EQUIVALENCE OF EXCHANGE IS DISTORTED

Case 1 ‘Canal de Craponne’

Long term agreement – devaluation of the price agreement

Early in the twentieth century, the farmers X and Y entered into a contract under which X promised to build and maintain an irrigation channel; Y was entitled to extract water at a fixed price. The contract was concluded for an unlimited period of time. Almost 100 years later, X's successors ask for an increase in the price arguing that due to inflation and a rise in the cost of maintenance as well as labour the agreed price has become completely inadequate.

Is the claim by X's successors justified? Are they, alternatively, entitled to terminate the contract?

Case 2 Extraordinary inflation

Hardship due to extraordinary inflation; hardship resulting from a foreign currency agreement

1. (a) Extraordinary inflation

2. X receives a loan from the Y-Bank. Under the agreement, the interest rate is fixed at 10 per cent for five years. In the twenty years immediately before the agreement, the rate of inflation had been relatively stable within a range of 1 to 6 per cent. In the third year after the conclusion of the agreement, the economic situation begins to destabilise and inflation rises quickly to 50 per cent.

3. Y-Bank asks for an adjustment or for a termination of the contract.

4. (b) Variation: foreign currency agreement

5. The loan agreement between X and the Y-Bank provides for repayment and interest in a foreign currency. In the ten years immediately before the agreement, the relevant exchange rate had been relatively stable within a range of 20 per cent. Subsequently, the national currency is devalued by 80 per cent compared to the foreign currency.

6. X asks for an adjustment or for a termination of the contract.

This is the eleventh book in the series the Common Core of European Private Law. This project was launched in 1993 at the University of Trento under the auspices of the late Professor Rudolf B. Schlesinger. The methodology used in the Trento project is novel. By making use of case studies it goes beyond mere description to detailed enquiry into how most European Union legal systems resolve specific legal questions in practice, and leads to thorough comparison between those systems. It is our hope that these volumes will provide scholars with a valuable tool for research in comparative law and in their own legal systems. The collection of materials that the Common Core project is offering to the scholarly community is already quite extensive and will become even more so when more volumes are published. The availability of materials attempting a genuine analysis of how things are is, in our opinion, a prerequisite for a stimulating and critical discussion on how they should be. Perhaps in the future European private law will be authoritatively restated or even codified, as is envisaged in the Draft Common Frame of Reference. The analytical work carried on by the nearly 300 scholars involved in the Common Core project is a precious asset of knowledge and legitimisation for any such normative enterprise.

Setting the scene

A contract, once concluded, binds the parties and is intended to remain binding even if the circumstances change. For instance, if the financial position of one of the parties changes, his or her need for the object of the contract alters or the value of the object goes up or down, the validity of the contract itself will not be affected. However, some occurrences that go beyond the reasonable expectations of the parties may raise serious doubts as to the binding nature of contracts. For instance, what about the effect of events such as natural disasters, an oil crisis, an armed conflict or – to mention a quite recent significant event – a fundamental financial crisis? These or similar issues have been dealt with by courts in all European legal systems at some point and the historical perspective (cf. Chapter 2) reminds us that the issue of how to deal with unexpected circumstances has a long tradition in jurisprudence. In this Introduction we shall begin our comparative analysis with a survey of the central questions that dominate the issue of unexpected circumstances and prepare the ground for the more detailed analysis in the overview and case studies.

The eventualities of life are infinite and, therefore, the legal issues referring to unexpected circumstances present a kaleidoscopic picture. Still, it is possible to identify some categories of fact patterns that occur regularly and involve specific issues.

EQUIVALENCE OF EXCHANGE IS DISTORTED

Case 1 ‘Canal de Craponne’

Long-term agreement – devaluation of the price agreement

Early in the twentieth century, the farmers X and Y entered into a contract under which X promised to build and maintain an irrigation channel; Y was entitled to extract water at a fixed price. The contract was concluded for an unlimited period of time. Almost 100 years later, X's successors ask for an increase in the price arguing that due to inflation and a rise in the cost of maintenance as well as labour the agreed price has become completely inadequate.

Is the claim by X's successors justified? Are they, alternatively, entitled to terminate the contract?

Germany and related jurisdictions

Germany

X's successors are entitled to claim adjustment under German law. Depending on the circumstances, X's successors may also have a right to terminate the contract.

I. In the given case, the parties did not include an express or implied provision for the impact of long-term inflation. The depreciation can also not be dealt with by interpreting the contract on the basis of the parties' hypothetical will. Thus, the contract itself cannot be drawn upon to eliminate the disproportionality between the contractual obligations caused by inflation.

II. Furthermore, X's successors are not absolved from the contractual obligation on the ground of practical impossibility (§275 II BGB).

Unexpected change of circumstances: perspectives of legal history

From the historical perspective, basically three legal concepts are worth exploring with regard to the influence of an unexpected change of circumstances on legal transactions. The first one, the clausula rebus sic stantibus doctrine, has its roots in Roman philosophy and was developed as a normative rule during the Middle Ages. Second, the concept of (tacit) presupposition (‘Voraussetzungslehre’) emerged in the German legal discourse of the late nineteenth century. At the same time the third doctrine to be examined here, the idea of frustration of contract, was created by the English courts in order to cope not only with an unexpected change of circumstances in general, but also with cases of impossibility. In Section 2 below the Roman foundations of the clausula rule and the emergence of this doctrine during the period of the ius commune, which began in the thirteenth century will be discussed. Section 3 addresses the development of that doctrine in the Early Modern Period between the sixteenth and the eighteenth centuries. The final section will focus on the development during the nineteenth and the early twentieth centuries in which the doctrine of presupposition and the idea of frustration have come to the fore (section below).

