did not include in the adjustments those obligations in which foreign currency was the contractual currency (e.g., if creditor had indeed lent U.S. dollars), if creditor had funded him/herself in a foreign country (case of bank mutuum in which the bank received a line from abroad and as such had to – at the same time – return foreign currency), and in the case of a genuine obligation in foreign currency (i.e., when there was a movement of goods or services beyond national boundaries).

2.1.9

1989 Hyperinflation

At the time of 1989 hyperinflation, which reached its highest peak in June of the same year, lawyers and judges were mentally prepared and boasted a large number of measures suitable for facing it. Therefore, hyperinflation12 did not cause serious troubles in the field of private law: revalorization of monetary obligations was accepted, adjustment clauses were stated in practically all contracts, adjustment

12

More than 250 % of inflation in June, 1989.

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indexes were known, and lawyers and judges learnt how to implement them; interest for adjusted obligations were pure and the 6 % rate was generalized as the rate to be used for credits updated in accordance with inflation indexes. Whenever adjustment indexes lead to an excess, case law put a limit thereto. The theory of unforeseen contingencies, as stated in the Civil Code, served as a background to solve the cases in which the absurd acceleration or growth of inflation turned the contract meaningless. What caused surprise, however, was a plan which the Government set out by the end of 1989 to face a new hyperinflation process. This plan involved the freeze of bank deposits and its restitution by means of installment of public securities. Constitutionality of such plan was ratified by the Court in the cases “Peralta” and “Videla Cuello”. In Videla Cuello13 the Court remarked that its case law “has admitted, in emergency situations, constitutionality of those laws temporally suspending the effects of contracts freely adjusted by the parties, as the effects of final resolutions, whenever the substance is not modified from one to another, for the purpose of protecting public interest in cases of serious disturbances” (Recital No. 7, emphasis added). For example, the Court recalled that, in accordance with its case law, “it is lawful that the law fixes the term and the price of urban rents, reduction of interest rates agreed by the parties, mortgage moratoriums, maximum prices, suspension of evictions and expulsions, imposition of mandatory unionization of vintners […], temporary paralyzation of provisional wages adjustment lawsuits, reduction of agreed retirement pension amounts […]” (Recital No. 7).

2.1.10

2001 Crisis

2.1.10.1

Backgrounds: Convertibility Law

In 1991 a new law for convertibility of Argentine currency was passed, in this case not regarding gold, but regarding the U.S. dollar. The same law prohibited any mechanism for updating obligations.14 This implied the return to a strict nominalism. However, at the same time, the Civil Code was amended in connection with obligations incurred in foreign currency: the Code in its original version stated that obligations incurred in foreign currency would be treated as obligations of giving a certain amount of property (section 617), and case law had adopted the theory by which such obligations could be always settled in domestic currency pursuant to the exchange rate in force at the

13

National Supreme Court, 27.12.90, LL 191-D-518. Law 23928. Sobre ella v. Alegría – Rivera, Convertibility Law, Buenos Aires, Abeledo Perrot, 1991. 14

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time of settlement.15 The same convertibility law amended section 617 of the Civil Code which stated that obligations not contracted in legal tender within the country are to be treated as obligations of giving amounts of money and they should be settled in the stated currency (Civil Code, section 619, also amended by convertibility law).

2.1.10.2

Emergency Law Dated January 6, 2002

This system lasted until the end of 2001; in such moment, the freeze of bank deposits was ordered (and other subsequent measures which made the position of depositors worse) and burst in January, 2002, when the new administration got the Congress to pass law No. 25561 abandoning convertibility. From that moment on, a series of measures were adopted which converted obligations undertaken in foreign currency into Argentine pesos. Conversion into pesos meant that debtors who had committed to pay in foreign currency were authorized to settle the obligation by making payments in pesos at a statutory fixed exchange rate which rapidly became too far from the real exchange rate. The legal system set forth the general rules; however, it also foresaw the possibility of adjustments to be made by the courts taking into consideration the special circumstances of each case. Thus, law No. 25561, section 11, set forth direct negotiations between debtors and creditors, and authorized the Executive Branch to enact provisions clarifying and regulating specific situations based on the provision established by section 1198 of the Civil Code – which stated the theory of unforeseen contingencies – and the principle of shared efforts. Furthermore, a subsequent executive order stated that if, as a consequence of implementation thereof the value of the property, product or service was superior or inferior to the one at the time of payment, any of the parties could request an equitable readjustment of the price (E.O. 214/2002, section 8). It is important to remark that the Argentine Supreme Court of Justice ratified the conversion of obligations into Argentine pesos.16

15

National Commercial Court of Second Instance, plenary session, 20.10.1967, ‘in re’: “Argentrac Cía. Argentina de Tractores y Maquinaria, S. A. v. Empresa Constructora Vidal, Martí y Cía., S. R. L.”, LL 128-751. 16 National Supreme Court, “Massa, Juan Agustín c. Poder Ejecutivo Nacional”, December 27, 2006, Court Orders 329:5913.

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41

Partial Conclusions

The Civil and Commercial Code keeps the pacta sunt servanda as a general principle. However, the aforementioned principle was moderated both by legislation and case law, supported by authors’ opinion, as from subsequent crises of the twentieth century. They were adopted in the following fields: – Contribution agreed, since it was accepted that debtors could settle their obligations by paying in a currency different from the one agreed (legal tender instead of sealed gold); the same happened in 2002 with the legal provision contemplating the possibility of paying in pesos obligations incurred in foreign currency; – Nominal amount of the monetary obligation, by accepting revalorization thereof pursuant to inflation indexes; – Terms and other contractual provisions, since laws stating minimum terms for renting housings, freezing prices of fixed term rents, stating mortgage moratoriums, etc. were enacted; which were always ratified by the Supreme Court case law. – Efficacy of contracts, since it was generally accepted that, in case of exceptional and unforeseen circumstances which would turn consideration excessively onerous for one of the parties, such party would be entitled to claim for termination of the contract (section 1198 of the Civil Code, as amended in 1968).

2.2

2012 Civil and Commercial Code

A Civil and Commercial Code project was launched in 2012 and it is currently in force, since the 1st of August, 2015. Section 1091 of the new Civil and Commercial Code states: “Unforeseen contingency. If in the case of commutative contracts of permanent or deferred execution, consideration in charge of one of the parties becomes excessively onerous due to an extraordinary modification of the circumstances existing at the time of execution thereof, caused by reasons beyond the parties’ control and the risk assumed by the affected party, such party is entitled to bring a court or out-of-court action, for action or as an exception, claiming total or partial termination of the contract, or an adjustment thereof. The same concept is applicable to the third party to whom rights have been conferred, or obligations have been allocated, resulting from the contract; and to aleatory contracts, if consideration becomes excessively onerous for reasons beyond the risk inherent thereto”. The main difference with the old Civil Code is this: the new Civil and Commercial Code recognizes—in favor of the damaged party—not only the possibility to claim damages, but also the possibility to have the contract revised. Also, it is remarkable that the new Civil and Commercial Code treats the hypothesis of frustration of the purpose of the contract in particular, in section 1090: “Frustration of the purpose. Final frustration of the purpose of the contract autho-

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rizes the detrimented party to declare its termination, if caused by an extraordinary modification of the circumstances existing at the time of execution thereof, beyond the party’s control, and which exceeds the risk assumed by the affected party. Termination is operative whenever this party communicates the termination statement to the other party. In case frustration of the purpose is temporary, the parties’ would be entitled to termination only if timely compliance of an obligation which time of execution is essential is not possible.” The explicit regulation of the frustration of the purpose of the contract relates to the fact that the new Civil and Commercial Code expressly recognizes the purpose of the contract as an element of contracts. It defines it in section 281 which states: “The cause is the immediate purpose authorized by the law which has been determining of the will. The cause is also formed by the exteriorized motives when these are legal and have been explicitly added or even tacitly if they are essential to the parties” and is completed with the regulation in section 1013 which reads “Requirement. The cause shall exist in the formation of the contract and during its execution, and subsist during its performance. The lack of cause opens the possibility, depending on the case, of nullity, adjustment or extinction of the contract.”

2.3

Theoretical Grounds for Legal and Court Interventions

2.3.1

Theory of Unforeseen Contingencies

The fact that since 1968 the possibility of requesting termination of contracts affected by the exceptional and unforeseen contingency is expressly stated (Civil Code, section 1198) makes the discussion on grounds thereof reduced to the scholars’ opinion, since the courts simply put into practice legislation in force. Nevertheless, there have been important contributions which allow us to accurately distinguish the cases of cancellation (or revision) from change of the circumstances of such cancellation as a result of frustration of purpose o disappearance of the contract basis. The alternatives in this debate are still applicable even after the recodification, as in the New Civil and Commercial Code the substantive solutions from the previous Code have been maintained with the modifications described above.

2.3.1.1

Grounds for the Theory of Unforeseen Contingencies as Enacted

Part of the Argentine scholars’ opinion has considered that the provision set forth in section 1198 of the Civil code is based on the general principle of good faith, which seems to be inferred from the text itself, since the same establishes good faith as the general principle governing execution, interpretation and enforcement of contracts. Other authors have considered it is a mere implementation of the rebus sic stantibus clause, but also have been influenced by the doctrine of the basis of contracts

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developed by the German jurist Karl Larenz,17 and many authors, and some court precedents found in it the grounds for inefficacy or revision of contracts caused by the subsequent excessive onerosity.18 We will revert to this idea when treating the frustration of purpose as an assumption of subsequent contractual inefficacy.

2.3.2

Other Methods of Contracts Adjustment

While the now derogated Civil Code was in force, methods for adjusting contracts when their commutativeness is affected were not limited to the ones set forth in section 1198 of the old Civil Code. In Argentina, as in many other countries which codes only state express provision in such respect, the scholars’ opinion and case law have opened the doors to revision/termination, through other legal concepts, such as the basis of business, frustration of contracts, etc. That is, regardless of its legal regulation, these doctrines have been created as praetorian creations of courts and as scholars’ proposals.19 Nevertheless, the captioned concepts are not to be confused, since each one of them is to be implemented in a different field.

2.3.2.1

Frustration of Purpose

Frustration of purpose is referred to those cases in which there has been a caused purpose, common to the parties, which for subsequent reasons – not personal or attributable to the parties, external to their field of influence and which does not constitute an assumed risk – cannot be reached. Termination of the contract is the effect thereof.

17

Larenz (1956). Case law also accepted it; thus, it is said that “the pacta sunt servanda principle can only be breached when the basis of the legal act has changed, and a serious and essential damage is caused”: National Court of Second Instance., civil and commercial chamber, 24.2.70, LL 140-452. 19 Those criteria have been reflected in the Commission No. 3 of the XIX National Congress of Civil Law in Rosario, in 2003, entitled “Renegotiation and revision of contracts” [Renegociación y revisión del contrato] which reads: “Revision of contracts due to excessive onerousity in term contracts –section 1198, 2° part of the civil code- does not exhaust the events in front of the negotiations unbalance in term contracts. The theory of unforeseen events, frustration of the contract purpose, the general principle of good faith, the abuse of law and equity are useful means of contract revision”: Iñiguez, Marcelo, Advances of authors’ opinion in the field of subsequent unbalance. The extraordinary in question, in the Communitarian and Private Law Magazine [RDPyC] 2007-1-141 et seq. 18

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The field in which frustration of purpose is more frequently implemented is in the contract for rental of property, and thus it is reflected in the Argentine Civil Code, sections 1522 and 1531.20 Argentine case law has put into practice the frustration of purpose doctrine in some cases; in one of them it was stated that the purpose of a contract of rental of a land intended for a livestock activity was frustrated if the land had not had the necessary water supply for reasons of insufficiency of provision from a canal. As we have mentioned before, the frustration of the purpose is expressly regulate in the Civil and Commercial code (section 1090), following the criteria established by scholars and case law during the life of the previous Code.21

2.3.3

Difference in Relation to Unforeseen Contingencies

Authors have explained the difference between the unforeseen contingencies, as set forth in legislation, and the so called frustration of purpose: – The “unforeseen contingencies” principle (or teoría de la imprevisión – théorie de l’imprevision) is implemented when the relation of equivalence has been broken, the contract has lost its commutative quality due to contingencies having an impact, so the contract becomes excessively onerous for one of the parties; – The “frustration of purpose” principle is implemented when the purpose in common of the parties cannot be reached, “in common” due to the fact that, since it has been revealed by one of the parties and accepted by the other, it has become a part of the contract, as a subjective final cause, as expressly established in the aforementioned section 281.22

20

Section 1522: If due to an act of God or force majeure the lessee is forced not to use the thing, or if it cannot be used for the purpose of the contract, he/she can claim for termination of the contract, or cessation of payment of the price, during the term he/she cannot use the property. Section 1531: If lessor is the non-prevailing party in a lawsuit regarding a part of the rented property, lessee can claim for a reduction of the price, or for termination of the contract if the part he/she is deprived of was the main part of the property, or of the object rented, and for subsequent damages. 21 National Civil Court of Second Instance, chamber F, 25.4.96, ED 169-345. The court decision is relevant since the Court clearly defined the concept; thus, it stated that the purpose of the contract is the basic purpose of one of the parties, known and accepted by the other, in such a way that it is objectified and becomes the purpose of both parties; and frustration thereof is observed when compensation is possible, but the purpose cannot be fulfilled due to circumstances beyond the parties’ control. 22 Rivera 1998, p. 60.

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45

Common Ground: The Contract Bases Doctrine

We have already stated that the contract bases doctrine developed by Larenz is seen as the basis of the provision set forth in section 1198 of the old Argentine Civil Code and section 1091 of the current Civil and Commercial Code. However, this idea must be completed stating that such bases doctrine is also the theoretical support of the subsequent inefficacy caused by frustration of the purpose of the contract. Thus, it can be stated that both concepts are inspired, in last instance, by the idea that the contract creates a rebus sic stantibus obligation. It is then supposed that the contract is surrounded by certain circumstances in its origin, which modification of disappearance during enforcement thereof may cause its termination or revision. These circumstances and the general state of things are the ones that exist at the time of execution of the contract; they constitute the objective basis of the contract and its existence or subsistence is objectively necessary for the contract to subsist, pursuant to the meaning of the intention of both parties, as regulation provided with sense. The objective bases basically involve two assumptions: (1) the break of a relation of equivalence within the contract for subsequent circumstances (excessive onerosity), and (2) frustration of purpose of the contract. In short, the well known theory developed by the German professor followed by Argentine authors, the unforeseen contingencies and frustration of purpose have a common ground: disappearance of the objective basis of the contract.23 In judicial practice, the bases theory has been implemented to solve some of problems arisen as a consequence of 2001 crisis. In such sense, it has been stated that “whenever the bases of a legal act are destroyed by external reasons, such as devaluation of currency, the intention of the creditor that the debtor strictly fulfills the obligations under the contract is not a viable principle, since it would imply a distortion of its essence, especially considering that, at the time the obligation was undertaken, the debtor had the apparent security granted by convertibility and intangibility of deposits in foreign currency laws”.24

23

In Argentina the doctrine has also linked the idea of contract basis with the cause; disappearance of the basis of the act would affect the cause of the act: Zannoni1998, p. 560. 24 National Civil Court of Second Instance, Chamber K, 27.8.03, Jud. Doc. 2004-1-721.

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Implementation of the Theory of Unforeseen Contingencies

2.4.1

Objective Estimates of Implementation of the Theory of Unforeseen Contingencies

Section 1091 of the Civil and Commercial Code requires that consideration of one of the parties becomes excessively onerous due to extraordinary and unforeseen reasons.

2.4.1.1

Extraordinary and Unforeseen Contingencies

The criterion to distinguish abnormal – extraordinary – events related to two elements25: – The origin of the event (it must be external to the conduct of the parties; e.g., war, inflation, change of currency); – Unforeseeable nature of the event, i.e., it must be an event which could not have been foreseen by the parties even when they acted conscientiously – Therefore, it is a risk not undertaken by the parties. Section 1091 expressly states that the event shall be strange to the parties and to the undertaken risk which it affects. The unforeseeable nature of the event is, therefore, decided on the basis of a series of information available at the time of execution of the contract, and in accordance with the possibility of prevision that the parties indeed had. Hence, both scholars and case law conclude that the contingency causing the excessively onerosity must meet the same characteristics that the acts of God: it must be unforeseeable, irresistible, external to the party alleging it, real and subsequent. At the same time, however, it is different from the act of God since the contingency does not have an insuperable effect, it does not cause an absolute impossibility to settle the obligation, since in such case the obligation is extinguished, and this extinguishment is the proper effect of the act of God. On the other hand, in the case of unforeseen contingency, the effect of such event external to the parties irresistible, unforeseen, subsequent, and real, is that consideration of one of the parties becomes excessively onerous; i.e., the affected party may be able to settle the obligation, but by making an unreasonable sacrifice. The concept will be analyzed below. It should be noted that foreseeability has also been examined by the tribunals with a lot of prudence as in abstract anything could be foreseen; what is evaluated is whether the event which distorts the economic balance of the contract was 25

Lorenzetti (2004), p. 521.

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unforeseen or not, which is not the same as whether it was unforeseeable. As such, in the case of a rental of a venue for a wedding where the fiancée dies before the event, it could be stated that there is nothing more foreseeable than death itself, but that it was unforeseen that it would happen to a young woman. Therefore unforeseeable is not unimaginable or impossible to contemplate with anticipation, as many force majeure events are imaginable, and therefor plausible of being mentally represented or previously observed. Thus what is really unforeseeable shall be stated on a case to case basis, without generalizations,26 and its notion is closer to what is unforeseen in the concrete case rather than to what is unforeseeable in “abstract”.27

2.4.1.2

Excessive Onerosity

Argentine legislation requires the extraordinary and unforeseen event to derive in an excessive onerosity of consideration due, so maintenance of the obligation implies commitment of a flagrant injustice,28 evidenced in the excess resulting from comparing consideration due by the detrimented party with the other party’s consideration. It is an economic relation in which something is given in exchange for another similar thing according to the market value: there is excessive onerosity when these values have been distorted. Such relation is objective; since it is a “relation” indeed, and it does not make reference to the expected consideration, but to its equivalent in relation to the other party’s consideration. In such sense, it has been stated that “It should be taken into account not only the asset situation of the damaged party, since it is attempted to examine correlativity of considerations derived from the contract and not a asset relation which has not been taken into consideration in the particular conventional program. In short, what counts is not consideration itself, but consideration in its equivalent relation to the other party’s consideration, which disadjustment causes an essential modification of the economic basis of the contract”.29

Therefore, damage derived from the extraordinary and unforeseen event does not require a loss consisting on the bankruptcy of the damaged party or his/her impoverishment with regard to all his/her assets, but only a serious damage in the legal act executed with the other party would be enough.30

26

As cited in the award in re “Empresa de Energía de Boyacá c/Compañía Eléctrica de Sochagota”, 21.4.04, Casación Civil, Colombia, 23.6.00. 27 An Argentine judicial court said the unforseen contingencies principle considers as extraordinary those events which do not usually occur, without giving unforseeability an absolut sense, as according to experience any event, even if unexpected, could be known and eventually thought of: CNCom., Chamber C, 22.8.77, LL 1978-B, 314. 28 Alterini (1998), p. 407. 29 Lorenzetti (2004), p. 523. 30 National Civil Court of Second Instance, chamber C, 19.10.78, LL 1978-D-684.

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Who May Invoke Excessive Onerosity

Section 1091 of the Civil and Commercial Code states that the actions set forth therein are applicable to all individuals who, being parties to a contract, allege that their pertaining considerations have become excessively onerous. Therefore, it does not exclude the legal standing of the damaged party which is a company or professional in the field of the business related to the contract. This, since any contract, even those executed between companies, may be affected by a modification of the circumstances that the parties had taken into consideration at the time of execution. Moreover, contract executed between companies are mostly affected by disappearance of the bases, since they are term contracts, monetarily significant, and they are subject to modifications of different markets.31

2.4.1.4

Contracts Affected

Section 1091 of the Civil and Commercial Code states that termination or revision of the contract due to excessive onerosity may be useful for commutative contracts of continuous or deferred performance. In the case of aleatory contracts, excessive onerousity may be invoked whenever the extraordinary contingency is external to the proper risk of the contract.

2.4.1.5

Resolution Action: Legal Standing for Claiming Revision

Section 1091 of the Civil and Commercial Code assigns the affected party the right to claim before a judge or extrajudicially, by action or exception, the total or partial resolution of the contract or its adjustment. This shall be related to the provision in section 1011, which regulates long term contracts. It established that when one of the parties decides to terminate the contract “it shall give the other the reasonable opportunity to renegotiate in good faith, without incurring in an abusive exercise of its rights.” So then, the idea that in long term contracts there is an obligation to renegotiate its provisions when the economic equation of the deal has been altered by events strange to the risk undertaken by the affected party, is considered as included in Argentine law. Such obligation is based in the principle of good faith.

31

Lorenzetti states that even in the case of contracts between pairs, the external event may break the economic equation; the difference would lie in the fact that if there are other extra-patrimonial elements or a practical end which can only be fulfilled by passing of the time, it could be more equitable for the parties to disassociate before being forced to fulfilled their obligations since, even when the preservation principle is still applicable, the court may decide upon due valuation of the case giving it less intensity.” Lorenzetti (2004), p. 516.

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49

Adjustment of Contracts

In Argentine law, the matter of which is the scope of adjustment of contracts, in cases in which it is applicable, has given rise to a vast literature and endless court resolutions. In sum, we can affirm that most authors and case law coincide in considering that revision does not mean mechanical readjustment of agreed obligations, or moving the effect of the extraordinary and unforeseen events to the other party. The contract is trying to be expurgated form flagrant injustice32 by examining its terms and conditions, so that execution thereof by creditors is not abusive, but not absolutely equalizing considerations33 or distributing subsequent onerosity over mathematical models or pursuant to fixed indexes or tables,34 but it must be done sensibly35; therefore, the court – as director of the process of revision – must obtain reasonable re-composition by means of a discretional assessment, to act in connection with the contract as a whole, and in the sense that one of the obligations should stop being intolerable.36 In the same line, it has been stated that “once the equitable solutions is claimed by any of the parties, the court must decide the equitable distribution of the subsequent risk, taking into consideration the original equation or balance”.37 Furthermore, case law has considered that, in the case of the theory of unforeseen contingencies, readjustment cannot and must not be mathematical, since it is not an attempt to strictly go back to the initial balance, which would imply conversion of the favoured party into the party damaged by the unforeseen contingency, but an equitable amendment of obligations is sought,38 therefore, it should be done sensibly.39 In other words, adjustment made by the court of the contract price shall not have the intention of amending all the damage suffered by the party as a result of the extraordinary and unforeseen contingency, but it shall try to expurgate the contract from the flagrant injustice by reviewing its terms and conditions, so that application by creditors is not abusive, but not trying to absolutely equalize considerations.40 It is therefore concluded that it is not necessary to obtain initial balance, but to neutralize the effects caused by the extraordinary and unforeseen contingency. 32

Llambías (1978) t. I, No. 225, p. 276 et seq. Lorenzetti (2004), p. 248. 34 National Civil Court of Second Instance, chamber E, 5.8.81, LL 1982-A-514; id., chamber D, 2.6.81, ED 95-418; id., chamber F, 30.9.81, ED 97-384. 35 National Commercial Court of Second Instance., chamber B, 2.12.76, ED 72-639; National Civil Court of Second Instance, chamber G, 23.2.81, ED 93-383. 36 Conf. Mosset (1977), p. 229. 37 San Rafael Congress of civil law, recommendation cited by Mosset (1977). 38 SCJ Mendoza, July 10, 1984, Lexis Nexis Jurisprudencia y Doctrina, Document No.: 16.7363. 39 National Civil Court of Second Instance, chamber B, December 09, 1983, JA 1984-III-136. 40 Alterini (1998) No.16 f) on p. 454; decision of Cavagna Martínez and Barra in Supreme Court, June 10, 1992, “Lafontaine, Oscar Rodolfo v. Lafontaine de Minteguiaga, Elsa Esther y otro”, Court decisions 315:1247. 33

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Rights of the Defendant

The Civil and Commercial Code does not set forth rights to any compensation whatsoever in favor of the defendant for termination of the contract affected by the subsequent excessive onerosity. The only means of the defendant to avoid termination of the contract is to offer an equitable readjustment to be made in accordance with the patterns set forth in 18.6 above.

References Alterini, A.A. 1998. Civil – commercial- contracts for consumption. General Theory [Contratos civiles – comerciales – de consumo. Teoría General]. Buenos Aires: Abeledo Perrot. Larenz, K. 1956. Basis of the legal act and observance of contracts [Base del negocio jurídico y cumplimiento de los contratos]. Trans. Carlos Fernández Rodríguez. Madrid: Revista de Derecho Privado. Llambías, J.J. 1978. Treaty – Obligations [Tratado – Obligaciones], 3rd ed. Buenos Aires: Perrot. Lorenzetti, R. 2004. Contract treaty. General part [Tratado de los contraltos. Parte General]. Buenos Aires: Rubinzal-Culzoni. Morello, A.M. 1989. Long term contracts and the need for a permanent renegotiation [Los contratos de larga duración y la necesidad de una renegociación permanente]. Buenos Aires: La Ley 1989-C-1227. Mosset, I. 1977. Contractual justice [Justicia Contractual]. Buenos Aires: Ediar. Nicolau, N. 2002. Revision and renegotiation of contracts as instruments useful for adjustment thereof to the subsequent circumstances, JA 2002-IV-1058. Rezzónico, L.M. 1954. Binding force of contracts and the theory of unforeseen events [La fuerza obligatoria del contrato y la teoría de la imprevisión]. Buenos Aires: Perrot. Rivera, J.C. 1998. Relation between frustration of the purpose and unforeseen contingencies [La relación entre la frustración del fin y la imprevisión], ED 179-60. Robledo, N.D. 2002. La salida de las cajas de conversión: algunos problemas jurídicos, JA 2002IV, 541. Spota, A.G. 1953. Contractual theory of unforeseen contingencies and abuse of law [La teoría de la imprevisión contractual y el abuso del derecho], JA 1953-30. Tobías, J.W., and F. De Lorenzo. 2003. Notes upon the autonomous actions of readjustment in accordance with section 1198 of the Civil Code [Apuntes sobre la acción autónoma de reajuste en los términos del art. 1198 del Código Civil], LL 2003-B-1185. Zannoni, E. 1998. in Belluscio – Zannoni, Commented Civil Code, volume 2, comment to section 502, No. 9. Zannoni, E.A. 2007. Contractual unbalance and renegotiation of contracts [El desequilibrio contractual y la renegociación del contrato], RDPyC 2007-1.

List of Cases National Civil Court of Second Instance, 30.12.38, LL 13-408. National Civil Court of Second Instance, chamber B, December 09, 1983, JA 1984-III-136. National Civil Court of Second Instance, chamber C, 19.10.78, LL 1978-D-684. National Civil Court of Second Instance, chamber D, 2.6.81, ED 95-418.

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National Civil Court of Second Instance, chamber E, 5.8.81, LL 1982-A-514. National Civil Court of Second Instance, chamber F, 25.4.96, ED 169-345. National Civil Court of Second Instance, chamber F, 30.9.81, ED 97-384. National Civil Court of Second Instance, chamber G, 23.2.81, ED 93-383. National Civil Court of Second Instance, Chamber K, 27.8.03, Jud. Doc.2004-1-721. National Commercial Court of Second Instance, plenary session, 20 .10.1967, ‘in re’: ‘Argentrac Cía. Argentina de Tractores y Maquinaria, S. A. v. Empresa Constructora Vidal, Martí y Cía., S. R. L.’, LL 128-751. National Commercial Court of Second Instance., chamber B, 2.12.76, ED 72-639. National Court of Second Instance, chamber I, 2.10.51, ED 18-97. National Court of Second Instance., 25.8.65, LL 121-645. National Court of Second Instance., civil and commercial chamber, 24.2.70, LL 140-452. National Supreme Court April 21, 1992, LL 1992-C-491, JA 1992-IV-166, Court decisions 3151790 and ED 152-133. National Supreme Court May 21, 2002, LL 2002-F-726 and Jud. Doc. 2002-3-942. National Supreme Court, “Massa, Juan Agustín c. Poder Ejecutivo Nacional”, December 27, 2006, Court Orders 329:5913. National Supreme Court, 21.5.76, ED 67-410. National Supreme Court, 23.9.76, ED 69-189. National Supreme Court, 27.12.90, LL 191-D-518. National Supreme Court, 28.4.22, Decisions 136-164. National Supreme Court, 7.12.34, Decisions 172:21. National Supreme Court. May 30, 2011, “Slatapolsky, Jorge Alberto c/Banco do Brasil S.A. s/ ordinario”, Court decisions 334:698. SCJ Mendoza. July 10, 1984, Lexis Nexis Jurisprudencia y Doctrina, Document No.: 16.7363.

Chapter 3

Keeping the Balance: The Effects of Financial Crises on Contracts Under Brazilian Law Anderson Schreiber

Abstract As many other legal systems, Brazilian law is not strictly attached to the “pact sunt servanda” anymore. There has been a significant mitigation of the binding force of contracts in the last 20 or 30 years. The Brazilian Consumer Code (1990) and the Brazilian Civil Code (2002) provides for different remedies that might be used in case of unpredictable events that cause severe change to the contractual balance. This brief article examines such remedies and how Brazilian Courts have been using them in connection with financial crises, both in national and international levels.

3.1

Introduction

Although there is no specific provision regarding financial crises on Brazilian Contract Law, legal provisions regarding hardship and significant changes of circumstances are being more and more used by Brazilian Courts in order to address the effects of financial crises on contracts. As detailed below, the Brazilian Civil Code (2002) and the Brazilian Consumer Protection Code (1990) – as well as some specific laws regulating contracts between private companies and the Public Administration – provide for a right to terminate contracts or to obtain their judicial review, as a result of supervening events that result in a significant change of circumstances. In that sense, there has been a severe mitigation of the “pact sunt servanda” in Brazilian written and case law.

A. Schreiber (*) Faculty of Law, Rio de Janeiro State University, Rio de Janeiro, Brazil e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_3

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Different Theories for the Same Purpose

There are several theories that have been used by Brazilian Courts on cases regarding the effects of financial crises on contracts. First of all, there is force majeure, which is defined by Brazilian law as an event that results in impossibility of performance (Civil Code, article 393). Under Brazilian law, impossibility of performance not caused by the debtor automatically terminates the contract. Force majeure is only used by Brazilian Courts in connection to very strong financial crises, which result in fact in an impossibility of performance. In most cases related to financial crises, Courts are not dealing with real impossibility to perform, but with mere hardship or difficulty to perform. On such cases, Brazilian Courts have been using the so-called doctrine of unpredictability (teoria da imprevisão). According to such doctrine, any unforeseen event that severely disrupts the contractual balance may be raised by the affected party in order to obtain the termination or the judicial review of the unbalanced contract. This doctrine is, actually, supported by several legal provisions under Brazilian law: i.e., Civil Code, article 478; Law 8,666, article 65, II, d and 78, XVII, among others. The famous “clausula rebus sic stantibus” and the doctrine of the basis of contract (Wegfall der Geschäftsgrundlage or “teoria da base do negócio”) are also quoted by Brazilian Courts sometimes, especially in cases where the disrupting event does not need to be necessarily unforeseen. For example, the Brazilian Consumer Code (Law 8,078/1990) authorizes Brazilian consumers to plead for judicial review of the contract in case of any change of circumstances, whether the supervening fact is unforeseen or not (Brazilian Consumer Code, article 6, V). In such cases, nominal references to clausula rebus sic stantibus and to the theory of the basis of contract may occur.

3.3

“Teoria da Imprevisão” (Doctrine of Unpredictability) Under the Brazilian Civil Code

According to the Brazilian Civil Code of 2002, there are four conditions necessary to apply the doctrine of unpredictability to a certain contract (article 478). First, it must be an ongoing contractual relationship (the doctrine is not applicable to contracts already performed or extinguished). Second, there must be proof of an unforeseen and extraordinary event (the simple financial difficulty of one of the parties is not deemed enough, as the doctrine is based on events that are unforeseen to everyone and not simply to one individual party). Third, such event needs to result in an excessive burden to one of the contractual parties. Finally, according to the Brazilian Civil Code, the excessive burden of one of the contractual parties needs to correspond to an extraordinary advantage for the other. Brazilian courts have not been very strict in regard to this fourth condition (extraordinary advantage), frequently presuming its existence upon the proof of the excessive burden.

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Mere Variations of Currency and Inflation

According to the Brazilian Superior Court of Justice, mere variations on the value of US dollar or other foreign currencies, or any other index used to determine the amount due on certain contracts are not considered an unforeseen event, unless they are very intense and severe. Due to Brazilian’s past experience with inflation and present economic policy, courts have been reluctant to consider simple variations of dollar as basis for judicial claims. However, it is important to keep in mind that, as already noted above, the unpredictability is not a condition required by the Brazilian Consumer Code (Law 8,078/1990, article 6, V). In other words, in consumer relationships (relationships between consumers and providers), consumers may obtain the contract judicial review based simply on its supervening unbalance.

3.5

Assuming the Risk of Financial Crises

Another common issue regards the willing assumption of risks under certain contracts. There is no legal provision excluding the right to judicial review or contractual termination in cases where the party has expressly assumed the risk of a financial crises or any other unpredictable economic event. However, Brazilian legal writers sustain that such remedies are not granted in cases where claimants have been negatively affected by changes concerning their “álea normal” (normal alea), or, in other words, by changes normally included on the risks assumed by the contracting party. For example, materials prices may raise during a construction agreement and that risk, even if it is not predicted by the constructor, it is considered to be included on the normal alea of his activity, not representing, therefore, an extraordinary (and generally unpredictable) event. Brazilian courts have also been known to apply this idea of normal alea, especially in cases regarding the unbalance of contracts by which the State grants to a private company the right and duty to supply public services (contratos de concessão).

3.6

What About Remedies? Right to Termination

When all the four conditions mentioned on item III above are present, claimant may require the contract termination. That is the normal remedy under Brazilian Civil Code, as provided for on its article 478: Article 478. In contracts with ongoing or deferred performance, if the obligation of one of the parties becomes excessively onerous, with extreme advantage for the other, by virtue of extraordinary or unpredictable events, the debtor may apply for the contract termination. The effects of the judicial decision that terminates the agreement shall be retroactive to the date of citation.

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So, according to the Brazilian Civil Code, the affected party could claim for termination. There is no doubt about that. What Brazilian legal writers debate about is the possibility of judicial review.

3.7

Is There a Right to Claim for the Judicial Review of Contracts Under Brazilian Law?

The Brazilian Consumer Code provides for the right to judicial review (article 6) but that legal provision may only be applied to consumer relationships and may only be raised by the consumer. In standard contractual relationships, the Civil Code is applicable and the Civil Code does not clearly state that the affected party may claim for a judicial review of contract, as a general rule. In fact, it suggests the opposite, providing for judicial review only in connection to unilateral agreements. That is precisely what the Civil Code states on its article 480: Article 480. If only one of the parties has obligations under the contract, that party may claim the reduction of its obligations, or that the manner of performing them be altered, so as to avoid excessive burden.

Unilateral agreements are not so common under Brazilian law. Most contracts are bilateral agreements, which means that both parties have mutual obligations. In such cases, the Brazilian Civil Code does not clearly provide for judicial review, at least when dealing with the doctrine of unpredictability. It would, however, be very unfair to force a contractual party to claim for termination when the unbalanced contract can be reviewed in order to restore its original balance. In fact, there are many cases where the parties depend or are interested on the survival of the contract. Imagine, for example, a transportation company that does not want to terminate an agreement with its main client, but is suffering the burden of a natural accident that has closed many roads across the country. In such cases, the contract may be adjusted to restore the original balance, without the necessity of termination. For these reasons, Brazilian legal writers and commentators have been defending the possibility of judicial review, which is being more and more accepted by Brazilian Courts everyday. Such possibility is usually based on analogies with the Brazilian Consumer Code (which, as seen above, expressly provides for judicial review) or an extensive interpretation of article 317 the Civil Code itself. Article 317 was originally designed for a high-inflation scenario and its main purpose was to keep the real value of monetary obligations between the date of the contract and the date of performance. Its wide wording, however, have allowed Brazilian legal doctrine to defend the existence of a general right to claim for judicial review. Article 317. When, for reasons that could not be foreseen, the value of the obligation owed and its value when it is performed becomes manifestly disproportionate, the judge may correct it, at the request of the party, in such a way as to ensure, as far as possible, the real value of the obligation.

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Based on article 317 of the Civil Code, Brazilian Courts are accepting more and more claims of judicial reviews in connection to financial crises. One may say that, nowadays, Brazilian law accepts both termination and judicial review as general remedies for contractual unbalance by virtue of unpredictable events. In the present scenario, there is no priority between such remedies. Claimant may freely choose between termination and judicial review. If claimant requires termination, Brazilian law grants the defendant right to avoid termination by proposing to restore the contractual balance. Article 479 of the Civil Code states that: “Article 479. Termination may be avoided, if the defendant offers to modify the conditions of the contract, on an equitable basis.” In other words, defendant may always offer himself to modify the conditions of the contract. However, that is not a duty under Brazilian law.

3.8

Is There a Duty to Renegotiate?

There is no duty to renegotiate under Brazilian law and there is no duty to enter into mediation either. Both remedies are, though, usually provided for in contractual clauses. Renegotiation in good faith is frequently mentioned by contracts as a preliminary stage in which each of the parties must engage before they seek a solution in Courts. Until today, however, it remains a matter for each contract itself.

3.9

Unlawful Termination

If a party terminates the contract without going to the court, indemnification may be applicable if, after a proceeding started by the counterparty, the court understands that there was no right to termination at all. On the other hand, if termination or judicial review are required to the courts – as provided by Brazilian law – and granted, no indemnification is due to the counterparty, unless it manage to be successful in an eventual counterclaim based on the breach of good faith. What Brazilian courts occasionally do is to split the economic burden resulting from the unforeseen event, if neither party could reasonably foreseen it or avoid it.

3.10

Conclusion

As many other legal systems, Brazilian law is not strictly attached to the “pact sunt servanda” anymore. There has been a significant mitigation of the binding force of contracts in the last 20 or 30 years. The Brazilian Consumer Code (1990) and the Brazilian Civil Code (2002) have embraced three or four general principles – such as good faith and “função social do contrato” (social purpose of the contract) – that are being used by Brazilian Courts and legal writers to build a new Contract Law.

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This new Contract Law seems less concerned with security and stability, in abstract, and more concerned with fairness and equity. In this scenario, contracts are seen as endurable relationships, each party being to some extent responsible for the other. Unpredictable events that cause severe change to the contractual balance may trigger important legal remedies under this new Contract Law, such as the right to terminate the agreement and, more importantly, the right to request the modification of the contract itself by the Courts (judicial review). One may say that this is too much: that Brazilian Courts could, in that connection, interfere in private autonomy, changing contracts at the slightest sign of financial retraction both on national or international scenarios. This is not true, neither in theory nor in practice. In theory, Brazilian law provides for a strict set of conditions that are deemed necessary to claim for judicial review or termination. In practice, Brazilian Courts have been very judicious about the use of such remedies and the cases in which they may be used. As detailed above, the mere variations on the value of currency, or the decrease of financial indexes or interest rates, are not considered extraordinary or unpredictable events. Brazilian recent economic history, characterized by a national victory against the so-called “inflation ghost”, might explain why the Courts have been acting so judiciously on this field. In conclusion, one may say that Brazil is currently trying to find a certain balance on defining the legal consequences of unbalance.

Chapter 4

Les effets exercés par les crises financières sur la force obligatoire des contrats: certitudes et incertitudes du droit québécois en matière d’imprévision Élise Charpentier and Nathalie Vézina

Abstract The Quebec law is marked by the coexistence of certainties and uncertainties related to the theory of imprevision. The Civil Code of Quebec, as the former Civil Code of Lower Canada, explicitly recognizes the principles of pacta sunt servanda and nominalism. However, there is no specific provision in the Civil Code of Quebec that recognizes or rejects the theory of imprevision. If it is clear that a change of circumstances could have an impact when the parties have included a hardship clause or even in one of the particular cases where the legislator explicitly provides for imprevision, authors express opposing views as to the applicable law in other hypotheses. For some, the absence of a general provision on the theory of imprevision means that the legislature did not wish to acknowledge it and that it only relies on the general principle of pacta sunt servanda. For others, in light of the new contractual morality that has recently emerged, the binding effect of the contract must be reconciled with the general principle of good faith, which imposes a duty of cooperation and allows for renegotiation of the agreement. In the next few years, Quebec courts will take a stand on this issue.

Le présent rapport se limite à l’état du droit civil québécois. Il ne porte pas sur le droit applicable dans les autres provinces canadiennes et assujetti aux principes de common law. É. Charpentier (*) Université de Montréal, Montréal, Québec, Canada e-mail: [email protected] N. Vézina Université de Sherbrooke, Sherbrooke, Québec, Canada e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_4

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Introduction

Problématique de l’imprévision Les crises financières ont parfois des effets dramatiques pour les contractants. De prime abord, cette affirmation peut surprendre, le contrat étant souvent décrit, sinon défini, comme une œuvre de prévisibilité, un moyen pour les contractants de se donner une emprise sur l’avenir. Cela dit, les changements économiques sont parfois imprévisibles. Lorsque de tels phénomènes se produisent, la question se pose de savoir si les tribunaux peuvent ou non intervenir afin de rétablir l’équilibre contractuel bouleversé – en d’autres termes, si le droit doit privilégier la stabilité et la sécurité des contrats ou encore une certaine conception de l’équité. C’est toute la problématique de l’imprévision, également connue comme celle du « changement de circonstances ». Distinctions entre l’imprévision et d’autres problématiques juridiques L’imprévision, telle qu’elle est conçue en droit québécois, se distingue de problématiques voisines avec lesquelles elle présente certaines similarités. Ainsi, même si elle pose la question du déséquilibre dans les prestations des parties, comme la lésion, il s’agit de deux notions distinctes. La lésion suppose un déséquilibre au moment de la formation du contrat, alors que l’imprévision porte sur le déséquilibre survenu au moment de l’exécution du contrat en raison d’un changement de circonstances.1 De même, l’imprévision se distingue de la théorie des risques applicable en cas de force majeure. En matière d’imprévision, l’obligation n’est pas impossible à exécuter, mais elle devient excessivement onéreuse. La force majeure se caractérise, au contraire, par une impossibilité d’exécution.2 Notion de crise financière Il convient également de définir la notion de « crise financière » pour les fins du présent rapport. La « crise » peut évidemment s’entendre au sens très large d’un dérèglement de l’économie globale. Il s’agit là d’une situation qui ne s’est sans doute pas présentée au Québec depuis la grande crise de 1929. Si l’économie globale a connu des variations, avec certaines périodes considérées plus difficiles du point de vue de la vitalité de l’emploi ou d’indicateurs tels que le taux de chômage ou l’inflation, elle n’a connu, au cours des dernières décennies, aucun bouleversement fondamental qui serait comparable à celui observé dans d’autres régions du monde (par ex. inflation astronomique, incapacité de l’État à faire face à ses obligations, etc.). Il nous semble utile d’inclure aussi, dans la notion de « crise », le phénomène des crises sectorielles, soit celles qui se rapportent à un domaine particulier d’activité. Il pourrait s’agir, par exemple, d’une augmentation ou d’une chute vertigineuse du prix d’une matière première sur laquelle repose un pan entier de l’industrie. Sans être très fréquentes, de telles situations se produisent à l’occasion et peuvent, dans 1 2

Lluelles et Moore (2012) no 803, p 397; Baudouin et al (2013) no 274, p 381. Baudouin et al (2013) no 846, p 1054.

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le secteur concerné, entraîner des impacts majeurs sur l’équilibre des prestations contractuelles. Il va de soi que le présent rapport se limite aux crises financières – globales ou sectorielles – qui présentent un caractère exceptionnel et imprévisible. Dans le contexte normal, l’économie évolue en fonction de cycles. Certains phénomènes économiques – parmi lesquels un taux d’inflation modéré, une fluctuation des taux d’intérêts, etc. – sont relativement prévisibles, même si leur portée exacte ne peut être anticipée avec précision. Il ne saurait être question de s’interroger ici sur l’impact de ces phénomènes normaux et prévisibles, puisque les parties sont à même de les anticiper et elles disposent de certains mécanismes pour en gérer les conséquences.3 En outre, si elles négligent de se prévaloir de ces mécanismes, les conséquences n’engendreront pas de déséquilibre marqué pour les parties, en l’absence de variations exceptionnelles par rapport à la normale. Le présent rapport s’attarde donc au déséquilibre créé entre les parties au contrat par l’effet des crises financières exceptionnelles et imprévisibles. Sans se limiter formellement à certains types de relations contractuelles, la problématique présente une pertinence toute particulière dans le cas de contrats de longue durée.4 Incidence des règles relatives à la faillite et l’insolvabilité et aux arrangements avec les créanciers en temps de crise Les difficultés économiques d’une partie contractante – qu’elles soient attribuables à une crise financière ou à d’autres causes – peuvent parfois empêcher cette partie de respecter ses engagements. Lorsque les conditions pertinentes sont réunies, certaines règles permettent de modifier les obligations du débiteur en difficulté, afin de lui permettre d’assainir sa situation économique à plus long terme. Tel est le cas, dans le contexte canadien, de la législation fédérale – donc applicable au Québec et ailleurs au Canada – en vertu de la Loi sur la faillite et l’insolvabilité5 et la Loi sur les arrangements avec les créanciers des compagnies.6 Ces lois permettent, dans les faits, une forme de réaménagement des rapports contractuels, en modulant le droit des créanciers d’exiger l’exécution des obligations, notamment celles qui résultent de contrats conclus avec le débiteur en difficulté. Elles ne seront toutefois pas abordées en tant que tel dans le présent rapport. Un premier motif justifiant d’écarter ces textes législatifs de notre analyse repose sur le caractère très technique des mécanismes mis en place. De façon plus fondamentale, ces mécanismes n’entrevoient pas le réaménagement du lien contractuel comme 3

Pour un inventaire des principaux mécanismes d’adaptation à la disposition des parties, soit les clauses de hardship (abordées ci-dessous, partie 4.2.3), les clauses de revalorisation et les clauses d’indexation, Lluelles et Moore (2012) nos 2236–2240, p 1291–1300. 4 La problématique des contrats perpétuels ne se pose pas en droit québécois. Les tribunaux y sont réfractaires et le législateur prévoit même des règles qui imposent une durée maximale pour certains contrats donnés (par ex. art. 1880 C.c.Q. qui limite la durée d’un bail à 100 ans). Cela dit, les contrats de longue durée constituent une réalité en pratique, puisque certaines ententes peuvent s’étendre sur plusieurs années, voire sur des décennies. 5 L.R.C. 1985, ch. B-3. 6 L.R.C. 1985, ch. C-36.

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une fin en soi; ils constituent plutôt une solution de dernier recours permettant de baliser les conséquences des difficultés financières du débiteur lorsque d’autres mécanismes de réaménagement des rapports entre les parties ont échoué ou sont indisponibles. Enfin, il convient de souligner que ces mécanismes sont mis en branle sur la base des difficultés éprouvées par une partie – difficultés parfois causées ou amplifiées par les crises économiques mais qui peuvent aussi résulter d’autres facteurs – et ils ne se fondent pas sur l’idée d’un déséquilibre des prestations contractuelles. Le présent rapport, au contraire, porte principalement sur les situations caractérisées par l’idée d’un déséquilibre résultant d’une crise financière.

4.2

Le droit positif: Les certitudes du droit québécois en matière d’imprévision

Même si la problématique de l’imprévision comporte des zones d’incertitude, sur lesquelles nous revenons plus loin (ci-dessous, partie 4.3), il est permis de tirer certains constats par rapport à la situation actuelle. D’abord, il n’existe aucune règle législative de portée générale qui traite explicitement de la problématique de l’imprévision, soit l’impact d’un changement de circonstances imprévu et qui entraîne un déséquilibre marqué entre les prestations contractuelles. Le législateur prévoit néanmoins certaines règles qui se rapportent à des situations spécifiques. Il est également clair que les parties, en l’absence de règle législative générale sur la question, ont la possibilité de prévoir conventionnellement les conséquences d’un changement de circonstances au moyen d’une clause de hardship.

4.2.1

L’absence de règle législative explicite de portée générale

L’état du droit avant la réforme du code civil Dans le droit antérieur à la réforme du code civil, alors que le Code civil du Bas Canada était en vigueur, les tribunaux ne permettaient pas de remettre en question la portée d’un contrat sur le fondement de changements de circonstances économiques rendant l’exécution d’un contrat exceptionnellement onéreuse pour une partie, sauf lorsque le législateur ou les parties le prévoyaient explicitement en fonction de situations bien délimitées. Pour le reste, les tribunaux s’en remettaient au principe général d’intangibilité du contrat, exprimé à l’époque au troisième alinéa de l’article 1022 C.c.B.C. : « [Les contrats] ne peuvent être résolus que du consentement des parties ou pour les causes que la loi reconnaît. »

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La réforme du code civil a mené à l’adoption en 1991 du Code civil du Québec, lequel est entré en vigueur en 1994 en remplacement du Code civil du Bas Canada. Cette réforme, qui a par ailleurs apporté un certain nombre de nouveautés en matière de bonne foi et d’équité, aurait pu être l’occasion d’une prise de position claire du législateur sur le sujet de l’imprévision. Tel n’a pas été le cas. Le législateur a plutôt choisi de ne pas adopter de disposition de portée générale portant explicitement sur la question et s’est contenté de reprendre le principe de l’intangibilité du contrat à l’article 1439 C.c.Q. La portée de cette reconduction de la règle connue dans le droit antérieur sera abordée plus loin (ci-dessous, partie 4.3.1). La disposition proposée par l’Office de révision du code civil Les travaux qui ont mené à l’adoption du nouveau code civil ont pourtant permis de s’interroger sur une possible atténuation du principe d’intangibilité du contrat. L’Office de révision du code civil (ORCC) soumettait, en 1977, un Projet de code civil destiné à guider le législateur dans sa réflexion en vue de l’adoption d’un nouveau code.7 À l’article 75 du livre V de son Projet de code civil, l’ORCC proposait de reconnaître le principe d’intangibilité du contrat même en cas de circonstances imprévisibles (al. 1), tout en aménageant une exception en cas de préjudice excessif pour une partie résultant de circonstances qui ne lui sont pas imputables (al. 2):

75. La survenance de circonstances imprévisibles qui rendent l’exécution du contrat plus onéreuse ne libère par le débiteur de son obligation. Exceptionnellement, le tribunal peut, nonobstant toute convention contraire, résoudre, résilier ou réviser un contrat dont l’exécution entraînerait un préjudice excessif pour l’une des parties, par suite de circonstances imprévisibles qui ne lui sont pas imputables.

75. If unforeseeable circumstances render execution of the contract more onerous, the debtor is not freed from his obligation. In exceptional circumstances, and notwithstanding any agreement to the contrary, the court may resolve, resiliate or revise a contract the execution of which would entail excessive damage to one of the parties as a result of unforeseeable circumstances not imputable to him.

Le rapport de l’ORCC comportait des commentaires exposant le fondement des règles proposées dans le Projet de code civil. Au sujet de la règle proposée au deuxième alinéa de l’article 75 – qui constituait une rupture avec le droit existant – l’ORCC soulignait d’abord que l’emploi de termes tels que « exceptionnellement », 7

Office de révision du Code civil, Projet de code civil(1978).

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« préjudice excessif » et « circonstances imprévisibles » permettait de baliser l’exercice discrétionnaire qui était ainsi octroyé aux tribunaux. L’ORCC invoquait également le souci de promouvoir la justice et l’équité en matière contractuelle, en proposant la reconnaissance de la lésion à l’étape de la formation du contrat et celle de l’imprévision à l’étape de l’exécution des obligations résultant du contrat. Enfin, selon l’ORCC, cette règle nouvelle se situait dans le prolongement de règles particulières élaborées dans le droit antérieur pour reconnaître l’impact de circonstances économiques exceptionnelles.8 Les projets ultérieurs qui ont mené à l’adoption du Code civil du Québec ne comportaient aucune disposition comparable à celle proposée par l’ORCC.9 Dans le Code civil du Québec adopté en 1991, le législateur québécois a été plus explicite sur le sort réservé à la lésion entre majeurs que sur celui de l’imprévision. S’agissant de la lésion, il a écarté formellement la proposition de l’ORCC. Le Code civil du Québec précise en toutes lettres que la lésion ne vicie le consentement – outre quelques exceptions spécifiques – que pour les mineurs et les majeurs protégés (art. 1405 C.c.Q.). En revanche, aucun article de principe ne porte de façon explicite sur la problématique de l’imprévision. Le législateur s’est contenté de codifier quelques cas où elle est formellement reconnue (ci-dessous, partie 4.2.2). En s’abstenant ainsi de prendre position clairement sur les cas autres que ceux explicitement prévus en matière d’imprévision, le législateur a créé un contexte où des interprétations contradictoires sont proposées quant à la portée de ce silence (voir cidessous, partie 4.3).

4.2.2

L’admission législative de l’imprévision dans certains cas particuliers

Seules certaines dispositions législatives de portée limitée traitent des changements de circonstances pour permettre explicitement de porter atteinte au principe d’intangibilité du contrat aux fins de rétablir l’équilibre contractuel. Les principales dispositions portent sur des actes juridiques à titre gratuit, au chapitre des libéralités, ainsi qu’en matière de fiducies. D’autres dispositions, sans pour autant admettre l’imprévision, visent néanmoins à adapter le contrat aux changements liés à la situation personnelle d’un contractant vulnérable, soit en matière de louage de logements sociaux et de contrat de crédit conclu par un consommateur.

8

Office de révision du Code civil, civilCommentaires (1978) p 624–625. Il s’agit de l’Avant-projet de loi sur les obligations (soumis pour consultations en 1987) et du Projet de loi 125 (déposé en 1990 et qui a mené à l’adoption du Code civil du Québec).

9

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Legs ou donations à charge Lorsque l’exécution d’une charge devient beaucoup plus onéreuse en raison de circonstances imprévisibles, le legs et la donation à charge peuvent être modifiés ou révoqués par le tribunal qui tient compte de la valeur du legs et de l’intention de l’auteur de la libéralité. Le législateur énonce cette règle aux articles 771 C.c.Q. (en matière de successions) et 1834 C.c.Q. (eu égard aux donations). 771. Si, en raison de circonstances imprévisibles lors de l’acceptation du legs, l’exécution d’une charge devient impossible ou trop onéreuse pour l’héritier ou le légataire particulier, le tribunal peut, après avoir entendu les intéressés, la révoquer ou la modifier, compte tenu de la valeur du legs, de l’intention du testateur et des circonstances.

771. If, owing to circumstances unforeseeable at the time of the acceptance of the legacy, the execution of a charge becomes impossible or too burdensome for the heir or the legatee by particular title, the court, after hearing the interested persons, may revoke it or change it, taking account of the value of the legacy, the intention of the testator and the circumstances.

1834. La charge qui, en raison de circonstances imprévisibles lors de l’acceptation de la donation, devient impossible ou trop onéreuse pour le donataire, peut être modifiée ou révoquée par le tribunal, compte tenu de la valeur de la donation, de l’intention du donateur et des circonstances.

1834. A charge which, owing to circumstances unforeseeable at the time of the acceptance of the gift, becomes impossible or too burdensome for the donee may be varied or revoked by the court, taking account of the value of the gift, the intention of the donor and the circumstances.

Les Commentaires du ministre de la Justice10 n’indiquent pas toujours le fondement des règles adoptées dans le Code civil du Québec. Au sujet de l’article 1834 C.c.Q., il est toutefois précisé que l’adoption de cette disposition a été guidée par l’équité. C’est aussi le cas lorsqu’il s’agit d’un legs. Malgré l’affirmation du Ministre, on peut penser que ses interventions sont aussi motivées par le respect de la nature des libéralités. En effet, dans le cas d’une donation ou d’un legs soumis à une charge devenue trop onéreuse, celle-ci serait susceptible de nier la nature de la libéralité ayant au départ eu pour fonction d’enrichir celui qui est gratifié. Les tribunaux n’ont pas eu beaucoup d’occasions de se pencher sur des affaires où les articles 771 ou 1234 C.c.Q. étaient susceptibles de s’appliquer. Les décisions 10

Commentaires du ministre de la Justice (1993).

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rendues illustrent toutefois bien le type de circonstances pouvant être jugées imprévisibles. On notera que les faits ayant donné lieu aux litiges ne s’apparentent pas à des crises financières. Les tribunaux ont révoqué des donations d’immeubles affectées de charges imposant une destination particulière qui pouvait toujours être respectée, mais à un coût devenu prohibitif. On a ainsi révoqué une charge grevant un immeuble obligeant le donataire à y maintenir à perpétuité la vocation de salle d’assemblée publique.11 La donation avait été faite en 1923. Or, soixante-dix ans plus tard, l’utilisation de la bâtisse nécessitait l’installation d’un champ d’épuration ainsi que des réparations pour rendre l’accès des lieux sécuritaire, et l’absence de terrain de stationnement causait problème. Le tribunal a décidé qu’il devait donner une interprétation libérale à l’article 1824 C.c.Q. tout en respectant les volontés réalisables du donateur. Il a précisé que l’expression « circonstances imprévisibles » n’était pas ambiguë et une qu’interprétation trop restrictive entraînerait une application limitée de la loi qui vise le dénouement des impasses. Il a aussi souligné que la valeur relative de la donation constitue plutôt un passif pour la requérante. Dans une autre affaire,12 il s’agissait de terrains donnés ou légués à des fins de culte ou paroissiales entre 1929 et 1950. Le tribunal, citant la précédente décision, a également adopté une interprétation libérale de l’article 1824 C.c.Q. susceptible de respecter les volontés du donateur. Il conclut que les exigences de cet article étaient remplies, en raison de l’imprévisibilité du changement de mentalités, ainsi que l’impossibilité pour le donataire d’assurer un fonctionnement adéquat de l’édifice et son maintien en bon état, vu les coûts exorbitants d’entretien et de fonctionnement des édifices voués au culte. Ces deux décisions montrent bien que le donataire pouvait toujours respecter la charge, mais qu’il était impossible de justifier, d’un point de vue économique, une dépense aussi onéreuse. Fiducies La même idée sous-jacente exprimée eu égard aux legs ou donations avec charge se retrouve dans les décisions en matière de fiducies. Si les circonstances rendent trop onéreuse la poursuite du but d’une fiducie, le tribunal peut y mettre fin ou, dans le cas d’une fiducie d’utilité sociale, lui substituer un but qui se rapproche le plus possible du but original. C’est ce que le législateur prévoit à l’article 1294 C.c.Q. qui se lit comme suit :

11 12

Hatley (Municipalité de) c. Court Good Cheer, [1997] R.D.I. 364 (C.S.). Fabrique de la paroisse de Notre-Dame de la Paix c. Ross (Succession de), 2011 QCCS 2283.

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1294. Lorsqu’une fiducie a cessé de répondre à la volonté première du constituant, notamment par suite de circonstances inconnues de lui ou imprévisibles qui rendent impossible ou trop onéreuse la poursuite du but de la fiducie, le tribunal peut, à la demande d’un intéressé, mettre fin à la fiducie; il peut aussi, dans le cas d’une fiducie d’utilité sociale, lui substituer un but qui se rapproche le plus possible du but original. Si la fiducie répond toujours à la volonté du constituant, mais que de nouvelles mesures permettraient de mieux respecter sa volonté ou favoriseraient l’accomplissement de la fiducie, le tribunal peut modifier les dispositions de l’acte constitutif.

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1294. Where a trust has ceased to meet the first intent of the settlor, particularly as a result of circumstances unknown to him or unforeseeable and which make the pursuit of the purpose of the trust impossible or too onerous, the court may, on the application of an interested person, terminate the trust; the court may also, in the case of a social trust, substitute another closely related purpose for the original purpose of the trust. Where the trust continues to meet the intent of the settlor but new measures would allow a more faithful compliance with his intent or favour the fulfilment of the trust, the court may amend the provisions of the constituting act.

Le pouvoir du tribunal ne se limite pas aux situations où les circonstances étaient imprévisibles. Il s’étend aussi aux circonstances au départ inconnues – mais peutêtre prévisibles – du constituant au moment de la constitution de la fiducie. Bien que l’équité puisse fonder une telle règle, on peut supposer que l’intervention du législateur est ici plutôt dictée par le respect de la nature même de la fiducie. Une affaire l’illustre bien. La fiducie prévoyait que les revenus devaient profiter à une personne sa vie durant, puis que les biens ait été remis à ses enfants. Le tribunal a conclu que le maintien de la fiducie, n’était pas justifié puis que, d’une part, la bénéficiaire était financièrement indépendante, et d’autre part, que les revenus de la fiducie servaient presqu’entièrement à acquitter les frais de gestion de celle-ci et les charges fiscales.13 Or, les frais de gestion et les charges fiscales n’avaient pas subi de fluctuations importantes depuis la création de la fiducie : ils étaient tout à fait prévisibles, mais peut-être pas justifiables. Devant des faits similaires, un autre tribunal a plutôt choisi de modifier les dispositions de l’acte constitutif, comme le permet le second alinéa de l’article 1294 C.c.Q., puisque la fiducie répondait toujours à la volonté du constituant.14 L’acte constitutif nommait une institution financière à titre de fiduciaire. Or, cette institu-

13 14

Stevenson c. National Trust Co., J.E. 95–780 (C.S.). Marmet (Succession de), J.E. 99–625 (C.S.).

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tion exigeait des frais de gestion élevés. Estimant que la constituante n’a pas prévu le fait qu’un jour une partie importante de son patrimoine profiterait au fiduciaire, le tribunal a ordonné le remplacement de la fiduciaire par une autre institution qui proposait ses services à moindre coût. Louage de logement à loyer modique et contrat de crédit conclu par un consommateur Le droit québécois compte en outre des mesures de protection très particulières qui remettent en question l’intangibilité du contrat de manière plus importante, puisqu’elles s’appliquent peu importe le caractère prévisible ou non du changement dans la situation économique du contractant. Il s’agit de règles fondées sur l’équité. Les deux situations visées protègent les locataires de logements à loyer modique et les consommateurs. Les habitations à loyer modique sont des logements sociaux destinés à des populations à faible revenu. Selon l’article 1994 C.c.Q., le locataire qui a conclu un bail pour ce type de logement a le droit d’obtenir une réduction de loyer s’il subit une diminution de revenu ou un changement dans la composition de son ménage. Si le locateur ne lui accorde pas la réduction de loyer, il peut s’adresser au tribunal pour l’obtenir. Dans ce cas, la prise en compte des circonstances joue dans les deux sens : si le revenu du locataire redevient égal ou supérieur à ce qu’il était, le loyer antérieur est rétabli. 1994. Le locateur est tenu, au cours du bail et à la demande d’un locataire qui a subi une diminution de revenu ou un changement dans la composition de son ménage, de réduire le loyer conformément aux règlements de la Société d’habitation du Québec; s’il refuse ou néglige de le faire, le locataire peut s’adresser au tribunal pour obtenir la réduction. Toutefois, si le revenu du locataire redevient égal ou supérieur à ce qu’il était, le loyer antérieur est rétabli; le locataire peut, dans le mois du rétablissement de loyer, s’adresser au tribunal pour contester ce rétablissement.

1994. The lessor, at the request of a lessee who has suffered a reduction of income or a change in the composition of his household, is bound to reduce his rent during the term of the lease in accordance with the by-laws of the Société d’habitation du Québec; if he refuses or neglects to do so, the lessee may apply to the court for the reduction. If the income of the lessee returns to or becomes greater than what it was, the former rent is re-established; the lessee may contest the re-establishment of the rent within one month after it is re-established.

Le consommateur qui a conclu un contrat de crédit assujetti à la Loi sur la protection du consommateur (L.p.c.)15 jouit d’une mesure analogue. En effet, lorsque le solde de sa dette devient exigible à la suite de son défaut, il peut demander 15

RLRQ, ch. P-40.1 (ci-après L.p.c.).

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au tribunal de modifier les modalités de paiement. L’intervention du juge tient alors compte de la capacité de payer du consommateur et de la raison pour laquelle le consommateur est en défaut. Le tribunal peut imposer les conditions qu’il juge raisonnables ou autoriser le consommateur à remettre le bien au commerçant. L’essentiel de ce mécanisme est énoncé aux articles 107 et 109 L.p.c. : 107. Si le consommateur ne remédie pas au fait qu’il est en défaut dans le délai prévu à l’article 106, le solde de son obligation devient exigible à moins que, sur requête du consommateur, le tribunal ne modifie les modalités de paiement selon les conditions qu’il juge raisonnables ou n’autorise le consommateur à remettre le bien au commerçant. 109. La requête doit être instruite et jugée d’urgence en tenant compte notamment des éléments suivants: (a) le total des sommes que le consommateur doit débourser en vertu du contrat; (b) les sommes déjà payées; (c) la valeur du bien au moment où le consommateur est devenu en défaut; (d) le solde dû au commerçant; (e) la capacité de payer du consommateur; et (f) la raison pour laquelle le consommateur est en défaut.

107. If the consumer does not remedy his default within the time provided for in section 106, the balance of his obligation becomes payable unless, upon a motion by the consumer, the court changes the terms and conditions of payment according to such conditions as it considers reasonable or authorizes the consumer to return the goods to the merchant 109. The motion must be heard and decided by preference, considering, in particular, the following facts: (a) the total of amounts that the consumer must disburse under the contract; (b) the sums already paid; (c) the value of the goods at the time of the consumer’s default; (d) the balance due to the merchant; (e) the consumer’s ability to pay; and (f) the reason for which the consumer is in default.

Ces deux illustrations montrent que le législateur québécois désire protéger les contractants qu’il juge vulnérables contre leurs revers de fortune. Ces dispositions ont donc un domaine d’application plus large que celles qui se limitent aux effets des crises économiques, en permettant de tenir compte de facteurs propres à la partie protégée et qui ne sont pas toujours directement liés au climat économique. Autrement dit, la situation précaire de la partie protégée peut être le résultat d’une crise financière, mais elle peut aussi s’expliquer par des circonstances propres à cette partie (congédiement, problèmes de santé, etc.) qui ont créé ou accentué une situation précaire sans égard à la conjoncture économique.

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4.2.3

É. Charpentier and N. Vézina

La possibilité d’aménagement conventionnel de l’imprévision par voie d’une clause de hardship

Les autorités s’entendent pour reconnaître aux parties la possibilité de permettre, sur une base conventionnelle, une intervention des tribunaux dans les rapports contractuels en cas d’imprévision.16 Liberté contractuelle quant à l’existence d’une clause permettent l’intervention du tribunal sur le fondement de l’imprévision L’aménagement conventionnel par lequel les parties permettent l’intervention du tribunal pour imprévision peut prendre la forme d’une clause que les parties insèrent au contrat.17 On parle communément d’une clause de hardship, bien que d’autres appellations soient également employées pour la désigner – « clause de sauvegarde », « clause d’équité », « clause de renégociation », « clause de révision » ou encore « clause d’imprévision ».18 Il arrive également que les parties s’en remettent à des instruments de soft law, tels que les Principes d’Unidroit relatifs aux contrats du commerce international, qui permettent de porter atteinte à l’intangibilité du contrat sur le fondement du hardship en vertu des articles 6.2.2 et 6.2.3. Le renvoi aux Principes d’Unidroit s’analyse alors comme une clause externe qui fait partie du contrat (art. 1435 C.c.Q.).19 Liberté contractuelle quant aux conditions, modalités et effets d’une intervention du tribunal sur le fondement de l’imprévision Comme les clauses de hardship résultent de la liberté contractuelle des parties, elles sont susceptibles de varier eu égard aux conditions, aux modalités et aux effets d’une intervention du tribunal fondée sur l’imprévision. Il suffit de s’attarder ici à certaines tendances qui résultent des pratiques contractuelles les plus courantes et, dans certains cas, du renvoi à des instruments de soft law qui reconnaissent l’imprévision. Au sujet des conditions qui permettent une intervention du tribunal fondée sur le changement de circonstances, les parties auront généralement tendance à préciser que l’intervention se limitera aux changements de circonstances exceptionnels, imprévisibles et qui ne sont pas attribuables à la partie qui en demande l’application. De cette façon, les parties minimisent les risques d’atteinte à la stabilité contractuelle, tout en assurant un mécanisme propre à favoriser la bonne foi et l’équité. Il s’agit, 16 Pineau et al. (2001) no 285, p 519; Lluelles et Moore (2012) nos 2238–2239, p 1292–1294; Lluelles (2006) nos 34-35, p 53–56; Baudouin et al (2013) no 442, p 533–534. Sur l’utilisation de telles clauses, voir Moisan (1994) p 320 et s. 17 Même si elle est en principe valide, une clause de hardship peut être invalidée pour certains motifs (clause abusive, objet qui n’est pas déterminé ou déterminable, application arbitraire en contravention du principe de bonne foi). À ce sujet, voir Baudouin et al (2013) no 442, p 534 et no 448, p 544. 18 Lluelles et Moore (2012) no 2238, p. 1292; Lluelles (2006) no 34, p 53. 19 Lluelles et Moore (2012) no 2239, p. 1293–1294; Lluelles (2006) no 35, p 55.

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en somme, de la recherche d’un équilibre qui n’est pas sans inspirer les auteurs qui préconisent la reconnaissance d’une règle non codifiée en matière d’imprévision dans le droit commun des contrats (voir ci-dessous, partie 4.3.2). S’agissant des modalités, l’intervention revient en principe au tribunal judiciaire normalement compétent pour trancher un litige résultant du contrat. Cela dit, les parties qui auront eu la prévoyance d’insérer une clause de hardship auront aussi, dans plusieurs cas, prévu que les litiges contractuels seront soumis à l’arbitrage.20 C’est sans doute ce qui explique la rareté des situations où les tribunaux judiciaires ont été appelés à appliquer une clause de hardship. Quant aux effets, l’autorité compétente – qu’il s’agisse d’un tribunal judiciaire ou d’une instance arbitrale – disposera généralement du pouvoir de mettre fin au contrat, une fois qu’il constate l’échec de démarches destinées à favoriser une renégociation entre les parties. Dans certains cas, elle permettra de soulever une fin de non-recevoir ou une clause de non-responsabilité face à la mise en œuvre du droit à l’exécution du cocontractant.21 La clause de hardship peut aller plus loin et permettre à l’autorité compétente d’adapter le contrat de façon à rétablir l’équilibre rompu par le changement exceptionnel et imprévu de circonstances.22 C’est notamment le cas lorsque le contrat renvoie aux Principes d’Unidroit, lesquels donnent le choix entre la terminaison et l’adaptation du contrat, au nom du favor contractus.23

4.3

Le droit prospectif: Les incertitudes du droit québécois face au silence du législateur aux lendemains de la réforme du code civil

En s’abstenant d’insérer une disposition générale et explicite en matière d’imprévision, lors de l’adoption du Code civil du Québec, le législateur québécois a engendré des difficultés d’interprétation qui divisent la doctrine. Le débat oppose deux grands principes en matière contractuelle, soit la stabilité des contrats, d’une part, et la promotion de la bonne foi et de l’équité entre les parties, d’autre part. Alors que certains auteurs considèrent que l’absence de reconnaissance formelle de l’imprévision s’analyse comme un rejet de ce mécanisme d’adaptation des contrats et justifie de donner priorité à la stabilité contractuelle, d’autres soutiennent que l’importance accrue du principe de bonne foi dans le nouveau code justifie la reconnaissance par les tribunaux de cette règle non codifiée.

20

Sur la juridiction arbitrale, voir Moisan (1994) p 329–331. Par ex. Canada Starch Co. c. Gill & Dufus (Canada) Ltd., [1990] R.L. 602 (C.A.). 22 Moisan (1994) p 331. 23 À ce sujet, voir Crépeau et Charpentier (1998) p 32–33 et 122–125. 21

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4.3.1

É. Charpentier and N. Vézina

Le rejet de l’imprévision en l’absence d’une disposition générale qui en admet l’existence

Une partie de la doctrine soutient que, comme dans le droit antérieur, le droit nouveau ne permet pas de reconnaître l’imprévision. La jurisprudence se présente effectivement sous le signe de la continuité depuis l’entrée en vigueur du nouveau code.

4.3.1.1

Les motifs avancés au soutien du statu quo quant au rejet de l’imprévision

Les opposants à l’imprévision fondent leur position sur une analyse de l’historique législatif, soit l’ensemble des travaux ayant menés à l’adoption du Code civil du Québec, ainsi que sur la logique interne du Code. À leur avis, malgré le développement de la nouvelle moralité contractuelle, le devoir de bonne foi ne permet pas de remettre en question le statu quo quant au rejet de l’imprévision. Historique législatif S’agissant des travaux ayant mené à la réforme, les tenants de cette position considèrent que le législateur a rejeté la règle de l’imprévision en toute connaissance de cause. En ne retenant pas la proposition formulée par l’ORCC dans son projet de 1977 (voir ci-dessus, partie 4.2.1), il aurait implicitement choisi de privilégier la voie de la stabilité contractuelle, sous réserve des quelques cas particuliers où il permet explicitement aux tribunaux d’intervenir sur le fondement de l’imprévision. Logique interne du Code. Intangibilité du contrat (pact sunt servanda), nominalisme et énumération limitative des cas où l’imprévision est reconnue Différents arguments relèvent de l’idée de logique interne du Code civil du Québec pour s’opposer à la reconnaissance de l’imprévision. Le principe de l’intangibilité du contrat (pacta sunt servanda) constitue l’argument central des auteurs opposés à la reconnaissance de l’imprévision.24 L’article 1439 C.c.Q. reprend le principe qui était auparavant énoncé à l’article 1022, al. 3 C.c.B.C. :

24

Pineau et al. (2001) no 285, p 515–521. Certains auteurs mettent également le principe de l’effet obligatoire du contrat (art. 1434 C.c.Q.) au cœur de leur analyse: Lluelles et Moore (2012) no 2230, p 1286; Lluelles (2006) no 26, p 44–45. Un auteur fait le constat que le législateur a maintenu le statu quo, tout en déplorant que « [l]a stratégie de perpétuation du rejet de la théorie du juste prix et du juste salaire par la société ultra-libérale […] entraîne à sa suite la fermeture aux idées modernes sur l’imprévision » Tancelin (2009) no 352, p 247; voir aussi nos 353–353.1, p 247–248. Un autre auteur a d’abord conclu que le Code civil du Québec enlevait toute marge de manœuvre aux tribunaux, pour ensuite se raviser dans ses écrits postérieurs en soutenant qu’une intervention judiciaire peut se fonder sur la nouvelle moralité contractuelle : Jobin (2000) p 69–70.

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1439. Le contrat ne peut être résolu, résilié, modifié ou révoqué que pour les causes reconnues par la loi ou de l’accord des parties.

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1439. A contract may not be resolved, resiliated, modified or revoked except on grounds recognized by law or by agreement of the parties.

Un argument additionnel, dans le cas d’une obligation de nature pécuniaire, se fonde sur le principe du nominalisme désormais codifié au premier alinéa de l’article 1564 C.c.Q.25 Cet article rejette la notion de « dette de valeur », soit la possibilité de moduler les obligations d’une partie en fonction des variations monétaires : 1564. Le débiteur d’une somme d’argent est libéré par la remise au créancier de la somme nominale prévue, en monnaie ayant cours légal lors du paiement. […]

1564. Where the debt consists of a sum of money, the debtor is released by paying the nominal amount due in money which is legal tender at the time of payment. […]

Enfin, l’existence de cas particuliers où le Code reconnaît explicitement l’imprévision – pour des situations bien délimitées – sert d’appui à un argument d’interprétation selon lequel le législateur n’aurait pas entendu donner un domaine d’application plus large au pouvoir d’intervention des tribunaux sur le fondement d’un changement de circonstances.26 Stabilité contractuelle Le processus de réforme du code civil a soulevé, en matière d’obligations contractuelles, l’opposition entre deux objectifs : d’une part, préserver la stabilité contractuelle, et d’autre part, permettre une remise en cause de l’intangibilité ou de l’effet obligatoire du contrat au nom de la bonne foi et de l’équité. Si certains mécanismes de droit nouveau ont permis de porter atteinte dans une certaine mesure à la stabilité contractuelle – notamment en permettant d’imposer la nullité ou la réduction d’une clause jugée abusive27 – des voix se sont élevées à l’encontre de la codification de mécanismes de portée plus large. Tel est le cas de la lésion entre majeurs, qui a été fermement écartée (art. 1405 C.c.Q.), malgré la proposition de l’ORCC, au nom de la stabilité contractuelle. Le refus d’admettre l’imprévision – quoique moins explicite – pourrait relever de la même logique. Les auteurs opposés à la reconnaissance de l’imprévision soulignent d’ailleurs le risque, en cas de crises financières, de réactions en chaîne susceptibles de porter encore davantage atteinte à la stabilité contractuelle.28 25 Lluelles et Moore (2012) no 2230, p 1286, et no 2233, p. 1289; Lluelles (2006) no 26, p 44, et no 29, p 48. 26 Lluelles et Moore (2012) no 2233, p 1289; Lluelles (2006) no 29, p 48–49. 27 Clauses abusives dans un contrat de consommation ou d’adhésion (art. 1379, 1384 et 1437 C.c.Q.); clause pénale abusive (art. 1623 C.c.Q.). 28 Lluelles et Moore (2012) no 2232, p 1288–1289; Lluelles (2006) no 28, p 48.

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Limites à la portée de la nouvelle moralité contractuelle Tout en reconnaissant le développement de la nouvelle moralité contractuelle, les auteurs opposés à la reconnaissance de l’imprévision par les tribunaux considèrent que le devoir de bonne foi ne constitue pas une assise suffisante pour imposer aux parties de renégocier le contrat à travers une obligation implicite de coopération.29 Selon cette position doctrinale, il ne saurait y avoir de clause implicite fondée sur la maxime rebus sic stantibus et toute clause en ce sens doit nécessairement avoir été explicitée par les parties. Synthèse des arguments de la doctrine réfractaire à l’imprévision en droit québécois Pour les auteurs opposés au principe d’imprévision, le législateur avait l’opportunité d’en reconnaître l’existence et ne l’a pas fait. Les parties ont également la possibilité d’aménager leurs rapports de façon à admettre une intervention du tribunal en cas de changement de circonstances. Si la loi ou le contrat ne prévoit pas explicitement le pouvoir du tribunal de porter atteinte aux principes de l’intangibilité du contrat et du nominalisme, ceux-ci doivent prévaloir au nom de la stabilité contractuelle. La jurisprudence actuelle semble effectivement suivre cette position en s’inscrivant dans un mouvement de continuité avec le droit antérieur.

4.3.1.2

La continuité de la jurisprudence en matière d’imprévision

Jurisprudence antérieure à la réforme du code civil Sous le Code civil du Bas Canada, l’imprévision n’a pas fait l’objet d’un grand nombre de décisions, mais la jurisprudence rendue sur la question ne laisse planer aucun doute sur le refus des tribunaux de l’admettre en droit québécois.30 L’intangibilité du contrat joue un rôle majeur dans cette jurisprudence opposée à l’imprévision. Jurisprudence rendue depuis l’entrée en vigueur du Code civil du Québec Depuis l’entrée en vigueur du Code civil du Québec, en 1994, les tribunaux ont été appelés à revoir la question de l’imprévision dans le contexte du droit nouveau. Or, les quelques décisions recensées sur la question se situent dans la continuité de celles rendues sous le droit antérieur et rejettent l’imprévision.31

29 Lluelles et Moore (2012) nos 2250–2251, p 1301–1302; Lluelles (2006) nos 46–47, p 65–67. Selon ces auteurs, il convient de distinguer les situations où les parties n’ont rien envisagé eu égard à un possible changement de circonstances et celles où la partie avantagée aurait fait valoir qu’on « pourrait toujours s’arranger » en cas de problèmes, ce qui constituerait une faute si cette partie négligeait d’y donner suite. 30 Verona Construction Ltd. c. Frank Ross Construction Ltd., [1961] R.C.S. 195, conf. [1959] B.R. 674; Grant Mills Ltd. c. Universal Pipeline Welding Ltd., [1975] C.S. 1203; H. Cardinal construction Inc. c. Dollard-des-Ormeaux (Ville de), [1987] R.L. 672 (C.A.). 31 Placements Claude Gohier inc. c. Supermarché Le Blainvillois inc., J.E. 2004–566 (C.Q.); Transport Rosemont inc. c. Montréal (Ville de), J.E. 2008–2273 (C.S.). Voir aussi en ce sens

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L’ouverture à l’imprévision en l’absence d’un rejet formel par le législateur

Certains auteurs, avant la réforme du code civil, constataient avec regret le rejet de l’imprévision par le droit positif.32 Aux lendemains de l’adoption du Code civil du Québec, l’appui doctrinal en faveur d’une reconnaissance de l’imprévision s’est accru et les tenants de cette position soutiennent que l’absence de rejet formel du principe de la part du législateur – contrairement à ce qui s’est produit en matière de lésion – laisse la porte ouverte à sa reconnaissance par voie jurisprudentielle. Cette proposition doctrinale suppose qu’advenant un revirement sur la question, la jurisprudence se substituera au législateur afin de définir les règles applicables à l’intervention des tribunaux en matière d’imprévision.

4.3.2.1

Les motifs avancés au soutien d’une reconnaissance de l’imprévision par les tribunaux

La position des auteurs favorables à l’imprévision se fonde principalement sur l’existence d’une obligation implicite de coopération entre les parties, au nom de la nouvelle moralité contractuelle marquée par les principes de bonne foi et d’équité. Pour ces auteurs, le souci de promouvoir la nouvelle moralité contractuelle doit avoir préséance sur la conception traditionnelle de la stabilité contractuelle, pour l’envisager plutôt sous l’angle du favor contractus. Cette proposition doctrinale prend aussi appui sur le droit comparé, en faisant référence aux systèmes juridiques étrangers et aux instruments de soft law qui prônent la reconnaissance de l’imprévision. Obligation de coopération fondée sur les principes de bonne foi et d’équité S’autorisant de l’affirmation de la bonne foi, une partie de la doctrine québécoise prône l’intervention judiciaire en cas d’imprévision.33 Les tenants d’une telle intervention judiciaire s’appuient sur la reconnaissance par les tribunaux dans le droit antérieur, puis la codification dans le nouveau code, du rôle de la bonne foi.

Québec (Procureur général) c. Kabakian-Kechichian, [2000] R.J.Q. 1730 (C.A.); Châteauguay (Ville de) c. Léry (Ville de), J.E. 2009–1838 (C.S.). 32 Tancelin (1986) no 245, p. 145–146; Tancelin et Gardner (1990) p 183–184; Soucy (1990) p 77 et s. Pour un point de vue plus nuancé ou réfractaire à l’imprévision à la même époque, voir Baudouin (1969) p 165 et s.; Pineau et Burman (1988) no 199, p. 281–282; Baudouin (1989) nos 355–357, p 238–240. 33 Martin (1993) p 624–625; Bédard (1997) p 774 et s.; Jobin (2004) p 693; Baudouin et al (2013) no 446, p 538–541; Jobin (2012) p 383–386.

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Le principe de la bonne foi34 – auquel certains associent également celui d’équité35 – a fait l’objet d’une codification parmi les dispositions générales relatives à l’exercice des droits civils, ainsi que dans le contexte propre au droit des obligations : 6. Toute personne est tenue d’exercer ses droits civils selon les exigences de la bonne foi. 1375. La bonne foi doit gouverner la conduite des parties, tant au moment de la naissance de l’obligation qu’à celui de son exécution ou de son extinction.

6. Every person is bound to exercise his civil rights in good faith. 1375. The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished.

Cette notion de bonne foi vise le respect d’une certaine « moralité contractuelle ». Selon ce raisonnement, si les parties avaient su ou avaient pu raisonnablement prévoir les événements altérant fondamentalement l’équilibre des prestations, elles n’auraient pas contracté dans ces termes. Si la bonne foi guide bel et bien les parties, ces dernières parviendront à adapter leur contrat initial conformément à une obligation implicite de coopération. Il s’agit, en quelque sorte, d’intégrer en droit privé une clause implicite fondée sur la maxime de droit international rebus sic stantibus, de façon à forcer les parties à réaménager leurs relations à la lumière des circonstances nouvelles.36 Pour les auteurs favorables à l’imprévision, en cas de circonstances exceptionnelles où l’obligation de coopération entre en jeu pour contraindre les parties à une renégociation, le principe de bonne foi doit prévaloir sur les principes normalement applicables, soit celui de l’intangibilité du contrat (art. 1439 C.c.Q.) et aussi, dans le cas d’obligations à caractère pécuniaire, celui du nominalisme (art. 1564 C.c.Q.). En dehors de circonstances exceptionnelles – c’est-à-dire lorsque le changement de circonstances s’inscrit dans l’ordre normal des choses – il ne saurait en revanche être question d’imposer une telle obligation de renégocier, et les principes d’intangibilité du contrat et du nominalisme auront plein effet. L’argument d’interprétation fondé sur l’existence de cas particuliers – interprétés comme une indication par le législateur du rejet de l’imprévision dans une perspective plus large – est écarté par les tenants de l’imprévision. Ces derniers soutiennent que les impératifs de bonne foi et d’équité doivent avoir préséance sur des arguments purement formels. Ils font valoir notamment, à cet égard, que les 34

La notion de « bonne foi » s’entend alors au sens d’une norme de comportement. Il ne s’agit pas d’une opposition entre les notions de « bonne foi » et de « mauvaise foi », comme c’est le cas lorsqu’il est question de la « croyance inexacte qu’on agit conformément au droit ». Sur cette distinction, voir Centre de recherche en droit privé et comparé du Québec (2003) v. « bonne foi » et « mauvaise foi ». 35 Baudouin et al (2013) no 159, p. 263–264. 36 Martin (1993) p 620–624. Voir aussi à ce sujet Crépeau et Charpentier (1998) p 116–117.

