Change of Circumstances

From Max-EuP 2012

by Hannes Rösler

1. Concept and history

In principle, obligations that have been agreed upon can subsequently neither be re-adjusted nor terminated. This general rule results from the contract’s purpose as a tool for individual economic planning and—at a more abstract level—from the requirement of transactional certainty. However, the idea of pacta sunt servanda (contract) is subject to various exceptions because human capacity to foresee the future is limited and performance depends on present or future developments within the broader contractual context. Far-reaching changes of this contractual context can be taken into account by the concept of ‘hardship’ or ‘change of circumstances’ (Störung der Geschäftsgrundlage).

The first approaches to such an equitable remedy can be found in the medieval ius commune doctrine of clausula rebus sic stantibus. Traces of this forerunner to the concept of hardship can still be found in modern laws. The clausula notion is accepted in public international law, anchored in Art 62 of the 1969 Vienna Convention on the Law of Treaties, and it is also an axiom of customary public international law that also binds the EU institutions (ECJ Case C-162/96 – Racke [1998] ECR I-3655).

In private law, the issue is more complex. Although some civil codes based on natural law accepted the clausula concept (IV 15, § 12 Codex Maximilianeus Bavaricus Civilis of 1756; § 377 I 5 Allgemeines Landrecht für die preußischen Staaten (ALR) of 1794), it was not incorporated into the French Code civil of 1804. Austrian law discards it as a general legal idea (see especially § 901 Allgemeines Bürgerliches Gesetzbuch (ABGB) for the irrelevance of a mistake in contractual motivation; but see also § 936 ABGB). The pandectists, too, who had a deep influence on the Bürgerliches Gesetzbuch (BGB), strongly rejected the concept because it had not been recognized in Roman law.

This is remarkable because the draftsmen of the BGB were familiar both with the clausula concept and Bernhard Windscheid’s pre-supposition doctrine, developed in his book Die Lehre des römischen Rechts von der Voraussetzung (‘The Doctrine of Pre-supposition in Roman Law’) published in 1850. In fact, Windscheid himself was a member of the First Commission for the Drafts of the BGB. Yet the two doctrines have to be differentiated. The clausula concept only covers changes in objective circumstances occurring after stipulation and before performance. Thus, it is distinct from mistake as a subjective element, on the one hand, and impossibility of performance on the other, which directly relates to the subject matter of the contract. The clausula doctrine was rejected by Windscheid who, in term, located the ‘pre-supposition’ on a subjective level as an undeveloped condition. Certain mistakes in motivation are to be regarded as relevant, as long as the other contracting party was able to perceive them. The motivation has ‘to be incorporated in the declaration of intent [and it has] to be made an integral part of it’ ((1892) 78 AcP 161, 195). Such a psychological focus, however, removes many problematic cases from the scope of application of the Voraussetzungslehre, because subsequent changes are often hard to anticipate at the time when the contract is concluded.

The BGB, with its liberal and individualistic conceptual model of contract, rejected both the clausula and the pre-supposition doctrine on the grounds of ‘certainty in legal transactions’ (Protocols II, 690). However, the increasingly less literal approach towards the BGB emerging in the Weimar Republic led to a revival of these ideas. A milestone was set by Oertmann’s book Die Geschäftsgrundlage (1921). Oertmann overcame the limitation inherent in Windscheid’s doctrine by providing the following definition: ‘Geschäftsgrundlage is the perception by one party which becomes apparent during the negotiations and which is recognized in its relevance, and not objected to, by the other party, or the common perception by the parties of the existence or the future occurrence of certain circumstances on which the [common] will to contract is based’ (p 37).

2. Acceptance in German law

a) Case law

Since the legal concept of change of circumstances was modelled in Germany, a closer look at the German legal development is advisable. The acceptance of the concept of Geschäftsgrundlage took place in the hyperinflation period after World War I. Following initial resistance to intervene, the Imperial Court (Reichsgericht: RG) first began to equate the situation where performance cannot reasonably be expected with that of impossibility of performance (so-called economic impossibility); the Court also referred to §§ 157, 242 BGB, ie the provisions on good faith, in general. Then, in the Vigognespinnerei decision handed down on 3 February 1922, the RG for the first time referred to Oertmann. Based on the notion of good faith, his doctrine allowed a contract to be re-adjusted or even to be terminated by the court in view of a fundamental price change that had occurred since its conclusion (RG 3 February 1922, RGZ 103, 328, 331 ff; RG 28 November 1923, RGZ 107, 78 ff).

