Imprevision Principle in the Romanian Legislation

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1 Imprevision Principle in the Romanian Legislation EMILIAN CIONGARU Ph.D., Associate researcher, Legal Research Institute Acad. Andrei Radulescu of the Romanian Academy, 13 September street, no.13, Bucharest, Romania Abstract The mutations turned up at world, European and national level in the political and economic systems of states, the substance changes regarding the structure and content of the international commercial relationships permanently subjected to often abrupt and unpredictable changes require more than ever the reassessment of the notion of risk of the events or circumstances that determine the impossibility of fulfillment of a contractual obligation assumed by one party or whose fulfillment would prejudice, since it has become so troublesome, the interests of the debtor who has to fulfill the obligation, if they, however, would fulfill it in the new conditions. In case of the contracts entailing an execution over time, such as the successive performance contracts or those affected by a suspensive term, there is the possibility that the occurrence of certain events prior the conclusion of contract should lead to an unbalance to the detriment of one of the contractual parties, usually to the debtor s detriment. The debtor will no longer be able to execute their obligation provided in the contract not because the obligation is impossible to fulfill but due to the fact that the fulfillment of obligation would place the debtor into a very difficult economic situation, maybe even bankruptcy. More precisely, we witness an excessive onerousness of debtor s obligation that they did not take into account upon contracting. In this case, the judge is asked to intervene and to apply the theory of imprevision so as to reestablish the contractual balance broken due to some circumstances unforeseen by the parties upon the conclusion of contract and unforeseeable on such date, in default of some express clauses or legal provisions that might authorize the debtor to revise the contract. Keywords: imprevision, contractual obligations, successive performance, excessive onerousness, contractual risk, contractual parties. 1. Introduction The consecration of the imprevision principle is made by the Roman law through the omnis conventio intellegitur rebus sic stantibus adage according to which all conventions are considered as valid if the circumstances in which they were concluded stay the same. Thus, if unpredictable events have occurred between the moment of conclusion of contract and the moment of execution, events that have fundamentally changed the economic conditions or of other nature existing at the moment of parties initial agreement making the performance by one of them more difficult, the principle of mandatory force of contract no longer acts, so the jurisdiction organ has the independent right to have a clause in this respect in the contract, to reformulate the contract depending on the new circumstances or, subsidiarily, to cancel the contract and to adequately eliminate debtor s responsibility.[1] 2. Historical references of imprevision principle During the Middle Ages, the action of the catholic church to correct certain excesses of the conceptual Roman law rebus sic stantibus (things thus standing) was resumed and developed [2] so that in the doctrine of canonic law of the 14 th century, and mainly in the works of theologian St. Thomas d Aquino, they initiated the just price principle which, starting from the generalization of Aristotle s arithmetic equality, showed that the just price exists when one may notice a perfect equality between two performances by taking into consideration all contractual circumstances. [3] This idea of equity in contracts was approved by the Christian ethics of the time which promoted the concept of absolute justice and it propagated even into the laical doctrine without having a remarkable success in the positive law of the epoch predominated by the pragmatism of contractual security and stability. In the European legal doctrine, the problem of application of rebus sic stantibus adage was ISBN:

2 insistently posed after World War I due to the negative economic effects of the conflagration on the contractual balance. After World War II, the problem was given different solutions in the Western doctrine and practice as compared to the ones in the East, especially in the socialist countries. If in the Western Europe doctrine, they gave coloured solutions to it, in Eastern Europe, for ideological reasons, they embraced the thesis of unacceptability of the theory of imprevision. [4] The liberty of contract principle has been initially taken over by the private international law in terms of the conflict of laws [5], and then it was consecrated in the internal law of the European states starting with Napoleon s Civil code, a codification work massively taken over by the Romanian civil code of We might say that by the recognition of the liberty of contract and the fact that the subjects of law are free to conclude or not any contracts and to establish their content in an unhampered manner being able to modify or extinguish the assumed obligations, the science of law has evolved from the rigidity of the quiritarian Roman law to the flexibility of consensualism from the modern era of law. The imprevision principle in its original form of a clause for withdrawal from contract following the change of circumstances envisaged upon the conclusion of contract had a first legal consecration in terms of the private international law, in the application of the principle of sovereignty and independence of states as subjects of international law. Thus, by art. 62 of the Convention on the law of treaties signed on May 23, 1969, in Vienna, under the name of Fundamental change of circumstances [6] they regulated the possibility for the states parties to withdraw from the effects of the treaty or, as the case may be, to consider as suspended the effects thereof in case of occurrence of some essential modifications that represented an essential element for the formation of parties consent and if the change of these circumstances determines the