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tribunaux n’ont pas hésité, dans le droit antérieur, à mettre de côté le principe de la force obligatoire du contrat pour sanctionner l’abus de droit contractuel. Si les tribunaux se sont ainsi permis de porter atteinte aux principes de l’effet obligatoire et de l’intangibilité du contrat quant à l’abus de droit contractuel au nom de la justice contractuelle, ils pourraient, en toute logique, élargir leur pouvoir d’intervention pour l’étendre à la problématique de l’imprévision.37 Pour une autre conception de la stabilité contractuelle(favor contractus) L’intervention judiciaire – qui peut aller jusqu’à mettre fin au contrat – ne constitue pas une fin en soi pour les tenants d’un tel pouvoir d’intervention. Elle représente plutôt un incitatif à la renégociation du contrat, et s’inscrit dans l’esprit du favor contractus. Dans cette perspective, l’idée de stabilité contractuelle se défend au nom de la viabilité de l’entente, surtout dans le cas de contrats à long terme. La renégociation vise à éviter que le changement de circonstances n’engendre un déséquilibre tel que l’exécution du contrat constitue une véritable injustice. Selon ces auteurs, l’intervention du juge, qui se limite à des circonstances exceptionnelles, ne risquerait pas de provoquer les réactions en série appréhendées. Elle favoriserait, au contraire, le maintien des relations contractuelles et la préservation de la force obligatoire du contrat.38 Apport du droit comparé et recherche d’une plus grande modernité du droit Les tenants de la reconnaissance de l’imprévision en droit québécois font valoir, à travers une analyse comparative, la percée de ce mécanisme dans d’autres systèmes juridiques où l’élément de bonne foi est également mis de l’avant – notamment en Suisse, en Allemagne et en Italie.39 Les Principes d’Unidroit sont également cités en exemple au soutien de la reconnaissance d’un pouvoir d’intervention des tribunaux, quoique l’élément de bonne foi soit absent du libellé des Principes et que le favor contractus ait sans doute joué un rôle plus déterminant en matière de hardship.

4.3.2.2

Les règles applicables advenant la reconnaissance de l’imprévision par les tribunaux

Advenant que la jurisprudence opère un revirement et admette la proposition doctrinale favorable à l’imprévision, il lui reviendra également d’en préciser les règles d’application, soit les conditions qui donnent ouverture à une intervention du tribunal, les modalités d’une telle intervention, ainsi que ses effets. Conditions d’application susceptibles de donner ouverture à une intervention du tribunal sur le fondement de l’imprévision Les tenants du pouvoir d’intervention des tribunaux sur le fondement de l’imprévision le restreignent à des 37

Jobin (2012) p 388. Bédard (1997) p 784 et s.; Baudouin et al (2013) no 447, p 542–543; Jobin (2012) p 389–390. 39 Bédard (1997) p 786 et s.; Baudouin et al (2013) no 444, p 536–537; Jobin (2012) p 389. 38

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circonstances très exceptionnelles – ce qui constituerait un élément commun avec d’autres systèmes juridiques qui en admettent déjà l’existence. L’imprévision est toujours conçue comme une exception, par essence limitée, au principe fondamental de l’intangibilité du contrat. Quoique la formulation exacte varie d’un auteur à l’autre, les principales conditions d’applications proposées se rassemblent autour des éléments suivants : – L’exécution du contrat devient excessivement onéreuse pour l’une des parties, compte tenu de la valeur de la prestation offerte ou de la contrepartie tirée du contrat; – le déséquilibre des prestations est attribuable à un changement de circonstances imprévisible au moment de la formation du contrat; – les circonstances invoquées ne sont pas imputables à la partie qui fait valoir l’imprévision.40 Modalités d’intervention des tribunaux sur le fondement de l’imprévision L’intervention des tribunaux en l’absence d’une clause de hardship, si elle venait à être admise en jurisprudence, viserait surtout des situations où les parties ne se sont pas prévalues de la clause d’arbitrage. Les tribunaux judiciaires seraient alors compétents pour assurer l’application des règles de l’imprévision. Il n’est pas exclu que les parties soient tout de même assujetties à une convention d’arbitrage. L’autorité arbitrale peut alors disposer d’une marge de manœuvre plus considérable que les tribunaux judiciaires, si la convention lui confie un rôle d’amiable compositeur. L’admission de l’imprévision proposée en doctrine, nous l’avons vu plus tôt, se fonderait principalement sur l’obligation de coopération. Elle placerait donc l’idée de renégociation au cœur de l’exercice des recours de la partie victime d’un changement exceptionnel de circonstances. La renégociation peut être entrevue sous différents angles : – Elle peut être conçue comme une condition d’exercice des droits de la partie victime du changement de circonstances, c’est-à-dire que cette dernière doit avoir tenté de renégocier avant de saisir le tribunal d’une demande pour adapter le contrat ou y mettre fin. L’absence de tentative de renégociation de sa part pourrait alors justifier une fin de non-recevoir face à la demande soumise au tribunal par la partie victime en vue pour déterminer le sort du contrat. – Elle peut aussi est vue comme un effet de l’intervention du tribunal, si l’on envisage la possibilité d’une intervention du tribunal en deux temps, d’abord pour imposer aux parties le devoir de renégocier,41 puis pour statuer sur le sort du contrat face à l’échec de la négociation.

40 41

Baudouin et al (2013) no 444, p 535, et no 446, p 541. Baudouin et al (2013) no 446, p 541.

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Peu importe le rôle attribué à la renégociation, il demeure qu’elle figure au cœur des modalités d’intervention des tribunaux sur le fondement de l’imprévision. Les causes de l’échec de la renégociation peuvent être variables. Parfois, la partie victime et son cocontractant auront cherché une voie de sortie de bonne foi, sans toutefois y parvenir. Dans d’autres cas, l’échec sera attribuable à l’absence de tentative véritable par la partie victime ou un défaut de collaboration de son cocontractant. Les causes de l’échec de la renégociation pourront, dans certains cas, avoir un impact quant aux effets de l’intervention judiciaire, notamment l’attribution de dommages-intérêts. Effets de l’intervention des tribunaux sur le fondement de l’imprévision. Toujours dans l’hypothèse où la jurisprudence admettrait l’imprévision en droit québécois, le tribunal qui constate l’échec des tentatives de renégociation devrait statuer sur le sort du contrat et, dans certains cas, assortir son jugement de l’octroi de mesures complémentaires telles que des dommages-intérêts. S’agissant du sort du contrat, il n’existe pas d’unanimité quant au pouvoir du tribunal d’adapter le contrat pour rétablir le déséquilibre engendré par le changement de circonstances. Cette alternative à la rupture du lien contractuel constitue la forme la plus aboutie du favor contractus. Certains auteurs, s’inspirant entre autres de la proposition de l’ORCC,42 y sont favorables.43 D’autres considèrent qu’une telle forme de révision irait trop loin en matière d’intervention judiciaire dans les relations contractuelles et que l’échec de la renégociation devrait tout au plus amener à mettre fin au contrat, ou encore à en neutraliser les effets au moyen d’une fin de non-recevoir face à la demande d’exécution de la partie avantagée.44 Le droit à des dommages-intérêts suppose nécessairement l’inexécution d’une obligation injustifiée d’une obligation résultant du contrat (art. 1458 et 1590 C.c.Q.). Dès lors, le simple fait de se prévaloir des règles relatives à l’imprévision n’entraînerait pas, à la charge de la partie victime du changement de circonstances, le paiement de dommages-intérêts au bénéfice de son cocontractant pour les conséquences de la renégociation du contrat et, le cas échéant, de sa révision, de sa terminaison ou de l’imposition d’une fin de non-recevoir. En revanche, il pourrait arriver que le contractant avantagé par le changement de circonstances soit appelé à verser des dommages-intérêts au cocontractant victime du déséquilibre des prestations. Ce serait notamment le cas s’il a manqué à son obligation de coopération par un refus de renégocier le contrat malgré l’invitation de son cocontractant ou encore en participant à la renégociation avec l’intention ferme de la faire échouer. La mesure des dommages-intérêts sera alors en fonction du préjudice résiduel, c’est-à-dire de la part du préjudice non réparé à la suite de l’intervention du tribunal (qui pourra, par exemple, avoir ordonné la révision ou la terminaison du contrat, ou encore l’imposition d’une fin de non-recevoir). En 42

Office de révision du Code civil, Projet de code civil (1978) livre V, art. 75 : « […] le tribunal peut, nonobstant toute convention contraire, résoudre, résilier ou réviser un contrat […] ». 43 Martin (1993) p 631–632. Voir aussi en ce sens Bédard (1997) p 791–793. 44 Baudouin et al (2013) no 446, p 541–542; Jobin (2012) p 387.

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revanche, le simple échec de la renégociation, menée de bonne foi par les deux parties, ne constituera pas une inexécution contractuelle susceptible d’entraîner l’attribution de dommages-intérêts à la partie victime du changement de circonstances.

4.4

Conclusion

Le sort réservé aux contractants victimes d’imprévision en droit québécois est encore très incertain. En effet, bien que le législateur n’ait pas saisi l’occasion de la réforme du code civil pour adopter une règle relative à l’imprévision et qu’il ne semble pas avoir l’intention d’intervenir à court ou moyen terme, la situation pourrait tout de même évoluer rapidement si les tribunaux jugeaient opportun d’opérer un revirement en la matière. Ceux qui s’intéressent à la question voient dans une affaire actuellement en instance l’occasion pour les tribunaux d’intervenir pour changer l’état du droit positif ou, au contraire, pour réaffirmer le statu quo.45 Par ailleurs, l’imprévision est devenue une question fort discutée au Québec depuis une vingtaine d’année. Les développements qui y sont consacrées dans les différents ouvrages de doctrine et la multiplication des articles à son sujet dans les revues universitaires et professionnelles ont pour effet d’enrichir les réflexions des juges, mais aussi d’alerter les praticiens face à cette problématique. Dès lors, les risques liés aux changements de circonstances sont plus susceptibles d’être pris en compte lors de la négociation des contrats à long terme, ce qui peut à tout le moins permettre de pallier l’incertitude résultant du silence du législateur.

Réferences Baudouin, J.-L. 1969. Theory of imprevision and judicial intervention to change a contract. In Essays on the law of obligations, dir. Dainow Joseph, 151. Baton Rouge: Louisiana State University Press. Baudouin, J.-L. 1989. Les obligations, 4e éd. Cowansville: Éditions Yvon Blais. Baudouin, J.-L., et P.-G. Jobin. 2013. Les obligations, 7e éd. par Pierre-Gabriel Jobin et Nathalie Vézina. Cowansville: Éditions Yvon Blais. Bédard, J. 1997. Réflexions sur la théorie de l’imprévision en droit québécois, 42 R.D. McGill: 761. Centre de recherche en droit privé et comparé du Québec. 2003. Dictionnaire de droit privé. Les obligations. Cowasville: Éditions Yvon Blais. Commentaires du ministre de la Justice, t. I et II. 1993. Québec: Publications du Québec.

45

Churchill Falls (Labrador) Corporation Ltd. c. Hydro-Québec, J.E. 2014–1469, 2014 QCCS 3590. Dans cette affaire, le tribunal de première instance a refusé d’intervenir sur le fondement de l’imprévision. La partie qui demandait l’intervention du tribunal pour réviser le contrat sur le fondement de la bonne foi a porté la décision en appel (500-09-024690-141).

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Crépeau, P.-A., et É. Charpentier. 1998. Les Principes d’Unidroit et le Code civil du Québec : Valeurs partagées?/The Unidroit Principles and the Civil Code of Quebec: Shared Values? Scarborough: Carswell. Jobin, P.-G. 2000. La modernité du droit commun des contrats dans le Code civil du Québec : Quelle modernité?, RIDC 49. Jobin, P.-G. 2004. L’étonnante destinée de la lésion et de l’imprévision dans la réforme du code civil du Québec, RTD civ. 693. Jobin, P.-G. 2012. L’imprévision dans la réforme du code civil et aujourd’hui. In Mélanges JeanLouis Baudouin, dir. Benoît Moore, 375. Cowansville: Éditions Yvon Blais. Lluelles, D. 2006. La révision du contrat en droit québécois, 36 R.G.D. 25. Lluelles, D., et B. Moore. 2012. Droit des obligations, 2e éd. Montréal: Éditions Thémis. Martin, S. 1993. Pour une réception de la théorie de l’imprévision en droit positif québécois, 34 C. de D. 599. Moisan, P. 1994. Technique contractuelle et gestion des risques dans les contrats internationaux : les cas de force majeure et d’imprévision 35 C. de D. 281. Office de révision du Code civil. 1978. Rapport sur le Code civil, t. I, Projet de code civil. Québec: Éditeur officiel. Office de révision du Code civil. 1978. Rapport sur le Code civil, t. II, Commentaires, vol. 2. Québec: Éditeur officiel. Pineau, J., et D. Burman. 1988. Théorie des obligations, 2e éd. Montréal: Thémis. Pineau, J., D. Burman, et S. Gaudet. 2001. Théorie des obligations, 4e éd. par Jean Pineau et Serge Gaudet, Montréal: Éditions Thémis. Soucy, R. 1990. Étude sur les abus de droit, R.L.n.s. 1. Tancelin, M. 1986. Des obligations. Contrat et responsabilité, 4e éd., Montréal: Wilson et Lafleur. Tancelin, M. 2009. Des obligations en droit mixte du Québec, 7e éd. Montréal: Wilson et Lafleur. Tancelin, M., et D. Gardner. 1990. Jurisprudence commentée sur les obligations, 4e éd. Montréal: Wilson et Lafleur.

Liste des jugements Canada Starch Co. c. Gill & Dufus (Canada) Ltd., [1990] R.L. 602 (C.A.). Châteauguay (Ville de) c. Léry (Ville de), J.E. 2009–1838 (C.S.). Churchill Falls (Labrador) Corporation Ltd. c. Hydro-Québec, J.E. 2014–1469, 2014 QCCS 3590. Fabrique de la paroisse de Notre-Dame de la Paix c. Ross (Succession de), 2011 QCCS 2283. Grant Mills Ltd. c. Universal Pipeline Welding Ltd., [1975] C.S. 1203. H. Cardinal construction Inc. c. Dollard-des-Ormeaux (Ville de), [1987] R.L. 672 (C.A.). Hatley (Municipalité de) c. Court Good Cheer, [1997] R.D.I. 364 (C.S.). Marmet (Succession de), J.E. 99–625 (C.S.). Placements Claude Gohier inc. c. Supermarché Le Blainvillois inc., J.E. 2004–566 (C.Q.). Québec (Procureur général) c. Kabakian-Kechichian, [2000] R.J.Q. 1730 (C.A.). Stevenson c. National Trust Co., J.E. 95–780 (C.S.). Transport Rosemont inc. c. Montréal (Ville de), J.E. 2008–2273 (C.S.). Verona Construction Ltd. c. Frank Ross Construction Ltd., [1961] R.C.S. 195, conf. [1959] B.R. 674.

Chapter 5

Can Financial Crisis Lead to the Application of the Institute of Changed Circumstances Under Croatian Law? Maja Bukovac Puvača, Gabrijela Mihelčić, and Iva Tuhtan Grgić

Abstract The consequences of the global financial crisis which began to manifest in Croatia during 2008 have not ended to this day. Doing business during the financial crisis is significantly hampered and imposes the need to devote special attention to the question of binding nature of a contract whose performance would be excessively onerous or would cause an excessive loss for one contracting party. Croatian law adopts the clausula rebus sic stantibus as a theoretical concept that defines the limits of attachment to a contract. Therefore, the consequences of the financial crisis may be considered only within the framework of the general rule on variation or termination of contract in case of change of circumstances. Contracting parties may invoke on an event as a consequence of the financial crisis as a changing circumstance only if all statutory requirements are fulfilled. Hence, the authors provided analysis of statutory requirements for termination or modification of the contract. Furthermore, the authors analyse the circumstances which the court should take into consideration when deciding on variation or termination of the contract, underlining the principle of good faith and fair dealing as the fundamental criterion by which the courts should be governed. Clausula rebus sic stantibus is an instrument of great importance, especially in the times of a financial crisis, because its purpose is to maintain the proper balance between principle of pacta sunt servanda on one side with the principle of good faith and fair dealing and the principle of equal value of performances on the other side.

M. Bukovac Puvača (*) • G. Mihelčić • I. Tuhtan Grgić Faculty of Law, University of Rijeka, Rijeka, Croatia e-mail: [email protected]; [email protected]; [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_5

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Introduction

Considering the nature of a financial crisis as a phenomenon (global or local) with different consequences in different fields of human activity, it is difficult to define it and discuss it as a unique circumstance that affects a specific contract and leads to its renegotiation, rescission or revision. There are no special rules on the impact of financial crises on the contractual obligations of the parties to a contract or the contract itself. A financial crisis, or precisely its consequences, can be considered only within the framework of the general rule on variation or termination of contracts due to a change of circumstances, as contained in Article 369/1 of the Civil Obligations Act (COA).1 Croatian law incorporates the clausula rebus sic stantibus (variation or termination of contract in case of change of circumstances) as a theoretical concept that defines the limits of bindings to the contract, matching the principle of pacta sunt servanda on one side with the principle of good faith and fair dealing and the principle of equal value of performances on the other side.2 The proper balance between those principles actually leads to the modified principle of pacta sunt servanda, whereby it is no longer important to perform the contract’s obligation exactly as contracted, but to maintain the contractual relation between the contracting parties, even by involuntary renewal of the contract.3 The principle of “pacta sunt servanda” is one of the fundamental principles of Croatian contract law, stated and defined in Article 9 of the COA as follows: “Parties to obligations shall perform their obligations and they are liable for their performance”. A tangible form for this abstract principle is provided in the general rule on the effects of obligations (Article 65 of the COA). The cited provision stipulates that pursuant to an obligation the creditor shall be authorised to request performance from the debtor and the debtor shall be obligated to fulfil the obligation.4 A debtor shall be liable for performance with all of his assets. In line with the concept of freedom of contract, parties to contracts can agree upon the ways the obligation can terminate, other than through performance. Such contracted reasons for possible termination of obligations are in accordance with the pacta sunt servanda principle and do not appear as controversial either in theory or in practice. There is no data on the number of contracts that were subject to renegotiation, rescission or revision as a consequence of financial crisis. However, there is a 1

Zakon o obveznim odnosima, Narodne novine (Official Gazette of the Republic of Croatia) no. 35/2005, 41/2008 and 125/2011. 2 Petrić (2007), p. 108. 3 Gavella (1965), p. 258. 4 Article 160 of the COA lays down the general rule on the termination of obligations and prescribes the following: An obligation shall be extinguished by mutual consent of the parties to the obligation, by performance and in other cases prescribed by law. Provisions of Articles 161–194 of the COA regulate performance of obligations as a common way to terminate the obligation. Besides through performance, there are other ways to terminate obligations (set/off, release of debt, merger, impossibility of performance, lapse of time, cancellation and death).

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significant number of cases where contractual parties, motivated by the impacts of the financial crisis, approached renegotiations. This was particularly evident for the authorities of local communities that expressed their willingness to reduce rental fees and claims against debtors, and in some cases even to release the debtors of their debt. The contracting parties are bound to take into consideration, with a required degree of care (of a good merchant or a good master of the house), the possibility of changes in circumstances and bear the risk of their occurrence. Legal transactions should correspond to those occasions and circumstances that were considered essential and served as a motive to the contracting parties to enter into contractual obligation in the first place.5 However, sometimes, after the conclusion of the contract, circumstances may arise which make the performance of the contract excessively onerous for one contracting party and thus may disturb the principle of equal value of performances. Insisting on the performance of the contract in instances when such circumstances arise would be contrary to the principle of good faith and fair dealing, and therefore unacceptable.6 Precisely those fundamental principles of civil law raised the need for including the clausula rebus sic stantibus in the Croatian legal system. The requirements for termination or modification of the contract are prescribed in Article 369/1 of the COA, stating that if, after entering into a contract, extraordinary circumstances arise that were impossible to foresee at the time of entering into a contract, making it excessively onerous for one party to perform its obligations, or if, under such circumstances, a party would suffer an excessive loss as a result of the performance, the party may request variation or even termination of the contract.

5.2

Overview of Clausula Rebus Sic Stantibus in Croatian Law

In the short period between World War II to today the institute of clausula rebus sic stantibus underwent several changes. In the first period the legal rules of the General Civil Code (GCC)7 were applied to civil contracts. At that time the possibility of invoking changed circumstances was not prescribed as a general rule but allowed

5

Vuković (1960), p. 286. Gavella (1965), p. 255. 7 Austrian Civil Code (ABGB) was enforced for the entire territory of the Republic of Croatia (as it is today) on the 1st of May 1853. After the Croatian-Hungarian Settlement in 1868, ABGB was not put out of force but reaccepted as Croatian law, as its General Civil Code (GCC). The Code was applied as such on the territory of today’s Croatia until World War II and, in some parts (if not contrary to the socialistic regime, as legal rules) even after the War. 6

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only in certain instances,8 and the aggrieved party could not seek the revision of the contract, only its termination. The institute of changed circumstances as naturalia negotii was introduced in Croatian (at that time Yugoslav) law for the first time in the Inheritance Act of 19559 for lifelong support contracts.10 Several years later its application was provided in the 1954 Trade Usages11 that were applicable only for commercial contracts. Even though their application was not obligatory, Usages were widely applied to commercial contracts, and the theory of clausula rebus sic stantibus had a significant role in jurisprudence.12 The principle of variation or termination of contract in case of change of circumstances was stipulated for the first time as a general rule for all onerous contracts by the Civil Obligations Act of 1978 (COA/78). By introducing the institute of clausula rebus sic stantibus in the COA/78, the Croatian (Yugoslav) legal system adopted a monistic concept according to which this institute applies not only to commercial contracts but to civil contracts as well. While the 1954 Usages followed a concept characteristic of the Italian Codice civile, the rules adopted by the COA/78 were pointed out in legal theory as being visibly impacted by case law and theories of German law (lapsed or undermined factual basis of the contract or an extended interpretation of the notion of force majeure).13 In 2005 the new Civil Obligations Act was adopted and the legislator made certain changes regarding the institute of clausula rebus sic stantibus, primarily by simplifying the former rules relating to the prerequisites for the application of the institute and by amending some details.14 Rules on variation or termination of contract in case of change of circumstances are prescribed in Articles 369–372 of the COA.

8

It was prescribed in § 901 of the GCC for cases when parties agree on stipulating a purpose of the contract as its condition, in § 936 of the GCC for preliminary contracts and in § 1048 of the GCC regulating contracts of exchange of species. See more: Gavella (1965), pp. 256–257. 9 Službeni list FNRJ (Official Gazette of the Federative Peoples’ Republic of Yugoslavia), no. 20/1955 and 12/1965. 10 If after the conclusion of the contract circumstances have changed in such an extent that its performance has become excessively onerous, the court shall, at the request of either contracting party, modify or terminate their relations, taking into consideration all circumstances. 11 Službeni list FNRJ (Official Gazette of the Federative Peoples’ Republic of Yugoslavia) (Dodatak - Appendix), no. 15 of 7 April 1954. 12 Blagojević and Krulj (1980), pp. 348–349. 13 Petrić (2007), p. 128. 14 Nikšić (2007), p. 600.

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The Scope of Application

By adopting COA/78,15 clausula rebus sicstantibus became a general institute of contract law – applicable to all bilateral contracts (both civil and commercial).16 General regulation of the institute is located in the part of the COA covering the effects of bilateral contracts (Articles 369–372). Due to the positioning of the rules on variation or termination of contracts in cases of changed circumstances, some scholars interpret that these rules should apply only to bilateral contracts.17 This view, that clausula rebus sic stantibus cannot be applied to donation contracts, as a unilateral contract, was expressed in legal practice as well.18 However, authors in legal theory pointed out that the possible application should be considered de lege ferenda adequately in other legal transactions (providing a foothold in comparative law: Italian CC and German BGB).19 If the basic idea of accepting the changed circumstances rule is deriving from the principle of equal value of performances, it is clear that there is no place for its application to unilateral legal transactions. However, if the purpose of the institute is to protect the debtor in cases where the changes would make it excessively onerous for him to perform, or if under such circumstances he would suffer an excessive loss as a result of the performance, then its application only to bilateral contracts would be too narrow and inequitable. Especially having in mind that while the other party to a bilateral contract (although suffering damages because of the changed circumstances) would still get some counteraction and has the right to invoke a change in circumstances, a party to a unilateral contract would have no right to require anything in return from the other party and must perform its obligation even though unexpected circumstances have emerged.20 In part of Croatian legal doctrine the view is expressed that there is no need to use clausula rebus sic stantibus in relation to unilateral contracts since special rules

15

Official Gazette of the Republic of Croatia, no. 53/91, 73/91, 111/93, 9/94, 7/96, 91/96, 112/99, 88/01. 16 The institute of variation or termination of contract in case of change of circumstances was stipulated for the first time as a general rule for all onerous contracts by the Civil Obligations Act of 1978 (COA/78). Before that time, the legal rules of the General Civil Code (GMC) - § 936 GMC were applied to civil contracts, while the 1954 Trade Usages were applicable to commercial contracts. 17 Vizner (1978), pp. 530, 532. 18 Supreme Court of the Republic of Croatia, Rev-2154/86 of 5 May 1987. 19 Slakoper (2005), pp. 433–434, Petrić (2007), pp. 130–131. 20 Petrić (2007), pp. 130–131, Slakoper (2005), p. 433.

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prescribed for such contracts take into consideration changed circumstances after entering into a contract,21 although in a narrower sense than the general rule.22 Clausula rebus sic stantibus is excluded, by the nature of things, from aleatory contracts. Although the COA does not explicitly mention this exclusion, nevertheless, it is clear that the institute of changed circumstances is not applicable since the court deciding on variation or termination must take into consideration risk distribution that arises from legislation or contract.23 However, it should be noted that the application of the clausula rebus sic stantibus was regulated for the first time in the Inheritance Act of 1955 for lifelong support contracts, which is an aleatory contract. Lifelong support contracts are now regulated in the COA, and it is explicitly laid down that the general provisions of the COA governing changes of circumstances shall apply to them (Article 584 of the COA). It should be noted that in Croatian law there is no overlapping of the institute of variation or termination of a contract in case of change of circumstances with the institute of impossibility of performance (of bilateral contracts) nor with the institute of excessive loss. Namely, pursuant to Article 373/1 of the COA, where performance of an obligation of one party to a bilateral contract becomes impossible due to extraordinary external events that occurred after entering into a contract and before the performance is due and which could not have been foreseen or prevented, avoided or eliminated by a party to a contract and for which neither of the parties is liable, the obligation of the other party shall also cease. If the party has performed its obligation partially, it has the right to restitution according to the regulations relating to restitution in case of unjust enrichment.24 So, if the performance of one contractual party’s obligations becomes impossible, the obligation of the other party shall also cease, provided that neither party is liable and the change of circumstances could not have been foreseen or prevented, avoided or eliminated. Furthermore, where performance of an obligation by one party to a bilateral contract is impossible due to an event for which the other party is liable, the first party’s obligation shall cease and it shall retain its claim towards the other party. However, such a claim is reduced by the benefit it might have had from the release

21

Until his obligation of performance becomes due, a donor may withdraw from a contract of donation, if after concluding such contract his financial standing deteriorated to the extent that performance of contract would jeopardise his livelihood or prevent him from performing an obligation of maintenance (Article 492 of the COA). A donor whose financial standing after performance of the contract of donation deteriorates to the extent that he lacks funds for his immediate support, and there is no person legally obligated to support him, may revoke the donation and request the donee to return the gift (Article 493/1 of the COA). 22 Nikšić (2007), p. 573. 23 Petrić (2007), p. 133. 24 In the case of partial impossibility of performance of one party due to an event for which neither of the parties is liable, the other party may terminate the contract if partial performance does not meet its needs; otherwise the contract shall remain valid and the other party shall be entitled to request proportional reduction of its obligation (Article 373/2 of the COA).

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from its own obligation (Article 374/1 of the COA). In such cases a new relationship arises – liability for damage. It is important to emphasize that the impossibility of performance has to be supervening i.e. has to occur “…after entering into a contract and before the performance is due…” (Article 373/1 of the COA). If the impossibility of performance existed at the time of the conclusion of the contract, the contract would be invalid. A distinction should be underlined in relation to the institute of excessive loss as well. Namely, contracting parties may not invoke changed circumstances where an evident imbalance of mutual performances existed at the time of entering into the contract. The harmed party in such a case may request annulment of the contract, provided that at the time of conclusion of the contract they did not know nor had any reason to know of the true value of their obligations (Article 375 of the COA).

5.4

Legal Nature of the Provisions on Clasula Rebus Sic Stantibus

According to Article 372 of the COA, parties may waive in advance their right to invoke certain changed circumstances, unless such an agreement would be contrary to the principles of good faith and fair dealing. From the cited provision it seems that clausula rebus sic stantibus is naturalia negotii of every bilateral contract. However, the freedom of contract principle regarding the possibility to agree upon the use of the institute of variation or termination of the contract in case of changed circumstances is restricted in two directions. Firstly, renunciation may not be agreed upon contrary to the principles of good faith and fair dealing. Under the assumption that there was no breach of the principles of good faith and fair dealing, the parties would be allowed to contract beforehand their renunciation to invoke clausula rebus sic stantibus for defined circumstances. By allowing the renunciation to invoke clausula rebus sic stantibus for defined circumstances, the legislator has prevented the contracting parties from precluding the application of the institute of clausula rebus sic stantibus as such with respect to all possible changed circumstances,25 because such an agreement would be contrary to the principle of good faith and fair dealing.26 The cited opinion was stated in the judgment of the Supreme Commercial Court in 1963, even before limits to the freedom of waiver were introduced.27 The above restrictions on renunciation to invoke clausula rebus sic stantibus are ius

25

Petrić (2007), p. 133, Nikšić (2007), pp. 578–579, Slakoper (2005), p. 432, Vizner (1978), p. 539. Petrić (2007), p. 133. 27 Supreme Commercial Court, Sl-2244/63 of 26 of December 1963. It is to be stressed that the above judgment was criticised by legal scholars, pleading for greater freedom of contracting parties. Goldštajn (1980), p. 183. 26

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cogens – prescribed in order to protect public order.28 Therefore, those renunciations made contrary to the principles of good faith and fair dealing, as well as those made with respect to all possible changed circumstances, would be null and the renouncing party would be able to invoke changed circumstances. On the other hand, by waiving the right to invoke specific changed circumstances, the liability of the debtor is extended by contract to cover cases for which it would not be liable otherwise, which is in accordance with Article 344 of the COA. In conclusion, the rules regulating clausula rebus sic stantibus will be applied when contracting parties did not agree to waive the right to invoke certain changed circumstances, as well as in cases where they agreed upon the waiver, but the waiver encompassed either all possible changed circumstances or defined circumstances that were contrary to the principles of good faith and fair dealing.

5.5

Requirements for Termination or Modification

Requirements for the termination or modification of a contract are prescribed in Article 369/1 of the COA. This article states that if, after entering into a contract, extraordinary circumstances arise that were impossible to foresee at the time of entering into a contract, which make it excessively onerous for one party to perform or if, under such circumstances, a party would suffer an excessive loss as a result of the performance, that party may request variation or even termination of the contract.

5.5.1

Change of Circumstances (Extraordinary and Unforeseen)

Circumstances under which the contractual party could seek variation or termination of the contract were enumerated, by way of example in Usage No. 56: natural disasters, such as drought, flood, earthquake; administrative measures such as the prohibition or restriction of imports or exports; and other restrictions of trade, changes in the system of prices, tariff changes and administered prices, changes in standards, and economic changes such as an extremely large and sudden fall or jump in prices. The rules of COA/78 and COA do not contain a list of circumstances that may affect the contract. It was stressed in legal literature that there was no need to regulate them, since it is not important which circumstances have changed but rather whether they have influenced the contracting parties, contractual

28

Slakoper (2005), p. 432. Ratio of the prohibition of the general waiver to invoke on changed circumstances was in the need to protect general interests and ‘the morale of the socialistic selfgoverning society’ Blagojević and Krulj (1980), p. 355.

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obligations and their performance.29 However, legal scholars, obviously inspired by the cited Usages, retained the classification to natural events, political and social changes, administrative and other measures of government, economic phenomena, etc.30 It is indisputable that financial crises should be classified as economic phenomena. However, contracting parties may invoke a financial crisis as a changed circumstance only if all statutory requirements (which will be described below) are fulfilled. It is to be noted that a financial crisis will prove its specificity relative to each requirement (questions will be raised as to the timing of the emergence of the crisis, predictability of its duration, intensity and its consequences). For the application of clausula rebus sic stantibus it is required that the “extraordinary circumstances that arise were impossible to foresee.” By such stipulation, provisions of the 2005 COA (Article 369/1) returned to the prerequisite as stated by the 1954 Trade Usages (Usage No. 55.). According to the COA/1978 the “emergence of circumstances” was required (Article 131/1). A comparison of rules of the 1954 Trade Usages with rules and regulations of the COA/78 makes it evident that the rules of the COA/78 dropped the requirement that the circumstances must be “unforeseen and extraordinary”. Since objective “unforeseeability” (as there are very few examples of objective unforeseeability) would significantly reduce the ability to apply this rule, the requirement for unforeseen circumstances was criticised in legal theory as inadequate.31 It was pointed out that foreseeability had to be comprehended ‘in a practical, and not philosophical meaning’.32 However, as the termination of the contract could not be invoked by a party that was obliged to take into consideration the circumstances at the time of entering into the contract, or could have avoided or overcome them, thus “unforeseen” circumstances were required in COA/78 indirectly. Jurisprudence and legal theory were concordant in this regard.33 Because of the aforementioned, the return to the requirement of unforeseen and extraordinary circumstances (which may seem as a more restrictive solution than the one of COA/78) is not a radical change and it is not to be expected that there will be a change in jurisprudence. Apart from the re-introduction of the requirements for change of circumstances, the legislator retained the provision of the COA/78 according to which variation or termination of a contract may not be requested by a contracting party invoking the change of circumstances if that party was obliged to take into consideration such circumstances at the time of entering into a contract or if it could have avoided or overcome them (Article 369/2 of the COA). Accordingly, (un)foreseeability is estimated taking into consideration not only the objective circumstances, but also the subjective features of the party (“bound to take into consideration”). The degree of care is assessed in relation to the area in which the contract is concluded (commercial or civil con29

Slakoper (2005), p. 434. Petrić (2007), p. 134. 31 Blagojević and Krulj (1980), p. 351. 32 Goldštajn (1980), p. 184. 33 Slakoper (2005), pp. 436–438, Petrić (2007), pp. 138–141. 30

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tracts) and the properties of the parties (good merchant or a good master of the house). Thus the Supreme Court’s decision Rev-2521/1995-2 of February 7 1996 expressed the view that banks must take measures to preserve the value of money (e.g. by contracting variable interest rates). The emphasis is on the alteration of circumstances that existed (or were reasonably expected) at the time of the conclusion of the contract, and not on the event that caused them.34 Moreover, the institute could be applied even in cases where the event expected in the regular course of events did not occur.35 Certainly, every change in the value of performance does not give a right to request variation and termination of the contract. If the constant change in the value of money – goods/ services, would allow their modification or termination in the moment when they are due, that could lead to abandoning the principle of nominal value in favour of adjusted value.36 Jurisprudence has often repeated the view that the loss of value of money does not meet the requirements of the changed circumstances rule, if the contract was concluded at the time of inflation, because this represents a fact that the parties must take into consideration (for example, the Supreme Court: Rev2899/91-2 of March 18 1992, Rev-1231/92 of 2 September 1992, Rev-1656/99-2 of March 9 2000). A party may invoke extraordinary circumstances if they are of such nature that the party cannot overcome or avoid their impact. Although these elements are usually included in the definition of force majeure, the main difference is that this extraordinary and unforeseen event does not have to be external, so there is an obvious omission of an essential characteristic of force majeure.37 As already stated, there are no special rules on the influence of a financial crisis on the contractual obligations and the contract itself. However, it is clear that it should be of a certain intensity and a certain grade of unpredictability to be qualified as a circumstance which a party may invoke when requesting modification or termination of a contract. The notion of the term unpredictability shows its problematic nature especially in regard to a financial crisis as a changing circumstance. We are witnessing a financial crisis whose proportions were not predicted to such an extent even by the greatest experts. Thus, the question is what shall the court consider that the contracting parties were bound to take into consideration.

5.5.2

Time of the Arisen Alteration

Regardless the fact that the circumstances may be qualified as extraordinary and unforeseen, the right to require variation or termination of contract will ensue only if all provided prerequisites are fulfilled. 34

Petrić (2007), p. 141. Petrić (2007), p. 134. 36 Nikšić (2007), p. 584. 37 Petrić (2007), p. 142. 35

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A further prerequisite that must be fulfilled refers to the time of the occurrence of the circumstances. The arising of the alteration of circumstances has to be subsequent, i.e. they have to arise after entering into the contract (Article 369/1 of the COA). A financial crisis is not a circumstance which occurs at an exact point. It is a complex process whose beginning and end is difficult to determine. If a financial crisis would be taken as a changing circumstance then contracting parties of all contracts concluded after its appearance could not invoke changing circumstances. Therefore, the time of the occurrence of the financial crisis is not important but rather the time of the occurrence of its consequence which caused the alteration of circumstances. If, at the time of entering into a contract, there was an evident imbalance between the performances of the contracting parties, the harmed party would be able to request an annulment of the contract, provided that at that time it did not know or had no reason to know of its true value (Article 375/1 of the COA). Furthermore, the party requesting variation or termination of the contract may not invoke a change of circumstances that occurred after the expiry of the time limit for performance of the obligation (Article 369/3 of the COA). Accordingly, changes in circumstances must occur after entering into a contract and before the performance is due. There are numerous court decisions rejecting the plaintiff’s claims for breach of contract, because the change of circumstances occurred after the debtor defaulted on its obligation (after the claim was due). After the performance, the right to request variation or termination of the contract in case of change of circumstances ceases.

5.5.3

Excessive Onerousness or Excessive Loss

The following prerequisite, prescribed by the same article (369/1 of the COA) entails that the performance of the obligation would be ‘excessively onerous for one party or if under such circumstances a party would suffer an excessive loss’. Such formulation was prescribed by the rules of the 1954 Trade Usages. According to COA/78 it was required that altered circumstances made performance ‘onerous for one party to perform’. Hence, the rules of COA/78 required only ‘onerous’, not ‘excessively onerous’ performance and ‘party who would suffer an excessive loss’ was omitted. The legal solution from Usages and COA provides a wider possibility to invoke altered circumstances, by allowing it not only to the debtor, but also to the creditor.38 Excessive onerousness has to be observed and evaluated in relation to a respective legal transaction, sometimes even in relation to a particular stage of performance in the case of complex contractual relationships.39

38 39

Nikšić (2007), p. 590. Nikšić (2007), p. 591.

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Circumstances Relevant for Judicial Decision

According to Article 371 of the COA, in deciding on variation or termination of a contract, the court shall be governed by the principles of good faith and fair dealing, taking into consideration the purpose of the contract, the allocation of risk resulting from the contract or from laws, the duration and effects of extraordinary circumstances and the interests of both parties. It is pointed out by legal scholars that it is clear that the stated article does not prescribe special requirements that would affect the occurrence of the right of the aggrieved party to seek alteration or termination of the contract in case of a change of circumstances, since those requirements are prescribed in Article 369 of the COA. However, they are of great importance since the courts should be governed by the principle of good faith and fair dealing and should take into consideration cited circumstances when deciding on revision or termination of the contract.40 The need to distinguish the phrases ‘courts should be governed’ and ‘courts should take into consideration’ is emphasised in legal theory. Namely, the advantage should be given to what the courts are governed by, as a basic criterion, through which everything that needs to be taken into consideration should be observed.41 Accordingly, the circumstances that should be taken into consideration – the purpose of the contract, the allocation of risk resulting from the contract or from laws, the duration and effects of extraordinary circumstances and the interests of both parties – may be considered relevant only if they are in accordance with the principles of good faith and fair dealing as the fundamental criteria by which the courts should be governed when deciding.

5.5.4.1

Frustration of Contract’s Purpose

The frustration of the contract’s purpose is not a requirement for variation or termination of the contract due to changed circumstances, as it was according to Article 132/1 of the COA/78. Even though frustration of the purpose of the contract is no longer stated as a special requirement, it is still a very important circumstance which the court shall take into consideration when deciding on the variation or termination of the contract due to change of circumstances. Jurisprudence often dealt with the problem of frustration of the contract’s purpose during the application of the COA/78. Case law holds that the frustration of purpose after the performance of the obligation is not relevant. There was a series of disputes in which defendants were calling upon the frustration of purpose of the contract after the decision of the authorities on the withdrawal and cancellation of bonds of a bank. When deciding on the referred disputes the Supreme Court held that the purpose of the contract was the acquisition of ownership rights on the 40 41

Gorenc (2005), p. 563. Gorenc (2005), p. 563.

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stocks. Hence, the purpose had been realized, irrespective of the subsequent loss of the stocks.42 However, legal scholars warned that the purpose of the contract is not only the objectified purpose (always the same for the same type of contract), but the contract may lose its purpose when the economic purpose for which the contract was concluded cannot be achieved.43 When a contract’s purpose ceases, its modification or termination should not be observed as an exception to the principle of pacta sunt servanda, but as its amendment, deriving from the essence of the contract – the will of the contracting parties.44

5.5.4.2

Allocation of Risk

At the time of conclusion of a certain type of contract and with a certain party, each contracting party assumes certain risks arising from that relationship, stated either in the contract or by law. Normal, usual risks, accompanying the particular contractual relation have to be borne by the contractual parties themselves. Risk diversification may, in regard to the alteration of circumstances in a particular contractual relation, fall on one or both contracting parties, partially or wholly.

5.5.4.3

Duration and Effects of Extraordinary Circumstances

The court shall also take into consideration the duration and effects of extraordinary circumstances when deciding on a particular case. Courts are given the ability to (taking into consideration all other factors as well) change the terms of performance in cases where the change of circumstances is of temporary nature and would cause excessive oneroussness or excessive loss only if the performance is completed at the contracted time of performance.

5.5.4.4

Interests of Both Parties

Taking into consideration the interests of both parties means that the court should take into account not only the fact that the performance of the obligation would be excessively onerous for one party or that under such circumstances a party would suffer an excessive loss, but also that in the event of termination of the contract the other party would suffer some loss. The court’s decision should be such that the losses on both sides are reduced to a minimum.

42

For the case law see: Nikšić (2007), pp. 592–593. Nikšić (2007), pp. 593–594. 44 Goldštajn (1980), pp. 183, 186. 43

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Taking into consideration all of these circumstances, the court should seek primarily to modify a contract equitably, and only if that is not possible, to terminate it.45

5.5.4.5

Equity

Equity as a requirement for the variation or termination of the contract due to change of circumstances was laid out in COA/78 (Article 133/1); the application of the clausula rebus sic stantibus was possible only if the contract, according to general opinion, would have been inequitable to keep in force. In the positive Croatian law equity is not a prerequisite for the application of the institute of clausula rebus sic stantibus anymore, but it is not completely abandoned either. Equity should be estimated within the court’s decision on the ‘equitable change in the relevant provisions of the contract’ when the other contracting party offers or agrees upon it (Article 369/4 of the COA) as well as in the case where a court declares termination of a contract and, at the request of the other party, obliges the party applying for the termination to compensate the other party with an equitable amount for the damage suffered due to the termination (Article 369/5 of the COA).

5.6

Termination or Modification of the Contract

In the event the requirements prescribed for variation or termination of the contract due to change of circumstances are fulfilled, de rerum natura, the right to seek variation or termination of the contract ensues. The right of the aggrieved party to seek variation or termination of the contract was historically regulated in a different manner. According to the rules of the 1954 Trade Usages affected parties had the right to require ‘…variation or even termination of the contract.’ The rules of the COA/78 gave the aggrieved party the right to seek termination of the contract. At the same time the law prescribed that the contract will not be terminated if the other party offers or agrees to amend the contract. Affected parties could not, pursuant to COA/78, require variation, but only its termination. The rule stated in Article 369/1 of the COA contains the same rule as 1954 Trade Usages. Aggrieved parties may request ‘variation or even termination of the contract.’ It is considered that this rule should be interpreted so as to give priority to modification of the contract over its termination. However, when observed within the context of Article 369/4 COA, according to which the contract shall not be terminated if the other contracting party offers or agrees to an equitable change to the relevant provisions of the contract, it could be argued that such a strict order of priority does not exist. Namely, it raises the question 45

Gorenc (2005), p. 564.

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as to why the other contracting party would have the right to offer or agree to a fair change in the relevant provisions of the contract, if the affected party must first seek variation of the contract, and only secondly its termination. The opinion that the rule of Article 369/4 of the COA is redundant and that priority should be given to contract modification over its termination was expressed in legal theory.46 Such concept is consistent with the fundamental principles of contract law as well as with the purpose and nature of the institute. It is important to note that the law prescribes a duty to the aggrieved party to inform the other side of the changed circumstances and its intent to require variation or termination of the contract. If the aggrieved party omits to inform, it will be liable for damages caused to the other party due to not being informed on time. However, by failing to inform its counterparty the aggrieved party does not lose its rights arising from the institute clausula rebus sic stantibus. Liability for damages, caused by the failure to inform, does not affect the right to alter or terminate the contract in case of a change of circumstances. The contracting parties may, in the event that they have acquired the prerequisites for variation or termination of the contract in case of change of circumstances, subsequently, after the occurrence of changed circumstances, enter into an agreement that will alter their relationship (for example, novation). When the parties do reach such an agreement, the institute clausula rebus sic stantibus will not be applicable. The institute of clausula rebus sic stantibus will also not be applicable in the cases where performance is affected, since then the right to seek variation or termination of the contract ceases.47 To conclude, when deciding on a request for modification or termination of a contract, the court’s decision shall be governed by the principles of good faith and fair dealing, taking into consideration the purpose of the contract, the allocation of risk resulting from the contract or from laws, the duration and effects of extraordinary circumstances and the interests of both parties (Article 371 of the COA).When a court declares termination of a contract it shall, at the request of the other party, oblige the party applying for the termination to compensate the other party with an equitable amount for the damage suffered due to the termination (Article 369/5 of the COA). The question regarding the determination of the amount of compensation for damage goes beyond the scope of this paper, but it is to be stressed that when deciding on the ‘equitable amount’ the court’s decision should be governed by the same principles and taking into consideration the same occasions as when deciding on modification or termination of a contract.

46 47

Petrić (2007), pp. 148–149, Slakoper (2005), p. 442. Nikšić (2007), p. 586.

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Conclusion

The impact of the financial crisis on renegotiation, rescission and revision of the contract under Croatian law may be observed only through the application of the rules on variation or termination of contract in case of change of circumstances (clausula rebus sic stantibus). This institute was regulated in different manners. By the latest statutory changes the institute is regulated along the lines of the Usages of Trade of Goods of 1954. The main difference (and indeed the only one that will, undoubtedly, result in a change in judicial practice) lays in the provision on revision or termination of the contract as the consequence of changing circumstances, whereby preference is given to the contract’s revision. Thus, for example, the frustration of the contract’s purpose and equity were previously prescribed as requirements for ensuing the right to require variation or termination of the contract, while in the positive Croatian law they are only circumstances relevant for judicial decision. A financial crisis could (according to the old and positive law) lead to the application of the institute of changed circumstances. Of course, due to the nature of the financial crisis as a complex process, without a specified time of occurrence and cessation, the court shall estimate, in each case, whether it has occurred after the conclusion of the contract, and if not, whether the contracting parties could have foreseen its consequences, intensity and scope, if they were acting with due diligence. The court shall actually assess, in each particular case, according to prescribed criteria, whether the certain consequence of the financial crisis (and not the financial crisis itself) may be estimated as an event which caused changes of circumstances. Neither the crisis itself nor its consequences will always create the right to invoke on changed circumstances, but in the case where this right ensues the modification or termination of the contract is in a line with the main principles of contract law.

References Blagojević, T.B., and Krulj, V. (eds.). 1980. Komentar Zakona o obveznim odnosima (Commnentary on the Law on Obligations). Beograd: Savremena administracija. Gavella, N. 1965. Clausula rebus sic stantibus u našem pravu (Clausula rebus sic stantibus in our law). Odvjetnik XV 10–12: 254–260. Goldštajn, A. 1980. Privredno ugovorno pravo (Commercial contracts), 3rd ed. Zagreb: Informator. Gorenc, V. (ed.). 2005. Komentar Zakona o obveznim odnosima (Commnentary on the Law on Obligations). Zagreb: RRiF-plus. Nikšić, S. 2007. Temeljna obilježja instituta izmjene ili raskida ugovora zbog promijenjenih okolnosti (Fundamental Properties of the Institute of Modification or Termination of the Contract due to Change of Circumstances). In Liber amicorum Nikola Gavella, 563–605. Zagreb: Pravni fakultet Sveučilišta u Zagrebu. Petrić, S. 2007. Izmjena ili raskid ugovora zbog promijenjenih okolnosti prema novom Zakonu o obveznim odnosima (Revision or Termination of Contract due to Change of Circumstances

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According to the New Law on Obligations). Zbornik Pravnog fakulteta u Rijeci 28(1): 107–155. Slakoper, Z. 2005. Promijenjene okolnosti danas i u Nacrtu Zakona o obveznim odnosima (Clausula Rebus sic Stantibus in Present Law and in Draft Law on Obligations). Zbornik Pravnog fakulteta u Rijeci 26(1): 429–452. Vizner, B. 1978. Komentar Zakona o obveznim odnosima (Commnentary on the Law on Obligations). Zagreb: Riječka tiskara. Vuković, M. 1960. Opći dio građanskog prava (General Part of Civil Law) Book II. Zagreb: Školska knjiga.

Chapter 6

Elimination of the Impacts of Financial Crisis on Legal Relationships According to Czech Private Law Marketa Selucká

Abstract The growing interconnectedness of global economies helped to spread the effects of the financial crisis to many different areas of human life. Among many other things, it also effected the civil law relationships. In this paper, the author introduced several areas of Czech civil law which had to reflect the circumstances brought about by the financial crisis. This paper investigates the “change of circumstances” which may lead to termination or alteration of an existing legal relationship according to Czech law. Considering the possibilities that law offers to the contractual parties heavily affected by financial crisis, the author reminds us that the effects of financial crisis on private-law relationships should be considered especially with solidarity in mind.

6.1

Introduction

Financial crises appear from time to time during the course of life of society. Although men have achieved great knowledge of economics, law or sociology, no man is able to foresee such a crisis or to be more precise no man is able to avoid it despite many expensive economic tools whose purpose is to enhance economies. The financial crisis which started in 2008, based on the American subprime mortgage crisis of 2007, may be one of the examples and proofs showing validity of the abovementioned premise. Global economy is so intertwined that a financial crisis of one market brings about a chain reaction. Hence it may be said that financial crises are a dangerous phenomenon in society and normative system should consider them and try to eliminate their impacts on legal relationships. Economic crises or crises of smooth functioning of economy are a common “unpleasant” and unwanted part of the development of economy. As opposed to economics, whose purpose is to research the course and functioning of society and

M. Selucká (*) Faculty of Law, Masaryk University, Brno, Czech Republic e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_6

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its relationship with economy, the primary purpose of law, as a normative system, is not to deal with economic crises. However, the legal order may help to eliminate economic crises by setting fair rules of how individuals and entities being active on financial markets shall behave and generally set proper square rules of how businesses should conduct. Hence, law sets the general rules which shall be followed while being active on the markets. These laws may then be defined as public-law regulation of businesses on the markets. Law, however, also introduces general private-law rules. It offers rules for the general private-law relationships and it should include balanced model solutions which ensure that the stronger party will not be able to misuse its power to disadvantage the weaker party (Inde datae leges, ne firmior omnia posset. Ovidius, Fast. III, 279), i.e. the stronger party shall not transfer its loss arising from the financial crisis to a weaker party. As for the financial crises, law should set the general principles of behavior which shall prevent such financial crises, i.e. law should set fair and proper rules of behavior guaranteeing that any speculative or improper deeds and acts of the market participants be prosecuted if not considered to comply with law. The purpose and goal of these rules would be to prevent certain behavior, whether the rules are set by public-law norms or private-law norms. Aside from that law should offer model solutions and rules for such cases when the preventive rules fail to achieve their goal, i.e. certain crises occur as a result of a phenomenon independent of human will despite full compliance with the preventive laws. In such cases, the risks, i.e. the impact of a financial crisis on society, should be fairly distributed so that society would “survive” such a financial crisis. The desired solution should ensure that an individual would be protected against any attempts of the more powerful and rich to “transfer” the impacts of the financial crisis on the poorest and weakest members of the respective society. The issue of balancing and distributing risks of the potential crises and their impacts on legal relationships may be primarily political, for the crucial question is who to protect: employment and the growth of GDP, i.e. preferring “survival” of businesses and large corporations or protecting individuals from transfers of the losses coming from the financial crises on them? It may happen that in global economy with many transnational corporations a man, as an individual human being, is “sacrificed” although the democratic principles on which the European and American culture is based, are not grounded on high GDP and the overall welfare of society measured by economic indicators, but rather on freedom of individuals and respect of man to one another. The goal is not “welfare” of society as an imaginary magnitude, but it is only a “mere side product”. The goal is an individual, each and every human being. On the other hand, if the employers do not survive, individuals will not survive as well as they depend as employees upon their employers. These phenomena are thus inextricably intertwined. Therefore we need to consider a balanced division of risks between the particular participants in the legal relationships in society. Although law, as a normative system, cannot eliminate economic crises, it may set rules helping to prevent the crises by, for example, fair behavior of those being

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active on the markets, and it may also establish rules in such a way that the impacts of crises did not interfere the legal relationships crucially, i.e. so that society would “survive as a whole”. Nevertheless, society may only survive as a whole if an individual, as a basic stone of society, survives. It is probable that private-law norms will have to be combined with the public-law norms. This could be done for instance on the principle of solidarity with an effective social system which would ensure that an individual affected by a crisis, e.g. an individual who has lost his job, would not have to face an existential issue, i.e. he would not starve to death. It is necessary to set such rules that an individual or a weaker party would not compensate a loss or the powerful ones. In other words it means that the consequences of financial crises should not be born only by the middle class, but also by the richest members of society. A wise lawgiver should know the historical fact that a lack of the middle class brings about a potential revolution, instability and radical changes having fatal consequences for the whole society. To name a few, it could lead to a complete perishing of middle class, but also disappearance of the richest class and occurrence of the power of “rabble”. Therefore we may conclude that a balanced division of the risks of financial crisis among all the members of society supports the idea of democratic society. Aside from that we should mention that placing risks only on the middle class or the weaker individuals in society in not acceptable even from the moral point of view.

6.2

Legal Phenomena Arising Out of the Financial Crisis

Generally, we may say that the purpose and goal of a contract is proper settling of the debt (fulfillment of an obligation). However if there are certain legal circumstances connected with financial crisis which have an impact on a proper fulfilment of an obligation, it may happen that an obligation does not terminate by a proper settlement of a debt. The contractual parties have several ways how to solve such a situation, e.g. raising the costs, not settling debt on time, etc. The first solution is a change of obligation due to the new situation arising out of the economic crisis. Such a change may take place based on a voluntary decision of the parties, i.e. based on an agreement whether it is a so-called cumulative novation or the legal institute clausula rebus sic stantibus, i.e. the parties agreed on change of an obligation. The advantage of using the institute clausula rebus sic stantibus is that if the negotiations about novation fail, a court would be entitled to step in and set the rights and obligations of the particular parties in a fair and balanced way. The worst case is that an obligation is not fulfilled at all, i.e. the purpose and goal of an obligation was not met. This is of course connected with certain responsibility, e.g. consequences arising out of default. An obligation may be also terminated by using the institute clausula rebus sic stantibus or an obligation may be terminated if it is no longer possible to fulfill an obligation.

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A Change of an Obligation Based on an Agreement of the Parties: Cumulative Novation

It is a general rule that an obligation may only be changed based on an agreement of the parties or if a law prescribes so. In the Czech private law, we can find certain provisions regulating a change in legal acts (the Section 564), change of a contract and change of the content of an obligation (the Section 1902). Some of the provisions of the new Civil Code regulating these situations often apply to the “same thing” or they sometime even contradict one another, which brings many problems. Nevertheless, in real life, it is only up to the will of the parties whether they want to alter their rights and obligations in order to take account of the effects of a financial crisis on them or not. Overall, Czech private law prescribes that a change of an obligation may only be carried out in the same form which is required for a contract itself. If this condition is not met, such a change of an obligation will be considered invalid. The Civil Code of 1964 stated that non-complying with the form prescribed by law means that the contract is “absolutely invalid”, e.g. if there was prescribed that a certain type of a contract has to be done in writing, but it was only concluded verbally. On the other hand, the new Civil Code is more benevolent to failing to comply with the prescribed form. The new Civil Code states that such contracts shall be only “relatively invalid”, i.e. the entitled party has to claim within 3 years that a contract is invalid. However, we should mention that also the Civil Code stated that if a form or a contract was set by an agreement by the parties, i.e. not by a statute, non-compliance with the form brought only “relative invalidity”. The parties may agree on a provision which shall eliminate the effects of extraordinary circumstances on fulfillment of an obligation, or to be more precise, a provision which shall eliminate disproportion or “subjective impossibility” to fulfill an obligation. For instance, we may mention the traditional price clauses or inflation clauses, but also certain clauses of other type, usually based the object of the contract.

6.4

Cumulative Novation: Contractual Provision Allowing Unilateral Change of Rights and Obligations of the Parties

There are, however, certain provision that may be rather understood as debatable. These provisions allow that one of the parties one-sidedly changes the rights and obligations of both of the contractual parties without an explicit approval of the other party. These provisions may not be a priori looked on as banned, but all circumstances of the respective case should be taken into consideration while dealing with such provisions, as such a provision or its morality should be considered with respect to the nature of the object of the contract, i.e. with regard to controllability,

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definiteness, foreseeability, etc. of the object of the contract. It should be definitely taken into consideration whether the one-sided change of an obligation or of a contract regards B2B or B2C relationships. In any case, such a provision has to be moral, i.e. it may not be contra bonos mores, which means that it cannot be characterized as misusing or disproportionate. The concept of a “misusing clause” is treated differently in B2B and B2C relationships, for the consumer relationships are considered with respect to the protection of a consumer in the light of the Directive 93/13/EEC on unfair terms in consumer contracts and the interpretation thereof which is based on the decisions of CJEU/ECJ.1 A consumer should be given at least a right to withdraw from a contract without any punishment, i.e. if the business one-sidedly changed the obligations of the consumer, the consumer shall be granted a right to terminate the relationship between him and the business without being punished for such a decision, e.g. by penalties, interest for the entire period of an originally agreed loan, etc. The Czech courts, e.g. the Supreme Court decision No 21 Cdo 5205/2007 of December 8, 2009,2 for instance had to deal with a “Contract on supply of heat” of July 12, 2001 was agreed that “the supplier has a right to change the contract based on a changes of the input energy by an algorithm of prices and changes at the customer found by a control and in accordance with the assessment of the Ministry of Finance of the Czech Republic.” During the proceedings, the plaintiff, referring to a decision by the Ministry of Finance and the Energetic Regulation Office, requested that the defendant shall pay an one-sidedly increased price for supply of heat. In the contract, there was also stated that “a notice for termination of a heating season and the notice itself has to be delivered by December 15 of the preceding year”, but this provision, as it was correctly pointed out by the appellate court, would make it impossible for the customer (the defendant) to give a notice in the time when he is receiving the supplies and is required to pay the increased price. In this situation, the court ruled that the contractual provision on the supplier’s right to one-sidedly increase the price that had been originally agreed upon in the contract is not valid. If the price was increased as a result of a material regulation of prices by a respective body, such a provision is invalid because it contradicts the Section 7 of the Act on Prices, it only allows a contractual increase of prices. If the price increase was made without an influence of a material regulation of prices by a respective body, such a provision is then invalid, for it contradicts the provision of the Section 56 para 3 letter i) of the Civil Code, which states that such a provision may only be upheld if the consumer (customer) is granted a right to withdraw from the contract (in this case, the consumer was not granted the right to withdraw; withdrawal

1 Decision of the ECJ, of March 21, 2013, RWE Vertrieb AG proti Verbraucherzentrale NordrheinWestfalen eV., C-92/11 or the decision of ECJ of April 26, 2012, Nemzeti Fogyasztóvédelmi Hatóság v. Invitel Távközlési Zrt., C-472/10. 2 The decision of the Supreme Court No 21 Cdo 5205/2007 of December 8, 2009, available: www. nsoud.cz; http://www.nsoud.cz/Judikatura/judikatura_ns.nsf/WebSearch/EFA70C129418AC1AC 1257A4E0065BC95?openDocument&Highlight=0,21,cdo,5205/2007.

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according to the Section 7 of the Act on Prices applies only to cases of material regulation of prices by the respective body). As for B2B relationships, if one of the parties were allowed to transfer due to a unilateral recognition of rights and obligations the entire risk of its business to the other contractual party, it would have to be considered whether such a provision does not contradict good manners or an honest business interaction. The question of a fair division of risk between the two contractual parties is of course a crucial question and morality or immorality of such provisions has to be considered by the general courts in light of many circumstances connected with the respective contractual relationship.

6.5

A Change of an Obligation: A Change of Circumstances (clausula rebus sic stantibus)

The Czech Civil Code, which had been in force till December 31, 2013, did not recognize the concept clausula rebus sic stantibus, or to be more precise, the change of circumstances was taken into account only as for pactum de contrahendo (an agreement to conclude a contract in the future) or in other very specific cases. The principle had not been recognized as a general concept of law of contract law although the “large amendment” to the Civil Code passed in 1991 (the Act No 509/1991), which entered into force on January 1, 1992, restored the traditional private-law institutes which are common throughout Europe. It should be mentioned that the former totalitarian private law did not recognize, for example, the concept of lease, as it rather preferred the concept of “usage”; it was only the state that was allowed to own things and the state was entitled to grant its citizens the right to “permanent usage” of certain things, e.g. real estate. On the other side, it should be made clear that the concept clausula rebus sic stantibus is not accepted throughout Europe without any objections. Despite the fact that the German legal doctrine has shaped this concept to “almost perfection”, for example French law is not very open to this concept. In the Czech legal doctrine, there are some who claim that although private law did not recognize a general institute considering a change of circumstances by the abovementioned amendment, it was possible to follow the pre-war legal doctrine and court decisions.3 Before the World War II, the Czech legal tradition derived the general concept of clausula rebus sic stantibus from the Section 936 ABGB; this provision however applied stricto senzu only to pactum de contrahendo, i.e. not all the situations arising out of change of circumstances. Thus the opinions that there was “clausula rebus sic stantibus immanently existed” in the Czech private law within the context of the literature and judicial decision from the era of the Czechoslovakian First republic were legitimate. For instance, the Supreme Court

3

Eliáš (2009).

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ruled that “the ‘rebus sic stantibus’ clause is important not only for the prior agreement, but for the contracts in general. Its effects do not necessarily depend on the right to terminate the contract, but it may also be manifested in establishing an economic and harmony between consideration and fulfillment” (Vážný No 1680 Supreme Court decision NS ČSR of May 17, 1922, No Rv I 407/22). Another decision of the Supreme Court reads: “the principle ‘rebus sic stantibus’ set forth in the Section 936 of the Civil Code applies also to the definitive contracts, especially to repeating mutual considerations for the future, in which there would be an extreme disproportion between the considerations of the parties” (Vážný No 17516. Supreme Court decision NS ČSR of December 15, 1939, No Rv I 612/39). The new Civil Code4 introduced several provisions which generally consider the significant change of circumstances (not only as for pactum de contrahendo), as is it influenced by the UNIDROIT Principles of International Commercial Contracts. Although the general motive and the model solutions corresponds with UNIDROIT (the Art. 6.2.1 through 6.2.3), certain minor changes and deviations may be found in Czech law. The explanatory report to NCC openly admits the inspiration be the abovementioned source.5 As for interpretation of the Sec. 1765–1766, it may be expected that the Czech general courts will take account of the model solutions and the theoretical arguments of legal doctrine presented in connection with PECL, DCFR or Gandolfi codification (6:111 PECL; the Art III.-1:110 DCFR; the Art 157 of the Code européen des contracts). In general, the concept of clausula rebus sic stantibus, as set forth in NCC, corresponds to the “hardship” clause. The difference between the approach of the Civil Code of 1964 and NCC is that according to the former, the parties had to include such a clause in their agreement (if the abovementioned First republic approach was not accepted), NCC supports the idea that the hardship clause is “immanently included in each contract” (except the so-called bold agreements); more detailed regulation of the clause may be found in NCC’s chapter on general law of obligations in the Sec 1765–1766. Czech private law will have to differentiate in more detail between the “objective impossibility of fulfillment”, “subjective impossibility of fulfillment” (sometimes called “economic impossibility of fulfillment”) and a situation in which it is more difficult or expensive to fulfill an obligation. Whereas the objective impossibility of fulfillment leads to a termination of an obligation,6 “economic or subjective impossibility of fulfillment” means that a fulfillment of a debt is still objectively possible, but there are significant impacts on the debtor which may even lead to winding up of such a debtor. The concept clausula rebus sic stantibus should therefore apply to extraordinary situations that cause among other things “economic impossibility of fulfillment”. With respect to eliminating the effects of financial crisis, the concept may be used for balancing the “effects of an economic crisis” between both parties with the motto “we all want to survive the economic crisis”. Looking for a balanced obligation, i.e. balanced rights and obligations of both parties will thus oscillate 4

Compare: Hulmák et al. (2014). Eliáš et al. (2012). 6 Impossibilium nulla est obligatio (Digesta 50,17,185). 5

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between the two principles recognized in democratic societies, i.e. the principle of ‘pacta sunt servanda’ and ‘rebus sic stantibus ominis promissio itellegitur’ (Aquinas, T. Summa theologiae 2,2,110,3).

6.6

The Czech Concept of Clausula Rebus sic Stantibus

According to Czech law, the concept of clausula rebus sic stantibus applies if all of the following conditions are met: (a) (b) (c) (d) (e) (f)

Change of circumstances Unpredictability of such a change Unavoidability of such a change Not assuming the risk of a change on oneself Occurrence of an extreme disproportion between the rights and obligations Causal connection between the change of circumstances and occurrence of the extreme disproportion

Economic crisis and its impact on the debtor’s ability to fulfil his obligation, i.e. to settle his debt, may meet all the three basic condition (A through C), i.e. it may be characterized as unpredictable and unavoidable change of circumstances. General law of obligations, however, upholds an idea that agreements should be kept and that outer circumstances should not influence a contract, i.e. a mere fact that fulfillment of an obligation may become less favorable for the debtor, i.e. he may gain less profit, cannot bring about termination of an obligation or origination of a right to launch new negotiations on the contractual terms (compare the Sec 1764 NCC). The contractual parties have to consider the risks while concluding the contract. The effects of the risks should be eliminated within the contractual terms, i.e. a moral and fair agreement shall be balanced as for the division of risks between the two businesses (B2B). As for consumer contracts, businessman cannot transfer risk to a consumer, since such a provision would be considered as disproportionate or unfair. Hence, Czech law would not take such a provision into account (the Sec 1815 NCC; the lawgiver construes a fiction of nullity of a legal deed). Economic factors are however only relevant if their influence cannot be characterized as a part of a common economic risks, i.e. risks that are usually connected with enterprising. Deviations from the normality of an economic course of affairs in society may however be a relevant factor; whether there is a downturn of currencies, collapse of monetary unions, change of some regulations, e.g. government directed prices of goods and services, collapse of directed economy and turn to market economy, hyperinflation, market downturns, or local conflicts or wars. The Czech literature the 1920s and 1930s openly stated: “We do not mean only a price increase which each good business or producer should consider although he may not make any profit or even suffer loss, what we have in mind is extraordinary circumstances caused by unpredictable events which cause an enormous rise of prices that a supply for the originally agreed prices is not possible without ruining the businessman

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or a supplier.” (Vážný 409 Supreme Court decision NS ČSR of February 10, 1920, sp. zn. Rv I 30/20). The unpredictability of a financial crisis may be assumed. Nevertheless, it is also important whether a particular contract was entered into during an ongoing crisis or when there was no real serious threat of a crisis. The Czech Supreme Court explicitly ruled that: “An economic impossibility of fulfillment shall only be taken into account if it had not been caused by such events that the parties might have expected at the time of concluding the contract (…) If a contract had been concluded before the war, but the date of performance took place during the war when the circumstances changed significantly and thus fulfillment of the contractual obligations become impossible, the court practice considered it as accidental impossibility, because such a radical change of circumstances was not possible to predict. If however a contract was concluded during the war, the circumstances were such that a party should have foreseen that a future economic impossibility might occur and if the impossibility was caused by such a party, the party may not claim that it was an accident and may not request benefaction of the legislation” (Vážný 1815. Rozh. NS ČSR ze dne 5.9.1922, sp. zn. Rv I 455/22).

6.7

Not Assuming the Risk of a Change on Oneself

In general, Czech private law stands on a principle that even if there was nothing particular in this respect concluded in an agreement, the clause ‘rebus sic stantibus’ is a “natural component of a contract”. This applies unless the parties agree otherwise, i.e. the parties may set in the agreement that this principle does not apply to a possible event of an economic crisis. A party may also assume, i.e. accept, all risks arising out of a contract; or such assumed risks may be itemized in the contract. We should however ask whether it is correct and fair if one of the parties bears all the risks, whereas the other is free of such risks. Such a situation could be accepted in so-called bold agreements or “almost” bold agreements, i.e. agreements that are based on some type of a speculation or a “bet” that a development will proceed in a certain way. In these cases, it is not relevant to take account of a significant change of circumstances. An excessive transfer of a risk to only one of the contractual parties, i.e. assumption of risk by one of the parties, could be considered if the risk is reflected for example in the price for the service or for the thing being purchased; the share of the risk assumed shall, however, be equivalent to the price. Nevertheless, if such an assumption of risk will bring about winding up of the assuming party, it is a question whether we should consider such a provision as moral and valid. As for B2C relationships, we believe that such provisions are not acceptable and the Czech Civil Code regards them to be null. As for the B2B relationships, it may happen that, for instance, a large transnational corporation misusing its power may dictate conditions that have to be accepted by the small businesses; some of the conditions could be assumption of risk connected with running a business by the small businesses. This could lead to a situation that in case of a financial

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crisis, such a transnational corporation would not feel the effects of the crisis, whereas the small businesses to which the risks connected with the business of the large corporation were transferred will be eliminated as a result of an excessive and unfair division of risks. In the today’s global society, there is no real autonomy of will, as the economic power of some market participants means that the small entrepreneurs have, in principle, no real chance to negotiate contracts freely; they rather have to accept the conditions dictated by the stronger party. Therefore, in the model solutions, we often see the term “small business”,7 which requires special protection from a misuse of power by the economically powerful transnational corporations. While considering the validity of provisions based on which a risk is unilaterally transferred to only one of the parties, attention should be paid not only whether this factor reflects in the price, but also whether the assumption of the larger part of risk or all the risk by one of the parties is not caused by a misuse of the economic power of the other party.

6.8

An Excessive Disproportion Between the Rights and Obligations

The occurrence of extraordinary circumstances does not necessarily have to lead to an unbalanced legal relationship between the parties. Clausularebus sic stantibus may only be applied if the extraordinary circumstances (economic crisis) cause that the proportion of rights and obligations of the parties is “extremely unbalanced” or “extremely unfair”. The disharmony may be found in a disproportionate increase of costs to be incurred during trying to fulfill the obligation on the side of the debtor or a disproportionate decrease of the object of performance on the side of the creditor. The disharmony (disproportion) has to be ‘qualified’, i.e. not just any unbalance in rights and obligations may lead to rights arising from a significant change of circumstances. An extreme unbalance may be based not only by a change of price, e.g. on the market, but also on occurrence of better alternative options. For instance, the Supreme Court ruled that: “If the process of rezoning the agricultural land to building land started between the conclusion of pactum de contrahendo and the sales contract, and if the defendant (the future seller) could not foresee such a change that caused that prices of the land increased significantly (also unpredictable), it may be concluded that a significant change of circumstances took place and the plaintiff cannot request that the defendant (the future seller) would conclude the sales contract (…) The changes found interfered the originally balanced agreement to conclude a sales contract which lead to disharmony of rights and obligations disfavoring the defendant, who, while concluding pactum de contrahendo, could only calculate

7

Compare: the Sec. 7 and 8 CESL; ‘SME’ is small or medium-sized enterprise.

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with an increase of price of land zoned as agricultural land and not a land for building houses.”8 It is likely that the new (still non-existing) judicial decisions interpreting the general institute clausula rebus sic stantibus in the NCC and the term “extreme disproportion” will refer to the judicial decisions of the inter-war period. Any general partial expression of the term “extreme disproportion” can neither be expected in the Czech judicial decisions not in the legal doctrine. Foreign judicial decisions may however serve as inspiration; there is not however any “clear and unambiguous rule” expressed in a mathematical formula. As for explanation of hardship in UNIDROIT,9 the practice of the courts oscillates between 80 and 100 %, but it cannot be considered as an undoubtable and clear mathematical rule,10 as also the practice of courts in relatively divided.11

6.9

Legal Consequences of the Significant Change of Circumstances

If the hardship conditions cumulatively expressed in NCC are met, it does not lead to termination of an obligation due to economic impossibility of fulfillment. The party which believes that the disproportion of rights and obligations disfavors such a party cannot reject performance; if the party did so, the party would have to bear the consequences of default or faulty performance, e.g. it has to pay contractual penalty, etc. Stricto sensu, by fulfilling the hypothesis of rebus sic stantibus, the content of obligation does not change and the rights and obligations remain the same. Nevertheless, aside from the rights arising out of the contract, any of the parties has a right to launch new negotiations about contract, i.e. right to renegotiations. In fact, it is not a new negotiation about a contract, because a contract was already concluded; it is rather a right to renegotiate changes in the content of the obligation so that its content is balanced and fair. Any of the parties may then ask the other contractual party to start negotiations on change of the contractual conditions. This is a general requirement, because the autonomy of will is a crucial principle of private law. Nevertheless if there is a significant change of circumstances, any of the parties has a right to negotiate and the other party has to negotiate although it does not even want to. Whereas the standard process of concluding a contract or a change of a contract is based on a free will of both parties, as for hardship, the legal status of the parties is different, because each of the parties has a right to ask for a new negotiation and the other party is obliged 8

Decision of the Supreme Court of March 28, 2012, No 33 Cdo 884/2010). Compare: the decisions of May 4, 1999, Himpurna California Energy Ltd. v. PT Perusahaan Listruik Negara, XXV Y.B. Intʼl Comm. Arb. 13. 10 Girsberger D, Zapolskis P, (2012), Brunner (2009). 11 CMS Gas Transmission Company v. The Argentine Republic, ICSID Case no ARB/01/8, of May 12, 2005; Scafom International BV v. Lorraine Tubes S.A.S., 2009. 9

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to negotiate. However, they do not have to come to an agreement; they are just obliged to negotiate. The right to request that new negotiation is tackled has each of the parties, once the abovementioned conditions are all met. The statutory period starts to run, as soon as the party had to be aware of the change of circumstances. The party has to exercise its right within a reasonable time. The Czech lawgiver set a rebuttable presumption that the ‘reasonable time’ is 2 months. However, evidence to the contrary is allowed, which means that the period may be longer in certain cases. The reasonableness of the period will be probably considered with respect to the nature of performance, the manner in which means of communication are used and other circumstances. The period is defined as relatively flexible. If the other party exercises its right to launch new negotiations late, it does not mean that its right perished. However, if the parties do not come a to an agreement and if one of the parties turns to the court and files an action asking the court to balance the rights and obligations, the court shall reject the action because a right to renegotiation was not exercised within a reasonable period towards the other party. The other party does not even have to claim that the period was missed, as the court has to research the period ex offo; of course, prior to that, the court would have to solve a preliminary question whether, with respect to all circumstances, the adequacy of the period does not differ from the presumption set forth by the law. It may be deduced from both the general part of law of obligations and the general principles of private law that parties shall act in an honest and responsible way. The other party may not act only formally; they cannot misuse their powers, block or slow down the litigation. The negotiation of the parties may lead to cumulative novation, i.e. the original obligation still exists, but it is altered. The original obligation may, however, be replaced by a new obligation (privative novation), but the outcome of the negotiation may also be a termination of the obligation without completing its goal, i.e. the debt will not be settled at all. If an agreement is not reached despite all the efforts of the parties, each of the parties may turn to the court and request that the court alters the obligation or even cancels it. The court shall try to find a balance between the mutual rights and obligations. It means that the impact of the extraordinary circumstances should be fairly divided between the two contractual parties. The court will probably not look for the “original balance state of affairs” which was originally agreed upon by the parties in the contract, but it will rather divide the impacts of extraordinary circumstances on rights and obligations arising out of the contract fairly between both of the parties. It may also happen that the original contract was concluded in a disproportionate disfavor to one of the parties. It such a case, it is possible to consider whether the original contract is valid at all or not and whether the court should modify the rights due to the change of circumstances. The court may not replace the original immoral contract by a new moral contract; it may only take into consideration the impacts of the change of circumstances on the existing rights and obligations. If the court finds out that the action filed is legitimate, i.e. the plaintiff has a right to have new negotiations, the court will decide how the rights and obligations of the

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parties changed; this is done with so-called ex nunc effects, i.e. the content of the obligation will be changed as of the day on which the decision enters into force. The Czech private law differentiates between several types of actions, but the court may not decide that the plaintiff receives more than what he asked for in the action. In so-called determining actions, the court is not bound by the action, i.e. the court may decide differently from what the plaintiff asked for; the court may even rule that the plaintiff receives more than what he asked for, because the court has a duty to set the rules and obligations the way they are. If a new contract is not concluded, each of the parties has a right to ask the court to determine a balanced rights and obligations of the parties. Despite the fact that the NCC does not explicitly states it, it is clear that such an action is a so-called ‘determining action’.12 The court therefore balances the rights and obligations regardless of the action filed by the plaintiff. The NCC is based on a liberal thesis that, especially as for the relative proprietary rights (obligations), it is possible to deviate from the law if it is not explicitly banned by the law. It is an interesting question which has not been solved by the Czech legal doctrine whether it is possible not to exclude the concept of change of circumstances, i.e. the right to launch new negotiation, and in the same time, exclude the right to file an action before the court as a consequence of not coming to an agreement. The model solution included in NCC allows only assumption of the danger of change or circumstances by one of the parties, i.e. the right to negotiation does not exist at all. Therefore, the question whether the parties may only exclude only the right to file an action before the court remains open. We could probably deduce that if it is possible to exclude application of the entire concept (and assume the risk of the change of consequences), it will also be possible to modify it, e.g. exclude the right to file an action if the renegotiation fails.

6.10

Financial Crisis Has a Significant Impact on Obligations Because It Brings About Termination of such Obligations Without Settling the Debt

The impacts of a financial crisis on legal relationships may, in some cases, be crucial, i.e. they may lead to a situation when a party is not able to settle its debt properly and on time, e.g. because the party’s suppliers did not settle their debts (did not fulfil their obligations). Generally, this will not be an objective impossibility of performance, because in such cases the obligation would perish ex lege. If, however, a party has been in delay over a long period of time, the other party may withdraw from a contract. There is a rule in the Czech private law that if one of the parties breaches a contract in a significant manner, the other party has a right to withdraw from the contract according to the Sec. 2002 NCC. Aside from that the party may 12

Compare: Králík M, Lavický P (2012).

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ask for compensation of damage caused by such a breach, i.e. contractual penalty or default interest (in case of monetary obligations). Significant breach of contract does not have to be just default, but also faulty performance. As for faulty performance, the Czech Supreme Court ruled: “If he parties do not set in their contract the criteria for determining when a breach is significant, the significance is usually determined by the extent and nature of the defects. In the case on hand, the expert opinions showed that the floors were faulty and they do not meet the health requirements in 80 per cent, the parquet blocks have sharp edges, grout in the joints crumbled away, the floor is dangerous for children, etc. If the appellate court found that the respective contract for work was breach in a significant manner, this finding is correct with respect to the extent and nature of the defects”.13 In some cases, the parties may react to the impacts of a financial crisis that they agree on termination of the original obligation which, due to an economic crisis, became disadvantageous, difficult or economically impossible. They may come to a new agreement independent from the original one. It is especially up to the parties whether they want to agree on privative or cumulative novation, or whether they want to cancel the obligation from its beginning. A new agreement realized on the grounds of the concept clausula rebus sic stantibus may be that the original contract is canceled; it may happen based on an agreement of the parties or, if they do not come to a new agreement, and one of the parties petitions the court, then the court could decide that the original contract is canceled. It is also possible that the plaintiff will ask that the rights and obligations arising from the original contract are modified, but court, as it is not bound by the action, may cancel the contract.

6.11

Impossibility of Performance as a Result of a Financial Crisis

Czech private law differentiates between so-called initial and subsequent impossibility of performance. The initial impossibility of performance means that the legal deed (a contract) did not occur at all, i.e. it is only an apparent (non-existing, null legal act). If, however, the performance is possible at the moment of conclusion of the contract but it later becomes impossible, it results in termination of the obligation. The concept of ‘impossibility of performance’ is based on the objective impossibility of performance in Czech private law. It means that if the debt may be settled by some else, it is not an objective impossibility of performance, but only subjective impossibility which does not have any impact on the existence of rights and obligations. It may however have an influence on, for instance, the right to launch new negotiation about the contract in light of clausula rebus sic stantibus. If, however, the nature of the debt were intertwined with a special skill of a particular individual

13

Decision of the Supreme Court of June 23, 2010, No 23 Cdo 1991/2008.