Further decisions, also by the RG’s successor, the Federal Supreme Court, confirmed and solidified Oertmann’s approach (BGH 23 October 1957, BGHZ 25, 390, 392; BGH 1 June 1979, BGHZ 74, 370, 372 ff). The judges stressed the issues of reasonableness and fair allocation of risks. The starting point for the analysis of risk allocation is the purpose of the contract. The circumstance on account of which the contract is to be adjusted must not be attributable to the party claiming hardship (BGH 25 May 1977, NJW 1977, 2262, 2263). Therefore, the risk of how an object of sale can be used or financed rests with the creditor. Conversely, the risk of procuring that object is assigned to the debtor. The risk of divergences in value and mistakes in price and motivation for concluding the contract are generally borne by the party now exposed to the materialization of that risk (but see the exception for mistake according to § 119(2) BGB).

Furthermore, the courts stressed that only drastic divergences from the normal allocation of risks can justify the required assumption that the party affected by them would not have concluded the contract at all or would have concluded it with a different content if it had known about the actual development. In any case, the adjustment or termination of a contract is only possible where required to avoid an entirely unreasonable outcome that would be incompatible with law and justice (BGH 29 April 1982, BGHZ 84, 1, 9; BGH 26 September 1966, BGHZ 133, 316, 321). Oertmann’s approach was thus ‘objectivised’ and the idea of Geschäftsgrundlage moved from the law of mistake towards the direction of the provisions on non-performance.

An elaborate case law has been developed. It deals both with specific problems and with issues of a larger scale, ranging from the post-war era to the consequences of German reunification. Typical clusters of cases concern the significant disturbance of the equivalence between performance and counter-performance (eg caused by inflation), other impediments of performance, disturbance or frustration of purpose (so that performance of the contract is no longer meaningful for the creditor), changes of the law, and mutual mistakes concerning the basis of transaction (subjektive Geschäftsgrundlage).

b) Codification

The principles laid down by the courts were codified as part of the attempt to modernize the German law of obligations in 2002. The new § 313(1) BGB, with its three main criteria highlighted here, reads as follows: ‘If [objective] circumstances which became the basis [ie: and not already the content] of a contract have significantly changed since the contract was entered into [first factual criterion] and if the parties would not have entered into the contract or would have entered into it on different terms if they had foreseen this change [second hypothetical criterion], adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract [third and central normative criterion] without alteration [and the other party can reasonably be expected to accept the alteration].’ This definition relates to the objective basis of a transaction (objektive Geschäftsgrundlage). The concept of subjektive Geschäftsgrundlage (essential expectations shared by both parties) also continues to exist (§ 313(2) BGB).

Both the subjective and the objective variants of the doctrine require the adjustment of the contract. If, however, performance of a claim adjusted by the judge proves to be impossible or unreasonable for one of the parties, the disadvantaged party has the right to terminate the contract (§ 313(3) BGB).

Systematically, the new provision on Geschäftsgrundlage now finds itself following the new provisions on consumer protection. This masks the close relationship to § 242 BGB (good faith). Furthermore, the provision conceals the strict priority of interpretation of both the contract (including supplementary interpretation) and the law. Priority must be given to the provisions on non-performance and mistake as well as to special provisions such as § 779 BGB governing mutual mistake concerning the basis of a settlement or, in case of continuing obligations, termination (both ordinary termination and extraordinary termination for good cause). But particularly the allocation of risks based on the specific type of contract and the characteristics of the individual case will hardly be possible without taking account of the established case law that has been developed prior to the new legislation.

3. Tendencies of legal developments

International scholars have taken considerable interest in the historically and doctrinally appealing doctrine of Geschäftsgrundlage. However, judges in England and France, for example, discard it on the grounds of contractual fidelity and the limited powers of the judge. The fascination with the concept can also be explained by the continuity in the well-balanced case law from the 1920s to the creation of § 313 BGB. A comparison reveals the convincing flexibility of the concept while maintaining a sufficient degree of predictability of the outcome of the individual case. It allows for the rehabilitation of contractual relations that have become economically meaningless or otherwise unbearable. The doctrinal history, with both its objective and subjective tendencies, reveals the functional relation to other legal concepts, especially the law on non-performance and mistake. Accordingly, functional equivalents (even if only partial ones) for the adjustment or termination of a contract by the judge can also be found in other legal systems.

a) England

In English law, the doctrine of frustration partially covers the functions of Geschäftsgrundlage. However, here the disturbance of the contractual relation always leads to the termination of the contract. Possible compensation claims are governed by the Law Reform (Frustrated Contracts) Act 1943 as part of the law of restitution. It allows the judge to divide the costs and the benefits received at his discretion. Characteristically, the concept also comprises frustration of purpose. The leading case Krell v Henry [1903] 2 KB 740 has been discussed throughout Europe. The case involved the rental of a room that offered a view of a coronation procession that, however, had to be postponed after the conclusion of the contract. The Court of Appeal held that the time of the ceremony was the ‘foundation of the contract’, and thus the whole contract had lost its object. English law therefore unites cases of impossibility and frustration of purpose in its frustration doctrine (cf Davis Contractors Ltd v Fareham UDC [1956] AC 696). Otherwise, a correction based on a subsequent change of circumstances is not granted.

The doctrine of Geschäftsgrundlage excludes developments that could have been anticipated and controlled. This conforms to the English precedent cited above: ‘The test seems to be whether the event which causes the impossibility was or might have been anticipated and guarded against’ ([1903] 2 KB 740, 752). Often parties could have provided for the event in their contract. The fact that they have not done so may then indicate the intended allocation of risks. German and English law both stress the aspect of risk allocation. This goes hand in hand with a move from reading an implied condition into the contract towards a more objective approach.

German law, however, distinguishes between impossibility and Geschäftsgrundlage. Since the reform, the defences in § 275(2) and (3) BGB on the so-called ‘factual’ and ‘personal’ impossibility, which take priority over the doctrine of Geschäftsgrundlage, lead to being released from the obligation to perform even though performance is still possible in principle. § 275(2) BGB covers cases where what is required of the debtor stands in great and economically irrational disproportion to the interest which the creditor has in receiving performance (eg delivery of a ring which dropped to the bottom of the sea). While the reference point for the proportionality test under the law of impossibility is the creditor’s interest in the performance, Geschäftsgrundlage takes into account all the interests involved and therefore additionally enables the law to deal with cases of mere unattainability.

b) France and Italy

The principle of sanctity of contract finds its strongest application in French law. The consideration of unforeseen events (so-called imprévision) is rejected in private law (Cour de Cassation, Cass. Civ., 6 March 1876, Canal de Craponne, D. 1876 I, 93, where the subsequent adjustment of a remuneration that had been agreed upon in 1576 was refused). This stresses the absolute validity of the force obligatoire du contrat as stated in Art 1134 Code civil. (An exception is made only in cases of cause étrangère in Art 1147 Code civil and force majeure or cas fortuit in Art 1148 Code civil.) This is different in French administrative law. Here the imprévision was judicially recognized, commencing with a case where adjustment of a contract saved public gas supplies (Conseil d’État, 30 March 1916, Gaz de Bordeaux, D. 1916. III. 25).

Conversely, the theory of the so-called économie du contrat is object to intensive discussion in French law. That theory states that the economic viability of a contract has to be restored by way of adjustment or termination if it is jeopardized. So far, the French courts in private law have been sceptical. Only in individual cases have the parties been obliged to renegotiate according to bonne foi (Cass. com., 3 November 1992, Bull. civ. IV, no 338; Cass. Com., 24 November 1998, Bull. civ. IV, no 277). This is taken into consideration in the 2005 Avant-projet de réforme du droit des obligations. Its Art 1135-2 allows a party that has lost its interest in the contract to file a claim for an order to renegotiate with the Tribunal de Grande Instance in cases where a contractual clause for adjustment is not contained in the contract. If the negotiations fail, any party may terminate the contract without an obligation to bear costs or to pay damages (unless it does so in bad faith). A judicial adjustment of the contract is unknown to the French system.

The Italian system differs from the current French law: renegotiation and contractual control are combined in case of excessive, unforeseen impediments to performance (eccessiva onerosità, Art 1467(3) Codice civile of 1942). The other party can avert the right of the disadvantaged party to terminate the contract by submitting an offer equitable to adjust the contract. Generally, however, there is considerable reluctance to interfere with the contractual freedom of the parties: Apart from Art 1467 (and also Art 1468) Codice civile, Italian judges do not have the power to adjust, but only to terminate a contract.

Mandatory renegotiations between the parties and judicial adjustments are clearly preferable to termination, as loyalty to the contract is preserved as far as possible. English law, on the other hand, releases the parties from their obligations in the rare cases where a remedy is awarded. This leads to the problems concerning the unwinding of the contract; in particular, one party may benefit from a development of the market in its favour. The rule that ‘courts do not rewrite contracts’, which attempts to respect contractual autonomy, therefore is an expression of a too narrowly conceived conception of the tasks of a judge. In contrast, the German § 313 BGB allows for considerable freedom of the judge while not providing for an obligation to renegotiate.

c) Solutions in other legal systems

Similar to German law, judicial adjustment or termination is also envisaged by the Greek Civil Code of 1946 (Art 388 Astikos Kodikas). A similar provision was introduced into Dutch law in 1992 under the label of onvoorziene omstandigheden, or unexpected circumstances (Art 6:258 NBW); for Portuguese law, see Art 437 Código civil. § 36 Nordic Contract Law allows for termination and adjustment in case of ‘unfairness’. Other legal systems recognize those possibilities on the basis of judge-made law.

