© Springer International Publishing Switzerland 2015Javier Plaza Penadés and Luz M. Martínez Velencoso (eds.)European Perspectives on the Common European Sales LawStudies in European Economic Law and Regulation410.1007/978-3-319-10497-3_8
8. Change of Circumstances
LL.M. Humboldt Universität Berlin, University of Valencia, Valencia, Spain
Luz M. Martínez Velencoso
In many legal systems a fundamental change to the circumstances of a contract can serve to loosen the binding nature of that contract. The legal doctrine that provides this effect is called by various names in the different European countries. In previous European instruments, such as the PECL and the DCFR, the term used has been “change of circumstances”, and this is also the term settled on for the CESL, specifically in Article 89 CESL. When the exact fulfillment of a contract becomes disproportionate due to an unexpected change of circumstances, Article 89 contains a duty to renegotiate. If, within a reasonable period of time, the parties do not reach an agreement, they may request the assistance of the court or arbitrator. The judge may decide to adapt the contract taking into account the hypothetical will of the parties, or declare the dissolution of the contract and lay down the conditions for so doing.
The application of Article 89 CESL should not be problematic in the different European countries as there are a lot of similarities between the various European legal systems in this field, both in the terms used and the results achieved, as well as in its treatment by legal scholars.
KeywordsChange of circumstancesUnforeseen circumstancesImprévisionGeschäftsgrundlageEccessiva onerosità sopravvenutaHardship, clause “rebus sic stantibus”FrustrationAdaptation of the contractTermination
8.1 Change of Circumstances in the CESL
8.1.1 Legal Precedents
188.8.131.52 Regulation in the PECL
The principle of “pacta sunt servanda” is universally recognised. Contracts are binding because individuals are willing to fulfill them and they also trust that their counterparts will do the same. If all contracts were generally reviewable, the confidence of the economic agents would vanish, and it is confidence that is fundamental in any economic system. In any case, the idea that, as a general rule, contracts are binding and, therefore, in the case of non-performance there would be some kind of responsibility, is a necessary condition for the efficient functioning of the economic system.
However, in many legal systems a fundamental change to the circumstances of a contract can serve to loosen the binding nature of that contract. The legal doctrine that provides this effect is called by various names in the different European countries. In previous European instruments, such as the Principles of European Contract Law (PECL) and the Draft Common Frame of Reference (DCFR), the term used has been “change of circumstances” , and this is also the term settled on for the Common European Sales Law (CESL). Although their rules are very similar, these instruments will be discussed separately, and then compared.
In the PECL the doctrine of change of circumstances is regulated in art. 6:111, which establishes that:
A party is bound to fulfill its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished.
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, provided that:
the change of circumstances occurred after the time of conclusion of the contract,
the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract, and
the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear.
If the parties fail to reach agreement within a reasonable period, the court may:
terminate the contract at a date and on terms to be determined by the court; or
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 .
The aim of this article is to prevent that an increase of costs incurred as a result of unforeseen circumstances should be born entirely by one of the parties. In this sense, the article reflects the modern tendency to confer on the court the power to moderate the rigor of the principle “pacta sunt servanda”.
In the opinion of Lando and Beale (2000), an argument against the inclusion of a provision of this type could be made in that the defence of the principle “pacta sunt servanda” is an incentive for the parties to introduce appropriate clauses in the contract preventing them from such a risk. However, in their opinion, experience shows that the parties do not have adequate means or often do not pay attention to possible future contingencies, or even include clauses that do not cover all eventualities. Consequently, it is not useful to rely on the parties’ ability to protect themselves from these kinds of contingences.
Nevertheless it has to be taken into account that the Principles are designed as default rules, so that the parties may adopt, in the contract, any other mechanism as to how the benefits may be adapted, or how any negotiation may be carried out. They can even provide that in the case of certain specific change of circumstances, this will not affect the contract.
The application of art. 6:111 requires that:
Compliance has become excessively burdensome, in the sense that it must have caused a serious imbalance in the contract, not only that it has become more onerous. As the precept states, this imbalance may be due to an increase in the cost of compliance, or a devaluation of the value of the service (for example, in the case of a work execution contract, the value of the performance of the contractor is devalued when it is determined according to a price index that unexpectedly depreciates).