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(nobody sings like Karel Gott), the obligation would cease to exist together with the particular ability needed for performance, e.g. vocal cords surgery and permanent loss of voice. Objective impossibility of performance may also happen if, for example, the object of performance ceases to exist; this, however, does not apply to a temporary change in the features of the object. In this respect, the Supreme Court ruled: “Termination of a lease as a result of destruction of the leased object is a special example of subsequent impossibility of performance. Destruction of the leased object happens when the leased object ceases to exist; the object may no longer be utilized. However, only a temporary loss of certain features of the object shall not be considered as destruction. A mere damage to a thing is not destruction. It may result in lessee’s right to receive a discount or a right to withdraw from a lease contract, whereas the lessor has to restore the object of lease. The lease terminates only if the object of lease ceases to exist, for if it does not exist, it cannot be leased.”14 According to the Czech general courts, if a debtor, for instance, loses his rights to perform his obligation, the law requires that such a performance is banned, e.g. there is a court decision or a decision of an administrative body that bans the activities to be performed by the debtor. These cases are usually called ‘subsequent illegality’. The Supreme Court decided that: “A rejecting zoning decision in the particular case was an obstacle to mining of gravel in the particular area and therefore it was a hindrance to performance according to the sales contract, as lack of a positive decision caused that the mining could not be started. This hindrance would not be regarded as ‘subsequent impossibility of performance’ if it were possible to perform after the particular date (…) In other words, while considering the consequent impossibility of performance, one may not take account of the events that took place later, after the hindrance of performance occurred. It means that while considering whether performance may be carried out after the agreed date, the decisive circumstances are only those that existed in the time when the hindrance of performance occurred.”15 “There was issued a decision prohibiting the defendant to carry out business as a physical person as for extending credit and giving loans (…) The defendant therefore cannot fulfill his obligation to extend credit for the plaintiff; the obligation of the loan contract thus perished due to the subsequent impossibility of performance. One should not consider that the defendant could have fulfill his obligations by means of another person or regardless of the more difficult circumstances with higher costs or after the date agreed upon, for such a behavior would have to be considered as circumventing the law.”16 Economic impossibility of performance is, however, not a legally relevant fact that would lead to termination of an obligation due to impossibility of performance. If the performance is possible with more costs or under more difficult conditions, 14

Decision of the Supreme Court of May 30, 2012, No 25 Cdo 4850/2009. Decision of the Supreme Court of April 10, 2007, No 32 Odo 795/2006. 16 Decision of the Supreme Court of June 26, 2012, No 32 Cdo 2762/2010. 15

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the obligation does not terminate for impossibility of performance. The same rule applies to a situation when it is possible to settle a debt after certain time. The Czech Supreme Court ruled: “If the law states that fulfillment is not possible, if it only may be carried out after the agreed date, it is objective, not subjective category. If the construction of a family house could have been carried out (a proper building permission was issued, a contract for work was concluded, proper credit was granted, there were not any circumstances depending on man’s will that would prevent the construction), but the subjective approach of the defendant was to stop the construction, we may conclude that performance of the defendant was possible.”17 We may conclude that where it is not possible to consider performance as objectively impossible, i.e. it does not contrary to natural laws, the concept of hardship applies. On the other hand, as for objective impossibility, the obligation terminates ex lege. The distinguishing between the two may be very slight so it is up to the general courts to deal with assessment of the facts using “common sense” and the “natural order of things”. In general, Czech private law prescribes that performance is not possible if it is not possible due to physical-mechanical or legal reasons, i.e. not upon economical impossibility to perform. The concept clausula rebus sic stantibus is relatively new to Czech private law, as until December 31, 2013, it was only deduced by theoretical argumentation of the legal doctrine, but it was not reflected in the judicial decisions of the general courts. It is interesting that the Czechoslovakian totalitarian law was based on the principle of economic impossibility of performance, especially because of the fact that most of the parties had to be characterized as “socialist institutions” which cannot bear the consequent economic impossibility of performance due to political reasons. As for impossibility of performance in Czech private law, the Supreme Court ruled that: “impossibility does not equal difficultness or the so-called objective difficulties which do not cause invalidity of a legal act. Invalidity of a legal act may only be brought about by a physical objective impossibility based on the fact that certain behavior which is an object of a legal act is not possible to be performed due to the natural rules for everybody. Impossibility of performance is objectively regarded impossibility, not a mere confidence of the debtor that the performance is not possible.”18 “Impossibility of performance, should it lead to termination of an obligation, has to be objective, independent from the person or will of the debtor. The so-called economic impossibility of performance meaning that the obligation may only be fulfilled under more difficult conditions, with higher costs or after the date agreed upon or the subjective impossibility do not bring about termination of the business obligation. The obligation thus does not cease to exist due to impossibility of performance if the debtor is not able to pay, regardless of whether the inability to pay was caused by him or whether it is based on other circumstances caused by the debtor.”19

17

Decision of the Supreme Court of October 20, 2011, No 30 Cdo 3460/2009. Decision of the Supreme Court of September 23, 2009, No 33 Cdo 1787/2007. 19 Decision of the Supreme Court of January 25, 2012, No 32 Cdo 3334/2010. 18

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Termination of an Obligation Without Settlement of Debt and Further Relating Rights

Termination of an obligation without settlement of debt caused by the impacts of economic crisis in private-law relationships will usually result in origination of right to compensation for damage or handing over unjust enrichment or both. The parties have to agree on distribution or a share of how they would implement the consequences of a financial crisis into the obligation. In other words, they are “sharing the damage caused by a financial crisis”, whether by their own agreement or by a court decision. As for default, the creditor is entitled to receive interest or even contractual penalty. If the creditor, however, withdraws from the contract, he shall also have the right to compensation for damage if the failure to fulfill obligation in time lead to harm of the property of the creditor and the damage caused due to the debtor’s delay is not covered by default interest (the Sec. 1971 NCC). If the harm arising out of breach of a certain provision of a contract is covered by the contractual penalty, the creditor is not entitled to claim right to compensation for damage unless agreed otherwise by the parties (the Sec. 2048 NCC). If an obligation ceases to exist due to objective impossibility of performance, the creditor shall have a right to compensation for damage based on what the cause of termination of the obligation is, i.e. whether the obligation ceased to exist because of the behavior of the debtor or of the creditor or due to vis maior. It is considered that vis maior is an outer event which cannot be affected by any of the parties. In general, if the debtor caused that an obligation ceased to exist, the debtor is responsible for damage. If it was the creditor who caused the termination of the obligation, he shall be responsible for the damage. Czech private law now differentiates between the right to compensation for damage caused due to breach of law or of a contract. Whereas breach of law is based on fault, i.e. there is subjective liability with the possibility of exculpation, breach of a contract is based on objective liability which admits the so-called reasons of liberation. It is a question whether an economic crisis may be classified as “an extraordinary, unpredictable, insurmountable obstacle not based on a will or the debtor or on his personal circumstances and not having occurred only after the due day”. In general, such extraordinary circumstances are, for example, environmental catastrophes, e.g. flooding, wildfire, etc, i.e. not “economic disasters”. The Czech Supreme Courts ruled: “If, for the purpose of international wire transaction, a domestic bank chooses a brokering bank in a so-called risky area in which there are economic and political reasons of payment difficulties leading to revocation of a bank license, which would result in not carrying out the payment of the client, the domestic bank will not be released from its obligation to compensate the damage.”20 In other case, the Supreme Court explains its approach in more detail: “A circumstance removing liability may also be an obstacle which does not depend on will of the debtor and it 20

Decision of the Supreme Court of January 8, 2003, No 29 Odo 690/2001.

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prevents the debtor to fulfill his obligation if one cannot reasonably presume that a the party should be able to over the obstacle or its consequences or to presume it. In agricultural production, one should take account of a situation that crop failure may take place; thus the objection that crop failure is a reason of liberation according to the Section 374 para 1 of the Business Code,21 may not be upheld, for the defendant, who is a businesswoman engaged in the agricultural sector, was obliged to take account of a possible crop failure while concluding the contract. It shall agree with the court that emphasized that the defendant was obliged to supply, i.e. not grow, the particular crop, or to be more precise the mustard plant. Therefore, the defendant’s objection that the supply could not be sent due to unfavorable weather conditions is not of any legal relevance. The defendant could have purchased the supply which she obliged herself to supply obtain in other manner, i.e. if she was not able to grow it, she was supposed to purchase it from other supplier or farmer and fulfill her obligation to supply the commodity. The defendant thus cannot be release from responsibility to compensate the damage.”22

6.13

Conclusion

Law, as a normative system dealing with and defining what ‘shall be’, is not able to eliminate the occurrence of economic or financial crises. Crises are an integral part of the development of human society and economy although they are an unwanted and unwelcome event. The system of law should have a preventive function, i.e. it should be set to make sure that irresponsible behavior of certain individuals or corporations could not bring about an economic crisis, or to be more precise, such a behavior should be “ostracized” or eliminated to a minimal degree. Therefore we consider the main function of the normative function to prevent economic crises by laying down fair “rules of games” and ensuring that the rules are followed. Nevertheless, it may happen that although the market participants comply with the principles of fair market, financial crises may occur and affect the legal relations in the society. In our opinion, the system of private law should be set to make sure that the effects of a financial crisis were “distributed” among all members of society, i.e. that the consequences and risks of an economic crisis are born by all classes of society, especially the middle class and the richest class, since it is likely that if hit by the consequences of a crisis, the poorest members of society would have existential problems. Aside from the basic standard solution is an agreement on change of the content of an obligation which would react to the changes brought by an economic crisis, the hardship clause or the concept of clausula rebus sic stantibus may be applied, i.e. an origination of the party’s duty to negotiate about a change that would take account of the effects of a financial crisis if requested by the other party. If a 21 22

Now, the same rule is included in the Sec. 2913 para 2 of NCC. Decision of the Supreme Court of January 25, 2012, No 23 Cdo 3066/2010.

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new fair agreement is not achieved, the rights and obligations of the contractual parties may be modified by the court. If it is not objectively possible to rely on fulfillment of an obligation, it shall be accepted that the obligation ceased to exist without settling the debt, i.e. the purpose and goal of an obligation was not achieved, but this solution is more reasonable for both parties and it does not affect the property of both of the parties so heavily that what would happen if sticking to the original obligation. In general, we could say that the purpose and objective of the concepts eliminating the effects of a financial crisis on the rights and obligations of the parties is “a survival of the democratic society as a whole” and making sure that the impact of a financial crisis on the legal relationships was as small as possible and fairly distributed among all the classes of society. It is not possible to admit that the effects of a financial crisis were born by small businesses or small entrepreneurs, the poorest population and the middle class, whereas the transnational corporations, large and global business would transfer their losses caused by the crisis to the weaker and dependent individuals. The fundamental principles of democracy are not only the freedom of individuals including, for instance the rights to run business, but also responsibility and solidarity. The effects of financial crisis on private-law relationships should be considered especially with solidarity in mind. Solidarity should be also taken in account while offering model solutions that would not have a crucial impact only on the weakest individuals and eventually the middle class, but they should also affect the richest part of society.

References Brunner, C. 2009. Force Majeure and Hardship under General Contract Principles: Exemption for Non-Performance in International Arbitration. Alphen aan den Rijn: Kluwer Law International. Eliáš, K. 2009. Clausula rebus sic stantibus (Význam změny okolností pro trvání obligace ex contractu). Obchodněprávní revue, No 6. Eliáš, K., et al. 2012. Nový občanský zákoník s aktualizovanou důvodovou zprávou, 1st ed. Ostrava: Sagit. Girsberger, D., and P. Zapolskis. 2012. Fundamental alteration of the contractual equilibrium under hardship exemption. Jurisprudencija 1: 125–129. Hulmák, et al. 2014. Občanský zákoník V. Závazkové právo. Obecná část (§ 1721–2054), 1. ed. Praha: C.H. Beck, p. 223–235. Králík, M., and P. Lavický. 2012. Doložka rebus sic stantibus. Soudní rozhledy, No 10.

List of Cases CMS Gas Transmission Company v. The Argentine Republic, ICSID Case no ARB/01/8, of May 12, 2005; Scafom International BV v. Lorraine Tubes S.A.S., 2009. ECJ of April 26, 2012, Nemzeti Fogyasztóvédelmi Hatóság v. Invitel Távközlési Zrt., C-472/10.

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ECJ, of March 21, 2013, RWE Vertrieb AG proti Verbraucherzentrale Nordrhein-Westfalen eV., C-92/11. Himpurna California Energy Ltd. v. PT Perusahaan Listruik Negara, XXV Y.B. Intʼl Comm. Arb. of 13 May 4, 1999. Supreme Court No 21 Cdo 5205/2007 of December 8, 2009, available: www.nsoud.cz; http:// www.nsoud.cz/Judikatura/judikatura_ns.nsf/WebSearch/EFA70C129418AC1AC1257A4E00 65BC95?openDocument&Highlight=0,21,cdo,5205/2007 Supreme Court of April 10, 2007, No 32 Odo 795/2006. Supreme Court of January 25, 2012, No 23 Cdo 3066/2010. Supreme Court of January 25, 2012, No 32 Cdo 3334/2010. Supreme Court of January 8, 2003, No 29 Odo 690/2001. Supreme Court of June 23, 2010, No 23 Cdo 1991/2008. Supreme Court of June 26, 2012, No 32 Cdo 2762/2010. Supreme Court of March 28, 2012, No 33 Cdo 884/2010. Supreme Court of May 30, 2012, No 25 Cdo 4850/2009. Supreme Court of October 20, 2011, No 30 Cdo 3460/2009. Supreme Court of September 23, 2009, No 33 Cdo 1787/2007.

Chapter 7

Financial Crises and Danish Contract Law: No Room for Hardship Mads Bryde Andersen and Joseph Lookofsky

Abstract Danish law recognizes a number of modifications to the pacta sunt servanda rule. When such modifications apply, a promisor may be relieved, in whole or part, of its obligation to perform as originally agreed. Due to the emphasis usually placed on pragmatic considerations in Danish law (which goes hand in hand with a lack of legal formalism in our legal system), the various recognized exceptions to pacta sunt servanda – both statutory and otherwise – sometimes tend to overlap. So although it seems appropriate in a comparative context to provide a schematic (point by point) presentation of these exceptions – e.g. with specific focus on exceptions related to the possible effects of financial crises (“Hardship”) – account must also be taken of their interaction in Danish legal theory and practice, not least because Danish courts do not always specify the exact legal principle which they apply when holding that a contractual provision is not binding.

7.1

Introductory Delimitation in Scope: Exclusion of Financial Institutions

Financial crises may impact on contractual obligations in different ways. For this reason it is appropriate to make some preliminary observations about the effect of financial hardship (i.e. difficulties in obtaining funding caused by dysfunctions in financial markets) on promises rendered by financial institutions (banks, insurance companies, etc.). As a main rule, which admits of nearly no exceptions, financial institutions remain bound to meet their contractual obligations, irrespective of whether a given institution’s failure to perform is the result of unexpected macro-economic circumstances. In relation to what is now referred to as the Systemically Important Financial Institutions (“SIFI”), the insolvency of one financial institution can quickly spread to other financial institutions or businesses that rely on the promises of such instituM.B. Andersen (*) • J. Lookofsky Faculty of Law, University of Copenhagen, Copenhagen, Denmark e-mail: [email protected]; [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_7

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tions. In this way the failure of one such SIFI can trigger a larger financial crisis, thus putting the economic well-being of the whole financial system at risk. To avoid a total breakdown of the financial system, governments and legislators during the recent financial crisis which commenced in 2008 intervened with government guarantees of various kinds.1 In November 2011 the Basel Committee on Bank Supervision (see www.bis.org/bcbs/) introduced a new set of regulations known as “Basel III”. On the basis of these regulations, a number of countries are now in the process of identifying which financial institutions qualify as SIFIs and implementing procedures to make sure that the inability of such institutions to perform their financial promises will not cause harm to the financial system as a whole.2 In light of this development, one might say that “hardship” in relation to financial institutions at large has become a legislative issue on the macro-economic political agenda, rather than a contractual issue to be dealt with by the parties themselves at the micro-economic level. Hardship is simply not relevant as an excuse for a bank’s non-performance of contractual obligations to its creditors.3 In Denmark at least, it has never (not even in 2008) been seriously suggested that financial institutions should be relieved by reason of hardship. For these reasons, the following discussion as it relates to contractual obligations involving financial institutions will focus only on the consequences which a financial crisis might have for parties other than those who rely on the contractual promises rendered in financial products (e.g. contracts regarding bank deposits or bank guarantees). In all circumstances, the financial institutions are expected to fulfill their obligations, even under the most severe hardship conditions.

1

In Denmark, in the wake of the collapse of Lehman Brothers in September 2008, the interbank market literary froze, leaving numerous Danish financial institutions with severe funding problems and liquidity risks. To overcome these problems, the Danish government introduced a legislative package (“Bank Package I”) which included a two-year government guarantee for all deposits and all financial obligations of those Danish financial institutions who opted into the package. Obviously, there are limits to governmental interventions of this kind. When the government guarantee expired in 2011, Danish banks were on their own again. A few months after a Danish bank of substantial size (Amager Bank) went bankrupt leaving numerous creditors unable to recover the full amount of their original clams above the 100,000 Euro guarantee provided by the Danish Guarantee Fund for Investors and Depositors. 2 In other words cyclical risks such as those outlined above can not affect the validity of the promises rendered by financial institutions as part of their financial products, in that the value to the financial system of the performance of and reliance on such promises is far stronger than the interest of one particular institution in being relieved of its promise under a given exception to the main rule that contracts are binding. 3 See also note 1 above.

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Financial Crises and Pacta Sunt Servanda

The earliest recorded sources of Danish law reflect Denmark’s long-standing adherence to the Roman law doctrine of pacta sunt servanda, i.e. the general principle that agreements must be kept. Indeed, Article 5-5-1 of the Danish Code of 1683, as promulgated by King Christian the 5th (the forerunner of all Danish statutory law), continues to mirror that Roman rule. The same principle follows from Article 1 of the 1917 Danish Contracts Act. A key goal of the Danish legal system is to maintain the existence of a wellfunctioning market economy. Clearly, the principles of contractual freedom and binding agreements are indispensible elements of that economy, and even if Denmark had not cemented these principles by statute, they would remain applicable as judge-made law.4 Before proceeding to address various recognized “exceptions” to the pacta sunt servanda rule, it is important to emphasize that codified rules of Danish contract law are in many contexts supplemented by unwritten general principles of law. These principles consist of both judge-made law and scholarly opinion which is expected to be applied by Danish courts. The fact that such principles are not codified does not deprive them of their legal force in Danish contract law.5

7.3 7.3.1

Exceptions to General (Binding Contract) Rule Introductory Remarks

Danish law recognizes a number of modifications to the general pacta sunt servanda rule. When such modifications apply, a promisor may be relieved, in whole or part, of its obligation to perform as originally agreed. Due to the emphasis usually placed on pragmatic considerations in Danish law (which goes hand in hand with a lack of legal formalism in our legal system),6 the various recognized exceptions to pacta sunt servanda – both statutory and otherwise – sometimes tend to overlap. So although it seems appropriate within the present comparative context to provide a schematic (i.e. point by point) presentation of the exceptions described under the individual headings and categories below, account must also be taken of their interaction in Danish legal theory and practice, not least because Danish courts do not always specify the exact legal principle which they apply when holding that a contractual provision is not binding.

4

See generally Andersen (2013), p. 53. See Andersen (2013), pp. 56ff. 6 Regarding legal pragmatism in Nordic law, see generally Blandhold (2005). 5

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Clausula Rebus Sic Stantibus

The Danish doctrine of failed assumptions (in Danish: svingtende forudsætninger) reflects the general principle underlying the clausula rebus sic stantibus principle. So, depending on the concrete circumstances, this Danish doctrine can come into play as a modification of the pacta sunt servanda principle. The starting point for the doctrine of failed assumptions is the psychological fact that a party who promises to perform does so in light of its subjective view (assumptions) as to the state of current affairs at the time of contracting, as well as the likelihood that changes might later take place and potential problems arise. Such assumptions can be, or prove to be, incorrect, either at the time of contracting or at a later point. Originally based on a German variant of a similar principle,7 the Danish doctrine of failed assumptions has sometimes been described in terms of “implied conditions.” Clearly, an “assumption” may be used to fill gaps in a contract. But the Danish version of this doctrine applies only to contingencies which have not achieved the status of contractual conditions.8 Whereas a condition is regarded as a part of the agreement (“jus”), the presence or absence of a legally relevant assumption is a given fact (“factum”) that may have legal implications according to the doctrine and under its requirements.9 The doctrine of failed assumptions has had its ups and downs, not least in Danish legal theory. In recent decades it has been overshadowed by the advent of Article 36 of the Contracts Act – a rule which (as further explained under Sect. 7.3.7 below) expressly empowers a Danish court to relieve a contracting party of its duty to perform a given contractual obligation which has become “unfair.” Although there are many court cases to that effect, Danish courts are reluctant to apply Article 36 to obligations incurred in contracts between commercial parties. Since there is an “overlap” between the newer statutory and older judge-made rules, Danish courts sometimes continue to premise their conclusions in terms of the parties’ justified assumptions. On the basis of Danish legal theory, as well as numerous relevant decisions rendered by Danish courts, one can enumerate three generally applicable conditions (i–iii) which must be met in order for a promisor to be granted relief on the basis of a given failed assumption10: i. Materiality (importance to promisor): The first requirement is that the assumption in question was “material” for the promisor, this in the sense that the promisor would not have made the promise if the assumption in question had, at the time of contracting, been expected to fail. But since it will almost always be 7

See Andersen (2013), p. 399. See Andersen (2013), p. 104 (comparing Lando’s characterizaton of the Danish doctrine). 9 See (e.g.) Andersen (2013), pp. 80–85 (comparing the English precedent established in Taylor v Caldwell with the corresponding Danish doctrine). 10 See Andersen (2013), p. 108; see also generally Andersen (2013), pp. 400–403. 8

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extremely difficult for the promisor to convince the court or arbitral tribunal of its state of mind at the time of contracting, this first condition often flows into the second (knowledge-of-promisee) prong. ii. Knowledge of promisee: The second requirement is that the promisee knew or at least ought to have known or foreseen at the time of contracting that the assumption in question was material for the promisor. As with the first requirement, it will also be difficult for the promisor to provide proof of the subjective state of mind of the promisee at the time of contracting. For this reason courts often focus pragmatically on “typical assumptions” (typeforudsætninger), i.e. the knowledge which a “typical” promisee can be assumed to possess in circumstances comparable to those in the concrete case. This element is often most easily established in cases where the parties share a common goal with respect to the fruition of the transaction concerned.11 This was, for example, the situation in a case decided by the Danish Supreme Court in 2002 where an agreement for the acquisition by the promisor of a given property was presumably premised on the parties’ common assumption regarding the conclusion of a rental agreement between the promisor and a third party (Burger King). When the facts underlying that assumption failed to materialize, the promisor sought to be relieved of its (originally binding) obligation to purchase. Since the court found this assumption to be both “typical” and “relevant” (see iii. below), the promisor was relieved of its duty to perform.12 iii. Relevance: The final and often most significant factor relates to what in Danish theory is referred to as the “relevance” of the assumption concerned. In this context “relevance” is a shorthand expression for the requirement that the court, after having evaluated the above named factors (i. and ii.), as well as all other relevant circumstances in the concrete case, finds it reasonable to assign the risk of the failure of the assumption concerned to the promisee, i.e. with the result that the promisor is relieved, in whole or in part, of its duty to perform. In this respect it should be emphasized that not all assumptions classified as “typical” in relation to the second condition (above) are also regarded as “relevant.” A party who purchases a given claim against a third party will of course assume that the third party will remain willing and able to pay, just as the purchaser will also typically regard this assumption as material. But since courts do not regard such an assumption as “relevant”, the purchaser remains liable to the seller even if the third party proves to be unable to pay.13 As suggested by the foregoing examples, the value of this tripartite test for evaluating the legal significance of a given failed assumption lies primarily in its identification of the main kinds of considerations which typically enter into the judicial equation. So although this list might appear logical, clear and convenient, a court asked to apply the doctrine of failed assumptions retains a considerable measure of 11

Andersen (2013), p. 401. See UfR 2002.1031H, Ugeskrift for Retsvæsen (Danish Weekly Law Reports) 1031 (2002). 13 Andersen (2013), p. 402. 12

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discretion involving an often complex and difficult evaluation of all relevant facts in the concrete case.14 Within the present commercial hardship context, however, it is important to emphasize that even sudden and irregular swings in exchange rates and other cyclical factors are not ordinarily classified as “relevant” failed assumptions. Such events generally fall within the sphere of clearly “foreseeable” risks impliedly undertaken by any promisor who elects to engage in commercial activity.15 In commercial relationships a party assumes the risk that it will be capable of fulfilling its promise, even though this later becomes more expensive or commercially less attractive. Commercial contracting is an inherently “risky business,” and for that reason alone Danish courts are loath to intervene in situations involving hardship, except in situations involving highly unusual circumstances involving gross disparity. And even in these situations viable excuses for non-performance are few and far between. For these reasons, the fact that a debtor faces difficulties in fulfilling its payment obligation with respect to a given financial product, in particular because the financial institution upon which the debtor has relied proves unable to pay (or otherwise fails to fulfil its obligation) is deemed to be a risk that the debtor must bear. For example, if a given purchaser is unable to pay because the credit line that its bank has promised to provide is terminated, such lack of funding does not constitute an excuse for the debtor’s non-performance of its contractual obligations. This result accords with the principle generally recognized in Danish law that a contracting party must bear the risk of the solvency of its subcontractors. In that regard, no distinction is made between financial and other subcontractors. The only exception to this principle which might apply in such a situation would be in the event that the financial difficulty faced by the financial institution in question is, at the time concerned, typical for other financial institutions in the relevant market. But as stated in the introduction above, legislators will usually take steps to avoid such breakdowns in the financial system. Therefore, the main rule in Danish law is that the debtor should bear the risk that the particular financial institution it has appointed might not be able to perform as agreed.

7.3.3

Frustration

In England, as well as in some other jurisdictions whose legal system derives from English common law, the doctrine of “frustration” is a term of art often used to designate contingencies which involve allegations of impossibility or (at least) impracticability of performance.16 Within the Danish legal system, such contingencies often fall with the heading of force majeure (see Sect. 7.3.5 below) and other

14

See Andersen (2013), p. 399. See Andersen (2013), p. 403. 16 Regarding frustration under English law see generally e.g. Treitel (2007), Ch. 13. 15

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clausula rebus variants, including the doctrine of “failed assumptions (Sect. 7.3.2 above).”17 Significantly, “mere hardship” is not sufficient under English common law to discharge, or even partially discharge, performance of a commercial contract. In this respect, the English doctrinal category of frustration accords with the prevailing position of the Danish legal system as regards the above exceptions to the pacta sunt servanda rule between commercial partners.

7.3.4

Wegfall der Geschäftsgrundlage

In German law the theory of Wegfall der Geschäftsgrundlage (disappearance of the basis of the transaction) may – among other things – comprise the effect of changed circumstances such as hardship. The doctrine derives from German court practice and statutory law with respect to impossibility of performance (unmöglichkeit, as embodied in Art. 275 of the German Civil Code: BGB).18 Apart from cases involving the galloping inflation after both World Wars, the doctrine of Wegfall der Geschäftsgrundlage has been applied restrictively by German courts, not least as regards commercial contracts.19 In this respect, this German doctrinal category accords with the prevailing position of the Danish legal system as regards exceptions to the pacta sunt servanda rule.

7.3.5

Force Majeure

Although Danish law has not formally adopted the principle of force majeure as such, there are a few Danish analogues. Most prominent among these is Article 24 of the Danish Sale of Goods Act (Købeloven) which in unofficial English translation provides as follows: In a sale of generic goods, the seller is strictly liable in damages for delay unless [the contract exempts him from liability, or] performance of the contract must be deemed impossible by reason of circumstances not of such a nature that the seller should have taken them into account at the time of the conclusion of the contract,

17 Regarding similarities and difference between these various doctrines see Lookofsky (1989), p. 80ff. 18 The doctrine provides relief for cases where the original economic basis of the contract has changed. When circumstances have unforeseeably and substantially changed, the foundations of the transaction have been destroyed and the parties are no longer bound to their original contractual commitments. Requesting the original performance of the contract in such circumstances would constitute bad faith under Art. 242 BGB. See Liu (2005) Changed Contract Circumstances, available at http://www.cisg.law.pace.edu/cisg/biblio/liu5.html. 19 Liu (2005).

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including [e.g.] accidental loss of all goods of the type or the bulk to which they relate, war, import restrictions etc. The rule in Article 24 applies only to merchant sellers of generic goods. For example, if a merchant has promised to provide the buyer with “10 bales of Grade A wheat” or “10 Lightning-model bikes”20 that seller will only be relieved of liability for non-delivery if (a) performance of that generic obligation must be regarded as virtually “impossible” and (b) the contingency leading to such impossibility was “unforeseeable” at the time of conclusion of the contract. As indicated by the examples set forth in the statute itself, only highly unusual contingencies satisfy this latter requirement.21 See also Sect. 7.4 below. Article 30 of the Sales Act provides for a similarly narrow exemption in cases where a buyer who fails to perform its (inherently generic) obligation to pay.22 And since performance of a payment obligation will rarely be prevented by circumstances which make payment impossible – i.e. factors (a) and (b) as set forth in the rule applicable to sellers – pacta sunt servanda admits of few exemptions vis-à-vis buyers. An example of such an exemption might be an unforeseeable governmental restriction which prevents the buyer from making payment from a contractually specified source. Regarding foreseeablity and impossibility see also Sects. 7.4.1 and 7.5.1 below. Danish law recognizes the principle “impossibilia nulla est obligatio” to the extent that a party who, by reason of unforeseeable impossibility, is exempted from liability in damages is also exempted from its obligation to perform in natura.23 As a condition for exemption from both specific performance and liability, “impossibility” may only be claimed as a defence under the exceptional circumstances set forth under Sect. 7.5.1 below. The fact that performance as originally agreed has been made more difficult, e.g. by a subsequent rise or fall in prices, will not serve to relieve a party from its liability to perform and will therefore not exempt the debtor from its obligation to perform in natura. Danish legal theory recognizes, however, that a seller’s duty to perform certain obligations may be rendered “virtually impossible” by a highly severe rise (or fall) in price. This phenomenon, whereby a party’s duty to perform passes the so-called “sacrifice threshold” (offergrænsen), is sometimes referred to in the Danish literature as “economic force majeure.”24 There are, however, no recent Danish court decisions which cast additional light on exactly how this exemption might be applied in practice. Given the fact that several other Danish statutes, as well as general conditions of trade, authorize liability exemptions in circumstances similar to those authorized by the Sales Act, it has been suggested in Danish legal literature that the principle of

20

For an analysis involving this example see Lookofsky (1989), p. 85 f. See generally Lookofsky (1989), pp. 87 ff; See Lookofsky and Ulfbeck (2015), p. 181 ff. 22 See Lookofsky and Ulfbeck (2015), pp. 222–223. 23 See Lookofsky and Ulfbeck (2015), p. 210f. Andersen and Lookofsky (2015), p. 206f. 24 See Andersen and Lookofsky (2015), p. 210f; see also Lookofsky and Ulfbeck (2015), p. 149. 21

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exemption of liability (and performance obligation) by reason of unforeseeable impossibility is applicable to all contractual obligations.25 In this connection it should be emphasized that provisions which limit a seller’s liability or duty to perform by reason of force-majeure are quite common also in Danish contract practice.26 The recognition and enforcement of such clauses by Danish courts illustrates that the doctrine of pacta sunt servanda (see Sect. 7.2 above) is a well-established principle of Danish law. Even in those few situations where a seller or buyer is exempted from liability by virtue of the abovementioned rules and principles, the liability exemption lasts only so long as the contingency in question actually prevents performance by the obligor as agreed.

7.3.6

Contract Interpretation Based on Parties’ Hypothetical Intentions

Although Danish courts are reluctant to interpret the obligations of contracting parties on the basis of their “hypothetical” intentions,27 Danish courts regularly interpret the expressly stated obligations of a given contracting party in light of the obligations typically incurred by contracting parties in similar circumstances. In such cases it is presumed that the parties have intended the typical effect of their ambiguous contract provisions. In a similar vein the intentions that parties can be assumed to have had at the time of contracting can sometimes play a role in determining the exact scope and legal consequences of a given obligation. One example (unrelated to a financial crisis) is provided by a case decided by the Danish Supreme Court in 2000,28 where the Danish Royal Theatre had commissioned a Danish composer to write the score for a new ballet. The composer was to receive both a fixed honorarium and a royalty based on the number of actual performances. Later, when the choreographer was unable to perform his obligation, the Theatre decided to cancel the ballet and in this connection maintained that it did not owe the composer any royalties. The composer then sued the Theatre, alleging that he was entitled to a royalty calculated on the basis of a hypothetical number of performances. A majority of the Supreme Court agreed that the composer should receive compensation in addition to the agreed (fixed) honorarium. To this extent the majority “supplemented” the written provisions of the contract with implied provisions. Although the reasoning by the majority accords with the Danish doctrine of “failed assumptions” (see Sect. 7.3.2 above), the outcome in this case can better be explained in terms of the parties hypothetical intentions, in that the fixed honorarium agreed was

25

See Gomard and Iversen (2011), p. 56 f. See Andersen (2015), pp. 418 ff. 27 See Andersen (2013), p. 340 f. 28 Ugeskrift for Retsvæsen 2000, p. 656 (Supreme Court). 26

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far less that the (total) compensation which this composer had received in similar contractual contexts.29 Although there are (as yet) no Danish precedents where the hypothetical intentions of the parties have provided a rationale to adjust the contractually agreed compensation payable to a party in a “financial hardship” situation, the precedent established by the just-named (royalty) case suggests that a Danish court might undertake such an adjustment if it were convinced that the hypothetical intentions of the parties concerned spoke in favor of such a result.

7.3.7

Other Theoretical Basis: The Danish “General Clause”

The traditional Danish doctrine of “failed assumptions” has in recent decades been overshadowed by the advent of Article 36 of the Contracts Act, often referred to as the “General Clause.” This provision, which the Act categorizes as a rule of contractual “validity,” provides (in unofficial translation) as follows: (1) A contract may be modified or set aside, in whole or in part, if its enforcement would be unreasonable or contrary to principles of good faith and fair dealing. […] (2) In making a decision under subsection (1) hereof, regard shall be had to the circumstances existing at the time the contract was concluded, the terms of the contract and subsequent circumstances. Article 36 thus empowers a Danish court to relieve a contracting party of its duty to perform a given contractual obligation – in whole or in part – if (full) enforcement of that obligation would, in the court’s opinion, be unreasonable or contrary to good faith.30 Among other things, this provision gives courts the power to amend an obligation, the enforcement of which has become unreasonable by reason of subsequent circumstances. To be sure, Article 36 was designed mainly to provide protection for consumers against commercial parties whose contracts overreach. And yet, the General Clause is properly characterized as a significant and distinctive feature of general Danish contract law, in that the legislative history of the provision clearly indicates that also parties in commercial relationships deserve protection against unfair contract terms, and Article 36 has in fact been applied by courts in certain instances involving substantive unfairness in contracts between commercial parties.31 At least one such application involved a situation where subsequent circumstances had resulted in “financial hardship” (though not as a result of a “financial crisis” as such). In this case the rental sum originally “fixed” under the terms of a 29

See Andersen (2013), pp. 341–342. Regarding the general Danish principle which obligates contracting parties to observe principles of good faith and fair dealing (loyalitetspligt) see Andersen and Lookofsky (2015), pp. 69 ff. 31 See Lookofsky (1998), pp. 496–498. 30

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150-year-old land lease had been set as 10 Danish Kroner, whereas the market rate in the interim had risen to 800 times that amount! Declaring that the original rental had become “unreasonably low,” the court amended the price-term of the contract to accord with the current market rate – this even though the contract itself contained no provision as to subsequent adjustment of the original rental sum.32 The fact that the General Clause has thus been applied in a commercial context to alleviate blatantly severe “financial hardship,” suggests that it may supplement the substantive rule in Article 24 of the Sales Act (see Sect. 7.3.5 above).33 In this way, both conceptions can serve to exempt an obligor from liability for failure to perform as originally agreed,34 just as both rules reflect limited modifications of the general pacta sunt servanda rule.35

7.4 7.4.1

Conditions for Application of Relevant Exceptions Unforeseeability

Unforeseeablity constitutes a key component within the Danish doctrine of “failed assumptions.” Furthermore, as previously explained (see Sect. 7.3.5 above), unforeseeablity constitutes a key component within the Danish doctrine which corresponds to “force majeure.” Thirdly, Article 36 of the Danish Contracts Act gives Danish courts the power to amend, or declare invalid, contractual provisions, the enforcement of which have become unreasonable by reason of subsequent (unforeseen) circumstances.

7.4.2

Extraordinary Circumstances

The possibility of a liability exemption pursuant to the Danish doctrine which corresponds to “force majeure” requires that the disadvantaged party who claims relief can establish supervening impossibility by reason of highly extraordinary circumstances.

32

See Andersen and Lookofsky (2015), p. 198. See in this connection Lookofsky (2011), pp. 141–169. 34 See generally Lookofsky (2011), pp. 156 ff. 35 See generally Lookofsky (2005), p. 434. 33

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No Obligation to Carry Risk of Crisis

A party to a contract must bear the risk of the solvency of its subcontractors. In that respect, no distinction should be made between financial and other subcontractors. The possible assignment of such a “risk” – as defined within the conception of “relevance” – constitutes a key component within the Danish doctrine of “failed assumptions.”

7.5 7.5.1

Exceptional Circumstances Which Could Justify Judicial Intervention Impossibility

Impossibility constitutes a highly significant component of the Danish doctrine which corresponds to the doctrine of force majeure as known in other legal systems.

7.5.2

Excessive Onerousness

The fact that performance as originally agreed has been made more difficult, e.g. by a subsequent rise (or fall) in prices, will not serve to relieve a party from its liability to perform pursuant to Article 25 of the Danish Sales Act. Danish legal theory recognizes, however, that a seller’s duty to perform can be rendered “virtually impossible” by a highly severe rise (or fall) in price. The concept of “excess onerousness” can also be said to constitute a key element within Article 36 of the Danish Contracts Act, in that application of this rule of validity – in particular, in a situation involving commercial “hardship” – requires that it would be highly unreasonable (and thus onerous) to require performance of the obligation in question as originally agreed.

7.5.3

Distortion of Contractual Equilibrium

The distortion of the original contractual equilibrium is a key element within Article 36 of the Danish Contracts Act. In a given situation involving commercial “hardship” it might sometimes be unreasonable to require performance as originally agreed if there is a severe distortion (alteration) of the contractual equilibrium.36 36

See UNIDROIT (2010) Article 6.2.2 which provides: “There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s

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Legal Consequences Contract Revision/Adjustment

Article 36 of the Danish Contracts Act empowers a Danish court to relieve a contracting party of its duty to perform a contractual obligation, in whole or in part, if full enforcement of that obligation would be unreasonable or contrary to good faith. Article 36 also empowers courts to amend or revise a contractual obligation, the enforcement of which has become unreasonable by reason of subsequent circumstances.

7.6.2

Termination

A seller, buyer or other obligor can be exempted from liability under Danish law for non-performance of a generic obligation due to “unforeseeable impossibility.” In this connection Danish legal theory recognizes that an obligor’s duty to perform can be rendered “virtually impossible” by a highly severe rise (or fall) in price, i.e. in a situation involving “economic force majeure.” Danish law recognizes the principle “impossibilia nulla est obligation,” and so a party who, by reason of unforeseeable impossibility, is exempted from liability (in damages) will also be exempted from its obligation to perform in natura. And if one party, e.g. the seller, is in fact relieved of its obligations to pay damages and perform, the other party is clearly entitled to terminate, in that Danish law will not require the payment of “something for nothing.”37 Danish law does not have specific provisions with respect to the effective date of a given (court-ordered) contractual obligation (pursuant to one of the above named legal rules and doctrines). The party who seeks to alter a contract would usually present that wish to the other party together with an indication regarding the point in time at which the alteration should take effect. Unless the parties then agree to renegotiate the contract, the requesting party will have to present its request for change to a court, including the point in time at which the change should be effected.

performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party.”; see also Andersen and Lookofsky (2010), p. 193 f. 37 See Lookofsky (1989), pp. 83–84.

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Renegotiation

Article 36 of the Danish Contracts Act authorizes courts to amend the provisions of a contract, inter alia, in cases of hardship that cause an unreasonable imbalance between the performances of each party. However, Danish law does not recognize a duty to renegotiate. Therefore, a Danish court cannot compel contracting parties to do so.38

7.6.4

Other Remedies

In consumer contracts, Article 22 of the Danish Law on Marketing (“Markedsføringsloven”) provides that the Danish Consumer Ombudsman (“Forbrugerombudsmanden”) shall supervise the way in which the rules and regulations promulgated under the Act are fulfilled in the market. In this connection the Act empowers the Consumer Ombudsman to require certain information from businesses, to engage in negotiations, to propose changes and (if necessary) to prosecute claims (including criminal sanctions) against particular businesses in Danish courts. The Act also empowers the Consumer Ombudsman to supervise the extent to which Danish businesses live up to the “good marketing” provision in Article 1 of the Act. In many cases “good marketing practice” goes hand in hand with the “reasonableness” condition in Article 36 of the Danish Contracts Act (the General Clause). Therefore, a commercial party who violates “good marketing practice” by imposing unreasonable contract provisions to its customers may be subject to the remedial provisions of the Danish Law on Marketing, i.e. in addition to the usual (inter partes) contractual consequences of such behavior. Financial institutions under inspection by the Danish Financial Supervisory Authority (“Finanstilsynet”) are subject to particular good faith obligations under Article 43, subparagraph 1, of the Danish Law on Financial Activity (“Lov om Finansiel Virksomhed”) and accompanying executive orders.

7.6.5

Priority Between Remedies

The fact that the General Clause has been applied in a commercial context to alleviate blatantly severe “financial hardship,” suggests that this general rule of contract validity, as codified in the Danish Contracts Act, can serve as a supplement to the substantive rule in Article 24 of the Sales Act (see head 7.3.7 above). In this regard, there is no “priority between remedies.” 38 See in this connection Andersen and Lookofsky (2015), p. 196ff; compare UNIDROIT (2010) Article 6.2.3.

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Necessary to Apply to Court to Benefit from Remedies

In the event that one (disadvantaged) party claims to be entitled to remedial relief by reason of “force majeure” or “hardship,” and the other party refuses to comply voluntarily, it is necessary for the disadvantaged party to apply to a competent court for assistance.

References Andersen, M.B. 2015. Praktisk aftaleret, 4th ed. Copenhagen: Gjellerup. Andersen, M.B. 2013. Grundlæggende aftaleret, 4th ed. Copenhagen: Gjellerup. Andersen, M., and J. Lookofsky. 2015. Lærebog i obligationsret, 4th ed. Copenhagen: Thompsen. Blandhold, S. 2005. Nordisk Rettspragmatisme. Cophenhagen: Jurist- og Økonomforbundets Forlag. Gomard, B., and T. Iversen. 2011. Obligationsret 2. del, 4th ed. Copenhagen: Djøf. Liu, C. 2005. Changed contract circumstances. Available at. http://www.cisg.law.pace.edu/cisg/ biblio/liu5.html. Lookofsky, J. 1989. Consequential Damages in Comparative Context. Copenhagen: Djøf. Lookofsky, J. 1998. The limits of commercial contract freedom under the UNIDROIT “Restatement” and Danish law. American Society of Comparative Law: XLVI, 496–498. Lookofsky, J. 2005. Impediments and hardship in international sales in 25. International Review of Law and Economics 434. Lookofsky, J. 2011. Not running wild with the CISG. The Journal of Law and Commerce 29: 141–169. Lookofsky, J., V. Ulfbeck. 2015. Køb - Dansk indenlandsk købsret, 4th ed. Copenhagen. Treitel, G. 2007. Law of contract, 12th ed. London: Sweet & Maxwell Ltd. UNIDROIT. 2010. Unidroit principles of international commercial contracts available at http:// www.unidroit.org/english/principles/contracts/main.htm

List of Cases UfR 2002.1031 H, Ugeskrift for Retsvæsen (Danish Weekly Law Reports) 1031 (2002). Ugeskrift for Retsvæsen, 2000, p. 656 (Supreme Court).

Chapter 8

Crises financières et contrats: le droit positif français refuse la révision d’un contrat devenu déséquilibré mais le projet de réforme entr’ouvre la porte à l’imprévision Rémy Cabrillac

Abstract When a contract becomes unbalanced because of un economic crisis, French law refused to modify it: contract must be performed as it was conclude. But this traditional solution could be change with the French drafts law of obligations reform.

Les crises économiques qui secouent le monde contemporain ne peuvent rester sans incidence sur le contrat,1 qu’il est devenu banal de qualifier, selon la formule célèbre dont la paternité revient à Maurice Hauriou, d’acte de prévision.2 Le contrat dont l’équilibre est bouleversé par un brusque et imprévisible changement des circonstances économiques doit-il continuer à s’appliquer ou le juge peut-il le résilier voire l’adapter ? Le droit français, d’une manière relativement isolée, privilégie traditionnellement la première solution (I), mais une solution différente est proposée par trois projets de réforme du droit français des contrats récemment élaborés (II).

8.1

Les solutions de droit positif

La solution traditionnelle, l’intangibilité du contrat (A) connaît des atténuations (B).

1

Cf. les différentes contributions présentées in Les prévisions contractuelles à l’épreuve de la crise économique, RDC 2010/1, p. 379 et s. 2 Lécuyer H (1999) Le contrat acte de prévision in: Mélanges F. Terré, Dalloz/Litec/PUF, p. 643. R. Cabrillac (*) Faculté de droit, Université de Montpellier, Montpellier, France e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_8

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La solution traditionnelle: intangibilité du contrat

La solution française n’est pas inscrite dans le Code civil de 1804. La jurisprudence a dû trancher dans une affaire célèbre, l’affaire Canal de Craponne.3 Deux conventions ayant pour objet la fourniture d’eau destinée à alimenter des canaux d’irrigation avaient été conclues en 1560 et 1567. Au cours du XIX ème siècle, se prévalant de la dépréciation de la monnaie et de l’augmentation du coût de la main d’oeuvre, l’entreprise exploitant le canal demanda une augmentation de la redevance. La Cour de cassation censura les juges du fond d’avoir accueilli la demande: « dans aucun cas il n’appartient aux tribunaux, quelque équitable que puisse leur paraître leur décision, de prendre en considération le temps et les circonstances pour modifier les conventions des parties et substituer des clauses nouvelles à celles qui ont été librement acceptées par les contractants ». Cette solution repose incontestablement sur la sécurité juridique. L’arrêt se retranche derrière le visa de l’article 1134 du Code civil, mais ce texte pourrait également justifier une solution inverse : ce qui doit avoir force obligatoire, c’est le contrat réellement voulu par les parties. Or, si les parties avaient prévu ce changement de circonstances économiques, il est probable qu’elles n’auraient pas conclu le contrat ou l’auraient conclu à des conditions différentes : appliquer le contrat tel qu’il avait été conclu à l’origine ne respecterait pas la volonté des parties. En réalité, au delà de cet argument de texte contestable, les juges ont d’abord voulu éviter qu’un contractant de mauvaise foi puisse demander la révision d’un contrat dès que celui-ci paraît moins intéressant pour lui. Ils ont également craint que la révision n’appelle la révision : le contractant qui voit sa dette augmentée à la suite de la révision risque de demander une révision à son profit dans les contrats où il est luimême créancier d’une obligation de somme d’argent. Un autre argument implicite, propre au droit français, a longtemps justifié l’intangibilité du contrat, la méfiance envers le juge. La crainte de « l’équité des Parlements » dont il valait mieux se garder s’est pour le moins estompée et pourrait laisser place à un rôle plus important du juge, qu’il ne s’est pas privé de s’arroger par ailleurs dans bon nombre d’autres questions fondamentales du droit des contrats. Mais l’intangibilité du contrat heurte la souplesse contractuelle: maintenir l’exécution du contrat tel qu’il a été conclu pourrait se révéler fâcheux alors que les contrats de longue durée se multiplient. Ces inconvénients expliquent les limitations apportées à la solution traditionnelle.

3

Civ., 6 mars 1876, D. 1876, 1, 193, note Giboulot in Capitant et al. (2008), n° 165.

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Les atténuations apportées à la solution traditionnelle

La jurisprudence administrative française a sans doute été une des premières à donner des signes avant-coureur d’une possible évolution. Si le Conseil d’Etat a admis depuis longtemps l’imprévision dans l’arrêt Gaz de Bordeaux,4 cette décision se fondait essentiellement sur la nécessité d’assurer la continuité du service public, fondement qui semblait exclure toute contagion aux contrats de droit privé. Mais le Conseil d’Etat a infléchi plus récemment sa position, considérant que le concessionnaire peut, alors même que la concession a pris fin, faire jouer la théorie de l’imprévision comme élément de règlement de la situation définitive : l’admission de la théorie de l’imprévision ne semble plus reposer sur la seule idée de continuité du service public mais également sur le droit du contractant à un équilibre financier,5 nouveau fondement susceptible de s’épanouir en droit privé. Dans la jurisprudence judiciaire, plusieurs arrêts, à la portée incertaine, sont intervenus, semblant déroger à la solution traditionnelle. Dans le célèbre arrêt Huard du 3 novembre 1992, la chambre commerciale de la Cour de cassation a ainsi condamné un contractant à payer des dommages et intérêts à son partenaire auquel il avait refusé la révision d’un contrat le conduisant à la ruine.6 Il est vrai que l’arrêt ne reconnaît pas expressément au juge un pouvoir de révision, se bornant sur la base du principe d’exécution de bonne foi des conventions inscrit dans l’article 1134 alinéa 3 du Code civil à sanctionner une faute contractuelle. Dans une autre décision,7 la Cour de cassation a semblé à certains auteurs suggérer que l’obligation de loyauté et d’exécution de bonne foi entraînait un devoir de renégocier une convention déséquilibré par une modification imprévue des circonstances économiques, la Cour ayant rejeté le pourvoi contre la décision des juges du

4

CE 30 mars 1916, Recueil Dalloz 1916, 3, 25, S. 1916, 3, 17. CE 12 mars 1976, Actualité juridique de droit administratif 1976, 528 et 552, concl. Labetoulle D. Cf. Guettier C (2004) Droit des contrats administratifs, PUF, Thémis, 3 ème éd., n° 579 et s. Ad.: Bucher CE (2011) L’inexécution du contrat de droit privé et du contrat administratif. Etude de droit comparé interne. nouvelle bibl. thèse, vol. 102, Dalloz, n° 237 et s. 6 Bull civ., IV, n° 338; JCP 1993.II.22164, note Virassamy G (1993) Revue trimestrielle de droit civil 124, obs. Mestre J. (exploitant d’une station service qui ne pouvait plus être compétitif du fait des prix du carburant imposés par son fournisseur exclusif). Dans le même sens, Com. 26 oct. 1999, D. 2000.224, note Aynès L (2000) JCP II.10230, note Casey J.; Nancy, 26 sept. 2007, D. 2008.1120, obs. Fauvarque-Cosson B et Amrani-Mekki S (2008) RTDCiv. 295, obs. Fages B. qui ajoute qu’en cas d’échec des négociations, la cour serait en mesure « d’apprécier la responsabilité des parties dans le rejet des propositions adverses et de sanctionner un abus éventuel par le versement de dommages et intérêts ». Ad. Cachard O (2008) L’ombre de la révision judiciaire du contrat, RLDC n° 49. 7 Civ., 1re, 16 mars 2004, D. 2004.1754, note Mazeaud D (2004) RTDCiv. 290, obs. Mestre J (2004) JCP I.173, obs. Ghestin J. 5

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fond au motif que le déséquilibre existait dès la naissance du contrat.8 Mais cette interprétation a engendré une vive controverse.9 Dans un arrêt plus récent dont il est difficile encore d’apprécier toute la portée, la chambre commerciale de la Cour de cassation a censuré une cour d’appel qui avait condamné en référé un contractant à exécuter une de ses obligations « sans rechercher, comme elle y était invitée, si l’évolution des circonstances économiques et notamment l’augmentation du coût des matières premières… n’avait eu pour effet de déséquilibrer l’économie du contrat tel que voulu par les parties lors de sa signature en décembre 1998 et de priver de toute contrepartie réelle l’engagement souscrit ».10 La généralité comme l’élégance de la formule pourrait indiquer un arrêt de principe ouvrant la voie à l’abandon de la jurisprudence Canal de Craponne.11 Mais l’absence de publication de cet arrêt rendu en formation restreinte, tranchant une question de procédure civile concernant la compétence du juge des référés, incite à plus de prudence.12 Ces fissures semblent toutefois insuffisantes à faire céder les solutions traditionnelles. La jurisprudence Canal de Craponne est régulièrement réaffirmée par les tribunaux français.13 Des bouleversements plus importants sont proposés par les projets de réforme.

8.2

Les solutions des projets de réforme

Les trois projets de réforme français, l’avant-projet de réforme du droit des obligations et de la prescription initié et conduit par le professeur Pierre Catala sous l’égide de l’Association Henri Capitant,14 et le projet préparé sous la direction du professeur François Terré dans le cadre de l’Académie des sciences morales et politiques,15 envisagent, quoique de manière sensiblement différente, de consacrer l’imprévision. 8

Mazeaud D, note citée. Ghestin J (2004) L’interprétation d’un arrêt de la Cour de cassation D. 2239. Ad. Benabent A (2005) Dalloz ou Dallas, D. 852. 10 Com. 29 juin 2010, D. 2010, 2481, note Mazeaud D, 2485, note Génicon T (2011) RDC 34, obs. Savaux E (2011) Defrénois, art. 39229, n° 4, obs. Seube JB. 11 En ce sens, Mazeaud D, note citée. 12 En ce sens, Génicon T, note citée. 13 Cf. par exemple récemment Civ., 3e, 18 mars 2009, RTDCiv. 2009.235, obs. B. Fages (2010) D. 235, obs. Fauvarque-Cosson (le preneur, en complément d’un faible loyer, s’était engagé à veiller sur le bailleur âgé et dépendant. Après le décès de ce dernier, les héritiers du preneur ne peuvent demander une augmentation de loyer). 14 Avant-projet de réforme du droit des obligations et de la prescription (dir. P. Catala), La documentation française, 2005. Ad., pour une présentation comparatiste, Regards comparatistes sur l’avant-projet de réforme du droit des obligations et de la prescription, dir. Cartwright J, Vogenhauer S et Whittaker S (2010) Soc. lég. comp. vol. 9. 15 Pour une réforme du droit des contrats, Dalloz, Thèmes et commentaires, 2009. 9

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Le Ministère de la justice a présenté en Conseil des ministres le 27 novembre 2013 un projet de simplification et de modernisation du droit comportant en particulier une réforme du droit des contrats qui devrait intervenir par ordonnance. Une loi du 16 février 2015 a habilité le gouvernement à réformer par ordonnance le droit des contrats, le régime de l’obligation et le droit de la preuve. Le texte relatif à l’imprévision ouvre la voie à une modification du droit français (art. 1196). Ce texte ne devrait pas être sensiblement modifié et devrait entrer en vigueur courant 2016 ou début 2017. Certains textes présentent la révision comme une dérogation, rappelant que le principe est la force obligatoire du contrat, même si l’exécution est devenue plus onéreuse. L’article 92 al. 1 du projet Terré dispose en ce sens que « Les parties sont tenues de remplir leurs obligations même si l’exécution de celles-ci est devenue plus onéreuse ». Au delà, si les trois projets imposent aux parties de renégocier le contrat, ils divergent sur le contenu (A) et la sanction (B) de cette obligation de renégociation.

8.2.1

Le contenu de l’obligation de renégocier

Dans l’hypothèse où un contrat est devenu déséquilibré suite à un bouleversement des circonstances économiques, les projets imposent aux parties une obligation de renégocier dont les conditions comme les modalités varient. Le projet Terré et le projet de la Chancellerie exigent dans une formulation très voisine, inspirée du projet Lando, la réunion de deux éléments pour que le juge puisse intervenir. Le premier est un changement des circonstances qui doit être « imprévisible » et dont une partie « n’avait pas accepté d’en assumer le risque ». Le second réside dans un déséquilibre contractuel résultant de ce changement de circonstances : la formule précisément retenue est une exécution devenue « excessivement onéreuse » (art. 1196 du projet de la Chancellerie; art. 92 al. 2 du projet Terré), expression empruntée au droit italien (art. 1467 C.civ. italien) via le projet Lando (art. 6:111 (1)). Le projet Catala retient une approche différente, il se borne à une référence à « l’effet des circonstances », exigeant que celui-ci ait entraîné une perturbation de l’équilibre initial au point qu’une partie perde son « intérêt dans le contrat » (art. 1135-1 C.civ.), condition plus rigoureuse que celle posée par les deux autres projets.16 Les modalités de cette obligation de renégociation du contrat sont appréhendées de manière sensiblement voisine. Cette renégociation doit être menée de bonne foi,17 mais seul le projet Catala rappelle expressément cette exigence (art. 1135-3 al. 3). 16

Cf. Catala P (2008) La renégociation des contrats in: Mélanges P. Didier, Economica, p. 97: « l’avant-projet s’écarte du critère dominant de « l’onérosité excessive » qui est apparu techniquement moins précis ». 17 Cf., en présence d’une clause de renégociation, Com. 3 oct. 2006, D. 2007.765, note Mazeaud D.

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La renégociation ne doit pas être conduite avec l’intention de ne pas aboutir. Elle doit s’inscrire dans un délai raisonnable (cf. projet Terré art. 92 al. 3). Les parties doivent en principe continuer à exécuter le contrat pendant les négociations (art. 1196 du projet de la Chancellerie). Le non respect de cette obligation de bonne foi ne semble devoir entraîner que le versement de dommages et intérêts (cf. art. 1135-3 al. 2 du projet Catala). A l’issue de ces négociations, si les parties se mettent d’accord pour résilier le contrat ou le poursuivre à des conditions nouvelles, cet accord s’impose à elles. A défaut d’accord, il convient alors de s’interroger sur la sanction du non respect de cette obligation de renégociation.

8.2.2

La sanction de l’obligation de renégocier

Une première possibilité est de permettre à chaque partie de résilier le contrat, possibilité qui sera en pratique utilisée par la partie victime du déséquilibre. C’est la solution retenue par le projet Catala (art. 1135-3 al. 2), et ce, dans le silence du texte, que le contrat soit à durée déterminée ou indéterminée. On peut donc constater que le projet Catala traduit une évolution importante par rapport à notre droit positif qui ne prévoit que la continuation du contrat originaire, tout en restant fidèle à la traditionnelle méfiance du droit français vis à vis du juge, lui refusant le pouvoir de s’immiscer directement dans le contrat qui doit rester la chose des parties.18 L’extinction du contrat se produit « sans frais ni dommage », chacune des parties étant simplement déliée de son engagement. La menace de la disparition du contrat pourra ainsi constituer un moyen de pression sur le contractant bénéficiant du déséquilibre pour qu’il accepte des concessions au profit de son partenaire. Le projet Terré comme le projet de la Chancellerie vont au delà, en harmonie avec le projet Lando ou la grande majorité des droits admettant l’imprévision, en accordant au juge un pouvoir important en cas d’échec de la renégociation, ce qui constitue la principale divergence avec le projet Catala et une évolution fondamentale par rapport au droit positif. Le projet de la Chancellerie subordonne le principe d’une adaptation à l’accord des parties; à défaut une partie pourra demander au juge de mettre fin au contrat, le laissant libre d’en fixer la date et les modalités (art. 1196 al. 2). Le projet Terré, en harmonie avec le projet Lando (art. 6:111 (3)), place les deux branches de l’option, adaptation ou résiliation, sur un pied d’égalité, permettant au juge d’intervenir sans l’accord préalable des parties (art. 92 al. 3). Les pouvoirs reconnus au juge en cas d’adaptation sont également appréciés différemment par le projet de la Chancellerie et le projet Terré. Le premier laisse une totale liberté d’appréciation au juge. La lecture de l’article 1196 alinéa 2 semble n’exiger, comme nous venons de l’indiquer, qu’un accord

18

Catala P., art. cit., p. 91.

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préalable des parties sur le principe de l’adaptation, sans qu’elles aient à se prononcer sur les modalités de cette adaptation. Le projet Terré précise que le juge peut adapter le contrat « en considération des attentes légitimes des parties » (art. 92 al. 3). Cette consécration de la théorie des attentes légitimes perme tune adaptation subjective : le juge va s’efforcer d’apprécier ce qu’auraient voulu les parties si elles avaient eu connaissance du bouleversement des circonstances et ce que chacune pourrait légitimement attendre comme nouvel équilibre contractuel. Cette appréciation, conforme au rôle reconnu à la volonté individuelle en droit français, présente l’inconvénient d’une certaine difficulté pour le juge à supputer ce qu’aurait pu ou ce que pourrait être la volonté des parties. L’assouplissement du droit français de l’imprévision semble souhaitable, moins au nom de la justice contractuelle que d’une nécessaire souplesse contractuelle. Il reste que la souplesse contractuelle ne peut vraiment que découler des parties. La rigidité actuelle de la position jurisprudentielle française, fonctionnant comme une règle supplétive répulsive, que les parties seraient incitées à écarter,19 devrait inciter les contractants à adopter une clause de révision du contrat.20 La pratique recourt fréquemment aux clauses de hardship ou aux clauses d’indexation. Le droit français s’est récemment inspiré de la pratique anglo-saxone pour importer la clause de benchmarking, qui permet aux parties de s’assurer qu’elles bénéficieront des meilleures conditions tout au long de l’exécution du contrat,21 ou la MAC clause (material adverse change), qui permet à un contractant de se dégager d’une opération contractuelle en cas d’évènement défavorable affectant la rentabilité de cette opération survenant entre sa conclusion (signing) et sa réalisation (closing).22 Le plus souvent, le régime de ces clauses est abandonné à la liberté contractuelle,23 offrant une large palette de combinaisons à l’imagination des rédacteurs de contrats. Ainsi s’explique la formule de l’article 1135-1 du projet Catala qui invite les parties à prévoir ce genre de clause, texte qui pourrait paraître superfétatoire au regard de la liberté contractuelle. Malgré quelques imperfections de détail, l’article 1196 du projet d’ordonnance nous semble réaliser un compromis satisfaisant entr’ouvrant la porte à la révision judiciaire d’un contrat devenu déséquilibré sans menacer la sécurité juridique. 19

Selon Pérès C, La règle supplétive, n° 588 (cf. Terré, Simler et Lequette (2013) Les obligations, Dalloz, 11 ème éd., n° 471). 20 Cf. Lequette Y (2010) De l’efficacité des clauses de hardship in: Liber amicorum C. Larroumet, Economica, 267 s. 21 Szuskin L et Juhan JL (2004) La clause dite de benchmarking dans les contrats de prestation de services ou comment rendre un contrat compétitif ?, RLDC déc. 2004, n° 11, p. 5 s. 22 Pélissier AC (2006), La MAC clause, RLDC avr. 2006, n° 26, p. 5 s. 23 Comp. Paris, 24 mai 2005, cité par A.-C. Pélissier, art. cit., qui refuse d’appliquer une MAC clause en faisant valoir que le demandeur avait disposé de toutes les informations utiles pour prévoir l’évolution de la dette de la société achetée.

Chapter 9

Financial Turmoil as a Change of Circumstances Under Greek Contract Law Nikolaos A. Davrados

Abstract The country’s uncomfortable economic climate has prompted legal scholars and the courts to revisit the doctrine of unforeseen circumstances (rebus sic stantibus) as a valid basis to revise binding obligations of preexisting contracts. Whereas the Greek civil code was one of the first modern codes to contain a provision specifically devoted to this issue, courts appear to be somewhat reluctant to apply this provision directly and resort instead to an objective good faith test when entertaining cases of debtors who are unable to perform. The plurality of the reported cases concerns private lessors who request a judicial adjustment to their rent. On the other hand, the legislature has enacted special laws dealing with debts from private bank loans to consumers. While the courts and the legislature are approaching this issue in a seemingly piecemeal fashion, legal doctrine could also look at the revival of an even older discussion, that of total or partial impossibility to perform a monetary obligation.

9.1

Introduction

This fifth consecutive year of recession and austerity for Greece finds the country with an economy shrunk by more than a quarter, an unemployment rate close to 30 %, and an unchanged value of its currency, the euro, from inception. Economists

This paper was submitted as the Greek National Report in the XIXth Congress of the International Academy of Comparative Law (Vienna 2014). The author has endeavored to state the law as on 1 June 2014. N.A. Davrados (*) Loyola University New Orleans, College of Law, New Orleans, Louisiana, USA University of Nicosia, Department of Law, Nicosia, Cyprus University of Athens, School of Law, Athens, Greece e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_9

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would identify this snapshot as a case of ‘internal devaluation’.1 In oversimplified terms, and for the purposes of the discussion that follows, this means that the average Greek debtor’s patrimony has diminished in value, either gradually or abruptly.2 In such a case, it may follow that this diminution could impair the average debtor’s ability to fulfill financial obligations stemming from agreements entered into prior to such devaluation. This paper attempts a succinct exposition of the Greek civil law3 on this issue.4

1

See Barkbu et al. (2012), p. 422 et seq. In theory, internal devaluation also involves a corresponding drop in the prices of goods and services. See, e.g., Armingeon and Baccaro (2012), p. 254 et seq. This attribute, however, has not yet been observed in Greece’s case, where salaries have plunged but prices have not. 3 Analysis will be made with reference to the provisions of the Greek Civil Code (hereinafter also referred to as ‘CC’), which was promulgated in 1940, and entered into force in 1946. See Georgiadis (2012), p. 95 et seq. [in Greek], with further references. 4 The analysis that follows will therefore concentrate on the ‘Greek financial crisis’ through a civil law lens and shall avoid any discussion with respect to the nature, character, or cause of the broader issue of the sovereign debt crisis. For such an analysis from a Greek viewpoint, the reader may turn to Chrysogonos (2012), p. 1353 et seq. [in Greek]; Katrougalos (2010), p. 157 et seq. [in Greek]; Pavlidis (2006), p. 124 et seq.; Kostopoulou (2013), p. 34 et seq. [in Greek]; Alexandridou (2010), p. 132 et seq. [in Greek]; Moustaira (2007), p. 141 et seq. [in Greek]; Studies on the Memorandum of Greek debt (2012), p. 2641 et seq. [in Greek]. For further analysis and international overview of sovereign debt and default, see also Borchard and Wynne (1951), Wynne (1951), Panizza et al. (2009), p. 651 et seq., Lienau (2008), p. 63 et seq. (supporting an international regulation of the concept of sovereign debt and default), Boudreau (2012), Wright (2010) passim, Tsoukala (2013), p. 241 et seq., Metallinos (2013), p. 19 et seq. (describing the recent haircut of Greek bonds under a collective agreement scheme), International Monetary Fund (2003) Reviewing the process for sovereign debt restructuring within the existing legal framework. IMF, Washington D.C., passim, Krueger (2002) passim (proposing the promulgation of an international regulation dealing with sovereign default), Krugman (1985) passim, Husain and Diwan (1989) passim, Ochoa (2008), p. 109 et seq., Spector (2009), p. 771 et seq., Sachs (1999), p. 377 et seq., Liendo (2007), p. 107 et seq. (proposing the insertion of an express or inherent restructuring debt-restructuring prerequisite to any assertion of sovereign immunity). 2

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Unforeseen Change of Circumstances The Rule of Article 388 of the Greek Civil Code

Like most of the world’s legal systems, Greek contract law recognizes the primacy of the principle of pacta sunt servanda5 and vests the power of a legal bond (vinculum juris6) in a valid contract.7 As a rule, therefore, the debtor is held liable for a failure to perform and may be excused from such liability only on very narrow and strict grounds of complete lack of fault, as prescribed in the law.8 When the negotiating parties reach an agreement on the terms of their contract, it is evident that they are acting within a given and present legal, economic, and social milieu, of which they are or should be fully aware, and to which they normally do not envisage or foresee any serious and sudden deterioration or disarray. In other words, the structure of a bilateral juridical act is erected on the foundation of the parties’ bona fide common understanding of the surrounding circumstances at the time of contracting. If these circumstances were to change suddenly and subsequent to the formation of the contract, it would follow that the foundation of the parties’ consent would also fail. Although traditional contract law attaches legal consequences to the fortuitous destruction of the object of the contract under the theory of ‘contractual risk’,9 under the principle of pacta sunt servanda, it is clear that a ‘change in circumstances’ would not necessarily qualify as an excuse from performing, moreover as an occurrence warranting a revision of the contract. The need for an exception to this inflexible rule became apparent very early in the Greek jurisprudence and formed the basis for the enunciation of a very progressive rule for its time,10 Article 388 of the Greek Civil Code on ‘unforeseen change of circumstances’, which reads as follows: 5

Sharp (1941), p. 792, McNair (1940), p. 173 et seq. Corpus Juris Civilis, Institutes 1.3.13 (“Obligatio est juris vinculum quae necessitate adstringimur alicuius solvendae rei secundum nostriae civitatis juris”). 7 See Sourlas (1949) in Litzeropoulos, et al. eds. Commentary to the civil code (hereinafter referred to as ErmAK), paras 64 et seq. [in Greek]; Tsirintanis in: ErmAK, Article 287 CC, paras 8 et seq. [in Greek]; Stathopoulos (1979) in Georgiadis and Stathopoulos Article 287 CC paras 24 et seq. [in Greek]; ibid, Article 361 CC paras 3 et seq. [in Greek]. 8 See Stathopoulos in: Georgiadis and Stathopoulos, Article 336 CC, paras. 2 et seq. 9 See, e.g., Jacoby (1972), p. 343 et seq., Sealy (1972), p. 255 et seq. 10 Article 388 of the Greek Civil Code was one of the very first provisions articulating an exception to the binding force of contracts in the event of unforeseen change of circumstances as a matter of positive law. Historically it was only preceded, though not directly influenced, by the Polish Code of Obligations of 1933 in its Article 269. See, in more detail, Stathopoulos (2004), pp. 23–24, 1225 [in Greek]. Today, similar provisions have found their way into the text of modern national codes and international conventions. For example, Article 79 CISG [on which see Stoll and Gruber (2005) Article 79 in: Schlechtriem and Schwenzer paras 43 et seq.; Huber and Mullis (eds) (2007), p. 257 et seq.; Tallon (1987) in Bianca and Bonell (eds), pp. 572–595; Marcantonio (1985), p. 41 et seq.]; Articles 6.2.1–6.2.3 of the Unidroit Principles of International Commercial Contracts (2010) on ‘hardship’ in performing an obligation arising from a commercial contract [see, in detail, 6

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If, having regard to the requirements of good faith and business usages, the circumstances on which the parties had based the conclusion of a bilateral contract have subsequently changed on exceptional grounds that could not have been foreseen and the performance due by the debtor taking also into consideration the counter-performance has as a result of the change become excessively onerous, the Court may at the request of the debtor and according to its appreciation reduce the debtor’s performance to the appropriate extent or decide the dissolution of the contract in whole or with regard to its performed part. If the dissolution of the contract has been decided, the obligations to perform arising therefrom shall be extinguished and the contracting parties shall be reciprocally obligated to restitute the performances by which each benefited pursuant to the provisions governing enrichment without cause.11

From a cursory glance at the text of the article itself, and the early Greek legal doctrine on this issue,12 it becomes readily apparent that the redactors of this codal provision were influenced by various legal theories of that time. Article 388 CC is thus a fine blend of the Roman maxim of rebus sic stantibus, the German version of the subjective will theory of contracts (and most notably the particular theory of the ‘foundation of the transaction’ – Geschäftsgrundlage), and an extended version of the French objective theory of imprévision. However, it retains its unique identity as a distinct legal provision, which has undergone extensive judicial and scholarly gloss since its enactment and has occupied the spotlight of modern legal discussion in Greece for obvious reasons. Article 388 CC is also one of the more verbose provisions in the Greek Civil Code. The prerequisites for its application are spelled out in a rather self-explanatory fashion. These prerequisites are briefly outlined as follows: (a) This provision applies to bilateral or synallagmatic contracts, that is, agreements where both contracting parties owe a performance as debtor and are entitled to a correlative counter-performance as creditor. Unilateral contracts (such as suretyship, loan without interest) or unilateral juridical acts (such as testamentary dispositions of property) are thus excluded from the ambit of application of this provision. From the general wording of the provision, it may be deduced that all bilateral contracts are included. However, a more faithful to the original maxim of rebus sic stantibus13 interpretation of this provision will reveal that only contracts providing for successive acts of performance over a future period of time must be understood as subject to the implied condition that the circumstances Scherer (2010), p. 219 et seq; Perillo (1997), p. 5 et seq.; for a comparative analysis of the notion of ‘hardship’ see Karampatzos (2005), p. 109 et seq.]. For a more analytical comparative approach see Hondius and Gricoleit (eds) (2014) passim. 11 Translation of the provision taken from Taliadoros (2000) with minor alterations. 12 See, e.g., Sakketas (1949) in: ErmAK, Article 388 CC , with further references to seminal German and French works, such as Krückmann (1918), Windscheid (1850), Oertmann (1921), Voirin (1922), Demogue (1931). 13 It is noteworthy that the words rebus sic stantibus are just the core of a maxim, the full text of which is: “contractus qui habent tractus succesivum et dependentiam de futurum, rebus sic stantibus, intelligentur” (Corpus Juris Civilis, Digest 4.4.8).

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will remain the same. This interpretative proposition can be readily understood in the light of the fact that contracts of long duration, such as lease contracts, differ greatly in purpose and structure from contracts calling for instantaneous, immediate, or simultaneous performance by the parties, such as most cases of sales contracts.14 But, even if the approach reflected in the full text of the maxim is not followed, it would still be difficult to contemplate a situation whereby a sudden change of circumstances would ensue within the marginal time window between agreement and performance in an instantaneous contract of sale. (b) There must be a change of circumstances on which the parties had based the conclusion of a bilateral contract, having regard to the requirements of good faith and business usages. The first limb of the test is to determine the subjective common understanding of the parties with respect to the existing circumstances at the time of their agreement.15 The parties’ perception of reality may obviously differ, and the underlying cause or desire of each party will normally play no decisive role with respect to the enforceability of the contract unless this underlying cause was communicated to the other party or was incorporated as a term or condition in the contract. From the varying desires of each individual party, a careful selection must be made of those subjective common elements that constitute the foundation of the contract. The second limb of the test is an objective one. The abovementioned common foundation of the contract is further confined to circumstances upon which bona fide contracting parties would normally and objectively structure their bilateral juridical relationship.16 The value of currency, taxes and duties, lawfulness of the object of the contract, weather conditions at the place of performance, and war would qualify as such circumstances. Depending on the nature of the contract, certain personal qualities and features of the debtor’s person may also be taken into account. (c) This change of circumstances must take place after the formation of the contract.17 If the circumstances had changed prior to the perfection of the contract and the parties knowingly entered into the contract nevertheless, it is clear that any plea for subsequent protection under this provision would be moot. If one or both parties labored under an erroneous perception of the existing circumstances when entering into their agreement, that party or both parties may 14

See Efthymiou (1966), p. 96 et seq. [in Greek]. This is identified as the subjective Geschäftsgrundlage, according to German and Greek legal doctrine. See Simantiras (1988) para. 916 [in Greek]. The German approach is further explained by Horn (1992), p. 137 et seq. 16 In this respect, the provision clearly adopts a modified version of the French théorie de l’imprévision. 17 Under Greek contract law, a contract is formed when acceptance of the offer is received by the offeror (art. 192 CC). There seems to be disagreement in Greek legal doctrine as to whether the provision will equally apply in cases of contracts under a suspensive condition, when the change of circumstances occurs during the pendency of the condition. Some scholars place this situation under the major premise of art. 388 CC, while others refer to the principle of good faith. See, in more detail, Stathopoulos, (1979) in Georgiadis and Stathopoulos, p. 1234. 15

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at first seek to avail themselves of the protection afforded under the provisions of error (mistake) in the declaration of their will. Pursuant to these provisions, only a substantial error of fact or of law will vitiate consent of the contracting party when the error is unilateral or of both contracting parties when the error is bilateral (art. 140 CC18). An error is substantial when it refers to a point of great importance in regard to the whole transaction and may also include certain features and qualities of both the object and the subjects of the contract according to good faith and business usages (arts 14119 and 14220 CC). When the error is substantial, the contract is a relative nullity and may be rescinded accordingly (arts 140, 15421 and 18422 CC). Therefore, an error of the parties as to the foundation of the contract must be substantial under the above provisions. However, as to this issue, the law of error contains a no less important exception: A unilateral error, of law or of fact, referring exclusively to the motivation that prompted the will of the contracting party shall not be substantial (art. 143 CC23). The Greek Civil Code is notably silent for cases of bilateral error as to the common motivation of the parties. It is broadly accepted that the subjective ‘foundation of the transaction’ (Geschäftsgrundlage) of the parties is akin, if not tantamount, to their motive for entering into the contract. That is so because the parties’ common perception of the existing or future circumstances, based on which they formed their contract, is an implied and inherent term of their mutual consent in their agreement.24 Therefore, if the contracting parties labored under an error when commonly forming the foundation of their contract, it 18

Article 140 CC: “If in the course of the conclusion of a juridical act the declaration made by a person does not accord due to a substantial error with his will such a person shall have the right to claim the annulment of the juridical act”. Translation taken from Taliadoros (2000) with minor modifications. 19 Article 141 CC: “An error is substantial when it refers to a point of such importance in regard to the whole of the juridical act that if the person in error were aware of the true situation he would not have committed the juridical act”. Translation taken from Taliadoros (2000) with minor modifications. 20 Article 142 CC: “An error referring to the qualities of a person or a thing shall be deemed substantial if according to the agreement of the parties or to the requirements of good faith and business usages such qualities are of such importance in regard to the whole transaction that if the person in error were aware of the true situation he would not have committed the juridical act”. Translation taken from Taliadoros (2000) with minor modifications. 21 Article 154 CC: “The annulment of a juridical act by reason of error, fraud or duress shall intervene by a Court decision. Shall only have the right to claim the annulment the person who was in error or defrauded or under duress and his heirs”. Translation taken by Taliadoros (2000) with minor modifications. 22 Article 184 CC: “A voidable juridical act is assimilated after its annulment to a juridical act that was null ab initio subject to the provisions relating to real rights acquired by third parties in virtue of a contract that was voided”. Translation taken from Taliadoros (2000) with minor modifications. 23 Article 143 CC: “Unless otherwise provided in the law an error referring exclusively to the motivation that prompted the will shall not be substantial”. Translation taken from Taliadoros (2000). 24 See Bosdas (1971), p. 150 et seq. [in Greek]; Georgiadis (2012), p. 623 et seq.; Chouvardas (1938) passim [in Greek].

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would seem that such bilateral error is either not regulated at all by the provisions on error or, by analogy, would not be characterized as substantial for the purposes of the provisions of arts 140–143 CC. That is so because such an error would concern their motive for entering into the transaction, which by law is not considered a substantial error. Being cognizant of this gap in the law of error, several Greek scholars have advocated the proposition that art. 388 CC serves as a subtle counterpart to the provisions on bilateral error as to the motive of the parties.25 It remains debatable whether the protection of art. 388 CC should extend to those cases where there was no subsequent change of circumstances, or whether protection in such cases must be sought within the principle of good faith.26 (d) The change of circumstances occurring after the formation of the contract must be unforeseeable at the time the contract was made. This test is necessarily objective, because it refers to the foresight of a reasonable contracting party and to the measure of suddenness and frustration caused by the change in circumstances.27 This requirement does not, however, equate foreseeability to fortuity. It simply entails any sudden and unpredictable change that the parties did not and could not reasonably anticipate when entering into their agreement.28 (e) This unforeseen change of circumstances must bring about an excessive increase in onerousness of performing the contractual obligation. In other words, the balance of performance and counter-performance associated with the bilateral and commutative contract must be disturbed to an extent that the obligation of the one party has become extremely more burdensome when juxtaposed with the corresponding counter-performance of the other party.29 (f) The debtor must not be in default. According to the general provisions on breach of contract, risk for fortuitous deterioration or destruction of the contractual object devolves upon the debtor who has been put in default for failure to perform.30 Based on these provisions, it has been argued that a defaulting debtor

25

It seems that bilateral error as to the foundation of the contract will be treated under this provision. Cases of unilateral error will normally be dealt with by the provisions of arts 140–143 CC, unless the party’s unilateral error as to the foundation of the contract was known or should have been known by the other party, as good faith would dictate. See Georgiadis (2012), p. 566 et seq.; Spyridakis (1990), p. 1320 et seq. [in Greek]. The relationship between the law of error and that of revision of the contract due to change in circumstances is obvious both in the civil and in the common law. It is noteworthy that at common law the doctrine of frustration of contract has been identified as the ‘sister-doctrine’ to that of mistake. See Kull (1991), p. 1 et seq. 26 See Stathopoulos (2004), pp. 1235–1236, with further references. 27 See Theodoropoulos (1949) passim [in Greek]. 28 A simple hypothesis of the parties as to a plausible change of circumstances or a thought thereof does not necessarily mean that the parties foresaw a future change of circumstances, and will normally not displace the application of this provision. See Stathopoulos (2004), pp. 1237–1238, with further references. 29 See Papanikolaou (1985), p. 940 [in Greek]. 30 Article 344 CC: “During the period of his delay a debtor shall be responsible for any negligence. He shall also be liable in respect of fortuitous events except if he can prove that the prejudice

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may not rely on the protection of art. 388 CC because that debtor has undertaken the risk associated with delayed performance of the agreed prestation. The validity of this conclusion, however, is questionable. Several scholars propose that the regulatory ambit of the provisions on breach of contract are necessarily confined to the performance of the debtor and are not concerned with the change of circumstances surrounding this performance. The same scholars explain that prior to the enactment of the Civil Code, there was a regulatory lacuna concerning the change of circumstances. This void, however, has now been filled by art. 388 CC. Therefore, according to this opinion, even a defaulting debtor may invoke the protection of this provision. However the default will be taken into consideration by the court when exercising its sovereign intervention in the failing contract.31 It would seem that the change in circumstances must be the primary if not sole reason for the default. (g) According to an older view, a waiver of the protection of Article 388 CC by the parties in the form of an adverse agreement must not exist. The precise legal nature of art. 388 CC as a suppletive (jus dispositivum) or mandatory (jus cogens) rule of law was heavily debated in Greek legal doctrine. Today, the prevailing view holds that art. 388 CC is a mandatory provision and that parties may not beforehand derogate from the protection afforded by this rule of law.32

9.2.2

The Good Faith Exception/Substitution: Article 288 of the Greek Civil Code

Traditional Greek civilian doctrine33 holds that all of the aforementioned prerequisites must be met in order for the exceptional rule of art. 388 CC to apply and displace the binding effect of a contract. As observed, there may be cases where these rigid prerequisites are not fulfilled in their entirety; however, it would seem unfair to deprive the debtor of some protection against the harsh effects of pacta sunt servanda. For example, a sudden change of circumstances may occur in a unilateral contract or in a bilateral contract of immediate execution (e.g. a contract of sale), or this change may not be subsequent would have resulted even if the undertaking were performed in time”. Translation taken from Taliadoros (2000). 31 See Spyridakis (1978), p. 1016 et seq. [in Greek]; Balis (1960), para. 88 [in Greek]; Economopoulos (1972), p. 325 et seq. [in Greek]. 32 See analytically Stathopoulos (2004), p. 1239, 1245 et seq. Naturally, the parties may waive their right to invoke the protection of art. 388 CC after the change of circumstances has occurred. Equally, the parties may agree on the precise content of a revision of their contract, as long as their agreement would not constitute an unfair term in their contract. Such contractual practice has been noticed with the insertion of ‘Material adverse change’ (MAC) clauses in financial agreements. See, e.g., Berger and Filgut (2005), p. 253 et seq., Hopt (2009), p. 681 et seq., Kindt and Stanek (2010), p. 1490 et seq. 33 See Sakketas (1949) in: ErmAK, Article 388 CC, para. 17.

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but may exist unbeknownst to the parties at the time of contracting, or the provisions of bilateral error may not afford the necessary protection in some cases where the parties had not expressed the cause of their agreement.34 As initially agreed both in theory and in the courts, protection of the debtor in these exceptional cases is provided through the application of the general principle of good faith, as expressed in Article 288 CC, pursuant to which: A debtor shall be bound to perform the undertaking in accordance with the requirements of good faith taking also into consideration business usages.35

According to this traditional view, the principle of good faith would thus operate as an extraordinary device that would complement the exceptional rebus sic stantibus protection against the stringent effects of pacta sunt servanda when good faith should so dictate.36 That is so because art. 388 CC was seen as a special expression of the principle of good faith in cases of bilateral contracts of continuous duration.37 This unison, however, between legal doctrine and the courts in treatment of the good faith exception only lasted until 1982, when the Greek Supreme Court (Areios Pagos) decided38 to enlarge the scope of application of art. 288 CC to the extent that the good faith principle has now invaded the territory of the provision of art. 388 CC and is applied to cases where art. 388 CC would normally apply. In other words, the Areios Pagos reduced the doctrine of rebus sic stantibus to a single test of the principle of good faith as enshrined in art. 288 CC and silently left out the considerations of art. 388 CC in this simplified and unified examination. This procedural stance is still heavily criticized by Greek legal doctrine.39

34

See Stathopoulos (1979), in Georgiadis and Stathopoulos, Articles 288 and 388 CC. Translation of the provision taken from Taliadoros (2000). 36 See Papantoniou (1957), p. 74, 150 et seq. [in Greek], with further references. 37 See Stathopoulos (2004), p. 1225, with further references. 38 Areios Pagos (plenary session) decision no. 927/1982, published in Nomiko Vima (Athens Bar Association Law Review) 1982: 214 et seq. 39 See Papanikolaou (2000), paras 216 et seq., 515 et seq. [in Greek]; Karampatzos (2006), paras 478 et seq. [in Greek]. A contrary view, in favor of the position of the courts, is expressed by Liappis (2011), p. 15 et seq. [in Greek], and Mentis (2012), p. 116 et seq. [in Greek]. 35

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Application of the Rule

Either under the more specific rule of art. 388 CC or by virtue of the general principle of good faith as articulated in art. 288 CC, the judge has the power to revise the contract in order to restore equilibrium in the relationship of the parties, or, in more extreme circumstances, to extinguish the obligation altogether.40 It is widely accepted in Greek legal doctrine41 that the present financial crisis constitutes an ‘unforeseen change in circumstances’42 with respect to those bilateral contracts of continuous duration that were perfected prior to the crisis, the starting point of which has been pinpointed in time by the courts in the year 2010.43 By applying the general principle of good faith (art. 288 CC), and with some recourse to the theory of rebus sic stantibus (art. 388 CC), the Greek courts have revised private lease contracts (adjusting the lease in the range of 15 % or higher in some circumstances), whereas in other cases, the courts have denied protection, either because the contract was entered into after 2010 or because a case of significant hardship was not proven by the plaintiff debtor.44 In its efforts to mitigate the harsh effects of the financial crisis, the Greek legislature has enacted special laws that affect the binding force of contracts. These laws could resemble a legislative rebus sic stantibus intervention. In particular, the legislation on commercial leases has been revised to allow the lessor to terminate

40

See Theodoropoulos (1960) p 134 et seq. [in Greek]; Stathopoulos (2004) p 1241 et seq. See especially Doris (2010), p. 19 et seq. [in Greek]; Kourakis (2010), p. 44 et seq. [in Greek]; Liappis (2012) passim [in Greek]. 42 The same conclusion is reached by international commentators as well. See, e.g., Smith et al (2009), Feissel and Gorn (2009), p. 1138 et seq. 43 This date is questioned by some scholars, who identified the actual nadir of the Greek economy in the summer of 2012, when rumors of Greece’s imminent exit from the Eurozone wreaked havoc in the financial markets. See Papadimopoulos (2012), p. 630 et seq. [in Greek], Albrecht (2012), p. 1059 et seq.; Perry and Gelman (2012–2013), p. 479 et seq.; Buchheit and Gulati (2011) Greek debt – The endgame scenarios www.ssrn.com [accessed 31 March 2014]. This, in turn, prompted international law firms to circulate advice to clients on the legal repercussions of a forced change of currency in a debt of a sovereign. See, e.g., Field Fisher Waterhouse (May 2012) The Eurozone crisis and financial transactions – A comprehensive guide www.ffw.com [accessed 31 March 2014]. 44 Professor Karampatzos of the Athens Law School has closely monitored the attitude of the Greek courts toward the revision of contracts due to the financial crisis. He has detected a multitude of cases where the courts have either reacted positively or negatively to the application of arts 288 and 388 CC. He further argues that the ensuing crisis has had devastating effects to the local economy and that, under the principle of good faith, courts must act more generously in some cases of debtors. See analytically Karampatzos (2013), p. 92 et seq. [in Greek], idem (2011) Commentary to Greek jurisprudence. Nomiko Vima (Athens Bar Association Law Review): 2317 et seq. [in Greek] (presenting cases of private leases); idem (2012), p. 430 et seq. [in Greek]; idem (2013), p. 92 et seq. [in Greek] (commenting on cases concerning commercial leases); idem (2012), p. 294 et seq. [in Greek] (commenting on the consequences of the haircut of Greek sovereign debt); idem (2010), p. 76 et seq. [in Greek]. 41

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the contract in cases of unforeseen financial hardship.45 Furthermore, by virtue of special legislation intended to relieve heavily indebted debtors of private and commercial loans, Greek law for the first time embraced the notion of bankruptcy of a private individual,46 a legal concept that was rejected by traditional Greek insolvency law.47 Having been struck by one of the most severe financial blows in the country’s latest history, the Greek courts have timidly shown some willingness to revise mainly private lease contracts, while there has been no record of an active judicial intervention in other types of contracts. The Greek parliament has also enacted specific laws aimed at soothing the over-indebted consumer population in cases of private loans. Perhaps one would justifiably expect a bolder intervention, especially if one takes into consideration the extensive coverage of the Greek financial tragedy as portrayed through the media. Then again, it is the same media that now proclaim that the crisis is miraculously nearing its end.48 On the other hand, one may rightly identify a moral hazard in tampering too much with the binding force of an obligation. However, an equally demoralizing atmosphere hovers relentlessly over the gloomy Athenian streets.

