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The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision

herausgegeben von: Başak Başoğlu

Verlag: Springer International Publishing

Buchreihe : Ius Comparatum - Global Studies in Comparative Law

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book is about one of the most controversial dilemmas of contract law: whether or not the unexpected change of circumstances due to the effects of financial crises may under certain conditions be taken into account.

Growing interconnectedness of global economies facilitates the spread of the effects of the financial crises. Financial crises cause severe difficulties for persons to fulfill their contractual obligations. During the financial crises, performance of contractual obligations may become excessively onerous or may cause an excessive loss for one of the contracting parties and consequently destroy the contractual equilibrium and legitimate the governmental interventions.

Uncomfortable economic climate leads to one of the most controversial dilemmas of the contract law: whether the binding force of the contract is absolute or not. In other words, unstable economic circumstances impose the need to devote special attention to review and perhaps to narrow the binding nature of a contract. Principle of good faith and fair dealing motivate a variety of theoretical bases in order to overcome the legal consequences of financial crises.

In this book, all these theoretical bases are analyzed with special focus on the available remedies, namely renegotiation, rescission or revision and the circumstances which enables the revocation of these remedies.

The book collects the 19 national reports and the general report originally presented in the session regarding the Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision during the XIXth congress of the International Academy of Comparative Law, held in Vienna, July 2014.

Inhaltsverzeichnis

Frontmatter

General Report and Original Questionnaire

Frontmatter

Chapter 1. General Report on the Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision

Abstract

Upon the outbreak of financial crises, financial assets suddenly lose a large part of their value. The collapse of financial institutions, insolvencies of companies, liquidity bottlenecks, not repaid credits, immensely rising interest rates cause severe difficulties for persons to fulfill their contractual obligations and destroy the equilibrium of the mutual obligations established initially in the contract. The frequency and intensity of financial crises and their negative repercussions on the traditional binding force of contracts are really immense. They evidently motivate the search for juridical solutions of the problem. While the economists search for economic precautions against and solutions for the financial crisis, the jurists look after juridical precautions and solutions. There are two dominant respective golden rules on the legal ground to be applied during financial crises. These rules are “pacta sunt servanda” and “nominalism”. The difficult mission of the jurist is to find the ideal proportion between two extreme poles. The options are whether to stick on the principles of “pacta sunt servanda” and “nominalism” or to respect the principle of loyalty (fairness), which is also considered as sacred. This chapter aims to analyze 20 impressive national reports from Argentina, Brazil, Canada (Québec), Croatia, the Czech Republic, Denmark, France, Germany, Greece, Italy, Japan, Poland, Portugal, Romania, Russia, Singapore, Taiwan, the United Kingdom, the United States and Turkey with regard to the effects of financial crises on the binding force of contracts: renegotiation, rescission or revision.

Rona Serozan

National Reports

Frontmatter

Chapter 2. From Crisis to Crisis: Weakness of Contracts in Argentina

Abstract

By the end of the nineteenth century and the beginning of the twentieth century, Argentina was the destination of hundreds of thousands of immigrants who considered it was a land full of opportunities, with an extraordinary future (The Royal Spanish Academy Dictionary in its 1913 Edition stated: It all leads to believe that Argentina is called to compete with the United States of America, due to the wealth and extension of its land as well as for the activity of its inhabitants and the development of its industry and commerce, which progress could not be more noticeable.). The reasons of its decline are hard to find, and even harder to explain. Some people state that the legal and judicial answers to those crises, which weakened the contractual nexus, legitimated the governmental interventions regarding private contracts and even abandoned nominalism, contributed not little to speed up said process of decline, which frustrated such hope.

Julio César Rivera

Chapter 3. Keeping the Balance: The Effects of Financial Crises on Contracts Under Brazilian Law

Abstract

As many other legal systems, Brazilian law is not strictly attached to the “pact sunt servanda” anymore. There has been a significant mitigation of the binding force of contracts in the last 20 or 30 years. The Brazilian Consumer Code (1990) and the Brazilian Civil Code (2002) provides for different remedies that might be used in case of unpredictable events that cause severe change to the contractual balance. This brief article examines such remedies and how Brazilian Courts have been using them in connection with financial crises, both in national and international levels.