The change of circumstances must occur after the conclusion of the contract; but it could also be that such circumstances already existed at that time without any of the parties having realised. In such cases, the rules on mistake would be applicable.
The change of circumstances should not have been foreseen at the time of the conclusion of the contract. In other words, that change should be unpredictable, since the law cannot protect irresponsible conduct. This requirement should be interpreted in the same way as in the case of non-performance, taking into account the parameter of the reasonable man. Consequently, any event is unforeseeable when a reasonable man in the same situation as the parties could not have anticipated it. (For example, if traffic is interrupted regularly in a particular region as a result of a strike, a reasonable person would not choose a route through the region with the hope that on that day in question he could move freely, but would opt for another route).
Finally, it must be decided whether the party affected by the change of circumstances should bear the risk associated with such a change, either because he expressly assumed it, or because it is a speculative contract. In these cases, the party may not invoke the application of art. 6:111.
As for the consequences, a duty to renegotiate is established. According to art. 6.111(2), the party that suffers the effects of the supervening hardship must start the renegotiation process within a reasonable time, specifying the effects that the change of circumstances has had on the contract.
The negotiation process should be carried out in accordance with the requirements of good faith ; for example, there is bad faith if a party enters into a contract with a third party that is incompatible with the contract in the process of renegotiation. Usually the principle of good faith requires that every aspect of the dispute between the parties is addressed in the negotiations. The consequences of the breach of the duty to renegotiate is compensation for losses suffered as a result of the refusal to bargain for one party, or the breakdown of negotiations in a way that is contrary to good faith. This sanction is not contemplated for instance, in art. 6.2.1 of the UNIDROIT principles that regulates the “hardship” , a term that is similar to the “change of circumstances” .
The immediate consequence of change of circumstances is the renegotiation of the contract. It is intended that the parties reach an agreement that is the same that they would have reached if the new circumstances had been known at the moment of the conclusion of the contract. This preference for the renegotiation has its explanation in the fact that the parties to the contract are those best placed to recover the equilibrium of the contract.
Both art. 6.2.3 UNIDROIT principles and art. 6.111(3) PECL provide for judicial intervention in the event of the failure of the renegotiation process. The court’s intervention is seen as the last resort; however, the judge is granted great discretionary powers. In this sense, the court could terminate or modify the contract; or they could even require the parties to make a final effort to renegotiate if they consider that there is still a chance to save the contract. Also they would be entitled, if permitted by their national law, to appoint a mediator to assist the parties.
If negotiations end unsuccessfully, the court can adapt the contract to the new circumstances, restoring the initial equilibrium and making sure that the extra costs arising from the unforeseen circumstances are shared equally between the parties. Unlike the risks arising from impossibility of performance, in cases of change of circumstances the parties must share the risks of unforeseen events.
The judicial resolution could involve, or not, depending on the nature of the change of circumstances in the case, a price adjustment or an extension of the period established to fulfill the contract. However, the variation would not necessarily reflect the total loss suffered by the changed circumstances since the court has to consider, for example, the extent to which a party has assumed the risk and the extent that the party entitled to require performance can still take advantage of such compliance (so in adapting the contract the court cannot impute just one of the parties with the risk represented by the change of circumstances).
On the other hand, according to Lando and Beale (2000), courts have wide powers in terms to adapt the contract, but there is a limit to this, which is that they cannot write contracts for the parties. Consequently, the court may modify some clauses, but cannot rewrite the entire contract. In this case, the only option remaining to the court is to terminate the contract (the court will fix the date from which it is understood that the contract is terminated, and the consequences of it).
184.108.40.206 Regulation in the DCFR
It is stated in the Introduction to the Draft Common Framework of Reference that many European legal systems have recognised that where, after the conclusion of the contract there is a relevant change of circumstances, this can affect the fulfillment of the contractual obligations. As already noted, this was reflected in the PECL . The DCFR also recognises this doctrine; and, as in the PECL, this rule is non mandatory so that the parties are free, if they prefer, to exclude any possibility of modifying the contract without their consent.
Moreover, in the opinion of the editors of the Draft, the recognition of the legal effects brought about by the change of circumstances is a derivation of a supreme principle of the Draft according to which the parties are obliged to act in accordance with the standards imposed by good faith (“good faith and fair dealing”) in fulfilling their obligations, in the exercise of their rights, in determining a remedy in case of non-performance, or in exercising the right to terminate the contractual relationship (cf. I.-1:103 DCFR).