9.3

In Place of a Conclusion – The Forgotten Alternative: Impossibility to Perform

The prevalence of the rebus sic stantibus approach in cases of economic failure is deeply rooted in the history of the civil law. The doctrine of rebus sic stantibus emerged in the early writings of Roman jurisconsults. The Romanist school of glossators and later Canonist writers relied upon it as a systematic effort in favor of a more flexible approach to impossibility of performance so that an excessive increase in onerousness of performing brought about by an unforeseen change of circumstances would be as much of an excuse for a debtor as the impossibility brought about by a fortuitous event. That is so because of the stringency of the rule of impossibility as a lawful excuse of a debtor from performing.

45

See Roussos (2010), p. 585 et seq. [in Greek]; Karampatzos (2013), p. 97 note 42 [in Greek]; Koumanis (2006), p. 1865 [in Greek]. 46 See Venieris and Katsas (2013) passim [in Greek], Dellios (2012), p. 241 et seq. [in Greek], Paparseniou (2010), p. 915 et seq. [in Greek], Roussis (2013), p. 1166 et seq. [in Greek]. Special legislation aimed at the protection of the individual consumer has also imposed a moratorium on foreclosures on the debtor’s homestead for a prolonged period of time. 47 See Perakis (2012) passim [in Greek]. 48 BBC Europe (28 January 2014) “Whatever happened to the eurozone crisis?” http://www.bbc. com/news/world-europe-25931829 [accessed 31 March 2014].

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The traditional doctrine of impossibility49 requires that performance is made absolutely impossible by a fortuitous event50 for the debtor to be relieved of liability for nonperformance. This doctrine allows impossibility to be an excuse for nonperformance only when it is absolute and demands, by implication, that the debtor employ all available efforts and resources, and even face economic collapse if necessary, in order to perform. In other words, the debtor’s diligence must be absolute and perfect regardless of the magnitude of the increase in physical or financial effort that unforeseen events or changes in circumstances may require of him in order to perform.51 An identical legal treatment of impossibility to perform is adopted at common law under the doctrine of frustration of the contract.52 When the obligation is to deliver fungible things, or things that are not individualized but merely indicated by species, it is difficult to think of circumstances that would reduce a debtor to an absolute impossibility to perform. That is so because of the principle expressed in the adage genera non pereunt.53 For that reason, obstacles that a debtor might find to fulfilling the obligation will be regarded as difficulties that make performance more burdensome, but do not constitute a true impossibility warranting the court’s excusing nonperformance.54 The same conclusion prevails, for greater reasons, when the obligation is to give a sum of money, that is, to pay a monetary obligation. In traditional civilian doctrine, absolute impossibility to perform such an obligation is inconceivable.55 Therefore, traditional civilian doctrine clearly excludes the application of the rules of impossibility to financial crises, but reserves the doctrine of rebus sic stantibus as a subtle counterpart.56

49

Corpus Juris Civilis, Digest 50.17.185 (“impossibilium nulla est obligatio”). Corpus Juris Civilis, Digest 18.6; 50.17.23 (“casus a nullo prestatur”). 51 See Kalligas (1885), p. 750 et seq. [in Greek], Theophanopoulos (1904), p. 136, 171 et seq., 250 [in Greek], Ude (1865), p. 246 et seq., Klimas (2006), p. 193 et seq., 212 et seq. 52 For a comparative excursus, see Corbin et al. (1947), p. 1 et seq. (containing reports from the United States of America, the Soviet Union, Uruguay, and Brazil); Hay (1961), p. 345 et seq.; Draetta (1996), p. 547 et seq.; Hondius and Gricoleit, (eds) (2014) passim; Klimas (2006), p. 212 et seq. 53 Corpus Juris Civilis, Digest 23.3.42; 30.66§2; 31.87; 35.2.30§5; 44.7.1§§2-4; 45.1.38; 46.3.33§1 (“genus perire non censetur”). 54 See Gasis (1949) in: ErmAK, Introduction of Articles 335–348 CC, para. 50; Kalligas (1885), p. 750 et seq.; Paparregopoulos (1890), pp. 84–85, 263 [in Greek]; Tomkins and Jenken (1870), pp. 350–351. The same solution has historically prevailed at common law. See e.g., Wharton (1882), p. 463 et seq. 55 The prevailing view among the Roman jurisconsults was that money was a both a fungible thing (res fungibilis) (Institutes of Gaius 2.196; 3.90) and a consumable thing (res consuptibilis), and that parties referred to the represented value of the currency and not to the physical object of the monies themselves (Corpus Juris Civilis, Institutes 2.4.2). See further Erdody (2007), p. 241 et seq.; Gasis (1949), in: ErmAK, Introduction of Articles 335–348 CC, para 52, and Introduction to Articles 291–292 CC, paras 3 et seq.; Stathopoulos (1979) in: Georgiadis & Stathopoulos, Article 336 CC para 3; idem, supra note 10, p. 1057 et seq. 56 See Pothier (1764), p. 121 et seq. 50

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Theoretically, however, even under the stringency of the traditional doctrine, impossibility to perform a genus of objects can occur, if the entire species becomes extinct, or if there is a noticeable shortage of the kind of species contemplated in the obligation. If this statement holds true, then the following question could be raised: In a monetary obligation between private individuals (who, unlike institutional transacting parties, do not have easy access to foreign currency) expressed in euros,57 is it conceivable to argue that the non-devaluation of the currency,58 or even the shortage in liquidity of available funds in a market (in plain words this means that no new euros are being printed or are circulating in the real economy due to ‘capital controls’), would in fact be tantamount to an impossibility on the debtor’s part to discharge the obligation, not because that debtor alone is insolvent, but because there are not enough euros in the money market, due to a monetary crisis? As long as this crisis unfolds, and until the common European currency becomes equipped with a common fiscal and monetary policy,59 such questions will not so easily be dismissed as theoretical absurdities, but may very well challenge our perception of certain basic and fundamental tenets of our contract law.

References Albrecht. 2012. Austritt aus der Euro-Zone – Vertragliche Gestaltungsmöglichkeiten für Unternehmen mit Vertragspartern in Krisenstaaten. ZIP – Zeitschrift für Wirtschaftsrecht: 1059 et seq. Alexandridou. 2010. The financial products of Lehman Brothers and the coverage of investors’ damages. Dikaio Epicheiriseon kai Etairion (Journal of Company and Enterprises Law): 132 et seq. [in Greek]. Armingeon, Baccaro. 2012. Political economy of the sovereign debt crisis: The limits of internal devaluation. Industrial Law Journal: 254 et seq. Balis. 1960. General law of obligations, 3rd ed. Athens: Pyrsos [in Greek]. Barkbu, Eichengreen, Mody. 2012. Financial crises and the multilateral response: What the historical record shows. Journal of International Economics: 422 et seq. BBC Europe. 28 Jan 2014. Whatever happened to the eurozone crisis? http://www.bbc.com/news/ world-europe-25931829. Accessed 31 Mar 2014. Berger, Filgut. 2005. Material-Adverse-Change-Klauseln in Wertpapiererwerbs- und Übernahmeangeboten. WM Zeitschrift für Wirtschafts- und Bankrecht: 253 et seq. Borchard, and Wynne. 1951. State insolvency and foreign bondholders, vol. I. New Haven: Yale University Press. Bosdas. 1971. The unchangeable circumstances as a silent term of the contract. Nomiko Vima (Athens Bar Association Law Review): 150 et seq. [in Greek].

57

See Iatrakis (2009–2010), p. 9 et seq. [in Greek]. See Kariv (1970), p. 533 et seq., Hirschberg (1982), p. 183 et seq., Tsimikalis (1950), p. 82 et seq, Floros (1959), p. 13 et seq. [in Greek], Kallimopoulos (1993), p. 114 et seq. [in Greek]. On the related issue of inflation, see Dawson (1934), p. 171 et seq., Dawson and Cooper (1935), p. 852 et seq. 59 See Varoufakis et al. (2011) passim. 58

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Boudreau. 2012. Restructuring sovereign debt under local law: Are retrofit collective action clauses expropriatory? Harvard Business Law Review Online www.hblr.org. Accessed 31 Mar 2014. Buchheit, Gulati. 2011. Greek debt – The endgame scenarios www.ssrn.com. Accessed 31 Mar 2014 Chouvardas. 1938. Error as to the basis of the contract. Athens: Petsalis [in Greek]. Chrysogonos. 2012. The lost honor of the Hellenic Republic. Nomiko Vima (Athens Bar Association Law Review): 1353 et seq. [in Greek]. Corbin, Agarkov, Coutoure, Azevedo. 1947. The treatment of “frustration of contract” in foreign legal systems. Journal of Comparative Legislation and International Law, 3d series: 1 et seq. Dawson, Cooper. 1935. The effect of inflation on private contracts: United States, 1861–1879. Michigan Law Review: 852 et seq. Dawson. 1934. Effects of inflation on private contracts, Germany, 1914–1924. Michigan Law Review: 171 et seq. Dellios. 2012. Outstanding bank credit contracts in periods of financial crisis. Chronika Idiotikou Dikaiou (Chronicles of Private Law): 241 et seq. [in Greek]. Demogue. 1931. Traité des obligations en general, vol. VI. Paris: Rousseau. Doris. 2010. Judicial reformation of the content of outstanding contracts in periods of financial crisis. In Association of Greek commercialists ed. Minutes of the 19th conference of commercial law: Commercial law and the financial crisis. Athens: Nomiki Vilviothiki, 19 et seq. [in Greek]. Draetta. 1996. Force majeure clauses in international trade practice. International Business Law Journal: 547 et seq. Economopoulos. 1972. Legal opinion. Neon Dikaion (The New Law Journal): 325 et seq. [in Greek]. Efthymiou. 1966. The legal principle of rebus sic stantibus. Elliniki Dikaiosyni (Journal of Greek Justice): 96 et seq. [in Greek]. Erdody. 2007. Some questions concerning money in Roman law – A new perspective. Acta Antiqua Hungarica: 241 et seq. Feissel, Gorn. 2009. Finanzkrise vs. Pacta sunt servanda – Vertragsanpassung in Krisenzeiten. Betriebs Berater: 1138 et seq. Field Fisher Waterhouse. May 2012. The Eurozone crisis and financial transactions – A comprehensive guide www.ffw.com. Accessed 31 Mar 2014. Floros. 1959. Jurisprudence on the problem of the devaluation of currency. Archeion Nomologias (Archive of Jurisprudence): 13 et seq. [in Greek]. Georgiadis. 2012. General principles of civil law, 4th ed. Athens: P.N. Sakkoulas. Georgiadis, Stathopoulos. eds. 1979. Commentary to the civil code (hereinafter referred to as Georgiadis and Stathopoulos), vol. II: General law of obligations. P. Sakkoulas Bros, Athens, paras 24 et seq. [in Greek]. Hay. 1961. Frustration and its solution in German law. American Journal of Comparative Law: 345 et seq. Hirschberg. 1982. The legal aspects of devaluation of currency in modern times. Commercial Law Journal: 183 et seq. Hondius, and Gricoleit. eds. 2014. Unexpected circumstances in European contract law. Cambridge: Cambridge University Press. Hopt. 2009. MAC-Klauseln im Finanz- und Übernahmerecht. In ed. Bitter, Lutter et al. Festschrift für K. Schmidt. Cologne: Verlag Dr. Otto Schmidt, p 681 et seq. Horn. 1992. Adaptation and modification of contracts in view of a change of circumstances. TelAviv University Studies in Law: 137 et seq. Huber, Mullis. eds. 2007. The CISG. Munich: Sellier. Husain, Diwan. 1989. Dealing with the debt crisis. Washington D.C.: World Bank. Iatrakis. 2009–2010. The nominalistic principle in times of financial crisis. Rhadamanthys (Heraklion Bar Association Law Review): 9 et seq. [in Greek].

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International Monetary Fund. 2003. Reviewing the process for sovereign debt restructuring within the existing legal framework. Washington D.C.: IMF. Jacoby. 1972. Les risques dans la vente: de la loi romaine à la loi de la protection du consommateur. McGill Law of Journal: 343 et seq. Kalligas. 1885. System of Roman law as applied in Greece, vol. C: Of obligations, 3rd ed. Athens: Koromilas [in Greek]. Kallimopoulos. 1993. The law of money. Athens/Komotini: Ant. Sakkoulas [in Greek]. Karampatzos. 2005. Supervening hardship as subdivision of the general frustration rule: A Comparative analysis of with reference to Anglo-American, German, French and Greek law. European Review of Private Law: 109 et seq. Karampatzos. 2006. Unforeseen change of circumstances in the bilateral contract. Athens/ Komotini: Ant. Sakkoulas [in Greek]. Karampatzos. 2010. The banking system and the next international crisis. Synigoros (Counsel Law Journal): 76 et seq. [in Greek]. Karampatzos. 2011. Commentary to Greek jurisprudence. Nomiko Vima (Athens Bar Association Law Review): 2317 et seq. [in Greek]. Karampatzos. 2012. ‘Glass bonds’ and potential claims of bondholders – A first approach. Dikaio Epicheiriseon kai Etairion (Journal of Company and Enterprises Law): 294 et seq. [in Greek]. Karampatzos. 2012. Commentary to Greek jurisprudence on arts 288 and 388 CC. Chronika Idiotikou Dikaiou (Chronicles of Private Law): 430 et seq. [in Greek]. Karampatzos. 2013. Commentary to Greek jurisprudence. Chronika Idiotikou Dikaiou (Chronicles of Private Law): 92 et seq. [in Greek]. Karampatzos. 2013. Financial crisis and revision of contractual performances – Especially under the scope of the recent court decisions on commercial leases. Chronika Idiotikou Dikaiou (Chronicles of Private Law): 92 et seq. [in Greek]. Kariv. 1970. Contracts under monetary fluctuations: The legal effects of devaluation. Northwestern University Law Review: 533 et seq. Katrougalos. 2010. Memoranda sunt servanda? Efimerida Dioikitikou Dikaiou (Journal of Administrative Law): 157 et seq. [in Greek]. Kindt, Stanek. 2010. MAC-Klauseln in der Krise. Betriebs Berater: 1490 et seq. Klimas. 2006. Comparative contract law. Durham: Carolina Academic Press. Kostopoulou. 2013. Memorandum, financial crisis and ECHR. Synigoros (Counsel Law Journal): 34 et seq. [in Greek]. Koumanis. 2006. Revision of contractual terms in commercial leases according to arts 388 and 288 of the civil code, due to failure of the Geschäftsgrundlage. Armenopoulos (Thessaloniki Bar Association Law Review): 1865 [in Greek]. Kourakis. 2010. Revision of obligations due to crisis. Synigoros (Counsel Law Journal): 44 et seq. [in Greek]. Krückmann. 1918. Clausula rebis sic stantibus, Kriegsklausel, Streikklausel. Tübingen: Mohr. Krueger. 2002. A new approach to sovereign debt restructuring. Washington D.C.: IMF Papers. Krugman. 1985. International debt problems in an uncertain world. In International debt and the developing countries, ed. Smith and Cuddington. Washington D.C.: World Bank. Kull. 1991. Mistake, frustration and the windfall principles of contract remedies. Hastings Law Journal: 1 et seq. Liappis. 2011. Financial crisis and contract law. Dikaio Epicheiriseon kai Etairion (Journal of Company and Enterprises Law): 15 et seq. [in Greek]. Liappis. 2012. Indemnification of investors and capital markets law. Athens: Nomiki Vivliothiki [in Greek]. Lienau. 2008. Who is the ‘sovereign’ in sovereign debt?: Reinterpreting a rule-of-law framework from the early twentieth century. Yale Journal of International Law: 63 et seq. Liendo. 2007. Sovereign debt litigation problems in the United States: A proposed solution. Oregon Review of International Law: 107 et seq.

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Litzeropoulos, et al. eds. 1949. Commentary to the civil code (hereinafter referred to as ErmAK), vol. II.A: General law of obligations. Athens: Hellenic Publishing Company [in Greek]. Marcantonio. 1985. Unifying the law of impossibility. Hastings International and Comparative Law Review: 41 et seq. McNair. 1940. Frustration of contract by war. The Law Quarterly Review: 173 et seq. Mentis. 2012. Defense and release of the heavily indebted debtor. Athens: P.N. Sakkoulas [in Greek]. Metallinos. 2013. The Greek sovereign debt restructuring. In Sovereign debt and debt restructuring, ed. Bruno. London: Globe Business, p 19 et seq. Moustaira. 2007. Over-indebtedness of states. Is the establishment of a special insolvency procedure warranted? Dikaio Epicheiriseon kai Etairion (Journal of Company and Enterprises Law): 141 et seq. [in Greek]. Ochoa. 2008. From odious debt to odious finance: Avoiding the externalities of a functional odious debt doctrine. Harvard International Law Journal: 109 et seq. Oertmann. 1921. Die Geschäftsgrundlage – Ein neuer Rechtsbegriff. Leizig: Deichert. Panizza, Sturzenegger, Zettelmeyer. 2009. The economics and law of sovereign debt and default. Journal of Economic Literature: 651 et seq. Papadimopoulos. 2012. The exit of a Member State from the Eurozone and its effect on monetary obligations. Chronika Idiotikou Dikaiou (Chronicles of Private Law): 630 et seq. [in Greek]. Papanikolaou. 1985. The measure of onerousness of performance and the extent of the judge’s corrective intervention in the contract according to article 388 CC. Nomiko Vima (Athens Bar Association Law Review): 940 [in Greek]. Papanikolaou. 2000. Methodology of private law and interpretation of juridical acts. Athens/ Komotini: Ant. Sakkoulas [in Greek]. Papantoniou. 1957. Good faith in the civil law. Thessaloniki: Sakkoulas [in Greek]. Paparregopoulos. 1890. The applicable civil law in Greece, vol. 3: Law of obligations. Athens: Vlastos [in Greek]. Paparseniou. 2010. The over-indebtedness of private individuals according to Law 3869/2010. Efarmoges Astikou Dikaiou (Applications of Civil Law): 915 et seq. [in Greek]. Pavlidis. 2006. La défaillance d’Etat. Sakkoulas. Athens: Thessaloniki, p 124 et seq. Perakis. 2012. Bankruptcy law, 2nd ed. Athens [in Greek]. Perillo. 1997. Force majeure and hardship under the UNIDROIT principles of international commercial contracts. Tulane Journal of International and Comparative Law: 5 et seq. Perry, Gelman. 2012–2013. Exiting the Euro. Richmond Journal of Global Law and Business: 479 et seq. Pothier. 1764. Traité des obligations selon les règles tant du for de la conscience que du for extèrieur. Paris: Debure. Roussis. 2013. Contractual architecture of management of insecure claims. Nomiko Vima (Athens Bar Association Law Review): 1166 et seq. [in Greek]. Roussos. 2010. Lessee’s right of termination of commercial lease according to art. 43 of Presidential Decree 34/1995. Chronika Idiotikou Dikaiou (Chronicles of Private Law): 585 et seq. [in Greek]. Sachs. 1999. Creditor panics: Causes and remedies. Cato Journal: 377 et seq. Scherer. 2010. Economic or financial crises as a defence in commercial and investment arbitration. Czech Yearbook of International Law: 219 et seq. Sealy. 1972. Risk in the law of sale. Cambridge Law Journal: 255 et seq. Sharp. 1941. Pacta sunt servanda. Columbia Law Review: 783 et seq. Simantiras. 1988. General principles of civil law, 4th ed. Athens/Komitini: Ant. Sakkoulas [in Greek]. Smith, Godwin, Roughton, Gilmore, and Kratochvilova. 2009. Is the credit crunch an event of force majeure or frustration?, www.lexogoly.com. Accessed 31 Mar 2014. Spector. 2009. Don’t cry for me Argentina: Economic crises and the restructuring of financial property. Fordham Journal of Corporate and Finance Law: 771 et seq.

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Spyridakis. 1978. Unforeseen change in circumstances during the debtor’s delay in performance. Nomiko Vima (Athens Bar Association Law Review): 1016 et seq. [in Greek]. Spyridakis. 1990. Substantial error, error as to qualities, error as to motives, and foundation of contract. Nomiko Vima (Athens Bar Association Law Review): 1320 et seq. [in Greek]. Stathopoulos. 2004. General law of obligations, 4th ed. Athens/Thessaloniki: Sakkoulas [in Greek]. Stoll, Gruber. 2005. Article 79. In Commentary on the UN convention on the international sale of goods (CISG), ed. Schlechtriem and Schwenzer, 2nd ed. Oxford/New York: Oxford University Press. Studies on the Memorandum of Greek Debt. 2012. Nomiko Vima (Athens Bar Association Law Review): 2641 et seq. [in Greek]. Taliadoros. 2000. Greek civil code. Athens/Komotini: Ant. Sakkoulas. Tallon. 1987. Article 79. In Commentary on the international sales law, ed. Bianca and Bonell. Guiffrè, Milan. Theodoropoulos. 1949. The unforeseen change of circumstances in contracts. Thessaloniki: Kallitechnikon [in Greek]. Theodoropoulos. 1960. The power of the judge in cases of unforeseen change of circumstances in a contract (article 388 CC). Elliniki Dikaiosyni (Journal of Greek Justice): 134 et seq. [in Greek]. Theophanopoulos. 1904. System of the Roman law, vol. C’: Law of obligations. Athens: Tzakas [in Greek]. Tomkins, Jenken. 1870. A compendium of the modern Roman law. London: Butterworths. Tsimikalis. 1950. The effects of changes in the value of money on international payments. Revue Hellénique de Droit International: 82 et seq. Tsoukala. 2013. Narratives of the European crisis and the future of (social) Europe. Texas International Law Journal: 241 et seq. Ude. 1865. Über die Bedeutung des Satzes “impossibilia nulla obligatio”. Archiv für die civilistische Praxis: 246 et seq. Varoufakis, Halevi, Theocharakis. 2011. Modern political economics: Making sense of the post2008 world. London/New York: Routledge. Venieris, Katsas. 2013. Application of Law 3869/2010 on over-indebted natural persons, 2nd ed. Athens: Nomiki Vivliothiki [in Greek]. Voirin. 1922. De l’imprévision dans les rapports de droit privé. Nancy. Wharton. 1882. A commentary on the law of contracts, vol. I. Philadelphia: Kay & Brother. Windscheid. 1850. Die Lehre des römischen Rechts von der Voraussetzung. Düsseldorf: Buddeus. Wright. 2010. Restructuring sovereign debts with private sector creditors: Theory and practice. Washington, DC: World Bank. Wynne. 1951. State insolvency and foreign bondholders, vol 2. New Haven: Yale University Press.

Chapter 10

“All Roads Lead to Rome”: The Multiple Grounds Under Italian Law to Challenge a Contract Due to Supervening Changes of Circumstances Marco Torsello

Abstract This paper focuses on the impact of the global financial and economic crises on the binding force of contracts from the perspective of Italian law. The analysis relies on a preliminary distinction between different factual consequences of the crises, in view of their potential availability as grounds for derogation to the principle “pacta sunt servanda”. The paper uses those factual circumstances as hypotheticals to illustrate the operation of Italian law, highlighting that impossibility of performance, supervening excessive onerousness of performance, excessive devaluation of the counter-performance and failure of presupposed conditions are all available doctrines under which an exception to the principle of “pacta sunt servanda” may be sought. The paper argues that all these different doctrines share the same rationale, that is the existence of an implied contract term of “rebus sic stantibus”, which may lead to the remedy of termination. The paper concludes that if any remedy is to be granted, termination is to be preferred to renegotiation or revision, as the former is more likely to lead to a reassessment of the price reflecting the new market conditions.

An earlier version of this article is published in the book “Rapports Nationaux Italiens au XIX Congrès International De Droit Comparé /Italian National Reports to the XIXth International Congress of Comparative Law – Vienne 2014” published by Giuffrè Editore in collobaration with Società Italiana per la Ricerca nel Diritto Comparato and Università degli Studi di Milano upon whose approval, was updated later by the author. M. Torsello (*) School of Law, University of Verona, Verona, Italy School of Law, New York University, New York, NY, USA e-mail: [email protected]; [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_10

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Introduction

It has not been a rare occurrence in the past half-decade to come across the statement that “nothing will ever be the same again”. Apart from a few citations of the lyrics of a melancholic song, in the vast majority of cases this expression and similar ones were used to refer to the impact of the recent global financial and economic crises on people’s everyday life. In fact, the same statement has been used by both laymen and business operators, consumers and professionals, debtors and creditors, and even by bankers and other representatives of financial institutions. The diversity of the background and economic standing of those calling forth the reported statement triggers the question as to what contingencies exactly does the reference to the recent “global financial and economic crises” apply to. The answer to this question may, in turn, make it easier to identify what, in people’s life will “never be the same again”, and whether such a dramatic change should result in a reversal of situations that beforehand were regarded as established. In particular, this paper will focus on the impact that the global financial and economic crises may have on the binding force of existing contracts and will provide an overview of the matter under consideration from the perspective of Italian contract law.1 The task undertaken here will be dealt with by making the attempt at addressing several relevant questions concerning the effects of financial and economic crises on the binding force of contract. Section 10.1 will start by identifying a list of possible factual consequences of financial crises, which deserve further investigation in view of their potential capability to provide viable grounds for a derogation to the principle of “pacta sunt servanda” under Italian law; on those grounds, Sect. 10.2 will provide an overview of the theoretical bases under which Italian law may provide for a derogation to the principle of “pacta sunt servanda” in exceptional circumstances; Sect. 10.3 will then deal with the conditions required for the exceptional circumstances to have legal effects; the appearances of the relevant exceptional circumstances will be considered in Sect. 10.4; in Sect. 10.5 the legal consequences of the occurrence of the said exceptional circumstances will be illustrated under Italian contract law; Sect. 10.6 will consider the position of the party that would have benefitted from the exceptional circumstances, following the operation of the rules protecting the disadvantaged party; this study will be concluded in Sect. 10.7 with some closing observations, based on the comparison of Italian contract law with solutions found in other legal systems.

1

It must be stressed here that Italian domestic law also includes sources of uniform law which were created at the supranational level, such as, for instance, the United Nations Convention on Contracts for the International Sale of Goods (CISG), adopted in Vienna on April 11th, 1980. Although the CISG is certainly part of the Italian legal system and its Article 79 may be regarded as addressing the issue of the effects of the financial and economic crises on international contracts of sale (for further details on Article 79 CISG, Ferrari, Torsello (2014) 317–333), this paper will deal neither with the CISG, nor with other supranational sources of contract law, but rather will focus only on Italian domestic contract law as laid out in Italian purely domestic law.

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The Factual Consequences of the Financial Crisis and Their Relevance Under Italian Contract Law

According to a widely accepted definition, reference to the recent “global financial and economic crisis” relates to the situation that materialized starting from approximately mid-2007. For reasons that need not be explored in detail here, parties to financial contracts in many nations simultaneously concluded that the contracts they held were unlikely to be honored by counterparties and that the financial assets that they had in their portfolios were likely to be worth substantially less than previously thought.2 Under those circumstances panic spread. Banks ceased to advance funds to others, demanded early repayment of loans, liquidated holdings of financial assets that could be sold and increased collateral requirements. All these actions are thought to have been taken to a degree that could not have been foreseen in advance by market participants, to the effect that a freeze of most financial activities occurred. In turn, the freeze of financial activities produced additional considerable difficulties in trading financial instruments. Also private individuals, fearing for their wealth, contributed to the crisis by demanding repayment of financial instruments and seeking to hold accepted stores of value, such as gold, the value of which, in fact, rocketed to unprecedented peaks. The global financial crisis is often symbolically identified with the collapse and filing for bankruptcy of the US investment bank, Lehman Brothers, which happened on September 15th, 2008.3 The financial crisis rapidly and dramatically resulted in a global economic crisis. Although the dynamics that led from the financial to the economic crisis are extremely complicated and still largely controversial, it seems correct to maintain that the withdrawal of credit to businesses caused by the global financial crisis created a severe downturn in economic activities, resulting in falls in national income and increase in unemployment. In one word, the financial crisis turned into an economic crisis, from which most economies worldwide have still not recovered in full. The financial crisis and the following economic crisis are often held to be phenomena that were unforeseeable and unpredictable before their occurrence. Indeed, it is a fact that, with very limited exceptions, economists had not predicted the crisis and proved to be largely unprepared to deal with it. From a legal perspective, unforeseeability and unpredictability are relevant characteristics of supervening events, which may lead to the inference of significant consequences on commercial relationships and existing contracts. In particular, it is widely accepted that the general rule of contract law that “pacta sunt servanda” may at times be subject to an exception, to the extent that supervening events occur, which have such an impact on the equilibrium of the contract that it would be unreasonable to impose a duty to perform, or liability for non-performance, on the party affected by the supervening 2

For this definition, see, Financial Times Lexicon, available online at: http://lexicon.ft.com. However, clear sings of the crisis were apparent well before the collapse of Lehman Brothers, although it may prove difficult to set a precise date for the start of the crisis. Relevant, pre-LehmanBrothers signs of the crisis included, in particular, the sharp revaluations in the prices of lower quality US mortgage-backed securities (so called subprime mortgages). 3

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event. Accordingly, it seems correct to affirm that, under certain circumstances, the rule that “pacta sunt servanda” is subject to the exception that the binding force of contracts persists only to the extent that “rebus sic stantibus”, i.e., only to the extent that the basic preconditions of the agreement do not change. However, the notion of “financial and economic crises” seems in itself too vague to make any proper assessment possible, as to the legal consequences of the occurrence of such global phenomenon. It is therefore necessary to take a closer look to the factual consequences of the crises in order to be able to make an assessment as to whether the changes brought about are capable of affecting existing contracts. In this respect, there are several different situations that are likely to arise from a financial or economic crisis, each one of which may be regarded as having a possible impact on the equilibrium of contracts. The first type of phenomenon resulting from the global financial and economic crises may be described as the “tightening of access to credit”. Indeed, the global financial crisis has proved to have a negative impact on the access to credit, in that financial institutions have become more reluctant to provide credit to individuals and businesses, and the cost of credit (i.e., primarily the interest rate on loans) has increased significantly. The social and political relevance of this phenomenon in Italy is confirmed by the attention paid by the Italian government to its impact on the increase of the cost of variable interest rates payable by individuals and families on mortgage loans concluded for the purchase by mortgagors of their house of principal domicile. In fact, a statutory provision was introduced in 2008,4 under which a complex mechanism was introduced with the goal of granting to the debtor the possibility of obtaining the reduction and stabilization of the interests payable per installment, in exchange for an extension of the duration of the loan. In one word, the legislative innovation intended to favor the renegotiation of existing loans.5 The second type of consequence typically resulting from a financial or economic crisis is “inflation”,6 which consists of the devaluation of the purchasing power of money and, as a result of that, in the increase of the cost of products. It should be noted with relief that up to date the global financial and economic crises have not produced significant inflationary effects, although there are fears that in the long run the several stimulus packages put in place by governments and central banks by injecting liquidity in the market may cause inflationary phenomena. However, even though generalized inflation has not occurred as a result of the financial crisis, the prices of some commodities and raw materials have risen unexpectedly beyond the range of normal fluctuation. As a result of this, it has been argued at times that the increased cost of products has had a negative impact on the equilibrium of existing contracts dealing with the products in question.7 4

Article 3 of the Law Decree (Decreto Legge) n. 93/2008, converted into the Statutory Law (Legge) of 24 July 2008 n. 126, in Official Journal n. 174 of 26 July 2008. 5 For further details, see Fausti (2008) 746. 6 For a classical study on the effects of inflation on contracts, see Nicolò (1944–1946) 41. 7 For a well-known recent court decision (although not rendered by an Italian court) dealing with the consequences of the exceptional increase in the market price of steel, see Hof van Cassatie (Belgian Supreme Court), 19 June 2009 (Scafom International BV v. Lorraine Tubes SAS), English translation available at http://cisgw3.law.pace.edu/cases/090619b1.html.

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The third type of consequence of a financial and economic crisis can be described as the opposite of the prior one. It is commonly referred to as “deflation”, and it has been observed and described as resulting from the global financial and economic crises and leading to the decrease in value of products. Also under deflationary circumstances, the equilibrium of existing contracts may be negatively affected in that the value of products exchanged under the contract may drop significantly. To provide just one relevant example closely related to the financial crisis (and possibly to some extent preceding and contributing to cause the crisis), the value of real estate has significantly dropped in many areas of the world. The forth, and last, type of relevant effect of the financial and economic crises capable of affecting existing contracts consists of the generalized “market slowdown”. As a result of the slowdown, many manufacturers have found themselves in a situation of “over-production” or “over-supply”, where the market is no longer capable of absorbing their output and, in turn, the manufacturers do not need the quantities of supplies previously required. It should be stressed that the situation that has just been described may occur and be relevant even if the value of the products manufactured by the business in question doesn’t change. Accordingly, the relevant change capable of affecting the contract does not consist of an alteration of the original equilibrium, but rather in a change of the overall context and conditions under which the parties had entered into the agreement. In the light of the foregoing, it seems correct to argue that the financial and economic crises may impact on contracts in various different ways. All the possible ways in which the economic crisis may affect contracts may be subsumed under the general notion of supervening changes of circumstances, which has often been described by reference to the existence of an implied condition of “rebus sic stantibus”. Under this implied term the effectiveness of the contract would be conditional upon the persistence of the circumstances under which the contract was concluded. However, in order to properly provide an overview of how Italian contract law deals with the effects of financial crises at large, the distinction that has been made among the different types of effects of the financial and economic crises will be considered in the light of the various theoretical bases under which the principle of “rebus sic stantibus” may constitute an exception to the fundamental rule of contract law that “pacta sunt seranda”.

10.3

The Theoretical Bases of the Effects of Financial Crises on Contracts Under Italian Contract Law

Not unlike all other modern legal systems, Italian law posits as a fundamental premise of the entire system of contract law that “pacta sunt servanda”.8 This rule was already codified in Article 1123 of the Italian Civil Code of 1865, which in this respect (as in many others) reproduced the solution adopted by the French Code

8

Cf. De Nova (1993).

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Napoléon of 1804. Indeed, according to Article 1134 of the Code Napoléon,9 «[l]es conventions légalement formées tiennent lieu de loi à ceux qui les ont faites».10 The Italian codified provision of 1865 read almost identically, and a very similar solution was also adopted in 1942 in the new Italian Civil Code (hereinafter also referred to as “c.c.”), currently in force, whose Article 1372 recites that “the contract has the force of law as between the parties […]”.11 As an example of the persisting fundamental role of the general rule under consideration, suffices it to mention a recent decision rendered by the Administrative Court of Lombardy, seated in Milan.12 Indeed, the court rejected the claim for a derogation from the duty to abide by the contract in a situation where the contractor to a construction contract with the municipality of Gallarate invoked the «unforeseeable and extremely severe global crisis in the construction business», along with the «crisis of the financial sector». The court did not share the view that the change of circumstances invoked by the construction company should have an impact on the contract and upheld the duty to abide by the terms of the agreement. In the past, a comparable solution, upholding the application of the principle that pacta sunt servanda, was adopted by Italian courts upon the occurrence of another (yet local) economic crisis. The economic crisis in question took place in the early Nineties, and led Italy to abandon the European Monetary System (E.M.S.). The system was based on the European Exchange Rate Mechanism, which attempted at minimizing the fluctuation of European currencies by linking them to the European Currency Unit (ECU). The abandonment of the E.M.S. by Italy resulted in a sudden fall of the exchange rate of the Italian Lira against the ECU, which in turn caused increases in the cost for repayment of loans denominated in ECU of up to 30 %. Notwithstanding this rather harsh consequence, Italian courts called upon to address the issue at hand held that contracts were not affected by the change of circumstances to an extent that would require the discharge from the contractual obligations.13 Courts thus confirmed that the general rule of Italian contract law strictly adheres to the principle that pacta sunt servanda. However, although pacta sunt servanda must be regarded as the general and fundamental rule of Italian contract law, under certain circumstances exceptions to that rule are allowed, in accordance with the principle of “rebus sic stantibus”.14 These exceptions are primarily based on the occurrence of relevant supervening

9 A solution that the Code Napoléon borrowed from DOMAT, Les lois civiles dans leur ordre naturel, Book I, Title I, Sec. II, VII: «Les conventions étant formées, tout ce qui a été convenu tient lieu de loi à ceux qui les ont faites et ells ne peuvent être révoquées que de leur consentement commun». 10 For comments on this provision, see, e.g., Jamin (2001) 901; Ghestin and Billiau (2001) 656. 11 Translation by the Author. For a scholarly writing dealing with the rule at hand, see Vettori (2002). 12 T.A.R. (Regional Administrative Court) Lombardia (Milan), 21 May 2013, in Foro Amm. – T.A.R., 2013, 1450; for a similar, although not identical, approach, see also Cons. Stato (Supreme Administrative Court), 17 May 2010, n. 3129, in DeJure Redazione Giuffè, 2010. 13 See, e.g., Trib. (Court of first instance) Pescara, 24 January 1997, in Foro it., 1998, I, 613; Trib. (Court of first instance) Firenze, 28 March 1998, in Gius, 1998, 2189. 14 On the principle of rebus sic stantibus, prior to the Italian codification of 1942, see, Caliendo (1938) 209; for an update on the same issue, see, Osti (1959) 353.

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events, which are deemed to have such a significant impact on the contract in question that derogation to the general rule appears necessary. Cases of express application of the principle of “rebus sic stantibus” in contracts are at times laid out with specific regard to individual types of contracts. However, a broader and more general possibility to claim the discharge from contractual obligations is also made available to the party affected by supervening circumstances under the general rules on contracts and obligations laid out in the Italian c.c.. A prominent example of a rule specifically devoted to a single type of contract is laid out in Article 1664 of the Italian c.c. with respect to contracts for works. Under this provision, «(1) [w]henever, as a result of unforeseeable circumstances, increases or decreases in the costs of materials or workforce occur, so as to determine an increase or decrease greater than one tenth of the overall price agreed upon, then either the contractor or the client may request a revision of the price. The revision may be granted only with respect to the difference that exceeds one tenth. // (2) If, in the performance of the contract works, difficulties arise, which are due to geological, hydric or similar causes, to the effect that the contractor’s works are significantly more onerous, the latter shall have the right to claim an additional equitable compensation».15 As already mentioned, in addition to rules dealing with specific types of contracts (such as contracts for works), Italian law also provides for rules applicable to contracts and obligations in general. In particular, the rules in question provide for the possibility to claim the discharge from an existing contract in the event of supervening circumstances altering to a significant extent the conditions taken into account by the parties at the time of contracting. The following overview will focus on the latter kind of provisions, which set forth general contract remedies available in the event of the occurrence of unforeseen supervening circumstances. First of all, not unlike in many other jurisdictions,16 under Article 1256 of the Italian c.c., relevant supervening events leading to the discharge of the contractual obligations, include impossibility of performance. Supervening impossibility consists of an objective and absolute impediment, which is not due to an act or omission of one of the parties and which cannot be overcome.17 Therefore, under Article 1256 of the Italian c.c., the party whose performance became impossible is discharged from his obligations. Moreover, under Article 1463 c.c., that same party cannot claim performance from the other party (whose performance is still possible), and if the counter-performance had already been rendered, the party whose performance has become impossible must make restitution of what he received.18 In addition to supervening impossibility, relevant changes of circumstances capable of having an impact on existing contracts include also “supervening exces-

15

Translation by the author. For a recent court decision applying the rule under consideration, see Cass. (Italian Supreme Court), 13 January 2010, n. 380, in Giust. civ. Mass. 2010, 2, 142. 16 See, e.g., with respect to the French legal system, Cass. (French Supreme Court) Ass. Plén., 14 April 2006, in Rev. des Contr., 2006, annotated by VINEY. 17 Cass. (Italian Supreme Court), 15 November 2013, n. 25777, in Giust. civ., Mass. 2013. 18 Cf. Cass. (Italian Supreme Court), 28 February 2013, n. 5033, in Giust. civ., 9, I, 1737, with comment by D’Auria.

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sive onerousness of performance”.19 This special kind of change of circumstances is expressly dealt with in Articles 1467–1469 of the Italian c.c.. The solution adopted by the provisions at hand has been regarded as a remarkable innovation of the 1942 Italian codification, which has inspired several subsequent national legislative provisions in Europe,20 Latin America,21 Islamic countries22 and elsewhere, as well as several supranational instruments dealing with the law of contract.23 The provisions under consideration operate only in long-term, relational contracts, which provide either for performance in installments, or for a postponed performance.24 Conversely, they do not operate with regard to discrete contracts, the rationale being that the supervening event may be taken into account only to the extent that the contract has not already produced all its effects. Moreover, under Article 1469 Italian c.c., the provisions on supervening excessive onerousness operate only with respect to commutative contracts, where the parties intend to execute an exchange of corresponding performances. Conversely, the provisions at hand do not operate with respect to so-called aleatory contracts,25 where the parties contractually accept the risk that one or both performances be not rendered or be not worth what was envisaged in the contract.26 It should be noted that the aleatory nature can be an intrinsic character of the contract in question, like in the case of insurance 19 For scholarly works specifically dealing with this matter, see, among others, Pennazio (2013), Riccio (2010), Macario (2009) 1026, Al Mureden (2004), Traisci (2003), Terranova (1996), Gallo (1991) 235, Tartaglia (1980) 155, Pino (1952). 20 In Europe codified solutions similar to the Italian one, and arguably inspired by the latter, can be found, e.g., in the Greek Civil Code of 1946 (Article 388), in the Portuguese Civil Code of 1966 (Articles 437–438), in the Dutch NBW of 1992 (Article 6:258), and in the Civil Code of the Russian Federation of 1996 (Article 451); also the 2002 Reform of the German Civil Code has led to a new provision in § 313 BGB, although the primary source of inspiration in that respect must be traced back to the pre-existing German case-law and scholarly writings on the issue of Geschäftsgrundlage, dating back to the landmark work of Windsheid (1850). 21 In Latin America, several legislatures introduced a special rule on supervening excessive onerousness on the basis of the Italian model: samples of this include Article 1198 of the Argentinian Civil Code, introduced by means of the Statute 17.711 of 1968; the Colombian Commercial Code of 1972 (Article 868); the 1975 Civil Code of Bolivia (Article 581–583); the Civil Codes of Paraguay and Perù, both adopted in 1984; and the new Brazilian Civil Code of 2003 (Articles 317 and 478). 22 As far as islamic legal systems are concerned, the Italian model on supervening excessive onerousness inspired the Civil Code of Egypt of 1949 (Article 147), which in turn was the source of inspiration for several other civil codifications, including those of Syria of 1949 (Article 166), of Libya of 1954 (Article 147), of Jordan of 1976 (Article 205), of Kuwait of 1980 (Article 198), as well as the Law on Commercial Contracts of the United Arab Emirates of 1993 (Article 181), and that of Tunisia, reformed in 2005 (Article 1022). 23 Provisions in international instruments, which may be held to have taken into account, at least to some extent, the Italian model on supervening excessive onerousness include the 1980 Convention on Contracts for the International Sale of Goods (Article 79); the Unidroit Principles of International Commercial Contracts (Article 6.2.3), the Principles of European Contract Law (Article 6.111), the Draft Common Frame of Reference (Article 1:110 of Book III), and the Proposal for a (EU) Regulation of the European Parliament and of the Council on a Common European Sales Law, of 11 October 2011, [COM(2011) 635 final] (Article 89). 24 For a similar statement, see, e.g., Tartaglia (1980) 161. 25 On the notion of aleatory contract see, e.g., Gabrielli (2000) 1, Di Giandomenico (1987). 26 See, e.g., Cass. (Italian Supreme Court), 4 January 1993, n. 10, in Giust. civ., Mass. 1993, 5.

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contracts; however, it can also be the result of the agreement of the parties, who are in principle free to allocate by contract risks among themselves, thus limiting the possible operation of rules on changes of circumstances.27 If one were to limit the analysis of Italian contract law only to the legislative formant, one would conclude that the provisions considered above exhaust the cases where supervening circumstances may have an impact on existing contracts. However, the proper methodology to be adopted in any legal analysis requires the interpreter not to limit the analysis to only one formant, but rather to consider the role of all formants with respect to the matter under consideration.28 Accordingly, a closer look to judicial and doctrinal formants of Italian contract law shows that there exist additional, non-codified, types of supervening occurrences, which may be invoked by the disadvantaged party to the contract in order to free himself from the duties arising under that contract. On grounds similar to those underlying the provision of Article 1467 of the Italian c.c., it has been held that not only the relevant increase of the costs of performance, but also a “significant devaluation” of the expected counter-performance justifies the discharge from his contractual obligations of the promisee of the devalued performance.29 This conclusion is not supported by any legislative provision laid out in the Italian c.c.; however, scholarly writings have provided convincing evidence that in a considerable number of cases where courts applied Article 1467 c.c., the facts of the case considered by the courts consisted of the devaluation of the counter-performance, rather that of the increased onerousness of the performance of the promisor.30 Accordingly, it is correct to argue that under Italian contract law, as resulting in particular from the doctrinal and judicial formants, the remedy provided for under Article 1467 c.c. is available also in the event of a significant devaluation of the expected counter-performance. On a different note, Italian scholarly writings and court decisions31 have hitherto supported without hesitation the application of another doctrine dealing with changes of circumstances and well-known also in other legal systems,32 namely the doctrine of “presupposizione”.33 “Presupposition” occurs when «a certain objective situation, whether factual or legal, past present or future – the existence, discontinuance and verification of which is entirely independent from the will of the 27

Cf. Balestra (2000). See, Gambaro and Sacco (2002) 4. 29 Cf. Sacco (2002) 682. 30 See, among many others, Cass. (Italian Supreme Court), 11 November 1986, n. 6584, in Foro it., 1987, I, 2177, with a comment by Massa, which declared the termination of a contract providing for an encumbrance on immovable on the grounds that inflation had devaluated the consideration payable under the contract. For an example of the prior approach in case law, holding that devaluation of the counter-performance did not justify termination under Article 1467 c.c., see, Cass. (Italian Supreme Court), 4 October 1951, n. 2618, in Giur. compl. Cass. civ., 1951, III, 680. 31 For a leading case on this matter, see Cass. (Italian Supreme Court), 17 December 1991, n. 13578, in Giust. civ. Mass. 1991, fasc. 12. 32 In particular, in German legal scholarship, besides the pivotal studies of Windsheid (1850), see Oertmann (1921), Larenz (1963). 33 On the notion and doctrine of “presupposizione”, see, among others, Bigiavi (1949) 173, Serio (1996) 294, Belfiore (1998), Nicolussi (2001) 848. 28

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parties and which does not constitute the object of a specific obligation of the parties – may be deemed, even in the absence of a specific reference to it in the contract terms, to have been taken into consideration by the parties in the expression of their consensus to the contract, as a decisive presupposition conditioning the existence and persistence of the binding force of the agreement».34 Therefore, the doctrine of “presupposizione” does not necessarily require a change in the economic equilibrium of the contact, but rather implies the failure of a presupposed condition, or the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.35 To sum up, under Italian contract law, impossibility of performance, excessive onerousness of performance, excessive devaluation of the counter-performance and failure of presupposed conditions, all constitute available theoretical legal grounds under which an exception to the fundamental rule that pacta sunt servanda may in principle be justified. Given the foregoing, it is confirmed that, at least in principle, the effects of the financial crisis may have an impact on the binding force of contracts, although this may happen under different doctrines, in relation to different circumstances. Indeed, “inflationary” consequences, as well as the “devaluation” of goods may trigger primarily the application of Article 1467 of the Italian c.c., in view of both, the possible increase of the costs of performance for the promisor and the possible decrease of the value of the counter-performance. On the other hand, the “tightening of access to credit” and the “market slowdown” may, in principle, be relevant under the doctrine of impossibility, at least to the extent that this doctrine is construed so as to include cases where performance cannot be reasonably expected from the promisor, due to contingencies similar to impracticability, or the like. As an alternative, the same aforementioned factual situations resulting from the economic crisis may become relevant under the doctrine of failure of presupposed conditions (“presupposizione”), undisputedly accepted in Italian scholarship and case-law.

10.4

Legal and Factual Pre-conditions for the Derogation to the Principle of Sanctity of Contracts

All the hypotheticals made in the previous section require now further investigation as to the legal and factual pre-requisites for the availability of an exception to the principle of “pacta sunt servanda”. It should be stressed that the said basic principle 34 Cass. (Italian Supreme Court), 24 March 1998, n. 3083, in Giust. civ., 1998, I, 3161, with note by Calderoni, Presupposizione e disciplina del contratto: translation by the Author. See also Trib. (Court of first instance) Modena, 20 February 2013, n. 249, in Giurisprudenza locale – Modena, 2013, suggesting that the doctrine of “presupposizione” presents, on the one hand, similarities with the notion of (implied) conditions precedent, and, on the other hand, with the doctrine of causa. 35 The language used in the text intentionally resembles that of the Uniform Commercial Code, Article 2–615, on “Excuse by Failure of Presupposed Conditions”. In fact, it is argued that the doctrine under Italian law and the provision under the U.C.C. serve similar goals by means of comparable legal tools.

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of contact law – also expressed by reference to the notion of “sanctity of contracts” – lays out a rule that serves well the need for certainty and predictability in contract law, and it is in line with the windfall principle under which “the loss must lie where it falls”.36 Accordingly, not any change of circumstances may justify the discharge of the promisor from his contractual obligations, but only the occurrence of certain extreme and well-specified legal and factual pre-conditions may support the derogation to the principle of sanctity of contracts. The rule of Italian contract law that most clearly serves the need to provide an escape from the binding force of contracts in the event of significant changes of circumstances is the one laid out in Article 1467 c.c.. It has already been pointed out that court decisions and scholarly writings converge towards the conclusion that the provision at hand is applicable not only in the event of an abnormal increase of the costs of performance for the promisor, but also in the event of an abnormal devaluation of the counter-performance owed by the promisee. Under Article 1467(1) c.c., the supervening excessive onerousness of promisor’s performance is relevant only to the extent that it is the result of extraordinary and unforeseeable circumstances.37 The expression is not to be regarded as a hendiadys, in that the requirements that the supervening event be extraordinary and that it be unforeseeable do not coincide, although at times they may overlap in whole or in part.38 On the one hand, the requirement that the event be extraordinary is an objective one, which requires a statistical measurement of the frequency, dimension and intensity of the event under consideration.39 In order to be relevant under Article 1467(1) of the Italian c.c., the occurrence of the supervening event must have been ex ante (i.e., at the time of the conclusion of the contract) highly unlikely to occur, or to occur with the frequency, dimension or intensity it did.40 On the other hand, the requirement that the event be unforeseeable is a subjective one. However, regard must not be had to whether the promisor foresaw the event in the case at hand, but rather to whether a reasonable person in the same circumstances would have foreseen the event.41 The approach to foreseeability adopted by Italian courts must be supported, in that it provides a somewhat more objective and predictable criterion to evaluate whether the requirement of foreseeability under Article 1467(1) of the Italian c.c. is met. According to the prevailing view in scholarly writings and court decisions the two requirements that the supervening event be extraordinary and unforeseeable

36 For a thorough discussion of this issue, see Kull (1991) 1 ff.; for a similar analysis conducted from the Italian perspective, see Trimarchi (1991) 63. 37 See Tartaglia (1980) 162. 38 Accordingly, among others, Cabella Pisu (2009) 555; for an overview of Italian case-law confirming the distinction of the two notions, see Accardo (1996) 16. 39 For this criterion, see, e.g., Cass. (Italian Supreme Court), 25 May 2007, n. 12235, in Rass. dir. civ., 2008, 4, 1134, with comment by Pennazio. 40 Cf. Sacco (2004) 711. 41 See, e.g., Cass. (Italian Supreme Court), 25 May 2007, n. 12235, cited in the previous note, as well as Cass. (Italian Supreme Court), 19 October 2006, n. 22396, in Il civilista, 2009, 12, 88, with comment by Pezzini.

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must concur,42 to the effect that the absence of either one of them prevents the possibility to rely on the discharge from the contractual duties granted under Article 1467 of the Italian c.c..43 It should be noted, however, that the mere fact that the parties had foreseen the possibility of a certain contingency does not in itself necessarily exclude the possibility to invoke the discharge from contractual obligations under Article 1467(1) c.c., to the extent that the dimension or intensity of the supervening event can be deemed to have reached an unforeseeable degree. Accordingly, to provide just one example, in a famous 1981 decision the Italian Supreme Court applied the rule at hand and discharged the promisor from his contractual obligations on the grounds of the exceptional increase of oil prices that occurred as a result of the 1973 Arab-Israeli war, although the parties had considered the possibility of an increase of price and had included in the contract a price-fluctuation clause.44 In addition to the pre-conditions that the supervening event be extraordinary and unforeseeable, Article 1467(2) also requires that the increased onerousness of performance (or the devaluation of the counter-performance) must range beyond the normal risk involved in contracts of the kind of the one in question.45 According to the Official Report by the Ministry of Justice, which accompanied the Civil Code,46 the normal risk involved in contracts consists of the risks that the contract involves as a result of its own structure and that the parties have implicitly undertaken by entering the contract. Notwithstanding the distinction of the different requirements,47 it has been noted that, in practice, all of them concur in defining the extent of the risk allocated on the promisor, as opposed to risks that cannot be held to have been allocated on him.48 An alternative escape from the binding force of contracts under Italian contract law may be provided by the rules that discharge the promisor from his obligations in the event of supervening impossibility of performance. It has already been pointed out that, under Article 1256(1) of the Italian c.c., the supervening impossibility of performance consists of an objective and absolute impediment, which is not due to an act or omission of one of the parties and which cannot be reasonably overcome.49

42

Cf. Bessone (1975) 15; Ferri G.B. (1988) 67; Bianca (1994) 397. Cass. (Italian Supreme Court) 19 October 2006, n. 22396, supra n. 38; T.A.R. (Regional Administrative Court) Puglia (Bari), 13 May 2010, n. 1865, in Foro Amministrativo – T.A.R., 2010, 5, 1820. 44 Cass. (Italian Supreme Court), 29 June 1981, n. 4249, in Giur it., 1982, I, 1, 672. 45 Cf. Riccio (2010) 164, who treats this requirement as the prevalent one, prior to the extraordinary and unforeseeable character of the event causing the alteration. 46 Relazione del Guardasigilli, n. 245. 47 The distinction is stressed, among others, by Gambino A (1960) 430. 48 Sacco (2002), 679; Cass. (Italian Supreme Court), 11 June 1991, n. 6616, in Giust. civ., 1992, I, 2830. 49 Cass. (Italian Supreme Court), 15 November 2013, n. 25777, supra n. 17. 43

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The impossibility of performance must, first, be an objective one, whereas a merely subjective impossibility cannot be given any relevance.50 As to the additional requirement that the impossibility be an absolute one, it is usually confirmed without hesitation by Italian courts.51 However, commentators have supported a more flexible construction of the notion of “absoluteness”, positing that it should be mitigated by having regard to the efforts that can reasonably be expected from the promisor in the given circumstances.52 In a way, this approach seems to introduce in the Italian legal system a notion of “impracticability”, which is more familiar to common law jurisdictions.53 An additional solution available under Italian law to claim a derogation from the duties arising under a binding contract lays in the non-codified doctrine of failure of presupposed conditions (“presupposizione”). The persisting role played by the doctrine at hand in Italian contract law may be justified in the light of the limitation to the sphere of application of the rule set forth in Article 1467 c.c..54 Indeed, not only does the latter rule apply only to commutative and relational contracts, providing for performance in installment, or a postponed performance, but it also requires that the supervening event have a significant quantitative impact on the value of the performance of the promisor, or on the counter-performance of the promisee. Commentators have objected that the codified provision introduced by the Italian legislator does not exhaust the list of contingencies that fell under the pre-existing doctrine of failure of presupposed conditions.55 Accordingly, legal scholars and court decisions have maintained that, notwithstanding the introduction in the system of the special rule of Article 1467 c.c., there is still room for application of the broader doctrine of “presupposizione”,56 which comes into play whenever a common assumption in fact or in law on which the parties based their agreement fails to exist, to persist into existence, or to materialize.57

50

See, e.g., Cottino (1955) 413. See, among many others, Cass. (Italian Supreme Court), 15 November 2013, n. 25777, supra n. 17, stating that «[i]n materia di obbligazioni pecuniarie, l’impossibilità della prestazione deve consistere, ai fini dell’esonero da responsabilità del debitore, non in una mera difficoltà, ma in un impedimento obiettivo ed assoluto che non possa essere rimosso, non potendosi ravvisare nella mera impotenza economica derivante dall’inadempimento di un terzo nell’ambito di un diverso rapporto». 52 Mengoni (1988) 1091, Cabella Pisu (2002) 9, Galgano (2009) 54. 53 Reference is made, in particular, to the U.S. Restatement (Second) of Contract, Ch. 11, § 261; as well as to the Uniform Commercial Code, Art. 2–615. 54 Accordingly, Roppo (2001) 1041. 55 For a similar remark see, e.g., Branca (1962) 238; Bessone, D’Angelo (1981) 1012; contra: Cataudella (1966) 280 ff., stating that the theory of failure of presupposed condition cannot be invoked in the absence of an express or implied contract term identifying a certain circumstance as a fundamental presupposition of the parties‘ consent. 56 Cf. Sacco (2004) 698. 57 See, e.g., Cass. (Italian Supreme Court), 25 May 2007, n. 12235, supra n. 37; Cass. (Italian Supreme Court), 3 December 1991, n. 12921, in Giur. it., 1992, I, 1, 2210, with comment by Oddi, In tema di presupposzione. 51

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Under the doctrine at hand the focus is not placed on the supervening event that altered the economic equilibrium of the contract as originally conceived by the parties. Instead, the doctrine of “presupposizione” emphasizes the frustration of the goal pursued by the parties, thus focusing on possible flaws in the original content of the agreement. On the basis of these premises, the doctrine under consideration comes to results, which closely resemble those at times reached by means of the doctrine of “causa”, at least to the extent that the latter is defined as a requirement of the agreement to be intended in a subjective and concrete fashion.58 The similarities of approaches and outcomes of the two doctrines is apparent in two recent decisions rendered by the Italian Supreme Court, which adopted a notion of “causa in concreto”, and emphasized the practical purpose pursued by the parties by means of the contract, in order to come to the conclusion that the promisor could be discharged from his contractual obligations because of the impracticability (“irrealizzabilità”) of the said “causa”.59 The coexistence of different legal grounds on which the promisor may base the claim for a discharge from his contractual obligations may legitimately cause some confusion. However, a closer look to those different legal grounds supports the conclusion that supervening impossibility of performance, supervening excessive onerousness of performance and failure of presupposed conditions are, in fact, different sub-species of the same general remedy,60 namely the remedy resulting from positing the existence of an implied term of “rebus sic stantibus”.61 A significant historical support to this conclusion may be found in the Official Report to the King, which accompanied the text of the new Civil Code in 1942.62 Indeed, the adoption of the rule laid out in Article 1467 c.c. is described as the legal tool to «introduce in an express and general fashion the principle that commutative contracts are subject to the clause rebus sic stantibus».63 The approach expressed by in the Official Report mentioned above has been taken over by the majority of legal scholars64 and court decisions65 and it is nowadays the largely prevailing view. Accordingly, although differences exist among the remedies provided in the event of supervening impossibility of performance, super58 For a similar approach, see Gorla (1954) 274, who subsumes the doctrine of “presupposizione” within the doctrine of causa, regarded from a subjective and concrete perspective; for a similar approach see also Galgano (2009) 551. 59 SeeCass. (Italian Supreme Court), 24 July 2007, n. 16315, in Foro it., 2009, I, 214; Cass. (Italian Supreme Court), 20 December 2007, n. 26958, in Nuova giur. civ. comm., 2008, I, 531. 60 Cf. Franzoni (1998) 17. 61 For a similar conclusion, see Al Mureden (2004) 40. 62 Relazione al Re, n. 133. 63 Translation by the Author. 64 See, e.g., Bigiavi (1949) 173, Rescigno (1961) 788, Galletto (1998) 391, Serio (1996) 297. 65 See, e.g., Trib. (Court of first instance) Genova, 31 July 1995, in Foro pad., 1995, I, 308; App. (Appellate Court) Milano, 26 May 1992, in Giur. it., 1994, I, 2, 272; Cass. (Italian Sureme Court), 28 August 1993, n. 9125, in I Contratti, 1993, 677, with comment by Moretti, Transazione novativa e presupposizione; Cass. (Italian Supreme Court), 3 December 1991, n. 12921, in Giur. it., 1992, I, 1, 2210, with comment by Oddi, In tema di presupposizione.

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vening excessive onerousness of performance, and failure of a presupposed condition, it can be argued that all these remedies express and apply the same underlying general principle of “rebus sic stantibus”.66

10.5

Appearances of Exceptional Circumstances Justifying an Exception to the Principle of Sanctity of Contracts

The theoretical framework that has been reported in the previous sections must now be followed by an overview of the ways in which, in practice, unexpected supervening circumstances may come into play in contract matters, so as to have an impact on the binding force of contracts. To this end, the distinction among the various types of phenomena resulting from a financial and economic crisis will be considered, as will be the distinction among the various remedies available to a party affected by the supervening contingencies. As already pointed out in previous sections, effects of the financial crisis which may qualify for application of the remedy of discharge from the contractual duties under Article 1467 of the Italian c.c. include supervening significant increases of the costs of performance for the promisor or devaluation of the promisee’s counterperformance. Under the unitary notion that has been described above, in order to trigger the application of the rule under Article 1467 c.c., the supervening contingency must cause consequences so burdensome to the promisor, that they cannot be deemed to be within the scope of the risks that the promisor undertook by contract.67 The criteria to carry out such evaluation are threefold, and they include the fact that the supervening event be extraordinary, that it be unforeseeable, and that the consequences of the supervening event had not been contractually allocated to the promisor. The appearance of the exceptional circumstances in the cases under consideration is based on a quantitative variation of the value of the performances that the parties promised in exchange to each other by agreement. The means of measurement of such variation is typically currency, which is used as tertium comparationis in order to measure the difference of conditions at the time of performance, as opposed to those at the time of contracting.68 The rule under consideration is thus primarily intended to protect the contractual equilibrium and the preservation of proportionality among the parties’ obligations.69 In this respect, it can be affirmed that the measurement of the “excessive onerousness” must be carried out objectively, without regard to the subjective conditions of 66

Accordingly, e.g., Galgano (2002) 575. For a similar statement, see, e.g., T.A.R. (Regional Administrative Court) Puglia (Bari), 13 May 2010, n. 1865, in Foro amm. TAR, 2010, 1820. 68 In this sense, e.g., A. Gambino (1960) 416. 69 Cf. T.A.R. (Regional Administrative Court) Lazio (Rome), 1° August 2005, n. 6056, in Foro amm. TAR, 2005, 2451. 67

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the promisor.70 Such measurement, however, cannot benefit from any predetermined figures setting the threshold beyond which the remedy should be made available. Instead, the analysis must be carried out on a case by case basis,71 and the main guidance offered to the interpreter consists of the combination of criteria laid out in Article 1467, according to which the promisor may be discharged from his contractual obligations only upon the occurrence of a contingency which is extraordinary, unforeseeable and beyond the scope of the risks that are allocated on the promisor under the contract at hand. From a rather different perspective, the effects of the financial and economic crisis may lead to the discharge of the promisor from his contractual obligations to the extent that such effects may be regarded as causing supervening impossibility of performance under Article 1256 c.c.. The appearances of such exceptional circumstances are more difficult to assess. This is primarily because of the rather strict position of Italian case-law in this respect. Indeed, Italian courts seem not willing to abandon the approach under which, the supervening impossibility relevant under Article 1256 c.c. «must possess the characters of objectivity and absoluteness, so as to represent an insurmountable obstacle to performance».72 Under the strict interpretation of the requirement that impossibility be an absolute one, it is apparent that the effects of the financial crisis are very unlikely to lead to the discharge of the promisor from his contractual obligations. Conversely, as already pointed out, Italian scholars have largely adopted a more flexible approach with respect to the “absolute” character of impossibility, under which any performance that cannot reasonably be expected from the promisor in the circumstances is “impossible” to the effects of Article 1256 c.c.. It is apparent that, if the more flexible approach toward impossibility of performance were to be adopted, the remedy at hand would provide a powerful tool available in situations resulting from the financial crisis. In particular, contingencies that could be subject to the remedy at hand would include situations that do not have a direct impact on the contract, so as to create an insurmountable obstacle to performance, but rather change the circumstances surrounding the contract. The tightening of access to credit and the general economic slowdown could fall in this group. It should be noticed, however, that impossibility of performance must not only be absolute, but also be objective in order for it to lead to the termination of contract. Accordingly, even if the notion of absoluteness were loosened, as proposed by Italian scholarship, the results of the financial crisis would still most likely not qualify as impossibility under Article 1256 c.c., in that they are unlikely to lead to “objective” impossibility of performance.

70 Accordingly, Sacco (2004) 677; Cass. (Italian Supreme Court), 20 July 1956, n. 2809, in Giur. comm. 1956, I, 1641. 71 Accordingly, e.g., Cass. (Italian Supreme Court), 8 August 2003, n. 11947, in Giust. civ., Mass. 2003, 7–8. 72 See, among many others, T.A.R. (Regional Administrative Court) Lombardia (Milan), 21 May 2013, n. 1337, in Foro amm. TAR, 2013, 1450 (translation by the Author).

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It has been shown that in most cases the doctrine of impossibility of performance cannot support the claim of a promisor willing to be discharged from his obligations on the basis of the effects of the financial and economic crises. A more fruitful approach might be the one based on the doctrine of failure of presupposed conditions (“presupposizione”), which provides a valuable tool to deal with situations resulting from the financial crisis. Several different contingencies, including the tightening of access to credit and the general economic slowdown, can be brought within the scope of the doctrine with relative ease. However, the party claiming discharge from his contractual obligations is under the burden of proving not only the existence of the presupposed common assumption on which the parties fundamentally based their contractual consent, but also the unpredictable failure of that assumption to exist, to persist into existence, or to materialize. More specifically, the analysis of case-law on this matter indicates that there can be multiple appearances of situations where the remedy of failure of presupposed conditions applies. On the other hand, the prerequisites that must be proved by the promisor willing to avail himself of this remedy include that the presupposed situation in fact or in law must not have been regarded as uncertain73; that it must have been common to both parties to the contract,74 or at least cognizable to the counterparty75; and that the performance of the party claiming the failure of a presupposed condition must not have been rendered yet.76 To the extent that the prerequisite are met, the doctrine under consideration may lead to the discharge of the promisor from his contractual obligations. Most importantly, the doctrine can apply irrespective of any measurement of quantitative alteration of the value of the performance owed by the promisor.

10.6

Rights of the Disadvantaged Party upon the Occurrence of Exceptional Supervening Events

Unlike other national77 and supranational78 systems of contract law, which provide for remedies such as revision or renegotiation, aiming at preserving the contract into existence, upon the occurrence of a contingency that alters to a relevant extent the 73 Cf. Trib. (Court of first instance) Sondrio, 31 May 2000, in Foro it., 2000, I, 2832; Cass. (Italian Supreme Court), 4 August 1988, n. 4825, in Giur. it., 1989, I, 1, 67. 74 Cf. Trib. (Court of first instance) Sondrio, 31 May 2000, supra n. 73; App. (Appellate Court) Trieste, 12 October 1987, in Nuova giur. civ. comm., 1989, 23; Cass. (Italian Supreme Court), 6 June 1985, n. 3366, in Foro. it., Mass. 1985. 75 Trib. (Court of first intance) Verona, 2 July 1981, in Giur. it., 1983, I, 2, 248. 76 Cass. (Italian Supreme Court), 6 June 1985, n. 3366, supra n. 74. 77 See, for instance, § 313 of the German BGB. 78 See, for instance, Article 6.2.3 of the Unidroit Principles of International Commercial Contracts; for a comment on this and similar provisions used in international contract practice, see Frignani and Torsello (2010) 293.

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original status quo of the contact, Italian law only provides for the remedy of termination of contract. This statement applies to all types of general contract remedies considered above, namely supervening impossibility of performance, supervening excessive onerousness or devaluation of performance, and supervening failure of presupposed conditions. Conversely, different solutions are provided for also under Italian law with respect to individual contracts.79 Indeed, in the event of supervening impossibility of performance, under Article 1256 c.c. the party whose performance became impossible is discharged from his obligations,80 whereas under Article 1463 c.c. that same party is prevented from requiring performance from the counterparty and must return what he received in the event that performance had already been rendered.81 In a way, it seems possible to affirm that the combination of the two provisions just mentioned suggests that the doctrine of impossibility of performance operates on the premise that impossibility frustrates the purpose pursued by the parties to an extent that the best solution to such situation is the complete unwinding of the contract by means of its termination and restitution in full (if possible) of whatever performance has already been rendered. In light of the foregoing, it is arguable that also the doctrine of presupposed conditions operates on similar premises.82 Indeed, also this doctrine justifies termination of contract on the grounds that the purposes pursued by the parties were frustrated by the occurrence of the supervening event, or the failure to materialize of a contingency that the parties had taken for granted.83 Under these circumstances, there is arguably no reason to compel the principle of “pacta sunt servanda”, because the goals for which the pactum was entered into cannot be pursued. Either party to the agreement is thus granted the right to bring the contract to an end. Finally, also under Article 1467 c.c. the supervening excessive onerousness of performance justifies the claim for contract termination brought by the party disadvantaged by the supervening event, provided that the latter did not participate in causing the event.84 As a general rule, the disadvantaged party is granted only the possibility of claiming termination of the contract, to the exclusion of any other alternative remedy.85 This means that the disadvantaged party does not have any legal tool to impose a revision or renegotiation of the contract. Therefore, either he decides to preserve the contract, thus waiving his remedies for the supervening circumstances, or he decides to avail himself of the remedy of contract termination, thus bringing the contract to an end. In order to fully understand the rationale of this 79

Cf. Article 1664 of the Italian c.c., on which see supra, n. 15, and the accompanying text. Cf. Cass. (Italian Supreme Court), 15 November 2013, n. 25777, supra n. 17. 81 Cf. Cass. (Italian Supreme Court), 24 April 2009, n. 9816, in Guida al dir., 2009, n. 26, 52. 82 For a similar remark, see, e.g., Roppo (1971) 265. 83 See, e.g., Pennazio (2013) 80. 84 Accordingly, Cass. (Italian Supreme Court), 23 February 2001, n. 2661, in Foro it., 2001, I, 3254, with comment by Mastrorilli, Sopravvenienza imputabile ed eccessiva onerosità. 85 For a similar statement, see, e.g., Macario (1990) 567, commenting Cass. (Italian Supreme Court), 18 July 1989, n. 3347. 80

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rule, however, it should be anticipated here that the right granted to the disadvantaged party to terminate the contract must be coordinated with the option given to the unaffected party, who can prevent the termination of the contract by offering an equitable adjustment of the contract.86 Accordingly, while the disadvantaged party cannot impose a revision or renegotiation of the contract, the unaffected party can react to the remedy of termination by offering to adjust the contract, thus precluding the effectiveness of the termination declared by the disadvantaged party. An exception to the rule that the disadvantaged party is granted only the possibility of claiming contract termination applies to gratuitous contracts, which can be characterized as contracts where only one party undertakes obligations.87 In gratuitous contracts, if performance becomes excessively onerous, the promisor may require a reduction or modification of his obligations, rather than termination, so as to cause the competent court to adjust equitably the contents of the obligations owed by the promisor.88 The provision at hand is of particular interest here, in that it seems to be based on a rationale different from the one supporting the rule applicable to commutative contracts under Article 1467 c.c..89 Indeed, the latter protects the reciprocal equilibrium of contractual performances and allows for contract termination when such equilibrium is significantly altered by a supervening event (unless the party non affected by the supervening event offers an equitable adjustment of the contact). The rule under Article 1468 c.c., on the other hand, cannot be held to protect the equilibrium of the contract for the very simple reason that in a gratuitous contract only one party is bound to perform his promises, without there being any corresponding counter-performance. Therefore, the justification for the rule laid out in Article 1468 c.c. must be found in a different doctrine (namely, the so-called doctrine of “attuabilità”, i.e., “viability”),90 under which the request for adjustment of the promisor’s obligation is justified on the sole grounds of the change of surrounding circumstances, in which the performance must be effected. In this respect, although distinct from those applicable to commutative contract, the requirements for the equitable adjustment under Article 1468 c.c. must, nonetheless, be traced back to the unitary general principle of “rebus sic stantibus”91; however, they apply independently from any comparison to a corresponding counter-performance, but rather as expression of the general duty to act in good faith in the context of a contractual relationship.92

86

See infra, Section VI. For an overview of the doctrinal debate regarding the scope of Article 1468 c.c. and the different types of contracts falling within the scope of the said provision, see Al Mureden (2004) 23, in particular sub note 34. 88 See Cass. (Italian Supreme Court), 20 January 1982, n. 436, in Giust. civ., Mass. 1982, fasc. 1. 89 For papers supporting this conclusion, see Boselli (1952) 100, Tartaglia (1980) 173. 90 See, in particular, Betti (1955) 199. 91 Cf. Sacco (2004) 718. 92 For a similar approach, see, e.g., Gallo (1992) 433. 87

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Most importantly, the different rationale and doctrine underlying Article 1468 c.c. justifies the difference in the type of remedy made available to the promisor affected by the supervening event, which, in the event of gratuitous contracts, consists of the equitable adjustment of the promisor’s obligation.93

10.7

Position and Claims of the Unaffected Party upon the Occurrence of Exceptional Supervening Events

The rule on supervening excessive onerousness of performance under Article 1467 c.c. makes a clear distinction as regards the position of the parties and their possibility to avail themselves of the remedy at hand. This approach makes a sharp distinction between the remedy under consideration and other remedies available in the event of supervening circumstances. In fact, in the event of supervening impossibility of the promisor’s performance, both the promisor and the promisee are granted the right to put forward a claim to bring the contract to an end, to be discharged from any future obligations and, if necessary, to obtain restitution of performances already rendered. In this regard, the parties may be regarded as being on a relatively equal footing. Similarly, in the event of failure of presupposed conditions, both parties have the option of bringing the claim for contract termination, although it is apparent that, in practice, one party will in most cases have a greater interest than the other in bringing the contract to an end. In any event, as a result of termination, both parties will be discharged from their respective contractual obligations. Again, the parties are placed on a relatively equal footing. The situation is rather different as regards the remedy of contract termination available on the grounds of the occurrence of supervening excessive onerousness of performance of the promisor under Article 1467 c.c.. Indeed, upon the occurrence of the contingencies considered by the provision in question, exceptional circumstances alter the equilibrium of the contract, to the effect that it is generally possible to identify one party to the contract who is negatively affected by the occurrence of the exceptional circumstances, and another party to the same contract who benefits from the changed circumstances. The rule under Article 1467 c.c. grants only to the party who is negatively affected by the supervening circumstances the right to bring a claim for contract termination. As already mentioned, however, that radical remedy is granted on a take-it-or-leave-it basis, in that the disadvantaged party has no alternative options and must decide either to put forward the claim for termination to the effect of bringing the contract to an end, or to bear the burden of the additional costs resulting from the exceptional circumstances.

93

In practice, the exercise of the right granted by the provision at hand requires an action in court, and a constitutive declaratory decision rendered by the court.

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On the other hand, however, the party who was not negatively affected by the supervening circumstances may prevent termination of contract by offering to adjust his own performance so as to re-establish the original equilibrium of the contract.94 This may be done, for instance, by a purchaser of goods offering an increase in the purchase price as a result of the increase of the manufacturing costs to be borne by the seller. The solution adopted by the Italian legislator offers to both parties to the contract the option to take an active role in the management of the effects of the supervening circumstances. First, it creates a mechanism that relies on the promisor’s choice in order to signal whether the alteration of the value of performance has deprived the promisor of the interest in preserving the contract. This result is obtained by placing the promisor before the alternative between performing at the original conditions (notwithstanding the effects of the supervening circumstances), or bringing the contract to an end. In the event that the promisor decides to terminate the contract, the promisee is then granted the right to prevent termination by offering an equitable adjustment of the contract.95 The tool offered to the unaffected promisee is technically a defense against the claim for termination brought by the plaintiff, while in substance it serves the purpose of allowing the unaffected promisee to preserve the contract.96 It should be noted that the dynamics of equitable adjustment of the price take place entirely among the parties, whereas an active intervention by the court is precluded. Indeed, it is well-established in Italian case law that the court may only decide whether the increased performance offered by the promisee succeeds in providing an “equitable adjustment”.97 If the court concludes that the adjustment offered is equitable, contract termination is precluded and the parties are bound to the adjusted terms of the agreement98; if the court concludes that the adjustment offered fails to equitably adapt the parties’ performances, then the court cannot but declare the contract in question avoided. Under no circumstances can the court modify the substantive contents of the unaffected party’s offer for equitable adjustment. In other words, the court is not granted any active role in the determination of the adjustment offered by the unaffected party. The court can only decide whether what is offered is equitable or not.

94

Cf. Del Bene (1997) 198. For a court decision applying the rule under consideration, see Cass. (Italian Supreme Court), 11 January 1992, n. 247, in Giur. it., 1993, I, 1, 2018, with comment by Magni. 95 For a recent application in case law, see Cass. (Italian Supreme Court), 25 March 2009, n. 7225, in Giust. civ., 2010, 1, I, 111, with comment by Carnicelli. 96 The pursuance of the goal of contract preservation is highlighted, among others, by T.A.R. (Regional Administrative Court) Campania (Naples), 4 March 2005, n. 1625, in Foro amm. TAR, 2005, 783. 97 See, among many others, Cass. (Italian Supreme Court), 11 January 1992, n. 247, supra n. 94. 98 Cf., e.g., Cass. (Italian Supreme Court), 13 January 1984, n. 275, in Giust. civ., 1984, I, 2535, stating also that the evaluation of the adjustment must be made as of the date of performance, and not as of the date of conclusion of the contract.

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In this regard, it is worth noting that the offer for adjustment by the defendant willing to prevent the termination of the contract does not need to re-establish the very same equilibrium, which existed prior to the occurrence of the exceptional circumstances. Indeed, court decisions have consistently maintained that the adjustment is to be considered equitable to the extent that it brings the relationship between performances back to a situation, which ex ante would not have justified the claim for termination.99 In other words, the offer for equitable adjustment may well be formulated by the defendant in terms that leave on the disadvantaged plaintiff the portion of negative effects resulting from the exceptional circumstances, which may be deemed to fall within the scope of the risks undertaken by the plaintiff by virtue of the contract in question. Therefore, what needs to be rebalanced is not the contract as a whole, but only the excessive onerousness thereof, that is, what is beyond the scope of the risks allocated to the promisor.

10.8

Closing Remarks on Italian Contract Law from a Comparative Perspective

The overview of Italian contract law regarding the effects of the financial and economic crises on the binding force of contracts has provided a manifold picture. Multiple remedies are made available by the legal system to a promisor affected by supervening exceptional circumstances. However, the analysis of existing case-law has shown that the promisor’s possibilities to avail himself successfully of those remedies are not as many as one could expect. With regard to the multitude of remedies available to a promisor affected by supervening exceptional circumstances, not only does the Italian legal system provide in Article 1469 c.c. for an express provision granting to the promisor affected by a supervening excessive onerousness of performance the possibility of terminating the contract, but it also provides for a non-codified doctrine of presupposed conditions, which in fact broadens the scope of application of the general rule of “rebus sic stantibus”. In particular, the rule on supervening excessive onerousness of performance has played a remarkable role not only domestically, but also from a comparative perspective. In fact, the Italian rule has inspired several similar solutions adopted in other national jurisdictions, as well as in supranational instruments.100 Moreover, the largely prevailing view in Italian scholarly writings and court decisions is that the innovation brought by the new provision on supervening excessive onerousness of performance does not prevent the application of another doctrine dealing with supervening circumstances, namely the doctrine of presupposed conditions. Under this doctrine, the possibilities granted to the promisor to claim a discharge from his

99

Cass. (Italian Supreme Court), 11 January 1992, n. 247, supra n. 94. See supra, notes 20–23 and the accompanying text.

100

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contractual obligations due to supervening exceptional circumstances are increased. Indeed, the doctrine of presupposed conditions applies to situations where the rule on supervening excessive onerousness would not be available. This is the case, in particular, as regards situations that have not directly altered the equilibrium of the contract. The different remedies mentioned above, and possibly also the remedy of supervening impossibility of performance (the more so if the notion of impossibility is loosened so as to include cases of impracticability), are all expressions of the general principle of “rebus sic stantibus”. Accordingly, Italy can certainly be included among the legal systems that accept that principle and that treat it as a fundamental principle of contract law. The foregoing, however, should not be overestimated and should not induce one to think that Italian law degrades the principle of “pacta sunt servanda” to a secondary role. To the contrary, the overview of Italian case-law has shown that the sanctity of contract is still the milestone of the system and that, notwithstanding the general acknowledgment of the availability of an exception under the principle of “rebus sic stantibus”, courts are very reluctant to hold that the promisor is discharged from his contractual obligations and this solution appears to be adopted only in the event of truly exceptional circumstances. Among the legal systems that provide for remedies based on the principle of “rebus sic stantibus”, Italy stands out also for another peculiarity of interest. In fact, although different solutions are provided with respect to individual types of contracts,101 under Italian general contract law the only remedy available to the promisor affected by supervening exceptional circumstances is the remedy of termination of contract. Compared to the broader availability of remedies offered in other legal systems, which include renegotiation, revision, and the like, the Italian solution may be regarded with suspicion. It should be noted, however, that the solution limiting to the sole termination of contract the remedies available to the party affected by the supervening circumstances may also have positive effects. Indeed, to the extent that the contract subject to termination was aimed at transferring goods that are traded in a functioning market, it can be argued that contract termination is the best solution to assure that the contract price be re-negotiated and re-established at the new market conditions. In fact, the purchaser under the terminated contract finds himself in a competitive market scenario, to the effect that he can choose between the offers for goods from the previous seller, as well as from new sellers, who can be best equipped to deal with the new state of the world resulting from the change of circumstances. The market mechanism thus leads to the determination of the “new” price for goods in a way that is much more likely to reflect the “real” market price than any possible price adjusted by a court, or by any third party involved in a mechanism of contract revision. Moreover, also with respect to the renegotiation of contract, it seems possible to argue that, given the effect of the supervening circumstances, it is preferable to favor 101

See supra, note 15 and the accompanying text.

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a mechanism leading to a renegotiation in a competitive market than a mechanism imposing renegotiation among the very same parties to the terminated contract. The foregoing does not, of course, overlook the benefits of a revision operated by the court or a third party, and of a renegotiation imposed to the very same parties to the frustrated contract. Those benefits consist, first of all, of the preservation of the contract and the reduction of the transaction costs of a fully new re-negotiation in a competitive market. Without prejudice to the foregoing, however, it is argued here that in many instances the advantages deriving from a new negotiation in a competitive environment largely outdo the savings of transaction costs obtained by means of the preservation of the pre-existing transaction. To the extent that the foregoing reasoning were to apply, one might conclude that in the very limited cases in which the effects of the financial and economic crises were to be regarded as justifying the derogation to the binding force of contract, the most efficient way to allow such derogation would be to allow for termination of the contact, thus causing the complete unwinding of the transaction and placing the parties back to the market to (re-)negotiate under the new contingencies.

