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	Murdoch University Electronic Journal of Law

Rebus sic stantibus: A Comparative Survey

Author:	Aziz T Saliba LLM Professor of Law, Universidade de Itauna and Faculdades de Direito do Oeste de Minas – Brazil
Issue:	Volume 8, Number 3 (September 2001)

The author wishes to thank Professors David Gantz and Boris Kozolchyk, of the University of Arizona, who inspired and guided him through his studies in the United States and Fernanda Saliba, for all her love and support.

Contents:

• Introduction:
• Pacta sunt servanda: The Sanctity of Contracts:
  • France:
  • Germany:
  • Italy:
  • Switzerland:
• Rebus sic stantibus in Latin America:
  • Mexico:
  • Argentina:
  • Uruguay:
  • Paraguay:
  • Brazil:
• Is there Rebus sic stantibus in Common Law Countries?
  • Impossibility:
  • Frustration:
  • Impracticability:
• Conclusion:
• Notes

Introduction:

1. The objective of this article is to briefly analyze the unforeseeability doctrine in Civil Law countries (where it is known as a rebus sic stantibus clause or by its French name - theorie de l’Imprevision), from its beginning to its current stage of development - in a comparative perspective.

2. As discussed below, there are three main modern approaches in the Civil Law countries, to the general application of the rebus sic stantibus doctrine. Some countries have rejected it; others have adopted it through court-constructed provisions in their codes and yet others have expressly adopted it in their coded legislations.

3. The author will also compare the rebus sic stantibus doctrine with some similar doctrines, which are available in Common Law countries.

Pacta sunt servanda: The Sanctity of Contracts:

4. The cornerstone of contract law is freedom of contract or the principle of autonomy, which means that when observing the proper legal restrictions, people can engage in whatever contractual relations they choose; and once they have decided to do so, they are bound by their contract.

5. The binding strength of contracts has religious roots. The Old Testament, which is sacred to Christianism as well as to Judaism asserts:

"When a man makes a vow to the LORD or takes an oath to obligate himself by a pledge, he must not break his word but must do everything he said.” [1]

6. In the New Testament, Jesus also commands his followers to honor their word: 

   "Let your 'yes' be 'yes,' and your 'no,' be 'no'."

7. A similar reverence for agreements can be found in traditional Muslim law. Chapter 5 of the Qur'an, sometimes called the Chapter of Contracts, begins with an appeal: 

            "O ye who believe! Fulfill (all) obligations. [2]

8. This notion is also found in Roman law: pacta sunt servanda ex fide bona:  

                    "...agreements must be fulfilled in good faith. [3]Rebus sic stantibus: [4]

9.  A limitation to this "contractual sanctity" was elaborated by the canonists of the twelfth and thirteenth century. According to the canonists, the Latin tag is: contractus qui habent tractum succesivum et depentiam de future rebus sic stantibus intelliguntur. This may be freely translated as:

   "contracts providing for successive acts of performance over a future period of time must be understood as subject to the condition that the circumstances will remain the same."

10. Rebus sic stantibus should not be confused with force majeure. Force majeure excuses the obligor to perform only if there is an irresistible (and unforeseeable) obstacle. In force majeure, the performance must be physically or legally impossible and must not be merely more onerous to perform. Thus, in a nutshell, the fundamental difference is that, unlike rebus sic stantibus, force majeure does not include economic hardship nor even economic impossibility.

11. Rebus sic stantibus was first applied by the ecclesiastical courts, especially when there was a suspicion of usury. It was subsequently adopted by other courts and jurists and this concept thus became widely accepted by the end of the XVIII century

    Obviously, as in most historical changes to the law, the acceptation of a particular concept in law gradually faded over time. As Prof. Rosenn explains:

"as early as the fifteenth century, the popularity of the theory of rebus sic stantibus had begun to wane, largely because of protests from burgeoning commercial interests against the climate of transactional insecurity produced  by the theory's widespread application. By the end of the eighteenth century, pacta sunt servanda reigned supreme,  and the theory of rebus sic stantibus had been relegated to the doctrinal scrap heap. Contributing to its demise were the rise of scientific positivism, and the increasing emphasis on individual autonomy and liberty of contract."

