Changing the Contract in a Changing (Economic) Environment
The article below answers the question in the form of a brief overview whether and under what conditions the alteration of balance of contractual obligations is possible in the practice of the Supreme Court and circuit courts over the past 10 years. First, the obligation to pay all the fees in a situation where the world around us has changed. Legally relevant grounds are listed in LOA art 97 and further, which must be met to be able to consider amending the contract unilaterally.
To point out in the beginning, the alteration of balance of contractual obligations cannot be based on a mere fact that the contractor does not have financial means to perform the contract. The Supreme Court pointed out in decision No. 3-2-1-136-11 p 18: “The Chamber notes that the courts have correctly stated that the change of circumstances within the meaning of LOA art 97(1) cannot at least generally be that the buyer does not find a way to finance the purchase […].” It should also be pointed out that unforeseeingness is also a condition for alteration of balance of contractual obligations – the party could not have reasonably guessed at the time of concluding the contract that the circumstances might change. Therefore, agreements that have been concluded in so-called changing circumstances could be much more difficult to amend unilaterally later.
By the practice of the Supreme Court and circuit courts, it could be said that alteration of balance of contractual obligations is more promising in contract cases where the parties undertake to perform the main contractual obligations to each other for a longer period of time. For example, a lease contract, the lessor undertakes to give the premises to the use of the lessee, and the lessee undertakes to pay the (monthly) rent for it. Courts have found that in a situation where a lessee enters into a lease contract with a market rental price of X when the market rent of that rental space is 40-55% lower at the time of Y than at the time of X, then this is a sufficiently significant change in the ratio of liabilities that would justify a reduction in the rent amount. In a situation where, when the contract was concluded, the parties could not foresee the emergence or extent of the economic crisis and it was impossible for them to influence the decrease in the value of the rental space, it is justified to make the contract more favourable for the lessee. That also due to the fact that the lessee, as a damaged contractual party, does not bear the risk of a decrease in the value of the rental space due to law or contract.
In contrary to the lease relationship, the usual sales contract is executed opposite essentially within the same time frame. In practice, there is also a common option where the seller immediately executes the sales contract, and the buyer retains the opportunity to pay the purchase amount in contributions. The liability with sales contracts for carrying the risks differs from lease contracts. Supreme Court has stated in the decision No. 3-2-1-136-11 p 22: “If, by agreement of the parties, the buyer is allowed to pay the purchase price after the concluding the contract, then it can be considered generally a favourable condition for the buyer and the risk of price fluctuations between the conclusion and execution of the contract must therefore be borne by them.” The Supreme Court also points out that in a otherwise buyers would choose to pay the sales amount over a long period of time and they would have the opportunity to change (speculate the change) the sales amount each time. Buyers who pay the sales amount immediately do not have that kind of an opportunity retrospectively. Therefore, the buyer should take into account the agreed payment amounts even if the sales object’s own market value decreases in the intervening period.
According to the Supreme Court 2016 decision No. 3-2-1-179-15 p 33, the condition for the alteration of balance of contractual obligations is such a change in circumstances which has resulted in a significant increase in the costs of performance of one party or a significant decrease in the value of the other party’s contract. In a typical loan agreement situation, the creditor pays out the entire loan amount in full, which the lender repays in instalments over a longer period of time. The District Court pointed out in 2017 decision that if the surrounding environment changes during the loan repayment period, then this does not lead to a decrease in the value of the loan amount at the moment when the loan amount was issued. Therefore, the lender at least does not have the basis by this to demand the amendment of the contract.
It is possible to protect ourselves against changes in economic and/or geopolitical circumstances. The best thing to do would be to proactively agree in the original agreement on the basis to amend the agreement. But at the same time, it may undoubtably affect the price of the contract and raise an uncomfortable discussion topic on the table. Another option is to ensure the performance of the contract against changing circumstances, but insurers may not provide the necessary insurance product. If negotiating about the terms of the contract is not an option and no agreement can be reached with the insurer, then (for the entrepreneur) the eternal question remains – whether to take this business risk or not.
Jaanus Stern/ LEADELL Pilv Advokaadibüroo advokaat