19.3 DIFFERENT APPROACHES TO CHANGED CIRCUMSTANCES

19.3.1 Historical Review

Historically, the concept clausula rebus sic stantibus was recognized in international law and found its way into eighteenth century codifications of private law, but was subsequently criticized because of its vagueness and lack of certainty; not surprisingly, therefore, the clausula doctrine fell into oblivion in the late 18th and the 19th centuries: the heyday of "classical" contractual doctrine when freedom of contract, economic liberalism and certainty of law reigned supreme.  ¹⁰³³  Nineteenth century liberalism, which accorded absolute priority to party autonomy and thus to the literal contents of a contract, either set aside the clausula rebus concept or sharply reduced its influence in most civil law countries. The rule that the will of the parties as freely expressed in their contract is the law of the parties and must not be changed by the courts, became the leading principle of contract law. The clausula rebus sic stantibus principle survived mainly in public international law (the law of nations).  ¹⁰³⁴ 

In our times, a backswing in legal thinking can be observed under the influence of the ideas of good faith and equity, contract law abandoned the doctrine of absolute obligations and legal systems started to provide for the discharge of one or both parties when a contract becomes impossible to perform. The results of this backswing differ, however, from country to country. In many systems this was achieved by referring to the concept of force majeure, in England by the doctrine of frustration. In the twentieth century a number of new theories emerged, for example imprévision, frustration of the common venture, impracticability and Wegfall der Geschäftsgrundlage. These extended the existing doctrines beyond the sphere of absolute impossibility to situations where unexpected changes in circumstances made performance far more expensive than anticipated. In some legal systems, like the French, such situations produce no effect. In other systems, like the English, it may be synonymous with impossibility, while in some, like the German or American, it may allow the court to adjust the contract.  ¹⁰³⁵ 

Thus, the modern trend is to recognize the established doctrines of impossibility of performance and frustration of the venture and to add to it a doctrine of excessive hardship, where, because of changed circumstances, a contract has become excessively burdensome on one of the parties, the party subjected to that burden may request a discharge of the contract, or, alternatively, its modification to reflect an exchange of values in accordance with market values at the time of the changed circumstances.  ¹⁰³⁶ 

19.3.2 National Doctrines

Arguably, under a variety of names, most, if not all, legal systems recognize changed circumstances as an excuse for contractual non-performance. In this respect, it should be observed that national concepts, when applied in the international arena, are modified to suit the needs of international transacting. It therefore, makes little sense to detail the different national practices in this respect. However, in order not to get confused and to dig out - perhaps - some common ground in this difficult area of basic problems of contract law, a brief comparison of these concepts is useful to help one understand the prevailing international definition of change of circumstances. For a full picture, however, the following review will focus on the remedial structure rather than individual provisions of different domestic legal systems.

In general, national legal systems contain a rule that changed circumstances may affect the binding force of a contract. This possibility is known under the maxim rebus sic stantibus: the contract remains binding "provided that things remain as they are". However, the concept that a party's contractual obligations can be excused because of changes in surrounding circumstances takes a different form in each national legal system. For instance, frustration under the common law is not the equivalent of force majeure or Unmöglichkeit nor is force majeure Unmöglichkeit in civil law; even force majeure under Belgian law is not force majeure under French law. As stated by Rimke: "The approach of municipal legal systems to the problem of changed circumstances varies from country to country. Although all these concepts are related to each other, since they share important features, the distinction between them is extremely important in drafting choice of law clauses in international contracts."  ¹⁰³⁷ 

In American law, section 2-615 of the UCC excuses contractual performance when presupposed conditions upon which the contract is based have not been met. Also, section 268 (2) of the Restatement (Second) of Contracts deals with the same contingency. Both provisions have departed from the old common law rule of impossibility and have adopted the new test of commercial impracticability. This test evolved from an "all-or-nothing remedy" to a "loss-sharing doctrine". Thus, excuse or partial relief is awarded if the occurrence of a certain contingency has made the performance of a commercial contract impracticable, i.e., unnecessarily burdensome, unprofitable or unfair to one of its parties. The rationale behind this rule is that no one in the business world is expected to work for free, and parties should not be encouraged to take advantage unjustifiably of the misfortunes of their partners; otherwise, the general stability of the institution of contracting would be threatened. It was, thus, thought far better to introduce the "flexible adjustment machinery" of UCC section 2-615 and Restatement section 268 (2), instead of the common law test of impossibility.  ¹⁰³⁸ 