‘Open’ versus ‘closed’ legal systems, the variety of doctrines and the difficulty of identifying clear tendencies

In the Introduction, we drew an initial distinction between ‘open’ and ‘closed’ legal systems. This distinction was based on the criterion whether or not a jurisdiction recognises a general rule under which the contract can be adjusted to unexpected circumstances by the courts. The distinction led to the following groups: as ‘open’ legal systems we have qualified those of Austria, Germany, Greece, Italy, Lithuania, the Netherlands, Portugal and Sweden and we have characterised as ‘closed’ jurisdictions those of Belgium, Denmark, England, France, Ireland, Scotland and Slovenia. To a certain extent this distinction goes along with the classic division into legal families. Not very surprisingly, the common law tradition, the French influence (‘closed’ jurisdictions) and the German tradition (‘open’ jurisdictions) lead to similarities in the doctrinal approach to cases of unexpected circumstances. There is one exception. The Nordic legal systems use the same concepts but arrive at different ends of the spectrum.

However, the distinction between ‘open’ and ‘closed’ jurisdictions did not survive the test wholly unscathed as far as the outcome of our cases is concerned. Thus, the distinction between ‘open’ and ‘closed’ jurisdictions is a rough doctrinal approach rather than a clear indication of differences with regard to the result of a certain case. Yet, the strict requirements for relief and the variety of other legal concepts dilute the effects of any particular doctrine.

GERMANY AND RELATED JURISDICTIONS

Germany

Introduction

Under German law the most prominent, general and important concept dealing with the effects of unexpected circumstances on the contract is the doctrine of Störung der Geschäftsgrundlage. This principle can roughly be described as an equitable relief that allows the courts to adapt or terminate a contract if the factual framework diverges fundamentally from the parties' expectations. The doctrine of Störung der Geschäftsgrundlage has been developed as a mechanism to define the limits of acceptable risk distribution by contractual stipulations. There are several other rules of a statutory or contractual nature dealing more specifically with the allocation of unexpected risks involved in a deal. It is widely accepted that the concept of Störung der Geschäftsgrundlage has a subsidiary character, i.e., it does not apply if the risk in question is provided for by either contractual or statutory provisions. The scope of the concept of Störung der Geschäftsgrundlage therefore depends on the application of those other legal rules.

Legal doctrines bordering the concept of Störung der Geschäftsgrundlage

The rules of mistake (§§119 et seq. BGB)

Three characteristics of the German law of mistake have a decisive influence on the scope of application of the doctrine of Störung der Geschäftsgrundlage. First, only certain kinds of errors are relevant, second, the consequence of a relevant mistake is only the avoidance of the contract, and, third, the party avoiding the contract may be liable for damages even if the mistake is mutual.

In 1993, the Common Core of European Private Law project was launched. Ever since, three groups convene every year to discuss themes to be taken up. In the group on contract law, the theme of unexpected circumstances was suggested on various occasions. As a matter of fact, one of the hypothetical cases dealt with in the very first theme that led to a published volume was about change of circumstances. In 2001, the general editors of the series, Mauro Bussani and Ugo Mattei, asked Ewoud Hondius, later to be joined by Hans Christoph Grigoleit, to set up a group on this subject. National reporters were then selected, both from within the Trento/Torino participants and from outside the group.

At the group's first meeting in 2001 reporters for Belgium (Luc Vael), France (Anthony Chamboredon) – both later replaced by Denis Philippe (Belgium) – Germany (Carsten Herresthal), Italy (Francesco Macario), the Netherlands (Mirella Peletier, later replaced by Willem Wiggers), Portugal (Júlio Gomes and Antonio Pinto Monteiro) and Sweden (Bert Lehrberg) discussed a questionnaire to be sent out. During the meeting or at later stages, the charter members were joined by members for Austria (Brigitta Lurger), the Czech Republic (Luboš Tichý), Denmark (Kim Østergaard), England and Ireland (Robert Clark and Cliona Kelly), Greece (Anastassios Valtoudis), Lithuania (Valentinas Mikelenas), Scotland (Laura Macgregor), Slovenia (Matjaž Tratnik) and Spain (Odavia Bueno Diaz and Luz Martinez Velencozo).

Introduction

It is often predicted that Vietnam will rise in Asia as a strong society and economy in the next few decades. This is not without justification. Vietnam indeed has much potential which, if fully exploited, can enable it to achieve a leading role in Asia. It occupies a strategic geographical position with a long coastal line of over 3000 kilometres. It borders strong trading partners such as China in the north and Laos, Cambodia and Thailand in the west. Vietnam has a hardworking population of nearly 90 million which offers a strong workforce, a significant market and hence strong manufacturing and trading potential. Vietnam is relatively rich in natural resources, with a number of petroleum fields off its coast and numerous deposits of bauxite, titanium, gold and other precious minerals concentrated in its highland areas. It has friendly relationships with countries in the region, in particular ASEAN countries, and increasingly strengthens its relationships with Western countries, including the United States of America and those in Europe and Latin America.

Significant and positive political and economic changes have taken place in Vietnam over the past two and a half decades. As is well known, following national unification in April 1975, Vietnam operated a closed, centrally planned, state-controlled economy, following the style of the former Soviet Union. For over 10 years, this proved highly unsuccessful and drove the Vietnamese economy into extremely serious depression.