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The author discusses the consequences of the rebuc sic stantibus clause in contracts in times of pandemic

The COVID-19 pandemic has heavily disrupted all aspects of our lives, starting from our daily routines and habits. The coronavirus has caused distortion to almost all branches of the economy worldwide, including the legal sector. It has forced companies and their legal advisors to carefully review their contractual relations from a different perspective –an angle of an extraordinary event that we are all facing due to the COVID-19. The situation creates a fertile ground for doctrinal and jurisprudential growth of the rebus sic stantibus doctrine that is analyzed in this article.

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How will the rebus sic stantibus clause affect contracts because of COVID-19?

The rebus sic stantibus (“things standing thus”) clause constitutes one of the oldest general principles and together with such norms as pacta sund servanda (“agreements must be kept”), good faith or the rule of equity form the basis of contract law globally. The rebus sic stantibus concept provides that contracts or treaties can be altered, terminated or a party can withdraw from a contract or a treaty due to a fundamental change of circumstances. The doctrine is recognized as a part of customary international law and it is also provided in the Article 62 of the 1969 Vienna Convention on the Law of Treaties regulating treaties between states. It has not been determined therein as the rebus sic stantibus rule but the concept of a fundamental change of circumstances has been codified.

The concept has also been a subject of international jurisprudence and certain rules and requirements have been developed. A vital example is the principle stipulated in the Fisheries Jurisdiction Case (United Kingdom v. Iceland, 1973), stating that the doctrine in question applies only to the changed circumstances that had not been contemplated by the parties. The doctrine’s occurrence in the international public law demonstrates its significance and omnipresence, and the international law has been contributing and will contribute to its development. However, what should be more interesting for companies and all contractual parties, is the presence of the rebus sic stantibus clause in the private law and legal systems of different countries.  

The discussed clause can be seen as contrary to the aforementioned pacta sund servanda principle determining that the obligations stated in a contract should always be fulfilled. The principle safeguards the stability and certainty of legal transactions ordering to perform a contract according to its nominal provisions. It facilitates rational conduct of business activities and distribution of possible economic risk. Whereas, the rebus sic stantibus clause provides for an option to adjust contractual obligations if a change of circumstances, that could not have been foreseen prior to signing the contract, occurs. Rigorous and strict application of the pacta sund servanda principle could lead to violation of the principles of equity and contractual balance of the parties, thus a possibility to renounce, terminate, or alter a contract by a court in certain circumstances has been introduced. The above principles should be therefore seen as supplementary to each other and as basic rules for the economic transactions. 

To maintain balance between contractual parties, many countries have implemented legal constructions based on the rebus sic stantibus principle to their legal systems. These constructions are not uniform. We can distinguish three different approaches, namely 1) the sensu stricto approach - incorporating the doctrine into a legal system through particular direct provisions; 2) the sensu largo approach – shaping the doctrine through jurisprudence; and 3) the concept rejecting the doctrine in principle. 

The first approach has been applied i.a. by Poland (also Italy or Portugal) by including the doctrine directly in the Polish Civil Code. According to the relevant provision, in such cases when, due to a fundamental change of circumstances that the parties could not foresee when entering into the contract, a fulfilment of obligations would entail excessive difficulties or threaten to cause glaring losses for one of the parties, a court may, taking into account the interests of the parties and the principles of community coexistence, impact the contract in any of the three ways: indicating the way the contract should be fulfilled, indicating the amount of the performance claim, or even terminating the contract. 

The second of the aforementioned approaches has been applied most widely. The representatives of that method are i.a.: Spain, Germany, Switzerland and the common law countries – the US and the UK. The main equivalent of the rebus sic stantibus doctrine in the UK legal system is “the doctrine of frustration of contract” determining that a contract can be terminated by operation of law in case of an unforeseen event either rendering contract’s performance impossible, or profoundly changing one party's key aim for concluding the contract. 

The third of the aforementioned approaches has been recognized i.a. in France. The reason for that is a very strict understanding of the pacta sund servanda principle being applied in the French legal system. It has been confirmed in the jurisprudence, that it is not courts’ responsibility to modify contracts and parties' voluntary decisions by considering fundamental change of circumstances even if such would be fair and just. In more recent jurisprudence, a possibility that courts impose an obligation to renegotiate contracts occurs, however it is still far from the rebus sic stantibus doctrine. 

The COVID-19 pandemic certainly constitutes an extraordinary event that can trigger application of the rebus sic stantibus principle in different legal systems, however before taking any legal action it is recommended to review and analyze appropriate provisions and jurisprudence that would apply to particular contractual obligations.

The rebus sic stantibus doctrine is not the only response to a change of circumstances as often it appears to be insufficient for constantly evolving and flexible contractual practices. Thus, in order to meet the challenges other autonomous solutions have been developed, primarily the force majeure clause and the hardship clause. Both institutions respond to an unforeseen change of circumstances for the purpose of protecting an affected party of a contract. The force majeure clause aims to free a party from liability for failure to perform contractual obligations in the case of impossibility to perform the obligations as a result of certain events specified in the contract.

Whereas, the purpose of the hardship clause is to maintain the most significant provisions of the contract in order to reflect its meaning in the new reality. It determines that the parties should still perform their contractual obligations even if, due to a change of circumstances, the contract’s performance have been rendered more burdensome than it had been anticipated at the contract’s conclusion. Both of the clauses must be included in a contract in order to be applicable. It must be emphasized that different countries’ doctrine and jurisprudence have developed various solutions and constructions related to those clauses, however direct and complete contractual provision can spare contracting parties a lot of trouble. If a contract does not explicitly indicate an epidemic or pandemic as examples of force majeure then, the answer to the question whether the COVID-19 can be regarded as one is not straightforward. On the other hand, the hardship clause should also list a pandemic unambiguously. Otherwise, in lack of contractual provisions, every case would be examined individually on the basis of the actual data and parties would be obliged to prove their positions. 

Conclusion

An attention must be drawn to the fact that countries’ approaches to the rebus sic stantibus doctrine differ significantly. Such heterogeneity does not meet the requirements neither of the dynamics of economic transactions nor of the international contractual practices, and it has led to various attempts to regulate all possible variants in contracts and giving more importance to the force majeure, the hardship and also renegotiation clauses. A careful attention must be paid to negotiating and constructing the contracts as it is certain that not all of the situations can be foreseen, thus certain universal but at the same time precise provisions must be included in a contract in order to fully protect contracting parties. Moreover, it is important to consider with care and to determine the law that will govern the contract. It should be also bear in mind that even if a certain legal system provides for a codified variant of the rebus sic stantibus clause (as described above) the relevant jurisprudence should be cautiously analyzed as most probably it will be applied in the event of the relevant legal provisions being found ambiguous.