13. Liberalism, which was the predominant philosophical stream in the eighteenth century, brought new ideas incompatible with the harsh and restrictive application of rebus sic stantibus as provided by the canonists. Pacta sunt servanda, on the other hand, was perfectly coherent with the concept of lasse faire, lassez passe. Therefore, the codes that were enacted in this period (Napoleon's code and the Italian Civil Code) did not and would not adopt rebus sic stantibus.
14. After the outbreak of World War I, European jurists had to search for a theoretical justification for excusing promissors from contracts whose performance had become extremely burdensome. Consequently, Rebus sic stantibus was again recycled, under different names and legislative enactments of various countries, together with their concomitant underlying justifications, which is briefly described below.

France:

15. As stated above, the Code Napoleon, by and large, reflected the values of the bourgeoisie. Another important characteristic of the Code Napoleon is that it separated the church from the state. Since, as explained above, rebus sic stantibus was initially applied by ecclesiastical courts when there was a suspicion of usury, it is not difficult to understand why rebus sic stantibus was left out of the Code Napoleon. The clause that enjoins the application of rebus sic stantibus to contracts, which are subject to French law, is art. 1134 of the Code Napoleon which reads: 

"agreements legally made take the place of law for those who make them. They may be revoked only by mutual consent or for causes which the law authorizes. They must be executed in good faith." (emphasis added).

19. With the event of World War I and the enormous devaluation of the French currency, jurists tried to obtain relief for performances that were not impossible but were much more onerous than a party could reasonably have predicted. Based on the last part of art. 1134, (contracts must be executed in good faith), and also art. 1156, (which asserts that the common intention of the parties must be sought for in agreements in preference to the literal meanings of their terms), French jurists had claimed that the Code Napoleon allowed the application of rebus sic stantibus, or theorie de l’Imprevision, as they called it.

20. However, the civil and commercial courts and especially France's highest court (Cour de Cassation) expressly rejected this doctrine, by ruling that only force majeure could excuse performance. A common misconception amongst legal scholars is that the famous case of Compagnie Generale d’Eclairage de Bordeaux v. Ville de Bordeaux is now recognized as a judicial sanction of the theorie de l’Imprevision.

21. Compagnie Generale d’Eclairage de Bordeaux (a supplier of gas) had contracted for deliveries to the city of Bordeaux, at fixed rates, over a period of years. As a consequence of the outbreak of World War I, there was an enormous increase in the price of coal. The gas company requested an increase in the contractual rate, which was rejected by various departmental authorities.

22. On appeal to the Conseil  d’Etat (the highest administrative court in France) the decision was reversed. The Conseil  recognized that, as a matter of principle, it was in the nature of such fixed- rate contracts that fluctuation in costs should be anticipated, but said that, as the increased cost certainly exceeds the outer limits of the increases that could have been contemplated by the parties when the contract of concession was concluded: "the case should be remanded to adjust the terms of the contract if the parties could not agree between themselves. [5]

23. Commentators also point out that Imprevision was applied on numerous other occasions by the Counseil d’Etat and other administrative courts. The problem with this ratio is that the Counseil d’Etat bases its decision on administrative law, whereas the civil and commercial courts are bound by the Napoleon code. Thus, their reasoning is completely different to, (and as put by the eminent French commentator Planiol when analyzing the ruling of the adminstrative courts in favor of rebus sic stantibus) the ruling of the other courts against it in the following words: "one should not compare these two rules, for the administrative tribunals are inspired solely by the necessity of assuring public service, and do not modify the contract except under such necessity. [6]

24. The great French jurist Rene David adds that: "The general interest of the public welfare is that it induces this attitude of the tribunaux administratifs, which decide cases according to "reason" and to precedents much in the same way as English judges must have adjudicated cases at the dawn of the common law. The interpretation and effects of contracts in which a public body is involved, are not governed in France by the rules of droit civil, but are held to be a matter of droit administratif, where special circumstances ought to be taken into consideration. [7]

25. As professor Rosenn notes:

"...in France, the théorie de l’imprévision did not develop into anything more than a method for reliving governmental contractors of unforeseeable hardships to insure the uninterrupted functioning of public services. In practice, the theory has been applied only to three contracts (1) public works, (2) governmental supplies, and (3) concessions such as gas and electricity. Attempts to expand the doctrine of imprévision to private contracts have been regularly frustrated by the Cour de Cassation, France's highest court, which has only been inclined to excuse performance of contractual obligations only if performance is literally impossible. [8] ."

