Change of Circumstance. Approach to the doctrine of "change of circumstance" in different countries and legitimacy of this doctrine

Table of Content

INTRODUCTION

CHAPTER I People’s Republic of China

CHAPTER II ENGLAND

CHAPTER III The United States of America

CONCLUSION

BIBLIOGRAPHY

INTRODUCTION

This paper will provide information about the doctrine of the “change of circumstance” and its approach in 3 different countries. Moreover, legitimacy and appropriate scope of the doctrine will be assessed as the conclusion of the paper.

Every passing year the importance of the doctrine of “changes of circumstances” is rising, especially in the result of unforeseen events in the global world, for instance economic crisis and unexpected disasters.

Any event of legal, economic, technical, political or financial nature
i) which occurs or becomes known to the disadvantaged party after the conclusion of the contract,
ii) which could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract and
iii) which fundamentally alters the equilibrium of the contractual obligations, thereby rendering the performance of the contract excessively onerous for that party provided that party has not, through express stipulation or by the nature of the contract, assumed the risk of that event

constitutes hardship (change of circumstances)^[1].

In most legal systems, change in circumstances is a juridical fact which, under certain conditions, engenders a number of defined legal principles and rules; and it is normally the case that these principles and rules are subsumed under broader legal doctrines (e.g., frustration, imprevision, clausula rebus sic stantibus, impracticability, Wegfall der Geschaftsgrundlage, Unmöglichkeit, hardship, eccessiva onerosita and Nazariyyat al-Hawadith al-Tari’ah, etc.).^[2]

The legal system, development of the doctrine of the “change of circumstance” and the approach to this doctrine in each different 3 countries will be discussed in this paper. The first country is The People’s Republic of China, second is England and the last discussed country is The United States of America.

CHAPTER I People’s Republic of China

The legal System of Chine is socialist system which is generally based on Civil law model. The origin of the current legal can be tracked back to the period of the Chinese Soviet Republic in the revolutionary bases prior to the establishment of the People’s Republic of China. The first formal piece of legislation, commonly referred to, was the Common Programme of the Chinese People’s Political Consultative Congress promulgated in 1949 which laid down the essential principles of the Constitution which was adopted in 1954.^[3]

Political changes induced the government to make reforms in the legislation. Moreover, after the entry of China into World Trade Organization the temp of reform in the Chinese Law raised significantly. The development of the Chinese legal system over the past twenty years has reflected a process of selective adaptation, by which borrowed foreign norms about law and legal institutions have been mediated by local legal culture.^[4]Despite the fact that the doctrine of “change of circumstances” was very necessary for judicial practice it had not been added to the legislation at that time.

It should be mentioned that the main source of the doctrine of the “change of circumstances” in China is judicial practice. In 1993, the Supreme People’s Court formulated this doctrine in the following terms:

If, due to causes for which neither party is responsible, there occur fundamental changes, unforeseeable to the parties, in the objective circumstances that are the foundation of the contract, thereby making it evidently unfair to perform the original contract, the contract may be modified or terminated according to the principle of change of circumstances upon application by the parties.^[5]

Despite of judicial practice this doctrine unexpectedly has not been included to the new Contract Law of Chine which was enacted in 1999. Inaction of a new legislative without the doctrine “changes of circumstances” created confusion among judges. However, Courts found the way how to overcome this problem, whereas, they applied directly to the principle of good faith to resolve cases of hardship.^[6]

The Global financial Crisis of 2008 was the immediate incident which occasioned the Second Judicial Interpretation. The Supreme People’s Court noticed that the global economic downturns had brought before the Chinese

courts a wave of civil and commercial contract disputes especially relating to enterprise. It was in the form of a judicial interpretation issued by the Supreme People’s Court that the doctrine of change of circumstances was formally established. In China, the judicial interpretations issued by the Supreme People’s Court have the force of law. This authority of the Supreme People’s Court is derived both from its constitutional role of supervising the adjudication work of the lower courts.^[7]