In English law, the doctrine of "frustration of purpose" excuses performance when the circumstances have changed so much that the performance required by the contract is radically different from that which was initially undertaken by the parties.  ¹⁰³⁹  However, though less far-reaching or more strictly than its American counterpart, this common law practice on the other side of the Atlantic is not substantially different from that of American courts. More recently, English judges have been generally reluctant to find that a particular contract has been frustrated.  ¹⁰⁴⁰  English courts have shown a willingness to imply in all contracts a condition to the effect that if the performance of a contract becomes physically or legally impossible, or if possible only in a very different manner from that originally contemplated, then the contract is dischargeable. The frustrating circumstances, however, must have arisen without the fault of either party. Frustration of the contract may be brought on by a variety of situations, including, for example, physical destruction of the subject matter of the contract, or subsequent legal changes, provided the contingency was not within the parties' contemplations. However, mere hardship is not sufficient under English common law to discharge, or even partially discharge, performance. Also, frustration affecting only part of the contract is subject to the normal conditions of frustration, and only arises in connection with severable contracts or where the supervening event is temporary.  ¹⁰⁴¹ 

In German law, the theory of Wegfall der Geschäftsgrundlage (disappearance of the Basis of the transaction) covers the effect of changed circumstances on the contract. It ensues from German court practice and "unmöglichkeit", as embodied in Art. 275 of the German Civil Code (BGB), and provides relief for cases where the original economic basis of the contract has changed. When the 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 would constitute bad faith (Art. 242 BGB requires that the contract be performed in good faith.). The Wegfall der Geschäftsgrundlage was quite easily applied in the years of galoping inflation after both World Wars. However, it has been less easily accepted with regard to commercial contracts concluded between businessmen. At present Wegfall der Geschäftsgrundlage is applied rather restrictively.  ¹⁰⁴² 

French contract law does not provide relief for changed circumstances which make contract performance more onerous but not impossible. The often quoted French doctrine of imprévision is only applied by French administrative courts to contracts concluded with public entities. In commercial contracts, the agreed contract price is not affected by increased costs or currency depreciation.  ¹⁰⁴³  The doctrine of imprévision is developed by the Conseil d'Etat in connection with contracts involving public services, derived from state practice and based only indirectly on Art. 1134 of the French Civil Code (good faith).  ¹⁰⁴⁴  The Swiss law of contract has much in common with the French law. In addition to drawing on parallel sources, they also provide for very similar solutions. The Swiss Federal Tribunal has admitted that some long-term contracts may be terminated because of an unforeseeable and fundamental change of circumstances on the basis of Art. 2 of the Code civil (good faith). Only changes which would unjustly enrich one of the parties give rise to such relief. Rebus sic stantibus, however, has to be applied restrictively.  ¹⁰⁴⁵ 

The impossibility and foreseeability elements of the frustration doctrine make up the core of the French force majeure and Swiss impossibility doctrines. The French and Swiss doctrines are based on only a few statutory provisions. Both systems enjoy a wealth of court practice from which the details of the doctrines of force majeure and impossibility are drawn. Both permit excusing contractual obligations only in cases of impossibility, unless there is a contractual clause to the contrary. Mere hardship is not sufficient to excuse performance. In addition to demonstrating that performance was rendered impossible, one must show that the occurrence of a force majeure event was unforeseen and not a result of either party's fault. Also, the unforeseen event must have been unavoidable in the sense that the party seeking an excusal of performance could not have prevented it. The harshness of this rule is not as severe as it appears, for it is applied in light of the good faith and equity requirements encompassed in Art. 1134 of the French Civil Code and Art. 2 of the Swiss Civil Code. In fact, international tribunals have awarded relief in cases where the facts far from demonstrated impossibility of performance. This also seems to be the position adopted by the national courts of both states. This brings the definition of force majeure or impossibility very near, if not identical, to that articulated in the doctrines of imprévision and wegfall der geschäftsgrundlage.  ¹⁰⁴⁶ 