23. Thus, France falls into the first category of our survey, which comprises countries that have not adapted the general doctrine of rebus sic stantibus. Additionally, since the Code Napoleon was adopted, in part or even in its entirety, in other countries, it could be said that France is a role model for that first category. In Germany, rebus sic stantibus was advocated in the teachings of eminent commentators and subsequently applied through judicial construction of code provisions, especially art. 242 of the German Civil Code (BGB), which provides for good faith [9] in contracts.

Germany:

24. The most successful of those advocates of rebus sic stantibus was Prof. Oertmann of Gottingen University. He revived it under the name of "contractual basis" doctrine (Wegfall der Geschäfstgrundlage), which, with slight modifications, constitutes Germany's current rebus sic stantibus doctrine. His definition of the doctrine, which has been transcribed into hundreds of decisions, is the following:

"Contractual basis" is an assumption made by one party that has become obvious to the other during the process of the formation of the contract and has received his acquiescence, provided that the assumption refers to the existence, or the coming into existence, of circumstances forming the basis of contractual intention. Alternatively, "contractual basis" is the common assumption on the part of the respective parties for such circumstances [10] ."

25. According to the German "Wegfall der Geschäfstgrundlage" (contract basis doctrine), if unforeseeable and radical changes occur after the formation of the contract the courts may adapt or even annul the contract, if adaptation is not possible [11] .

Italy:

26. Italy also resorted to rebus sic stantibus after the First World War, through transitional legislation, which allowed the use of force majeure to cases, which the war had made performance extremely onerous to one party. Even after that, Italian courts applied rebus sic stantibus, either by accepting it as a general principle of law or by extending the concept of force majeure so as to include contracts that had become notably onerous because of unforeseen events. However, the highest courts (Cortes di Cassazione) of Florence, Rome and Turin resolutely rejected rebus sic stantibus soon after. [12] 

27. Finally, in 1942, rebus sic stantibus was adopted by the Civil Code. Art. 1467 [13] of the 1942 Italian Civil Code, which states that: "In contracts for continuous or periodic performance or for deferred performance, if extraordinary and unforeseeable events make the performance exceedingly burdensome, the party who owes such performance can demand a dissolution of the contract, with the effect set forth in art. 1458." [14] (emphasis added).

28. However, such a dissolution cannot be demanded if the supervening onerousness is part of the normal risk of the contract.  A party against whom dissolution is demanded can avoid it by offering to modify equitably the conditions of the contract.

29. Italy's code was the first contemporary code to adopt a general rebus sic stantibus clause. Thus, Italy is not only an example but also a role model of our third category, which constitutes countries that have expressly adopted a general rebus sic stantibus clause.

Switzerland:

29. A similar solution, and under the same name, was also used in Switzerland. Even though there is no specific provision dealing with rebus sic stantibus, the Code of Obligations, in its art. 373 allows contractors to raise their price "where extraordinary circumstances which could not be foreseen, or which were excluded by the basis upon which both parties entered into the contract, prevent or unduly impede the completion, the court may, at its discretion, increase the price or rescind the contract." After World War I, Swiss courts started applying this article analogically, which had the effect of implementing rebus sic stantibus as a general rule in Swiss law.

Rebus sic stantibus in Latin America:

Mexico:

30. The first code to adopt the rebus sic stantibus clause in Latin America was the Civil Code of the Mexican State of Jalisco (arts. 1733 and 1734), enacted in 1935. Rebus sic stantibus was also implemented in the Civil Code of Aguascalientes (1771 and 1772).
31. These two states form the exceptions in Mexico, since the other twenty-nine Mexican states do not adopt it. The main reason for this non-acceptance of the rebus sic stantibus principle in the other states of Mexico is that art. 1796 of the Civil Code of the Federal District (which was adopted by most states) and which was based on art. 1134 of the French Civil Code, which is similar to its French version. This has been interpreted as a deterrent to the adoption of rebus sic stantibus, which can only serve to muddle their laws.  Art. 1796 states that:

"Contracts become binding by the mere consent of the parties, except for those contracts that must have a form established by law. From the time a contract becomes binding, the contracting parties are obligated not only to perform that which has been expressly agreed to, but also are liable for the consequences that, by the nature of the contract, conform with the principle of good faith, custom and usage or the law."