Anderson Schreiber

Chapter 4. Les effets exercés par les crises financières sur la force obligatoire des contrats: certitudes et incertitudes du droit québécois en matière d’imprévision

Abstract

The Quebec law is marked by the coexistence of certainties and uncertainties related to the theory of imprevision. The Civil Code of Quebec, as the former Civil Code of Lower Canada, explicitly recognizes the principles of pacta sunt servanda and nominalism. However, there is no specific provision in the Civil Code of Quebec that recognizes or rejects the theory of imprevision. If it is clear that a change of circumstances could have an impact when the parties have included a hardship clause or even in one of the particular cases where the legislator explicitly provides for imprevision, authors express opposing views as to the applicable law in other hypotheses. For some, the absence of a general provision on the theory of imprevision means that the legislature did not wish to acknowledge it and that it only relies on the general principle of pacta sunt servanda. For others, in light of the new contractual morality that has recently emerged, the binding effect of the contract must be reconciled with the general principle of good faith, which imposes a duty of cooperation and allows for renegotiation of the agreement. In the next few years, Quebec courts will take a stand on this issue.

Élise Charpentier, Nathalie Vézina

Chapter 5. Can Financial Crisis Lead to the Application of the Institute of Changed Circumstances Under Croatian Law?

Abstract

The consequences of the global financial crisis which began to manifest in Croatia during 2008 have not ended to this day. Doing business during the financial crisis is significantly hampered and imposes the need to devote special attention to the question of binding nature of a contract whose performance would be excessively onerous or would cause an excessive loss for one contracting party.

Croatian law adopts the clausula rebus sic stantibus as a theoretical concept that defines the limits of attachment to a contract. Therefore, the consequences of the financial crisis may be considered only within the framework of the general rule on variation or termination of contract in case of change of circumstances. Contracting parties may invoke on an event as a consequence of the financial crisis as a changing circumstance only if all statutory requirements are fulfilled. Hence, the authors provided analysis of statutory requirements for termination or modification of the contract. Furthermore, the authors analyse the circumstances which the court should take into consideration when deciding on variation or termination of the contract, underlining the principle of good faith and fair dealing as the fundamental criterion by which the courts should be governed.

Clausula rebus sic stantibus is an instrument of great importance, especially in the times of a financial crisis, because its purpose is to maintain the proper balance between principle of pacta sunt servanda on one side with the principle of good faith and fair dealing and the principle of equal value of performances on the other side.

Maja Bukovac Puvača, Gabrijela Mihelčić, Iva Tuhtan Grgić

Chapter 6. Elimination of the Impacts of Financial Crisis on Legal Relationships According to Czech Private Law

Abstract

The growing interconnectedness of global economies helped to spread the effects of the financial crisis to many different areas of human life. Among many other things, it also effected the civil law relationships. In this paper, the author introduced several areas of Czech civil law which had to reflect the circumstances brought about by the financial crisis. This paper investigates the “change of circumstances” which may lead to termination or alteration of an existing legal relationship according to Czech law. Considering the possibilities that law offers to the contractual parties heavily affected by financial crisis, the author reminds us that the effects of financial crisis on private-law relationships should be considered especially with solidarity in mind.

Marketa Selucká

Chapter 7. Financial Crises and Danish Contract Law: No Room for Hardship

Abstract

Danish law recognizes a number of modifications to the pacta sunt servanda rule. When such modifications apply, a promisor may be relieved, in whole or part, of its obligation to perform as originally agreed. Due to the emphasis usually placed on pragmatic considerations in Danish law (which goes hand in hand with a lack of legal formalism in our legal system), the various recognized exceptions to pacta sunt servanda – both statutory and otherwise – sometimes tend to overlap. So although it seems appropriate in a comparative context to provide a schematic (point by point) presentation of these exceptions – e.g. with specific focus on exceptions related to the possible effects of financial crises (“Hardship”) – account must also be taken of their interaction in Danish legal theory and practice, not least because Danish courts do not always specify the exact legal principle which they apply when holding that a contractual provision is not binding.

Mads Bryde Andersen, Joseph Lookofsky

Chapter 8. Crises financières et contrats: le droit positif français refuse la révision d’un contrat devenu déséquilibré mais le projet de réforme entr’ouvre la porte à l’imprévision

Abstract

When a contract becomes unbalanced because of un economic crisis, French law refused to modify it: contract must be performed as it was conclude. But this traditional solution could be change with the French drafts law of obligations reform.

Rémy Cabrillac

Chapter 9. Financial Turmoil as a Change of Circumstances Under Greek Contract Law

Abstract

The country’s uncomfortable economic climate has prompted legal scholars and the courts to revisit the doctrine of unforeseen circumstances (rebus sic stantibus) as a valid basis to revise binding obligations of preexisting contracts. Whereas the Greek civil code was one of the first modern codes to contain a provision specifically devoted to this issue, courts appear to be somewhat reluctant to apply this provision directly and resort instead to an objective good faith test when entertaining cases of debtors who are unable to perform. The plurality of the reported cases concerns private lessors who request a judicial adjustment to their rent. On the other hand, the legislature has enacted special laws dealing with debts from private bank loans to consumers. While the courts and the legislature are approaching this issue in a seemingly piecemeal fashion, legal doctrine could also look at the revival of an even older discussion, that of total or partial impossibility to perform a monetary obligation.