transformation of the extent of the assumed obligations. The concept of reviewing the contract for imprevision fundamentally establishing the purpose of the institution as it is known in the contemporary law is rooted in the need felt to get ensured against the monetary risk and the uncertain evolution of economic mechanisms at that time, following the economic changes that followed the two world wars, a context that required the introduction of legal instruments by which certain contracts might be reviewed, especially the successive performance contracts. The theory of imprevision did not get a legislative consecration in the Civil code of 1864 it being regulated in terms of the loan contract by opposition to the idea of imprevision to the principle of monetary nominalism (according to which in monetary obligations the payment power of money remains unchanged even if its purchase power changed until the maturity of debt, and thus the debtor is forced to pay only the amount specified in the contract) art The obligation resulted from a money loan is always for the same numeric amount specified in the contract. If the value of money increases or decreases before the time of payment, the debtor shall reimburse the borrowed numeric amount and they shall be compelled to reimburse such amount only in the currencies existing at the moment of payment. [7]. The regulation of this principle was of course in agreement with the climate from the communist period in which, given the closed character of economy and the state s strong intervention, the payment power of money [8] remained constant and the purchase power was not influenced either because it did not fluctuate [9]. 3. Evolution of imprevision in romanian legislation The evolution of the market economy in the period after 1989 made the theory of imprevision find its application, even in the absence of regulation as an autonomous legal institution, by legal norms given for the regulation of a restrained area of legal relationships. In the old Civil code, jurisprudence was many times contradictory and confusing in terms of the applicability of the theory of imprevision, mainly in the first years since the passing to the market economy. Since imprevision is determined by the economic phenomenon of monetary depreciation by inflation, a product subsequent to the conclusion of contract, the problem is to adapt the contract to the new circumstances. The parties may stipulate in the contract imprevision clauses that allow them to readapt performances in relation with certain economic indices so as to maintain the real value of obligations [10] over time. At the same time, based on the principle of will autonomy, the contracting parties may by their agreement stipulate in the contract imprevision or indexation clauses that might allow judges to readapt or balance performances. There are two types of imprevision clauses: hardship clauses and indexation clauses. What they ISBN:

3 have in common is their purpose to prevent an unbalance of performances of co-contractors from an onerous successive performance contract, unbalance that might be caused by strong fluctuations of prices during the execution of contract due to economic instability and, implicitly, to a high inflation rate. The two types of clauses also have distinctive elements that discriminate between them. Thus, the hardship clause is the stipulation in a long-term contract by which the parties undertake to adapt it promptly and equitably by renegotiation or by an arbitrary procedure or reconciliation procedure in the case when, after the conclusion of contract, an extraordinary circumstance occurs that seriously impairs the balance between counter-performances. Thus, the hardship clause entails parties obligation to renegotiate the contract or, in default of a mutual agreement regarding the renegotiation, to resort to the arbitrary or reconciliation procedure for the rebalance of performances. The indexation clause is the contractual clause by which they try to maintain the value of a longterm contract by avoiding the difficulties that may occur following the price variation. The indexation clause provides the binding of amounts specified in the contract to a monetary rate or to one or several basic products. The former price is automatically replaced by a new price, without parties intervention, depending on the variation of the agreed rate thus maintaining the relative level of price. The indexation clause does not require the subsequent intervention of the parties since it operates automatically depending on the variation of the standard established by mutual agreement upon the conclusion of contract. Since they are established by mutual agreement between the parties, the observance of these clauses by co-contractors and, implicitly, the acceptance of their effects to keep the balance of their counterperformances only underline and reinforce the application of pacta sunt servanda principle. These clauses must be in line with the monetary and economic public order as they may become void if they are abusive [11]. The review for contract imprevision was acknowledged as such and codified in the international trade law through the elaboration of the first edition of UNIDROIT Principles (1994) under the name of the Hardship clause. The work of codification of the principles governing the international commercial contracts also represented the source of inspiration for the Romanian legislator when editing the New civil code by taking over UNIDROIT provisions, in their quasi-totality, in the regulation of imprevision, art , in terms of hardship of the International Chamber of Commerce of Paris. In the New civil code, the theory of imprevision may be found in article as it is expressly regulated for the first time in the Romanian legislative system. Thus, the rule says that: the parties are bind to fulfill their obligations, even though their execution became onerous, either due to escalation of the execution cost of their own obligations, or to the depreciation of the value of the counterperformance. According to this first paragraph, each party shall execute their obligation pursuant to the contractual clauses, even when their obligation has become more onerous than it