Among other systems, in Italian law, Art. 1467 of the Codice civile provides relief when the performance of one party has become excessively onerous as a consequence of extraordinary and unforeseeable events and when the party has not assumed the risk for such changes. In Dutch law, Art. 6.5.3.11 of the Nieuw Burgerlijk Wetboek (New Civil Code) provides for the adaptation of the contract when circumstances have unforeseeably and substantially changed. However, the travaux préparatoires show that this possibility is exceptional and has to be applied with much restraint. Japanese law has a theory of changed circumstances, but applies it quite restrictively. Under Belgian law, even under Belgian administrative law, no general theory of imprévision is recognized.  ¹⁰⁴⁷ 

To sum up, different legal concepts deal with the doctrine of changed circumstances and provide for the discharge of the duty to perform of one or both parties when a contract has become unexpectedly onerous or impossible to perform. This principle is considered by some commentators to be a sort of contrariety to pacta sunt servanda but is really in healthy tension, an attenuation, covering all of the substantial varieties among different national systems of excuse concepts or varieties of relief from an unjust application of pacta sunt servanda. Lumping together related but not identical concepts, this includes impossibility, imprévision, frustration, Wegfall der Geschäftsgrundlage and force majeure.  ¹⁰⁴⁸  However, it is to be noted that in most laws overlapping legal concepts can be found; for instance, English "frustration" and American "impracticability" contain elements of both impossibility and hardship. Nonetheless, the classic concept of force majeure is primarily directed at settling the problems resulting from non-performance, either by suspension or by termination. Concepts like imprévision or hardship are mainly directed at the adaptation of the contract.  ¹⁰⁴⁹ 

19.3.3 International Perspective

19.3.3.1 Public international law

A comparative look at public international law (the law of nations) is justified by the experience that general problems of contract law are more or less the same in private law and public international law. It is said that the assimilation of international contracts to which states are Parties to treaties is a technique resorted to in many texts.  ¹⁰⁵⁰ 

Under the law of treaties, the question of changed circumstances is quite settled, and the Vienna Convention on the Law of Treaties of 1969 (hereinafter in this Chapter "Vienna Convention"), under Arts. 61 and 62, recognizes two instances where performance can be excused because of extraneous events. Art. 61 deals with situations in which performance has become impossible because the object of the treaty is unavailable. The "unavailability of the object of a treaty" has been widely defined to include instances other than physical destruction. Accordingly, impossibility of performance has extended beyond cases of material impossibility to include those involving legal impossibility. In either case, the impossibility must to be absolute; otherwise, performance is not excused, but merely suspended. Art. 62 provides for instances where, due to a fundamental change in the circumstances in which a treaty was concluded, the parties' obligations have become radically transformed. Such a change warrants withdrawing, terminating or suspending a treaty, and, in some cases, it may also be a sufficient ground for the party disadvantaged by the change to request a revision of the original contract. There is a consensus among jurists that the doctrine of fundamental change of circumstances, kept within defined limits, embodies a general principle of law.  ¹⁰⁵¹ 

However, it is carefully worded in the Vienna Convention so as not to encourage the over-use of the principle and thus to avoid uncertainties as to the sanctity of international treaties: The wording of Art. 62 demonstrates the exceptional character of rebus sic stantibus. It is subordinate to the more general principle of pacta sunt servanda, as set out in Art. 26 of the Vienna Convention. The change in circumstance has to be fundamental. It has to jeopardize the survival of the State. Simple loss of economic gain or currency reforms are insufficient. As the International Court stated in the Fisheries Jurisdiction case, the changes must be vital: they have to "imperil the existence or vital development of one of the parties". Moreover, the change in circumstances has to be unforeseeable.  ¹⁰⁵² 