32. In October 1980, the Supreme Court of Mexico interpreted Article 1796 in the following manner:

 "This article, which is clearly drafted, does not leave room in its interpretation for the application of the theory of unforeseeable circumstances with regard to good faith that obviously constitutes a general principle of law. This is because the article requires that the party obligated by a contract must conduct himself like a person conscious of his responsibility to fulfil all of his obligations, whatever the magnitude of those obligations, even when supervening circumstances occur that were unforeseen or unforeseeable ... This is especially true if we take into account that in accordance with Article 385 of the Commercial Code, a sale of commercial character is not rescinded even on account of lesion ... However if unforeseen circumstances exist that fundamentally alter the economic circumstances of a certain social group, the contractual terms can be changed by way of general dispositions. [15] "

Argentina:

33. In 1968 Argentina expressly adopted rebus sic stantibus in its civil code. Art. 1198 of the Argentine Civil Code states in part that:

"Contracts are to be made, interpreted and executed in good faith, according to what the parties understood or could have understood, acting with care and foreseeablity. (...) if the obligation of one of the parties becomes exceedingly burdensome, as a result of unforeseeable and extraordinary events, that party may ask for a termination of the contract. (...) The other party may bar the termination of the contract by offering an equitable compensation. [16] " (Emphasis added).

34. Thus, Argentina has basically adopted art. 1467 of the Italian Civil Code.

Uruguay:

35. Uruguay is the only country in Mercosur [17] that does not adopt rebus sic stantibus. Art. 1291 of Uruguay's civil code (from 1868) is practically a translation of art. 1134 (and 1135) of the French Civil Code, which states:

    "contracts legally made take the place of the law for those who made them."

36. Thus, its strict language leaves no room for rebus sic stantibus.

Paraguay:

36. Paraguay's civil code also provides for rebus sic stantibus, in its art. 672 [18] , when it states that:

    "(...) if unforeseable and extraordinary circumstances make the obligation exceedingly burdensome, the debtor may ask for a termination of the contract."

37. Thus, like Argentina, Paraguay also adopted, in general art. 1467 of the Italian Civil Code.

Brazil:

38. The first application of Rebus sic stantibus was in 1932. A religious order (Ordem Terceira) had rented, for 25 years, one of its buildings in Rio de Janeiro. In the contract, there was a clause stating that the tenant could buy the property for 25 "contos de réis".  Because of significant improvements in the area, by the City of Rio de Janeiro, the value of the property went from 25 to 800 "contos de réis". The tenant promptly decided to purchase the building and the religious order did not accept the 25 "contos de réis". Judge Nelson Hungria, who later became a Justice to the Brazilian Supreme Court, ruled that in the case of such profound change in the economic equilibrium of the parties, the court should apply the rebus sic stantibus clause and terminate the contract[19] The  support for the rebus sic stantibus clause kept increasing among commentators and in the lower courts in Brazil. But since the 1916 civil code had not adopted it, some question remained regarding whether or not the Supreme Court would accept or reject its application.  
39. Finally, in the late thirties the Supreme Court dealt with the issue of whether or not rebus sic stantibus was contrary to Brazilian Civil and Commercial legislation and concluded that it was not. Currently, the highest commercial and civil law court in Brazil, as determined by the 1988 Constitution, is the Superior Tribunal de Justica (STJ), which was created to reduce the enormous workload of the Supreme Court. The STJ has also admitted the application of rebus sic stantibus, but only under the argument that:

"Justice must prevail over the literal interpretation of the law. Therefore, the magistrate must analyze the law and the relevant social factors, and by applying the doctrine of rebus sic stantibus, so as to prevent changes in the economic situation, which may cause unjust enrichment to one party and loss to another [20] ."

40. STJ normally employs the following test in order to assert as to whether rebus sic stantibus is applicable [21] :
• The event must have been unforeseeable;
• There must be have been a change in the equivalence of the obligations;
• There must have been a significant financial loss to one of the parties;
41. Since, as in Germany and Switzerland, Rebus sic stantibus was advocated by commentators and later applied as court-construed doctrine, Brazil likewise, fits itself under this second category.