Nikolaos A. Davrados

Chapter 10. “All Roads Lead to Rome”: The Multiple Grounds Under Italian Law to Challenge a Contract Due to Supervening Changes of Circumstances

Abstract

This paper focuses on the impact of the global financial and economic crises on the binding force of contracts from the perspective of Italian law. The analysis relies on a preliminary distinction between different factual consequences of the crises, in view of their potential availability as grounds for derogation to the principle “pacta sunt servanda”. The paper uses those factual circumstances as hypotheticals to illustrate the operation of Italian law, highlighting that impossibility of performance, supervening excessive onerousness of performance, excessive devaluation of the counter-performance and failure of presupposed conditions are all available doctrines under which an exception to the principle of “pacta sunt servanda” may be sought. The paper argues that all these different doctrines share the same rationale, that is the existence of an implied contract term of “rebus sic stantibus”, which may lead to the remedy of termination. The paper concludes that if any remedy is to be granted, termination is to be preferred to renegotiation or revision, as the former is more likely to lead to a reassessment of the price reflecting the new market conditions.

Marco Torsello

Chapter 11. Effects of a Bubble Economy on the Binding Force of Contracts: The 1990s Experience of Japan and Its Implications

Abstract

This report focuses on the problem of whether financial crises can be covered by the doctrine of change of circumstances. The report describes two types of lawsuits caused by the biggest financial crisis in Japan: the 1990s bubble crash. One type involves the “sub-lease” contracts, most famous at that time, in which incorrect predictions of future economic changes were especially significant. The other type involves claims against country club management companies for the return of deposits, a rare situation in which the doctrine of change of circumstances was claimed in court. In conclusion, two particular characteristics in Japan will be observed. One is that companies are required to predict future changes in economic circumstances. The other is that the most popular dispute resolution method is the interpretation of contracts, rather than the application of the doctrine of change of circumstances.

Shugo Kitayama

Chapter 12. The Effects of Crises on the Binding Force of Contracts: Polish Solutions

Abstract

Pacta sunt servanda principle is a basis of the law of obligations, assuring the necessary stability of legal relationships. This principle is declared by the Polish civil code in Article 354. This provision sets a frame of the manner in which an obligation is to be carried out. Due to the fact that Polish economy resisted the negative economic phenomena to a great extent there was no need to narrow this principle. Sufficient enough turned out to be an original solution that we can find in the Polish civil code. This solution was to be Art. 357¹ of the civil code. The provision reads as follows: “If, due to extraordinary change in relationship concerning fulfilling the obligation, it would be connected with undue hardship or one party would be at a risk of a gross loss and which was not foreseen by the parties while concluding a contract, court may, having considered the interests of both parties and in accordance with social coexistence, decide on the manner of performing the duty, the amount of compensation or even decide on terminating the contract.”

Wojciech Robaczyński

Chapter 13. Discussing the (Ab)Normality of Financial Crises as a Relevant Change of Circumstances Under Portuguese Law

Abstract

The present financial crisis and its ongoing effects on the Portuguese economy have been sharply and repeatedly reflecting in a multiplicity of contracts. As a result of this impact lawsuits aiming at the rescission or amendment of contracts due to change of circumstances have become more frequent. Recent rulings and the debate surrounding them give strengthened pertinence to the specific challenges related to the recognition of financial crises as a relevant change of circumstances. Special difficulties arise here from the requirement to prove the abnormality of the change in its social context. At the end, the exceptional nature of the intervention in the contract alongside with a concomitant need for counterbalancing in case of undesirable or intolerable outcomes arriving from the crisis are the main axiological basis for a complex set of legal assumptions of varying intensity, supported around the syndicating role of the principles of good faith.

Manuel Carneiro da Frada, Mariana Fontes da Costa

Chapter 14. L’imprévision dans le Nouveau Code Civil roumain enfanté par la crise économique mondiale

Abstract

The study is treating the slow path of contractual unforeseeability, from total rejection to being defined into the legislation of a country dominated by the French legal culture. Incidental or not, this radical change of vision took place after the effects of the world economic crisis reverberated on the South-Eastern European economies. The new Romanian Civil Code from 2011 implements, for the first time, the texts of the Common Frame of Reference of the Study Group on a European Civil Code regarding the unforeseeability (art. 6:111) and we believe that the doctrine and jurisprudence that will develop on this text will become a valuable contribution for future essays to unify the law of obligations in the European Union.