This legal institution is regulated inside the Book III, art. 1:110. According to this article:
An obligation must be performed even if performance has become more onerous, whether because the cost of performance has increased or because the value of what is to be received in return has diminished.
If, however, performance of a contractual obligation or of an obligation arising from a unilateral juridical act becomes so onerous because of an exceptional change of circumstances that it would be manifestly unjust to hold the debtor to the obligation a court may:
vary the obligation in order to make it reasonable and equitable in the new circumstances; or
terminate the obligation at a date and on terms to be determined by the court.
Paragraph (2) applies only if:
the change of circumstances occurred after the time when the obligation was incurred;
the debtor did not at that time take into account, and could not reasonably be expected to have taken into account, the possibility or scale of that change of circumstances;
the debtor did not assume, and cannot reasonably be regarded as having assumed, the risk of that change of circumstances; and
the debtor has attempted, reasonably and in good faith , to achieve by negotiation a reasonable and equitable adjustment of the terms regulating the obligation.
As for the legal consequences, it is the judge who should decide on the modification of the contract or on its termination. In both cases, the decision as to how the contract should be modified or the effects of termination is a matter for judicial discretion.
Here, an additional criterion has been introduced for the application of judicial intervention due to change of circumstances . As well as the traditional criteria of an unexpected supervening change of circumstance, and the unforeseeability of any legal or contractual risk that could have been contemplated previously, there is the requirement that the debtor attempted in good faith to renegotiate the contract.
8.1.2 Regulation in the CESL
The Proposal for a Regulation on a Common European Sales Law regulates the effect that a change of circumstances could have in a contract (art. 89 CESL).
A party must perform its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of what is to be received in return has diminished.
Where performance becomes excessively onerous because of an exceptional change of circumstances , the parties have a duty to enter into negotiations with a view to adapting or terminating the contract.
Consequently, as a general rule, the parties must fulfill their obligations even if performance has become more onerous, either because the cost of compliance has increased or because the value of what is going to be received has decreased.
Where compliance has become excessively onerous because there has been an exceptional change in circumstances, the parties have a duty to negotiate in order to adapt or terminate the contract.
If the parties fail to reach an agreement within a reasonable time, then, upon request by either party a court may:
adapt the contract in order to bring it into accordance with what the parties would reasonably have agreed at the time of contracting if they had taken the change of circumstances into account; or
terminate the contract within the meaning of Article 8 at a date and on terms to be determined by the court.
For this rule to apply, it is necessary that (according to paragraph 3):
the change of circumstances occurred after the time when the contract was concluded;
the party relying on the change of circumstances did not at that time take into account, and could not be expected to have taken into account, the possibility or scale of that change of circumstances; and
the aggrieved party did not assume, and cannot reasonably be regarded as having assumed, the risk of that change of circumstances.1
For the purpose of paragraphs 2 and 3 a ‘court’ includes an arbitral tribunal.
This article begins by recognising the general principle “pacta sunt servanda”, so that the contract should be fulfilled even though it is more onerous because costs have increased or the value of the consideration is less than expected. However, when this is disproportionate, art. 89 contains a duty to renegotiate.
If, within a reasonable period, the parties do not reach an agreement, they may request the assistance of the court or arbitrator. The judge may decide to vary the contract taking into account the hypothetical will of the parties or declare the termination of the contract and lay down the conditions of that termination. Thus, the court is bound by the parties’ request; but there is no provision for a case in which there is a total absence of an express request in this sense. This situation should be resolved, according to Schmidt-Kessel (2013), by taking account of the laws of the States involved.
Article 89 is not applicable in cases of initial error as to the economical basis of the contract; in such cases arts. 48 et seq., relating to mistake, would be applicable.
It is also necessary that the change of circumstances is unexpected, so art. 89 should not be applied in cases where a risk has been assumed by the contracting parties.