seemed to be on the date of conclusion of contract thus affecting the initially presumed balance between performances. The exception states that: if the execution has become excessively onerous due to some exceptional change that would make clearly unjust the execution of obligation by the debtor, there is the possibility for the court to intervene in the contract. Considered as an exception to the pacta sunt servanda principle, the theory of imprevision represents the review of effects of the legal act due to the breaking of contractual balance following the change of circumstances envisaged by the parties upon the conclusion of the legal document, as the effects of the legal document are others than the ones established by the parties as mandatory for them upon the conclusion of such document. [12] As one may see it is the court s responsibility, in quality of interpreter of the law corroborated with the situation in question, to discriminate between more onerous and excessively onerous conditions for the execution of contract. As far as we are concerned, we appreciate that this regulation legislative technique by antagonism of the exception as compared to the rule may rigorously differentiate between the contract risk falling under the incidence of the phrase more onerous and the unpredictable excessively onerous, respectively. As the Supreme Court stated in 2003 [13], by the incidence of unpredictable, the execution of contract must be transformed in such a way so that the obligation may lose identity unlike those variations of circumstances that may be included in the risks assumed by the parties upon the conclusion of contract. On the other hand, the formula proposed by the legal text has the disadvantage that it approaches the appreciation of unpredictable ISBN:

4 situation to the notion of insurmountable specific to the force majeure thus generating a confusion risk between the two institutions. As for another aspect, though the first paragraph of art comprises the entire sphere of incidence of the unpredictable in terms of the party who sees their counter-performance diminished, this situation is not longer withheld in the other paragraphs, since they speak only of the debtor and the party whose obligation has become excessively onerous to execute. We do not think that legislator s intention was to exclude the prejudiced party, through the diminution of the counterperformance received, from enjoying the review of contract knowing that in practice such situations may be encountered (for example, in case of a drastic monetary depreciation affecting the balance of performances in a sale-purchase contract where the price is paid in installments spread on a long period of time or a supply contract). The cumulative conditions provided in art paragraph (3) that must be met for imprevision to be incidental underline the relative difficulty as an evidentiary matter and in terms of court s appreciation assignment that might accompany a potential juridical approach of the victim of imprevision. Thus, in a first stage, it is necessary to prove the intervention of an exceptional change of circumstances affecting the execution of contract. The change of circumstances must have a dimension and very serious implications such as changes of legislative, fiscal or institutional nature and it must affect objectively such contract. Thus, one might not reconsider the payment obligation of the price in a successive performance contract motivated only by the intervention of the general economic crisis without demonstrating that the aggravation of debtor s situation was specifically and directly owed to it. In other words, the modification must be significant for the economy of the contract and it may not be reduced to a simple monetary fluctuation or an insignificant variation of economic circumstances. In a second stage, it is necessary to prove that the change of circumstances and the impact of this change on the execution of contract were not and they could not have been envisaged upon the conclusion of contract [14] by the victim of imprevision, in other words, the contractual unbalance could not have been prevented. In this situation, it is necessary to relate to bonus pater familias principle, namely the situation of the one acting with maximum diligence in the negotiation, conclusion and management of obligational relationships since we speak of contracts that are executed for a long period of time. In the third stage, proof must be made of the unbalance between performances and of the fact that the further execution of the contract in the initial terms and conditions would be clearly unjust for the victim of imprevision. For this purpose, it is necessary to examine the effects produced by the change of circumstances on the entire contract, but mainly by referring to the individual situation of the victim of imprevision. One example in this respect would be of a debtor of such an onerous obligation so that the further execution thereof in the same way would lead to the depreciation of the financial situation and possibly to insolvency. Unlike the UNIDROIT Principles, the Romanian legislator no longer takes over all the conditions related to the negotiation between the contracting parties of the adaptation of contract for imprevision and it establishes only the obligation of the party prejudiced by imprevision to try the renegotiation of contract within a reasonable period of time and in good faith. The source regulation also provides that the request for the renegotiation of contract must identify the grounds thereof, what the unpredictable consists of, as well as the fact that initiation of renegotiation does not entitle the claiming party to suspend the execution of contract or to diminish their performances. We appreciate that in practice it will be necessary to regulate the procedure of renegotiation of contract by contractual provisions so that the parties might act in a climate of certitude and obtain the equitable adaptation of contract without transforming this approach into an unbalance to the detriment of the other party. As for the solutions that the court receiving a petition may pronounce, it is interesting to notice that the notion of adaptation of contract, abstract so far, is given a comprehensive definition, namely the equitable distribution of losses and benefits resulted from the change of circumstances between the parties. In this context, the rebalance of contract may represent more than the reduction of obligation that has become excessively onerous, the court or even the parties to the preliminary negotiation being able, for example, to establish a reduction of other party s counter-performance so as not to subject the latter to the risk of an inequitable execution of contract. At the same time, as results from the legal text, the idea of rebalance of parties position is kept even in the case of a solution to terminate the contract since this shall occur at the moment and in the conditions established by the court, the granting ISBN:

5 of certain remedial measures or a compensation of the losses incurred by the victim of imprevision with the benefits registered by their contractor not being excluded. The entrance into force of the new civil code has given rise to strong polemics in terms of the legal institution treated by this paper, mainly regarding the potential threat that the bank credit contracts would represent for the stability of a category of legal relationships of incontestable actuality, especially in the context of the current economic crisis. In this respect, we appreciate that the invoking of the theory of imprevision will not automatically result in the adaptation of contract to the benefit of the borrower, in default of very serious unpredictable causes. For instance, the loss of one s job will not be considered as such a cause taking into consideration that this event in not unforeseeable, because GEO 50/2010 stipulates certain facilities during the borrower s unemployment, and banks most often sustain the credit contracts by insurance contracts including against the non-reimbursement risk due to unemployment. We appreciate that the legislative change will determine the credit institutions to reshape the loan contracts by inserting clauses by which the debtor assumes the risk of change of circumstances so that they may not subsequently invoke imprevision. The person willing to conclude a credit contract will have to pay special attention to the analysis of contract and to reject the insertion of such stipulations that might disadvantage them subsequently. The contract should represent a negotiation of clauses but, most of the time, in the bank credit contracts the bank imposes a form of contract that the borrower accepts by signature unequivocally. Distinction must be made between imprevision and lesion, the most relevant being the moment when the unbalance between performances occurs. In case of lesion, the clear disproportion between the two performances is appreciated when making the agreement, whereas imprevision is appreciated at the moment of execution. In case of imprevision, at the moment of conclusion of the agreement there is no unbalance between parties performances, but it appears subsequently. We must also distinguish between imprevision and force majeure. As for force majeure, we witness an event that could not be foreseen or prevented by the debtor who find themselves in the impossibility to execute their obligation, whereas in case of imprevision it is certain that the obligation is not impossible to execute, but it is just more onerous, and if the debtor executed it than they would become bankrupt. Force majeure may not lead, as in case of imprevision, to the adaptation of contract, but it only results in the suspension or cessation of the effects thereof. 4. Conclusions The regulation of imprevision in the New civil code certainly represents one of the major challenges brought by the legislator in the Romanian legislative system. Used a means of harmonization of the economic and juridical realities with the new challenges of the 21 st century, the theory of imprevision wants to be a viable solution for the finalization of as many contracts as possible whose execution is impaired by the existence of a major unbalance between parties counter-performances appeared after the conclusion of contract. The theory of imprevision must be regarded, in the context of the new regulation, as a legal instrument within reach of the parties that act in good faith and loyalty or which relies on the need to provide a balance between just and useful [15] wishing to solve the crisis of contract, the effective execution and the fulfillment of contractual relationships. As far as it is possible, we expect that the decisions delivered by the courts by virtue of this regulation should favor the adaptation of contract and not its cancellation since this is, in essence, the innovation that the old legal concept of imprevision brings into the Romanian legislative system. References [1] D. Al. Sitaru, International Trade Law. Treaty. vol. II, Actami, Bucharest, [2] L. Fin-Langer, The contractual balance, Librairie générale de droit et de jurisprudence, Paris, [3] D. Berthiau, The principle of equality and civil law contracts, Librairie générale de droit et de jurisprudence, Paris, 1999, nr [4] Gh. Beleiu, Unpredictability theory rebus sic stantibus, in The Civil Law no. II, Review Law nr , Bucharest, 2003, p [5] E. Ciongaru, International Privat Law, Scrisul Romanesc, Craiova, [6] The European Private Code Project, art. 6:111, in Principles of European Contract Law, Prepared by the Commission of ISBN:

6 European Contract Law, Kluwer Law International, De Lando, Haga, 2000, p [7] Civil Code from 1864, Art [8] B. Starck, Civil Law. Obligations, Librairies Technique, Paris, [9] L. Pop, General theory of obligations, Lumina Lex, Bucharest, [10] M. Gaita, Civil Law. Obligations, Institutul European, Iasi, [11] R. I. Motica, E. Lupan, General theory of civile obligations, Lumina Lex, Bucharest, [12] G. Boroi, Drept Civil, Partea Generală, Persoanele, All Beck, Bucharest, 2001, p [13] Decision nr.1122 from 21 february 2003, ICCJ, Commercial sector. [14] L. Pop, Treaty of Civil Law. Obligations. Volume II. Contract. Universul Juridic, Bucharest, [15] J. Ghestin, Ch. Jamin, M. Billiau, Treaty of civil law. The effects of contract, 3rd Edition, Librairie générale de droit et de jurisprudence, Paris, ISBN: