?? The majority of countries in the European Community have introduced into their law some mechanism intended to correct the situation which may arise in very exceptional cases when performance of a contractual obligation, although not completely impossible, has become so excessively and disproportionately onerous as a result of supervening events which the parties to a contract could not reasonably have foreseen when they made the contract that it would be grossly unjust to hold them to their obligations. In practice contracting parties often adopt the same idea, supplementing the general rules of law with a variety of clauses, such as "hardship" clauses. If they do not do so, the reasonable conclusion may often be that theyassumed the risk. However, this will not always be a reasonable conclusion. There may be cases where the parties simply overlooked the need for a hardship clause or the need for a clause to cover the circumstances which in fact arose. dr R. Strugała WPAiE

Italian law L’imposibilita’ sopravenuta (1256 CC) Eccessiva onerosita’ (1467 CC) La presupposizione (legal writing and case law; 1467 CC) dr R. Strugała WPAiE

L’imposibilita’ sopravenuta (1256 CC) Obbligation (contract) is extinguished ex lege (no duty to render performance which became impossible + no duty to render a counter performance which is still possible to perform); no activity of the counterpart needed (like art. 495 KC) Retroactive effect = unjustified enrichment; however it is not the case, where the contract is for periodic or continuous obbigations (art CC) L’impossibilita temporanea L’imposibilita parziale (it is for the other party to a contract to choose: 1) to maintain the contract with modifications (reduction of their own performance); 2) to cancel the contract) dr R. Strugała WPAiE

Eccessiva onerosita’ (1467 CC) Assumtions of the parties when making a contract Changed circumstances – how does it affect the contract? The problem arises in respect to long term contracts (as opposed to on the spot contracts) Unexpected, extraordinary events (regular risk of change in circumstances is not covered); conttratti aleatori – not covered Right to ask for the solution of the contract (in the court of law); a „counterright” to offer modifications to the contract (to render its provisions back to be in line with the actual circumstances) dr R. Strugała WPAiE

La presupposizione Implied provision which provides that the contract stands unless the facts change that constituted assumptions on which the decision to make this contract was based A land bought to build a house on it, where there is a plan of public authorities to dedicate the whole area to agriculture only (Cass., n. 8200/1990) Extinguishment of the contract  via broad interpretation of 1467 CC dr R. Strugała WPAiE

English Law (Common Law) Doctrine of frustration – now Before: strict approach – pacta sunt servanda (even if impossible) Development of the doctrine:  19th century: Taylor v Coldwell (he music hall); theoretical explanation: an implied terms  An implied term: if the performance of the contract depends on the existence of a given thing or person (e.g. an artist) the imposibility of performance arising from vanishing of this person or thing shall excuse the performance dr R. Strugała WPAiE

English Law (Common Law) Doctrine of frustration – an implied term theory rejected What constitutes frustration? – a test for frustration A modern test of frustration of purpose: Davis Contractors Ltd. V Fareham What are the consequences of frustration? dr R. Strugała WPAiE

What constitutes frustration? – a test for frustration Change in circumstances has occured The contract does not deal with this change in cirumstances (there is no provision in the contract which allocates the risk of it; e.g. hardship clauses, force majeure clauses) Must the change in circumstances be unforseeable by the parties at the moment of making a contract or is it enough that they failed o deal with it in the contract? Lack of provision dealing with forseeable event ammouts to dealing with it (the parties probably wanted the contract to remain unchanged) dr R. Strugała WPAiE

What constitutes frustration? – a test for frustration The change in circumstances must be outside the parties’ control (it hapaned without default of either party). Otherwise it is a case of breach of the contract = gives rise to remedies (e.g. the sunk ship case) The change in circumstances makes it impossible to perform the contract in line with the contract (not only literally impossible; radically diferent performance ammouts to impossibility) Impossible both physically and legally Broad meaning of impossibility: frustration of purpose even if performance itself is still possible dr R. Strugała WPAiE

What constitutes frustration? – a test for frustration Broad meaning of impossibility: frustration of purpose even if performance itself is still possible  Krell v Henry case Beyond the scope of frustration: the so called economic frustration (Davis contractors) dr R. Strugała WPAiE

What are the consequences of frustration? Termination of the contract – no notice of the party, no order of the court  termination takes effect automatically Contract is terminated – unlike in the case of breach no secondary obligations arise Does not operate retroactivly – parties are released for the future only, no reversal of the performance rendered Ex tunc – problems, total failure of consideration (delivery of the machinery: Fibrosa Spolka Akcyjna v Fairbarin Lawson)  law reform 1943 Frustrated Contracts Act dr R. Strugała WPAiE

German Law Storung (Wegfall) der Geschaftsgrundlage – before 2002 legal writing and case law Section 242 Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration After 2002 Section 313 Interference with the basis of the transaction (1)If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, 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 without alteration. (2)It is equivalent to a change of circumstances if material conceptions that have become the basis of the contract are found to be incorrect. (3)If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may revoke the contract. In the case of continuing obligations, the right to terminate takes the place of the right to revoke. dr R. Strugała WPAiE

Model rules (DCFR) III.–1:110: Variation or termination by court on a change of circumstances (1) 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. (2) 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: (a) vary the obligation in order to make it reasonable and equitable in the new circumstances; or (b) terminate the obligation at a date and on terms to be determined by the court. dr R. Strugała WPAiE

Model rules (DCFR) (3) Paragraph (2) applies only if: (a) the change of circumstances occurred after the time when the obligation was incurred, (b) 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; (c) the debtor did not assume, and cannot reasonably be regarded as having assumed, the risk of that change of circumstances; and (d) the debtor has attempted, reasonably and in good faith, to achieve by negotiation a reasonable and equitable adjustment of the terms regulating the obligation. dr R. Strugała WPAiE

Model rules (DCFR) – the scope of the rule The court’s powers arise only in the case of contractual obligations and obligations arising under a unilateral juridical act. It would not be appropriate to allow a court to modify or terminate an obligation which arises by operation of law, even if the obligation is one which is within the intended scope of these rules. In some cases, as in the obligation to reverse an unjustified enrichment, the question of change of circumstances is already addressed by the relevant rules. There is no reason to exclude obligations arising under unilateral juridical acts from the scope of the provision. Indeed there may be a stronger case for including such obligations, which are often gratuitously undertaken, than for including many contractual obligations. dr R. Strugała WPAiE

Model rules (DCFR) – the negotations The Principles of European Contract Law (Art. 6:111) imposed an obligation on contracting parties to enter into negotiations with a view to adapting the contract or ending it: damages could be awarded for loss caused by a refusal to negotiate or by breaking off negotiations contrary to good faith and fair dealing. Only if negotiations failed did a court have power to modify or terminate. On consultation, this technique was criticised by some stakeholders as being undesirably complicated and heavy. The present Article takes account of these criticisms. It does not impose an obligation to negotiate but makes it a requirement for a remedy under the Article that the debtor should have attempted in good faith to achieve a reasonable and equitable adjustment by negotiation. There is no question of anyone being forced to negotiate or being held liable in damages for failing to negotiate. dr R. Strugała WPAiE

Model rules (DCFR) – When do court’s powers arise? C hange of circumstances must be exceptional. The present Article makes it clear that the court’s power arises only if the change of circumstances is exceptional. Performance must have become unjustly onerous. The change in circumstances must have made performance of the obligation so onerous that it would be manifestly unjust to hold the debtor to the obligation. When this happens in a contractual situation there will be a major imbalance in the parties’ respective obligations. The whole basis of the contractual relationship can be regarded as completely overturned by events. Change must have occurred since obligation was incurred. In the case of a contractual obligation this will normally be the time when the contract was made. If, unknown to either party, circumstances which make the contract excessively onerous for one of them already existed at that date, the present Article does not apply. In certain cases, but not in all, the rules on mistake may come into operation. dr R. Strugała WPAiE

Model rules (DCFR) – When do court’s powers arise? Circumstances could not have been taken into account. The court’s powers will not arise if at the time when the obligation was incurred the debtor took into account, or could reasonably be expected to have taken into account, the possibility or scale of the change of circumstances. Assumption of risk. The court will have no power to vary or terminate the obligation if the debtor assumed the risk of the change of circumstances. Even if there was no actual assumption of risk the court will have no power if the circumstances are such that the debtor can reasonably be regarded as having assumed the risk of the change. It would generally be reasonable to take this view if the obligation arose out of an inherently speculative transaction (for instance a sale on the futures market) or if the events which occurred were within the debtor’s own control. Where a professional contracts with a consumer it would also generally be reasonable to regard the professional as having assumed the risk of changes of circumstances in relation to matters within the area of professional expertise. dr R. Strugała WPAiE

Model rules (DCFR) – When do court’s powers arise? Debtor must have attempted a negotiated settlement. As noted above, the Article does not impose an obligation on the parties to negotiate. In order to encourage negotiated solutions to the problems caused by changes in circumstances it does, however, make it a requirement for relief that the debtor has attempted, reasonably and in good faith, to achieve a satisfactory negotiated adjustment. The words “reasonably and in good faith” imply that a reasonable time must have been allowed for the negotiation process. It is not expressly stated that the debtor’s attempt must have failed but this goes without saying. There would be no point in litigation if a satisfactory adjustment has been negotiated. It will be for the debtor to decide whether an offer by the creditor is so inadequate that the risk of a court application is worth taking. dr R. Strugała WPAiE