Dumitru Dobrev, Marilena Uliescu

Chapter 15. The Russian Federation Legislation on the Effects of Financial Crises on the Binding Force of Contracts: Renegotiation, Rescission or Revision

Abstract

This article describes the provisions of the Russian legislation with respect to the financial crisis situation. The authors analyze how the crisis situations affect the provisions of the contracts. The provisions of the Russian Civil Code are subject of the analysis in the present article. The subject of the research was the situations which happened on the Russian financial market within recent 20 years. Although the crisis situation is often understood as general market destabilization the situations varied much as well as the legal ways of overcoming the situation.

According to the authors one should see the difference between the effects the financial crisis on the contracts concluded between market participants (B to B relationship) and between market participant and a customer (B to C relationship). Proving this idea authors compare the situation on the market in 1998th and in 2014–2015th.

Nataliya Georgievna Doronina, Natalia Gennadievna Semilyutina

Chapter 16. The Effects of the Global Financial Crisis on the Binding Force of Contracts: A Focus on Disputes over Structured Notes in Taiwan

Abstract

Taiwan, whose financial market is closely linked to the international market, was seriously affected by the Global Financial Crisis. Among the affected retail investors, those who invested in financial products such as structured notes might have been unaware of the real risk these products posed. Investors left holding worthless products in the wake of the 2008 crash were quick to seek legal redress for their losses, but these disputes were difficult to address by properly using the civil remedies then available in Taiwan. Few of the possible causes of actions listed in the Taiwanese Civil Code (“CC”) or in other special laws were well adapted to address disputes over structured notes. The most applicable remedy available in the then legislation might be Article 227-2 of the CC, which governs the rule of changed circumstances, but it was referred to only rarely in these disputes. In order to put an end to this type of structured-note controversy, the Financial Consumer Protect Act (“FCPA”) was passed in 2011. Nevertheless, there is room for the FCPA to be improved and refined.

Chang-hsien Tsai

Chapter 17. Certainty Over Clemency: English Contract Law in the Face of Financial Crisis

Abstract

This Chapter has the objective to consider the legal implications of negative economic trends under English contract law in the aftermath of the global Financial Crisis of 2007–2008. Unlike other jurisdictions, most notably in civil law countries, the English position in the law governing a fundamental change in circumstances has remained narrow, that is, no relief will be granted unless it is an exceptional situation. The English courts deal with the issue either by the doctrine of frustration or through construing contractual force majeure provisions. Following the crisis, indeed there have been an increasing number of cases going down these avenues. Apart from relying on frustration or force majeure clause, another emerging phenomenon is that there has been a growth in allegations of misrepresentation and therefore requesting a rescission of contract. In either case, the aim of claimants is apparently trying to bring the contractual obligations to an end.

Horace Yeung, Flora Huang

Chapter 18. Financial Crisis and the Remedy of Rescission in the United States

Abstract

Common law contract in the United States does not offer any reliable avenue by which to rescind a contract as a result of financial crisis. Most formal doctrines eschew taking into account the economic vulnerability of a party where that vulnerability is not the product of the contract itself. More generally, the legal position of parties tends not to turn on their economic resources and market fluctuation is regarded as a foreseeable risk that contracting parties assume. Nevertheless, a few targeted statutory developments use the possibility of rescission to advance public policy goals that implicate particular kinds of transactions, such as home mortgage agreements.

Aditi Bagchi

Chapter 19. The Adaptation of the Contract in Turkish Law

Abstract

Turkish Law has adopted the renowned principle of pacta sunt servanda. Therefore, the former Code of Obligations numbered 818 did not provide a general provision for neither the adaptation of the contract and nor the termination of the contract in case of hardship. Even then, the Court of Cassation and legal scholars accepted adaptation of contracts in the occurrence of the unexpected event, such as economic crises. The new Turkish Code of Obligations numbered 6098 which came into effect as of 1 July 2012 has introduced a general clause for adaption of the contract. Accordingly, the obligor may demand the adaptation or the revocation of the contract if adaptation is not possible through meeting all of the required conditions. This chapter presents an overview of the conditions and the consequences of adaptation of the contract under Turkish Law and specifically analyzes the option for renegotiation of the contract in comparison to the UNIDROIT Principles (6.2.3), Principles of European Contract Law (PECL 6:111) and Draft Common Frame of Reference (DCFR III.-1:110).

Başak Baysal

Backmatter

Titel: The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision
herausgegeben von: Başak Başoğlu
Verlag: Springer International Publishing
Electronic ISBN: 978-3-319-27256-6
Print ISBN: 978-3-319-27254-2
DOI: https://doi.org/10.1007/978-3-319-27256-6