In comparing art. 89 CESL with its precedents in the PECL and the DCFR, we can conclude that there are no great differences in their respective rules. In all of them, at the very beginning, there is an explicit recognition of the principle “pacta sunt servanda” . Nevertheless this principle can be moderated in cases where there is a change of circumstances that makes the contract more onerous, either because it has increased the value of the performance or because it has devalued the value of the consideration . The impact that the exceptional change of circumstances would have on the contract is described in different words: “performance of the contract becomes excessively onerous” in the PECL; the contract “becomes so onerous (…) that it would be manifestly unjust to hold the debtor to the obligation” in the DCFR; and “performance becomes excessively onerous” in the CESL. On the other hand, there is no hierarchy established between variation of the contract or its termination; the decision in each case is left to the judge. The remedy of termination does not present a huge problem: the judge will determine its consequences. As for variation, the terminology changes, “adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains” in the PECL; “vary the obligation in order to make it reasonable and equitable in the new circumstances” in the DCFR; and “adapt the contract in order to bring it into accordance with what the parties would reasonably have agreed at the time of contracting if they had taken the change of circumstances into account” in the CESL.
Both the CESL and PECL, as a consequence, first establish the duty to renegotiate. The Draft refers directly to the judge’s intervention, but the renegotiation is a prerequisite for application of that intervention. Apart from that, the requirements for the application of this intervention almost totally coincide, except that art. III.-1:110 of the DCFR is applicable to contractual obligations and obligations arising from a unilateral juridical act. The inclusion of the latter category is not a common feature of national jurisdictions or international instruments. Its inclusion in the Draft has its justification in the protection of a debtor in cases of unilateral contracts that, in most cases, are gratuitous in nature.
On the other hand, it is only in the PECL that 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 .
This rule of ‘unexpected change of circumstances’ does not have an equivalent in every legal system of the Member States, but there are some that recognise this legal doctrine.
8.2 Change of Circumstances in certain European Legal Systems
After the conclusion of the contract the parties are obliged to fulfill their obligations even when a change of circumstances makes the contract more onerous (according to the principle “pacta sunt servanda”). Nevertheless, there might be circumstances beyond the reasonable expectations of the contracting parties that could create doubts as to whether the contractual obligations should remain unchanged. In this sense, it is important to take into consideration the financial crisis that is taking place nowadays as that will definitely be affecting many contractual relations.
These issues have been addressed by the courts in many Western legal systems, in such a way that the event of unforeseen circumstances may, under certain conditions, influence the rights and duties arising from the contract. In fact, in many legal systems there are doctrines (statutory or case law) that identify certain circumstances as an exception to the binding nature of the contract. The essence of such doctrines goes beyond the contract itself giving a solution for the effects that this contract should have according to equity. Therefore, the basis for the termination of the contract is equity. These are doctrines that operate by way of exception to the general rule. The name is different in the different legal systems such as: “Wegfall der Geschäftsgrundlage” in Germany; “Frustration of contract” in England; “eccessiva onerosità sopravvenuta” in Italy; and a “rebus sic stantibus” clause in Spain; and the effects also differ as regards to termination of the contract, variation and renegotiation .
8.2.1 The Theory of “imprévision” in French Law
In France, where the effects of the two World Wars did not produce the amount of unforeseen circumstances with regard to existing contracts as in other countries, these types of doctrines are not widely accepted. Nevertheless, there has been a development of the so-called theory of “imprévision” . This doctrine refers to cases where unforeseen economic circumstances become apparent after the conclusion of the contract and compliance is extremely difficult or much more expensive, but not impossible.
This doctrine is not regulated in the French Civil Code, which was influenced to a large extent by a liberal conception of the economy (art. 1134 contains the principle “pacta sunt servanda”). It has its origin in case law, in particular the famous French court decision of “Canal de Craponne”. This case concerns a judgment by the Court of Aix, 1874, whereby it resolved the dispute between the owners of a canal built by the engineer Craponne in the seventeenth century and the owners of a farm who were the beneficiaries of the concession for the irrigation of the canal. In this case, agreements concluded in 1560 and 1567 fixed the price of a watering fee that the beneficiary had to pay to the owner of the irrigation canal. But in the middle of the nineteenth century, the firm in charge of the exploitation of the canal asked for an increase of the fee, considering that it no longer corresponded to the maintenance cost. The French Court of appeal of Aix-en-Provence, taking into account the imbalance of the agreements, held on the 31st of December 1873 that the price should from then on increase up to the price of a similar contract concluded at the date of the judgment, and so fixed the amount of this new price.
However, in 1876 the Cour de Cassation (France’s highest civil law court), taking into account the legal uncertainty which in the opinion of many scholars this thesis generated, overruled this solution and decided the case in favour of the specific performance of the contract.