Is there Rebus sic stantibus in Common Law Countries?

42. Rebus sic stantibus has not been expressly adopted in Common Law countries. Nevertheless, Common Law courts managed to achieve very similar results to those of the countries that adopted rebus sic stantibus through three overlapping doctrines that will be briefly discussed:
• Impossibility;
• Impracticability;
• Frustration.

Impossibility:

43.  As far as we can trace, the common law rule was pacta sunt servanda. Impossibility was no excuse and even though the court would not grant specific performance, the breaching party was still liable for damages. In the seventeenth-century case of Paradine v. Jane, a lessee sought to be excused from paying rent because a "German Prince, by name Rupert, an alien born, enemy to the King and kingdom," ousted him from the land, so that he could not take income from it. In a dictum that was to gain far-reaching acceptance in the Common Law world, the Court of King's Bench declared that:

"...when the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by contract. And therefore if the lessee covenants to repair a house, though it be burnt by lightning, or thrown down by enemies, yet he ought to repair it [22] ."

44. The only exceptions to this strict view that "impossibility is no excuse" were supervening illegality, death and disability. [23] Later, another exception was formulated in Williams v. Lloyd, W.Jones [24] . This was a case which concerns the destruction of the subject-matter of the contract. The court held that that a bailee's duty to return a horse was discharged when, without the bailee's fault, the horse died, because "that is become impossible the act of God" [25] .
45. However, Taylor v. Caldwell is deemed to be the fountainhead of the Common Law doctrine of impossibility. Taylor contracted with Caldwell's music hall for performances on four days, in return for payment of 100 pounds a day. The hall was accidentally destroyed by fire less than a week before the performance. Taylor then sued Caldwell for breach of contract. Taylor claimed as damages the expenses he had incurred in preparing for those performances. The Court of Kings Bench ruled that Caldwell was excused because: 

"looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance. [26] "

Frustration:

46. The common law's rigid Pacta sunt servanda rule persisted well for a long time. Sir George Jessel, M.R., in 1875 held that:

"[I]f there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be enforced by Courts of Justice. [27] "

47. This strict view, however, was attenuated by the doctrine of frustration. The modern formulation of the doctrine of frustration can be found in the decision of the House of Lords in Davis Contractors Ltd. v. Fareham U.D.C, [28] since 1956. Lord Radcliffe stated that:

"...frustration occurs whenever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do."

48. This conception has been accepted by Australian, Canadian, and New Zealand courts [29] . American law, nevertheless, dealt with frustration in a slightly different manner, since impossibility was replaced with impracticability.

Impracticability:

49. Similarly, in the U.S. this concept was adopted by UCC 2-615 as it stated that:

"Except so far as a seller may have assumed a greater obligation...[d]elay in delivery or non-delivery in whole or in part .is not a breach of his duty under a contract for sale if performance as agreed upon has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made."

50. Thus, there are four requirements to be met by the party that wants to be excused from performance:
    • Firstly, performance as agreed must be impracticable [30] . Clearly, impracticable is a more flexible test than impossible. How much more flexible is a question left to the courts.
    • Secondly, the threshold to be met is the existence of an event that changed a basic assumption (common to both parties) on which the contract was made.
    • Thirdly, impracticability cannot result from the fault of the party seeking to be excused.
    • Fourthly, that party must not have assumed a "greater obligation than the law imposes", as the UCC puts it.

Conclusion:

51. In Civil Law Countries, three basic attitudes towards Rebus sic stantibus could be detected:
• The French model basically rejects the doctrine. In our survey, this was detected in Uruguay and Mexico;
• The German model, where rebus sic stantibus is accepted through a court construction of the civil and commercial codes. This is also the case in Switzerland and Brazil.
• The Italian model, where the codes expressly adopt rebus sic stantibus. Argentina and Uruguay are examples of this model.
52. There is not an equivalent doctrine of rebus sic stantibus in common law countries. However, through the court-constructed doctrines of "frustation, impossibility and impracticability" common law countries have achieved the same result. In the U.S., impracticability has now been codified.

Notes