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List of Cases Cass. (French Supreme Court) Ass. Plén., 14 April 2006, in Rev. des Contr., 2006, annotated by Viney. Cass. (Italian Supreme Court) 19 October 2006, n. 22396, in Il civilista, 2009, 12, 88, with comment by Pezzini. Cass. (Italian Supreme Court), 11 January 1992, n. 247, in Giur. it., 1993, I, 1, 2018, with comment by Magni. Cass. (Italian Supreme Court), 11 June 1991, n. 6616, in Giust. civ., 1992, I, 2830. Cass. (Italian Supreme Court), 11 November 1986, n. 6584, in Foro it., 1987, I, 2177. Cass. (Italian Supreme Court), 13 January 1984, n. 275, in Giust. civ., 1984, I, 2535. Cass. (Italian Supreme Court), 13 January 2010, n. 380, in Giust. civ. Mass. 2010, 2, 142. Cass. (Italian Supreme Court), 15 November 2013, n. 25777, in Giust. civ., Mass. 2013. Cass. (Italian Supreme Court), 17 December 1991, n. 13578, in Giust. civ. Mass. 1991, fasc. 12. Cass. (Italian Supreme Court), 18 July 1989, n. 3347. Cass. (Italian Supreme Court), 20 December 2007, n. 26958, in Nuova giur. civ. comm., 2008, I, 531. Cass. (Italian Supreme Court), 20 January 1982, n. 436, in Giust. civ., Mass. 1982, fasc. 1. Cass. (Italian Supreme Court), 20 July 1956, n. 2809, in Giur. comm. 1956, I, 1641. Cass. (Italian Supreme Court), 23 February 2001, n. 2661, in Foro it., 2001, I, 3254, with comment by Mastrorilli, Sopravvenienza imputabile ed eccessiva onerosità. Cass. (Italian Supreme Court), 24 April 2009, n. 9816, in Guida al dir., 2009, n. 26, 52. Cass. (Italian Supreme Court), 24 July 2007, n. 16315, in Foro it., 2009, I, 214. Cass. (Italian Supreme Court), 24 March 1998, n. 3083, in Giust. civ., 1998, I, 3161, with note by Calderoni, Presupposizione e disciplina del contratto. Cass. (Italian Supreme Court), 25 March 2009, n. 7225, in Giust. civ., 2010, 1, I, 111, with comment by Carnicelli. Cass. (Italian Supreme Court), 25 May 2007, n. 12235, in Rass. dir. civ., 2008, 4, 1134, with comment by Pennazio. Cass. (Italian Supreme Court), 28 February 2013, n. 5033, in Giust. civ., 9, I, 1737, with comment by D’Auria. Cass. (Italian Supreme Court), 29 June 1981, n. 4249, in Giur it., 1982, I, 1, 672. Cass. (Italian Supreme Court), 3 December 1991, n. 12921, in Giur. it., 1992, I, 1, 2210, with comment by Oddi. Cass. (Italian Supreme Court), 4 August 1988, n. 4825, in Giur. it., 1989, I, 1, 67. Cass. (Italian Supreme Court), 4 January 1993, n. 10, in Giust. civ., Mass. 1993, 5. Cass. (Italian Supreme Court), 4 October 1951, n. 2618, in Giur. compl. Cass. civ., 1951, III, 680. Cass. (Italian Supreme Court), 6 June 1985, n. 3366, in Foro. it., Mass. 1985. Cass. (Italian Supreme Court), 8 August 2003, n. 11947, in Giust. civ., Mass. 2003, 7–8 Cass. (Italian Supreme Court), 28 August 1993, n. 9125, in I Contratti, 1993, 677, with comment by Moretti, Transazione novativa e presupposizione. Cons. Stato (Italian Supreme Administrative Court), 17 May 2010, n. 3129, in DeJure Redazione Giuffè, 2010. Hof van Cassatie (Belgian Supreme Court), 19 June 2009 (Scafom International BV v. Lorraine Tubes SAS), English translation available at http://cisgw3.law.pace.edu/cases/090619b1.html T.A.R. (Regional Administrative Court) Campania (Naples), 4 March 2005, n. 1625, in Foro amm. TAR, 2005, 783. T.A.R. (Regional Administrative Court) Lombardia (Milan), 21 May 2013, in Foro Amm. – T.A.R., 2013, 1450. T.A.R. (Regional Administrative Court) Puglia (Bari), 13 May 2010, n. 1865, in Foro Amministrativo – T.A.R., 2010, 5, 1820. Trib. (Court of first instance) Florence, 28 March 1998, in Gius, 1998, 2189.

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Trib. (Court of first instance) Genoa, 31 July 1995, in Foro pad., 1995, I, 308; App. (Appellate Court) Milano, 26 May 1992, in Giur. it., 1994, I, 2, 272. Trib. (Court of first instance) Modena, 20 February 2013, n. 249, in Giurisprudenza locale – Modena, 2013. Trib. (Court of first instance) Pescara, 24 January 1997, in Foro it., 1998, I, 613. Trib. (Court of first instance) Sondrio, 31 May 2000, in Foro it., 2000, I, 2832 App. (Appellate Court) Trieste, 12 October 1987, in Nuova giur. civ. comm., 1989, 23. Trib. (Court of first instance) Sondrio, 31 May 2000, supra n. 73; App. (Appellate Court) Trieste, 12 October 1987, in Nuova giur. civ. comm., 1989, 23. Trib. (Court of first instance) Verona, 2 July 1981, in Giur. it., 1983, I, 2, 248.

Chapter 11

Effects of a Bubble Economy on the Binding Force of Contracts: The 1990s Experience of Japan and Its Implications Shugo Kitayama

Abstract This report focuses on the problem of whether financial crises can be covered by the doctrine of change of circumstances. The report describes two types of lawsuits caused by the biggest financial crisis in Japan: the 1990s bubble crash. One type involves the “sub-lease” contracts, most famous at that time, in which incorrect predictions of future economic changes were especially significant. The other type involves claims against country club management companies for the return of deposits, a rare situation in which the doctrine of change of circumstances was claimed in court. In conclusion, two particular characteristics in Japan will be observed. One is that companies are required to predict future changes in economic circumstances. The other is that the most popular dispute resolution method is the interpretation of contracts, rather than the application of the doctrine of change of circumstances.

11.1

Introduction

This report addresses Japan’s experience with the bubble economy and the subsequent crash in the late 1980s, which triggered varied contractual disputes and lawsuits. This study reveals certain tendencies in Japanese court decisions related to economic and financial problems and focuses on the above period because the 2008 worldwide financial crisis did not strongly affect the Japanese economy. The expansion and burst of the Japanese economic bubble that peaked in 1990 and 1991 unfolded in the following manner. In the late 1980s, financial liberalization and low interest rate policies resulted in a surplus of money in the economy. Stock prices rose rapidly, with the Nikkei average stock price spiking from approximately JPY 13,000 in January 1986 to approximately JPY 39,000 in December 1989. In January 1990, this price witnessed a sudden decline, and by August 1992,

S. Kitayama (*) School of Law, Seikei University, Tokyo, Japan e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_11

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it was down to JPY 14,000. Moreover, land price rose, especially in big cities; in the region around Tokyo, using the 1983 prices as the benchmark, land prices rose by 250 % by 1991 and subsequently witnessed a rapid decline in 1992. Financial speculation grew, and targeted products ranged from artistic products and country club memberships to financial products. After the bubble burst, many types of contracts, drawn on the assumption that prices of stocks, land, and other goods would continue to rise, became the subject of disputes and lawsuits arguing for their rescission and revision. This study focuses on two types of disputes, each involving several court decisions and relating significantly to the problem of the pacta sunt servanda (agreements must be kept) principle. Sub-lease cases and repayment claims of deposits for country club rights are the two types of disputed contracts that were affected. Analyzing the cases and decisions related to these disputes provides a succinct overview of how the Japanese courts addressed the difficult problem of changed economic circumstances. Finally, this study raises general questions on the effects of financial crises on the binding force of contracts. Japan’s legal doctrine for addressing unexpected circumstances is called the doctrine of change of circumstances. It is recognized as a case law (in legal writings) but does not appear in Japan’s Civil Code. This doctrine admits the rescission or revision of contracts if (a) the circumstances that had been the basis for drawing a contract have changed (b) the change in circumstances could not have been foreseen by the parties (c) the change in circumstances was not due to the actions of either party, and (d) binding the parties to the original contract fundamentally violates the principle of good faith. Although the doctrine of change of circumstances is admitted as a case law, courts do not apply it easily in actual cases. In particular, the Supreme Court, after World War II, did not affirm the application of the doctrine in any case until now. The cases discussed in this study clarify why the doctrine of change of circumstances has seldom been applied, especially in cases of change of economic circumstances.

11.2

Case Decisions

11.2.1

Sub-lease Lawsuit Decisions

11.2.1.1

Background

Structure of the Sub-lease Contracts After the bubble burst, many lawsuits were raised especially in Tokyo. Thus, lower courts proposed various legal theories on the matter, and the Supreme Court finally proposed a decisive, unified, but not necessarily persuasive theory.1 1

Before the decision of the Supreme Court in 2003, about 50 lower court decisions can be found in the Japanese database LEX/DB.

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Sub-lease usually refers to a re-lease from the original lessee to another. In Japan, however, sub-lease refers to a whole project involving owners of a building (lessors) and real estate agents (lessees) in which land owners construct office buildings at their own expense (usually by borrowing money from banks) and rent the building as a whole to real estate agents, who re-rent them in parts to many tenants. Tenants pay rent to the real estate agents, who in turn pay rent (less than the sum collected from tenants) to the owner. The real estate agent sources the tenants and is responsible for administration of the tenants and the building itself; thus, the agent’s profit is the difference between the rent collected from tenants and rent paid to the owner. Rent paid to the owner is usually fixed by sum or by rate, facilitating the owner’s expectations of a certain amount of income regardless of the number and real payments made by tenants. In the boom phase of the bubble, under the assumption that both land prices and office building rents would continue to rise, terms and conditions of automatic increases in rent were frequently included in sub-lease contracts. Under these conditions, the rent paid by agents to owners would increase without notice at a certain rate after a fixed period elapsed. However, because of the bubble burst, land prices and tenant rents began to fall, making it difficult for the agents (lessees) to pay the increased rent stipulated by the terms and conditions. Subsequently, owners (lessors) were required to continue to repay the borrowed money to banks, thereby requiring a certain level of cash inflow. Therefore, strict enforcements regarding terms and conditions involved in automatic rent increase became a serious legal problem. Art.32 of Land and House Lease Law Japan’s Land and House Lease Law stipulates the following regarding future changes in rent: Art.32 (1) When the burden against the land or house increases or decreases in light of taxes to the house or land or other reasons; when economic circumstances change by the increase or decrease in the price of the house or land or by other reasons; or when the house rent is inappropriate compared with the same kind of house in the neighborhood, notwithstanding the contract’s terms and conditions, the parties can request an increase or decrease of the rent on the house in the future. However, if a condition stipulates that the rent will never increase during a certain term, such a condition is valid.2

In legal literature, Art.32 is considered as a type of materialization of the doctrine of change of circumstances. Thus, a difficulty emerged in sub-lease cases: which would take precedence, Art.32 or the automatic rent increase terms?

11.2.1.2

The Case Judged by the Supreme Court

The case wherein the Supreme Court addressed the sub-lease dispute for the first time is as follows:

2

In Japan, the Land and House Lease Law can be applied to both residential and office properties. Thus, Art.32 (1) is applicable to office rent agreements including sub-lease contracts.

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Facts of the Case In 1991, Company X (hereafter X) accepted the recommendation of the sub-lease schema by Company Y (hereafter Y) and constructed an office building on X’s land by borrowing JPY 18 billion from a bank; X then rented the completed building as a whole to Y, which in turn subleased the floors to tenants. In the agreements between X and Y, a clause stated, “the rent contract is valid for a duration of 20 years. The annual rent is JPY 2 billion, which will increase 10 % of the immediately preceding rate every three years” (Art.6 (1)). In addition, another clause stated that “X and Y can renegotiate the percentage increase of the rent in case it becomes inappropriate because of drastic changes in economic conditions, such as rapid inflation” (Art.6 (3)). After drawing the contract, Y requested a decrease in rent a total of four times, citing Art.32 of the Land and House Lease Law and a decrease in office rent due to the burst of the bubble. Thus, Y claimed that it owed X JPY 0.54 billion per year in rent since March 1999. Moreover, the office rent Y collected from tenants totaled JPY 1.4 billion in 1994, JPY 0.55 billion in March 1999, and JPY 0.72 billion in April 1999 and thereafter. X sued Y for the non-payment of increased rent as per the automatic rent increase clause, to which Y filed a countersuit against X to recognize that this rent should be JPY 0.54 billion per year.3 The primary issue raised in court comprised two related questions: (a) whether this sub-lease contract was a house rent agreement applicable under the Land and House Lease Law (Art.32 of the Law); X stated the agreement was a typical contract not subject to the Land and House Lease Law, and (b) notwithstanding the existence of the automatic rent increase clause, whether the request for rent decrease based on Art.32 in the Land and House Lease Law was permissible. Decision of the Tokyo District Court, August 28, 1988 Decision1–1 “When drawing the contract, X and Y expected a change in the rent if economic circumstances changed according to Art.6 of this contract, implying that both parties excluded the possibility of rent increase and decrease on the basis of Art.32 of the Land and House Lease Law”. “It is impossible to think that Art.6 of this contract is void because of the violation of Art.32 of the Land and House Lease Law. …It is unwise for the court to intervene in the private autonomy and deny the original effect of the agreement; moreover, in consideration of the content and purpose of this contract, Art.32 of the Land and House Lease Law should be deemed non-applicable to this contract. In addition, even if, with such a result, Y suffers damages because of the unexpected changes in the rent market, the disadvantage from the mistaken expectation should not be owed by Y, who admitted and bore, at the time of drawing the contract, the guarantee of the rent and all other risks.”

3

A claim to decrease the rent on the basis of Art.32 is recognized immediately in effect to avoid the judicial strategy of the lessor prolonging the trial. Of course, in cases where the parties cannot agree on a new rent, the court will make the final decision whether the lessee’s claim is just.

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“Therefore, because Art.6 of this contract is valid, X can request the difference between the automatically increased rent and the rent that Y actually paid, and Y cannot claim the decrease of the rent on the basis of Art.32 of the Land and House Lease Law.” Decision of the Tokyo Court of Appeal, January 25, 2000 Decision 1–2 “Although the contract takes a house lease form, which is one of the typical contracts in the Civil Code, in light of its substantive function and contents, it should be considered an atypical contract with the nature of entrusting a business, whereby the application of the Land and House Lease Law is inappropriate; moreover, only limited effects that will not conflict with the contract’s purpose, function, and nature should be admitted.” “As for this contract, the institution of decreasing the rent from Art.32 of the Land and House Lease Law is modified by the adjustment clause of Art.6 of this contract. Therefore, limited factors, such as its procedure and the effect of the claims, are applicable.” “It should be noted that, because of the economic circumstances (the declining property market and rent building market) beyond the responsibility of both the contracting parties, the rent between X and Y and the re-rent between Y and tenants, indicate a considerable disparity in that the first and the third request by Y to decrease the rent does decrease the extent of modifying the automatic 10 % price increase to 0 % on the basis of Art.6 (3) of the contract.” “If Y’s requests to decrease the rent are deemed as requests that are based on the general clause of the Civil Law―the doctrine of change of circumstances―the conditions for applying the doctrine are as follows: (a) the change in circumstances since the drawing of the contract should not be the parties’ responsibility, and (b) the change in circumstances was so aberrant that the parties did not and could not have foreseen it. However, Y is a large company knowledgeable about the negotiation and rental of real property, and the time when this contract was drawn was precisely at or just after the beginning of the burst of the bubble. …Therefore, Y could have foreseen (at least in the near future) the declining property values and the rent market. In addition, comparing the time the contract was drawn with the time of Y’s requests, there was no change in prices or change in the value of money; thus, no long-term inequity between the parties exists for the application of that principle.” Both X and Y appealed to the Supreme Court. Decision of the Supreme Court October 21, 2003 (Civil Case Law Report, Vol. 57, No. 9, p. 1213) Setting Aside and Referring Back Decision 1–3 “The agreement contract facilitated Y by X to utilize the rented building for which Y paid rent to X; therefore, it is clear that this contract is a lease of a house, to which the Land and House Lease Law as well as Art.32 are applicable.” “Although there exists an automatic rent increase clause in this contract, Art.32 of the Land and House Lease Law is a mandatory statute that cannot be excluded by the automatic rent increase clause (see the Decision of the Supreme Court on May 15, 1956, and the Decision of the Supreme Court on April 20, 1981); therefore, the

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parties of this contract are not necessarily permitted to request the increase or decrease of the rent based on Art.32.”4 “This contract comprises parts of Y’s sub-lease project and the sum of rent, and the automatic rent increase agreement is the proposition for X to invest significant capital in Y’s project.…These facts are important elements for the parties when determining the original rent; thus, this should be fully considered from the perspective of equity to judge the propriety of the request for decreased rent based on Art.32 of the Land and House Lease Law (whether conditions in the article are satisfied), and the calculation of proper rent.” “When determining the propriety of the price decrease request and the sum of the rent, what the parties of the lease contract consider and other circumstances should be examined in total, along with how the parties determined the original rent, the details of the inclusion of the automatic rent increase clause, and in particular, the difference between the original rent and the rents of similar neighboring buildings, Y’s expectation of income and expenditure from the sub-lease business (the parties’ recognition of the change in rent rates compared with the rent from tenants), and X’s schedule of repaying the deposit money and debt to the bank.”

11.2.1.3

A Minority Opinion of the Supreme Court Judge in Another Case

After the above decision, the Supreme Court’s opinion was reiterated by similar decisions issued by other two chambers of the Court (the Supreme Court decision of October 23, 2003, and that of November 8, 2004). However, in the latter decision, Judge Fukuda showed the following minority opinions: Judge Fukuda ’s Minority Opinion Decision 1–4 “A sub-lease contract is, even though part of the contract has the form of lease contract, precisely a joint venture of coordination between the land owner (who supplies not only the land but also the construction of a building suited for the venture), the rental agent, the bank that finances the money necessary to construct the building, and the design engineering office that designs and administrates the construction of the building. The real estate lease contract, which comprises one part of the venture agreement, is by nature entirely different from the ordinary lease contracts to which the Land and House Lease Law is applied.” “If the content of the venture agreement conflicts with external circumstances (e.g., natural disaster) and clearly requires modification, a possible theory is, for example, the doctrine of change of circumstances, which underlies all contracts. Therefore, an automatic rent increase clause, which is part of the profit division clause between the parties, can be modified. In such cases, the object of revision

4

Legal literature notes that the two referenced cases (1956 and 1981) here concerned themselves with the effects of a renegotiation clause; therefore, they are not proper precedents for this case, which concerns an automatic price increase clause.

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should be not only the automatic rent increase clause but also the other agreements related to the division of profits from the joint venture, for example, agreements in which financial conditions offered by banks are closely connected with the contents of the sub-lease contracts (such as when rents from tenants are transferred from the agent to the owner through the bank’s account, and the refund from the owner to the bank is done from the account by installments, i.e., finance agreement is substantially integrated with the sub-lease agreement).” The decision also stated, however, “regarding this case, concerning the facts founded by the court below, the conditions that justify the application of the doctrine of change of circumstances are not recognized.”

11.2.1.4

Controversies on the Decision of the Supreme Court

What type of conclusion can be drawn from the decision of the Supreme Court regarding sub-lease contracts on the problem of the effects of financial crises on the binding force of contracts? First, the Supreme Court did not adhere to the principle of pacta sunt servanda. Applying Art.32 of the Land and House Lease Law, the Court admitted the possibility of modifying the original contract terms (i.e., the automatic rent increase clause). Second, by applying Art.32, the Court instructs not only the simple application of Art.32 but also its application in light of the minute circumstances surrounding the contract. This comprises a request to the lower courts to complementarily interpret the contracts on the basis of the parties’ intentions. Third, the impact of financial crises on the binding force of contracts was not rescission of the contract but the revision in sub-lease cases. However, several critiques exist in legal literature. The most arguable point is whether Art.32 of the Land and House Lease Law is a mandatory statute. Special terms and conditions included in lease contracts to automatically calculate current rents are validated by several previous lower courts’ decisions. In addition, in case the automatically calculated rent becomes unworkable, the court first denies the binding force of the terms and conditions by applying the doctrine of change of circumstance, and then determines the appropriate rent according to Art.32. As for sub-lease contracts, such lower courts’ decisions include the following: Decision by the Tokyo District Court June 10, 1997 Decision 1–5 “The automatic rent increase clause in this case is reasonable because of the succession and long duration of the lease contracts, but in light of Art.32 of the Land and House Lease Law, in case the unforeseeable change in economic circumstances not foreseen when drawing the contract made the enforcement of the original contract unreasonable, the automatic rent increase clause could be nullified by the application of the doctrine of change of circumstances. This automatic rent increase clause was agreed upon in December 1989, when standard office rents in the building were largely expected to increase; it was implausible to believe that X and Y had agreed to the clause under the expectation of the drastic fall in the rent that would continue until 1992. It must

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be said that Y, which is a large property administration company in Japan, was unable to predict the present economic situation when drawing the contract. …Considering such a change of economic circumstances and the response of the expert witness, the premise of the concluding contract in this case no longer exists; therefore, enforcing the automatic rent increase would be intolerably unreasonable. Thus, the clause was no longer in effect between April 1, 1993 and April 1, 1995.”5 According to legal literature, if the lower courts had reflected on how this decision was to be judged, Judge Fukuda’s minority opinion appears better reasoned than the majority opinion of the Supreme Court. In addition, legal literature also notes that the automatic rent increase clause is the result of bearing the risk of change in rent levels based on the predictions of the rental agency companies when drawing the contract; thus, the onus should be on the agency companies to recant their own predictions when circumstances change. This argument forms another reason for criticism of the Supreme Court’s decision. Moreover, the Supreme Court cited a large number of elements not clearly included in Art.32 in deciding the case. The necessity of considering many elements implies that the standards to solve disputes of this kind are not clear, especially for the lower courts. As seen above, many critiques have been leveled against the Supreme Court’s decision. Nevertheless, the Supreme Court still maintains that Art.32 of the Land and House Lease Law is a mandatory statute, even in similar cases after 2003.

11.2.2

Claims Against Country Club Management Companies for the Return of Deposits

11.2.2.1

Background

During the boom phase of the bubble, country club memberships became objects of speculation because of the rapid increase in membership prices. The burst of the bubble changed that situation, and speculators who bought membership rights with the objective of making a resale profit faced a sudden drop in prices. Unable to profit from resale, they requested the return of the deposits securing their membership rights. Deposits are paid to the country club owning company (managing company) by new members upon purchasing a membership, and after a period of deferment (usually 10 years); a member who quits the club can request the return of the deposit. Many members—particularly those who bought memberships for speculation— requested the return of deposits after the bubble burst. However, country clubs typically use almost all deposit funds to acquire land for golf courses and equipment maintenance, and in reality the management never expects to return deposits. 5

Several other similar decisions rejected the applicability of the clauses by means of the doctrine of change of circumstances: the decision of the Tokyo District Court, June 13, 1996; the decision of the Tokyo Court of Appeal, September 29, 1998; and the decision of the Tokyo Court of Appeal, December 25, 1998, etc.

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Faced with the possibility of a deluge of requests for return of deposits, the management of these companies claimed the various clauses shown below to deny such requests. Many lawsuits were filed since 1996 (10 years after the formation of the Japanese bubble).6

11.2.2.2

Decisions Denying Claims to Return Deposits

Decision of the Tokyo District Court May 28, 1998 [Facts of the case] X, who is a member of a country club managed by company Y (hereafter Y), requested that Y return the deposit of JPY 22 million after the 5-year deferment period. Y rejected X’s request on the basis of a clause in the rules of the club society stating that “the period of deferment can be extended in case unavoidable matters occur, such as natural disasters, with the approval of the board of directors (club members appointed by the managing company).” Y insisted that the economic disaster following the burst of the bubble was equivalent to a natural disaster. The primary issue was whether the resolution by the board of directors was enforceable against X. [Decision of the Court]―Decision 2–1 “In August 1990, when X became a member of the club, it had not been expected that members would request the return of deposits after 5 years, because by reselling membership rights more money could be acquired than deposit sums.” “The burst of the bubble economy was beyond the expectations of X and Y. Moreover, Y had already spent the deposits on the construction of golf courses, so Y currently had only 1 % of the deposits. If Y accepted requests from members such as X, Y would be forced to file for bankruptcy.” “Extending the deferment period by Y was on account of an unavoidable need to protect the interests of the club’s management and its existing members’ rights to play golf in the midst of the unprecedented economic confusion (the bubble burst), which could not have been foreseen and was not Y’s responsibility; therefore, the extension satisfies the conditions for application of the clause, implying that the period of deferment can be extended with the approval of the board of directors in case of unavoidable circumstances such as natural disasters.” “Considering the above facts, the extension of the deferment period by Y is valid on the basis of the rules of the club society and is in effect for X.” Hence, X’s claim was dismissed. Decision of the Tokyo District Court September 24, 1998 [Facts of the case] In December 1987, X became a member of a country club managed by company Y by paying a deposit of JPY 14.4 million. In October 1997, X withdrew from the club and requested that the deposit be returned in the coming December. [Decision of the court]―Decision 2–2 6

More than a hundred decisions can be found in the Japanese database LEX/DB.

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“In the rules of the club society, there exists a clause that in case of unavoidable matters such as natural disasters, the time and method of returning the deposit can be changed by the resolution of both the club’s and the company’s board of directors.” “The term ‘unavoidable situation’ in the clause cannot be interpreted to exclude changes in economic conditions; rather, it is natural to interpret the clause to include cases such as drastic changes in economic conditions that could not have been easily foreseen when drawing the contract, thereby making it difficult to prepare for the return of deposits. Therefore, X’s claim that changes in the economic conditions cannot be considered in applying the clause, cannot be adapted.” “Y not only decided to extend the deferment period but also took strong measures against changes in economic circumstances (evident in the fact that a fairly large number of club members heard Y’s explanation and accepted it).” “Therefore, X’s claim has no merit because the deferment period is extended for 5 years; thus, the day to return the deposit has not arrived yet.” Decision of the Tokyo District Court January 13, 1999 [Facts of the case] X became a club member in April 1987 after paying a membership deposit of JPY 18 million. After 10 years, X withdrew from the club and requested the return of the deposit. Y rejected X’s request on the grounds that the deferment period was extended for 10 years with the approval of the board of directors. The rules of association included a clause that stated that the company could extend the deferment period in certain years with the approval of the board of directors in such cases (a) wherein it was necessary to manage the Company smoothly (b) there was a danger of preventing the profits from the members concerning the club’s management, and (c) natural disaster, striking change of social circumstances, and occurrence of other unavoidable matters. [Decision of the court]―Decision 2–3 “As for the resolution of this case, first, changes in economic circumstances after the burst of the bubble cannot be termed ‘a natural disaster’. Second, business managers should expect changes in any economic situation, and club managers did prepare for the same them by extension of the deferment period; thus, a ‘striking change of social circumstances’ cannot be admitted.” “At the time of the resolution to extend the deferment period, Y had no other option, and thus this resolution was not just to defer the time of bankruptcy but also to plan the measures during the extended period to maintain the club and to address the problem associated with the return of deposits, including a project to switch to a new system such as stockowner membership. Therefore, the condition necessary for the company’s smooth management is thought to be satisfied. …As a conclusion, the resolution concerned here is valid.” Several decisions were assumed as valid to extend the deferment period. It is assumed that in all three decisions (especially in Decision 2–3), current club

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members’ rights were considered more important than the rights of speculators. However, in terms of case law as a whole, the resolutions were seen as invalid and requests for the return of deposits were admitted in the courts, as will be seen below.

11.2.2.3

Decisions Affirming Claims to Return Deposits

Decision of the Tokyo District Court July 27, 1998 [Decision of the court]―Decision 2–4 “It is clear that in the original rules of the association, a clause noted that ‘the deferment period can be extended by means of a resolution of the company’s board of directors, along with the approval of the members’ board of directors in such cases as the occurrence of natural disasters, force majeure events, and other unavoidable events for the management of the company.’ However, the requirement for both a resolution of the company’s board of directors and the approval of the members’ board of directors means that Y’s unilateral will would be enough for Y (the obligee of the deposit money) to escape from its own obligation. …The extension clause cannot be deemed as an effective standard agreement between X and Y.” Moreover, “the fact that Y is asked to return the deposits is a fundamental legal principle in origin, which can be realized—even without the burst of the bubble economy and Y’s false expectations—because of the decreased number of golfers and other similar changes in social circumstances. …Since modern economic conditions are changing rapidly, there is no room to accept the claim for the application of the doctrine of change of circumstances when the company betrays its expectation that the price of a country club membership will always stay above the sum of its deposit. It is clear that neither the occurrence of a natural disaster and other force majeure events nor the unavoidable events for the company’s management is proved.” Decision of the Osaka Court of Appeal February 18, 1999 [Decision of the court]―Decision 2–5 “Because club members’ rules determine the rights and duties of Y as well as other club members who are admitted to enter the society and because the extension of the deferment period is an unprofitable change of the member’s right, the effect of extending the deferment period cannot be imposed on a member who does not individually accept it (see the Supreme Court’s decision, September 11, 1986, Case Law Times, No. 623, p.74).” In addition, “although the rules of the society provide that ‘in case of natural disasters and other occurrences of matters of the force majeure,’ extension of the deferment period can be done by the board of directors. The facts that Y insist upon are the reasons for Y’s managerial problems because of the extreme change in economic circumstances, including the burst of the bubble, which does not satisfy the condition above.”

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Decision of the Tokyo Court of Appeal May 26, 1999 [Decision of the court]―Decision 2–6 “The change in economic situation is—even if Y did not expect it—not unforeseeable and is a contingency that business managers should always take into consideration. A deposit’s return request is a member’s fundamental right after the deferment period, which is consistent with the principle of good faith; therefore, it is impossible to find any circumstance that will comprise the application of the doctrine of change of circumstances as well as exclude X’s claim.” “A deposit return claim comprises major components of country club membership including the right to play on its course, and it is, in spite of the existence of a precondition to withdraw from the club, fundamentally a claim that is same as other monetary claims. When a company falls into excessive debt or insolvency, it can modify its debt without individual consent of the obligor and avoid bankruptcy if it can get the agreement of majority of the obligors along with approval by the court according to the legal procedures. In such procedures, managers must agree to the supervision and findings of the court, and in certain cases can be pursued to fulfill their financial responsibilities, but only by such compensation can a decrease in debt be justified. Modifying the claim of obligors, without using such procedures or consent of obligors, by way of the resolution of the members’ board of directors (under the influence of the owner or managing company) cannot be permitted in principle.” Decision of the Tokyo District Court July 28, 1999 [Decision of the court]―Decision 2–7 “Y insists that the revision of the contract should be admitted on the basis of the doctrine of change of circumstances, and that the deferment period should be extended by a resolution. For the application of the doctrine, it is necessary that the following conditions be fulfilled: (a) the circumstances forming the basis for drawing the concerned contract have changed (b) the change in the circumstances was not and could not have been foreseen by the parties (c) such a change has not occurred through the fault of either parties’ action, and (d) as the result of the changed circumstances, binding the parties to the original contract is a clear violation of the principle of good faith. On the other hand, Y’s claim can be summarized by considering these aspects. Y’s managerial situation is made difficult by the unexpectedly numerous requests for return of deposits after the change in economic conditions. However, the requests to return the deposits after the deferment period were foreseeable and were a members’ right; hence, Y should have anticipated them when drawing membership agreements. Moreover, changes in economic circumstances such as the burst of the bubble are, while not foreseen by Y, a possibility that should have been considered by business managers as a matter of course and not an extreme change of circumstance. As the result, extension of the deferment period of the deposit in this case on the basis of the doctrine of change of circumstances cannot be validated.”

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Three parties are interested in the return of the deposit: first, former members who request the return of their deposits. Second, the managing companies that wish to continue their businesses. Third, the present members who want to enjoy golf at the club. Since the parties of the lawsuit are always former members and companies, protecting the rights of the present members is a difficult issue. Through resolutions of the members’ board of directors, they can claim their rights to a certain degree. In negotiation and renegotiation outside court, it is especially important to take into account the costs and benefits of involving a non-party in the original suit in the court. As for the case law in this dispute, rediscovery of the decision of the Supreme Court in 1986 was decisive (see Decision 2–5). Although a membership agreement between a newcomer and the company has the nature of being both an individual contract and a corrective contract, the Supreme Court highlighted the former. Of course, there are two types of managing companies; those with a conscience and those with speculative expectations. Relatively recent companies (especially during the boom phase of the bubble) aim to accumulate money through deposits from new customers. To exclude self-protection by such companies, the individualistic theory of the Supreme Court’s 1986 decision would be useful. On the other hand, companies with a conscience could save themselves by recognizing efforts at renegotiation, an element that can be seen as the boards’ approval to extend the deferment period (see Decision 2–2).

11.3

Some Inquiry into the Financial Crises and the Binding Force of Contracts

Does Japanese Law Account for the Effects of Financial Crises on Contracts or Does It Strictly Adhere to the Principle of Pacta Sunt Servanda? In the sub-lease cases, Decision 1–1 discourages easy judicial intervention in contracts and admits to the enforceability of the automatic price increase clause, which seems to be a rather rare case. In other cases, the courts try to moderate the parties’ costs and profits through certain types of legal reasoning (see Decisions 1–2, 1–3, and 1–5). In the country club deposit cases, Decision 2–1 states that natural disasters and the burst of the bubble economy are the same type of problem. This would be an exceptional decision. Decisions 2–3, 2–4, and 2–5 clearly distinguish these two abnormal situations. More importantly, Decisions 2–6 and 2–7 deny the defendant’s claims that changes in economic circumstances allow them to renege on their obligations. These decisions argued that changes in economic conditions were foreseeable and business managers undertook an economic risk.

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In addition, from the experience of the rather short-term bubble economy in Japan, the time frame when the contract was drawn is considered an important element. As per Decision 1–5, the court denied the validity of the clause for the automatic increase in rent due to the reason for impossibility of predicting the bubble burst in 1989 (1 year before the burst). On the other hand, as per Decision 1–4, the doctrine of change of circumstance could not be applied because the sub-lease project was started in 1991 (almost just the beginning of the bubble burst year). The difference in these two decisions is closely related to the fact that predictability of the burst increased as the bubble economy reached its peak. What Is the Theoretical Basis for the Acceptance of the Effects of Financial Crises in Japanese Courts? As seen in the sub-lease cases and the country club deposit cases, Japanese courts solve this problem through complementary interpretation of the contract based on letters on paper as well as by examining the hypothetical intentions of the parties. However, in cases when the problem cannot be focused on the parties’ will, the doctrine of change of circumstances is invoked. The limit of the possible interpretation of parties’ intentions is well described in Decision 1–5. In Japan, the doctrine of change of circumstances is considered a last resort. Claiming the right and determining the parties’ claims without using this doctrine is a common practice among Japanese lawyers. According to Japanese Law What Are the Conditions for Accepting an Exceptional Fact? In the sub-lease cases, as was properly highlighted by Decision 1–3, the necessity of revising the parties’ proportionality in profit and loss sharing was triggered by the courts’ motive to intervene in contracts. The unforeseeability of the exceptional situation was likely regarded as being very important, because Art.32 of the Land and House Lease Law in Japan does not require the change in circumstances to be unforeseeable for the contract to be revised. However, in the country club deposit cases, as can be seen in the Decisions 2–6 and 2–7, the unpredictability of present circumstances at the time of drawing the contracts was a strict requirement for the release from company obligation. There are two reasons for this. First, for a long time, courts have had a tendency not to recognize the unpredictability of exceptional circumstances when applying the doctrine of change of circumstances; therefore, this pattern may continue to be held in cases involving financial crises. Second, and more importantly, Japanese companies were immersed in ‘irrational exuberance’ during the boom of the bubble economy; therefore, Japanese judges may have looked back on past activities of concerned companies without any interest. Perhaps the nature of the financial crises in each country would influence its courts’ tendencies. Comparing the sub-lease cases and the country club deposit cases, the significance of damage to the companies was not weighed as heavily in the latter cases. In the former, the bankruptcy of either the lessor or lessee seemed to have been deemed unacceptable by judges. In the latter, as per Decision 2–6, bankruptcy was deemed

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a possible option. The size of the business and its impact on the larger economy were important factors affecting these decisions. What Would Be the Legal Consequence of Such a Case Under Japanese Law? In the sub-lease cases, no decision admitted the termination of the contract. All the legal consequences involved revision of the contracts based on both the automatic rent increase clause and Art.32 of the Land and House Lease Law. In reality, the lessee (administrative company) would have been eager to terminate the contract, but no case was published in which the lessee demanded termination in the court. In the golf club deposit cases, the issue has been whether the resolutions of the managing companies’ boards of directors (or members’ associations) were valid. Thus, the legal consequences were limited to revision of the contracts (extension of the deferment period) as a matter of course. In Japan’s legal literature, the effect of the doctrine of change of circumstances is now being actively argued. The relative priorities of revision and termination (rescission) and the legal nature of the duty to renegotiate are the central themes of this discussion. Although these problems seldom appear in case laws in Japan, the type of the contract argued would be an important determining factor (e.g., sales or lease contract, and discrete or successive contract).

11.4

Supplementary Consideration: The Social Dimension of Pacta sunt Servanda in Japan

As previously mentioned, the doctrine of change of circumstances, which creates the exception to the principle of pacta sunt servanda, is rarely admitted. This does not necessarily mean, however, that contracts and transactions in Japan are strictly governed by the principle of pacta sunt servanda. In Japan, the official revision of the Civil Code (concerned with the law of obligation) is now in progress and is scheduled for completion in 2016. In the revision, the doctrine of change of circumstances was originally had planned to be stipulated in the text. During the revision process, public comments on all planned revisions were formally requested of many laypersons, professionals, companies, law firms, and lawyers’ associations. The majority of the comments opposed codification of the doctrine of change of circumstances. Hence, it was finally decided that the doctrine would not be codified in the Civil Code. The major reasons for public opposition to the codification of the doctrine were the following: (a) codification of the doctrine in the Civil Code would invite abuse for the purpose of escaping original legal obligations; (b) the doctrine could become a weapon for the stronger party to force their demands on the weaker party; (c) the obligation to renegotiate would be used by one party to buy time during the conflict; (d) the basis of the doctrine, i.e., the good faith principle, is sufficient for addressing the problem of changed circum-

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stances. Hence, no need exists to codify minute requisites and effects such as the doctrine of change of circumstances. (e) interpretation of contracts based on the good faith principle would be both sufficient and preferable for solving individual and characteristic disputes flexibly; and (f) revision of contracts by the court represents excessive interference in light of the principle of private autonomy. What Can Be Seen from These Reasons Against the Codification of the Doctrine? Japanese business persons and companies do not place a high value on the enforcement of the original contracts and do renegotiate outside the courts in cases of change of circumstances to revise the original contracts. Thus, they feel no inconvenience by resolving disputes in this manner. A thorough interpretation of the negative comments above suggests that de facto renegotiations reflect the power balance between the parties as effectively as the letters and clauses of original contracts. The standards for resolving such issues are not the predictability of the changes or the seriousness of economic damages, but ad hoc considerations of the varied facts and intentions of the parties in each case. Accordingly, parties who make concessions in de facto renegotiations prefer to avoid the revaluation of their conclusions by the courts. If this idea is correct, the ideal legal principle for exceptions to the enforceability of the original contracts should be constructed not by the interpretation of the risk allocation in the original contract nor the unpredictability of the future change of circumstances, but by the identification and recognition of a range of de facto standards in order to promote fair and equitable renegotiations free from the arbitrary demands of stronger parties.

Chapter 12

The Effects of Crises on the Binding Force of Contracts: Polish Solutions Wojciech Robaczyński

Abstract Pacta sunt servanda principle is a basis of the law of obligations, assuring the necessary stability of legal relationships. This principle is declared by the Polish civil code in Article 354. This provision sets a frame of the manner in which an obligation is to be carried out. Due to the fact that Polish economy resisted the negative economic phenomena to a great extent there was no need to narrow this principle. Sufficient enough turned out to be an original solution that we can find in the Polish civil code. This solution was to be Art. 3571 of the civil code. The provision reads as follows: “If, due to extraordinary change in relationship concerning fulfilling the obligation, it would be connected with undue hardship or one party would be at a risk of a gross loss and which was not foreseen by the parties while concluding a contract, court may, having considered the interests of both parties and in accordance with social coexistence, decide on the manner of performing the duty, the amount of compensation or even decide on terminating the contract.”

12.1 One of the issues that have permanently been a subject of a lively discussion in the science of civil law is the scope of rules of pacta sunt servanda principle. This principle is a basis of the law of obligations, assuring the necessary stability of legal relationships. Therefore, it comes as no surprise that contemporary legal system formulate it in one form or another. Pacta sunt servanda principle is also declared by the Polish civil code in Article 354. This provision sets a frame of the manner in which an obligation is to be carried out, placing in the foreground the requirement to perform that duty in accordance with the provision. Thus, it is the content of the

This article is also published in the book “Rapports polonais – XIXe Congrès international de droit comparé” edited by Biruta Lewaszkiewicz-Petrykowska, and published by Łódź, Wydawnictwo Uniwersytetu Łódzkiego upon whose approval was updated later by the author. W. Robaczyński (*) Faculty of Law and Administration, University of Łódź, Łódź, Poland e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_12

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contract that determines the manner in which the contractual obligation is to be carried out, even though in the light of Article 354 § 1 of civil code, the following are also of importance: socio – economic objective of the obligation, principles of social coexistence and the established customs. These non-contractual criteria are only of ancillary character – it is the content of the contract that is of primary importance. The positive aspects of pacta sunt servanda principle are most visible when the obligations are carried out under stable economic conditions. Thanks to real performance of contractual obligations, in a manner that remains in accordance with the originally accepted duties, certainty of behaviour is achieved, which is a value not to be overestimated. However, there appear situations in which – without negotiating the meaning of pacta sunt servanda principle – attempts are undertaken to find solutions aiming at mitigating the blade of the above mentioned principle. Discussions concerning this issue usually arise in cases of exceptional, unforeseen changes in circumstances accompanying performance of the contract.1 The impact of changes in the circumstances on the contract should be among the classic issues of civil law. Literature concerning this subject, both Polish and worldwide, is really extensive.2 For obvious reasons, the interest in the possibility to modify the contractual relationship bond increases in the periods of special phenomena occurrence, which are rooted in imbalance of the contract originally concluded by the parties. If, however, in the past, the discussions on this subject were connected primarily with natural catastrophes, nowadays attention is drawn mainly towards phenomena of economic character. The global economic crisis contributed to such a state of things in the first instance, through plaguing the economies of individual countries and also a significant part of the worldwide economic system for several years. The situation of Poland to the other European countries is a specific one, for reasons that are both economic and concerning the applied legal solutions. A significant economic circumstance is a fact that Polish economy resisted the negative economic phenomena to a great extent. The reasons for this are various, but we will not look into the crisis in its economic aspect. From the point of view that is of interest to us, a more significant is an original solution that we can find in the Polish civil code. 12.2 As is commonly known, Poland of the nineteenth century did not have its own statehood and the land was divided between Prussia, Austria-Hungary and Russia. Due to that fact, a foreign law was in force at that time, depending on who occupied the land. Additionally, on parts of the lands occupied by Russia (the so-called Polish Kingdom), French law was in force, which was a remnant of the Napoleonic era. As a result, Polish lands were under the influence of several jurisdictions, which later, after gaining independence in 1919, became models for a unified legal system in Poland. Among the systems that were of particular influence on the Polish 1 2

Rajski (2010); Lackoroński (2012), No 3. See. e.g. Brzozowski (1992).

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jurisdiction, were German and French laws. BürgerlichesGesetzbuch civil law (the German civil code) and Code Napoleon (the French civil code), were the points of reference while creating Polish legal regulations. Particularly, the code of obligations of 1933 is seen as a result of these works, which became an example of the civil code that was created in 1964. It is necessary to point out here that when it comes to the problem of this analysis, the Polish law took a different way to the already mentioned European legislations. If in the above mentioned codes, pacta sunt servanda rule was a rule that was rigorously followed, a solution was introduced into the code of obligations (Art. 269) that allowed a modification of a contractual relationship on the grounds of a court’s ruling in case of – as it was then versed – an extraordinary event. This was truly an innovative solution that adapted into the Polish legal order the idea of rebus sic stantibus clause. This solution was characterised by originality and that feature remains valid until today. Originally, an equivalent of Art. 269 of the obligation code was not introduced into the Polish civil code that was based on the western examples, even though it was enacted right in the middle of the communist era. It was found that in case of economy that was centrally planned and detached from the market rules, there is no room for unforeseen circumstances. As it appeared, however, due to the permanent crisis of the then existing economic model, it is necessary to restore a solution allowing the legal system to react in situations that are unexpected and violating the principles of contractual balance. This solution was to be Art. 3571 of the civil code that was introduced in 1990 as a course of the amendment.3 The provision reads as follows: “If, due to extraordinary change in relationship concerning fulfilling the obligation, it would be connected with undue hardship or one party would be at a risk of a gross loss and which was not foreseen by the parties while concluding a contract, court may, having considered the interests of both parties and in accordance with social coexistence, decide on the manner of performing the duty, the amount of compensation or even decide on terminating the contract. By terminating the contract court may also, if needed, decide on settlement of the parties, considering the principles set out in the preceding sentence”. It is worth noting that initially, between 1990 and 1996, there was also another provision (§ 2), which excluded the possibility of an entrepreneur referring to Art.3571 of civil code if a settlement should remain in connection with managing his enterprise. This restriction was lifted, however, under criticism formulated in the legal literature.4 In the initial period of the restored solution, it was applied primarily in cases of events that had a character of natural disasters. A rather sceptical approach was given both in the literature and jurisdiction, to the possibility of applying this provision in case of economic changes. Soon it appeared, however, that the changes in social, political and economic system resulting from the fall of communism, became “the extraordinary change of relationships” in themselves, as stipulated by Art. 3571

3 4

See Robaczyński (1991), No 11–12. See Brzozowski (2009), p. 180.

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of civil code. The jurisdiction of the Polish Supreme Court in this area is rather extensive.5 Together with economic stability, the meaning of rebus sic stantibus clause began to weaken. It was only the abovementioned world economic crisis resulting in serious changes in the power of Polish currency following the fall of the Lehman Brothers bank in 2008 that became the impulse to resume a lively discussion concerning this issue. 12.3 Thus, the Polish law constructed its own model of the legal system’s reaction in the face of a fundamental change of circumstances. In order to make a certain simplification in considerations, usually a reference is made to adapt rebus sic standibus clause in Article 3571 of civil code. It seems, however, that this provision cannot be interpreted as a contractual clause nowadays. In terms of Polish law, the discussed solution does not constitute a contractual clause in its traditional understanding. Neither does it seem possible to talk about a clause that is simply tacitly accepted by entities concluding contracts in case of a change in circumstances. A solution included in Article 3571 of civil code should thus be understood not as a contractual clause, but as exceptional statutory authorisation for court to intervene in the content of the contractual relationship that ties the parties. So as to maintain a certain tradition, it is allowed to use the term rebus sic stantibus as it is deeply rooted in the science of law. As is well-known, in various legal orders, there evolved several fundamental theories that justify a revision of a contractual relationship in case of a change in circumstances. The following are of particular importance: a German concept “Wegfall der Geschäftsgrudlage”, French “theorie de l’imprévision”, or the one formed on the basis of common law “frustration of contract”. One should also not forget about the tendency to broadening the interpretation of the notion of inability to provide, which aims at constructing a concept of the so-called economic inability (wirtschaftlicheUnmöglichkeit). The need to find appropriate solutions both in the science of law and in judicature, is justified by the lack of appropriate statutory construction. Whereas in Poland, due to the applicability of Article 3571 of civil code as an exceptional statutory authorisation, there is no need to construct other theoretical justifications of the change in circumstances on the contract. Thus, Polish regulation constitutes a specific solution that is best fitting the needs of Polish economic turnover. This expresses the realisation of the rebus sic stantibus concept, even though due to the aforementioned reasons, I would opt for a cautious use of the traditional understanding of the rebus sic stantibus concept. It needs to be emphasised, however, that applicability of Article 3571 of civil code does not undermine the principle of pacta sunt servanda as the main regulation of performing obligations. It may be also said that the possibility of modifying obligations on the basis of Article 3571 of civil code is rather

5

See e.g. Supreme Court, Dec. 2, 1998, I CKN 972/97; Apr. 22, 2005, III CK 594/04.

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a supplement to the statutory rules of performing contracts than a contradiction to the principle of pacta sunt servanda.6 12.4 Let us now analyse Article 3571 of civil code, which will allow us to evaluate the meaning of the solution it includes from the point of view of legal system needs to react to the crisis phenomena. Obviously, listing the conditions of applications from Art. 3571 of civil code is of primary interest here. These conditions could be defined as follows: (a) Obligation results from the contract (b) Extraordinary change of relationship between concluding the contract and performing it (c) Violating the balance of the contract, i.e. excessive difficulty in meeting the provisions of the contract or a threat of gross loss (d) Unpredictability of the influence of a change of relationship on the obligation Annotation (a) Applying Art. 3571 of civil code is only possible with reference to those obligations that result from the contract. Not only the stipulations of the provision support this viewpoint, but also the clause rebus sic stantibus, the concept of which was shaped on the basis of contracts. In Polish law, the Supreme Court attempted to apply this construction to the non-contractual obligations.7 However, it was greeted with criticism in the legal literature, following which the Supreme Court waived this view.8

In the light of Article 3571 of civil code, it does not in fact matter who is a party of the contract. Hypothetically, a court’s interference in the contractual relationship may concern contracts concluded by all entities. In practice, however, in case of contracts concluded by professionals, with consumers in particular, court will be more rigorous when evaluating the other conditions, even more so since the discussed provision orders to include the rules of social coexistence. Annotation (b) The basic premise of Article 3571 of civil code is extraordinary change of relationship. The notion “extraordinary change of relationship” requires defining what “a change of relationship” is and under what circumstances it may be classified as extraordinary.

It is often emphasised in the literature that a change of relationship means a change of external conditions under which a contract is performed. These are not conditions concerning a specific part of a contract, e.g. illness, bankruptcy, factory fire. These are circumstances concerning the entire class of subjects or a significant area.9 These changes are based on re-evaluation of the currently existing obligations 6

See Robaczyński (1998), pp. 68–70. Supreme Court, Nov. 26, 1992, III CZP 144/92. 8 See e.g. Jaworski (1998), No 9, p. 35. 9 See Robaczyński (1998), pp. 92–93; Machnikowski (2013), pp. 562–563. Different opinion: Bieniak M (2009a) Extraordinarychange of relationships as an conditio to applyArticle 3571 of civil code – an attempt to define (Nadzwyczajna zmiana stosunków jako przesłanka zastosowania art. 3571 k.c. – próba definicji), Studia Prawnicze No 4, pp. 82–83. See also Bieniak M (2009b) Rebus sic stantibus clause – possibilities of its current use (remarks in the light of Article 3571 of civil code (Klauzula rebus sic stantibus – możliwości jej aktualnego zastosowania [uwagi na tle art. 3571 k.c.]), Monitor Prawniczy, No 12, p. 641. See also Appeal Court of Warszawa, Apr 25, 2014, I ACa 1502/13. 7

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and functioning of the contract in a completely new light. It is not suffice to claim the change of relationship, however. This change is to be of extraordinary character. In the literature and jurisdiction it is emphasised that the term “extraordinary” means not frequent, unusual and exceptional. Thus, it is only when we qualify the change of relationship as extraordinary, may we consider any further conditions of the rebus sic stantibus clause. These could be circumstances of various character. Obviously, the fore changes would be those connected with catastrophic natural changes: earthquakes, hurricanes, tsunami, floods, disastrous droughts. Also significant disruptions of social life cannot be ruled out, such as wars, riots, strikes, blocks of all kinds, terrorist attacks, etc. It needs to be stressed, and that was mentioned earlier, that an extraordinary change of relationship may also mean perturbations of economic nature, connected with crisis phenomena in particular. See Appeal Court of Katowice, Mar 6, 2015, I ACa 564/14; Appeal Court of Wrocław, Jan. 24, 2013, I ACa 1362; Appeal Court of Katowice, Mar 6, 2015, I ACa 564/14. In many cases, circumstances treated as extraordinary may also be – from a different perspective – seen as force majeure (vis maior). Even though these circumstances may be related or even identical, their function remains different. If rebus sic stantibus clause enables the modification or termination of a contractual bond by court, force majeure is a circumstance that releases the debtor from responsibilities in case of improper or insufficient performance of their obligations.10 Annotation (c) Violating the balance of the contract is a result of an extraordinary change of relationship. We assume that in case of each contract a consensus between the parties is reached. Thus, the contract is a result of a compromise, an understanding of divergent interests between the parties. The contract is also a result of a cooperation.11 An extraordinary change of circumstances results in violating the balance. As a result, a court’s interference is made possible, so as to achieve the balance of the contract.

The above mentioned violation of balance may take the form of an excessive difficulty in performing the obligations or a threat of a gross loss. An excessive difficulty applies to a debtor who may be in a position to perform his duty, but these would require such efforts that no prudent participant may demand in such a situation. These particularly include technical, organisational or logistics difficulties, but also these of economic nature (the necessity to gather disproportionate funding). Whereas the threat of a gross loss is connected solely with the effects of an economic nature. This may affect any of the parties. In case of a significant change of circumstances, it may appear that one or the other party may have to engage in fulfilling the obligation such funding, goods or services that in relation to the value of the other party’s services, the balance of performing the contract proves negative and to such an extent that the term “gross loss” applies for that particular party. Obviously, the term “gross loss” is of an evaluative character and in every case court must assess individually whether this loss would be of such a character. It should be remembered, however, that not in each case a loss may mean the necessity to intervene in the content of contractual bond. It needs to be remembered that intro10 11

Bagińska (2010), p. 182. Robaczyński (1998), pp. 77–80.

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ducing a mechanism correcting the content of a contract should take place – due to the necessity to maintain the certainty of behaviour–exclusively in cases where the scale of effect of relationship on the obligation is of such a kind that it exceeds the so-called normal contractual risk. See Appeal Court of Lublin, Jul 31, 2013, I ACa 239/13; Appeal Court of Warszawa Apr 25, 2014, I ACa 1502/13. See also Supreme Court, Nov. 19, 2014, II CSK 191/14. The term of normal contractual risk is not used in the Act, it is a concept elaborated in the science of law and legislation. It means that every honest contractor should be aware of certain changeability of exterior conditions and the possibility of the economic value of a transaction being influenced by it. Such phenomena as fluctuations, variability in demand and supply, floating exchange rate, etc. are normal phenomena that have always accompanied the economic life. The contracting party must be aware of these phenomena and cannot in every case demand the revision of contractual provisions. This would place turnover at undesired destabilisation of turnover. It is only when the scale of the above mentioned phenomena reaches such intensity that the sense of the originally concluded contract becomes questionable, one may consider applying Article1 of civil code, obviously only when all other provisions stipulated in it have been fulfilled. A similar approach is applied when referring to Article 3581 § 3 of civil code, which provides for judicial indexation of cash benefits (there will be more on indexation in this work). Annotation (d) In order to apply rebus sic stantibus clause, it is necessary for the change of relationship between the parties to be unpredictable. It needs to be stressed that – despite certain doubts that one may have reading the content of the provision literally – there is an agreement concerning the fact that it refers to an objective lack of possibility to foresee the influence of changes in circumstances on the obligation and not to a lack of subjective anticipation of this fact by the parties.12

While constructing this condition, the legislator is of the opinion that if there is a possibility to foresee the influence of changes on the circumstances, then the parties may include this risk in their contract, thus eliminating in advance the negative influence on the economic sense of the contract. Clearly, it may happen that the parties may have foreseen the outcome of certain events, however it was not possible to have foreseen that the actual outcome will be even more far-reaching. In such cases, applying Article 3571 of civil code will not be excluded – so it seems – it will be possible to apply it in part that places it out of any predictability. 12.5 Fulfilling the conditions of Article 3571 of civil code creates a possibility for the interested party to apply to court for an appropriate demand to modify the contractual relationship. Polish legislator does not require the submitted request to be preceded by an attempt to renegotiate the contract. Obviously, the parties may reach agreement at any time and change the provisions of the contract (except for the cases that are non-negotiable and concern public procurement). In such cases, it is

12

See Machnikowski (2013), p. 565; Bieniak (2009b) Rebus sic stantibus clause, pp. 640–64. See also Supreme Court, Sep 21, 2011, I CSK 727/10; Appeal Court of Rzeszów, Mar 28, 2013, I ACa 452/12.

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the contractors themselves who establish how the balance of their contract is to be restored. If, however, for any reason, reaching an agreement in this matter proves impossible, then the possibility of applying to court opens up. The legislator does not impose too strict rigors of modification of the contractual relationship. Modification criteria are stipulated very generally, which provides the flexibility desired in extraordinary circumstances. As can be seen from the above quoted content of Article 3571 of civil code, court is to consider the interests of parties (both parties) and be guided by the principles of social life. In the Polish law, the social life principles function as certain extralegal measures to assess social behaviour and an indicator of a manner in which an obligation is fulfilled, similarly to, e.g. the principle of good faith and trust on the basis of German civil code (“TreuundGlauben” – § 242 BGB). The necessity to consider the interests of both parties is obvious as it is impossible to allow a situation in which the whole burden of unfavourable phenomena that constitute an extraordinary change of a relationship would be borne by just one party. In order to restore the affected balance of the contract, court may – first of all – change the amount of a settlement or the manner in which it is to be performed (for instance the time limit). As a final solution, a possibility to terminate the contract is provided (in the provision there is a term that court may “even decide to terminate the contract”). In case of terminating the contract, it may be necessary to also decide on settlements between the parties, especially in cases when the settlement has partly been carried through. While determining the settlements, court is also to consider the interests of both parties, guided by the principles of social coexistence. 12.6 The conditions presented above as for the application of Article 3571 of civil code may justify the application of rebus sic stantibus clause also in the face of phenomena of economic character.13 Assuming that in a given situation we are dealing with ‘abnormal’ crisis situations rather than with ‘normal’ fluctuations of a market situation, it could be concluded that an extraordinary change of relationships in the understanding of the discussed provision is taking place.14 It is worth emphasising, that this extraordinary change should be expressed in phenomena of deeper nature than just a change – even a serious one – of currency exchange rates. Just a change in the value of money itself, if relevant, justifies the use of the so-called court indexation on the basis of Article 3581 § 3 of civil code, which will be discussed later on, than the clause rebus sic stantibus.15 If, however, the crisis phenomena mean a fundamental market change that are additionally connected with, for instance, a wave of bankruptcies of many companies, due to which a market collapse takes place, then we may assume the extraordinary change of relationships is arising. Such phenomena may be compared to a crisis that Poland was experiencing by the end of the communist era in the 80s of the twentieth century. As was men13

See Brzozowski A (2009), pp. 980–982; Bagińska (2010), p. 181; Strugała (2010) No 8, pp. 47 and following. 14 See e.g. Appeal Court of Wrocław, Jan. 24, 2013, I ACa 1362/12. 15 Supreme Court, Feb. 25, 2004, II CK 493/02.

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tioned earlier, Polish judicial system was inclined to accept such phenomena as an extraordinary change of circumstances. Such a change may influence the contract, leading to violating its balance.16 We could say that violating the contractual balance stands out as the first met condition of Article 3571 of civil code that leads to searching for answers to a question whether this violation resulted from the change of circumstances that was of extraordinary character. It should be added here that the Polish judicial system accepts also changes in the legal system, including those concerning taxes, as the extraordinary change in relationships as stipulated by Article 3571 of civil code. Serious changes, e.g. in VAT rates, may significantly undermine the economic sense of an obligation.17 However, it should not be forgotten here that applying the mechanism of rebus sic stantibus requires determining the unpredictability of the influence of the change in relationships on the obligation. If certain economic phenomena can be predicted and their influence on the contractual relationship is also to be predicted, court will refuse its intervention into the content of the obligation. Expecting the occurrence of certain economic phenomena, the parties may calculate the risk connected with that fact in the provisions of the concluded contract, appropriately spreading the contract risk.18 Applying Article 3571 of civil code is not then justified. Assuming otherwise could lead to undermining all contracts concluded during the times of occurrence of crisis phenomena, which would also lead to extending the market chaos. The above mentioned question of unpredictability is crucial in practice. Taking it into account undermined the possibility of applying Article 3571 of civil code in the so-called option contracts that were concluded prior to the market collapse in the year 2007. It could be said that these contracts were concluded by enterprises with the banks precisely in order to be able to respond flexibly to the changes in exchange rates in crisis situations. Thus it is hard to justify appointing the extraordinary change of circumstances in relation to these contracts, if the possibility to change a relationship was an assumed in advance reason for which such a contract was concluded in the first place. 12.7 It is worth noting that a solution similar to the Polish one was included in the Principles of European Contract Law (PECL). Although Article 6.111 paragraph 1 of PECL accentuates the meaning of pacta sunt servanda principle, yet in Article 6.111 §§ 2 and 3 there is a possibility to revise the contractual relationship. However, contrary to the solution accepted in the Polish law, Article 6.111 of PECL requires the parties to undertake an attempt to change the content of the contract by renegotiation. It is only when renegotiations fail that a request to court to terminate the contract or modify it would be justified. It is possible also that the other party could claim compensation for damages caused by refusing the other party participation in 16

Morek R (2013), p. 99. Supreme Court, May 16, 2007, III CSK 452/06; Nov. 22, 2007, III CSK 111/07; Jan. 17, 2008, III CSK 202/07; Nov 19, 2014, II CSK 191/14; Mar 29, 2012, I CSK 333/11; See also Appeal Court of Warszawa, Jan 17, 2014, VI ACa 307/13. 18 Supreme Court, May 10, 2006, III CK 336/05. 17

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renegotiations or by carrying them out in bad faith, i.e. in a manner that remains contrary to the principles of good faith and honest turnover. It should be expected that a solution suggested by PECL may reflect in the legal orders of the European Union members, even more so due to the fact that the worldwide economic crisis leads to seek such solutions. Contrary to the Polish law, however, this is just a proposition that perhaps will be included in the European Civil Code in future. On the other hand, current solution, similar to the one accepted in Poland, is included in Article 1467 of Italian civil code. This provision gives grounds to terminate a contractual relationship in a situation when as a result of exceptional and unpredictable events, it would become too difficult to perform the contractual obligation (eccessiva onerosita). It is worth noting that Article 1467 paragraph 2 of Italian civil code rules out the possibility to quote that provision when the event remains within the frames of risk that the parties should be aware of while concluding the contract. This provision is also accepted in interpretation of Article 3571 of civil code, even though it was not stipulated expressis verbis there.19 12.8 Accepting a solution described in Article 3571 of Polish civil code results in considerations connected with the search of a solution that is of interest to us from the point of view of the concept of inability to provide, recognised as economic inability to provide, are currently not undertaken. It needs to be noted, however, that in the period after the repeal of Article 3571 of civil code, attempts to theoretically justify using this concept, the influence of the change in relationship on the obligation were undertaken. A solution was then proposed, according to which conditions concerning economic inability were arranged in a manner analogous to the former Article 269 of obligation code, that is they corresponded to – in their basic shape – to the conditions of current solution stipulated in Article 3571 of civil code. Certainly, it was such propositions that allowed to “store” the idea of rebus sic stantibus between 1965 and 1990, which resulted in adopting the currently existing solutions.20 Currently, majority of cases where one could trace back the concept of economic inability to provide may be resolved on the basis of Article 3571 of civil code. This does not, however, mean that this concept should be completely rejected. It needs to be remembered that the theory of inability does not ensure such flexibility as is expressed by the rebus sic stantibus clause. The result of subsequent inability to provide is termination of obligations (Article 475 § 1 of civil code) and that leaves no place for modification of the obligation and adjusting the contractual provisions to the changed conditions. 12.9 Apart from the rebus sic stantibus clause in its general form, the Polish law also provides for special cases of court interference into the content of an obligation. Of particular importance here is Article 632 § 2 of civil code that includes a possibility to increase a flat-rate remuneration in contracts for specific works (also in 19 20

Robaczyński (1998), p. 39. See Lewaszkiewicz-Petrykowska (1970), pp. 82–83.

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contracts for construction works) in a situation when in case of a change of relationships that was impossible to foresee, payment of a flat-rate only would threaten the contractor with a loss, especially in cases of the necessity to carry out unexpected additional works. On the other hand, in case of contracts for public procurement, Polish Act of January 29, 2004 – Public Procurement Law – provides (Article 145 § 1) that in case of an unexpected change in circumstances resulting carrying out the contract being not in public interest, the ordering party (entity that has public funding at their disposal) may withdraw from the contract. In such a case it is not a question of restoring the disturbed balance of a contract. The only solution is terminating the legal relationship that binds the contractor with the ordering party. It is necessary to point out, however, that in the light of a dominating opinion, also in cases of public procurement it is possible to apply the mechanism of the rebus sic stantibus clause and thus applying to court with a request on the basis of Article 3571 of civil code.21 12.10 Polish civil code knows yet another solution that may be applied in a case of economic situation change that results with a change in currency value.22 It is indexation of cash benefits. It may take a twofold character: contractual or judiciary indexation. It is a rule in the Polish law that cash benefits are accomplished by their face value. This rule (the so-called nominalism principle) is specified by Article 3581 § 1 of civil code. According to this provision, if a subject of an obligation since the moment it has been determined, is a given sum of money, accomplishing this duty should take form of a face amount payment. However, in case of changes in the currency value after the obligation has been established, the parties may apply a contractual value by introducing into the contract the so-called indexation clause which is provided for in Article 3581 § 2 of civil code. According to this provision, the parties may stipulate in the contract that the amount of cash benefit will be determined according to another measure of value than money. This stipulation is done by introducing into the contact the so-called indexation clause. The Act does not limit the parties in their choice of measure in a given case. Most frequently, it will be the so-called currency clause that refers to the contract currency relation to other currencies. It is worth noting here that currently, civil code does not favour Polish currency as a object of provision. The parties are free to choose. Applying currency clause in the case when the object of provision is Polish currency may, however, lead to unreliable results due to the recurring phenomenon of fluctuation that do not reflect the actual market situation. Another form of security may be the metallic clause (it refers to primarily to gold), commodity clause (grain, fuel, raw materials, etc.) or index clause that provides a measure that in this case becomes a variable of several different base measures.

21

District Court of Białystok, Oct. 25, 2011, VII GC 127/11. See also Robaczyński (2005) No 10; Machnikowski (2013), p. 561. 22 See Mróz (2000) No 2–3, pp. 7 and following.

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Applying the index clause depends, however, on a previous decision made by the parties in this respect. In case the parties do not provide such a contractual mechanism, civil code also provides the so-called court indexation of cash benefit. Article 3581 § 3 of civil code is the basis. This provision reads as follows: “In case of a significant change in the purchasing power of money after the obligation has been concluded, court may, having considered the interests of both parties, in accordance with the principles of social coexistence, change the amount or manner of accomplishing the payment, even though they may have been provided for in the contract”. We should note that in this case – as opposed to the rebus sic stantibus clause from Article 3571 of civil code – the same code does not require a change of relationship to take place that would be of extraordinary character. A “significant” change in the value of money suffices here. The level of relevance of this change remains to be assessed by court, yet the literature emphasises that in case of court indexation, similarly to the rebus sic stantibus clause, the mechanism of modification of the obligation should only be started when the level of change in the purchasing value of money reaches the limits of the above mentioned usual contract risk. It should also be noted here that court indexation of a cash benefit cannot take place at the entrepreneur’s request and not only against a natural person that is also a consumer, but also against another entrepreneur. Prohibition to quote Article 3581 § 3 of civil code by the entrepreneur, results from Article 3581 § 4 of civil code. As a consequence, in economic turnover contractual indexation clauses are of less value than court indexation. As can be seen from the above comments, there are certain similarities between the rebus sic stantibus clause in Article 3571 of civil code and court indexation in 3581 § 3 of civil code. These similarities incline some authors to apply terms such as “a grand rebus sic stantibus clause” (Article 3581 § 3 of civil code). I am of the opinion, however, that similarities between these constructions are more of a “technical” character and they differ on the merits. Only the solution provided in Article 3571 of civil code realizes the rebus sic stantibus idea clause as understood traditionally, thus leading to a transformation of the already existing contractual obligation. Court indexation means that it is only a technical operation of an accounting character, which allows to make the amount of a benefit more real but not leading to any change in the merits of the contractual relationship.23

References Bagińska, E. 2010. Rebus sic stantibus clause – contemporaryapplication (Klauzula rebus sic stantibus – współczesne zastosowania), Gdańskie Studia Prawnicze. Vol. XXIV. Bieniak, M. 2009a. Extraordinarychange of relationships as an conditio to applyArticle 3571 of civil code – an attempt to define (Nadzwyczajna zmiana stosunków jako przesłanka zastosowania art. 3571 k.c. – próba definicji), Studia Prawnicze.

23

See also Robaczyński (1998), p. 180 and following; Malarewicz (2005), No. 12, pp. 587–588.

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Bieniak, M. 2009b. Rebus sic stantibus clause – possibilities of its current use (remarks in the light of Article 3571 of civil code (Klauzula rebus sic stantibus – możliwości jej aktualnego zastosowania [uwagi na tle art. 3571 k.c.]). Monitor Prawniczy. Brzozowski, A. 1992. Influence of changes of circumstances on obligations in the Polish law (in the light of selectedforeigncountries) (Wpływ zmiany okoliczności na zobowiązania w prawie polskim [na tle prawa niektórych państw obcych]). Warszawa. Brzozowski, A. 2009. Private law system (System prawa prywatnego). Vol. 6, – Law of obligation – general part (t. 6 – Prawo zobowiązań – część ogólna). Warszawa. Jaworski, L. 1998. Rebus sic stantibus clause (Klauzula rebus sic stantibus), PrawoSpółek, No 9. Lackoroński, B. 2012. The rebus sic stantibus clause and ex contractu liability (Klauzula rebus sic stantibus a odpowiedzialność ex contractu, Państwo i Prawo. Lewaszkiewicz-Petrykowska, B. 1970. Follow-upinability to deliver (Niemożliwość świadczenia następcza), Studia Prawno-Ekonomiczne. Vol. IV. Machnikowski, P. 2013. Civilcode. Commentary (Kodeks cywilny. Komentarz). Edited by E. Gniewek and P. Machnikowski. Warszawa. Malarewicz. A. 2005. Influence of changes in relationship on delivering obligations (Wpływ zmiany stosunków na wykonanie zobowiązań), Vol. II, Monitor Prawniczy Morek, R. 2013. Civilcode. Commentary (Kodeks cywilny. Komentarz). Edited by K. Osajda. Vol. II. Warszawa. Mróz, T. 2000. On delivering cash benefits under the change of circumstances (O wykonywaniu świadczeń pieniężnych w warunkach zmiany okoliczności). Palestra. Rajski, J. 2010. From the issues of functioning of the principle pacta sunt servanda and rebus sic stantibus clause in contemporary economic climate (Z problematykifunkcjonowaniazasadypacta sunt servanda iklauzuli rebus sic stantibus we współczesnymklimaciegospodarczym). PrzeglądprawaHandlowego. Robaczyński, W. 1991. The return of rebus sic stantibus clause (Powrótklauzuli rebus sic stantibus). Palestra. Robaczyński, W. 1998. Judicial change of contract (Sądowa zmiana umowy). Warszawa. Robaczyński, W. 2005. Changes in circumstances and stabilisation of a contract in public procurement (Zmiany okoliczności a stabilizacja umowy w sprawie zamówienia publicznego). Finanse Komunalne. Strugała, R. 2010. Court’s intervention in the relationship of obligation on the basis of Article 3571 of civil code (Ingerencjasądu w stosunekzobowiązaniowynapodstawie art. 3571 k.c). PaństwoiPrawo.

List of Cases Appeal Court of Lublin, Jul 31, 2013, I ACa 239/13. Appeal Court of Katowice, Mar 6, 2015, I ACa 564/14. Appeal Court of Warszawa, Apr 25, 2014, I ACa 1502/13. Appeal Court of Rzeszów, Mar 28, 2013, I ACa 452/12. Appeal Court of Wrocław, Jan 24, 2013, I ACa 1362/12. Appeal Court of Katowice, Mar 6, 2015, I ACa 654/14. Appeal Court of Warszawa, Jan 17, 2014, VI ACa 307/13. Supreme Court, Sep 21, 2011, I CSK 727/10. Supreme Court, Nov 19, 2014, II CSK 191/14. Supreme Court, Mar 29, 2012, I CSK 333/11. Appeal Court of Wrocław, Jan 24, 2013, I ACa 1362/12. District Court of Białystok, Oct 25, 2011, VII GC 127/11. Supreme Court, Nov 26, 1992, III CZP 144/92.

220 Supreme Court, Dec 2, 1998, I CKN 972/97. Supreme Court, Feb 25, 2004, II CK 493/02. Supreme Court, Apr 22, 2005, III CK 594/04. Supreme Court, May 10, 2006, III CK 336/05. Supreme Court, May 16, 2007, III CSK 452/06. Supreme Court, Nov 22, 2007, III CSK 111/07. Supreme Court, Jan 17, 2008, III CSK 202/07.

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Chapter 13

Discussing the (Ab)Normality of Financial Crises as a Relevant Change of Circumstances Under Portuguese Law Manuel Carneiro da Frada and Mariana Fontes da Costa

Abstract The present financial crisis and its ongoing effects on the Portuguese economy have been sharply and repeatedly reflecting in a multiplicity of contracts. As a result of this impact lawsuits aiming at the rescission or amendment of contracts due to change of circumstances have become more frequent. Recent rulings and the debate surrounding them give strengthened pertinence to the specific challenges related to the recognition of financial crises as a relevant change of circumstances. Special difficulties arise here from the requirement to prove the abnormality of the change in its social context. At the end, the exceptional nature of the intervention in the contract alongside with a concomitant need for counterbalancing in case of undesirable or intolerable outcomes arriving from the crisis are the main axiological basis for a complex set of legal assumptions of varying intensity, supported around the syndicating role of the principles of good faith.

13.1

The Legal Impact of Financial Crises on Contracts

It is peacefully accepted that Portuguese law recognises the “pacta sunt servanda” principle. Article (art.) 406(1) of the Civil Code1 (CC) establishes that “[a] contract must be duly performed and can only be amended or terminated by mutual consent of the parties or where admitted by law”. Among the exceptions to a formal understanding of this principle of the binding force of contracts is the possibility of termination or amendment of the contract due to a change of circumstances. 1

Approved by Decreto-Lei (DL) no. 47 344, of 25 November 1966.

M.C. da Frada (*) Faculty of Law, University of Porto, Porto, Portugal e-mail: [email protected] M.F. da Costa Law Department of the Faculty of Economics, University of Porto, Porto, Portugal e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_13

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In fact, according to the provisions of art. 437(1) of the same Code, “[i]f the circumstances on which the parties founded the decision of contracting have suffered an abnormal change, the injured party has the right to terminate the contract or amend it according to equity criteria, provided the demands of the obligations undertaken seriously affect the principles of good faith and are not included in the set of risks inherent to the contract”; paragraph 2 adds that “[should] termination be requested, the other party may object to the request, stating to accept the amendment to the contract under the preceding paragraph”.2 This is, therefore, a possibility generally provided for all contracts, without prejudice to the recognition of their binding force; it is the general legal framework in Portuguese private law. Without endorsing or conceding to any normative-legalistic positivism – particularly in the core of private law – in a legal system provided with a Civil Code, any assumptions on the possibility of amending or terminating a contract due to changes in circumstances must be primarily considered in light of the law. Therefore, even though Portuguese common contract law provides no exception to the principle of the binding force of contracts that specifically relates to the occurrence of financial crises the question to arise is whether they can be subsumed under or are outside the scope of application of said art. 437(1). This point is particularly important at a time when the country is undergoing a severe financial crisis: the general effects of the global financial crisis that erupted in 2008 were worsened by national circumstances – simpliciter, of public overindebtedness – which expanded those effects and caused others of a similar nature. Thus, the ongoing crisis in Portugal, within its range of causes, has been sharply and repeatedly reflecting in a multiplicity of contracts. As a result of this impact, lawsuits aiming at the rescission or amendment of contracts due to change of circumstances have become frequent. For example: In its judgment of 14 June 2012, the Lisbon Court of Appeal (TRLx: 187/10.4TVLSB. L2-2°) upheld a request for the amendment of a credit facility agreement to finance a wine production project based on a subsequent change of circumstances, due to the “(…) serious, unexpected and unavoidable economic crisis that has been ongoing since 2008 (…)”, which led to a decrease by over 50 % in revenue from wine sales in 2009 (against 2006), thus exceeding, according to the court, the normal contractual risk. This decision was reversed on appeal by the Supreme Court of Justice (STJ 10-Jan-2013: 187/10.4TVLSB.L2.S1), on the argument that, even though the economic and financial crisis could, in abstract terms, create imbalances likely to create situations of abnormal change of circumstances, not all defaults occurred in times of crisis have a cause/effect correlation with it; in the absence of evidence of a causal connection between the deterioration of the plaintiff’s economic capacity and the international economic crisis, the situation cannot be subsumed under art. 437(1). On the other hand, the judgment of the Lisbon Court of Appeal of 12 February 2013 (2831/10.4TVLSB.L1-7), reads, sensu stricto, that the devaluation of a plot of land as a result of the depreciation felt throughout the entire real estate sector is a vicissitude

2

This provision was included in the Portuguese Civil Code and has not been subject to any amendment to date.

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“unavoidably covered by contractual risks” and is, therefore, outside the scope of the principle of change of circumstances. However, in a judgement dated 19 February 2013, that same court (TRLx: 1117/10.9TVLSB.L1-1) stated, by way of obiter dictum, that the contraction in lending, consumer credit and financing for economic activity and for the real estate sector, which resulted from the 2008 crisis, constitutes an abnormal change of circumstances, in the sense contemplated by art. 437(1). The court concluded, nevertheless that, in that particular case, such change was not a decisive factor for the increase in the risk associated with the payment of the agreed price by promissory buyers, which was particularly high even before circumstances changed and did not undergo significant changes as a result thereof. Very recently, and at odds with the position held by the majority of Portuguese doctrine and jurisprudence, in its judgment of 5 November 2013, the Coimbra Court of Appeal (TRC: 1167/10.5TBACB-E.C1) stated that financial crises cannot be considered totally unpredictable abnormal circumstances, but rather cyclical situations, repeated in time, which constitute a risk inherent to contracting in itself.

Particularly topical, also in public opinion, is whether or not the so-called “swap” contracts are subject to change of circumstances, as some of these contracts have proven excessively burdensome for the entities that subscribed to them, given the continued drop in interest rates in the Euro Zone.3 The general doctrine and jurisprudence consider, and rightly so, that the random nature of a contract does not exempt it from the framework of change of circumstances, if its inherent risks are exceeded (Serra 1957: 332 et seq.; Telles 2002: 347, footnote 318; Ascensão 2007: 524; M J Costa 2009: 344; Frada 2009: 668). The main problem is, however, determining when and to what extent these contracts can entail a limitation of their random essence, which legitimises a judicial intervention for their termination or amendment within a scenario of financial crisis.4 Naturally, it becomes harder to justify so if such contracts were concluded already within the scenario of financial instability or volatility.5 In its judgment of 31 January 2013, the Guimarães Court of Appeal (TRG: 1387/11.5TBBCL. G1) expressly advocated the possibility of applying the change of circumstances institute to swap contracts despite their random nature.6 Furthermore: the collective of judges held that the 2008 crisis was an unforeseeable event, which generated absolutely abnormal circumstances, and led to such an intense worsening of the imbalance in contractual performances that their maintenance would be contrary to the principle of good faith. Thus, the ruling 3

On this particular issue, defending, in light of art. 1245 CC, the nullity of a purely speculative swap agreement (by considering it to be subsumed under the concept of gambling or betting) and the possibility of application to the swap agreement, when valid, of the change of circumstances institute provided for in art. 437–439 CC, Freitas (2012): 943 et seq. Also on this topic, recently P. Pinto (2014). 4 Other concepts and principles of contract law may be invoked in this regard, such as: error on the object of the contract, culpa in contrahendo due to lack of information provided by banking institutions to subscribers of such products, usurious contract, etc. On the liability for informations under the Portuguese legal system, J. Monteiro (1989): 335 et seq. 5 It is, than, possible, altough not necessarily, that the fulfilment of the unpredictability requirement fails, leading to the refusal of the revision of the contract based in change of circumstances (J. Costa (2012): 321 et seq.). 6 Opposing the decision given in the judgment, for considering that the drop in interest rates is already covered by contractual risks, Calheiros (2013): 11 et seq.).

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concluded that, although swap contracts represent a financial instrument specially designed to manage interest rate risk, the fluctuations of this rate during the crisis that began in 2008 exceeded the risk inherent to the contract sub judice, and thus the termination of such contract was justified, under and pursuant to the framework of subsequent change of circumstances provided for and governed by art. 437–439, with retroactive effects. This decision by the TRG regarding the relevance of the financial crisis of 2008 as grounds for contract termination due to abnormal change of circumstances was confirmed by the STJ in its recent judgement of 10 October 2013 (1387/11.5TBBCL.G1.S1), which will certainly have a paradigmatic impact on this topic.

However, it is still early to pass definitive judgement on the significance of the financial crisis in Portugal as grounds for a deviation from the principle of the binding force of contracts under the aforementioned art. 437(1) CC. Not only many of the legal proceedings filed within this financial context are still not concluded, but doctrine, notwithstanding the increasing attention that the subject has been given, has not yet offered or sedimented completely clear conclusions in this regard. In addition, some decisions that could constitute leading cases in the matter – namely due to the fact that they were issued in cases of significant economic relevance – emanate from arbitration courts and are not usually made public. Lastly, it should be taken into account that many of the contracts that are highly sensitive to changes in the financial environment concern public-private partnerships (in Portuguese jargon, “PPPs”), based on project finance contracts. Such ventures, contracted between the State and private groups, in areas such as construction and exploitation of road infrastructure, hospitals, seaports and various long-term concessions, etc., are often regulated by ad hoc clauses and statutes, which provide for specific mechanisms for rebalancing, renegotiation and compensation in case of changes in several different variables, either financial or arising therefrom.7 In these situations, the intervention of such relationship-stabilising mechanisms naturally reduces conflict. In any case, and despite this, the State has introduced, through legislation, several amendments to the framework of such partnerships, based on the change of the country’s financial situation. The State’s intervention has, moreover, covered various sectors, such as energy, which are concessioned and operated in a situation of monopoly or oligopoly by private entities, in order to reduce the expenses borne by the State. This intervention has generally been accompanied by a demand for politically negotiated financial rebalancing, accepted by the private entities. Its real meaning and impact is, however, currently the object of a heated public discussion among us. A financial crisis always presents a multitude of harmful consequences for parties in contracts. Due to their nature, emphasis goes to its effects on the cost and access to credit, which is currently very restricted. Moreover, as a consequence of the scarcity and 7

As an example, take clauses 86 (“Force Majeure”) and 94 (“Financial Balance”) of the Concession Agreement signed between the Portuguese Government and Ascendi Norte, Auto-estradas do Norte, S.A., as amended on 5 July 2010, available at www.utap.pt.

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high cost of money, many initiatives continue to be cancelled, some already underway and dependent on funding. Contracts relating to financial products or aimed at hedging the risk of changes in the cost of money were also affected (as shown above). Thus, several constellations of problems arise. For example: (a) May a lending entity which has granted a very long-term loan invoke the financial crisis (difficulties to refinance itself or the perception of greater credit risk or greater risk associated to the sovereign debt that stood as collateral, for example) to amend a contract and increase interest or request the early repayment of the amount loaned? (b) May a bank which has accepted to finance a specific project (e.g., a motorway) under a project finance scheme avoid the consequences of the decrease of credit costs or its own compensation if the profitability of the said motorway for the borrower (which would pay for such costs) drops dramatically as a result of decreased traffic derived from less use by potential users in financial distress? (c) May a bank refuse the amendment or early termination of a contract designed to hedge the risk of changes in the interest rates of another loan, which it has also granted, upon verifying that the progress of interest rates, as a result of the stagnation/deflation that set in with the crisis, is currently generating, and will predictably do so for a long time, enormous losses for the other party8? The aforementioned judgment of the STJ of 10 October 2013 (1387/11.5TBBCL. G1.S1), which maintained the previous decision of the TRG (31-Jan-2013: 1387/11.5TBBCL.G1) to uphold a request for the termination of a swap contract on the grounds of subsequent change of circumstances, as a result of an unexpected drop in interest rates caused by the financial crisis, provided a negative answer to the last question and constitutes an important input for the prognosis of the courts’ response to this issue in the future. This judgment marks an important break with the impression – still to prove – of a certain caution that has, to this date, characterised the majority of judgments in proceedings brought about on the basis of changes in the financial context having in mind especially certain consequences generated by the 2008 crisis. We do not ignore that legislative or regulatory interventions were carried out to face the adverse effects of the financial crisis (for example, DL no. 227/2012 of 25-Oct. and DL no. 35/2013, of 28-Feb.). Although with the primary aim of protecting typically disadvantaged contractual parties from unilateral changes to contracts by the initiative of banks (e.g., in consumer credit or house loans), these can be interpreted as a recognition that the financial crisis is relevant and could, if invoked by borrowers, hinder the exercise of certain contractual prerogatives or lead to the amendment of the contract. 8

Such questions are similar to those put across by R. Pinto Duarte in an intervention (unpublished) at the Judicial Studies Center – CEJ [Centro de Estudos Judiciários], on 1 March 2012, on the “Possibility of a unilateral amendment of contractual obligations (in particular those resulting from financing agreements).”

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Justifying the Effects of a Relevant Change of Circumstances

Although it is early to draw definitive conclusions on how the current crisis is regarded upon, within the Portuguese legal context, one can certainly expect that Portuguese courts and doctrine continue to develop their criteria in line with Portuguese tradition when it comes to understanding the effects of change of circumstances, such as established by art. 437(1) CC. Among the theoretical foundations usually invoked to justify such effects, the theory of the basis of the transaction – of the change or modification of the basis of the transaction (Wegfall der Geschäftsgrundlage) – takes up a privileged position in jurisprudence (Vide recently STJ 10-Jan-2013: 1387/11.5TBBCL.G1.S1 and STJ 18-Jun-2013: 493/03.4TVLSB-A.L1.S1). Certainly contributing to this is the fact that the aforementioned art. 437(1) can be considered, by its very wording, as conducive to such an understanding, as it provides for the termination or amendment of a contract only “if the circumstances under which the parties founded the decision to contract have suffered an abnormal change”. In fact, the preparatory works of the Civil Code already evidenced the influence of this doctrine in the content of this provision.9 The theory of the basis of the transaction was also subject to special consecration in art. 252(2) CC, which specifically regulates the problem of error on the basis of the agreement. Assessing whether a specific situation falls under the scope of the principle of change of circumstances or of error on the basis of the agreement is not always simple. The element of distinction traditionally employed relates to the fact that the error reports to either the past or the present, whereas the change of circumstances refers to the future (by all, C. Pinto 2005: 505). The problem appears, however, particularly acute with regard to the so-called “error in futurum”, i.e., a false or flawed prediction of the future evolution of current circumstances. While some authors believe to be dealing with a typical situation of subsequent change of circumstances, subsumed under art. 437 (by all, A Monteiro 2008: 81 et seq. and Ferreira 1998: 90), there are others who argue that the foreseeable change of future circumstances or the current error by the parties on the future representation of the basic circumstances of the agreement substantiate cases of error (regarding the first case Cordeiro 2014: 291–292 and the second case Almeida 2013: 5 et seq.).

It is, therefore, natural that the courts, while judging and justifying the application of art 437–439 CC, resort to formulations that are tributary of this doctrine, even when they do not specifically discuss or invoke it, or even when they do not draw from it nothing more than a mere dogmatic and axiologically neutral formula. In doctrine, the scenario is more diverse. 9

Despite some criticism to the theory of the basis of the transaction, in its preliminary draft to the 1966 Civil Code, Serra (1957) already shows hints of the prevailing influence of this theory – first developed by Oertmann – in the proposed legislative solution regarding change of circumstances. On the important role of prominent Portuguese jurists, such as Guilherme Moreira, Vaz Serra and Manuel de Andrade, in the strong influence of German doctrine on Portuguese civil law, J Monteiro (1997).

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One of the most notable features of Portuguese legal science is its openness to the outside world and its capacity for dialogue with the most diverse guidelines that arise at any given time, within other relevant doctrinal spaces. Thus, in the matter in hand, the lines of Portuguese thought present themselves today quite rich, also expressing various dogmatic discussions. Initially, even before the Civil Code of 1966, the “theory of unpredictability” (“théorie de l’imprévision”, originating from the French State Council), as well as the “theory of presupposition” (“Die Voraussetzung”, by Windscheid) were especially well accepted in the doctrine.10 When drafting the new Code, however, the favour of contemporary doctrine clearly went ultimately to the theory of the basis of the transaction, as it recognised the limitations of the former two theories, despite their merits (Andrade 2003: 406; Serra 1957: 308 et seq.; Varela 1950: 262 et seq.). The exegetical stage that usually follows the compilation of a Code undertook to further emphasise the predominance of the theory of the basis of the transaction, as per the wording of art. 437(1) of the new Code. However, the progressive temporal gap and the need to critically rethink said provision so as to draft more accurate decision models – given the vagueness of the theory of the basis of the transaction and the consequent oscillations of jurisprudence and insecurities in reasoning – led to the flourishing of new doctrinal orientations. Generally speaking, the Portuguese doctrine currently highlights: (1) The importance of contractual justice, alongside private autonomy, and the basic relevance of the intuition underlying the rebus sic stantibus clause, either subjectively or as an imposition of the legal system (Ascensão 2007: 519–520; A Monteiro 2003: 66; Hörster 2007: 580; Martinez 2015: 150; Duarte 2007: 142 et seq.) (2) The materialisation of the concept of exemption of compliance in accordance to the principles of good faith as a decisive criterion (Cordeiro 2007: 1106 et seq.) (3) That, in fact, art. 437(1) contains a set of concepts and phrases organised into a network of mutually referenced meanings, whose core is composed by the “principles of good faith”, a ductile phrase that refers to objective requirements of justice which are, however, susceptible to be shaped by the representations of the parties (Frada 2009: 678 et seq.) (4) The need to refine the scope of application of the termination or amendment of a contract due to change of circumstances, as a result of the vagueness of the basis of the transaction theory, from other dogmatic fields such as the theory of error or of impossibility (Cordeiro 2014: 291 et seq.) 10

We must point out, however, the terminological imprecision associated with the doctrinal treatment of the issue of change of circumstances in the period in question, which is liable to cause misunderstandings. Thus, for example, while referring to the issue of “presupposition”, the position advocated by Manuel de Andrade seems to be towards the theory of the basis of the transaction, as formulated by Lehmann (Andrade 2003: 403 et seq.); with the same point of view, Cordeiro (2007): 923. Also, L. Carvalho Fernandes resorts to the term “unpredictability” to identify the issue of change of circumstances, without, however, adhering to the theory of the French State Council (Fernandes 2001).

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(5) The importance of observing the space of interpretation or integration of contracts in the distribution of contractual risks (Cordeiro 2014: 299 et seq.) (6) The relevance of alternative termination grounds as ways of reacting to changes in the context of long-term contracts, thus withdrawing space and prominence from art. 437(1) (Machado 1991c); A Monteiro 2004: 134 et seq.; L Vasconcelos 2010: 113 et seq.; F Pinto 2013: 338 et seq.) (7) The relevance of the construction of more accurate risk distribution criteria, which materialise in disparate, but generalizable legal regulations (Machado 1991a): 257 et seq.) (8) The adequacy of the notions of frustration of contract or imbalance in contractual performance in the implementation/consolidation of the relevant changes of circumstances (Idem ibidem: 305 et seq.; Pereira 2001: 35 et seq.) (9) The configuration of financial (and political) crises as “major change of circumstances” that must not unilaterally encumber one of the parties and thus represent a risk to all (in doubt, or in the absence of specific factors, this risk shall be divided equally between the parties) (Frada 2009: 682 et seq.) There is, therefore, an eclecticism of doctrinal positions, which seek to explore all contributions deemed useful for the elucidation of the issue of change of circumstances. Even older doctrines, such as the windscheidian presupposition, have found voices reminding of its relevance, for example, to meet the shortcomings of the legal framework.11

13.3

The Required Abnormality of the Financial Crisis and Other Conditions of Intervention in the Contract

Regardless of the adopted theoretical basis, in accordance with the provisions of art. 437(1), our legal system requires abnormality in the change of circumstances to justify the termination or amendment of the contract. Therefore, strictly speaking, we reject the doctrine of the tacit clause of “maintenance” of circumstances – rebus sic stantibus – without prejudice, of course, to its symbolic value. Not just any change is relevant, it must be considered abnormal. The law does not define abnormality. The text suggests that no extraordinary, highly unlikely facts per se are required. But abnormality always requires an

11

Cf, recently, Frada (2012): 504, emphasising the restriction that the legal requirement of abnormality in change of circumstances represents, which is, however, avoided by the theory of presupposition, This can be very important, since many contracts, especially high-profile ones, are preceded by preamble and preliminary considerations which may indeed represent presuppositions likely to give rise to termination or amendment of the contract, should they not take place, regardless of any “abnormal” changes: if something was explicitly presupposed by the parties, there is always (besides what, expressis verbis, the law provides) relevance when developments belie such presupposition.

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unexpectable change from the normal course of events, and with a considerable impact on the contract. This requirement corresponds to a significant restriction on changes that are relevant for the purposes of art. 437(1). Not all changes allow terminating or amending a contract, even if their impact is significant. Hence the interest, namely, of the windscheidian theory of presupposition, in the establishment of grounds for contract termination or amendment, beyond the law, when the course of circumstances deviates from what the parties laid out in the initial recitals of the contracts they signed or in reference documents (accounting, urban development, etc.) that formed the basis of their decision to contract and which, not infrequently, are an integral part of the respective contracts, as annexes (Frada 2012). We would add, of course, the possibility of the parties themselves including contract revision clauses for the event of a hypothetical subsequent change of circumstances, such as hardship clauses (Gomes 1997). In such cases, the issue of the scope of the binding force of the contract in face of the effects of the financial crisis shall be, first and foremost, an issue related to the interpretation of the discipline it entails and of its scope or boundaries. In doctrine and jurisprudence, the abnormality of the change is usually associated with the requirement of unpredictability, but it also appears associated with the requirement of significance of the impact of such change in the contract and either emerging autonomously as a stand-alone requirement, or embedded in good-faith (Telles 2002: 343–344; Ascensão 2007: 522 et seq.; Cordeiro 2014: 322 et seq.; Fernandes 2001: 291). According to the judgment of the Porto Court of Appeal of 5 December 2003 (TRP: 0355837), “[a]n abnormal change of circumstances – art. 437(1) CC – implies unpredictability and uniqueness of supervening facts that cause a manifest imbalance in the mutual contractual performances of the parties, thereby altering the negotiating framework existing at the date of the agreement, both regarding preliminary matters and the conclusion of the agreement”. The Supreme Court of Justice, in its judgment of 10 January 2013 (187/10.4TVLSB. L2.S1) upholds a more generous point of view: terminating or amending a contract based on abnormal change of circumstances requires “(i) that the change occurred is not the foreseeable development of a condition known at the date of conclusion of the contract and (ii) that such change causes the fulfilment of the obligation to offend the principles of good faith”. The aforementioned judgment also requires the existence of a factually demonstrated direct correlation between the new constraint (in the present case, the current economic crisis) and the detrimental consequences arising to the fulfilment of the contract (degradation of the actual economic capacity of the agent) for the change to be considered abnormal.

Despite the proximity and frequent coalition between the abnormality of the change of circumstances and its unpredictability, there is no equivalence between the two requirements, because an abnormal fact may not be abstractly unpredictable.12 In long-term financing agreements or financial product sales contracts, for 12

The distinction will certainly involve the differentiation between objective reality and conceived or represented reality. In doctrine, M J Costa (2009): 338 invokes the greater breadth of the concept of abnormality regarding the requisite of unpredictability, maintaining that this should be dispensed within cases

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example, it is normal for banks and other entities professionally engaged in these operations to set up a comprehensive palette of risk scenarios. Even though they are equated or integrated in comprehensive mathematical models, they may still be considered abnormal if the probability of their actual occurrence is remote. In a judgment dated 19 February 2013, and regarding the consequences of the financial crisis of 2008, the Lisbon Court of Appeal (1117/10.9TVLSB.L1-1) deemed it incorrect that the basic criterion for ascertaining the occurrence of an abnormal change of circumstances is unpredictability. In the words of the Panel of Judges, “[w]hat matters is the confirmation of a significant change in the conditions that constituted the circumstantial framework in which it was customary for a certain type of contractual relationship to take place, regardless of whether or not such situation could be regarded as a consequence of previous occurrences.” With regard to the current financial crisis, the aforementioned judgment of the Supreme Court of Justice of 10 January 2013 (187/10.4TVLSB.L2.S1), reads as follows: “[t]he law does not require that this be an unpredictable occurrence; however, it deems necessary for the change of circumstances to have been unpredictable: there is unpredictability when the future development cannot be predicted shortly after the occurrence has taken place.”

Therefore, a distinction must be made between the abstract predictability regarding the possibility of occurrence and concrete predictability. It is concrete unpredictability that can configure abnormality in change of circumstances. This differentiation, which is normally dismissed, proves crucial for the issue at hand. The point is, the financial crisis that has come upon us and affects us was not altogether sudden, unlike what happens with many political crises or social and military upheavals. Rather, as per its nature, it underwent a certain incubation period and gradually set in, over a given period of time, throughout which its signs became progressively evident. Especially considering the global scale, it cannot be said that it had not been predicted by some, or that it was not, or could not, have been considered possible or even predictable by a number of financial experts, although the danger of its imminence had remained hidden from most economic agents (Financial Crisis Inquiry Report 2011: 187, 279 and 386). Thus, unpredictability must be considered as a minimum probability of actual occurrence, in accordance with the standards and expectations of a regular contracting party within their typical sphere of knowledge. Art. 437(1) also sets forth a condition requiring that the change is not covered by the risks inherent to the contract itself. This limitation, expressly enshrined by the lawmaker, was the subject of an analysis by Portuguese courts following the political changes that took place in the country after the Revolution of 25 April 1974. There was some discussion among us, for example, on whether or not the nationalisation of a company (which took place following the Revolution of 25 April 1974) whose shares had been sold previously to the Revolution with deferred payment comprised a loss or a deterio-

where good faith would require the other party to accept that the contract would be contingent on the maintenance of the circumstance that underwent the change. With a different opinion, Cordeiro (2010): 291.

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ration of the object for the purpose of the rule that assigns the corresponding risk to the owner (cf. art. 796(1) CC). During the debate, normal cases of perishing of goods were distinguished from the possibilities of legal perishment (cf. Varela and Mesquita 1982: 7 et seq. and with a different view Xavier 1983: 15 et seq.). It is our opinion that a nationalisation resulting from a political upheaval certainly constitutes a major change of circumstances (as expressed by Kegel) which, because it affects the basic political and economic coordinates of a society, should cause its effects to be distributed (in principle and in doubt) equally among all members of the community. Therefore, art. 796(1) does not apply. The legal perishing of a set of shares (of a nationalised company) as a result of the aforementioned upheaval cannot but be considered abnormal.

Thus, Portuguese law states that the obligation to support the risk of a crisis under a legal or contractual regulation rules out, in principle, the possibility of terminating or amending the contract due to change of circumstances. This is what stems from the last part of art. 437(1). However, within the structure of the precept, this is (apertis verbis) a negative requisite – ruling out the possibility of contract termination or amendment – and not (so much) a positive qualifying condition of the very abnormality of the change and compliance with the central element of predictive provisions constituted by the aforementioned abnormality of the change of circumstances. This point suggests an important comment: according to the structure of the legal text, it seems that once the abnormality (and other requisites) of the change of circumstances is proven, the doubt on whether or not such change is relevant in light of the contract’s own risks (arising from what was agreed to by the parties or from a specific legal provision that, somehow, assigns them as naturalia negotii, to some of the parties) should be resolved in favour of the relevance of the change and the possibility of intervening in the contract. According to this mindset, the burden of reasoning favours a review of the contract in cases where there is uncertainty regarding the existence of a legal or conventional distribution of risk in the opposite direction. This allows for the possibility of terminating or amending the contract. It should be recalled that the distribution of the contract’s own risks, which is liable to rule out intervention due to a change of circumstances, is sometimes obtained through the interpretation or integration of the contract. Therefore, such distribution, when configured as a negative requisite on the precept’s economy, favours termination or amendment where the result of said interpretation or integration is uncertain or insecure. Also excluding the possibility of resorting to the change of circumstances institute is, in principle, a delay in performance from the injured party, in accordance with art. 438 CC (except if there is no conexion between the delay and the ocurred change of circumstances). Thus, if the injured party was in arrears at the date of verification of the change of circumstances, it loses the right to terminate or amend the contract on that basis. Otherwise, if the change of circumstances predates the delay of the debtor, it is not the simple fact that the later incurs in arrears that prevents it from asking for the termination or amendment (Lima and Varela 1987: 416).

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Despite its extent, the intervention in the contract due to a change of circumstances is distinctly subsidiary.13 However, greater doubts arise from the terms of the concurrence of the principle of change of circumstances and other solutions, which also tend to be subsidiary, such as the theory of trust, unjust enrichment or the abusive exercise of certain faculties or powers contractually established, in a scenario of changed circumstances.14 In any event, the requisite of abnormality in changed circumstances can only be truly understood within a mutual reference framework, considering all other requisites set forth by the legal system for such purpose. What is essential is the lawmaker’s call to the “principles of good faith,” to which is assigned a decisive syndicating and differentiating role. And, naturally, discussion is warranted on whether such a phrase is, after all, but the appeal to an objective principle of (maintaining or safeguarding the) justice for the contract or for the contractual relationship (Ascensão 2007: 524 et seq.).15 Still, in the version of the precept, the idea is not so much to positively promote the justice of the contract, as it is to, more reservedly, prevent injustice. In other words, it is the criterion of injustice, and not of justice, that gains relevance.16 This is in line with the requisite of the exceptional nature of the intervention in the contract, as ultima ratio of the system to avoid the undesirable or intolerable, also present in the requisite of the abnormality of the change. At the end, we have a complex set of assumptions, of varying intensity and ranked under a moveable system around the axis of what, pursuant to law, are the “principles of good faith”. It is up to jurisprudence to bring them about and weigh them. Change of circumstances more shows, in a broader sense, that, in the legal system, there is a fracture line between “pacta sunt servanda”, if formally understood, and contractual justice, two principles of contract law which need to be harmonised in the case at hand, in order to reflect a materially fair understanding of private autonomy: this will not always be done in the same manner, as their articulation is moveable; it all depends on the issue of knowing what, ultimately, is the basis for 13

Highlighting the subsidiary nature of change of circumstances in relation to contractual error, risk, impossibility, interpretation and integration, as well as the protection of trust, Cordeiro (2010): 292 et seq. and Fernandes (2001): 264 et seq. 14 As a starting point, concurrence shall be elective. However, there must be a real possibility to resort to more than one fundament for the same purpose. Indeed, the alternative solutions listed in the text are undoubtedly different. 15 Still, it can be said that the expression “good faith” is also relevant, even though the observance of representations of the contractual parties itself is not called into question. The fact is, because it calls to the representations and attitudes of the parties, “good faith” also constitutes an indispensable element for ascertaining justice (Frada (2003): 363 et seq. and 862 et seq.). 16 The point is relevant: it becomes easier to converge on what constitutes injustice than on what represents justice in a contract (which, in its way, and in our sphere of analysis, corresponds to a transmutation of Schmidt-Rimpler’s doctrine of the contract as a guarantee of justice [Richtigkeitsgewähr] within the concept of the contract as a guarantee of non-injustice).

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the binding nature of contracts (Ribeiro 2007: 35 et seq. and Frada 2003: 434 et seq. and 799 et seq.). If we wish to try out a rough draft of a model framework to understand its mutual workings, it can be said that, in general, when a contract is concluded, the legal system is largely disinterested in the justice thereof, and is satisfied with merely ensuring the free and informed exercise of private negotiation autonomy [for example, and namely via culpa in contrahendo, setting forth the duty to inform for one party in benefit of the other (M. F. Costa 2007: 367 et seq.)]. Intervention only occurs, as a rule, in cases of flagrant or obvious injustice when combined with disturbances in the formation of will (paradigmatically, the provisions concerning usurious contract, in art. 282 and 283 CC). Certainly because it is believed to be just to respect the will of the parties and that the requirement for a consensus in a contract ultimately avoids injustice. However, the legal system becomes much more demanding towards the control of justice or of contractual balance throughout the duration of relationships already (previously) established, especially in the event of subsequent changes. Such concern is shown in many legal, mandatory or subsidiary provisions, which bind the parties to a proper and reasonable – tout court, just – conduct for the duration of the relationship, namely in the use of powers and faculties to which they are entitled and actively fostering contractual balance: cf., among others, the provisions of arts. 334, 400, 762 (2), 812, 1040 CC, etc. The very discipline of the change of circumstances, which constitutes an outcropping of such concern, warrants reading and interpreting in this context. In short: the legal system respects the justice which (at the time of conclusion of the agreement) was originally intended by the parties. However, upon the conclusion of such agreement, it does not resign, allowing for relational justice to change according to fortuitous contingencies. It considers intolerable for chance to generate injustice and imbalance between the parties. The standard for this intolerability is not, as already noticed, any requirement regarding the (inexorably) extraordinary nature of a change of circumstances, but a pattern of abnormality. In order to define this pattern, the criterion of (supervening) impossibility is unusable, not only because it is too restrictive, but also because there is a specific regime for such cases, which exempts the debtor from his obligations (arts. 790 et seq. CC). Instead, in Portuguese doctrine, what is being discussed today is, in essence, the scope of the institute of impossibility, namely knowing whether or not the impossibility of attaining the purpose of the contractual performance (Zweckerreichung, Zweckstörung) constitutes a case of impossibility.17

17 For a broad notion of obligation, encompassing the purpose, Cordeiro (2007): 1094 and Pereira (2001): 11 et seq. Nevertheless, we prefer a perspective that does not encompass the purpose in the concept of contractual performance, as well as a differentiated approach, which reduces the margin for impossibility and opens the way for change of circumstances. With a precursory piercing criticism of a broad concept of performance and impossibility, Machado (1991a): 283 et seq. For further developments see also Faria (1990): 359 et seq.

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Focusing on excessive burden, it is not qua tale a criterion used in Portugal. However, such burden undoubtedly constitutes a sign of the unenforceability of obligations undertook under the principles of good faith, as required by law for the possibility of contract termination or amendment. Still, excessive burden will naturally gain added importance in gratuitous contracts. In fact, in onerous contracts, it will often tend to simultaneously translate into a distortion of equivalence. In any event, and in view of Portuguese law, it is essential that the change of circumstances brings about a rather significant increase of the sacrifice required from at least one of the parties to the contract. Another is the risk of the cost of money, or that of the change in purchasing power within a crisis scenario. As for this latter aspect, under and pursuant to art. 550 CC, which enshrines the principle of monetary nominalism, the risk of currency devaluation shall be borne by the creditor whenever there is a pecuniary obligation of amount or quantity at issue. Even though this provision reinforces the principle of the binding nature of the contract in the event of fluctuations in the value of the currency in circulation (traditionally associated with periods of financial instability), it seems reasonable to accept that it does not exclude the applicability of the institute of change of circumstances, whenever requisites are met for the termination or amendment of the contract.18 One can also ask whether banks are allowed to unilaterally change interest rates (especially spreads) as a result of the crisis. The answer should be affirmative, but its limits need to be emphasised: limits that have to be enforced even if such amendments emerge from clauses intended to adapt the contractual terms to change of circumstances, and especially if such clauses have been introduced into the contracts before the onset of a crisis which was (also) unexpected for borrowers.19 Unilaterally decided contractual amendments can be syndicated. All contractual powers must be exercised in a reasonable and balanced manner (art. 400, 762(2), 334 CC). Plus, contractual amendments may be nullified if they are used by one of the parties in the event of an unexpected global financial crisis not specifically regulated under the contract, to completely shift the burden of risks resulting from such a crisis to the other party: otherwise, the core of art. 437(1) would be offended. In general, when the contract contains specific discipline to deal with a change of circumstances, the issue may arise of ascertaining the validity of such discipline. It is important to know whether the risk distribution that was agreed upon is correct and justifiable, since there is an inalienable core of contractual public order in the principle of change of circumstances (resulting in unenforceability justified by the principles of good faith or in the observance of minimum contractual justice).

18

Defending the prevalence of the principle of monetary nominalism over the framework of supervening change of circumstances enshrined in art. 437, by all, Faria (1990): 119 et seq. and Fernandes (2001): 311–313. With a different opinion, M J Costa (2009): 742–743; Cordeiro (2007): 1028; A Monteiro (1984): 21–22; Freitas (2012): 966 and, thus suggests, Machado (1991b): 431. 19 Namely, by resorting to general contractual clauses, as there the legal system exerts tighter control over the efficacy and validity of such contractual provisions.

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In line with the foregoing, the Bank of Portugal, via a circular note dated 17/5/2011 (under no. 32/2011/DSC), laid out guidelines to be followed by financial institutions in the drafting of clauses that enable them to “unilaterally alter the conditions agreed upon, namely the interest rate or amount of other applicable charges”. Among them20: «1.1. In cases where the credit agreement provides for facts that constitute “plausible grounds” in light of the provisions of article 22(1)(c) of DL no. 446/85 of 25 October [Portuguese law regulating the conclusion of contracts that make use of general contractual clauses], or which correspond to “market variations” for the purposes provided for under article 22(2)(a) of the said law, financial institutions must confirm such facts with sufficient detail. 1.2. Facts specified in the agreement must: (a) Be external or foreign to the financial institution, and be beyond its sphere of influence, action or control; and (b) Be relevant, exceptional and have an underlying reasonable motive that is based on an objective judgement or criterion. 1.3. Financial institutions must set a reasonable deadline to enable consumers to exercise their right to terminate the credit agreement. (…) The Bank of Portugal considers that such deadline must not be less than 90 days. (…) 1.5. The clause that allows for unilateral changes in interest rates or other charges must provide for the reversal of such changes when and insofar as the facts which justified the change no longer exist, and set forth the necessary procedures in order to produce the corresponding effects. 2. Unilateral changes to the interest rate or other charges in credit agreements. 2.1. Principles In situations where, pursuant to law and under the credit agreement, financial institutions are legally entitled to change interest rates or other charges in credit agreements, the exercise of such faculty must: (a) Be contingent on the existence of a relation of causality between the event being invoked as plausible grounds and the content and scope of the change that the financial institution intends to introduce; (b) Obey the principle of proportionality, avoiding the creation of unjustified imbalance in the contractual relation. (…)».

Thus, it should be borne in mind the question of whether a contractual clause can affect the risk of change of circumstances solely for one of the parties. The answer may be in many cases negative: if the financial crisis is a general risk, both the borrower and the lender must assume such risk [unless the adjustment to the exact terms contained in the clause was voluntarily and knowingly weighted by the parties as part of the overall balance of the contract upon its conclusion, as underlined also by Fernandes (2001: 289)].

20

We bear in mind the considerations of Rui Pinto Duarte in the aforementioned publication on “The possibility of unilateral change in contractual obligations (in particular, those resulting from financing agreements)”, several of which regarding the principle of contractual balance described ahead. With regard to the latter, we can also refer to P Vasconcelos (2009): 417 et seq.

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Generally speaking, contracts are onerous. The theory of equivalence disturbance (Äquivalenzstörung) constitutes, in such cases, a significant sign of the lawfulness of an intervention regarding the contents of the contract. However, precautions must be taken. First of all, because it is not just any equivalence that is to be restored: it must be the one corresponding to the economy of the contractual arrangement as initially intended by the parties. Thus, this is understood almost as a development of contractual regulation, whose balance – we say again – it cannot change and has to be taken as an undisputed starting point. (In this regard, the principle of balance of onerous contracts goes further, as it intervenes to ensure the material maintenance of equivalence or proportionality throughout the life of the contractual relationship established, in aspects not covered by the provisions of art. 437(1)). In turn, the hypotheses of frustration of purpose (Zweckvereitelung) are usually symptoms of the relevance of the change of circumstances. However, they must not be regarded as self-sufficient. The fact is some of these situations do not constitute a change in circumstances, but, rather, twists of fate that are liable to affect a contract in a socially typical fashion. In other words, in some cases of frustration of purpose, within the scope of certain contracts, there is no change of circumstances. Following the beginning of the financial crisis, several public works projects were compromised or postponed sine die, which produced great upheaval in the real estate sector, namely as concerns promissory contracts concluded with the aim of executing the said projects or based on the expectation thereof. In this regard, the judgement issued by the Lisbon Court of Appeal on 12 February 2013 (2831/10.4TVLSB.L1-7) maintained that “[i]n a promissory contract for the purchase of plot of land, the characterisation of the future surrounding area constitutes a predictable risk and is included in ordinary fluctuations, as part of the risks inherent to the contract, except if the parties expressly include exceptional provisions in respect to that concern”.

13.4

Consequences of the Recognition of the Financial Crisis as a Relevant Change of Circumstances

In view of the Portuguese law, the effects of an abnormal change of circumstances are, pursuant to art. 437(1), the termination or amendment of the contract. Section 2 of the said article also reads that, following a request for termination, the other party may oppose such request, requesting that the contract be amended instead. The injured party shall have the initial choice of requesting either the termination or the amendment of the contract. However, from the wording of art. 437(2), it can be inferred that priority is given to amendment over termination, although always in observance of the possibility that the party against which such termination has been requested accepts such request, pursuant to their private independence

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(Cordeiro 2007: 1105; P Vasconcelos 2015: 334–335). Naturally, such amendment only makes sense when the change that has occurred did not permanently frustrate the purposes of the contract, in which case, summo rigore, there would be a novation of the obligations (Frada 2009: 691 et seq.). As a determining criterion for operability, art. 437(1) also provides for the recourse to considerations of equity. What is at issue is the confirmation of the need to cause the judge’s consideration to focus on the specific circumstances surrounding that contract before and after the abnormal change, in order to bring about justice for the case at hand (Teles 2008: 81 et seq. and Frada 2012: 109 et seq.). Given its very nature, the amendment of the contract due to change of circumstances must be judicially requested, and the court shall decide on the validity of the request and on the terms under which it shall take place. Further doubts arise as to the way the termination occurs. Whereas, on the one hand, the wording of art. 437(2) (“[s]hould termination be requested…”) appears to point out the need for such termination to occur via the courts (M J Costa 2009: 347–348; STJ 10-Dec-1996: 96A470), on the other, in the absence of a contrary provision, the enforcement of the general framework regarding termination seems justified [a position strengthened by the reference made by art. 439 to art. 436 CC, pursuant to which, termination can be effected via an out-of-court notice to the counterparty (Telles 2002: 345–346 footnote 314; Leitão 2014: 134–135; Pires 2013: 188)]. It seems defendable, given the general framework regarding termination, to recognize the possibility of an out-of-court notice, regardless of the right to resort to the judiciary. As a rule, the effects of a termination due to a change of circumstances are not retroactive. This is the solution that best safeguards contractual stability and investments by the counterparty (Ascensão 2007: 529–530; Fernandes 2001: 296–297; Pires 2013: 188 et seq.; STJ 16-May-2002: 02B1145).21 On the other hand, we notice the absence of a legally imposed obligation to renegotiate the contract. In practical terms, in most cases, this renegotiation corresponds to a logical choice: faced with a change of circumstances, the injured party normally begins by (an attempt at) opening a negotiation process with the other party, aimed at adapting the contract. Only if the (re)negotiation is refused or fails – which could lead to civil liability due to a breach of the code of conduct according to good faith22 – do the proceedings move to the courts.

21

However, with a different view, the judgement of the Supreme Court of Justice of 10-Oct-2013 (1387/11.5TBBCL.G1.S1), deciding that the effects of a swap contract termination would be retroactive to January 2009, the date on which the interest rate began to drop at a faster pace, exceeding the contractually stipulated threshold of 3.95 %. 22 It is justifiable to admit, even if praeter legem a duty to negotiate a fair way out from the effects of the change. Accepting such a duty is easier if justice is considered to be the basis for the binding nature of the contract, instead of will itself. The duty is then founded on art. 762(2), which, thus, disputes the space of intervention of the courts under art. 437. These shall only issue a ruling if the parties cannot fulfil that duty or if either party feels that the other failed to do so. There is therefore

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In spite of this, the solution under Portuguese law is not perfect. Indeed, it often happens that only after “having measured forces” in legal proceedings are the parties open to the possibility of (re)negotiating, or agreeing to do so under appropriate terms. That is why, it would be important (de lege ferenda) to enshrine under art. 437 the possibility of the judge ordering the opening of a contract (re)negotiation period, prior to, in lieu of the parties, issuing a decision. Such a possibility, often not even provided for in arbitration regulations, is especially useful for situations where the judge is hardly in a position to choose the best way to adapt the contract. The terms for the adjustment of a contract very often involve corporate and political decisions regarding corporate relationship policies, which should only fall to the judge as a last resort, in the event the parties cannot reach an agreement.23 Another issue concerns knowing whether once a request is made to amend a contract in a certain way, the court is allowed to order a different amendment, which it deems more suitable. In principle, the court must respect the principle of party disposition. However, if the parties’ request is only a feasible materialisation of the legal criterion of equity, then it appears that the court can effectively order an amendment with a differing view without offence to the aforementioned principle.24 In case the contract is adjusted or terminated there is no direct provision allowing for the counter-party who is injured by these measures to claim any indemnification of equity under Portuguese law. However, the reference, in art. 437(1) CC, to the criterion of equity would serve, as a last resort, to justify that possibility. For instance, in the event of advance payments being made from one party to the other, if the corresponding contractual obligations are not (or cannot) be performed, pari passu so as to maintain the contractual relationship in a state of balance, it is certain that, with the occurrence of an event requiring an amendment or termination of the contract, the restoring of balance in the relationship would be appropriate. To this aim, a relationship of liquidation is established to ensure the respect of that balance (Frada 2003: 670–671).

no theoretical obstacle to a cumulation between termination/amendment requests of the contract under art. 437, and a claim for compensation for non-compliance of the duty to negotiate. Naturally, one may question the existence of such duty if one admits that, after an amendment to the contract is requested by the injured party due to a change of circumstances, the other party may choose to terminate the contract. In any event, merely opportunistic behaviours must be prohibited. 23 A Monteiro and Gomes (1998): 40 note that, even in the context of a legal decision, the court must seek a solution that is consensual to the greatest extent possible and which takes into account the interests and proposals put forth by the parties. 24 If the goal is to obtain a verdict according to equity, the principle of party disposition will have to be understood accordingly: the idea is to obtain a verdict based on equity, even when a certain understanding is put forth regarding what it implies. Still, this could be done differently: when the requesting party feels that their understanding is the only one or a sine qua non condition for the amendment, lest it chooses to prefer the alternative of terminating the contract.

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The terms for the amendment of the contract do not follow any arithmetic rule for distributing the damages among the parties; instead, it falls to the judge to determine the proportion in which the losses shall be distributed, considering the specific circumstances of the case at issue. To such end, the court must weigh the degree of investment made by each of the parties in the contractual arrangement and the consequences arising to each of them from the modification of that arrangement, as well as the parties’ behaviour during the performance of the contract prior to the change of circumstances, whether causing the generated effects to worsen due to carelessness, or mitigating those same effects, through diligent conduct (Fernandes 2001: 302).25 Incidentally, the court-ordered amendment can perfectly encompass monetary transfers between the parties. Nothing prevents this. In the end, what matters are the criteria under which such compensations, intended to restore financial balance – which are not technically indemnifications – should be arbitrated. However, an important clarification should be made: the aforementioned “reparations” are basically ways of restoring the balance of a contractual relationship that was disturbed by a change of circumstances. In this sense, they do not constitute the consequence that is typical of (any) civil liability.

References Almeida, C. 2013. Erro sobre a base do negócio. Cadernos de Direito Privado 43: 3–9. Andrade, M. 2003. Teoria geral da relação jurídica. Vol. II, Facto jurídico, em especial negócio jurídico, reprint. Coimbra: Almedina. Ascensão, J. 2007. Onerosidade excessiva por “alteração das circunstâncias”. In Estudos em memória do Professor Doutor José Dias Marques, 515–536. Coimbra: Almedina. Calheiros, M. 2013. O contrato de swap no contexto da actual crise financeira global. Cadernos de Direito Privado 42: 3–13. Cordeiro, A. 2007. Da boa fé no direito civil, reprint. Coimbra: Almedina. Cordeiro, A. 2014. Tratado de Direito Civil IX. Coimbra: Almedina. Costa, J. 2012. Contratos de derivativos cambiais, Contratos aleatórios, Abuso de direito e abusividade contratual, Boa-Fé objetiva (Dever de informar e ônus de se informar, Teoria da imprevisão, excessiva onerosidade superveniente). Revista de Direito Bancário e do Mercado de Capitais 15(55): 321–382. Costa, M. F. 2007. O dever pré-contratual de informação. Revista da Faculdade de Direito da Universidade do Porto IV: 367–394. Costa, M. J. 2009. Direito das Obrigações, 12th ed. Coimbra: Almedina. Duarte, D. 2007. Modificação dos contratos segundo juízos de equidade (Contributo para a interpretação dos artigos 252.° n.° 2, e 437.° do Código Civil). O Direito 139: 141–213. Faria, J. 1990. Direito das Obrigações, vol. II. Coimbra: Almedina. Fernandes, L. 2001. A teoria da imprevisão no direito civil português, reprint with notes on the updated version. Lisboa: Quid Juris.

25

Thus, the doctrine of contributory negligence may apply following the change, if the injured party fails to minimise its effects.

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Ferreira, D. 1998. Erro Negocial, Objecto – Motivos – Base Negocial e Alterações de Circunstâncias, 2nd ed. Coimbra: Almedina. Financial Crisis Inquiry Report. 2011. Final report of the national commission on the causes of the financial and economic crisis in the United States. Official Government Edition. Frada, M. 2003. Teoria da Confiança e Responsabilidade civil. Coimbra: Almedina. Frada, M. 2009. Crise financeira mundial e alteração das circunstâncias: contratos de depósito vs. contratos de gestão de carteiras. Separata da Revista da Ordem dos Advogados 69(III/IV): 633–695. Frada, M. 2012. Sobre a interpretação do contrato. O Direito 144(III): 499–508. Freitas, J. 2012. Contrato de swap meramente especulativo; Regimes de validade e de alteração de circunstâncias. Revista da Ordem dos Advogados 72(IV): 943–970. Gomes, J. 1997. Cláusulas de Hardship. In Contratos: Actualidade e Evolução; Actas do Congresso Internacional organizado pelo Centro Regional do Porto da Universidade Católica Portuguesa de 28 a 30 de Novembro de 1991, ed. A. Monteiro, 167–204. Porto: Universidade Católica Portuguesa. Hörster, H. 2007. A parte geral do código civil português, Teoria geral do direito civil, reprint. Coimbra: Almedina. Leitão, L. 2014. Direito das Obrigações, vol. II, 9th ed. Coimbra: Almedina. Lima, F., and Varela, J. 1987. Código Civil Anotado, vol. I, 4th ed. Coimbra: Coimbra Editora. Machado, J. 1991a. Risco Contratual e Mora do Credor. In Obra dispersa, Vol. I, 257–343. Braga: Scientia Iuridica. Machado, J. 1991b. Nominalismo e indexação. In Obra dispersa, Vol. I, 425–455. Braga: Scientia Iuridica. Machado, J. 1991c. Parecer sobre denúncia e direito de resolução de contrato de locação de estabelecimento comercial. In Obra dispersa, Vol. I, 647–681. Braga: Scientia Iuridica. Martinez, P. 2015. Da cessação do contrato, 3rd ed. Coimbra: Almedina. Monteiro, A. 1984. Inflação e Direito Civil. Separata do número especial do Boletim da Faculdade de Direito de Coimbra – «Estudos em Homenagem ao Prof. Doutor António de Arruda Ferrer Correia» Monteiro, A. 2003. Erro e Teoria da Imprevisão. In Il nuovo codice civile brasiliano, ed. A. Calderale, 65–86. Milano: Giuffrè Editore. Monteiro, A. 2004. Contratos de Distribuição Comercial, reprint. Coimbra: Almedina. Monteiro, A., and Gomes, J. 1998. A “hardship clause” e o problema da alteração das circunstâncias (breve apontamento). In Juris et de Jure, Nos vinte anos da Faculdade de Direito da Universidade Católica Portuguesa – Porto, ed. M. Vaz and J. Lopes, 17–40. Porto: Universidade Católica. Monteiro, J. 1989. Responsabilidade por conselhos, recomendações ou informações. Coimbra: Almedina. Monteiro, J. 1997. Manuel de Andrade und der Einfluß des deutschen Bürgerlichen Gesetzbuches auf das portugiesische Zivilgesetzbuch von 1966. In Auf dem Wege zu einem gemeineuropäischen Privatrecht; 100 Jahre BGB und die lusophonen Länder; Symposium in Heidelberg 29.-30.11.1996, ed. E. Jayme and H. Mansel, 29–43. Baden-Baden: Nomos Verlagsgesellschaft. Pereira, M. 2001. Conceito de prestação e destino da contraprestação. Coimbra: Almedina. Pinto, C. 2005. Teoria Geral do Direito Civil. ed. A. Monteiro, and P. Pinto, 4th ed. Coimbra: Coimbra Editora. Pinto, F. 2013. Contratos de distribuição; Da tutela do distribuidor integrado em face da cessação do vínculo. Lisboa: Universidade Católica Editora. Pinto, P. 2014. Contrato de swap de taxas de juro, jogo e aposta e alteração das circunstâncias que fundaram a decisão de contratar. Revista de Legislação e Jurisprudência 143: 391–413. Pires, C. 2013. Efeitos da alteração das circunstâncias. O Direito 145(I/II): 181–206. Ribeiro, J. 2007. O contrato hoje: funções e valores. In Direito dos Contratos/Estudos, 35–56. Coimbra: Coimbra Editora.

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Serra, A. 1957. Resolução ou modificação dos contratos por alteração das circunstâncias. Boletim do Ministério da Justiça 68: 293–384. Teles, M. 2008. Arbitragem comercial internacional ex aequo et bono e determinação da lei de mérito. Revista de Arbitragem e Mediação 5(19): 81–104. Telles, I. 2002. Manual dos Contratos em Geral, 4th ed. Coimbra: Coimbra Editora. Varela, J. 1950. Ineficácia do testamento e vontade conjectural do testador. Coimbra: Coimbra Editora. Varela, J., and Mesquita, M. 1982. Resolução ou modificação do contrato por alteração das circunstâncias. Colectânea de Jurisprudência 7(II): 7–17. Vasconcelos, L. 2010. O Contrato de Franquia (Franchising), 2nd ed. Coimbra: Almedina. Vasconcelos, P. 2009. Contratos Atípicos, 2nd ed. Coimbra: Almedina. Vasconcelos, P. 2015. Teoria Geral do Direito Civil, 8th ed. Coimbra: Almedina. Xavier, V. 1983. Alteração das circunstâncias e risco (Art. 437 e 796 do Código Civil). Colectânea de Jurisprudência 8(V): 15–23.

Table of Cases (All Available Online at www.dgsi.pt) Coimbra Court of Appeal, 05-Nov-2013 (José Avelino Gonçalves, case no. 1167/10.5TBACB-E. C1) Guimarães Court of Appeal, 31-Jan-2013 (Conceição Bucho, case no. 1387/11.5TBBCL.G1) Lisbon Court of Appeal, 14-Jun-2012 (Sérgio Almeida, case no. 187/10.4TVLSB.L2-2°) Lisbon Court of Appeal, 12-Feb-2013 (Gouveia de Barros, case no. 2831/10.4TVLSB.L1-7) Lisbon Court of Appeal, 19-Feb-2013 (Rijo Ferreira, case no. 1117/10.9TVLSB.L1-1) Porto Court of Appeal, 5-Dec-2003 (Fonseca Ramos, case no. 0355837) Supreme Court of Justice, 10-Dec-1996 (Fernandes Magalhães, case no. 96A470) Supreme Court of Justice, 16-May-2002 (Ferreira de Almeida, case no. 02B1145) Supreme Court of Justice, 10-Jan-2013 (Orlando Afonso, case no. 187/10.4TVLSB.L2.S1) Supreme Court of Justice, 18-Jun-2013 (Moreira Alves, case no. 493/03.4TVLSB-A.L1.S1) Supreme Court of Justice, 10-Oct-2013 (Granja da Fonseca, case no. 1387/11.5TBBCL.G1.S1)

Chapter 14

L’imprévision dans le Nouveau Code Civil roumain enfanté par la crise économique mondiale Dumitru Dobrev and Marilena Uliescu

Abstract The study is treating the slow path of contractual unforeseeability, from total rejection to being defined into the legislation of a country dominated by the French legal culture. Incidental or not, this radical change of vision took place after the effects of the world economic crisis reverberated on the South-Eastern European economies. The new Romanian Civil Code from 2011 implements, for the first time, the texts of the Common Frame of Reference of the Study Group on a European Civil Code regarding the unforeseeability (art. 6:111) and we believe that the doctrine and jurisprudence that will develop on this text will become a valuable contribution for future essays to unify the law of obligations in the European Union.

14.1

Le droit positif roumain, entre les effets de la crise financière mondiale et le principe traditionnel romain du droit des obligations: pacta sunt servanda

Après l’entrée en vigueur du Nouvel Code Civil roumain le 1er octobre 2011, dans le droit positif roumain on a approché le problème de l’imprévision contractuelle d’une manière radicalement différente que précédemment. Cela en partie à cause de la crise économique mondiale qui s’est installée en 2008, en partie parce qu’on a eu comme but la transposition de certains textes du Cadre Commun de Référence publié par le Groupe d’études sur un Code civil européen. Entre 1865 et 2011, tantôt la doctrine que la pratique judiciaire ont été, à de rares exceptions, défavorables à l’application de l’imprévision contractuelle – rebus sic stantibus. La raison de cette approche consiste dans le fait que l’Ancien Code Civil Roumain (1865–2011) a été en effet une copie du Code Napoléon de la 2ème moitié du XIX-ème siècle, contenant de faibles améliorations et adaptations au contexte D. Dobrev (*) • M. Uliescu Legal Research Institute “Acad. Andrei Rădulescu” of Romanian Academy, House of Romanian Academy, Bucharest, Romania e-mail: [email protected]; [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_14

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socio-économique de la Roumanie. Comme beaucoup d’entre les universitaires et les praticiens marquants des Principautés Unies (et plus tard du Royaume de la Roumanie) s’étaient formés à l’école française, jusqu’ à la fin de l’entre-deuxguerres, ils sont restés les partisans des théories de l’autonomie de la volonté et du nominalisme monétaire,1 en répudiant ainsi la théorie de l’imprévision contractuelle. En suivant la célèbre décision Canal de Craponne de la Cour de Cassation Française2: «Il n’appartient pas aux tribunaux, quelque équitable que puisse leur paraître leur décision, de prendre en considération le temps et les circonstances pour modifier les conventions des parties.3 », la jurisprudence (de droit privé) française, aussi que la jurisprudence roumaine (à l’exception de quelques causes isolées4) ont rejeté le principe rebus sic stantibus. Il y a eu aussi des doctrinaires d’un incontestable prestige académique,5 qui, en notant l’effet de la dévalorisation monétaire des années 1919–1920, ont affirmé que: « cet intervention nisme dans la matière classique des contrats a été justifié par le renversement des valeurs économiques et par de phénomène de la dévalorisation monétaire, dont le résultat a été le déséquilibre des prestations réciproques… Il est facile d’envisager l’effet de la dévalorisation de la monnaie sur un contrat de rente viagère conclu avant la dévalorisation. Si l’on demandait au débiteur de continuer l’exécution, en payant au crédirentier l’équivalent en or de la rente, il serait ruiné. » À cause du courant conservatoire, le Code Civil Carol II de 19406 n’a pas réglementé l’imprévision contractuelle, bien qu’il se soit éloigné sous certains aspects des solutions « traditionnelles » du Code de 1865, en admettant une institution en quelque sorte similaire à l’imprévision contractuelle: la lésion pour les majeurs (art. 1119). La dernière

1

Dans les travaux de plusieurs doctrinaires roumains de la période 1865–1947, la théorie de l’imprévision était mentionnée le plus souvent pour la combattre, le principal reproche étant celui de n’avoir pas été consacrée par le Code Civil roumain de 1865. Plus que ça, l’art. 1578 du Code Civil de 1865 est un correspondant parfait de l’art 1895 Code Civil français (« l’obligation qui résulte d’un prêt en argent, n’est toujours que de la somme numérique énoncée au contrat »), ce qui consacre le principe du nominalisme monnétaire – incompatible, dans la vision des doctrinaires roumains de l’Entre-deux-guerres, avec la théorie de l’imprévision. 2 Commune de Pélissanne c./ marquis de Galliffet, affaire dite du Canal de Craponne, Cass. Civ., 6 mars 1876, publiée sur le site : http://www.mafr.fr/IMG/pdf/canal_de_craponne.pdf consulté le 18 janvier 2014. 3 Fauvarque-Cosson and Mazeaud (2008), p. 470. 4 Voir la discussion sur la cause Lascăr Catargiu c. Banca Bercovici, le Tribunal Ilfov, La I-ère Section Commerciale, décision du 11 mai 1920, dans – Zamşa (2006), p. 231–232 et dans le sens contraire, voir CAS. I, Deciziunea No. 1869 din 9 Martie 1926, publicată în Pandectele Române, 1930.I.49-53 avec un note de Georgiu Plopul „En ce qui concerne la dévalorisation entre temps de la monnaie et le changement de la valeur effective de la somme convenue en tant que prix on doit maintenir le fait que l’imprévision, comme elle n’est pas réglementée par la loi, ne peut pas constituer la base pour l’établir, car entre temps, à cause de la guerre, la valeur du terrain a changé par rapport à la dévalorisation de la monnaie.” 5 Rosetti-Bălănescu et Băicoianu (1943), p. 44. 6 Il s’agit du Code Civil Carol II, publié le 6 septembre 1940 mais qui n’entra jamais en vigueur, qui s’inspirait dans la section sur les obligations du projet de code des obligations et des contrats franco-italien de l’an 1927.

14

L’imprévision dans le Nouveau Code Civil roumain enfanté par la crise…

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tentative de reforme de la période 1947–1989, le projet de code civil de 19717 évite pour des raisons évidentes de réglementer l’imprévision contractuelle. Avec l’adoption du Nouveau Code Civil, le 1er octobre 2011, la vision du législateur roumain change radicalement. Par l’art. 1271 NCC, on réglemente une norme d’application générale de l’imprévision contractuelle. Par la Loi 71/2011 de mise en application du Nouveau Code Civil, on a finalement adopté ce texte: (1) Les parties sont tenues à exécuter leurs obligations, même si leur exécution est devenue plus onéreuse, soit à cause de la hausse des coûts de l’exécution de sa propre obligation, soit à cause de la diminution de la contre-prestation. (2) Quand même, si l’exécution du contrat est devenue excessivement onéreuse, à cause du changement exceptionnel des circonstances, qui rendrait visiblement injuste le fait d’obliger le débiteur à l’exécution de l’obligation, le tribunal peut disposer: (a) l’adaptation du contrat, pour distribuer d’une manière équitable entre les parties les pertes et les profits résultant du changement des circonstances; (b) la cessation du contrat, au moment et dans les conditions qu’il établit. (3) Les dispositions de l’alinéa 2 sont applicables seulement si: (a) le changement des circonstances est survenu après la conclusion du contrat; (b) le changement des circonstances, ainsi que sa durée, n’ont pas été et ne pouvaient être prises en considération par le débiteur, raisonnablement, au moment de la conclusion du contrat; (c) le débiteur n’a pas assumé le risque et on n’aurait pas raisonnablement considéré qu’il l’aurait assumé. (d) le débiteur a essayé, dans un délai raisonnable et de bonne confiance, la négociation de l’adaptation raisonnable et équitable du contrat.

14.2

La base théorique pour la prise en considération des effets de la crise financière mondiale dans le droit civil roumain: le principe rebus sic stantibus

La principale source d’inspiration du Nouveau Code Civil roumain de 2011 dans la matière des obligations est le Code Civil du Québec (C. c. Q) de 1991. Celui-ci, par l’art. 1434, réglemente seulement le principe de la force obligatoire du contrat, en représentant en fait une reprise des art. 1134–1135 du Code Napoléon (art. 969–970 de l’ancien Code Civil roumain), ce qui montre le caractère réticent et conservatoire du droit québécois en ce qui concerne l’institution de l’imprévision contractuelle. Il y a une seule différence: par l’art. 1834 C. c. Q., on admet l’imprévision contractuelle seulement en matière du contrat de donation avec charge. (« La charge qui, en raison de circonstances imprévisibles lors de l’acceptation de la donation, devient impossible ou trop onéreuse pour le donataire, peut être modifiée ou révo7

Le projet de Code Civil de la Republique Socialiste de la Roumanie aurait du devenir un code qui remplisse les mêmes exigences que Zivilgesetzbuch der D. D. R. (1975), mais il n’est jamais entré en vigueur.

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quée par le tribunal, compte tenu de la valeur de la donation, de l’intention du donateur et des circonstances ».)8 L’équivalent de l’art. 1834 C. c. Q. est l’art.1006 du Nouveau Code Civil roumain, avec le contenu suivant: Art. 1006: Le domaine d’application Si, à cause des circonstances imprévisibles et que l’on ne pourrait imputer au bénéficiaire, survenues (ultérieurement) à l’acceptation de la libéralité, le remplissement des conditions ou l’exécution des charges qui affecte la libéralité est devenu(e) extrêmement difficile ou excessivement onéreux/-se pour le bénéficiaire, celui-ci peut demander la révision des charges ou des conditions. Art. 1007: Le solutionnement de la demande de révision Le tribunal d’instance saisi de la demande de révision peut, tout en respectant aussi que possible la volonté du donataire, disposer des changements quantitatifs ou qualitatifs des conditions ou des charges qui affectent la libéralité ou les grouper ensemble avec ceux provenant d’autres libéralités. Le tribunal d’instance peut autoriser l’aliénation partiale ou totale de l’objet de la libéralité, tout en établissant que le prix soit utilisé à des fins conformes à la volonté du donataire, aussi que toute autre disposition qui maintienne autant que possible la destination poursuite par celui-ci.

Nous pensons que l’on pourrait reprocher le surnormativisme à cette réglementation, qui contient la norme d’applicabilité générale de l’art. 1271 NCC, aussi que la norme spéciale, applicable seulement au contrat de donation avec charge (art. 1006– 1007 NCC). Nous ne voyons pas les raisons pour lesquelles la norme générale prévue par l’art. 1271 NCC ne puisse être appliquée également à des contrats synallagmatiques imparfaits, tels que les contrats de donation avec charge. Ce furent deux auteurs français d’un grand prestige scientifique dans la Roumanie de l’Entre-deux-guerres, Maurice Hauriou et Marcel Planiol,9 qui contestèrent premièrement la conception volontariste, napoléonienne, basée sur les principes de l’autonomie de volonté et de la liberté contractuelle. Ils ont apporté plus d’autorité scientifique aux critiques de la théorie de l’autonomie de la volonté10 dans les discussions intenses que les doctrinaires roumains de l’Entre-deuxGuerres et d’après la 2e Guerre Mondiale avaient autour de «la crise du contrat». 8

Pour des détails sur l’application très limitée de l’imprévision contractuelle dans le droit québécois, voir Jobin (2004) publié sur le site www.institut-idef.org/img/doc/jobin.doc consulté le 18 janvier 2014: « hors du droit des contrats, l’imprévision peut aussi être invoquée à propos de la charge d’un legs (art. 771 C.c.Q.) et d’une fiducie quand la poursuite de son but est rendue impossible ou trop onéreuse par suite de circonstances imprévisibles (art. 1294 C.c.Q.) », et la pratique judiciaire citée dans ce travail: Cour d’Appel, Province de Québec (Procureur général) c. Kabakian-Kechichian, 2000 Can. LII 7772 (QC CA). 9 Voir Maurice (1986), p. 138 : « Ce qui justifie la théorie de l’imprévision dans les relations du droit administratif doit la justifier aussi dans celles du droit privé. Cela seul et rien d’autre car il y a unité des principes du droit » și Planiol et al. (1947), p. 168–169. 10 Ionașcu (1943), p. 737–741. Il est indubitable que l’on connaissait dans la Roumanie de l’Entredeux-guerres la thèse de doctorat d’Emmanuel Gounot (1912), Le principe de l’autonomie de la volonté en droit privé. Contribution à l’étude critique de l’individualisme. Thèse, Dijon. A. Rousseau.

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Ces critiques, en premier lieu de la perspective positiviste,11 ont été biensûr amplifiées par les événements à impact économique majeur de l’époque: la brusque dépréciation monétaire des années 1918–1921 et la grande crise économique des années 1929–1933. Après 1990 furent publiées plusieurs études approfondies d’analyse critique de la théorie de l’autonomie de la volonté soit d’une perspective éclectique,12 soit de la perspective des supporters de la théorie du solidarisme contractuel,13 adeptes des visions des doctrinaires français (Yves Lequette, Cristophe Jamin, A. S. Courdier-Cuisinier).14 En suivant cette tendance de réévaluation de la théorie de l’imprévision de la doctrine française, des auteurs roumains plus conservatoires15 ont considéré eux aussi que la théorie de l’imprévision devrait trouver sa place dans le droit positif roumain, pendant que d’autres, plus téméraires,16 ont essayé de justifier dès les années 199017 l’application de la théorie de l’imprévision même dans les conditions de l’art. 1578 de l’ancien Code Civil Roumain (traduction de l’art. 1895 du Code Napoléon), qui consacre le principe du nominalisme monétaire. Pendant les années 2000 plusieurs commissions de rédaction du nouveau code civil se sont succédées, et fut publiée une monographie dédiée au problème de l’imprévision contractuelle,18 où l’on a utilisé comme arguments des travaux récents de la doctrine française19 et des arguments de droit comparé (la soi-disant théorie de l’eccesiva onerosita,20 résultée de l’interprétation de l’art. 1467–1468 Code civil italien).

11

Des arguments de la critique de l’autonomie de la volonté d’une perspective positiviste ont été utilisés dans les cours universitaires des années 1930–1940 par les plus importants doctrinaires roumains de l’époque : Ionașcu (1943), p. 739, Djuvara (1933). 12 „En ce sens on doit reconnaître qu’aujourd’hui les fondements du contrat ne peuvent être circonscrits à la sphère exclusive d’une ou de l’autre des théories élaborées au cours du temps, qu’il s’agisse de l’autonomie de la volonté, du positivisme juridique dans toutes ses hypostases et variantes, ci-incluse la variante utilitariste, le solidarisme contractuel et le volontarisme social” affirme le professeur Liviu Pop dans (2007), Incercare de sinteza a principalelor teorii referitoare la fundamentele contractului, cu privire speciala asupra teoriei autonomiei de vointa si teoriei solidarismului contractual, Revista Română de drept privat, 5(5): 75–118. 13 Piperea (2011), p. 13–36. 14 Stoffel-Munck (1994). 15 Pop (2009). 16 Voir Albu (1994), p. 44–54; Albu et Man (1996), p. 20–27; Burzo (1998); Zamşa (2006). 17 Pendant les années 1990–1991, à la suite des changements majeurs en plan économique et politique, eut lieu une grande dépréciation monétaire. Pendant que le cours officiel était de 35 ROL/ USD, après la libéralisation des prix sur le marché parallèle le cours était de 180 ROL/USD. Le 30 avril 1993, le cours officiel de la Banque Nationale de la Roumanie était de 615 ROL/USD. Voir Isărescu (2006) sur le site: http://www.ince.ro/ReflectiiIsarescu3.pdf consulté le 18 janvier 2014. 18 Zamşa (2006). 19 Flecheux (2001), p. 590. 20 Voir, en ce qui concerne la doctrine italienne: Boselli (1952) et pour la pratique judiciaire: Corte Suprema di Cassazione, Sezione Terza Civile, Sentenza n. 12235 del 25 maggio 2007 sur le site internet: http://www.cortedicassazione.it/ consulté le 18 janvier 2014.

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Nous pensons qu’un rôle important pour l’adoption de l’imprévision comme solution législative en Roumanie eut le fait que le dernier projet de réforme du droit des obligations français,21 aussi que le projet de Cadre Commun de Référence publié par le Groupe d’Étude pour un Code Civil Européen présidé par le professeur Christian von Bar en 2008 (art. 6: 111) ont inclus des textes proposant des réglementations de l’imprévision contractuelle. Tout en commentant le projet français, le prof. J. Ghestin affirme: « Moralement souhaitable, la révision ou l’adaptation du contrat devient économiquement indispensable. L’utilité sociale commande qu’un déséquilibre excessif des prestations, constitutifs d’une trop grande injustice, soit désormais pris en considération par le droit positif ».22 Comme le Groupe d’Étude pour un Code Civil Européen est finalement abouti à une version plus conservatoire que l’antérieure, celle-ci a été transposée telle quelle dans le Nouveau Code Civil roumain. Par conséquent, le texte de l’art. 1271 este en fait une traduction du point III-1:110 du Projet de Cadre Commun de référence. Cette nouvelle révision du Projet de Cadre Commun de Référence demande que la révision judiciaire du contrat réunisse simultanément quatre conditions, assez difficilement de prouver en pratique et qui nécessitent un comportement irréprochable du débiteur de l’obligation devenue extrêmement onéreuse, aussi qu’une diligence peu commune des commerçants dans la phase de négociation précontractuelle. Certains auteurs considèrent qu’une autre source pour l’inclusion de la théorie de l’imprévision contractuelle dans le NCc seraient les Principes applicables aux contrats commerciaux internationaux codifiés par l’Institut International pour l’unification du droit privé en l’an 1994 (les Principes UNIDROIT).23 Expression de la lex mercatoria, les Principes UNIDROIT traitent de l’imprévision contractuelle aux articles 6.2.1-6.2.3.24 Même après le début de la crise mondiale (dont les effets furent ressentis en Roumanie à commencer de l’an 2008), la pratique judiciaire de Roumanie a été néanmoins assez réticente envers cette tendance de la doctrine, tantôt en ce qui

21

Projet de réforme du droit des obligations. Texte du projet de la Chancellerie. Ghestin (2009), p. 30. 23 Voir Tița-Nicolescu (2012), 95 (11). 24 Les principes UNIDROIT sont disponibles a cette adresse internet: http://www.unidroit.org/english/principles/contracts/main.htm, consulté le 18 janvier 2014. 22

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concerne le droit privé,25 tantôt en ce qui concerne les contrats administratifs,26 en restant fidèle au principe pacta sunt servanda. Même dans les causes où les instances n’ont pas exclu de plano l’application de la théorie de l’imprévision pour manque de réglementation (ce qui est la motivation traditionnelle des instances roumaines), on a considéré qu’en cause n’étaient pas remplies à la fois les conditions27 pour que cette limitation de la force obligatoire de contrats28 soit effective. 25

Voir la pratique judiciaire relevante: - la décision arbitrale (pas encore publiée) no. 171/ 15.07.2010, dossier no. 330/ 2009, La Cour d’Arbitrage International aupres la Chambre de Commerce de la Roumanie, définitive, qui statue le caractère « exceptionnel » de l’imprévisions et qui ne pourrait invoquer, dans l’absence d’une clause de hardship (que les partie n’ont pas prevue dans un contrat de louage à 10 ans) ; - l’arrêt no 194/ 24.01.2013 de la Haute Cour de Cassation et de justice, la 2-ème Section Civile, par laquelle on maintient la motivation de l’appel de la Cour d’Appel de Bucarest de l’arrêt civil no 31 du 24 janvier 2012 : « Une des conditions essentielles de la théorie de l’imprévision est que la circonstance qui a déterminé le déséquilibre contractuel soit apparue entre le moment de la conclusion du contrat et le moment ou l’exécution des obligations assumées par les parties devait se faire, condition qui dans ce cas-ci n’est pas remplie. Les parties ont conclu l’avant-contrat de vente-achat l’11 février 2008 et on prévu que la conclusion du contrat de vente-achat aura lieu le 15 mai 2008, et la situation imprévisible invoquée par la requérante-défendeuse (la chute du marché immobilier et l’arrêt des financements immobiliers) est ultérieure, respectivement après 15 septembre 2008. 26 Voir la Haute Cour de Cassation et de Justice, la Section de contentieux administratif et fiscal, décision no 5266 du 25 novembre 2010, avec un commentaire explicatif, par juge dr. Bogasiu, Gabriela, publiée dans 2012, Revista Română de Jurisprudenţă, 21 (3) disponible sur le site web www.idrept.ro et la décision no 713/CA/ du 20.10.2010 de la Cour d’Appel de Constanța publié sur la page internet du Ministère de la Justice: http://portal.just.ro/36/Lists/Jurisprudenta/DispForm. aspx?ID=656 consultés le 18 janvier 2014. 27 Voir la Haute Cour de Cassation et de Justice, la Section de contentieux administratif et fiscal, décision no 5266 du 25 novembre 2010, avec un commentaire explicatif, par juge dr. Bogasiu, Gabriela, publiée dans 2012, Revista Română de Jurisprudenţă, 21(3): « En principe, le concessionnaire supporte les risques de l’exploitation, en ce sens qu’il assume les risques de l’exploitation, dans la mesure que les bénéfices qui résulteraient d’une baisse des coûts d’exploitation lui profitent. Le principe de l’équilibre financier ne fait que tempérer l’autre principe, celui de l’exploitation du service public ou du bien concessionné au risque et à la responsabilité du concessionnaire, sans l’enlever dans sa substance, parce que, au contraire, la prééminence-même de l’intérêt public dans les rapports administratifs serait niée. Par conséquent, si on n’a pas prévu expressément dans le contrat la possibilité de la diminution de la redevance ou son ajustement par rapport aux résultats économiques obtenus, le principe de l’équilibre financier ne peut être invoqué en tant que motif légal en ce sens d’autant moins pour la restitution des sommes déjà payées à titre de prix de la concession, en l’absence des preuves concernant l’impossibilité inévitable de continuer l’activité d’intérêt public. Celle-ci est aussi la conclusion de la décision prononcée par le conseil d’État de la France mentionné dans les conclusions de l’intimée-requérante (l’affaire du gaz de Bordeaux, le 30 mars 1916), dans laquelle on a accepté la révision du contrat en faveur du concessionnaire, non pas dans le but de diminuer les pertes ou de couvrir le manque du profit, mais pour pouvoir assurer la continuité du service public d’éclairage de la ville, devenu trop couteux dans les conditions du triplement du prix du charbon pendant les années 1915–1916, durant la Première Guerre Mondiale. » 28 Les auteurs Pop, Liviu, Popa, Ionuț, Vidu, Stelian Ioan dans (2012), Tratat elementar de drept civil. Obligațiile, București, Universul Juridic, utilise en tant que figure le style le terme de lésion a posteriori.

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La clause de hardship

La clause de hardship n’était pas considérée valide auparavant dans les contrats conclus sous la loi roumaine, mais seulement dans les contrats synallagmatiques, à exécution successive et avec un élément d’extranéité dans lesquels les parties, par une clause compromissoire valide, choisissaient un autre droit matériel applicable au contrat que le droit roumain. Par conséquent, chez la Cour d’Arbitrage Commercial International auprès de la Chambre de Commerce et Industrie de la Roumanie il y a eu quelques causes dans lesquelles on a considéré valide la clause de hardship. Ceux-ci étaient des contrats internationaux complexes de fourniture de matières primaires des pays du Tiers Mode, ou de transport international intermodal ou maritime soumis à la loi anglaise. À ce moment-ci, tous les doctrinaires sont d’accord qu’une clause de hardship est licite et on peut l’insérer dans tout contrat interne rédigé sous le Nouveau Code civil. Certains auteurs recommandent quand même l’insertion de cette clause seulement dans les contrats commutatifs (pas dans les contrats aléatoires) à exécution successive et qui s’étendent sur un grand nombre d’années (des contrats de louage ou de fermage à 10–20 ans) qui incluent, autant que possible, un algorithme de calcul qui permette de redimensionner l’obligation devenue excessivement onéreuse.

14.4

Des palliatifs législatifs au problème du déséquilibre économique qui affecte le contrat

La seule modalité « traditionnelle » par laquelle on a imposé un moratoire dans les contrats excessivement onéreux, suite d’un déséquilibre monétaire imprévisible et de grande ampleur, a été l’intervention du législateur. Comme pendant les années 1920 les gouvernements avaient encouragé les crédits pour les petits fermiers et les petites industries, pour réduire l’impact social de la Grande Crise économique de 1929–1933 on a adopté la Loi de la conversion des dettes agricoles et urbaines29 no 33/7.04.1934, par laquelle on a établi un moratoire de 15 ans pour le remboursement des crédits bancaires. Récemment, par une initiative des quelques parlementaires du pouvoir et de l’opposition, on a déposé dans la Chambre des Députés un projet de loi pour l’atermoiement de l’exécution forcée des personnes qui on fait des crédits en francs suisses. Le projet de loi réduit le domaine du moratoire seulement aux personnes 29 La Loi no. 33/1934, publiée dans le Journal Officiel Roumain no. 83/07. 04. 1934, art. 4 : « Les dettes des débiteurs prévus a l’art. 1 se diminuent par 50 % conformément a l’art 3 de la loi. Les dettes ainsi réduites seront payées en 34 fractions trimestrielles, qui vont comprendre un taux de 3 % par an et qui seront payées chaque 15 mai et 15 novembre de chaque année, l’échéance de la première fraction étant le 15 novembre 1934. Chacune des premieres deux fractions représenteront 2,5 %, et chacune des deux suivantes, 3 % de la créance réduite conformement a l’alinéa 1. Les autres 30 fractions seront égales et comprendront tout le reste de la dette.

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physiques qui on fait des crédits pour acheter des immeubles à destination de logement mais nous ne croyons pas que celui-ci sera adopté parce qu’il ne peut pas avoir le support du gouvernement qui a un accord stand-by avec le Fonds Monétaire International et la Banque Mondiale.30 Un autre acte normatif qui a été modifié à cause de la crise est la Loi de l’insolvabilité no 85/ 2006. On introduisit l’art. 931 avec le contenu suivant: Les obligations résultant d’un avant contrat vente immobilière à date certaine, antérieure a l’ouverture de la procédure, dans lequel le promettant-vendeur entre en procédure, seront exécutées par l’administrateur judiciaire/ le syndique de faillite à la demande du promettantacheteur, si: – le prix convenu dans le contrat été payé intégralement ou peut être payé, et le bien se trouve dans la possession du prometteur-acheteur; – le prix n’est pas inférieur à la valeur de marché du bien; – le bien n’a pas une importance déterminante pour la réussite d’un plan de redressement.

Ce texte a été introduit par le Parlement par la Loi no 277/2009 parce que plusieurs promoteurs immobiliers de logements collectifs faisaient faillite et on avait abouti à la situation suivante: les banques avaient crédité les promoteurs et elles avaient des garanties réelles (hypothèque sur l’immeuble terrain et sur le bien futur – le bâtiment) et les prometteurs-acheteurs des appartements du logement collectif (d’habitude, des personnes physiques) avaient payé intégralement ou partialement, dans la plupart de cas par des crédits bancaires, les prix de ceux-ci, mais en étant seulement des titulaires d’un droit de créance. Comme il était évident que dans le cas d’une confrontation légale entre les deux catégories de créditeurs des promoteurs immobiliers – les banques et les prometteurs acheteurs – les premières auraient été avantagées, le législateurs est intervenu et a permis que ces contrats de vente achat soient conclus à l’opposition du créditeur garanti et la levée de l’hypothèque. La pratique judiciaire qui a suivi cette mesure, en ce qui concerne la levée de l’hypothèque, n’est pas unitaire.31

30

Voir le projet législatif sur le site de la Chambre des Députés : http://www.cdep.ro/proiecte/ bp/2013/800/70/7/pl877.pdf. 31 La Cour d’Appel de Timișoara, la Section Commerciale, décision civile no. 72 du 18 janvier 2011: « Il n’y a pas de disposition légale qui permette à l’instance d’accorder la préférence à un créancier chirographaire au détriment d’un créancier garanti; il est complètement injuste qu’un tel créancier, qui a pris de mesures suffisantes pour garantir le crédit financier accordé à un débiteur et qui fait ultérieurement déclaration d’insolvabilité, soit transformé en créancier non garanti, et ceux qui n’ont pas constitué de garantie lorsqu’ils ont accordé des acomptes a la société faillie en échange de la construction et de la vente de logements aboutissent a voir réalisées intégralement pu en grande partie leurs créances. »

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Conclusions

Sans doute que le législateur roumain a essayé, en suivant les textes les plus récents de la doctrine européenne, de créer un mécanisme judiciaire apte à offrir des solutions pour deux des plus grandes provocations que l’on peut rencontrer dans le monde contemporain globalisé: le déséquilibre monétaire ou une crise globale du marché de l’énergie. Il reste que le juge roumain ne recoure que dans des situations exceptionnelles à cette véritable boîte de Pandore qui est l’adaptation judiciaire de l’équilibre contractuel dans un pays où il n’y a pas de tradition ou de mentalité du milieu d’affaires préparées pour une telle approche. Raison pour laquelle un optimisme modéré nous fait réitérer l’affirmation du prof. Pierre-Gabriel Jobin de l’Université McGill de Montréal: Comme on le sait, tel était le cas en France durant la période de l’adoption du Code Napoléon, car on était déterminé tout spécialement à mettre un terme aux interventions judiciaires dans les affaires privées: «Que Dieu nous garde de l’équité des parlements»32

References Albu, I. 1994. Probleme actuale privind reevaluarea judiciară a creanțelor, indexarea convențională a obligațiilor pecuniare și indexarea dobânzilor dans. Dreptul 49(1): 44–54. Albu, I., and A. Man. 1996. Utilizarea terminologiei juridice latine cu referire specială la adagiile pacta sunt servanda și rebus sic stantibus. Dreptul 74(2): 20–27. Boselli, A. 1952. La risoluzione del contratto per eccessiva onerosità. Torino: Unione tipograficoeditrice Torinese. Burzo, M.E. 1998. Efecte al devalorizării monetare în raporturile juridice patrimoniale. Teză de doctorat, Cluj-Napoca, Bibilioteca franceză de drept, Universitatea “Babeş-Bolyai” Facultatea de Drept. Djuvara, M. 1933. Drept rațional, izvoare și drept pozitiv. București: Editura Socec. Fauvarque-Cosson, B., and D. Mazeaud. 2008. European contract law materials for a common frame of reference. München, Sellier: European Law Publishers. Flecheux, G. 2001. Renaissance de la notion de bonne foi et de loyauté dans le droit de contrats, dans Le contrat au début du XXI siècle, Mélanges J. Ghestin, Paris, LGDJ: 590. Ghestin, J. dir. 2009. Observation sur le projet de réforme du droit des contrats: LPA, 12 février 2009, n°spéc., n°31: 30. Gounot, E. 1912. Le principe de l’autonomie de la volonté en droit privé. Contribution à l’étude critique de l’individualisme. Thèse, Dijon, Paris, A. Rousseau. Ionașcu, T. 1943. Ideea de aparență și rolul său în dreptul civil român modern. Curs de drept civil aprofundat. București: Editura cursurilor litografiate. Isărescu, M.C. 2006. Reflecţii Economice. Contribuţii la teoria macrostabilizării, București, Academia Română – Centrul Român de Economie Comparatã și Consens, 23, sur le site: http:// www.ince.ro/ReflectiiIsarescu3.pdf consulté le 18 janvier 2014. Jobin, P.G. 2004. Deux lacunes de la justice contractuelle dans le code civil au Québec, publié sur le site www.institut-idef.org/img/doc/jobin.doc consulté le 18 janvier 2014.

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Jobin (2004) publié sur le site internet IDEF http://www.institut-idef.org/Deux-lacunes-de-lajustice.html consulté le 18 janvier 2014.

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Maurice, H. 1986. Aux sources du droit. Le pouvoir, l’ordre et la liberté. Caen: Publication du Centre de philosophie politique et juridique. Piperea, G. 2011. Introducere în teoria solidarismului contractual. Revista Română de Dreptul Afacerilor 91(3): 13–36. Planiol, M., G. Ripert, and J. Boulanger. 1947. Traité élémentaire de droit civil. Paris: Librairie générale de droit et de jurisprudence, Tome deuxième. Pop, L. 2007. Încercare de sinteza a principalelor teorii referitoare la fundamentele contractului, cu privire specială asupra teoriei autonomiei de voinţă și teoriei solidarismului contractual. Revista Română de drept privat 5(5): 75–118. Pop, L. 2009. Tratat de drept civil. Obligațiile, vol. II. Contractul, București: Universul Juridic. Pop, L., I. Popa, and S.I. Vidu. 2012. Tratat elementar de drept civil, Obligaţiile. București: Universul Juridic. Rosetti-Bălănescu, I., and Băicoianu Al. 1943. Drept Civil Român. Studiu de doctrină şi de jurisprudenţă. Bucureşti: Editura Socec & Co. Stoffel-Munck, P. 1994. Regards sur la théorie de l’imprévision. Vers une souplesse contractuelle en droit privé contemporain. Aix en Provence: Presses Universitaires d’Aix-Marseille. Tiţa-Nicolescu, G. 2012. Noul Cod civil. Excepţiile de la principiul obligativităţii efectelor contractului prevăzute în Noul Cod civil. Pandectele Române 95. Zamşa, C.E. 2006. Teoria Impreviziunii. Studiu de doctrină și jurisprudență. București: Editura Hamangiu.

Chapter 15

The Russian Federation Legislation on the Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision Nataliya Georgievna Doronina and Natalia Gennadievna Semilyutina

Abstract This article describes the provisions of the Russian legislation with respect to the financial crisis situation. The authors analyze how the crisis situations affect the provisions of the contracts. The provisions of the Russian Civil Code are subject of the analysis in the present article. The subject of the research was the situations which happened on the Russian financial market within recent 20 years. Although the crisis situation is often understood as general market destabilization the situations varied much as well as the legal ways of overcoming the situation. According to the authors one should see the difference between the effects the financial crisis on the contracts concluded between market participants (B to B relationship) and between market participant and a customer (B to C relationship). Proving this idea authors compare the situation on the market in 1998th and in 2014–2015th.

15.1

The Principle of “Pacta Sunt Servanda” in the Cases Connected with the Application of the Articles 450–451 of the Civil Code (A Substantial Change of Circumstances)

Before the economic reforms of 1990s there has been no crisis situations in the planned economy; the crisis started to happen after the reforms and turn to the market economy. After the basic elements of the financial market had been created, that is:

N.G. Doronina (*) • N.G. Semilyutina Private International Law Department, Institute of Legislation and Comparative Law, Moskow, Russian Federation e-mail: [email protected]; [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_15

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– the financial instruments, to be bought and sold on the market; – the infrastructure of the market (that is a set of organizations engaged in the organization of the market: depositories, clearing & settlement, trading system); – market participants, who sell and buy the financial instruments on the market. Staring form the beginning of the “market period” Russia faced several periods of tension on the market. The situations that could be characterized as crisis were connected with the periods of global destabilization on the market. Such situations happened in 1997–1998 years, 2007–2008, 2014-up till present moment. Financial crisis 1997–1998 was financial crisis that affected mostly the professional financial participants, the crisis of 2007–2008 was global and did not affected internal Russian. The crisis that started in the end of 2014 is far from its resolution and it affects the consumers of financial services – the debtors on the secured liens. The comparison between the situations in 1998 and 2014 affords the see various approaches to the crisis resolution although based on the provisions of the Civil Code of the Russian Federation (Civil Code, CC RF). Generally the Russian Civil Code stands on the position “pacta sunt servanda”. According to the article 309 of the Civil Code “obligations must be performed a proper manner in accordance with the terms of obligations, requirements of the statute, other legal acts, and in the absence of such terms and requirements – in accordance with the customs of commerce or other usually made requirements”. According to article 310 of the Civil Code “unilateral refusal to perform an obligation and unilateral change in its terms is not allowed with the exception of cases provided by a statute. Unilateral refusal to perform an obligation, connected with the conduct by the parties of entrepreneurial activity and unilateral change in the terms of such an obligation is allowed also in cases provided by contract unless otherwise follows from a statute or the nature of the obligation”. At the same time one of the basic principles of the Russian law of obligation is the principle of the fault of the debtor. According to the article 401 (1) “a person who has not performed an obligation or who has performed it in an improper manner shall bear liability in case of fault (intent or negligence) except for instances when a statute or contract provides other basis of liability”. A person is recognized as not at fault, if with the degree of care and caution that was required of him by the nature of the obligation and the conditions of commerce, he has taken all measures for the proper performance of the obligation. Absence of fault must be proved by the person who has violated an obligation (article 401 (2)). Generally, this principle often is named as the “presumption of the debtors fault”. But the Civil Code also provides for the creditor’s fault which decreases the amount of the debtor’s liability (article 404 of the Civil Code). The described above general principle is applied with respect to entrepreneurial activities in a special way. According to article 401 (3) “unless otherwise provided by a statute or the contract, a person who has not performed an obligation or has performed an obligation in an improper manner in the conduct of entrepreneurial activity shall bear liability unless he proves that proper performance became

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impossible as the result of f(1orce majeure, i.e. extraordinary circumstances unavoidable under the given conditions. Such circumstances do not include, in particular, violation of obligations by contact partners of the debtor, absence on the market of goods necessary for performance, nor the debtor’s lack of the necessary monetary assets”. At the same time, according to the article 451 (1) “a substantial change of circumstances from which the parties proceeded in the conclusion of the contract is a basis for its change or rescission unless otherwise is provided by the contract or follows from its nature. A change of circumstances shall be considered substantial when they have changed to the extent that, if the parties could have reasonably foreseen this, the contract would not have been concluded by them at all or would have been concluded on significantly different terms.” According to the article 450 (2) of the Civil Code it is the competence of the court to determine upon demand of one of the parties whether the change and rescission of a contract are possible. But according to Russian experts “there is no practice on the application of the article 451 of the Civil Code”.1 The same point of view was expressed at the annual VIII Russian civil law conference the devoted to the professor Serguey Bratus memories that was held in Moscow in October 2013. Professor A. Komarov from the Russian Academy of the Foreign Trade mentioned that at the time of drafting of the Civil Code the experts wished to provide for the preservation of the contractual relations between the parties despite of the changes of the economic situation. “We hoped that in case of the dramatic changes of the economic situation the modified contract would help the parties to go on with the contract and that would assist the parties to overcome the difficulties of the crisis. But the courts preferred to uphold the variant of rescinding of the contract.” – professor A. Komarov pointed out. The authors of the textbook mentioned above tried to explain the court’s position through the unwillingness of the courts to impose on the parties any of the additional obligations that is to renegotiate. If the parties could and wished to modify the contract they would have done this before bringing an action to the court. So for the courts it is preferable to rescind the contract rather to invent something for the parties which are ready to rescind the contract themselves.2 This idea may be supported by the practice of the Russian courts. First of all it should be mentioned that there are not so many cases connected with the application of the articles 450–451 of the Civil Code. In the decision of the Presidium of the Supreme Arbitrazh Court3 of the Russian Federation of April 13th 2010 N1074/10 1

See the basic classical textbook of the Russian law of contracts by Braginskiy M, Vitryanskiy V (2002): Брагинский М.И., Витрянский В.В. Договорное право. Книга первая. Общие положения, М: «Статут», с. 447. 2 Braginskiy and Vitryanskiy (2002): Брагинский М.И., Витрянский В.В. Договорное право. Книга первая. Общие положения, М: «Статут», с. 447. 3 One of the peculiarities of the Russian legal system is the existence of the system of the “Arbitrazh Courts” which in fact originated from Arbitration courts. We have already described the origins of the Russian state arbitration courts in our National report we directed to professor G.Bermann from the Columbia University who is the moderator of the subject “Review and recognition of foreign arbitral awards – The application of the New York Convention by national courts. If you

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(this is the final decision of the Court of the highest instance) the Presidium refused to admit the inflation and general increase of prices as the change of circumstances in the sense of the article 451 of the Civil Code and refused to satisfy the claim of the leasor to change the conditions of the contract and to increase the price in the contract for the lease of premises. The practice demonstrates that the parties seldom turn to the courts applying for the change of the contract due to the change of circumstances on the basis of the articles 450–451 of the Civil Code. The most demonstrative situation happened with the crisis of August 1998. Unlike the most of the Western countries the Russian experience in dealing with the financial crises was connected with the exact date August 17th, 1998. The other events connected with financial crises like US CDS default of late October 2008, Lehman Brothers bankruptcy, recent events in Greece and Cyprus were not as impressive for Russia as August 17th, 1998 was. On Monday morning, of August 17th, 1998 the Russian government and Central Bank of Russian Federation (CBR) issued a Declaration by means of which: 1. a 90-days moratorium on repayment of foreign commercial loans by commercial banks was declared; 2. ruble was effectively devaluated; it was declared that ruble would be traded in a band of 6–9.5 rubles per dollar; (the value of ruble immediately depreciated far outside this brand); 3. the internal debt was defaulted by means of suspension of trade in government securities (GKO/OFZ4) and conversion of those securities into new securities with deferred maturities; GKO/OFZ securities immediately became illiquid and uncertain in value. The Government and CDR Declaration had a serious effect on the Russian economy. The situation was really unexpected even by professionals as on the eve of the mentioned day the President Eltsin officially in his interview to the mass media declared for the stability of the national currency. The Declaration affected the most of the citizens and entrepreneurs as it caused serious depreciation of national currency. That caused destabilization of payment systems. Some of the foreign banks refused to admit VISA, Mastercard, EuroPay cards issued by Russian banks. There were certain difficulties for the importers and for those who had domestic loans nominated in foreign currencies.5 Still the most serious consequences the Declaration had for the financial market and professional participants. Besides the currency depreciation the Declaration are interested we can resend it for you. With respect to this topic we think its enough to know that Russian Arbitrazh Court is an analogue of the economic court. At present time the reform of the court system in Russia is declared, it provides for the uniting of the arbutrazh or economic courts with the courts of the general jurisdiction. – N.D. & N.S. 4 GKO – government short-term bonds; OFZ – bonds of federal loan – medium term securities. 5 See e.g. Сергеев В.И. «Обвал» финансового рынка и обстоятельства непреодолимой силы // Законодательство, 1998, №11, с. 6–12.

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frosted the most popular financial instrument – GKO. In practice that meant that the sufficient part of the banks, securities companies assets were blocked. The problem became very serious for the foreign participants of the GKO market. The foreign participants had the right to participate on the GKO market on certain conditions. According to these conditions the foreign participant had to buy a currency ruble/dollar forward contract on the interbank (OTC) market. Most of the forward contracts were index forward contracts (that is the contracts for the price difference). As from the point of view of the western experts the depreciation of the Russian currency was the most probable and predictable (the unpredictable was the order and the speed of the depreciation) the bought the forwards of the right direction unlike most of the Russian banks. So after the August 17th 1998 a huge amount of the Russian banks appeared to be in a very difficult situation: on one hand a certain amount of assets used to be frosted in the GKOs; on the other hand most of them were in a “wrong” position with the forward contracts. In this situation some of the market participants instead of applying for the application of the article 451 of the Civil code, preferred to deny the enforceability of the index forward contracts applying to the article 1062 of the Civil Code. The article 1062 provides for the unenforceability of the gambling transactions. According to article 1062 “claims of citizens and legal persons connected with the organization of games and wagers or with the participation therein shall not be subject to judicial protection”. The practice of the courts and commercial arbitration (not the State Arbitrazh courts) turned out to be very contradictory as well as the doctrine.6 The matter was brought to the Constitutional Court. In the Regulation of December 16, 2002 N 282-O the Court determined that it was up to the competent courts to determine whether the index-forward contract was gambling or not. The situation remained undetermined until by means of amending articles 1062–1063 the excuse was made for the contracts with the professional participants of the market.

15.2

The Practice of Referring to Force Majeure Circumstances and the 1998 Financial Crises on the Financial Market

The Civil Code naturally does not have special provisions with respect to financial crises at all. It stands on the general principles: – “clausula rebus sic statibus” (as it is provided it the Article 309 and 310 of the Civil Code, quoted above); – the faulted liability with the exception for those who are engaged in the entrepreneurial activities (see Article 401 of the Civil Code);

6 See Брагинский М.И., Витрянский В.В. Договорное право. Книга пятая. Том 2, М: «Статут», 2006, с. 585–604.

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– persons who are engaged in the entrepreneurial activities would be liable “unless he proves that proper performance became impossible as the result of force majeure” (see Article 401 (3) of the Civil Code). The ideas of “frustration of the contract”, the doctrine of “Wegfall der Geschäftsgrundlage” (which are more or less alike to the force majeure (at least with respect to practical consequences)) are not reflected expressly within the provisions of the Civil Code. At the same time, the Civil Code provides for the impossibility of performance. According to article 416 (1) “an obligation is terminated by impossibility of performance if the impossibility of performance if the impossibility was by the circumstances for which none of the parties is liable”. According to article 416 (2) “in case of impossibility of performance by a debtor of an obligation caused by actions for which the creditor was at fault, the latter does not have the right to demand return of what was performed under the obligation”. According to the Russian basic course by professors M. I. Braginskiy and V. V. Vitryanskiy of the Law of Contracts, “the impossibility of performance that is the impossibility for the debtor to perform the obligations which occurred without his fault, according to the general role of the law will terminate the obligation in case, if it was caused by a circumstance for which none of the parties is liable”.7 The only possibility to take into consideration crisis circumstances (to persuade the courts to take into consideration the crisis aspects) was the force-majeure reference. According to article 401 (3) “unless otherwise provided by a statute or the contract, a person who has not performed an obligation or has performed an obligation in an improper manner in the conduct of entrepreneurial activity shall bear liability unless he proves that proper performance became impossible as the result of force majeure, i.e., extraordinary circumstances unavoidable under the given conditions. Such circumstances do not include, in particular, violation of obligations by contract partners of the debtor, absence on the market of goods necessary for the performance, nor the debtor’s lack of the necessary monetary assets”. Article 417 provides for the termination of an obligation on the basis of an act of a state body. According to this article “if as the result of the issuance of an act of a state body the performance of an obligation becomes impossible in full or in part, the obligation is terminated in full or for the respective part. Parties that have suffered losses as the result of this have the right to claim compensation for them in accordance with articles 13 and 16 of the present Code”. With respect to the situation of the August 17th,1998 the mentioned above Declaration turned out to be Act of State. With respect to the state bonds the state chose the way of the change of the contract of public debt, providing for the “novation” of the obligations, deriving from the GKOs with respect to legal persons. The state fulfilled its obligations completely with respect to physical persons – GKO-holders. Irrespective the GKO market situation, one should analyze the practice of the Russian Courts with respect to the application (or refusal to apply) the force majeure Брагинский М.И., Витрянский В.В. Договорное право. Книга Первая. Общие положения, Издание 2-ое, М:Статут, 2005, с. 763–764. 7

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clause. The Moscow International Commercial Arbitration Court (ICAC)8 is the oldest commercial arbitration court competent to resolve “the disputes resulting from contractual and other civil law relationships arising in the course of foreign trade and other forms of international economic relations, provided that the place of business of at least one of the parties is situated abroad”.9 ICAC was created in 1932 for resolution of the disputes between the Soviet Foreign-Trade Organizations (vneshnetorgovye obyedineniya –VTO) and foreign firms. The disputes which were resolved by ICAC had market economy origin (unlike the other domestic dispute connected with the planned economy where the force majeure hardly ever happened). The ICAC experience in this connection seems to be important and interesting. According to the contract concluded by the parties in 1993 the defendant was to deliver the goods to the claimant. The contract provided for the 100 % prepayment and the claimant fulfilled his obligations completely. The defendant refused to deliver the goods referring to the significant increase of prices in the local market, the defendant was ready to fulfill the delivery after additional payments were done. ICAC refused to admit the increase of tarifs and workers’ wages in the local market as a force majeure and carried out the award requesting the defendant to fulfill his obligations completely. The practice of referring to force majeure circumstances does not seem to occur often. The party referring to it must prove that the event had unpredictable and could not be foreseen by the party, the event should have inevitable character. Usually in order to prove that the circumstances preventing the performance according to the contract the interested party has to turn to special commission at the Chamber of commerce for the certificate confirming the presence force majeure circumstances impeding the performance. With respect to the 1998 crises the Chamber of commerce made an announcement that the August 17th, 1998 Declaration by the Russian Government and the Central Bank of Russian Federation (CBR) can not be considered as a force majeure circumstance. So the financial crises itself (at least with respect to the situation of August 17, 1998) was never construed as a force majeure. But the financial market participants faced the most serious consequences. As it was mentioned above, the seriousness of the consequences was connected not only with the devaluation of national currency but also with the default of the internal debt. At that time GKO and OFZ represented the most liquid and the most secured type of the securities. Many banks hold and financial institutions hold their reserves in GKOs. The organizations of market infrastructure also were very dependent on GKO/OFZ. Moscow Interbank Currency Exchange (MICEX) was one of the largest private financial institutions and organization of the financial market infrastructure. MICEX The full name of ICAC in Russian: Международный коммерческий арбитражный суд при Торгово-промышленной палате Российской Федерации – МКАС при ТПП РФ; the information on ICAC both in Russian and English one may see on the site http://www.tpprf-mkac.ru/. 9 See Article 1 (2) of the Law of the Russian Federation “On International Commercial Arbitration” of July 7th, 1993. 8

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was the exchange for trading government securities (GKO/OFZ) and foreign currencies. It was formed in 1991 by the group of the largest Russian bank. In 1998 it organized trading and clearing services. In 1996 MICEX started derivatives trading: foreign currency futures (dollar/ruble) were traded in MICEX. The emergency measures taken by the government had direct effect on MICEX derivatives market. First of all, the devaluation of national currencies directly concerned derivatives trading and first of all dollar/ruble futures. Secondly, as MICEX fulfilled a function of clearing organization doing centralized clearing on the derivatives market it faced the default of a significant number of market participants. The most serious was the fact that MICEX risk management system accepted GKO/ OFZ as collateral securing the derivatives transactions. Thirdly, “GKO/OFZ securities and foreign financing constituted principal sources of liquidity for the Russian commercial banking system. Russian commercial banks held a very significant portion of their assets in these securities. As a result of the default on GKO/OFZ securities, the Russian baking system became illiquid, several large banks failed, and bank customers generally could not access their funds on deposit”.10 Responding to financial collapse the MICEX Directorate suspended trades on the derivatives market on August 17, 1998. MICEX considered alternatives of: (i) settling all positions in futures contracts at the prices recorded at the close of trading on Friday, August 14, 1998; or (ii) resuming trading in futures contracts, provided that the market participants posted the additional margin deposits and guarantee deposits. On August 21st, 1998 the MICEX Board upheld the decisions of MICEX Directorate and on August 26th, 1998 required all clearing members to increase their margin deposits before August 31st, 1998. As most of the clearing members had to overcome financial difficulties (most of them kept the financial assets in GKO or OFZ which had been defaulted), the requirement of the MICEX Board was not fulfilled. As a result MICEX Board on September 2nd, 1998 in accordance with the articles 81 and 84 of the Rules of the MICEX Derivatives Division ordered closing out of all derivatives position at the closing prices of August 14th, 1998. There was an attempt to bring an action doubting the decisions of the MICEX Board in court but it failed.

15.3

The Risks and the Conditions of the Contracts Between the Parties in Business: The Possibility of Intervention into Business Relations

As we may see from the 1998 experience the Russian market participants are in the field of the unpredictability of the government actions and steps undertaken. In our opinion this unpredictability of the state is the main factor that negatively affected the investment climate in Russia. 10

Cagliotti M and Burt J (1998), MICEX and the Russian Financial Crisis in: The Harriman Review, Special Issue, December 1998, pp. 14–18.

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Still we should notice that somehow the situation changes for the better. In this situation the main recommendation for the market participants is to work out thoroughly the conditions of the contract. The provisions of the MICEX rules and accurate step-by-step fulfillment of their provisions, which were aimed at the risk – diversification among market participants. These provisions helped MICEX and MICEX market participants to come over the difficulties of August 17, 1998 without any interference of the state. With respect to the mentioned above conditions in our opinion all of them should be described within the contract taking into consideration the risks and the conditions of the parties business. It should be also taken into consideration that the western model provisions should be “translated” into Russian which means that the contract should be adopted for the realities of the Russian law. Much depends on what is understood as “an intervention” on the frustrated contract. As we understand from our national experience, the state prefers to issue a general rule which does not interfere in the parties’ relations. It is advisable for the parties to provide for the possible crisis situation within their contract, so that it was possible to find a solution in the difficult situation. As it was mentioned above Article 451 provides for the termination or renegotiation of the contract as it would be determined in the court’s decision. The courts usually prefer to rescind the contract. It should be clarified whose faulted actions caused the injuries. In the beginning we have described the general principles of the parties responsibility if it concerns the parties. The general principles would be applied with respect to the state actions. But it is necessary to clarify the situation out of which the injuries occur. The situation that happened in the Russian financial market and particularly on MICEX derivatives market helps to understand the special regulation, that has priority before general rules of the civil law.

15.4

The Situation of 2015: Ruble Devaluation and Its Effect on the Contracts of Banks with Customers

The situation that started to develop on the market quite recently the result of huge Russian ruble depreciation and secured currency loans granted to consumers. The amount of currency loans does not exceed 3.5 % of total amount of secured loans on the market. On one hand because of the ruble depreciation the total sum of the debt increased sufficiently being nominated in national currency and the general tendency is in favor further increase of the debt (due to the further depreciation of ruble). On the other hand the general economic tendency leads to the decrease of the amount of incomes for the most of the debtors. The decrease of total amount of incomes affects general creditworthiness of the debtors. The mentioned tendencies challenge the market: because of the decrease of total incomes of households the offer of premises increases as the mount of bids decreases. The situation threatens to the market in genera as in case of multiple

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defaults it becomes problematic for the creditors to compensate the losses by means of by-out. The Central Bank recommended commercial banks holding secured loans in foreign currencies to turn to restructurization of the loans. By March 1st the Central Bank and the Government should work out the conditions of currency debt restructurisation. At present moment the conditions of the mentioned restructurizations have not been announced yet, but it is obvious that they should be based on the Civil Code principles and in some way would support the consumer as the weakest party. The recent initiative of a Group of Deputies of the State Duma was in the general trend: the suggested that the insolvent debtors in the foreign currency secured loans should not be deprived of their households. Among the measures which are under discussions are: – transferring of a foreign currency denominated loan into a national currency (ruble) denominated contract – restructuring the sum of the debt in accordance with the fixed rate, which is in the middle between the initial currency rate on the date of the loan contract and the present market rate; – postponement the term of the contract. The recommendations seem to be likely provide for a set of measure or a combination of some of the mentioned above measures. The expected recommendations issued by the Government and the Central Bank would include figures and parameters, that credit institutions are recommended to use taking into consideration the prudential purposes.

Chapter 16

The Effects of the Global Financial Crisis on the Binding Force of Contracts: A Focus on Disputes over Structured Notes in Taiwan Chang-hsien Tsai

Abstract Taiwan, whose financial market is closely linked to the international market, was seriously affected by the Global Financial Crisis. Among the affected retail investors, those who invested in financial products such as structured notes might have been unaware of the real risk these products posed. Investors left holding worthless products in the wake of the 2008 crash were quick to seek legal redress for their losses, but these disputes were difficult to address by properly using the civil remedies then available in Taiwan. Few of the possible causes of actions listed in the Taiwanese Civil Code (“CC”) or in other special laws were well adapted to address disputes over structured notes. The most applicable remedy available in the then legislation might be Article 227-2 of the CC, which governs the rule of changed circumstances, but it was referred to only rarely in these disputes. In order to put an end to this type of structured-note controversy, the Financial Consumer Protect Act (“FCPA”) was passed in 2011. Nevertheless, there is room for the FCPA to be improved and refined.

16.1

Introduction

In 2008, an economic crisis struck most of the world’s financial markets (Wang 2011b, 1945). During the Global Financial Crisis (“GFC”), markets were devastated by bank over-lending, and consequently several international financial companies were unable to sustain their business, sparking serious controversy around the international financial market. Taiwan, whose financial market is closely linked to the international market, was also seriously affected by this disaster. Among affected retail investors, those who invested in financial products such as structured notes might have been unaware of

C.-h. Tsai (*) Institute of Law for Science and Technology, National Tsing Hua University, Hsinchu, Taiwan e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_16

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the real risk they ran in doing so.1 This has resulted in a multitude of disputes that proved difficult to properly address through the civil remedies then available in Taiwan. Although authorities found temporary solutions for the problem, the need for a special act exclusively protecting financial consumers was evident, finally leading to the passing of the Financial Consumer Protection Act (“FCPA”) in 2011. An overview of the problem with structured notes in Taiwan will be presented in this chapter as follows: Sect. 16.2 will deal with the question of whether the rule of changed circumstances is applicable in circumstances such as financial crises; in Sect. 16.3, the development of legislation following the GFC will be explained; and Sect. 16.4 will conclude this chapter with a brief assessment of the FCPA’s prospects.

16.2 16.2.1

The Principle of Pacta Sunt Servenda v. Clausula Rebus Sic Stantibus A Summary of Theories

If the effects of the GFC on contracts are taken into consideration in Taiwan, the theoretical basis appears to lie in the rule of a fundamental change of circumstances (clausula rebus sic stantibus), or the idea of frustration of contracts. The first issue affected by the GFC that will be explored herein is the “rule of changed circumstances,” which concerns sudden events that affect the foundation of transactions. In the GFC context, the question is whether those structured note contracts can be terminated or rescinded, as some retail investors claim, because in some instances the GFC totally changed the circumstances at the moment a contract was signed. In terms of law, the rule of changed circumstances is an exception to the principle of pacta sunt servenda (“the promise must be kept”). The rule of changed circumstances developed under both common law and civil law; in practice, it is often applied to dramatic changes resulting from wars (Hou 2003, 108). In common law countries, there are two main categories of rules governing situations when an event happens after a contract is formed. The first category consists of contracts that are impractical or impossible to enforce; the second category covers frustration of purposes (Lo 2013a, 70). The idea of changed circumstances was created for and applied in German civil law cases (Peng 1984, 161, 175, 179, 190); it also exists in the Taiwanese Civil Code (“CC”), although with somewhat different wording. In Sect. 16.2.2, the relevant articles in the CC will be introduced.

1

Structured notes are hybrid financial products combining derivatives and debts securities, which link to other investment products in the market (see Chen 2011a, 211).

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Principles in the Taiwanese Civil Code

Some provisions of the CC share certain characteristics of the rule of changed circumstances. Even before the codification of the Taiwanese version of this rule, similar concepts were present in other laws and court decisions. As for the CC, there are two main groups of articles addressing contract enforcement issues under changed circumstances: the first group concerns events that render a contract impractical or impossible to enforce, while the second group addresses other changed circumstances after a contract is formed.

16.2.2.1

Impracticability or Impossibility

The first group of articles consists of Article (Art.) 2252 and Art. 2663 of the CC. These cover objective impracticability or impossibility of enforcement resulting from events that cannot be attributed to any of the parties to a contract. In other words, the consequences of objective impracticability or impossibility cannot be imputed to the debtors. According to these articles, when an event occurs after a contract is formed that cannot be attributed to any of the parties to the said contract, the question of distribution of risks must then be considered. Art. 225 releases the debtor from the obligation of performance if the change cannot be attributed to him or her. Art. 266 releases the creditor from the obligation of counter-prestation when the event cannot be attributed to either party (Chen 2011b, 148).

2

Art. 225 stipulates: (1) The debtor will be released from his obligation to perform if the performance becomes impossible by reason of a circumstance to which he is not imputed. (2) If the debtor is entitled to claim compensation for the injury against a third party in consequence of the impossibility of the performance under the preceding paragraph, the creditor may claim against the debtor for the transfer of the claim for the injury, or for the delivery of the compensation he has received.

Please note that all English translations of legal texts in this chapter are official translations from the “Law and Regulation Database of the Republic of China” maintained by the Ministry of Justice in Taiwan. 3 Art. 266 stipulates: (1) If none of the parties is imputed to the impossibility of one party’s performance, the other party shall be released from his obligation to perform the counter-prestation. (2) If the impossibility is only partial, the counter-prestation shall be reduced proportionately. In the case provided in the preceding paragraph, if the counter-prestation has been wholly or partially performed, it may be claimed for the reimbursement in accordance with the provisions concerning Unjust Enrichment.

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The Rule of Changed Circumstances: Background

Art. 227-24 of the CC can be said to be equivalent to the rule of changed circumstances, although its legal or theoretical foundation is somewhat different from common law rules. The CC generally follows the approach of civil law and is patterned mainly after the German Civil Code. Prior to the codification of Art. 227-2, there were even similar developmental backgrounds between Taiwan’s and Germany’s laws regarding changed circumstances. The need to address this issue was highlighted by the problems with enforcing contracts during and after a time of war,5 when local market conditions tend to be extremely unstable (Hou 2003, 108). Although the rule of changed circumstances was not directly imported from Western legal systems, Taiwanese courts have long relied on the principle of good faith to resolve contract disputes due to changed circumstances, which shares the same basis as its development in other civil law countries (Lin 2000, 61). In Taiwan, the idea of changed circumstances was usually cited by courts to deal with dramatic changes in price level indexes and the change of currency after the Second World War (“WWII”) (Hou 2003, 108–110).6 The first attempt to codify the rule of changed circumstances was Art. 397 of the Code of Civil Procedure (“CCP”),7 which is worded similarly to the current Art. 227-2 of the CC. The former additionally emphasizes that the event is not the result of the actions of either party (Lin 2000, 66–67). This article was initially placed in the CCP rather than the CC in 1968 simply for the sake of expediency.8 Before the rule was codified in the CC, courts kept trying to apply similar concepts to this rule based on previous court decisions, such as the interpretation of the principle of good faith and Art. 397 of the CCP (Lo 2013b, 69).

4

The full text of and conditions that apply to this article will be discussed in Sect. 16.2.2.3. The current ROC government moved to Taiwan after the end of WWII due to the defeat by the Chinese Communist Party in a civil war. Therefore, cases relating to contract enforcement during a time of social change were often brought to the court during and after the war (see Hou 2003, 108). 6 Taiwan’s currency changed once after the end of WWII in an effort to control inflation. Most of the court cases related to this event dealt with the value difference between the New Taiwan Dollar and the original Taiwan Dollar. 7 Art. 397 used to stipulate: 5

(1) The court shall, ex officio, make just determination and give judgment to increase, decrease, or make payment, or change other effect of any juristic act which has its effect become unjust after it is done due to change of circumstances upon cause not attributable to the parties concerned and beyond their expectation. (2) The above provision shall apply mutatis mutandis to legal relationship originated from non-juristic act. Please note that this article was later modified in February 2003, and now no longer covers changed circumstances in terms of substantive law (as opposed to procedural law). 8 The amendment was made in February 1968, when there was no official plan to amend the CC, so that the rule of changed circumstances was placed under the CCP as a temporary solution (see Lin 2000, 66).

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Art. 227-2, an official legal basis for the rule of changed circumstances, was finally added in 1999 when the CC was amended (Lo 2013b, 69). This is now the legal foundation for applying the rule of changed circumstances under the CC, as will be discussed in detail in the next section.

16.2.2.3

The Rule of Changed Circumstances: The Conditions Necessary to Accept an Exceptional Outcome

Art. 227-2 of the CC states: (1) If there is change of circumstances which is not predictable then after the constitution of the contract, and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation. (2) The provision in the preceding paragraph shall apply mutatis mutandis to the obligation not arising from the contract.

However, even after the enactment of this article, the requirements for applying the rule of changed circumstances did not become fully clear, and continued to be supplemented by legal theories and court decisions. Legal scholarship and practice evolved a set of elements to justify the existence of changed circumstances: – If there is a fundamental change of circumstances, these circumstances must be closely related to the establishment of the contract, and should be an objective event that cannot be attributed to any of the parties. According to the wording of the article, the change need not be sudden or extreme; however, commentators have noted that, referring back to German Law, the change must be substantial (Lo 2013b, 70). – The event must happen after the contract is formed but before the obligations detailed therein are performed (Lo 2013b, 70). – The event must have been unforeseeable at the time the contract was formed, which is an important element. This rule applies even if it was unforeseeable only to the claimant. However, commentators and court decisions have recognized that, at least in such cases as a sudden increase of the general price level— even if there are contract terms specifying the price level—the rule of changed circumstances still applies, as the scope of the increase is obviously beyond one’s expectations (Lo 2013b, 70–71). – The change of circumstances should not result from any fault of the contracting party applying the rule. This requirement can be found in the legislative comments on Art. 227-2.9 It is worth discussing further the question of whether, aside from force majeure events, the rule applies to those events due to the fault of a third party. Some commentators believe it still applies when there are no other possible remedies (Lo 2013b, 71–72). – The change of circumstances has led to an obviously unfair situation: If the result is so unjust that no one can expect the affected party to continue to abide 9

See the Legislative Comment on Art. 227-2.

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by the terms of the contract, then the contract cannot be considered binding (Lo 2013b, 72). With those elements in the CC, the question is therefore whether the events of the GFC qualify as exceptional circumstances. If so, we must then discuss whether this rule has legal applications that retail investors can take advantage of.

16.2.2.4

Exceptional Circumstances that Justify an Intervention Due to Changed Circumstances Under the Taiwanese Civil Code

As stated above, concepts similar to the rule of changed circumstances had already been invoked by courts before the rule was codified in the CC. These court decisions made before codification are important references for interpreting the current Art. 227-2 (Lo 2013b, 74). In the context of financial crises, the core issues requiring interpretation seem to be the standard of “obviously unfair” and foreseeability. The standard of “obviously unfair” The wording of Art. 227-2 itself provides no clue as to how to decide what constitutes “obviously unfair.” There are two cases that may serve as particularly clear demonstrations of the problem: both share a similar factual background, but came to different conclusions. In 2009 the Taiwan Supreme Court ruled10 that if the contractor is not economically disadvantaged, and if there is a price-index-adjustment term included in the contract, the rise of the price index is insufficient justification for invoking the rule of changed circumstances. Nonetheless, the Supreme Court also held11 that when a significant rise in price would lead to unfair results if the contract remained in force, then the rule of changed circumstances could be invoked and the contract terms adjusted. In this case the Supreme Court applied the rule without additional requirements such as weighing the economic strength of the contracting parties. Although the two cases seem to contradict one another, the concept of “substantive fairness” is common to both. Foreseeability An unforeseeable event is another condition that might necessitate invoking the rule of changed circumstances. One example of this can be found in another 2009 case, where the court, in a previous decision, determined that the worsening of marine conditions was not unforeseeable because the contractor knew that the construction site was in a sub-tropical marine area and the weather was unstable; therefore she could not invoke the rule of changed circumstances (Lo 2013b, 75). Further examples of the standard of determining foreseeability can be found in previous cases addressing price level changes. In these typical cases, the courts determined that if the price level term has been included in a contract, the rule of

10 11

Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 2470 (2009) (Taiwan). Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 2299 (2009) (Taiwan).

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changed circumstances is generally not applicable (Cheng 2010, 11–12)12 unless the result of a change is unconscionable.13 Based on these court decisions, the interpretation of terms in a contract involving financial products such as structured notes might be an important key to the issue of whether the investment or credit risk thereof is unforeseen. However, even if the rule of changed circumstances can be applied in controversies resulting from the GFC, whether the legal effects of this rule meet the needs of retail investors is another question, one that will be explored in the next section.

16.2.2.5

The Legal Consequences of the Rule of Changed Circumstances

According to Art. 227-2, the legal consequences of applying the rule of changed circumstances appear to be clear, including “increasing or reducing his payment” and “altering the original obligation.” Nevertheless, theoretically there are two tiers of possible legal consequences of applying the rule of changed circumstances. The primary consequence is to allow the court to adjust the contract terms while maintaining its validity. If the adjustment cannot offer a fair result, secondary consequences come into play (i.e., termination or rescission of a contract), which must be decided by the court (Hou 2003, 114). According to past court practices, civil courts in Taiwan decided contract adjustment in cases involving a change of a currency value (Hou 2003, 115). In these cases, the Supreme Court stated that the advantages and disadvantages faced by both parties because of the change of circumstances should be taken into consideration in order to reach a fair adjustment (Hou 2003, 115).14 Other possible means of adjusting contracts include delaying the deadline, changing the type of payments, or invoking Art. 265 of the CC (Hou 2003, 114).15 Only if the adjustment fails to achieve a fair result, as commentators assert, may the court decide to terminate or rescind the contract, and award damages if necessary, based on the principle of good faith (Lin 1963, 20). This two-tier approach is 12

See also the following similar court decisions: Zuigao Fayuan [Sup. Ct.], Civil Division, TaiShang No. 760 (1995) (Taiwan); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 126 (2007) (Taiwan); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 99 (2007) (Taiwan); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang-Geng (Yi) No. 32 (2009); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 59 (2009) (Taiwan). 13 See Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 53 (2008) (Taiwan). 14 See also the following court decisions supporting this ruling: Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 1771 (1958) (Taiwan); Zuigao Fayuan [Sup. Ct.], Civil Division, TaiShang No. 2630 (1997) (Taiwan). 15 Art. 265 states: A person who is bound to perform his part first may, if after the constitution of the contract the property of the other party have obviously decreased whereby the counter-prestation might become difficult to be performed, refuse to perform his part, until the other party has performed his part or furnished security for such performance.

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meant to maintain the validity of a contract as long as possible, as, in accordance with the principles of the CC, the court should not interfere in private transactions unless absolutely necessary (Lo 2013b, 75). However, secondary consequences have yet to be applied in court decisions, so opinion has it that only “adjustment”—the primary consequence—is allowed by the CC (Hou 2003, 114). As one commentator reckons, the only choice provided in Art. 227-2 and the former text of Art. 397 in the CCP is “adjustment,” and it is possible that Taiwanese courts have never tried to broaden this interpretation to cover the secondary consequences of the rule (Hou 2003, 115). It is thus possible to make a temporary argument regarding application of the rule of changed circumstances to a dispute over structured notes: According to the current text of Art. 227-2, it is important to assess the interpretation of an investment or credit risk if the rule of changed circumstances can be applied in the context of the GFC. Even if the rule does apply, the wording of Art. 227-2 and previous court decisions imply that the court may only adjust the payment. It is also necessary for retail investors who took part in transactions involving structured notes to apply to the court in order to benefit from this remedy (Huang 2005, 22–23). The typical issues involved in disputes over structured notes in Taiwan and the legal tools available to address these disputes will be introduced in the next section.

16.3

The Effects of the Global Financial Crisis on the Binding Force of Contracts in Taiwan: Renegotiation, Rescission, or Revision?

16.3.1

The Effects of the Global Financial Crisis on the Binding Force of Contracts in Taiwan: Lessons from Disputes Over Structured Notes

16.3.1.1

Background

Financial institutions in Taiwan began promoting structured notes around 2001; before this time, investors had to purchase these financial products through foreign banks (Lin 2012, 82). In 2003, the Ministry of Finance (“MOF”) announced regulations on disclosing information related to investment-linked insurance policies in order to protect retail investors. In September 2008, Lehman Brothers Holdings Inc. (“Lehman Bros.”) went bankrupt, and all transactions involving structured notes issued or brokered by Lehman Bros. were suspended during the period of bankruptcy protection (Lin 2009, 45). This event set off a wave of lawsuits brought against banks; retail investors argued that the banksʼ sales representatives had not fully disclosed the risks inherent in purchasing structured notes (Lin 2009, 46).

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16.3.1.2

273

Typical Controversies

At the core of the controversies outlined above is what is known as a “Designated Money Trust” (“DMT”), a kind of contract used by banks to sell structured notes to retail investors (Li 2009, 29). Under DMT contracts, investors (clients) retain the right to decide how to use their money, while banks are required to offer financial products that entail a risk level appropriate for each client and to disclose investment risks (Li 2009, 29). In cases where a dispute over structured notes enters into renegotiation procedures or the parties of a DMT contract go to court, the most common type of disputes was the charge that the client lacked information for one reason or another—that the retail investor lacked the necessary knowledge to understand the financial products he or she was offered, that the bank did not fully disclose the necessary information, or that the information was not given at a proper time (Ku 2010, 119). Another frequent cause of disputes was whether banks (or their salespersons) had adequately discharged their fiduciary duties (Ku 2010, 120). Ku (2010) compiled a list of the most common types of disputes (Table 16.1).

16.3.1.3

Temporary Solutions

Before the FCPA was passed, there was no professional authority to handle these kinds of disputes over financial products. The provisional authority in charge was the Bank Bureau of the Financial Supervisory Commission (“FSC”), tasked with resolving cases in which the disputed value was larger than one million New Taiwan Dollars (“NTD”). Other cases involving objects under one million NTD were Table 16.1 The most common types of structured-note disputes (Ku 2010, 119) Types 1.

2.

3. 4. 5. 6.

Facts Retail investors lacked necessary knowledge; some of the investment documents were filled out or signed by bank salespersons Banks did not go through the “Know Your Customer” (“KYC”) process, or did not recommend suitable products according to the risk-bearing levels of respective clients

Banks promoted structured notes as a kind of fixed-income deposits Banks did not disclose that the contract would include a service fee A full set of documents was not given to retail investors Banks did not provide an alert to price or risk changes at a proper time

Legal claims made by investors The contract was obviously unfair and should be invalid 1. Applying Art. 184 of the CC: Banks violated some statutory provisions enacted for the protection of others, so that it is an act of tort 2. Banks did not fulfill their duty of care as prudent administrators The contract was formed due to fraud or a mistake The contract was based on fraud The contract was not yet constituted Banks did not fulfill their fiduciary duties

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handled by either the Securities and Futures Investors Protection Center (“SFIPC”) if a Lehman Bros. product was involved, or the Bankers Association of the ROC (“BAROC”) if non-Lehman Bros. structured notes were involved. All of the above cases that passed procedural review were finally assigned to the Appraisal Committee of Financial Consumer Disputes under the BAROC (“Appraisal Committee”) for substantive review (Wang 2011b, 1980). The temporary mechanism is summarized in Fig. 16.1 below. However, some cases involving structured notes did not fit the legal definition of “consumer disputes” in the Consumer Protection Act (“CPA”), and therefore do not fall under the BAROC’s jurisdiction. In response to public pressure, the BAROC solved the problem by amending its own administrative rules to include any cases referred to it via the appropriate authorities (Wang 2011b, 1980). As of April 1, 2011, 25,214 cases had been reviewed under this provisional system; however, only the first 100 decisions made by the Appraisal Committee were open to the public for reference at that time (Chen 2011a, 211). Therefore, the general public was not in a position to acquire information about the provisional Alternative Dispute Resolution (“ADR”) procedures mentioned above. Furthermore, adjudications made by the Appraisal Committee had no binding force on individual complainants when neither party had agreed to the settlement terms; decisions were only binding on banks under certain conditions (Chen 2011a, 212; Li 2009, 37). At the same time, in order to maintain its neutral position, the Bank Bureau itself could not make any decision on an individual case unless the bank in question had been proved to have violated the law. Thus, in this regard, the BAROC was the actual authority operating the temporary ADR mechanism (Kuo 2012, 52–61).

Is the Disputed Value over 1 Million NTD?

Yes

Apply to the Bank Bureau Under the FSC

No

Does the Dispute Involve Lehman Bros Structured Note Products?

Yes

Apply to the SFIPC

No

Apply to the BAROC

Fig. 16.1 The Pre-FCPA temporary dispute settlement mechanism (Lin 2009, 46)

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16.3.1.4

275

Obstacles to Applying Available Remedies

Even if a temporary mechanism cobbled together in a hurry was available, the uncertainty over what constitutes a valid cause of action was still problematic. Applicable remedies were still scattered among various statutory provisions, and therefore it was difficult for retail investors to identify sufficient and effective remedies (Tsai 2013, 14–17). Theoretically, causes of action for retail investors to seek damages or to adjust a contract term involving structured notes might include the following articles (Tsai 2013, 6–7; see also Chen et al. 2012, 57–78): – Art. 88 and Art. 89 in the CC relate to mistakes in signing contracts. Art. 92 and Art. 93 provide remedies if a contract is fraudulent or was signed under duress; however, it is difficult for retail investors to prove a bank’s mens rea, and these articles provide a limited amount of time for individuals to seek legal redress. – According to Art. 153 in the CC, an investor may claim that the two parties have not reached an agreement on necessary elements in the contract, and thus the contract has not been finalized. – Many investors relied on the Trust Law (Art. 22 and Art. 23) and the Trust Enterprise Act (Art. 22, Art. 23, and Art. 35), or the liability rules governing a contract of mandate in the CC (Art. 535 and Art. 544); however, proof is still needed as to what constitutes a bank’s fiduciary duties in selling financial products, or whether a bank salesperson’s breach of company internal rules constitutes a breach of fiduciary duties as provided under the above laws. – It is also difficult to apply tort law (e.g., Art. 84, Art. 188 and Paragraph 1 of Art. 197 in the CC) because it is difficult to prove a bank’s mens rea. – Art. 247-116 in the CC controls the content of standard form contracts. Retail investors may claim that the standard form contract was so unfair or so much against good faith that it should be declared unenforceable; however, the court may not agree if the complainant signed the contract, as signing personally is usually taken to mean that one agrees to the contract terms. – Retail investors claiming that their contracts were not finalized may encounter difficulties when trying to apply Art. 245-1 of the CC. This article covers precontractual liabilities in cases where a contract is not finalized,17 and requires 16

Art. 247-1 of the CC states:

If a contract has been constituted according to the provisions which were prepared by one of the parties for contracts of the same kind, the agreements which include the following agreements and are obviously unfair under that circumstance are void. (a) To release or to reduce the responsibility of the party who prepared the entries of the contract. (b) To increase the responsibility of the other party. (c) To make the other party waive his right or to restrict the exercise of his right. (d) Other matters gravely disadvantageous to the other party. 17 Art. 245-1 of the CC provides: (1) Even though the contract is not constituted, one of the parties is responsible for the injury caused to the other party who without his own negligence believed in the constitution of the contract when he, in order to prepare or negotiate for the contract, has done either of

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retail investors to prove that financial institutions intentionally concealed or lied about important information before entering into the contract. Nonetheless, once an investor has entered into an agreement with a bank, it is not easy to invoke the article. – The court has rarely agreed that structured notes are “securities” as defined in the Securities and Exchange Act; however, neither has the court agreed that the Securities Investment Trust and Consulting Act applies, as a transaction that per se would be deemed a DMT contract is not a security. – Under the current definition in the CPA, structured notes are not “products” and it is therefore impossible for retail investors to invoke the CPA in structurednote-related disputes. – As discussed in Sect. 16.2.2, Art. 227-2 might theoretically be taken into account to adjust the terms of DMT contracts in structured note cases, but this type of claim is rarely made. This may be due to the strict conditions required by law, which might deter retail investors from applying the rule of changed circumstances in actual cases. It is obvious that there were no sufficient and effective regulations targeting so unusual a financial product as the structured note. In order to prevent similar problems in the future, the FCPA finally went into effect in 2011.

16.3.2

A New Horizon: The Enactment of the Financial Consumer Protection Act

16.3.2.1

Introduction of the Financial Consumer Protection Act

When the FCPA was passed in June 2011, the Taiwanese legislature required that the FSC, as the competent authority of this Act, establish an additional professional authority to handle financial consumer disputes (Lin 2012, 34). This new Act covers the following subjects: – The financial services enterprise (Art. 3).18 This definition includes the following entities: “banking enterprises, securities enterprises, futures enterprises, the following: (a) Hidden in bad faith or dishonestly explained the gravely relevant matter of the contract when the other party inquired. (b) Intentionally or gross negligently spilt out the other party’s secret known or held by himself which the other party has explicitly expressed to be kept in secret. (c) Any other matter obviously against good faith. (2) The claim for the injury in the preceding paragraph shall be extinguished by prescription if not exercised within 2 years. 18 Art. 3 stipulates: (1) The term “financial services enterprise” as used in this Act includes banking enterprises, securities enterprises, futures enterprises, insurance enterprises, electronic stored value card enterprises, and enterprises in other financial services as may be publicly announced by the competent authority. (2) The terms “banking enterprises,” “securities enterprises,” “futures

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insurance enterprises, electronic stored value card enterprises, and enterprises in other financial services as may be publicly announced by the competent authority” (Chiu et al. 2012, 24). – Financial consumers. Art. 419 of the FCPA defines financial consumers as “parties that receive financial products or services provided by a financial services enterprise,” but excludes consumers with a certain level of income or with professional knowledge of investment; therefore, investment companies apparently cannot be consumers under the FCPA (Chiu et al. 2012, 25). – Financial consumer disputes. The FCPA only copes with CC disputes over financial products or services (Art. 5) (Chiu et al. 2012, 26). However, these disputes also include disagreements that arise during contracting or advertising, and other similar disputes between parties that relate to financial products or services (Chiu et al. 2012, 26). Nevertheless, commentators indicated that this legislation merely provided another new channel for seeking relief; it is not a catchall to cover every issue. Obviously, it is not an ultimate solution for every future dispute similar to those over structured notes (Lin 2011, 27).

16.3.2.2

New Causes of Action

The FCPA imposes new obligations on financial service enterprises, particularly regarding new causes of action to be applied in financial consumer disputes. These new obligations include: additional requirements in advertising (Art. 8)20; KYC and enterprises,” and “insurance enterprises” as used in the preceding paragraph shall take the definitions set out in Article 2, paragraph 3 of the Organic Act Governing the Establishment of the Financial Supervisory Commission; provided, however, that securities exchanges, over-the-counter securities exchanges, central securities depositories, futures exchanges, and enterprises in other financial services as may be publicly announced by the competent authority are not included within the meaning of these terms. (3) The term “electronic stored value card enterprises” as used in paragraph 1 means issuers as defined in Article 3, subparagraph 2 of the Act Governing Issuance of Electronic Stored Value Cards. 19 Art. 4 provides: (1) The term “financial consumer” as used in this Act means parties that receive financial products or services provided by a financial services enterprise; provided, however, that it does not include the following: 1. qualified institutional investors; or 2. natural persons or juristic persons with a prescribed level of financial capacity or professional expertise. (2) The meanings of the terms ‘qualified institutional investors’ and ‘prescribed level of financial capacity or professional expertise’ as used in the preceding paragraph shall be prescribed by the competent authority. 20 Art. 8 states: (1) A financial services enterprise, in publishing or broadcasting advertisements or carrying out solicitation or promotional activities, shall not engage in falsehood, deception, concealment, or other conduct sufficient to mislead another party, and shall verify the truthfulness of the content of its advertisements. The obligation it bears to financial consumers shall not

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suitability requirements (Art. 9)21; duties of full explanation and disclosure (Paragraphs 1 and 3 of Art. 10)22; and exercising the due care of a good administrator and fiduciary duty (Paragraph 3 of Art. 7).23 The FCPA also specifies that obligations may not be limited or exempted by prior agreement (Art. 6). The above articles emphasize financial institutions’ obligations to be “honest,” to fully disclose information (especially information about risks related to financial products), and to sell suitable products to financial customers (who are usually far less informed about the products they are buying than financial institutions). To summarize, the FCPA supplies two new causes of action for financial consumers (Wang 2011a): (1) Liabilities for false advertising; and (2) Breach of duties for implementing KYC and the suitability test, as well as the duties of explanation and disclosure. The liability standard is strict liability, as Art. 11 of the FCPA

be less than that indicated in the content of the aforementioned advertisements or in the materials or explanations provided to financial consumers in the aforementioned solicitation or promotional activities. (2) Regulations governing the methods, content, and other requirements pertaining to the advertisements and solicitation or promotional activities of the preceding paragraph shall be prescribed by the competent authority. (3) A financial services enterprise shall not take advantage of education and awareness programs to introduce individual financial products or services. 21 Art. 9 stipulates: (1) Before a financial services enterprise enters into a contract with a financial consumer for the provision of financial products or services, it shall fully understand the information pertaining to the financial consumer in order to ascertain the suitability of those products or services to the financial consumer. (2) Regulations governing what “information pertaining to the financial consumer” must be fully understood and what matters relating to “suitability” must be taken into account, as mentioned in the preceding paragraph, and other matters requiring compliance, shall be prescribed by the competent authority. 22 Art. 10 provides: (1) Before a financial services enterprise enters into a contract with a financial consumer for the provision of financial products or services, it shall fully explain the important aspects of the financial products or services, and of the contract, to the financial consumer, and shall also fully disclose the associated risks…. (3) The explanations and disclosures that the financial services enterprise provides to the financial consumer, as mentioned in paragraph 1, shall be in text or use another method that is fully understandable to the financial consumer; and the content thereof shall include, without limitation, aspects of material significance to the interests of the financial consumer, such as transaction costs, and possible gains and risks. Regulations governing related requirements shall be prescribed by the competent authority. 23 Paragraph 3 of Art. 7 states: A financial services enterprise, in providing financial products or services, shall exercise the due care of a good administrator; for any financial product or service it provides that has the nature of a trust or mandate arrangement, the financial services enterprise shall also bear such fiduciary duty as may be required by applicable legal provisions or contractual stipulations.

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requires that a financial services enterprise bear the liability for paying damages to financial consumers if any of the above duties are breached (Wang 2011b, 1986).24 Placing strict liability on financial services enterprises takes into account their contracting power and the information asymmetry existing between the parties to transactions involving financial services or products. Hence, even if a financial services provider merely plays the role of brokers, it cannot be exempted from liability by claiming that it had insufficient knowledge of the product it provided (Wang 2011b, 1986). These new causes of action may prove to be more direct and powerful weapons for retail investors to use against financial institutions than the remedies that existed before the FCPA came into effect. Furthermore, the FCPA provides other procedural rules to resolve disputes over this kind of financial transaction, as will be discussed in the next section.

16.3.2.3

The Establishment of the Financial Ombudsman Institution

Another important contribution of the FCPA is the establishment of an independent authority that exclusively handles financial controversies: the Financial Ombudsman Institution (“FOI”). The FOI is an answer to previous difficulties where financial consumer disputes were widely dispersed in various courts but not decided under a common guideline, and the pace of courts’ decision-making further compounded the confusion (Tsai 2013, 16). The FOI is a semi-official foundation funded by both regulated private enterprises and government agencies (Lin 2011, 32). The decision-making organ of dispute resolution is the ombudsman committee (Art. 17 and Art. 18), which is composed of 9–25 members. These members include scholars, experts, and other professionals with sufficient practical knowledge. Because the FOI is merely a semi-official foundation, the FCPA vests the committee with the power to ask financial services enterprises to provide necessary documents (Art. 20). However, retail investors still have to make a complaint to those financial services enterprises before they are allowed to apply to the ombudsman committee (Art. 24) (Lin 2011, 32).25 The process of dispute resolution generally goes as follows: after a retail investor brings a complaint to the financial services enterprises concerned, the investor may then file the case with the FOI. The FOI will first review the case to determine whether there is any possibility of reaching a settlement; 24

Art. 11 stipulates:

A financial services enterprise which, by violating any provision in either of the two preceding articles, causes harm to a financial consumer shall bear liability for damages; provided, however, that this shall not apply if the financial services enterprise can prove that occurrence of the harm was not due to: its failure to fully understand the suitability of a product or service to the financial consumer; its failure to provide an explanation, or provision of an explanation that was untrue or incorrect; or its failure to fully disclose risks. 25 Id.

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if not, the ombudsman committee will start the committee hearing procedure. From the moment the case is referred to the FOI, the decision must be made within 3 months (Chiu et al. 2012, 45–46). This system was designed to address disputes in a reasonable and timely manner. The process of dispute resolution is outlined in Fig. 16.2 below. Nevertheless, some problems remain with the design of the current system. The first issue is the protection of a retail investor’s right to choose from various disputeresolution civil procedures. The FCPA leaves room for the two parties to agree freely on whether to be bound by the committee’s decision. The FCPA also devised

A Financial Consumer Dispute

A Retail Investor Complains to the Financial Institution Concerned

Both Parties Agree

A Decision is Made by the Financial Institution

Case Close

If the Retail Investor Is Unsatisfied with the Decision or the Financial Institution Does Not Reply within 30 days

Apply to the FOI within 60 Days

Both Parties Agree

Mediation Proceedings Instituted by the FOI

Case Closed

Where Any Party to the Dispute Does Not Agree to Participate in the Mediation Proceedings, or if the Mediation Proceedings Fail to Achieve a Resolution

Ombudsman Committee Continues Reviewing the Case and Makes a Decision

The Retail Investor is Informed of the Decision

The Retailer Investor Accepts the Decision

The Financial Is the Disputed Value above a Certain Amount?

No

Institution Must Accept the Decision

The Retail Investor Rejects the Decision

Yes

Other Civil Dispute

The Result Depends

The Decision

Resolution Procedures

on Whether the

Confirmed by

Financial

the Court is

Institution Accepts

Binding

Can be Accessed, e.g. Courts

the Decision

Fig. 16.2 Flowchart of dispute resolution after the establishment of the FOI (Lian 2013, 95)

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an “agreement in advance” mechanism: if a financial institution agrees to enter into dispute resolution procedures under the FCPA, either through a written statement before entering into the procedures or in a contract involving the disputed financial products or services, the financial institution will automatically be bound by the ombudsman committee’s decision in cases where the value of the disputed products or services is under a certain amount (Lian 2013, 108).26 However, in cases where there is no agreement in advance or the value of the disputed products or services exceeds “a certain amount,” the financial institution retains the final say on whether or not it will be bound by the FOI’s decision. This is unfair to retail investors with weaker bargaining power (Lin 2011, 36; Kuo 2012, 77). Second, members of the ombudsman committee make decisions by casting votes; this process makes the composition of the committee a crucial variable. The time needed to review a case could be prolonged, as the committee members do not work full-time. However, it is required by law that a committee consist of a wide range of professionals “borrowed” from outside institutions, and therefore full-time committee members may be an option for reform in the future (Lin 2011, 38–39). In order to maintain fairness in their decisions, committee members should be protected from unnecessary liabilities in exercising their authority, which would also require an amendment to the FCPA (Kuo 2012, 79). Neither does the current system offer an internal review mechanism, which might be necessary to maintain the fairness and coherency of the FOI’s decisions (Kuo 2012, 79). Third, the authority of the committee is also important. As it stands, the FCPA does not impose a real duty on financial services enterprises to cooperate with the committee, such as to provide necessary documents. Art. 20, for example, allows the committee to ask financial institutions to provide necessary documents, but it does not grant the committee the power to impose punishment for a failure to cooperate, thus further weakening the committee’s authority. Therefore, penalties for non-compliance need to be clearly codified in the FCPA in the future (Lin 2011, 39). Furthermore, based on the limited range of subjects covered in the FCPA, it appears that different authorities continue to regulate other relevant financial products or services. For example, in one court case involving investment-linked insurance policies, the financial product in question was in fact linked to structured notes; however, whether this case could have been reviewed by the FOI under the current provisions of the FCPA is unclear (Wang 2011b, 1989). One commentator indicated that this conundrum substantiates the necessity of integrating the regulation of all financial-consumer-related cases under one law, thus providing full protection to financial consumers as the U.S. Consumer Financial Protection Bureau (“CFPB”) does (Wang 2011b, 1990).

26

Please note that “a certain amount” is determined according to product types. For example, the threshold amount is 1 million NTD for investment-linked products or services, while the amount for non-investment-linked ones is 0.1 million NTD (Financial Supervisory Commission 2012).

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Conclusion

Concepts and Regulations similar to the rule of changed circumstances have long been applied in Taiwan, particularly in efforts to address the changes in the economic environment that have occurred during the second half of the twentieth century, despite the fact that the rule was not officially codified in the CC until 1999. However, the elements of Article 227-2 of the CC still leave it to the courts to establish a fixed and clear standard for applying the rule and to furnish guidance on the possible legal consequences of doing so. Based on previous court practices, it should be possible to apply this rule in financial-crisis-related disputes, but such cases are rare. Obviously, among the disputes that arose during and after the 2008 GFC, disputes over structured notes deserve special attention, especially due to the bankruptcy of Lehman Bros. These particular disputes illustrate how extremely complicated the financial market is without proper and clear regulation. The multitude of suits brought in the wake of the GFC illuminated the chaotic state of the legal remedies available to complainants. The CC and other special laws provide a number of possible causes of actions, but few of them are well-suited to address disputes over financial products or services. Although Article 227-2, which governs the rule of changed circumstances, should have been applied as a remedy, it was rarely referred to in such cases. This may be because the requirements of applying the rule of changed circumstances were difficult to meet and the legal consequences of the rule were not ideal for retail investors, or because retail investors possessed insufficient legal knowledge to apply the rule. In order to end such disputes over structured notes, a new set of rules and regulations under the FCPA was eventually passed in 2011. Nevertheless, though the FCPA appeared to provide additional protection to financial consumers, it has not yet established an exclusive system to cover all financial consumer disputes. There is still room for the FCPA to be further improved and refined; we must continue to draw knowledge and experience from the designs of foreign professional authorities for consumer financial protection, such as the CFPB in the United States, as well as other practices used in different dispute-resolution civil procedures in Taiwan. Acknowledgement I thank Prof. Wen-Yeu Wang of National Taiwan University and Prof. YenLin Agnes Chiu of Fu Jen Catholic University, Taiwan for their comments and suggestions. I also thank Yen-nung Wu for outstanding research assistance. I acknowledge research funding from the Ministry of Science and Technology of Taiwan (MOST 103-2919-I-002-004-A1) and Multiculturalism in Monsoon Asia Program at National Tsing Hua University, Taiwan. Any remaining errors or omissions are, of course, my own.

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References Chen, C.-H. 2011a. Lian dong zhai jiu fen de si fa shi jian—2009 zhi 2010 nian jian xiang guan pan jue zhi yan jiu (The structured notes fiasco in the courts: A study of relevant judgments between 2009 and 2010). Zhong Yan Yuan Fa Xue Qi Kan (Academia Sinica Law J) 10: 161–221. Chen, T.-F. 2011b. Min fa gai yao (Introduction to the Taiwanese civil code), 7th ed. Taipei: Angle Publishing. Chen, K.-H., P.-H. Li, C.-L. Cho, and H.-M. Hsu. 2012. Jin rong xiao fei zhe bao hu fa jie xi (Analysis of the financial consumer protection act). Taipei: Hsin Hsueh Lin. Cheng, M.-C. 2010. Wu jia bian dong tiao zheng zhi qing shi bian geng yuan ze shi yong (How the rule of changed circumstances applies on price level changes). Wan Guo Fa Lu Shuang Yue Kan (FT Law Review) 174: 9–15. Chiu, C.-T., I.-H. Sheng, and H.-L. Ke. 2012. Jin rong xiao fei zhe bao hu fa yu an li jie xi (Cases & analysis of the financial consumer protection act). Taipei: Angle Publishing. Financial Supervisory Commission. 2012. Notice of financial supervisory commission: Executive yuan no. 10000423911. Executive Yuan Gazette 18:324. Hou, C.-C. 2003. Min fa qing shi bian geng yuan ze zhi yan jiu (A study on rules of changed circumstances in civil law). Fa Xue Cong Kan [China Law J] 191: 107–130. Huang, K.-C. 2005. Qing shi bian geng yuan ze shi fou bi xu yi qi su zhi fang shi zhu zhang (Should a claim on the rule of changed circumstances necessarily be made via an action). Yue Dan Fa Xue Jiao Shi (Taiwan Jurist) 29: 22–23. Ku, H-I. 2010. Lian dong zhai zheng yi zui xin fa yuan pan jue po xi—yin xing shou tuo ren yi wu zhi jian shi (A study on the most updated court decisions on structured-note disputes—A survey of banks’ fiduciary duties). In Hou ECFA Shi Zhan Tsai Jin Fa Lu (Post–ECFA financial laws), ed. LCS and Partners, 111–130. Taipei: Shu Ch’uan. Kuo, T.-W. 2012. Jin rong xiao fei zheng yi jie jue ji zhi zhi yan jiu—Wo guo fa yu ying guo fa zhi bi jiao (The dispute resolution mechanism of financial services: A comparative study between Taiwan and the United Kingdom). Zhong Zheng Tsai Jing Fa Xue (Chung Cheng Financial and Economic Law Review) 4: 47–86. Li, L.-C. 2009. Jin rong shang pin xiao shou jiu fen yu qiu chang an li fen xi: Yi lian dong shi zhai quan xiao shou wei zhong xin (An analysis of disputes in sales of financial products and relevant cases—Centered in structured notes). Quan Guo Lu Shi (Taiwan Bar J) 13(8): 25–43. Lian, C.-C. 2013. Jin rong xiao fei zhe bao hu fa yu ping yi an li jie xi (The financial consumer protection act and case studies). Taipe: Taiwan Academy of Banking and Finance. Lin, J.-Y. 1963. Qing shi bian geng yuan ze zhi li lun yu shi ji xu (The theory and practice of the rule of changed circumstances (II)). Fa Lu Ping Lun (Chas Yang Law Review) 29(7): 19–23. Lin, C.-E. 2000. Qing shi bian geng yuan ze zhi zai tan tao (Rethinking the rule of changed circumstances). Tai Wan Ben Tu Fa Xue Za Zhi (Taiwan Law Journal) 12: 57–76. Lin, Y.-T. 2009. Cong lei man shi jian zhi chu li jian shi wo guo jin rong xiao fei zheng yi zhi jie jue ji zhi (Reviewing current financial consumer dispute resolution mechanisms after the Lehman Brothers bankruptcy). Quan Guo Lu Shi (Taiwan Bar J) 13(8): 45–59. Lin, Y.-T. 2011. Xin jin rong zheng duan de you xiao jie jue—Ti dai xing jin rong zheng duan jie jue ji zhi guo qu, xian zai yu wei lai (Effectively resolving new financial disputes—The past, present and future of alternative dispute resolution of financial disputes). Yue Dan Fa Xue Za Zhi (The Taiwan Law Review) 199: 26–40. Lin, C.-H. 2012. Jin rong xiao fei zhe bao hu fa zhi li lun yu shi wu (The Financial Consumer Protection Act: Theory and practice). Taipei: Taiwan Law Journal. Lo, C.-T. 2013a. Qian lun mei guo fa shang qi yue mian ze shi you yu wo guo qing shi bian geng yuan ze zhi bi jiao (shang) (An introduction to contract defenses in US contract law and the rule of changed circumstances in Taiwanese law (Part I)). Wan Guo Fa Lu Shuang Yue Kan (FT Law Review) 186: 68–79.

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Lo, C.-T. 2013b. Qian lun mei guo fa shang qi yue mian ze shi you yu wo guo qing shi bian geng yuan ze zhi bi jiao (xia) (An introduction to contract defenses in US contract law and the rule of changed circumstances in Taiwanese law (Part II)). Wan Guo Fa Lu Shuang Yue Kan (FT Law Review) 187: 68–78. Peng, F.-Z. 1984. De duo jin dai min shi fa shang guan yu qing shi bian geng yuan ze zhi li fa yu xue shuo zhi yan jiu (Theories of and legislation relating to the rule of changed circumstances in the modern German Civil Code). Zheng Da Fa Xue Ping Lun (Chengchi Law Review) 30: 159–203. Tsai, C-H. 2013. Jin rong xiao fei zhe bao hu fa shang shi ti gui ding zhi xing si: Cong lian dong zhai pan jue zhi shi zheng guan cha chu fa (Meditations on liability rules in the Financial Consumer Protection Act: An empirical perspective on structured-note cases). Unpublished manuscript, Institute of Law for Science and Technology, National Tsing Hua University, HsinChu, Taiwan. Wang, C.-C. 2011a. Jin rong xing xiao zhi kong zhi ji fa zhi bian ge: Jin rong xiao fei zhe bao hu fa zhi shi yong ji jie shi (The control of financial marketing and legal reform: Application and interpretation of the financial consumer protection law). Wan Guo Fa Lu Shuang Yue Kan (FT Law Review) 179: 2–10. Wang, W.-Y. 2011b. Developments in the law: A review of financial regulation: Global perspective and local reexamination. Tai Da Fa Xue Lun Cong (NTU Law J) 40: 1945–1991.

Chapter 17

Certainty Over Clemency: English Contract Law in the Face of Financial Crisis Horace Yeung and Flora Huang

Abstract This Chapter has the objective to consider the legal implications of negative economic trends under English contract law in the aftermath of the global Financial Crisis of 2007–2008. Unlike other jurisdictions, most notably in civil law countries, the English position in the law governing a fundamental change in circumstances has remained narrow, that is, no relief will be granted unless it is an exceptional situation. The English courts deal with the issue either by the doctrine of frustration or through construing contractual force majeure provisions. Following the crisis, indeed there have been an increasing number of cases going down these avenues. Apart from relying on frustration or force majeure clause, another emerging phenomenon is that there has been a growth in allegations of misrepresentation and therefore requesting a rescission of contract. In either case, the aim of claimants is apparently trying to bring the contractual obligations to an end.

17.1

Introduction

Although originated in the US, the Financial Crisis has had a widespread impact across the globe. Starting from the financial markets, eventually virtually all sectors in the society have been affected, no matter mega sized banks like Lehman Brothers or ordinary citizens like you and me. Accordingly, faced with a fundamental change of circumstances, that is unforeseen and unforeseeable at the time of making and signing the contract before the crisis, it might be inevitable for certain contractual

This Chapter was based on a much shorter national report solely prepared by Horace Yeung for the 14th International Congress of Comparative Law, 20–26 July 2014, at the University of Vienna, Austria. Horace Yeung would like to thank his co-author (also colleague at Leicester) Flora Huang for her input by substantially extending the discussions in the national report to form a full Chapter in this edited volume, as well as Prof. Rona Serozan for coordinating the Congress session on the topic ‘The Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision’ as the general reporter. The usual disclaimer applies. H. Yeung (*) • F. Huang School of Law, University of Leicester, Leicester, UK e-mail: [email protected]; [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_17

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parties to have second thoughts about their contractual obligations. As a result, it is crucial to examine the relevant area of English contract law in this regard. As put by Thomas (2011: 23), there have been ‘[emerging] English cases…in which the legal implications of negative economic trends have been argued’ but English courts have ‘upheld a position which places certainty above clemency in commercial contracts’ by maintaining the traditional position for making exceptions to adverse economic circumstances. This Chapter has the objective to consider the legal implications of negative economic trends under English contract law in the aftermath of the Financial Crisis. In the next section, the Chapter will explore the impact of the crisis on the UK briefly. The crisis did not only lead to the bail-out of banks such as Royal Bank of Scotland, but also created hardship on small and medium‐sized enterprises and ordinary citizens through the drying up of credits and increasing unemployment. Then, in Section Three, it will proceed to look at the principle of pacta sunt servanda or ‘sanctity of contracts’ after the crisis. It appears that other jurisdictions notably those in civil law countries would provide more leeway regarding a change of circumstances. In contrast, the UK position remains a strict adherence to the principle enshrined in Paradine v Jane.1 Afterwards, in the following sections, this work will examine the bases for deviating from pacta sunt servanda, namely frustration and force majeure clause, the conditions and appearances of the exceptional circumstances requires, and the related legal consequences. Finally before the conclusion, the Chapter will consider a parallel development in English contract law in which contractual parties might invoke misrepresentation with a view to finding an escape route through rescission of contracts.

17.2

Impact of the Financial Crisis on the UK

Following the Financial Crisis which began in 2007, different governmental bodies have tried to find out the causes, impact and remedies of it with a view to preventing the same from happening again (Financial Services Authority 2009; High Level Group of Financial Supervision in the EU 2009; Financial Crisis Inquiry Commission 2011). The Financial Crisis Inquiry Commission (2011: xvii) in the US alleged that the increasing sophistication of the financial sector had set a perfect scene for the crisis. From 1978 to 2007, the amount of debt held by the financial sector soared from USD 3 trillion to USD 36 trillion, outgrowing the rise of gross domestic product (GDP) by more than a double during the same period. Similarly by 2005, the ten largest commercial banks in the US held 55 % of the industry’s assets, again more than double the level held in 1990. On the eve of the crisis, financial sector profits constituted 27 % of all corporate profits in the US, up from 15 % in 1980. As the High Level Group of Financial Supervision in the EU (2009: para. 1) indicated, although the crisis had originated primarily in the US, the crisis subsequently went 1

[1647] Al 26; 82 ER 897.

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global, deep and contagious. From 2007 to 2009, falls in global stock markets resulted in losses in the value of the listed companies of more than EUR 16 trillion, equivalent to about 1.5 times the GDP of the EU. The Financial Crisis was triggered by the burst of a widespread housing bubble in the US. Pressure to promote home ownership for low income households led to unregulated or insufficiently regulated mortgage lending (High Level Group of Financial Supervision in the EU 2009: para. 7). Subprime mortgage lending in the US rose significantly from USD 180 billion in 2001 to USD 625 billion in 2005. Housing market problems were then recognised as widespread in UK, US and other countries, as house prices fell and supply of credit dried up (Financial Services Authority 2009: 27). A number of financial institutions went into trouble, including Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, AIG and Washington Mutual in the US, Northern Rock, Halifax Bank of Scotland (HBOS), Bradford & Bingley and Royal Bank of Scotland (RBS) in the UK, as well as those outside of the US and UK such as Icelandic banks. Indeed, the crisis reached its climax on 15 September 2008 when Lehman Brothers filed for bankruptcy and destabilised the global banking system. According to the investigation by Buckley (2011: 196), the downfall of the UK banks seemed to have their own specific reasons. Northern Rock was engaging in dangerous business practice by selling on mortgages for repackaging, in which this market subsequently stalled. Similarly, HBOS invested heavily in credit default swaps and collateralised debt obligations, with a large exposure to US mortgages. On the other hand, for RBS, the bank suffered most from an aggressive acquisition strategy, as shown in the hostile takeover of NatWest in 1999 and participation in the consortium of break-up of ABN Amro in 2007. The end result was that all these banks had to be rescued by the government (HM Treasury 2012). On 17 February 2008, the UK Treasury announced that Northern Rock would be taken into public ownership. Northern Rock was nationalised the following day. For this, the Banking (Special Provisions) Act 2008 was passed on 21 February to provide the government with powers to nationalise banks. Likewise, on 13 October 2008, the Chancellor announced GBP 37 billion of capital support for UK banks. The Treasury acquired holdings of GBP 20 billion in RBS, GBP 12 billion in HBOS and GBP 5 billion in Lloyds TSB. Some banks were rescued by being taken over by other banks. For example, both Alliance & Leicester and Bradford & Bingley are now part of the Spanish bank group Santander. It was not just the banks which suffered, but other stakeholders as well. Basically all taxpayers in the UK had to foot the bill when the government nationalised the aforementioned banks and for all the pay-out under the Financial Services Compensation Scheme.2 Furthermore, according to a research conducted by the 2

The scheme was set up under the Financial Services and Markets Act 2000, becoming operational on 1 December 2001. It is the UK’s compensation fund of last resort for customers of authorised financial services firms. It will pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default. The scheme covers business conducted by firms authorised by the Financial Conduct Authority and the

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Centre for Small and Medium‐Sized Enterprises of the University of Warwick, the crisis and ensuing recession have led to both a tightening of loan approval thresholds and an increase in default risk (Fraser 2010). In terms of the availability and cost of finance for small firms, for instance, term loan rejections increased to 16.3 % in 2008 from 6.1 % in 2004. As regards the overall impact of the crisis on the UK economy, the Bank of England revealed that in the period of around 2008–2010, UK’s output in terms of GDP fell by 6 % (Faccini and Hackworth 2010). Employment fell by almost 2 % in the same period with a drop in average working hours to a similar degree. Trade was adversely affected in light of the fact that its level in 2010 remained 5 % below that of 2008 and 17 % below what it would have been had it continued to grow at its pre-crisis average rate (Domit and Shakir 2010). The vulnerable was especially affected, Banks and colleagues (2012) examined the effect of the crisis on the finances of those aged 50 and over in England and they found that many of these households had experienced a significant wealth shock. Given that the society was being hit from all angles and at an unprecedented scale, there is no wonder why various parties in recent years have attempted to avoid contractual obligations, in particular by alleging frustration or the application of a force majeure clause, in cases such as Classic Maritime Inc v Lion Diversified Holdings,3 Tandrin Aviation Holdings v Aero Toy Store4 and Gold Group Properties v BDW Trading (formerly known as Barratt Homes Limited).5 In Classic Maritime, Classic brought the action against Lion under a written guarantee in 2008 by which it had guaranteed the obligations of its subsidiary, Limbungan, under a Contract of Affreightment (COA). Lion raised two defences to the claim. One of which was that performance of the COA was frustrated in part, inasmuch as it was unable to discharge the ships on two nominated voyages in Malaysia, or that performance of those shipments was excused under the force majeure clause in the COA. In Tandrin Aviation, the action concerned the sale by Tandrin to Aero of a new Bombardier executive jet aircraft. However, subsequently, Aero failed to participate in the predelivery contractual procedures and in alleged breach of contract failed to accept Tandrin’s tendered delivery of the aircraft in 2009 or pay the balance of the purchase price. Among Aero’s defences, one of which was that the company had been entitled to rely on the force majeure clause, contained in Clause 7.17 of in the aircraft sale agreement. Finally in Gold Group, the dispute between the parties arose out of a development agreement in 2007 relating to a substantial site in Surrey. The intention was that Barratt would develop the site by building a large number of houses and flats, which would then be sold on long leases, with Gold Group and Barratt sharing the revenue generated by the sales. In the event, almost nothing happened on site between 2008 and 2009. Barratt argued that, because they had received advice that a fall in the property market meant that those minimum prices would not Prudential Regulation Authority. European firms (authorised by their home state regulator) that operate in the UK may also be covered. 3 [2009] EWHC 1142 (Comm). 4 [2010] EWHC 40. 5 [2010] EWHC 323 (TCC).

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be achieved, they were not obliged to start work and/or the agreement was frustrated. In all these cases, attempts to rely on the Financial Crisis as a ground of frustration or for invoking force majeure were rejected.

17.3

Principle of Pacta Sunt Servanda amid the Global Financial Crisis

English contract law is derived from four legal sources: common law, statute, international convention and EU law (Beale 2012: para. 1–002). Among which, the common law (including equity) provides the fundamental rules governing all aspects of the law applicable to contracts generally (Beale 2012: para. 1–003). Unlike other branches of law such as company law which has a ‘Companies Act’, English law has not adopted a contract law code nor a ‘Contract Act’. Yet, statute has become increasingly important in governing certain specific aspects of contracts. Examples include the Unfair Contract Terms Act 1977 to control exemption clauses and certain related classes of unfair terms, the Law Reform (Frustrated Contracts) Act 1943 to govern the consequences of frustration, and the Consumer Credit Act 1974 for contracts of consumer credit. The foundation of the principle of pacta sunt servanda in English contract law was laid down in the case Paradine v Jane.6 In this case, the claimant lessor claimed rent due from the defendant lessee. The defendant argued that, as she had been evicted from the land by Prince Rubert, a German Prince who was an enemy to the King, and she could not take the profits, therefore she ought not to be liable for the rent. The court rejected the plea from the defendant. She was still held liable for the rent. The case denied the existence of a doctrine of excuse for non-performance. According to the judgement: [W]hen the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.7

Such a principle of sanctity of contract has barely changed in the face of the recent Financial Crisis. According to the Turner Review which investigated the causes of the crisis and made recommendations on the changes in regulation, the regulatory debates have largely been centred on the capital adequacy, accounting and liquidity of financial institutions, as well as the institutional and geographic coverage of regulation (Financial Services Authority 2009). To consider whether there can be an escape route for contracting parties adversely affected by the crisis, there is a need to examine the rules of English law governing changes of circumstances. Indeed around the world, various attempts have been made by scholars to explore the approaches of various jurisdictions in this regard. 6 7

[1647] Al 26; 82 ER 897. Paradine v Jane [1647] Al 26; 82 ER 897.

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Ridder and Weller (2014) indicate that whilst pacta sunt servanda or the ‘sanctity of contracts’ is a fundamental principle of private law, it can be overcome in cases of impossibility, force majeure, hardship or unforeseen circumstances. Using Germany as an example, they point out that the two main provisions of Section 275(2) and Section 313 German Civil Code are the answer from German contract law. Firoozmand (2007), in his article comparing the approaches in France, Germany, the US and Muslim countries, reveal that the Islamic doctrine of Quwa Qahira may be comparable to concepts such as force majeure, imprevisión,8 frustration, commercial impracticability and Wegfall der Geschäftsgrundlage.9 Rösler (2007) believes that English law is roughly placed between the Germanic and French legal solutions in a sense that it is not as conservative as France which rejects the concept of imprevisión but at the same time not as radical as Germany which allows the courts to revise the contract. In the book by Uribe (2011) which compares European and Latin American jurisdictions as well as American contract law, he stresses the recognition of a change of circumstances as a remedy for the affected party in the name of justice and fairness as a counterbalance to the general principle of freedom of contract. Also it is equally important to ensure that a proper set of remedies is available for the affected parties, including but not necessarily limited to, the duty to renegotiate and the revision of the contract by the courts. Some jurisdictions might have gone far enough to respond to the crisis. In the Czech Republic, the new Czech Civil Code which entered into force on 1 January 2014 entails provisions on a hardship clause and its legal effects (Fiala and Selucká 2014).10 In contrast, for common law countries, major market changes are rarely, if ever, the basis of avoidance of a contractual obligation (Crystal and Giannoni-Crystal 2010). In the US, the Restatement (Second) of the Law of Contracts and the Uniform Commercial Code both reflect this ‘principle of market risk’ and reported case law dealing with the effect of the economic crisis on contracts are quite uniform in applying the market risk principle to deny relief (Crystal and Giannoni-Crystal 2010). Thomas (2011: 22–23) has tried to draw a line for the distinction of common law and civil law jurisdictions in this regard by suggesting that the latter typically provide ‘a basis on which a contract may be adjusted to reflect significant changes to the economic equilibrium of the contract’, whereas English law ‘has always been regarded as at the upper end of the spectrum in terms of rigour in dealing with claims for relief due to adverse economic circumstances’. In other words, the English courts have upheld a position which places certainty above clemency in commercial contracts.

8

Articles 1147 and 1148 of the French Civil Code. The German approach. 10 Sections 1764–1766 of the Czech Civil Code No 89/2012 Coll. 9

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Bases for Deviating from Pacta Sunt Servanda

In the view of Treitel (2014: para. 1–001), the major issue here lies in a conflict between two fundamental principles: pacta sunt servanda and rebus sic stantibus. The former insists on the literal performance of contracts irrespective of events occurring after the contract. In contrast, the latter realises the situation that contractual obligations may be discharged by supervening events where these have brought about a change of circumstances so significant as to destroy the basic assumption(s) the parties contemplated initially. The same tension can also be illustrated in J Lauritzen AS v Wijsmuller BV,11 Bingham LJ on the one hand recognised ‘the rigour of the common law’s insistence on literal performance of absolute promises’ but on the other hand the doctrine of frustration has evolved ‘to give effect to the demands of justice, to achieve a just and reasonable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances’.12 According to McKendrick (2012: 701), the reference made by Bingham LJ is an important one and there are several elements which can be taken note of: first, the common law rule was a very strict one which was generally reluctant to absolve a contracting party from the consequence of his failure to perform his contractual obligations; second, the effect of the doctrine of frustration is to provide such an absolving power; third, the doctrine only applies where there has been a ‘significant change in circumstances’; finally, the doctrine does not apply where express provision, generally known as a force majeure or hardship clause, is in place to regulate events which may impede or hinder performance of the contract. Accordingly, the two subsections below will seek to explore each of these two mechanisms, namely the doctrine of frustration and a force majeure or hardship clause respectively.

17.4.1

Frustration

The rules of English law governing changes of circumstances are in some respects more limited than those in many civil law systems (Cartwright 2013: 252).13 A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract (Beale 2012: para. 23–001). It is worth noting that in English law, there is no such thing as partial or temporary frustration, that is, the contract is either frustrated or 11

[1990] 1 Lloyd’s Rep. 1. See also Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [1926] A.C.497 at 510. 12 [1990] 1 Lloyd’s Rep. 1 at 8. 13 See also the discussions above in Part 14.3.

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remains in force unless the obligations are ‘severable’, as illustrated in Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association.14 The doctrine of frustration was established in its present form in Taylor v Caldwell.15 The case was about a contract for the use of a music hall which was destroyed by fire before the time for performance. Both parties were excused from performance of their obligations under the contract. Blackburn J said: Where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.16

This was said to be based on an implied term in the contract, given that it is virtually impossible for contracts to contain express provision for every possible eventuality which might interfere in the contractual performance. A more liberal approach was also witnessed in Jackson v Union Marine Insurance17 and Krell v Henry.18 However, subsequent cases in the twentieth century adopted a restrictive approach, albeit still broader than the strict approach taken in Paradine v Jane.19 The courts are generally reluctant to invoke the doctrine of frustration. Lord Roskill in The Nema said that the doctrine of frustration was ‘not lightly to be invoked to relieve contracting parties of the normal circumstances of imprudent bargains’.20 The modern test for frustration was set out in the speech of Lord Radcliffe in Davis Contractors Ltd v Fareham UDC: [An implied term of the contract] is in line with the tendency of English courts to refer all the consequences of a contract to the will of those who made it. But there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticised as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves.21

This construction theory approach rejects the artificiality of the implied term approach and requires an assessment of the events that have occurred in the light of the agreed terms of the contract in order to determine whether the agreed performance 14

[2010] EWHC 2661 (Comm). (1863) 3 B&S 826. 16 Taylor v Caldwell (1863) 3 B. & S. 826 at 833–34. 17 (1874) LR 10 CP 125. 18 [1903] 2 KB 740. 19 See for example, Davis Contractors Ltd v Fareham UDC [1903] UKHL 3 and J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep. 1. 20 The Nema [1982] AC 724 at 752. 21 Davis Contractors Ltd v Fareham UDC [1956] UKHL 3. 15

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is not impossible or of a fundamentally different nature (Poole 2012: 455–56). To decide whether or not a contract has been frustrated, a ‘multi-factorial’ approach has been applied by more recent authority to take account of all of the facts and circumstances of the case.22 Examples of factors include: Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.23

The construction theory is supported in the Gold Group case, as per Coulson J, ‘In any situation where one party to a contract alleges that the contract has been frustrated, the proper construction of the contract will be the necessary startingpoint of the Court’s investigation.’24 This can be made in a sharp contrast to Blackburn J’s reference in Taylor v Caldwell to ‘an implied condition that the parties shall be excused’.25 As a result, the implied term theory is now generally rejected.26

17.4.2

Express Term in the Contract

If a contract contains a provision dealing with the situation of a change in circumstances, it is not a case of frustration. It is simply a matter of giving effect to the provision of the contract. Examples are a force majeure clause or a hardship clause. The expression ‘force majeure clause’ is normally used to describe a contractual term by which one (or both) of the parties is entitled to cancel, the contractor is excused from performance of the contract, in whole or in part, or is entitled to suspend performance or to claim an extension of time for performance, upon the happening of a specified event or events beyond his control (Beale 2012: para. 14–140). An example of force majeure clause is found in Channel Island Ferries Limited v Sealink UK Limited27:

22

Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547, [2007] 2 Lloyd’s Rep. 517. 23 Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547, [2007] 2 Lloyd’s Rep. 517. 24 Gold Group Properties v BDW Trading (formerly known as Barratt Homes Limited) [2010] EWHC 323 (TCC) at [45]. 25 Taylor v Caldwell (1863) 3 B. & S. 826, 833–34. 26 See also, for example, Shell (UK) Ltd v Lostock Garage Ltd [1976] 1 W.L.R. 1187 and Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407. 27 [1988] 1 Lloyd’s Rep. 323.

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A party shall not be liable in the event of nonfulfilment of any obligation arising under this contract by reason of Act of God, disease, strikes, Lock-Outs, fire, and any accident or incident of any nature beyond the control of the relevant party.

On the other hand, a hardship clause will generally define what constitutes ‘hardship’ and will lay down a procedure to be adopted by the parties in the event of such hardship occurring (McKendrick 2013: 256–7). Where there is a force majeure clause in the contract, that clause will usually be enforced by the courts (Poole 2012: 454). At the same time, the court is very cautious in a sense that the clause is ‘not to be lightly involved’ since it operated ‘to kill the contract’.28 In the absence of a force majeure clause ‘the doctrine of frustration operates within narrow confines’.29 In reality, the courts have tried to restrict the operation of such clauses by adopting a process of narrow construction of words (Treitel 2014: para. 12–009). In Metropolitan Water Board v Dick Kerr,30 by a contract made in July 1914, a firm of contractors contracted with a water board to construct a reservoir to be completed within 6 years, subject to a proviso that if by reason of (inter alia) any difficulties, impediments, or obstructions whatsoever and howsoever occasioned the contractors should, in the opinion of the engineer, have been unduly delayed or impeded in the completion of the contract it should be lawful for the engineer to grant an extension of the time for completion. By a notice given by the Ministry of Munitions in February 1916, in exercise of the powers conferred by the Defence of the Realm Acts and Regulations, the contractors were required to cease work on their contract and they ceased work accordingly. The contractors claimed that the effect of the notice was to put an end to the contract. It was held that the contract was frustrated in spite of the fact that the events which had happened were literally within the clause which provided for delays. The justification of the court was that, the hardship clause did not cover the case ‘in which the interruption is of such a character and duration that it vitally and fundamentally changes the conditions of the contract, and could not possibly have been in the contemplation of the parties to the contract when it was made’. As a result, the general ‘catch-all’ words of a typical force majeure clause will not enable that party to excuse its non-performance in times of recession or the collapse of the world’s financial markets by alleging economic or funding difficulties (Poole 2012: 465). Such circumstances would need to be expressly specified in the clause for it to have an effect.31

28

J. Lauritzen A/S v Wijsmuller B.V. [1990] 1 Lloyd’s Rep. 1. As per Coulson J in Gold Group Properties v BDW Trading (formerly known as Barratt Homes Limited) [2010] EWHC 323 (TCC) at [68]. 30 [1918] AC 119. 31 In Tandrin Aviation Holdings v Aero Toy Store [2010] EWHC 323 (TCC), the principal defence which Aero has advanced to seek to justify its refusal to accept delivery of the aircraft was that the alleged ‘unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets’ triggered the force majeure clause in the agreement. 29

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Conditions for the Acceptance of the Exceptional Fact

Having discussed the two general mechanisms in English contract law governing a change in circumstances, this section and the next will explore some substantive issues in invoking the doctrine of frustration and/or the force majeure clause in a contract.

17.5.1

Foreseeability

Apparently the doctrine of frustration ought not to apply to an event which is within the contemplation of the parties at the time the contract is concluded. This proposition has been challenged by Lord Denning in The Eugenia: It has frequently been said that the doctrine of frustration only applies when the new situation is “unforeseen” or “unexpected” or “uncontemplated,” as if that were an essential feature. But it is not so. The only thing that is essential is that the parties should have made no provision for it in their contract. The only relevance of it being “unforeseen” is this: If the parties did not foresee anything of the kind happening, you can readily infer they have made no provision for it: whereas, if they did foresee it, you would expect them to make provision for it. But cases have occurred where the parties have foreseen the danger ahead, and yet made no provision for it in the contract.32

Rix LJ summarised the position on foreseeable and foreseen events as follows: In a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration. Even events which are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs when an event such as a strike, or a restraint of prices, lasts for so long as to go beyond the risk assumed under the contract and to render performance radically different from that contracted for. However…the less that an event, in its type and its impact, is foreseeable, the more likely it is to be a factor which, depending on other factors in the case, may lead on to frustration.33

However, two questions may arise: firstly, whether the allegedly frustrating event has to be foreseen or foreseeable by one party only or both parties. Many dicta support the view that frustration is excluded where the event was foreseen or foreseeable by both parties (Treitel 2014: paras. 13–007 & 13–008). However, sometimes it is not necessary. When the event could have been foreseen by the party claiming to be discharged, but not by the other party, the doctrine of discharge could still be excluded.34 Secondly, there is a question of whether the degree and extent of foreseeability should be taken into account. For example in Krell v Henry,35 the defendant agreed to hire from the plaintiff a flat on which days it had been announced that 32

The Eugenia [1964] 2 QB 226 at 239. Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547, [2007] 2 Lloyd’s Rep. 517. 34 Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch. 274. 35 [1903] 2 KB 740. 33

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the coronation processions would take place. However, there was a good deal of contemporary evidence which suggested that it was ‘foreseeable’ that King Edward VII might fall ill on the date fixed for his coronation (Treitel 2014: para. 13–012). In The Eugenia,36 charterers took a vessel on a time charterparty for a ‘trip out to India via Black Sea’ including a war clause forbidding the charterers to bring her within a dangerous zone without the owners’ consent. The vessel was trapped in the Suez Canal, which was a dangerous zone when she entered it. On her release the charterers claimed that the contract was frustrated and the owners treated this as a repudiation and claimed damages. At that time, mercantile men realised that there was a risk that the Suez Canal might be closed owing to the Suez Crisis of that year, and the agents of the parties indeed appreciated the risk by making suggestion for dealing with it (Treitel 2014: para. 13–014).

17.5.2

Risk Allocation

Poole (2012: 466–69) has put forward two scenarios where in one there is express risk allocation, where in another the foreseeable risk is not provided for in the contract. In the first scenario, the position was explained by Tomlinson J in The Florida37: [A] clause may give one or other party certain rights or protections in certain circumstances, but those circumstances can still result in frustration of the contract unless all of their effects on the rights and liabilities of both parties are dealt with comprehensively.

In Bangladesh Export Import v Sucden Kerry SA,38 Bangladesh Export Import entered into contracts with Sucden Kerry for the import of sugar into Bangladesh. Import licences were required. The contract contained a term which said that licences were to be obtained by Bangladesh Export Import and that the inability to obtain an import licence shall not be justification for declaration of force majeure. Despite the company’s success to obtain licences, these were subsequently revoked. By placing the risk on Bangladesh Export Import using express term, the possibility of frustration was excluded. In the second scenario, although the presumption is, the risk will be allocated to lie where it falls ‘naturally’, the parties actually foresaw a particular risk but made no express provision for it did not prevent the frustration doctrine from intervening (Poole 2012: 468–69). A relevant case is CTI Group Inc v Transclear SA.39 The fact that a supplier chose not to make goods available for shipment, thus rendering performance by the seller impossible, was not of itself sufficient in the circumstances to frustrate a contract. 36

[1964] 2 QB 226. [2006] EWHC 1137 (Comm); [2007] 1 Lloyd’s Rep. 1. 38 [1995] 2 Lloyd’s Rep. 1. 39 [2008] EWCA Civ 856. 37

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297

Extraordinary Circumstances

The question of foreseeability perhaps can best be answered by examples of events that can be considered as ‘extraordinary’. The following events may be taken as illustrations of the kind of events which have been held, in the circumstances of particular contracts, to bring the doctrine of frustration into operation (Beale 2012: paras. 23–020 & 23–021): destruction of the subject-matter of the contract,40 incapacity or death of a person obliged to perform personal services,41 delay sufficiently long to frustrate the commercial adventure of the parties,42 a change in the law or subsequent illegality43 and outbreak of war.44 In the context of financial transactions, Hudson (2009: 473) believes that contracts which are to be settled by intangible objects (such as money in bank accounts) would add further complications to the issue. One example can be, when a stock exchange’s ability to quote a price is terminated, the situation can be regarded as ‘destruction’. Despite the unprecedented degree of the Financial Crisis witnessed in 2007–2008, this situation apparently has not happened.

17.6

Appearances of the Exceptional Circumstances

Having discussed the required conditions for the acceptance of the exceptional fact, this part will proceed to examine the appearances of these exceptional circumstances.

17.6.1

Impossibility

A contract which has become impossible of performance is frustrated. In the case of Taylor v Caldwell,45 the destruction of the music hall rendered performance of the contract impossible the contract was frustrated. Even temporary unavailability of the subject-matter may frustrate the contract. In Jackson v Union Marine Insurance,46 the contract was frustrated because the ship was being repaired and therefore not available for the voyage for which she was chartered. Lord Simon has elaborated on 40

For example, Taylor v Caldwell (1863) 3 B&S 826. For example, Graves v Cohen (1930) 46 TLR 121 and Morgan v Manser [1948] 1 KB 184. 42 For example, The Nema [1982] AC 724. 43 For example, Baily v De Crespigny (1869) LR 4 QB 180 and Islwyn BC v Newport BC (1994) 6 Admin. LR 386. 44 For example, Robson v Premier Oil and Pipe Line Co Ltd [1915] 2 Ch. 124. 45 (1863) 3 B&S 826. 46 (1874) LR 10 CP 125. 41

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the question of impossibility in Imperial Smelting v Joseph Constantine Steamship Line: Discharge by supervening impossibility is not a common law rule of general application, like discharge by supervening illegality; whether the contract is terminated or not depends on its terms and the surrounding circumstances in each case. Moreover, it seems to me that the explanation of supervening impossibility is at once too broad and too narrow. Some kinds of impossibility may in some circumstances not discharge the contract at all. On the other hand, impossibility is too stiff a test in other case.47

Sometimes, the position can be further reinforced by statutes. For instance, pursuant to Section 7 of the Sales of Goods Act 1979, ‘where there is an agreement to sell specific goods and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is avoided.’

17.6.2

Excessive Onerousness

This position was summarised by Viscount Simon: The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate - a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point.48

Whilst the increased cost of performance may make the contractual performance something radically different from that which was originally undertaken, the law appears to exclude frustration in most cases (Poole 2012: 464). In the context of the financial crisis, it is worth noting that inconvenience, or hardship, or financial loss involved in performing the contract has been held insufficient to frustrate particular contracts.49 As Cartwright (2013: 257) points out, English law does not admit ‘economic’ frustration. In contrast, ‘impracticability’ has been a ground of discharging contractual obligations in the US. Section 261 of the Restatement (Second) of the Law of Contracts provides that: Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non‐occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

47

Imperial Smelting v Joseph Constantine Steamship Line [1942] AC 154 at 163–64. British Movietonews v London and District Cinemas [1952] AC 166 at 185. 49 As noted by Lord Ratcliffe said in Davis Contractors Ltd v Fareham UDC [1956] UKHL 3, ‘[I] t is not hardship or inconvenience or material loss which calls the principle of frustration into play’. See also for example, Tandrin Aviation Holdings v Aero Toy Store [2010] EWHC 40 and some other cases happened after the Financial Crisis as discussed above. 48

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Nonetheless, there is a differing level of treatment between buyer and seller in this regard. Uniform Commercial Code Section 2–615 excuses only sellers. This is because the seller’s loss can be theoretically infinite, for example, the prices of his raw materials can rise without limit. In contrast, the buyer’s loss can never exceed the contract price. The word ‘impracticable’ can be found in English cases sometimes. In Horlock v Beal,50 Lord Loreburn said, ‘the first question to be decided is whether or not, and at what date, the performance of this contract of service became impossible, which means impracticable in a commercial sense.’ Apart from this, the use of ‘impracticability’ or ‘commercial impossibility’ has not been popular among judges even to Lord Loreburn himself. In Tennants (Lancashire) v CS Wilson,51 he said that ‘the argument that a man can be excused from performance of his contract when it becomes “commercially” impossible…seems to me a dangerous contention, which ought not to be admitted unless the parties have plainly contracted to that effect’. The Classic Maritime52 case might have provided a distinction between impracticability and impossibility in the aftermath of the Financial Crisis. In that case, the defendant alleged that the crisis caused an unprecedented and unforeseen collapse in the demand for steel products and therefore it became impossible for the iron ore which was scheduled to be delivered to be discharged. Similarly in Tandrin Aviation, whilst the buyer the alleged ‘unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets’ triggered the force majeure clause, Hamblen J only found that the clause had only referred to ‘any other cause beyond the seller’s reasonable control’ and there was nothing ‘which is even remotely connected with economic downturn, market circumstances or the financing of the deal’.53 As a result, there is still a possibility that a contracting party may claim to be discharged not under the general doctrine of discharge but under an express provision of the contract such as a force majeure clause.

17.6.3

Frustration of Purpose

Where the common purpose for which the contract was entered into can no longer be carried out because of some supervening event, the contract may be frustrated (McKendrick 2013: 259). An example of frustration of purpose, despite rare, was illustrated by Krell v Henry.54 The facts of which have been mentioned before. In this case, the contract contained no express reference to the coronation processions, or to any other purpose for which the flat was taken. As the processions did not take place on the days originally fixed, the Court of Appeal held that the contract was 50

[1916] 1 AC 486. [1917] AC 495. 52 [2009] EWHC 1142 (Comm). 53 Tandrin Aviation Holdings v Aero Toy Store [2010] EWHC 40 at [44]. 54 [1903] 2 KB 740. 51

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frustrated. However, according to Treitel (2014: para. 7–011), Krell v Henry is controversial in a sense that there is a fundamental question whether the doctrine of discharge should have been applied at all. The danger of such a rule lies in the fact that it can be extended to many cases in which a contract has simply, as a result of supervening events, become for one of the parties a bad bargain, but not in the name of justice and fairness.

17.7

Legal Consequences of a Frustrated Contract

At common law frustration brings the contract to an end forthwith, without more and automatically, in the sense that it releases both parties from any further performance of the contract (Beale 2012: para. 23–071). A court does not have the power to allow the contract to continue and to adjust its terms to the new circumstances (Beale 2012: para. 23–071). Moreover, the remedy of termination for frustration takes effect not by election of either party, nor by the order of a court, but automatically on the occurrence of the frustrating event (Cartwright 2013: 259). At common law, the remedy of termination is not retroactive in the sense that both parties are released from performance of the contract for the future, but there is no automatic reversal of the performance which has been rendered under the contract (Cartwright 2013: 257). The Law Reform (Frustrated Contracts) Act 1943 now provides for most of the legal consequences of frustration. Pursuant to section 1(2) of the Act, all sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable. On the other hand, the effect of frustration upon a claim to recover the value of goods supplied or services provided prior to the frustrating event is dealt with by section 1(3) of the Act.

17.8

Rescission as a Consequence of Misrepresentation

Apart from relying on frustration and force majeure clause, another post-crisis phenomenon as observed by Poole (2012) in English contract law is that there has been a growth in allegations of misrepresentation. The modern law relating to misrepresentation, unlike above, is a somewhat complex amalgam of rules of common law, equity and statute law (Beale 2012: para. para. 6–001). Whilst according to the Misrepresentation Act 1967 the representee has an absolute right to rescind where the misrepresentation is fraudulent, the Act also gives the court a discretion to refuse to permit a representee to rescind a contract, but to award him damages in lieu of rescission, if the misrepresentation is negligent or wholly innocent. The difference between frustration and rescission is best summarised by Lord Wright, ‘where there

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is frustration a dissolution of a contract occurs automatically. It does not depend, as does rescission of a contract on the ground of repudiation or breach, on the choice or election of either party.’55 Recent cases in this area include: Springwell Navigation Corp v JP Morgan Chase Bank (formerly Chase Manhattan Bank)56 and Erlson Precision Holdings Ltd (formerly GG132 Ltd) v Hampson Industries PLC.57 In Springwell Navigation, a bank employee was accused of making representations that certain loan notes linked to Russian Federation issued bonds were a ‘conservative and liquid investment and without currency risk’. The Court of Appeal held that what was said by the employee were expressions of opinion which would not have been actionable. Furthermore the relevant documentation gave rise to a contractual estoppel preventing any claim for misrepresentation or misstatement. In Erlson Precision, a share purchase agreement was rescinded where the chief operating officer of the company being sold knew that income forecasts given to the buyer were no longer accurate, but chose not to inform anyone. It can be seen that in these two cases one claimant succeeded in the action but one did not. It might be useful to explore what indeed constitutes misrepresentation. The traditional rule is that a misrepresentation must be a false statement of fact, as distinct from a statement of opinion, a statement of intention or a mere commendatory statement (Beale 2012: para. 6–006). In relation to its truthfulness, Rix J in Avon Insurance v Swire Fraser held that a representation needs not be ‘entirely correct’, but it should be ‘substantially correct’.58 As regards the meaning of ‘statement’, Denning LJ gave a fairly broad requirement that ‘any behaviour, by word or conduct, was sufficient to be a misrepresentation if such as to mislead the other party’.59 For example, such an impression might even be conveyed by simply handing the document to the customer as if it were a receipt, or by asking her to sign it without drawing attention to the condition. Merely silence or non-disclosure would not amount to misrepresentation, but that requires active steps to conceal a defect. In Gordon v Selico,60 the court held that the estate agent was liable to the buyer of a property as there had been at the time of the purchase a fraudulent concealment of dry rot. A misrepresentation will not be effective to ground relief in law unless it was material (Beale 2012: para. 6–040). Furthermore, it must be known to the representee. In Horsfall v Thomas,61 a seller delivered to a buyer a gun which was defective, for after being fired it exploded, and the buyer was injured. The buyer alleged that the sale had been procured by fraudulent misrepresentation and that the defect had been concealed. However, because he had never examined the gun, the 55

Denny, Mott & Dickson v James B. Fraser & Co [1944] AC 265 at 274. [2010] EWCA Civ 1221. 57 [2011] EWHC 1137 (Comm). 58 Avon Insurance & Ors v Swire Fraser [2000] CLC 665 at 670. 59 Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 at 808–9. 60 (1986) 18 HLR 219. 61 (1862) 1 H & C. 90. 56

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misrepresentation should have had no effect on the buyer’s mind and did not induce the contract. Once it is proved that a false statement was made which is ‘material’ in the sense that it was likely to induce the contract, and that the representee entered the contract, it is a fair inference that he was influenced by the statement (Beale 2012: para. 6–039). Although both frustration and rescission bring the primary obligations of the contractual parties to an end, rescission leaves outstanding the guilty party’s liability in damages whilst there is no such liability after discharge by frustration (Treitel 2014: para. 15–005). The combination of remedies available for misrepresentation depends upon the type of misrepresentation which can be categorised into three types: fraudulent, negligent and innocent. Fraud was defined by the House of Lords in Derry v Peek,62 ‘fraud is proved when it is shown that a false representation has been made: (1) knowingly; or (2) without belief in its truth; or (3) recklessly, careless whether it be true or false.’ In contrast, a negligent misrepresentation is one which is made carelessly, or without reasonable grounds for believing it to be true (Beale 2012: para. 6–072). Naturally, it follows that innocent misrepresentation is one which is neither fraudulent nor negligent. At common law, the right to rescind was confined to cases in which the misrepresentation was fraudulent, but in equity there was a right to rescind even for innocent misrepresentation (Beale 2012: para. 6–108). Therefore regardless of the type, the victim is often entitled to rescission of the contract, except under Misrepresentation Act 1967 which gives the court power to refuse rescission and award damages in lieu for non-fraudulent misrepresentation. It is worth noting that there is no right to damages (in addition to rescission) for innocent misrepresentation (Poole 2012: 522). Damages would only come as a consequence of the court’s discretion under Section 2(2) of Misrepresentation Act 1967 to award damages in lieu of rescission. As a parallel development to the increase in misrepresentation cases, there has been a consequential reliance on an express term to exclude liability for misrepresentation. In BSkyB Ltd v HP Enterprise Services UK Ltd (formerly Electronic Data Systems Ltd),63 Electronic Data Systems was held liable in deceit where it falsely represented that it had carried out a proper analysis of the amount of time needed to complete the initial delivery and go-live of a customer contact centre. Consequently, it held the opinion that, and had reasonable grounds for holding the opinion that, it could and would deliver the project within the timescales put forward. In the contract, there were clauses limiting Electronic Data Systems’ liability for certain kinds of loss (except in respect of claims in deceit) and to a liability cap of GBP 30 million. Similar cases can also be seen in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc64 and AXA Sun Life Services Plc v Campbell Martin Ltd.65 Indeed, the use of this sort of provision excluding liability for misrepresentation is

62

(1889) 14 App. Cas. 337. [2010] EWHC 86 (TCC). 64 [2010] EWHC 1392 (Comm). 65 [2011] EWCA Civ 133. 63

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governed by Section 3 of the Misrepresentation Act 1967 (as amended by the Unfair Contract Terms Act 1977).66

17.9

Conclusion

The Chapter has looked at the legal implications of negative economic trends under English contract law in the aftermath of the Financial Crisis. As opposed to some civil law jurisdictions, in common law jurisdictions, major market changes are rarely, if ever, the basis of avoidance of a contractual obligation. Whilst the US would still consider the situation of ‘impracticability’ under the Restatement (Second) of the Law of Contracts and the Uniform Commercial Code, the applicability of this concept in the English court has been more fictional than real. In recent cases such as Classic Maritime Inc v Lion Diversified Holdings,67 Tandrin Aviation Holdings v Aero Toy Store68and Gold Group Properties v BDW Trading (formerly known as Barratt Homes Limited),69 using the Financial Crisis as an excuse to invoke the doctrine of frustration and/or the force majeure clause have been proved fruitless. A more fruitful attempt might have been finding faults on the part of counterparty and rescinding the contract as a result. Misrepresentation have been considered in cases like Springwell Navigation Corp v JP Morgan Chase Bank (formerly Chase Manhattan Bank)70 and Erlson Precision Holdings Ltd (formerly GG132 Ltd) v Hampson Industries PLC,71 with both incidentally involving financial transactions which were hardest hit amidst the crisis. To sum up, quite clearly the English contract law has not changed much in response to the Financial Crisis. Certainty remains the core value over clemency.

66

It provides that: If a contract contains a term which would exclude or restrict – (a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or (b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in Section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does. The reasonableness test as stipulated in Section 11(1) of the Unfair Contract Terms Act 1977 is one that a contract term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made. 67 [2009] EWHC 1142 (Comm). 68 [2010] EWHC 40. 69 [2010] EWHC 323 (TCC). 70 [2010] EWCA Civ 1221. 71 [2011] EWHC 1137 (Comm).

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References Banks J., R. Crawford, T. Crossley, and C. Emmerson. 2012. The effect of the financial crisis on older households in England in IFS Working Paper W12/09. http://www.ifs.org.uk/wps/ wp1209.pdf. Accessed 11 Oct 2014. Beale, H. (ed.). 2012. Chitty on contracts. London: Sweet & Maxwell. Buckley, A. 2011. Financial crisis: Causes, context and consequences. Harlow: Pearson. Cartwright, J. 2013. Contract law. Oxford: Hart. Crystal, N., and F. Giannoni-Crystal. 2010. Contract enforceability during economic crisis: Legal principles and drafting solutions. Global Jurist 10(3): Article 2. Domit, S., and T. Shakir. 2010. Interpreting the world trade collapse in Bank of England Quarterly Bulletin 2010 Q3. Available at http://www.bankofengland.co.uk/publications/Documents/ quarterlybulletin/qb100302.pdf. Accessed 11 Oct 2014. Faccini, R., and C. Hackworth. 2010. Changes in output, employment and wages during recessions in the United Kingdom in Bank of England Quarterly Bulletin 2010 Q1. Available at http:// www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100103.pdf . Accessed 11 Oct 2014. Fiala, J., and M. Selucká. 2014. The effects of financial crisis on the binding force of contracts in the Czech Republic. The Lawyer Quarterly 4(2): 108–118. Financial Crisis Inquiry Commission. 2011. Financial crisis inquiry report. http://www.gpo.gov/ fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf. Accessed 11 Oct 2014. Financial Services Authority – FSA. 2009. The turner review: A regulatory response to the global banking crisis. Available at http://www.fsa.gov.uk/pubs/other/turner_review.pdf. Accessed 11 Oct 2014. Firoozmand, M.R. 2007. Changed circumstances and immutability of contract: A comparative analysis of force majeure and related doctrines. Business Law International 8: 161–185. Fraser, S. 2010. The effect of the credit crisis on UK SME finance available at http://www.esrc. ac.uk/_images/Evidence%20briefing%20-%20finance%20for%20SMEs_tcm8-13957.pdf. Accessed 11 Oct 2014. High Level Group of Financial Supervision in the EU. 2009. Report available at http://ec.europa. eu/internal_market/finances/docs/de_larosiere_report_en.pdf. Accessed 11 Oct 2014. HM Treasury. 2012. Review of HM Treasury’s management response to the financial crisis. https:// www.gov.uk/government/uploads/system/uploads/attachment_data/file/220506/review_fincrisis_response_290312.pdf. Accessed 11 Oct 2014 Hudson, A. 2009. Law of finance. London: Sweet & Maxwell. McKendrick, E. 2012. Contract law. Oxford: Oxford University Press. McKendrick, E. 2013. Contract law. Basingstoke: Palgrave Macmillan. Poole, J. 2012. Textbook on contract law. Oxford: Oxford University Press. Ridder, P., and M.P. Weller. 2014. Unforeseen circumstances, hardship, impossibility and force majeure under German contract law. European Review of Private Law 22(3): 371–391. Rösler, H. 2007. Hardship in German codified private law – In comparative perspective to English, French and international contract law. European Review of Private Law 15(4): 483–513. Thomas, D. 2011. Frustration and force majeure: A hard line in English law. Construction Law International 6(2): 21–23. Treitel, G. 2014. Frustration and force majeure. London: Sweet & Maxwell. Uribe, R.M. 2011. The effect of a change of circumstances on the binding force of contracts. Cambridge: Intersentia.

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List of Cases Avon Insurance & Ors v Swire Fraser [2000] CLC 665. AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133. Baily v De Crespigny (1869) LR 4 QB 180. Bangladesh Export Import v Sucden Kerry SA [1995] 2 Lloyd's Rep. 1. British Movietonews v London and District Cinemas [1952] AC 166. BSkyB Ltd v HP Enterprise Services UK Ltd (formerly Electronic Data Systems Ltd) [2010] EWHC 86 (TCC). Channel Island Ferries Limited v Sealink UK Limited [1988] 1 Lloyd’s Rep. 323. Classic Maritime Inc v Lion Diversified Holdings [2009] EWHC 1142 (Comm). CTI Group Inc v Transclear SA [2008] EWCA Civ 856. Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805. Davis Contractors Ltd v Fareham UDC [1956] UKHL 3. Denny, Mott & Dickson v James B. Fraser & Co [1944] AC 265. Derry v Peek (1889) 14 App. Cas. 337. Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547, [2007] 2 Lloyd's Rep. 517. Erlson Precision Holdings Ltd (formerly GG132 Ltd) v Hampson Industries PLC [2011] EWHC 1137 (Comm). Gold Group Properties v BDW Trading (formerly known as Barratt Homes Limited [2010] EWHC 323 (TCC). Gordon v Selico (1986) 18 HLR 219. Graves v Cohen (1930) 46 TLR 121. Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407. Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [1926] A.C.497. Horlock v Beal [1916] 1 AC 486. Horsfall v Thomas (1862) 1 H&C. 90. Imperial Smelting v Joseph Constantine Steamship Line [1942] AC 154. Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association [2010] EWHC 2661 (Comm). Islwyn BC v Newport BC (1994) 6 Admin. LR 386. J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd's Rep. 1. Jackson v Union Marine Insurance (1874) LR 10 CP 125. Krell v Henry [1903] 2 KB 740. Metropolitan Water Board v Dick Kerr [1918] AC 119 Morgan v Manser [1948] 1 KB 184. Paradine v Jane [1647] Al 26; 82 ER 897. Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc [2010] EWHC 1392 (Comm). Robson v Premier Oil and Pipe Line Co Ltd [1915] 2 Ch. 124. Shell (UK) Ltd v Lostock Garage Ltd [1976] 1 W.L.R. 1187. Springwell Navigation Corp v JP Morgan Chase Bank (formerly Chase Manhattan Bank) [2010] EWCA Civ 1221. Tandrin Aviation Holdings v Aero Toy Store [2010] EWHC 323 (TCC). Tandrin Aviation Holdings v Aero Toy Store [2010] EWHC 40. Taylor v Caldwell (1863) 3 B&S 826. Tennants (Lancashire) v CS Wilson [1917] AC 495. The Eugenia [1964] 2 QB 226. The Florida [2006] EWHC 1137 (Comm); [2007] 1 Lloyd's Rep. 1. The Nema [1982] AC 724. Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch. 274.

Chapter 18

Financial Crisis and the Remedy of Rescission in the United States Aditi Bagchi

Abstract Common law contract in the United States does not offer any reliable avenue by which to rescind a contract as a result of financial crisis. Most formal doctrines eschew taking into account the economic vulnerability of a party where that vulnerability is not the product of the contract itself. More generally, the legal position of parties tends not to turn on their economic resources and market fluctuation is regarded as a foreseeable risk that contracting parties assume. Nevertheless, a few targeted statutory developments use the possibility of rescission to advance public policy goals that implicate particular kinds of transactions, such as home mortgage agreements.

Common law contract in the United States does not offer any reliable avenue by which to rescind a contract as a result of financial crisis. Most formal doctrines eschew taking into account the economic vulnerability of a party where that vulnerability is not the product of the contract itself. More generally, the legal position of parties tends not to turn on their economic resources. Nevertheless, a few targeted statutory developments use the possibility of rescission to advance public policy goals that implicate particular kinds of transactions. Contract law in the United States is state law: each of the fifty states in principle has its own law. That said, each has a variation of the “common law,” which was adopted from Britain at the time of independence and has evolved, largely in parallel though not in lock-step, across the fifty states. Although there are some important differences between the states, in no state are contracts subject to rescission or revision in the event of financial crisis. I will discuss the U.S. position on some of the particular questions raised by the General Reporter and then point out some areas in which regulation of exchange is arguably responsive to financial crisis indirectly.

This article is also published in the Journal “American Journal of Comparative Law” upon whose approval, was updated later by the author. A. Bagchi (*) Law School, Fordham University, New York, NY, USA e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_18

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In general, in the United States, mistake, misrepresentation and changed circumstance are all possible grounds for rescission of contract. However, a party may not avoid liability under a contract for mistake (either unilateral or mutual) if she assumed the risk of the fact that later surfaced. Under Restatement (Second) of Contract Section 154, which is nonbinding but reflects the usual rule, a party will be deemed to have accepted a certain risk if he was allocated the risk, he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. Because fluctuation in the economic environment is foreseeable, and because parties often enter into contract precisely to guard against the variability in price and inventory associated with economic cycles, courts are unlikely to regard a “mistake” related to the economic environment as grounds for rescission. After all, excusing a party on grounds of such a mistake effectively transfers the loss to the other party. One could imagine an argument in some cases that the other party was better informed regarding the probability of an economic downturn, or less likely to have made a basic cognitive error such as a failure to register that possibility at all. But the probability of a financial crisis is notoriously uncertain for everyone, and the range of estimations as to that probability is publically available information. Excusing less informed or less sophisticated parties on this ground would have the effect of raising their costs in a wide range of transactions, potentially harming them in all those more abundant cases where transactions do not run into financial downturn. The approach to mistake in US common law is usually formal in that it does not systematically turn on the status of parties to contract or apply rules in the event of a financial crisis that cannot be explained by reference to more general principles. Because formal principles do not support excuse, a party would not be allowed to avoid contract on grounds of mistake regarding the prospect of a financial crisis. Parties may also rescind a contract where they relied on a material misrepresentation by the other side.1 Some buyers of mortgage-backed securities have sued a number of large banks for misrepresenting underwriting standards and seek rescission, among other remedies.2 Regardless of whether any of these claims succeed, we could not properly characterize the rescission remedy here as responsive to the financial crisis per se. Although banking practices were causally related to the crisis, and the motivation of buyers to seek rescission is clearly related to a drop in the value of their securities, plaintiffs in these suits claim (as they must) that misleading banking practices justify rescission, and those practices are alleged to justify rescission whether accompanied by an economic crisis or not. Because misrepresentation

1

Restatement (Second) of Contract §164. See, e.g., Your Guide to the Massive Bank Lawsuits, 9/5/11 Bus. Insider. (describing suit by Federal Housing Finance Agency against seventeen banks seeking to rescind more than $196 billion in sales of mortgage-backed securities). 2

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focuses on the conduct of the plaintiff, its successful invocation does not turn on the general economic climate. Changed circumstance refers to a cluster of conditions under which courts will excuse a party for performance, but these doctrines are difficult to invoke successfully.3 Even a severe change in general economic circumstance is unlikely to qualify. Neither inability to pay nor a drop in the market value of a purchased good is a likely ground for excuse under impossibility, impracticability or even frustration of purpose.4 Because one of the purposes of contract for exchange at a fixed price is to guard against price fluctuations, the parties are expected to have incorporated the risk of an economic downturn into their price. Again, the effect of excusing one party because a change in the economic environment makes her contractual obligation very burdensome, or has made performance impossible (e.g., due to liquidity problems), is to transfer that burden to the other party; such a transfer of burden between private litigants requires affirmative justification. One might argue that such transfers are justified just where one party is better positioned to bear the loss. But this proves too much. It is often the case that one party is better able to bear a loss than the other but this cannot be regarded consistently as grounds for imposing liability on the former or excusing the latter from liability. Such a policy could not in principle be limited to cases of financial crisis, since parties are dissimilarly positioned to bear loss even when the financial climate is positive. A principle that allows a party to avoid contractual liability because enforcement is more burdensome for her than uncompensated breach is for the other would have negative repercussions for the reliability of contract, and on the access of weaker parties to markets. These social costs would extend beyond the duration of a given financial crisis. Another ground for invoking the formal remedy of rescission is unconscionability. Distortion of the equivalence of exchange is not grounds to avoid liability but it may contribute to unconscionability, which does excuse performance. An unconscionable contract must be substantively unconscionable, in that its terms must “shock the conscience.”5 A highly inequitable contract may meet that standard. However, unconscionability usually also requires procedural unconscionability.6 Procedural unconscionability entails some defect in the process that does not rise to the level of an independent ground for excuse. For example, highly unequal bargaining power, the absence of an opportunity to bargain, or a lack of commercial sophistication may render a contract procedurally unconscionable. A contract that 3

RESTATEMENT (SECOND) OF CONTRACTS §§ 261–72 (discussing impracticability, impossibility and frustration). See also Trakman (1985) Winner Take Some: Loss Sharing and Commercial Impracticability, 69 Minn. L. Rev. 472 at 472–73. 4 See Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265, 276–78 (7th Cir. 1986). 5 See Fransmart, L.L.C. v. Freshii Dev., L.L.C., 768 F.Supp.2d 851, 870–71 (E.D. Va. 2011) (“The substantive terms of the contract must be so grossly inequitable that it ‘shocks the conscience.”’ (citation omitted)). 6 See Lawrence v. Beverly Manor, 273 S.W.3d 525, 531 (Mo. 2009) (requiring both substantive and procedural unsconscionability).

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suffers from an uneven equivalence of exchange might plausibly be substantively and procedurally unconscionable but it will likely not be deemed unconscionable if it became unconscionable entirely as a result of events that took place after the time of contract formation.7 Logically, procedural unconscionability, or defects in formation, cannot be present where the substantive unconscionability, or defects in terms, arose only after formation. Because the doctrine of unconscionability aims primarily to do equity as between the parties, rather than to redress more general unfairness that might arise in the course of contract, it is of limited utility in responding to the financial crisis. Still another open-ended doctrine that one might invoke is the rule that contracts against public policy are invalid. One might be tempted to argue that contracts that appear “at odds” with a new economic climate and threaten to exacerbate the problems of social dislocation and upheaval that attend a financial crisis are against public policy in a broad sense. But the doctrine does not contemplate voiding contracts because they are in tension with public policy in this broad sense. Judges are not licensed to identify intuitively plausible public policies and pursue them in an ad hoc way through the medium of contract enforcement. Such an application of the public policy doctrine in contract runs into the same problem as did overextension of other common law doctrines to the case of financial crisis: It threatens to metamorphose a narrow doctrine into one that undermines the credibility of many contracts. Although the analysis thus far might make it appear that there are few resources within US common law to respond to the financial crisis, there are several modes of response. Within the common law itself, there is an increasingly liberal attitude toward renegotiation. Parties have always been permitted to renegotiate their contracts, and if the obligations of both parties are altered, there is no inquiry into the circumstances that prompted the modification. Courts will now enforce modifications even where the obligations of only one party have been altered as long as the party seeking enforcement of the modification can show a change of circumstance that justified renegotiation.8 Although changed circumstance is difficult to establish for purposes of avoiding a contract, it is more easily grounds for renegotiation. If performance of a contract would result in substantial loss to one of the parties, that change would qualify as grounds for renegotiation. Thus, though a party could not be excused from a contract altogether because of financial crisis, even a moderate economic downturn might render enforceable any modified terms she is able to extract from the other party. The more prominent legal response to the financial crisis at the level of individual contract has occurred in particular subject matter areas. First and most important, the centrality of subprime and other mortgages to the crisis focused attention on the underlying mortgage contract. Remedies that had already been available

7

Restatement (Second) of Contracts §208 (“If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract.”) (emphasis added). 8 Restatement (Second) of Contracts § 89 (on modification of an executory contract).

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became more salient and there have been some political and judicial efforts to make borrowers’ statutory rights more robust. The Truth in Lending Act (TILA) grants borrowers who offer a security interest in their principal dwelling a limited right to rescind loan agreements where the lenders failed to make certain material disclosures.9 In principle, the statutes might be thought to expand the common law doctrine of misrepresentation, treating certain nondisclosures as affirmatively misleading in statutorily specified contexts. But courts have recognized that the statute was intended to stabilize the market for consumer credit, which seemed unduly unstable where large numbers of borrowers took out loans on terms they did not understand well. Although the statute predates the most recent financial crisis, it is emblematic of the basic policy response. Many observers view the crisis as reflecting some kind of market failure. Affording individual borrowers relief where lenders have engaged in practices that distort the market serves both to mitigate the human damage of financial crises as well as to prevent avoidable escalation of market bubbles. A second area of contract in which rescission has come under focus in the aftermath of the recession is health insurance. Here, the concern has been with limiting rather than expanding rescission. The recent and controversial Patient Protection and Affordable Care Act (PPACA) banned the practice of health insurance rescission.10 The practice involved insurance companies rescinding insurance for expensive customers (those who had fallen ill and had become heavy users of insurance) based on conditions that the customer failed to disclose at the time of initial application for insurance. In some cases, these pre-existing conditions were not medically related to the “expensive” conditions that later required expensive treatment, and in some cases the patients themselves were not aware of them (because they were minor and did not require action). Like rescission under TILA, rescission in this context was formally consistent with the common law doctrine, which permits cancellation of a contract due to misrepresentation. However, unlike in ordinary contract, insurance companies systematically undertook to investigate insured applications only after claims were filed, and even innocent misrepresentations would provide grounds for rescission. Health insurance rescission was a problem among the individually insured, and the financial crisis reduced further the percentage of Americans insured through their employers. The financial crisis thus made more acute what had been a longstanding policy problem and arguably helped bring about the political impetus to address it, albeit in large and complex health care reform legislation that intervened in the health care market in numerous other ways as well. One final subject matter area in which rescission has been under some scrutiny has been in the securities markets. Issuers may offer preemptive rescission in order to avoid investor claims for alternative remedies. All but four states bar civil liability under state law (outside of fraud claims) if a purchaser received a written offer for 9

See 15 U.S.C. § 1635 (2012). See 42 U.S.C. § 300gg-12 (2012).

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rescission and did not accept it.11 By contrast the federal Securities and Exchange Commission has decided that, under Section 14 of the Securities Act of 1933 and Section 29(a) of the Securities Exchange Act of 1934, attempts to immunize oneself from civil liability by way of a preemptive rescission offer are void.12 However, violations of Section 5 of the federal Securities Act of 1933 give the purchaser a one-year right to rescind implicated transactions. Again in this context, rescission operates as a remedy against those who have engaged in some form of misrepresentation. In this context, however, the equitable dimensions of rescission arguably recede in focus as compared to the systemic implications of the remedy. That is, whether we allow investors to rescind, or allow issuers to preemptively rescind, importantly shapes the scope of liability under securities law. On the one hand, those who would see the recession as the fault of inscrutable practices and possible securities violations would decry any expansion of rescission at the expense of remedies that are more costly and possibly encourage more private oversight of company disclosures. But for others, the recession throws into relief an imperative to reduce company costs generally and ostensibly frivolous plaintiff suits in particular; a more liberal regime of rescission might reduce plaintiff suits. The upshot of this overview is that the United States has little doctrinal response to financial crisis within the domain of common law contract itself. Some of the facts relating to the crisis may be grounds for rescission but even a severe economic downtown is not itself a fact on which the outcomes of contract doctrines will turn, from a technical standpoint. However, the United States has expanded and delimited rescission by statute to deal in a targeted way with specific problems, including ones exacerbated or highlighted by the recent recession. Although our regime has a rigorous commitment to the sanctity of contract, this principle co-exists with an occasionally expansive understanding of what meaningful consent entails as well as a broad view of the social implications of contract in particular areas.

11

Robert Robbins, Regulation D Offerings and Private Placements, SU032 ALI-ABA 577 (2013). See Stoiber v. SEC, 161 F.3d 745, 753 (D.C. Cir. 1998) (affirming sanctions notwithstanding defendant’s rescission offer). 12

Chapter 19

The Adaptation of the Contract in Turkish Law Başak Baysal Abstract Turkish Law has adopted the renowned principle of pacta sunt servanda. Therefore, the former Code of Obligations numbered 818 did not provide a general provision for neither the adaptation of the contract and nor the termination of the contract in case of hardship. Even then, the Court of Cassation and legal scholars accepted adaptation of contracts in the occurrence of the unexpected event, such as economic crises. The new Turkish Code of Obligations numbered 6098 which came into effect as of 1 July 2012 has introduced a general clause for adaption of the contract. Accordingly, the obligor may demand the adaptation or the revocation of the contract if adaptation is not possible through meeting all of the required conditions. This chapter presents an overview of the conditions and the consequences of adaptation of the contract under Turkish Law and specifically analyzes the option for renegotiation of the contract in comparison to the UNIDROIT Principles (6.2.3), Principles of European Contract Law (PECL 6:111) and Draft Common Frame of Reference (DCFR III.-1:110).

This article is published in Turkish in “Symposium of New Turkish Code of Obligations, İstanbul, 2012” edited by Inceoglu upon whose approval, was updated later by the author and translated by Att. Yasemen Öztürkcan (Istanbul Bar Association) and edited by Att. Işıl Ergeç (Istanbul Bar Association, Graduate student in Civil Law at Istanbul University). English translation of the article is also published in the book “Turkish National Reports to the XIXth Congress of the International Academy of Comparative Law” edited by Rona Serozan and Başak Başoğlu, and published by Vedat Kitapçılık upon whose approval, is contributed to this volume. B. Baysal (*) Faculty of Law, Istanbul University, Istanbul, Turkey e-mail: [email protected] © Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6_19

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19.1

Introduction

Article 138 of the Turkish Code of Obligations1 in force is a new regulation which did not take place in the former code. In the law systems of many countries as well as in international law, there are provisions regarding the change of circumstances and the adaptation of the contract.2 Constituting a provision in the code regarding the adaptation of the contract is a crucial development in Turkish Law and one of the most essential changes handed with the TCO. According to Article 138 of the TCO; entitled “Excessive Onerosity”3: When an extraordinary situation which is not foreseen and is not expected to be foreseen by the parties during conclusion of the contract arises due to a reason not caused by the obligor and if the present conditions during conclusion of the contract are changed to the detriment of the obligor to such an amount as to violate principal honesty and if the obligor has not discharged his debt yet or has discharged his debt by reserving his rights arising from excessive difficulty of performance, the obligor shall be entitled to demand from the judge the adaptation of contract to new provisions, and to withdraw from the contract when such adaptation is impossible. In contracts including continuous performance, the obligor shall, as a rule, use his right to termination instead of right to withdraw. This provision shall also apply to the debts in foreign currencies.

Before the analysis of the provision, we would like to point out the complexity and multiplicity of terms relating to adaptation of the contract. Amongst the various terms used in Turkish Law referring to the adaptation of the contract, “excessive onerosity” was preferred in Article 138 of the TCO. There is not a common expression in Turkish Law corresponding to the adaptation of the contract. The differences in terms of legal basis, conditions and consequences between the theories of “imprévision”, “clausula rebus sic stantibus” and “interference with the basis of the transaction” which are often considered as synonyms in Turkish jurisprudence and doctrine, are not emphasized enough.4 Mentioning the issue with different expressions besides of these theories caused a confusion. In this context, terms like “unexpectedness”, “force majeure”, “hardship”, “modification or termination of the contract by judge”, “adjustment of the contract” can be given as an example.5 The main reason for the excessive use of terms is the multiplicity of theories and opinions on the legal basis of the adaptation of the contract.6 Both for avoiding any discussions on the issue and for using a 1

Here in after referred to as “TCO”. Law numbered 6098 of 11 January 2011. Official Gazette numbered 27836 of 4 February 2011. 2 For example; Italian Civil Code art. 1467, German Civil Code BGB § 313, Portuguese Civil Code art. 437/438, Greek Civil Code art. 388, Civil Code of Argentina art. 1198, Brezilian Civil Code art. m. 478, Algerian Civil Code art. 107, Egyptian Civil Code art. 147. Also UNIDROIT Principles (PICC 6.2.1-6.2.3), PECL 6:111 and Draft Common Frame of Reference (DCFR III.-1:110). 3 Translated by Özel (2013) Article 138. 4 It is emphasized by the doctrine that these expressions are not synonyms and have major differences. Draetta and Lake (1996), p. 178. 5 Tunçomağ (1967), p. 887. 6 Hausheer and Jaun (2003) ZGB Art. 2 N. 114.

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general term without referring to any theory, the adaptation of the contract will be used throughout the study. The adaptation of the contract constitutes an exception for the principle of pacta sunt servanda. Indeed the main principle of Contract Law asks the contracting parties to be bound with the contract and to fulfil their contractual obligations even if there appear difficulties after the conclusion of the contract. However, changes that arise after the conclusion of the contract might make the fulfilment of the obligations extremely unbearable, in which case, pressing the parties might be injust towards the aggrieved party which would as well violate principle of good faith covered in Article 2 of the Turkish Civil Code.7 Already prior to the entering into force of Article 138, Turkish Court of Appeal and the doctrine acknowledged that, in such cases, insisting on the fulfilment of the contractual obligations would violate principle of good faith and that the contract should be adapted.8 Therefore, the legal basis of the adaptation of the contract is principle of good faith, as is accepted in the comparative law. In order for a better comprehension of the new provision, before the analysis of the conditions and the consequences of Article 138 of the TCO, the practice of the adaptation of the contract prior to the entering into force of the TCO should be examined.

19.2

Adaptation of the Contract Prior to the Entering into Force of Article 138 of the TCO

In order to understand the practice related to the adaptation of the contract and the constitution of this provision, the need for the use of such concept in the law system should be determined in the first place. The main reason is the recent major economical crisis in Turkey and its negative effects on the debts in foreign currency. The last paragraph of Article 138, which explicitly states that the principle set forth by this Article for the adaptation of the contract applies as well to the debts in foreign currencies, indicates the tendency of seeking for solutions to the unfair consequences caused by this economical crisis. With the effects of the aforementioned economical crisis, the adaptation of the contract became a current issue especially for the loan agreements and lease agreements in Turkish law. The positive attitude of the courts towards the adaptation of the lease contracts unfortunately was replaced

7

Law numbered 4721 of 22 November 2001. Official Gazette numbered 24607 of 8 December 2001. 8 Turkish Court of Cassation (Hereinafter referred as “Y.”) General Assembly of Civil Chambers (Hereinafter referred as “HGK”), E. 2203/13-332, 2003/340, T. 7.5.2003; YHGK, E. 2003/13-599, 2003/599, T. 15.10.2003, YHGK E. 2010/14-14, K. 2010–15, T. 27.1.2010; YHGK 1998/815, 1998/835, T. 18.11.1998, Schwarz (1944), pp. 186–202; Feyzioğlu (1947); Gürsoy (1950); Erman (1979); Tekinay et al. (1993), pp. 783–784; Burcuoğlu (1995), p. 41 ss.; Serozan (2014), § 20; Oğuzman and Öz (2010), p. 156; Baysal (2009), p. 89 ff.

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with a more solid understanding when it comes to loan contracts. This inconsistent approach in jurisprudence has increased the need to specify objective criteria for the adaptation of the contract. In recent years, the number of the decisions of the Court of Appeal related to the adaptation of the contract largely increased. As a result of every economical crisis, numerous events were appealed and the Court of Appeal put forth some principals for the contracts affected by the economical crisis. Nevertheless, there is not a consistent approach to the adaptation of the contract. The most stunning example in this regard is the Courts considering the economical crisis as an unexpected situation and not hesitating to apply the adaptation of the lease contracts, however when it comes to the loan agreements, not reacting so.9 This approach of jurisprudence has been rightly criticized by the doctrine.10 Regarding the disputes related to the loan contracts in recent years, the Court of Appeal pays special attention to the characteristics of the banks as criteria to be taken into account in the adaptation of the contract.11 The Court of Appeal considers the good faith of the banks suggesting their clients refund of the credit payments in Turkish Liras another reason not to apply the adaptation of the contract.12 In fact, the main problem for the post economical crisis period regarding the credit indexed contracts is the extraordinary increase in the foreign currency and therefore, the suggestion of conversion into Turkish Liras would not be a satisfying solution for the obligor. Nevertheless, the decisions of the Court of Appeal cover the theory of interference with the basis of the transaction more in depth. In this regard, the Court of Appeal broadens the scope of this theory by not limiting it to the contracts of Law of Obligations, rather including as well the contracts of Family Law regarding alimony and contribution to be calculated in the regime of separation of property after divorce.13 Besides, the Court of Appeal also accepted that the adaptation of shortterm contracts is valid.14 In the meantime, we should point out a fact not to be forgotten: The duration of the long-term contracts increase the probability of the unforeseen events to occur and the parties concluding long-term contracts should 9

Y. 11. Civil Chamber (Hereinafter referred as “HD.”) 12.12.1994, E. 1994/5786, K. 1994/9585; For another decision of the Court of Appeal in this matter stating that the special conditions of the banks should be taken into consideration regarding the adaptation of the contract, see Y. 11. HD. 01.04.2002, E. 2001/10794, K. 2002/2870; On the other hand, for another decision accepting the adaptation of the foreign exchange credit loan contract, see Y. 13. HD. 06.04.1995, E. 1995/145, K. 1995/3339. 10 Burcuoğlu (1995), p. 41 ff.; Burcuoğlu (1996), p. 76 ff.; Baykal (1998), pp. 231–265; Serozan (2014) § 20 N. 10; Baysal (2009), p. 74 ff. 11 Y. 11. HD. 01.04.2002, E. 2001/10794 K. 2002/2870, YHGK, 19.02.1997, E. 1996/11-762, K. 1997/77, YKD 1997/5, pp. 681–682; YHGK 19.02.1997, E. 1996/11-674, K. 1997/87. 12 YHGK 17.09.1997, E. 1997/11-460 K. 1997/651; Y. 11. HD. 01.04.2002, E. 2001/10794 K. 2002/2870. 13 Oktay-Özdemir (2007), pp. 980–993; Y. 3. HD. E. 2005/5426, K. 2005/5859, T. 26.5.2005; Y. 3. HD. E. 2003/6477, K. 2003/6152, T. 20.5.2003, also see Y. 3. HD. E. 2003/1941, K. 2003/2097, T. 4.3.2003; Y. 3. HD. 07.10.2004, E. 2004/11065, K. 2004/10658). 14 YHGK 30.10.2002 E. 2002/13-852, K. 2002/864, Yargı Dünyası, Şubat 2003, N. 86, pp. 38–43.

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take into consideration the risks. In the short-term contracts, in contrast, the probability to foresee such events is higher but the responsibility of the parties to take into consideration the risks are lower. As long as this comparison of short-term and long-term contracts is regarded, the duration of the contract should not be considered as an additional condition in order to apply the adaptation of the contract. This additional condition requires a subjective evaluation; what would be the criteria to determine whether a contract is short-term or not? For example, regarding the adaptation of the contract, one year might be considered short for lease contract but long for credit contract. This would apparently lead to indefinite and arbitrary consequences. Having pointed out to the principles accepted by the doctrine and the decisions of the Court of Appeal for the period prior to the entering into force of Article 138 of the TCO, we can now examine the conditions set forth in the mentioned provision for the adaptation of the contract.

19.3

Conditions of TCO Article 138

The conditions specified in Article 138 of the TCO for the adaptation of the contract are listed as follows in the preamble of the provision: 1. An extraordinary event which is unforeseen and not expected to be foreseen by the parties during conclusion of the contract must have occurred; 2. This situation should have arisen due to a reason not caused by the obligor; 3. This situation must have changed the present conditions during conclusion of the contract to the detriment of the obligor to such an amount as to violate the principle of good faith. 4. The obligor must have not discharged his debt yet or have discharged his debt by reserving his rights arising from excessive difficulty of performance. 5. Each of the conditions will be explained briefly.

19.3.1

Unforeseeability

Unforeseeability is the main condition for the adaptation of the contract. The extraordinary event in question should be unforeseen by the parties during conclusion of the contract. When one foresees an event, it is not possible to state that this person does not have the option to choose. In the case where one foresees or is expected to foresee an event, this event and its consequences would be amongst the chain of thoughts leading this person to make choices. Therefore, that person should bear the consequences of her/his choice and thus the conclusion of the contract, since such event would no longer be counted as an external factor.

318

B. Baysal

Parties cannot consider every probability during conclusion of the contract. However, in some cases, the parties have to bear the consequences of an event unforeseen by them and cannot demand from the judge the adaptation of the contract to new provisions. In these cases, the parties are expected to foresee the event and take into account its consequences and in this sense, such events are considered to be “foreseeable”. Article 138 of the TCO explicitly states that the extraordinary situation in question should be “not foreseen and not expected to be foreseen by the parties during conclusion of the contract”. Therefore, the situations covered by the provision are not only the events unforeseen but also the events not expected to be foreseen by the parties. In other words, even if the parties do not foresee such event but it is expected to be foreseen by them, they cannot demand the adaptation of the contract. For example; following the major economical crisis in our country, the doubtful approach of the Court of Appeal towards unforeseeability is easily spotted in its decisions, an excerpt from one of which is as follows15: It is a known fact that devaluation and economical crisis do not occur at once, they occur following some financial bottleneck. Those who conclude a contract and incur debt in foreign currency instead of Turkish currency which constantly loses value against foreign currency should foresee such increase, looking at the history of the currencies in our country, and the defendant should expect the upcoming change.

Another issue that is often raised in the decisions of the Court of Appeal needs to be pointed out under this section. It is a really problematic issue whether the merchant can or cannot demand the adaptation of the contract. Does liability for the due care and diligence of a prudent Merchant (Article 18 of the Turkish Commercial Code16) mean that trader can foresee every situation? The Court of Appeal consider the “liability for the due care and diligence of a prudent merchant” in the case where the party who demands the adaptation of the contract is merchant. In the decisions of the Court of Appeal, in comparison with non-merchants, merchants are subject to a stricter evaluation regarding state changes, subsequent developments, examples of which can be listed as follows: The Merchant “should know the authorities of the Ministry of Finance to allocate foreign currency better than anyone else and act like a prudent and cautious merchant”17; “merchant must act like a prudent business man in the case of low production and should have stored up the raw materials in advance”.18 Beside these particular situations, the Court of Appeal generally applies strict criteria to merchants especially about foreseeability of the unstable economic situation. The demands for the adaptation of the contract of the merchants concluding contracts covering debts in foreign currency are often rejected because of the lack of unforeseeability.19 15

Y. 13. HD. 9.6.2005, E. 2005/1874, K. 2005/9749. Law numbered 6102 of 13 January 2011. Official Gazette numbered 27846 of 14 February 2011. 17 YHGK., 18.4.1984 T., E. 11–139, K.426 (Uygur 2003, pp. 4029–4030). 18 Y. 15. HD., 2.6.1987 T., E. 26, K.2433 (Uygur 2003, art. 117, pp. 4031/4032). 19 YHGK 15.10.2003 E.2003/13-599 K. 2003/599; YHGK 07.5.2003 E. 2003/13-332, K. 2003/340; Y. 13. HD. 28.6.2004, E. 2004/2610, K. 2004/10082, Y. 13. HD. 23.9.2003, E. 2003/5912, K. 16

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It seems that the Court of Appeal takes into consideration only whether the contracting party is merchant or not. The decisions of the Court of Appeal reveal the fact that an abstract evaluation is done and that the subjective features of the contracting parties are not taken into consideration. Nevertheless, liability for the due care and diligence of a prudent merchant, which originates from being a merchant, should not be the only criterion to be considered in the decisions of the Court of Appeal. When carrying out an abstract evaluation, the adaptation of the contract would not be possible if the contracting party to the detriment of whom the present conditions during conclusion of the contract are changed did not foresee the event whereas a reasonable man would foresee. In the case where the adaptation of the contract is demanded by the merchant contracting party, being a merchant would surely be considered as a criterion but the demand should not necessarily be rejected for this reason. As a matter of fact, if another merchant under the same circumstances might not have foreseen the changed conditions either, being a merchant would not be considered as the reason for the lack of the condition of unforeseeability. A significant disadvantage of the abstract evaluation is, if it is done in a strict manner, to come to the conclusion that everything is foreseeable. A way to prevent this result would be to regard the subjective features of the parties and the circumstances of the present case during the abstract evaluation. The features of a reasonable man and how this reasonable man would react under the same circumstances as the contracting parties should be determined by taking into consideration the characteristics of the party demanding the adaptation of the contract. For example; in the case where a merchant demands the adaptation of the contract, the characteristics and the knowledge of that merchant who acts reasonable and exercises due diligence should be regarded instead of those of any merchant who is expected to be liable for due care and diligence of a prudent merchant. Another problem is how the economical situation of the contracting parties should be taken into consideration about the assessment of risk sharing and unforeseeability. In our opinion, economical and social situation of the parties can be a criterion only for the abstract evaluation of unforeseeability. The evaluation should always be carried out looking at whether a reasonable man of the same features as the aggrieved party can foresee the changing conditions or not. In other words, the economical situation and the personal features of that person should not be taken into consideration. Especially the economical situation of the parties can only be a secondary criterion regarding foreseeability. Subjective economical and social situation of the parties does not necessarily mean that they are to undertake the risks related to the contract. Therefore, a party having good economical situation does not have to undertake the risk. The fact that a contractor works in a big and marketdominant firm would lead her/him to take into consideration the risks and thus

2003/10490; Y. 13. HD. 3.7.2003, E. 2003/4607, K. 2003/9022; Y. 13. HD. 10.6.2003, E. 2003/3622, K. 2003/7636.

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foresee better, not undertaking the risk because of her/his good economical situation, compared to an average contractor. Another important question to be answered is the scope of foreseeability during conclusion of the contract. For example; the event itself might be foreseen but the extent of its consequences might not be; the possibility of the outbreak of a war or of an economical crisis might be foreseen during conclusion of the contract but the duration of the war or the economical crisis and its severity might not be. In the case where an event is foreseeable however its consequences are huge in an extraordinary way, such event is considered to fulfil the condition of unforeseeability in the Turkish doctrine.20 For this reason, it would be better to express the unforeseeability of the effects of the changed situation to the contract, rather than the unforeseeability of the situation itself. Whether the situation is foreseeable should be determined by the present conditions during conclusion of the contract. On the other hand, what happened prior to the conclusion of the contract is also of importance. If the change occurred after conclusion of the contract did not happen for a long time prior to the conclusion of the contract, this fact might provide an important data regarding unforeseeability. For example; a sudden rise in coal prices after conclusion of the contract while the prices had a steady uptrend in the last 20 years, might be accepted unforeseeable. Another significant criterion might be the market situation during conclusion of the contract. It may be difficult to say that the situation is unforeseeable regarding a contract concluded during an economical crisis in the case where this economical crisis increasingly continues. As stated in the decision mentioned above, if you live in a country where economical crisis occurs frequently, you would probably foresee. The last criterion regarding the condition of unforeseeability is an extraordinary event to occur. However, this issue is quite problematic in the doctrine.21 Further information on this discussion is out of the scope of this work but it is noteworthy that the decisions of the Court of Appeal are in accordance with this last criterion. The Court of Appeal clearly seeks the “extraordinary changes” in many of its decisions for the adaptation of the contract.22 However, such extraordinary changes should not exclusively refer to disasters as earthquake or flood affecting the entire community, whether these changes are extraordinary for the contracting parties should also be considered.

20

Erman (1979), pp. 80–81; Tandoğan (1989), pp. 241–242; Arat (2006), p. 105. Baysal (2009), pp. 161–162. 22 YHGK 19.02.1997 E. 1996/11-762, K. 1997/77 in YKD 1997/5, s.681-682; YHGK, 18.11.1998, E. 1998/13-815, K.1998/835, Yasa 2000/1, p. 66 ff. 21

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19.3.2

321

The Situation Should Have Arisen Due to a Reason Not Caused by the Obligor

In order for the aggrieved party to have the right to demand the adaptation of the contract, the situation resulting from the unexpected event which occurred after conclusion of the contract should not have arisen due to a reason caused by the obligor.23 If the party who claims to be aggrieved because of the change of circumstances has an effect on the change which occurred following conclusion of the contract, this party cannot demend the adaptation of the contract. The condition that the unexpected event should have arisen due to a reason not caused by the obligor is technically broader than fault. The aggrieved party should not have caused the situation, given rise or had an effect on it.24 This condition is also covered under Article 138 of the TCO. It is stated in the provision that the change in the circumstances “arises due to a reason not caused by the obligor”. It is appropriate to prefer such expression instead of the term “fault”. Nonetheless, there is a point to be criticized in the expression of “arises due to a reason not caused by the obligor”. It is misleading that the provision mentions only “obligor”; the article is wrongly regulated in the manner as if the creditor cannot be the aggrieved party because of the change of circumstances, cannot demand the adaptation of the contract or can demand the adaptation of the contract despite the change of circumstances which is attributable to him. However, it has been accepted since many years in the Turkish jurisprudence that both obligor and creditor can demand the adaptation of the contract.25 Moreover, the adaptation of lease contracts has been accepted primarily in favor of lessor in the decisions of the Court of Appeal.26 Hence the need of the adaptation of the contract can be also raised by the creditor. Therefore, it would be more appropriate if the term of aggrieved party (la partie lesée, benachteiligte Partei) was used instead of creditor or obligor.27 Nevertheless, it is possible to read the provision in this manner since it cannot be expected that Article 138 of the TCO was regulated as falling behind the decisions of the Court of Appeal.

23

Serozan (2014), § 20 N. 8; Tekinay et al. (1993), p. 368, 1007; Arat (2006), p. 135; Kaplan (2007), pp. 150–151; Erman (1979)), p. 85 ff.; Jäggi and Gauch (1980) Art. 18 OR N. 673; Bischoff (1983), p. 216; Merz (1966) in Berner Kommentar Art. 2 ZGB, N. 227; Deschenaux (1942), pp. 509a–636a, p. 558a ff. 24 Kramer and Schmidlin (1986) in Berner Kommentar Art. 18 OR N. 342; Deschenaux (1942), p. 559a. 25 YHGK, E. 2003/13-332, 2003/340, T. 7.5.2003; YHGK, E. 2003/13-599, 2003/599, T. 15.10.2003. 26 Y. 13. HD. 12.2.1981, E. 1981/147, K. 1981/932, YKD 1982, p. 1561 ff. 27 Cf. BGB § 313, PICC 6.2.2, PECL 6:111. The party “against whom the balance of benefits is reversed” is also mentioned in some decisions of the Court of Appeal. Y. 11. HD., 4.11.1984 T., E. 4170, K.4731 (Uygur 2003, p. 292 vd.), this expression is also proper, however the term of “aggrieved party” is not only more brief but also commonly used in comparative law. Burcuoğlu (1995), p. 29 ff.

322

B. Baysal

The condition that the aggrieved party should not have contributed to the unexpected event is seeked for in two stages. The aggrieved party should not have an effect on the change of circumstances and should act carefully after the change of circumstances occurs. First of all, the aggrieved party should notify the other party regarding the hardship because of the change of circumstances without delay.28 The notification should be made before the change of circumstances becomes excessively onerous; otherwise, the aggrieved party would be contributing to the onerosity of the change of circumstances.29 Unless the notification is made, the aggrieved party bears the risk of the change of circumstances that has become onerous. In this regard, a question that comes to mind is whether the contracting party can demand the adaptation of the contract in case of default. The common opinion is that the contracting party is not able to demand the adaptation of the contract in case of default.30 No matter whether it is the default of the creditor or obligor, the party demanding the adaptation of the contract should not be in default.31 On the other hand, it is stated in the doctrine that the defaulting party might demand the adaptation of the contract if there is not fault for default.32 Such interpretation would be in compliance with Paragraph 2 of Article 119 of the TCO.

19.3.3

This Situation Must Have Changed the Present Conditions During Conclusion of the Contract to the Detriment of the Obligor to Such an Amount as to Violate the Principle of Good Faith

This condition specified in Article 138 of the TCO is qualified as the condition of unexpectability of performance.33 As a result of change of circumstances after conclusion of the contract, the performance should be unexpectable from one of the parties in the light of the principle of good faith so that the adaptation of the contract can be demanded. The degrees of unexpectability of performance by the aggrieved party are significant also in terms of the consequences of Article 138 of the TCO. If the performance of the contract cannot be expected even in the case of its adaptation, the contract should be withdrawn. If apparently the performance cannot be expected from the aggrieved party because of the change in circumstances, Article 138 of the TCO applies. After this phase, if the conclusion that the performance 28

Erman (1979), p. 89. Deschenaux (1942), p. 561a. 30 Jäggi and Gauch (1980) Art. 18 OR N. 674; Kramer and Schmidlin (1986) in Berner Kommentar Art. 18 OR N. 344; Bischoff (1983), pp. 218–219; Merz (1966) in Berner Kommentar Art. 2 ZGB N. 227; Tercier (1979), p. 208; Deschenaux (1942), p. 561a ss; Larenz (1963), p. 139. 31 Jäggi and Gauch (1980) Art. 18 OR N. 674. 32 Jäggi and Gauch (1980) Art. 18 OR N. 674 Kramer and Schmidlin (1986) in Berner Kommentar Art. 18 OR N. 344; Bischoff (1983), p. 219. 33 Baysal (2009), p. 190 ff. 29

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might be expected after adaptation of the contract can be drawn, the adaptation should be done and if that is not possible, the contract should be withdrawn. Thus, in Article 138 of the TCO, it is emphasized expressly that the obligor is “entitled to demand from the judge the adaptation of contract to new provisions and to withdraw from the contract when such adaptation is impossible”. The expression “when such adaptation is impossible” refers to the possibility where the performance cannot be expected due to the principle of good faith even after adaptation of the contract. In that case, the only way to provide a fair risk share again is the termination of the contract. The Court of Appeal considers onerosity of performance as a criterion.34

19.3.4

The Obligor Must Have Not Discharged His Debt Yet or Have Discharged His Debt by Reserving His Rights Arising From Excessive Difficulty of Performance

It is a problematic issue that whether a performed contract can be adapted or not.35 The common opinion in the doctrine is that in order to accept the adaptation of the contract, the obligations should not have been performed yet.36 The decisions of the Court of Appeal are in accordance.37 “The performance of the obligation already demonstrates that there is not hardship”.38 It is asserted that performing the obligation eliminates the option of the adaptation of the contract; the obligor accepts both the existence of the obligation and that performance can be expected despite the change of circumstances. In our opinion, the performance of contract does not indicate that there is not hardship. It would be easier to comprehend recognizing the fact that the adaptation of the contract can be demanded not only by the obligor but also by the creditor. In the case where the creditor demands the adaptation of the contract (e.g. demanding the adaptation of the rental), she/he would continue performing her/his obligation (e.g. allowing lessee to use the rented thing). The adaptation of the contract by the creditor is accepted in Turkish Law.39 Just because the obligation is performed by the creditor does not necessarily indicate that the performance has not become onerous for her/him. In some cases, the adaptation of the contract is the only just way despite the performance of the contract. In our opinion, the only valid criterion, in this context, for the adaptation of the contract is to determine the moment from

34

YHGK 1.10.1997, E. 1997/13-493, K. 1997/87. Baysal (2009), p. 111 ff. 36 Eren (2014), p. 441; Bischoff (1983), p. 220. 37 Y. 13. HD. 21.04.2003, E. 2002/15326, K. 2003/4726, (in: İBD 2003, pp. 805–809, (p. 809)). 38 Burcuoğlu (1995), p. 12; Arat (2006), p. 123; Kaplan (2007), p. 153. 39 Burcuoğlu (1995), p. 13. 35

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which the non-adapted performance can no longer be expected from the aggrieved party based upon the principle of good faith. The opinion that the performed contract can only be adapted on specific conditions was accepted in Swiss-Turkish Law in order to reach a common ground and prevent inequitable situations. According to this opinion, the adaptation of the contract is possible only if the performance is realized by reserving the rights arising from excessive difficulty of performance.40 This opinion was suggested in order to protect particularly the weaker party; in other words, it was acknowledged taking into consideration the individuals who suffered from economical crisis in our country. Article 138 of the TCO is based on this opinion as explicitly as “if the obligor has not discharged his debt yet or has discharged his debt by reserving his rights arising from excessive difficulty of performance”. Since we are of the opinion that a performed contract can be adapted, we do not seek for any conditions as the one indicated in the provision. Moreover, it would not be practical to also look for whether the performance is realized by reserving the rights arising from excessive difficulty of performance, while checking if the adaptation of the contract can be done is already complicated. The adaptation of a performed contract in a strict sense should be done very carefully. Nevertheless, if the injustice arising due to the change of circumstances, the conditions of the present case and the status of the contracting parties indicate excessive difficulty of performance despite the performance done, the adaptation of the contract in a strict sense should be considered possible. If, in the present case, the performance after the change of circumstances requires unbalanced sacrifice, the fact that the performance is done should not prevent the adaptation of the contract. As a principle, in order for the adaptation of a performed contract, it should be accepted that the obligor can only use her/his right to termination instead of right to withdraw. However, in exceptional cases, the obligor can use the right to withdraw (rückwirkende Vertragsanpassung) while demanding the adaptation of the contract which would change the content of the contract.41

19.4 19.4.1

Consequences of TCO Article 138 General Overview

If the above mentioned conditions are satisfied, pursuant to Article 138 of the TCO, the obligor – it shall be read as the aggrieved party – has the right to demand from the judge the adaptation of the contract to new provisions or withdrawal from the contract when such adaptation is not possible. Carefully read, the provision 40 Burcuoğlu (1995), p. 13; Arat (2006), p. 124; Kramer and Schmidlin (1986) in Berner Kommentar Art. 18 OR N. 345; Jäggi and Gauch (1980) Art. 18 OR N. 675; Bischoff, p. 219. 41 Larenz (1963), p 137 ff., Jäggi and Gauch (1980) Art. 18 OR N. 676; Kramer and Schmidlin (1986) in Berner Kommentar Art. 18 OR N. 345; cf. Bischoff (1983), p. 220.

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prioritizes the adaptation of the contract and the option to withdraw from the contract is accepted only if the adaptation of the contract is impossible.

19.4.2

Is It Obligatory to Demand the Adaptation of the Contract from the Judge?

Regarding the provision, the most problematic issue is probably whether it is obligatory to demand from the judge the adaptation of the contract. This discussion should better be mentioned. There are two consequences of Article 138 of the TCO; the contract can be either adapted or withdrawn. The withdrawal from the contract, as it is accepted, is so called (Yenilik doğuran hak – Gestaltungsrecht-right to establish alter or terminate a legal transaction) and it does not have to be addressed to the courts. To this respect, the conclusion that the adaptation of the contract as one of the consequences of Article 138 of the TCO should be demanded from the judge and on the other hand, the withdrawal from the contract does not have to be demanded from the judge might be drawn. However, it would be conflictual to accept that the two consequences of demanding the adaptation of the contract have different legal characteristics. Therefore, in the doctrine, it is stated that a severe sanction as withdrawal from the contract not requiring to be demanded from the judge and on the other hand, a less severe sanction as adaptation of the contract requiring to be demanded from the judge is inconsistent.42 The two consequences are not completely different; withdrawal from the contract, in fact, is the most severe form of the adaptation of the contract; moreover it is named, in the doctrine, as “adaptation to zero” (Anpassung auf Null).43 In our opinion, the right to demand the adaptation of the contract should be accepted as a Yenilik doğuran hak (Gestaltungsrecht-right to establish alter or terminate a legal transaction) for both of the consequences of Article 138 of the TCO.

19.4.3

Whether Renegotiation of the Contract Is Compulsory for the Parties Within the Scope of TCO Article 138

Renegotiation of the contract is recently accepted as one of the consequences regarding the adaptation of the contract in European Contract Law. There are provisions regarding renegotiation of the contract in UNIDROIT Principles (6.2.3), Principles of European Contract Law (PECL 6:111) and Draft Common Frame of Reference (DCFR (III.-1:110).44 42

Atamer (2006), p. 16. Fikentscher (1971), p. 107. 44 For the discussions regarding CISG art. 79 also see Baysal (2009), p. 71 ff.; Atamer (2005), p. 463 ff.; Dewez et al. (2011), pp. 101–154. 43

326

B. Baysal

According to Article 6.2.3. of PICC which includes the consequences of hardship: (1) In case of hardship the aggrieved party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based. (2) The request for renegotiation does not in itself entitle the aggrieved party to withhold performance. (3) Upon failure to reach agreement within a reasonable time either party may apply to the court. (4) 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. According to Article 6:111 of PECL: (2) (…) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or terminating it. (…) (3) If the parties fail to reach agreement within a reasonable period, the court may: (a) terminate the contract at a date and on terms to be determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances. In either case, the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing. Pursuant to the DCFR III.-1:110, renegotiation is one of the conditions of the adaptation of the contract to new provisions. According to this provision, if the judge decides that the renegotiation is not being performed reasonably and not in compliance with the principle of good faith, she/he can avoid to render a verdict regarding the adaptation of the contract or withdrawal from the contract, by which way she/he would lead the parties to renegotiate reasonably and in compliance with the principle of good faith. Pursuant to the harmonization of European Contract Law, at the time the adaptation of the contract is demanded from the judge, the renegotiations should have done, however the parties should not have succeeded to renegotiate reasonably. Moreover, according to PECL, the judge may also determine compensation in the case where the renegotiations are not performed reasonably.45 As regards to Turkish law, neither the Court of Appeal nor the legislator expressed at all the renegotiations, as if they are unaware of the subject matter.

45 For the discussions regarding the juridical nature of duty of renegotiation also see Baysal (2009), p. 233 ff.

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On the other hand, Article 138 of the TCO does not exclude renegotiation. In our opinion, renegotiation shall be performed not to violate principle of good faith which is, in fact, the legal ground of the provision.46 In order for the party requesting the adaptation of the contract to be considered fulfilled her/his duty of renegotiation; first of all she/he should notify the other party regarding the change of circumstances and its effects on the contract. This notification should include the proposal for renegotiation as well. This duty should be considered fulfilled in the case where the addressee refuses to negotiate or if it is certain that no result can be achieved by negotiations in the light of principle of good faith. In case the negotiations start, they should be held in accordance with principle of good faith so that the renegotiation would be counted fulfilled. The party holding the right to demand the adaptation of the contract should do her/his best regarding this matter. It is in compliance with the Turkish law system that the parties should perform the duty of renegotiation, which is the last chance to reconciliate the parties without the adaptation of contract. The legal ground of the duty of renegotiation is principle of good faith in comparative law as well. The principle of good faith, in the first place, should lead the parties facing difficulty in performing the contractual obligations to come together and to seek a solution. Therefore, we are of the opinion that the parties shall come together in order to fulfil the duty of renegotiation prior to the adaptation of the contract. In our opinion, acting contrary to the mentioned duty would eliminate the right to demand the adaptation of the contract, which would constitute a sanction. To sum up our opinion regarding the consequences of Article 138 of the TCO, the aggrieved party who suffers because of the change of circumstances after conclusion of the contract has the right to demand the adaptation of the contract to new provisions by unilateral declaration (Yenilik doğuran hak - Gestaltungsrecht-right to establish alter or terminate a legal transaction). However, in order for the aggrieved party to exercise this right, she/he should primarily renegotiate with the other party. This is not an obligation for the aggrieved party, rather it is her/his duty. If the aggrieved party does not act according to this duty, she/he will not be asked for compensation; nevertheless, she/he can no longer demand the adaptation of the contract. In case the adaptation of the contract is not possible, withdrawal from the contract would be the solution.

46

In Turkish Law, Gürsoy is of the opinion that the aggrieved party should propose negotiation by notifying the other party before she/he exercises a yenilik doğuran hak regarding the adaptation of the contract; according to the author, in the case where the aggrieved party does not make the notification, this can be excused only if it is certain that the proposal for negotiation would be rejected or negotiation is not possible because of hardship. Gürsoy (1950), p. 173.

328

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B. Baysal

Conclusion

To sum up the adaptation of the contract, it reveals a problem of sharing the risks. Who will bear the risk arising from the change of circumstances? Article 138 of the TCO does not take us further than the decisions of the Court of Appeal. Accordingly, the question that comes to mind is what the subject provision would contribute to Turkish Law. The adaptation of the contract, constituting an exception for the principle of pacta sund servanda, changes the basis of Contract Law. Since the adaptation of the contract is covered explicitly in the TCO, significant consequences will be faced. The contracting parties should not interpret the provision as they have the right to demand the adaptation of the contract for every problem they face. The criteria for the adaptation of the contract should be objective and should not lead to misconception as repealing the principle of pacta sunt servanda. Article 138 of the TCO does not specify objective criteria, rather includes general expressions; therefore the wording will be improved by practice. In order to enable the correct implementation of Article 138 of the TCO not violating the basic principles of Law of Obligations, the courts should render verdicts taking into consideration the problems raised in the doctrine regarding the provision. It should not be forgotten that although the tendency is to regulate in the codes the adaptation of the contract increased recently, objective criteria is being adopted by the courts in many countries. Article 138 of the TCO does not prevent objective criteria to be adopted. Substantially, it takes us to another discussion regarding this topic: Is the tendency to regulate in the codes the adaptation of the contract appropriate? In our opinion, the judge should consider the adaptation of the contract in accordance with substantial justice and the adaptation of the contract should be improved by means of precedents.

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Dewez, J., C. Ramberg, R.M. Uribe, R. Cabrillac, and L.P.S.M. Pradera. 2011. The duty to renegotiate an international sales contract under CISG in case of hardship and the use of the Unidroit principles. ERPL 1-2011: 101–154. Draetta, U., and R. Lake. 1996. Contrats Internationaux: Pathologie et Remèdes. Trans. Laure Tournefier. Bruxelles: Victoria Vohman. Eren, F. 2014. Borçlar Hukuku Genel Hükümler. Ankara: Yetkin. Erman, Hasan. 1979. İstisna Sözleşmesinde Beklenilmeyen Haller (BK. 365/2). İstanbul: Istanbul Universitesi, Hukuk Fakultesi. Feyzioğlu, T. 1947. İdare Hukukunda Emprevizyon Nazariyesi (Beklenmeyen Haller Meselesi). Ankara: Milli Eğitim Basımevi. Fikentscher, W. 1971. Die Geschäftsgrundlage als Frage des Vertragsrisikos. Münih: Beck. Gürsoy, K.T. 1950. Hususî Hukukda Clausula Rebus Sic Stantibus- Emprevizyon Nazariyesi. Ankara: Güney matbaacılık ve gazetecilik t.a.o. Hausheer, H., and M. Jaun. 2003. Die Einleitungsartikel des ZGB, Art. 1–10 ZGB. Bern: Stämpfli. Jäggi, P., and P. Gauch. 1980. Kommentar zum schweizerischen Zivilgesetzbuch, V. Band, Obligationenrecht, Teilband V 1b (Art. 18 OR), Zürich. Kaplan, İ. 2007. Hakimin Sözleşmeye Müdahalesi. Ankara: Seçkin Yayıncılık. Kramer, E.A., and B. Schmidlin. 1986. Berner Kommentar zum schweizerischen Privatrecht, Allgemeine Einleitung in das schweizerische Obligationenrecht und Kommentar zu Art. 1–18 OR, Teilband 1, Art. 18 OR, Bern. Larenz, K. 1963. Geschäftsgrundlage und Vertragserfüllung. München: Beck. Merz, H. 1966. Berner Kommentar zum schweizerischen Privatrecht, Einleitung, Art. 1–10 ZGB, Art. 2 ZGB, Bern. Oğuzman, K., and T. Öz. 2010. Borçlar Hukuku Genel Hükümler. İstanbul: Vedat Kitapçılık. Oktay-Özdemir, S. 2007. Mal ayrılığı rejiminde eşlerin mali yükümlülükleri ve evlilik sona erdikten sonra diğer eşin malvarlığında bulunan katkıların iadesi in Prof. Dr. Ergon A. Çetingil ve Prof. Dr. Rayegân Kender’e 50. Birlikte Çalışma Yılı Armağanı, İstanbul: 980–993. Özel, Ç. 2013. Turkish code of obligations. Ankara: Seçkin. Schwarz, A. 1944. Harbin Hususi Akitler Üzerindeki Tesiri. Adliye Dergisi 186–202. Serozan, R. 2014. İfa – İfa Engelleri – Haksız Zenginleşme (Kocayusufpaşaoğlu/Hatemi/Serozan/ Arpacı; Borçlar Hukuku Genel Bölüm – Üçüncü Cilt). İstanbul. Tandoğan, H. 1989. Borçlar Hukuku Özel Borç İlişkileri, V.II, İstisna (Eser) ve Vekalet Sözleşmeleri Vekaletsiz İş Görme Kefalet ve Garanti Sözleşmeleri, Ankara. Tekinay, S.S., S. Akman, H. Burcuoğlu, and A. Altop. 1993. Tekinay Borçlar Hukuku Genel Hükümler. İstanbul. Tercier, P. 1979. Clausula rebus sic stantibus JdT I: 208. Tunçomağ, K. 1967. Alman Hukukunda Borcun İfasında Aşırı Güçlük (Muamelenin Temeli) ile ilgili Objektif Görüşler. İÜHFM: 887. Uygur, T. 2003. Açıklamalı-İçtihatlı Borçlar Kanunu Sorumluluk ve Tazminat hukuku, vol. 4, 109– 213. Ankara: Seçkin. 2. b.

19.5.1

List of Cases

Turkish Court of Cassation 11. Civil Chamber dated 01.04.2002, E. 2001/10794 K. 2002/2870. 11. Civil Chamber dated 01.04.2002, numbered E. 2001/10794 K. 2002/2870. 11. Civil Chamber dated 12.12.1994, E. 1994/5786, K. 1994/9585. 11. Civil Chamber dated 4.11.1984 T., E. 4170, K.4731 in Uygur T (2003) Açıklamalı-İçtihatlı Borçlar Kanunu Sorumluluk ve Tazminat hukuku, Madde 109–213, V. 4, 2. b., Ankara: 292. 13. Civil Chamber dated 06.04.1995, E. 1995/145, K. 1995/3339.

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B. Baysal

13. Civil Chamber dated 10.6.2003, E. 2003/3622, K. 2003/7636. 13. Civil Chamber dated 12.2.1981, E. 1981/147, K. 1981/932 in YKD 1982: 1561. 13. Civil Chamber dated 21.04.2003, E. 2002&15326, K. 2003/4726 in İBD 2003: 805–809. 13. Civil Chamber dated 23.9.2003, E. 2003/5912, K. 2003/10490. 13. Civil Chamber dated 28.6.2004, E. 2004/2610, K. 2004/10082. 13. Civil Chamber dated 3.7.2003, E. 2003/4607, K. 2003/9022. 13. Chamber dated 9.6.2005, E. 2005/1874, K. 2005/9749. 15. Civil Chamber dated 2.6.1987 T., E. 26, K.2433 in Uygur T (2003) Açıklamalı-İçtihatlı Borçlar Kanunu Sorumluluk ve Tazminat hukuku, Madde 109–213, V. 4, 2. b., Ankara: 4031–4032. 3. Civil Chamber dated 07.10.2004, E. 2004/11065, K. 2004/10658. 3. Civil Chamber dated 20.5.2003 numbered E. 2003/6477, K. 2003/6152. 3. Civil Chamber dated 26.5.2005 numbered E. 2005/5426, K. 2005/5859. 3. Civil Chamber dated 4.3.2003 numbered E. 2003/1941, K. 2003/2097. General Assembly of Civil Chambers dated 07.5.2003 numbered E. 2003/13-332, K. 2003/340. General Assembly of Civil Chambers dated 1.10.1997 numbered E. 1997/13-493, K. 1997/87. General Assembly of Civil Chambers dated 15.10.2003 numbered E. 2003/13-599, 2003/599. General Assembly of Civil Chambers dated 17.09.1997 numbered E. 1997/11-460 K. 1997/651. General Assembly of Civil Chambers dated 18.11.1998 numbered E. 1998/13-815, K.1998/835 in Yasa 2000/1: 66. General Assembly of Civil Chambers dated 18.4.1984 numbered E. 11–139, K.426 in Uygur T (2003) Açıklamalı-İçtihatlı Borçlar Kanunu Sorumluluk ve Tazminat hukuku, Madde 109–213, V. 4, 2. b., Ankara: 4029–4030. General Assembly of Civil Chambers dated 19.02.1997 numbered E. 1996/11-762, K. 1997/77 in: YKD 1997/5, p 681–682. General Assembly of Civil Chambers dated 19.02.1997 numbered E. 1996/11-674, K. 1997/87. General Assembly of Civil Chambers dated 27.1.2010 numbered E. 2010/14-14, K. 2010–15. General Assembly of Civil Chambers dated 30.10.2002 numbered E. 2002/13-852, K. 2002/864 in Yargı Dünyası, February 2003–86: 38–43. General Assembly of Civil Chambers dated 7.5.2003 numbered E. 2003/13-332, 2003/340. General Assembly of Civil Chambers, dated numbered 15.10.2003E. 2003/13-599, 2003/599.

Index

A Adaptation (adjustment) of the contract, 314–328 Alteration of the circumstances, 27, 92, 93, 95 Aufopferungsanspruch, 5, 23, 25

B Basis of the contract doctrine (Wegfall der geschäftsgrundlage), 4, 11, 15, 54 Binding force of the contracts, 4–29, 57, 147, 154, 164, 166, 172–174, 177, 184, 186, 191–218, 265–282 Burden of proof, 179 Burden of risk, 5, 19, 234

C Canal de Craponne case, 13 Change of circumstances, 10, 11, 14, 15, 17–20, 23–25, 42, 53, 54, 84, 86, 88, 90–92, 94–98, 106–109, 111–113, 145–157, 164–186, 192, 193, 195–198, 201, 202, 204–206, 210, 212, 215, 221–239, 255–259, 266, 268, 269, 271, 285, 286, 290, 291, 310, 314, 321–324, 326, 327 Clausula rebus sic stantibus, 4, 9–12, 54, 84–90, 96–98, 103, 106–109, 111, 114, 116, 118, 124–126, 259, 266–272, 314 Collapse of financial institutions, 4 Complementary interpretation of the contract based on the hypothetical intentions of the parties, 4

Convention on International Sales of Goods (CISG), 16, 147, 164, 325 Coronation cases, 12, 13

D Damages, 44, 87, 97, 127, 128, 133, 194, 206, 215, 239, 271, 275, 279, 296, 300, 302, 326 Depreciation of currency, 298 Destruction of subject matter, 297 Devaluation, 4, 22, 38, 45, 146, 166, 171–174, 177, 180, 222, 234, 261, 263–264, 318 Distortion of the equivalence of exchange, 5, 309 Draft Common Frame of Reference (DCFR), 17, 20, 29, 107, 170, 314, 325, 326

E Economic crises, 34, 37, 101–103, 107–110, 114, 117, 118, 164–168, 172, 177–179, 186, 208, 210, 216, 222, 229, 265, 290, 308 Error, 14, 15, 19, 20, 150, 151, 153, 226, 227, 282, 308 Exceptional circumstances, 5, 9, 63, 128, 132, 164, 177–179, 182, 184, 185, 204, 270–271, 286, 297–300 Excessive onerousness, 5, 8, 9, 14, 20, 21, 36, 93, 132, 169–170, 172, 173, 176, 177, 180, 182, 184, 185, 298–299 Exemption clauses, 289 Extraordinariness, 4, 19, 20, 22

© Springer International Publishing Switzerland 2016 B. Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision, Ius Comparatum – Global Studies in Comparative Law 17, DOI 10.1007/978-3-319-27256-6

331

332 F Failed assumptions, 12, 15, 124, 125, 127, 129–132 Fault, 7, 117, 147, 202, 256, 260, 269, 298, 303, 312, 321, 322 Financial crises, 3–28, 34, 53–58, 84, 101–119, 121–135, 146, 164, 191, 221–239, 255–282, 285–303, 307–312 Force majeure, 4, 44, 54, 60, 86, 92, 126–129, 131–133, 135, 201, 212, 224, 259–262, 269, 286, 288–291, 293–296, 299, 300, 303, 314 Foreseeability, 91, 105, 151, 173, 270–271, 295–296, 318–320 Foundation of the contract (Geschäftsgrundlage), 151 Freedom of contract, 11, 84, 89, 290 Frustration, 4, 10, 12–17, 20, 24, 25, 42–45, 94–95, 98, 126–127, 151, 156, 176, 210, 228, 236, 260, 266, 286, 288–303, 309 Fundamental change, 9, 10, 269

G Gaz de Bordeaux decision, 13 Good faith, 4, 6–11, 14, 17, 18, 21, 22, 24, 28, 29, 36, 42, 57, 76, 84, 85, 89, 90, 94, 97, 130, 133, 134, 148–154, 181, 192, 202, 205, 214, 216, 222, 223, 227, 229, 232, 234, 237, 268, 271, 275, 315–317, 322–324, 326, 327 Guarantee liability, 5–9, 16, 22, 27, 28

H Hardship, 4, 5, 16, 17, 19, 53, 54, 62, 70, 71, 77, 78, 107, 111, 116, 118, 121–135, 143, 154, 155, 209, 229, 250, 286, 290, 291, 293, 294, 298, 314, 322, 323, 326

I Immorality, 14–16, 106 Implied term (implied condition), 124, 148, 167, 172, 176, 292, 293 Impossibility, 6, 7, 12, 14, 16, 25, 46, 54, 88, 89, 104, 107, 109, 111, 113–117, 126–129, 131–133, 155–157, 169, 172, 174–176, 178, 180, 182, 185, 204, 227, 233, 260, 267, 290, 297–299, 309

Index Impracticability, 126, 172, 175, 176, 185, 267, 290, 298, 299, 303, 309 Imprévision, 4, 10, 13, 15, 24, 60–80, 139–143, 148, 210, 227, 243–252, 314 Indemnity, 5, 25, 26 Intervention, 5, 6, 8–23, 27–29, 35, 42, 65, 67, 69, 70, 73–75, 77–79, 132, 152, 154, 155, 183, 203, 215, 223–225, 228–236, 244, 250, 252, 263, 270–271

L Leases, 19, 154, 288 Lesion, 15 Liability, 36, 89, 90, 117, 127–129, 131–133, 147, 156, 165, 223, 237, 239, 256, 259, 275, 279, 302, 308, 309, 311, 312, 318, 319 Long-term contracts, 228, 316 Loyalty, 4, 7–11, 21, 24, 25, 28, 29

M Mistake, 14, 15, 19, 150, 151, 273, 275, 308 Modification, 38, 45, 47, 48, 58, 85, 90–98, 123, 124, 131, 139, 141, 181, 196, 209, 212, 214, 216, 218, 226, 239, 310, 314

N Negligence, 36, 37, 152, 239, 256, 275 Nominalism, 5–9, 16, 22, 27, 28, 39, 217, 234

P Pacta sunt servanda, 4–10, 13, 16, 22, 24–29, 33, 34, 36, 41, 72, 84, 95, 108, 123, 124, 127–129, 131, 147, 153, 164, 165, 167, 168, 172, 180, 185, 192, 197, 203, 205–210, 215, 221, 232, 243–245, 249, 255–259, 286, 289–294, 315, 328 Payment, 7, 34, 37, 40, 44, 69, 73, 117, 126, 128, 133, 193, 217, 218, 223, 230, 238, 258, 261, 268, 269, 271, 272, 316 Performance, 6, 8–19, 21, 22, 25, 26, 42, 48, 54–56, 84–95, 97, 109–117, 122, 126–129, 132–134, 148, 149, 151, 152, 155, 156, 169–185, 208, 212, 223, 228, 229, 231, 233, 239, 256, 257, 260, 261, 267, 269, 271, 288, 291–293, 295–300, 309, 310, 314, 317, 322–324, 326

333

Index Precondition, 12, 166, 172–177, 202 Presupposition, 10, 12, 36, 171, 175, 227–229 Principles of European Contract Law (PECL), 17, 18, 20, 24, 29, 107, 170, 215, 314, 321, 325, 326 Priority between remedies, 5, 26, 57, 134 Public policy, 307, 310

R Reasonableness, 6–8, 10, 27, 28, 112, 134, 303 Recession, 145, 288, 294, 311, 312 Reform, 8, 11, 18, 170, 255, 258, 281, 289, 300, 311 Renegotiation, 4–29, 57, 84, 98, 111–113, 134, 166, 179–181, 185, 186, 203, 206, 215, 216, 224, 237, 255–264, 272–281, 310, 325–327 Rents, 34, 35, 39, 41, 193, 196, 197 Restitution, 39, 88, 169, 180, 182, 249 Revision, 4–29, 42, 43, 48, 49, 84, 86, 94, 98, 133, 147, 151, 152, 154, 169, 179, 180, 185, 186, 192, 196, 197, 202, 205, 206, 210, 223, 229, 255–264, 272–281, 290, 307 Risk allocation, 5, 21, 28, 206, 296 Risk of crisis, 132

S Sanctity of contract, 6, 172–179, 185, 286, 289, 290, 312 Shocking cases, 9

Suez canal cases, 13, 296 Supervening events, 20, 53, 165, 168–170, 173–177, 179–182, 291, 293, 299, 300

T Taylor v Caldwell, 124, 292, 293, 297 Termination, 5, 9, 13, 15, 17, 18, 23, 25–27, 29, 36, 37, 41–43, 45, 48, 50, 54–58, 84–98, 105, 107, 108, 111–118, 133, 178, 180–186, 205, 212, 216, 221–229, 231, 234, 236–238, 260, 263, 271, 300, 314, 323, 324 Theory of unpredictability, 13, 14, 227

U Unexpected event, 12, 19, 321, 322 Unforeseeability, 4, 19, 20, 22, 23, 91, 131, 165, 204, 317–320 Unidroit Principles on International Commercial Contracts (PICC), 17, 18, 20, 21, 24, 107, 147, 170, 179, 321, 326 Unjust enrichment, 88, 117, 232, 267 Unpredictability, 4, 13, 54–56, 92, 108, 109, 165, 204, 206, 211, 215, 223, 227, 229, 230, 263 Usury, 14, 15, 22

V Voraussetzung, 12