According to the Swiss courts, Art 2(2) Swiss Civil Code (ZGB) obliges the judge to ‘terminate or adjust a contract if it is abusive for one party to insist on performance of the contract in view of a disproportion between performance and counter-performance caused by subsequent, unpredictable circumstances’ (BGE 97 II 390, 398). It is unnecessary to resort to this doctrine in cases of a mutual mistake concerning the basis of the contract, Art 24(1) no 4 Swiss Code of Obligations (OR).

4. Principles and unified law

The doctrine of Geschäftsgrundlage has gained the most prominence in the various academic model rules. Article 6:111 Principles of European Contract Law (PECL) refers to it as an excessively onerous ‘change of circumstances’ or changement de circonstances. Article III.-1:110 Draft Common Frame of Reference (DCFR) adopts this terminology. Articles 6.2.1—6.2.3 UNIDROIT Principles of International Commercial Contracts (PICC) use similar language in the German version. The English and even the French version speak of ‘hardship’. Apart from these differences in terminology, it is decisive that the three sets of model rules offer the judge criteria as well as far reaching powers resembling the German prototype. However, all three oblige the parties first to initiate negotiations on the termination or adjustment of the contract (contrary to German law). Only if the parties are unable to reach an agreement within an appropriate amount of time can the judge terminate the contract or adjust it in a just and equitable way. As a result of the different conceptions of the role of the judge the primacy of adjustment is not, unfortunately, expressly mentioned. However, it will normally result from the principle of maintaining the contract (see Art 6:111 PECL, Commentary D, 392; furthermore Art III.-1:110 DCFR, Commentary E, 715: ‘avoid any reduction in the vital stability of contractual relations’). Such two-stage approach complies with the principle of contractual fidelity, which generally must be adhered to as far as determination of the legal consequences is concerned.

Concerning the difference between change of circumstances, or hardship, and the law on mistake, the latter generally covers defects in the pre-contractual decision-making process. § 313 (2) BGB, covering instances of subjektive Geschäftsgrundlage, provides an exception. Other legal systems mainly rely on avoidance due to error also in this respect. This is reflected in PECL, UNIDROIT PICC and DCFR. However, the judge can adjust the contract in cases of a common mistake under Art 4:105(3) PECL and II.-7:203(3) DCFR; this is an innovative element in these model rules.

The CISG (sale of goods, international (uniform law)) does not have a provision governing the problem of changed circumstances. Nonetheless, obstacles that are unforeseeable and inevitable for the debtor, exclude claims for damages (Art 79 CISG). This very narrow exception from the strict liability imposed by the CISG does not—according to the more persuasive opinion—cover cases of ‘hardship’, but only impossibility to perform. The question arises whether the rules on hardship in Arts 6.2.1—6.2.3 UNIDROIT PICC can be regarded as a usage in terms of Art 9(2) CISG. Arbitration practice is reluctant to make such an assumption. Judicial interference with the contract is—following the common law tradition—not envisaged in the CISG. In the light of this uncertainty, it is advisable in international commercial transactions to resort to clauses on force majeure, or hardship, as recommended by the International Chamber of Commerce (ICC).

Literature

Guenter H Treitel, Frustration and Force Majeure (2nd edn, 2004); Hannes Rösler, ‘Grundfälle zur Störung der Geschäftsgrundlage’ [2004] Juristische Schulung 1058, 1062, [2005] Juristische Schulung 27; Antonis Karampatzos, ‘Supervening Hardship as Subdivision of the General Frustration RuleA Comparative Analysis with Reference to Anglo American, German, French and Greek Law’ (2005) 13 ERPL 105; Pascal Ancel, Bénédicte Fauvarque-Cosson and Robert Wintgen, ‘La théorie du “fondement contractuel” (Geschäftsgrundlage) et son intérêt pour le droit français’ [2006] Revue des Contrats 897; James Gordley, Foundations of Private Law—Property, Tort, Contract, Unjust Enrichment (2007) ch 15; Hannes Rösler, ‘Hardship in German Codified Private Law—In Comparative Perspective to English, French and International Contract Law’ (2007) 15 ERPL 483; Christoph Brunner, Force Majeure and Hardship Under General Contract Principles/Exemption for Non-performance in International Arbitration (2009); Anders Bernhard Mikelsen and Kåre Lilleholt, ‘The DCFR Rules on Unexpected Difficulties in Performance’ (2009) 17 ERPL 573; Hugh Beale, Arthur S Hartkamp, Hein Kötz and Denis Tallon (eds), Cases, Materials and Text on Contract Law (2nd edn, 2010) 592 ff.

Retrieved from Change of Circumstances – Max-EuP 2012 on 29 June 2022.

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