The doctrine of change of circumstances is specified in Article 26 of the Second Judicial Interpretation, which stated:

If a material change in the objective circumstances that could not have foreseen by the parties at the time of the conclusion of the contract caused by something other than force majeure and falling outside the realm of commercial risk occurs after the formation of the contract and continued performance of the contract would be manifestly unfair to one of the parties or realisation of the objectives of the contract has become impossible and a party petitions a people's court for amendment or termination of the contract, the people’s court shall, based on the principle of fairness and while taking into consideration the actual circumstances of the case, determine whether to amend or terminate the contract.^[8]

As can be seen from this Article that“material change in the objective circumstances”is very important fact of the doctrine of “changes of circumstances”. The case betweenXinbaiwan Catering Co. Ltd. of Zhangjaikou and Xuanhua Hotel Ltd^[9] is a good example for it. In this case, the parties entered into a contract in March 2005 under which Xuanhua Hotel allowed Xinbaiwan Catering to run its restaurant for a monthly rental of RMB 50,000. The amount was supposed to also cover utilities expenses (i.e. water, electricity and heat). However, since the opening of the restaurant in August 2005, Xuanhua Hotel found that the money it paid for water and electricity each month far exceeded the amount it received from Xinbaiwan Catering. Consequently, from May 2006, Xuanhua Hotel stopped paying the fees for electricity and water for Xinbaiwan Catering and was sued by the latter for breaching the contract. In the trial, the request of Xuanhua Hotel to modify the contract was granted by the court. As the court reasoned, when entering into the contract, both parties operated on the presumption that Xuanhua Hotel would make a certain profit from the rental after deducting the sum of money paid for water and electricity. However, because of the occurrence of some special circumstances, Xuanhua Hotel incurred losses instead and this led to an excessive imbalance of interest between the parties. The Xuanhua Hotel’s insistence that Xinbaiwan Catering must perform the contract in the original terms contravened the principle of good faith. Hence the court modified the contract,inter alia, that Xinbaiwan Catering would pay for its own water and electricity expenses in exchange for a reduced amount of rental.

[...]

^[1] Trans-lex, Document-ID: 951000. (No. VIII.1 – Definition)

Source: http://www.trans-lex.org/951000

^[2] Adnan Amkhan, The Effect of Change in Circumstances in Arab Contract Law, p. 258

^[3] WANG Guiguo and John MO, Chinese Law, p. 1-2

^[4] Pitman B. Potter, The Chinese Legal System, p. 2

^[5]“Quanguo jingji shenpan gongzuo zuotanhui jiyao” [Summary Proceedings of the National Symposium on the work on Economic Adjudication] (6 May 1993), s.2(6). The English translation is adopted from B. Ling, Contract Law in China (Hong Kong, Singapore and Malaysia: Sweet & Maxwell Asia, 2002), p. 293.

^[6] S. Han, “Qingshi biangeng yuanse yanjiu” [A study of the principle of change of circumstances] in

Zhongguo Minfa Jingcui, ed. by Fayuan Jingcui Bianweihui (Beijing: Jixie Gongye Chubanshe, 2001), p. 358-359

^[7] Gordon Y. M. Chan, The Doctrine of Change of Circumstances in Chinese Contract Law, (dissertation), p. 6-7

Source:http://www.researchgate.net/publication/228282731_The_Doctrine_of_Change_of_Circumstances_in_Chinese_Contract_Law

^[8] The English translation here is adopted from the “Interpretation on Several Issues Concerning the Application of the <PRC Contract Law>”, China Law and Practice (June 2009), p. 73.

^[9] D. Xia, “Fasheng qingshi biangeng shi keyi chengshi xinyong yuanze biangeng hetong tiaokuan” (Using the principle of good faith to modify the contractual provisions when there is a change of circumstances), vol.22 (2008), p. 40-42.