It is to be noted that the Vienna Convention is applicable only to treaties between sovereign states on a political level. It is not applicable to contracts between private parties or to contracts with an international institution such as the World Bank. However, several articles of the convention provide a principle for treaty obligations capable of application to private contracts. Several arbitral decisions have cited the principle pacta sunt servanda as a basic principle of international law, often using the Vienna Convention for support.  ¹⁰⁵³  However, the advocates of this view almost always ignore the competing doctrine of international law which implies a clausula rebus sic stantibus in every treaty, making the treaty binding only in situations where the original conditions under which the treaty was made continue to exist.  ¹⁰⁵⁴  Nonetheless, Horn believes that "article 62 [of the Vienna Convention] is a strong argument for the existence of a general legal principle which might also be relevant to transnational contracts with or between private parties."  ¹⁰⁵⁵  The Iran-US Claims Tribunal also on the basis, among other things, of Art. 62 of the Vienna Convention rules: The concept of changed circumstances, also referred to as rebus sic stantibus, has in its basic form been incorporated into so many legal systems that it may be regarded as a general principle of law; it has also found a widely recognized expression in Art. 62 of the Vienna Convention.  ¹⁰⁵⁶ 

19.3.3.2 International commercial practice

Does international practice, particularly international commercial arbitration, recognizes the effects of changed circumstances on the performance of contracts? It is said that international commercial practice, whether emanating from the Iran-U.S. Claims Tribunal or other arbitral tribunals, regards rebus sic stantibus (sometimes referred to as "frustration", "force majeure", "imprévision", and the like) as a general principle of law.  ¹⁰⁵⁷ 

On more than one occasion, it is held that under a variety of names, most, if not all, legal systems recognize force majeure as an excuse for contractual non-performance. force majeure therefore can be considered a general principle of law.  ¹⁰⁵⁸  The assertion is limited, however. Tribunals have adopted a reservation that the rebus sic stantibus doctrine, though general in the sense that it is applicable regardless of a clause to the effect, still should be regarded as an exception to the sanctity rule. Acting accordingly, tribunals have required parties to plead and prove the condition of rebus sic stantibus. In addition to pleading and proving force majeure, a party invoking it must have notified his contractual partner of the existence of the disruptive event and his intention to terminate or suspend the contractual relationship because of it. In a word, force majeure conditions have to be pleaded, proved, communicated to the other party and narrowly interpreted. Further, questions relating to force majeure are considered ones of fact, and, thus, their legal effects very much depend on the circumstances of each case.  ¹⁰⁵⁹ 

Tribunals accepting the above definition of the scope and role of rebus sic stantibus are inclined to confine the application of the doctrine to its narrowest possible boundaries. This is particularly evident in tribunals' allocations of losses ensuing from the occurrence of a force majeure. Even if performance is excused, arbitrators refrain, in general, from equitably allocating the ensuing losses. The rule is to let the loss lie where it falls, regardless of the equities of the situation. By contrast, other awards articulating a more liberal approach tend to attach to rebus sic stantibus a broader scope, and are more inclined to adapt the parties' relationship to the new status quo that resulted from the force majeure conditions. Thus, the loss does not have to lie where it falls, but is equitably allocated. Each of these two approaches is the product of either the classical or modern contractual models. At this juncture, it should be mentioned that any excuse or suspension of contractual performance because of changed circumstances is, in principle, a departure from the strict application of the classical theory. Nonetheless, modern classical theorists do not adhere to such a strict model, which has been greatly modified to allow for more flexibility towards modem needs of contracting.  ¹⁰⁶⁰ 

Finally, it should be noted that in practice, although "force majeure", "rebus sic stantibus", "frustration" and "changed circumstances" or the like are terms of frequent usage in international arbitral awards, arbitrators do not attach to these terms the same definitions as those articulated in national jurisdictions. A study of international arbitral awards will demonstrate how international tribunals have amalgamated these different national doctrines into what is generally referred to as changed circumstances, or so-called rebus sic stantibus. At the most, it can be claimed that a broad distinction is maintained between, on the one hand, absolute impossibility and, on the other hand, all the other above-stated doctrines that denote a change in the context in which the parties' agreement was concluded.

19.3.4 Conclusion

As in municipal systems, so in international law, public or private, it is recognized that the doctrine of changed circumstances, also referred to as rebus sic stantibus (sometimes referred to as "frustration", "force majeure", "imprévision", hardship and the like) may justify the non-performing party's right to termination or adaptation of the contract. Although the various approaches contain very different responses, the doctrine of changed circumstances may be regarded as a general principle of law. Thus, if a change in the circumstances surrounding an international commercial contract occurs, a party to that contract seeking relief from contractual liability with a modification or termination of the contract, in the absence of any contractual provision on such issues, may have recourse to the objective norms of the law, national or international, applicable to the contract.