Change of circumstances: CISG, CESL and a case from Scotland

Author:Hector L. MacQueen
Position:University of Edinburgh, Edinburgh, UK
SUMMARY

Purpose – The purpose of this paper is to present a critical analysis of the concept of “change of circumstances” as a justification for judicial revision of contracts. Design/methodology/approach – The study analyses international legal texts on the subject in the light of a decision of the Inner House of the Court of Session in Scotland, Lloyds TSB Foundation for Scotland ... (see full summary)

 
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Article 79 of the CISG exempts from liability in damages any party to a sales contract unable to perform its obligations due to an impediment beyond its control which it could not reasonably have been expected to have taken into account when the contract was concluded, or to have avoided or overcome. Schlechtriem and Schwenzer (2010, p. 1064) observe:

[I]n contrast to the CISG, many legal systems as well as projects for a uniform contract law contain a separate provision for hardship, which applies not only to cases of mere increased difficulty for performance or the decrease in value of the performance, but also to cases of frustration of purpose. In terms of legal consequences, these rules require the contract to be adapted or at least require that new negotiations be entered into. They thus offer greater flexibility than the CISG and, to that extent, are preferable (footnotes omitted)1.

To the uniform contract law projects cited by Schlechtriem and Schwenzer may now be added the European Commission's Proposal for a Common European Sales Law (CESL), published in October 2011. Article 88 provides for the exemption from any liability for non-performance of a contracting party unable to perform as the result of an impediment beyond its control or ability to overcome (although the other party may then terminate for fundamental non-performance). Article 89 adds a hardship provision entitled “Change of Circumstances”. In general, an increased burden on performance has no effect upon the obligation to perform, but, under Article 89, the parties have a duty to negotiate an adaptation or termination of the contract if it is the result of an “exceptional” change of circumstances subsequent to contract formation. The change must be of a nature or scale that the party relying on a claim of changed circumstances could not reasonably have taken into account at the time of contracting, nor could it have been reasonably regarded as having assumed the risk of its occurrence. If the parties fail to reach agreement on what is to be done, then either party (or, presumably, both) may request a court to adapt the contract in order to bring it into accordance with what the parties would reasonably have agreed upon at the time of contracting if they had taken the change of circumstances into account, or in the alternative, to terminate the contract at a date and on terms to be decided by the judge.

Articles 88 and 89 CESL derive immediately from the Draft Common Frame of Reference (DCFR) provided to the European Commission by an academic group in 2009, which in turn, drew upon the Principles of European Contract Law ( von Bar and Clive, 2009 )2. Unlike the proposed CESL, the DCFR has a commentary, which can be useful in interpreting the CESL. The DCFR commentary states that the change of circumstances must be “very exceptional”, of a nature that “parties to a contract could not reasonably have foreseen when they made the contract”, so that performance becomes “excessively and disproportionately onerous” and leads to a “major imbalance” between the parties' respective obligations3. This provision may be:

[…] the direct result of increased cost in performance – for example, the increased cost of transport if the Suez Canal is closed and ships have to be sent round the Cape of Good Hope4.

Or, it may be:

[…] the result of the expected counter-performance becoming valueless; for example if a drastic and unforeseeable collapse in an index of prices means that the debtor will be expected to do demanding and extensive work for practically nothing5.

Article 89 of the CESL, however, follows PECL rather than DCFR in providing that in such changed circumstances the parties first have a duty to negotiate, and to do so for a reasonable period of time, before either of them may turn to a court for a solution. Such an approach was rejected in the DCFR as “undesirably complicated and heavy”6. For example:

[…] a creditor in an obligation might be acting in a fiduciary capacity and might be placed in a difficult situation of conflict of interests if obliged to negotiate away its advantage7.

Instead of imposing a duty, with its connotations of potential liability for breach thereof, the DCFR made a debtor's good faith attempt to negotiate a solution to the problem merely a pre-condition of going to court to have a solution imposed upon an unwilling creditor. In...

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