SLOVENIAN REPORT by Matjaž Tratnik, University of Maribor
UNEXPECTED CIRCUMSTANCES
A. Introductory remarks
The territory of today’s Slovenia was until 1919 a part of the Austro-Hungarian monarchy. Most of it belonged to the Austrian part, where the Austrian Allgemeines bürgerliches Gesetzbuch (ABGB) was enacted on January 1st 1812. A small territory in the North-East belonged to the Hungarian part and Hungarian law was applicable there. In 1919, Slovenia became a part of the Kingdom of Yugoslavia. The new State left the civil law uncodified and kept the existing legislation in force. Consequently, the ABGB remained in force until 1945. The new communist regime abolished all old legislation in 1945, but due to the lack of new regulations, the old legal rules[1] remained applicable insofar the did not contravene the principles of Yugoslav Constitution and the new Yugoslav legislation. This meant, that for contracts between private persons, as well as for contracts between State enterprises, the rules of the ABGB remained applicable until the enactment of the Yugoslav Obligations Act in 1978.[2] The rules of the ABGB were in the case law sometimes modified on grounds of the socialist ideas, especially in the fields of compensation for damages and unjust enrichment.
In the field of commercial contracts (between state enterprises) however, the so-called ’Splošne uzance za blagovni promet' (General Commercial Usages) that were established by the Yugoslav State Arbitration in 1954, applied in most cases. The usages contained not merely commercial customary law, but also a number of general rules of the law of obligations.
Due to its federalist structure and to the division of legislative competences between the federal legislator and the legislators in the federal units, Yugoslavia abandoned the idea of a civil code and started to prepare special codifications for separate parts of civil law.[3] The law of obligations was regulated by the Obligations Act of 1978, which was a federal statue and was based upon on extensive comparative research. The strongest impact on the statute still had the Austrian ABGB, but also influences of German BGB, Italian Codice Civile, French Code Civil and of the Eastern-European codifications were noticeable. After Yugoslavia has fallen apart in 1991, the Obligations Act remained in force until on January 1st 2002, when the present Slovenian Code of Obligations (CO)[4] has been enacted. It is important to note, that it does not differ considerably from its predecessor. The strong resemblance of the Slovenian CO 2002 with the Obligation Act 1978 makes the interpretation of most of its provisions by the case law and scholarly writings (also in other parts of former Yugoslavia) on the basis of the Obligation Act 1978 possible. This is especially important, because Slovenia is a small country, with only a few specialists in the field of contract law. It will also take some time before (a considerable amount) case law based on the CO 2002, will be available. The fact that Slovenian civil law has (mostly) been developed from the Austrian law makes it also possible, to use as a source of interpretation Austrian scholarly writings, and to a limited extent, even Austrian case law. It is in fact quite usual that Slovene authors, when writing about Slovenian civil law, refer to the doctrine and case law in Austria and in other countries with related legal systems, as well as to the doctrine in other parts of former Yugoslavia.
B. The cases
I. Equivalence of exchange is distorted
1.
AC: Canal de Craponne: Long-term contract, “regular” inflation/price-increase
Early in the 20th century, the farmers A and B enter into a contract under which A promises to build and maintain an irrigation channel; B is entitled to draw off water at a fixed price. The contract is concluded for an unlimited period of time. Almost 100 years later, A’s successors ask for an increase in the price arguing that due to inflation and a rise in the cost of maintenance as well as labour the agreed price has become completely inadequate.
Is the claim of A’s successors justified? Are they, alternatively, entitled to terminate the contract?
1.1.
Under the Slovenian law, A’s successors do not have the right to ask the court to adjust the agreement (the price). They can, however terminate the agreement by a simple notice. Alternatively, they can try to renegotiate the contract. The possibility of termination on the side of A’s successors might force B’s successors to accept a higher price.
1.2 Termination by notice
In the present case, the contract has been concluded for an undefined period of time. Under the Slovenian law, a long-term contract, concluded for an undefined period of time, may be terminated By a mere notice of one of the parties (Article 333 CO). A’s successors should determine a reasonable notice period for the termination of the contract. [5]
1.3. Change of circumstances
The Slovenian legal system has adopted the principle, that in case of a significant change of circumstances (clausula rebus sic stantibus), it might not be just and reasonable to require from the parties to perform their obligations in accordance with the contract. This possibility mitigates the principle pacta sunt servanda in cases, where strict adherence to this principle might be too severe.[6] The Slovenian CO 2002 addresses the issue of change of circumstances in articles 112-115. Said provisions enable the court to dissolute a contract, upon a demand of one of the parties, due to a change of circumstances.[7] A party, whose performance has become more difficult, is not allowed to demand adjustment of the contract, which is nevertheless possible, if the other party proposes it, or at least, if it gives its consent.[8]
The conditions for an action on grounds of a change of circumstances are the following. The change of circumstances should occur after the conclusion of a contract and render the performance of one of the parties more difficult, or frustrate the purpose of the contract.[9] The change of circumstances should be so significant that the contract obviously no longer complies with the expectations of both parties and it would be in accordance with the general opinion unjust, to keep it in force as it was concluded.
The disadvantaged party is however not allowed to ask for a termination of a contract, if it should have taken such circumstances into consideration when the contract was concluded, if it could have avoided them or if it could have averted their consequences. The same applies, if the change of circumstances occurred after the performance of the disadvantaged party was due.
In the present case, the change of circumstances consists of devaluation of money. Slovenian CO in Article 371 expressly provides that if an obligation consists of the payment of a sum of money, the debtor must pay the amount of currency in which the obligation is stipulated (the principle of monetary nominalism). Exceptions are only possible upon an agreement of both parties.[10] This would mean, that the ‘clausula-rule’ does apply in case of devaluation of money. It is however not clear, if this rule can be applied without exceptions. The principle of monetary nominalism was already codified in article 394 of the old Yugoslav Obligations Act of 1978, but this regulation provided, that this principle only applies, “unless statutorily provided otherwise”, which left room for exceptions on grounds of a change of circumstances.[11] There is also case law relating to said provision that allows for an action in cases of abnormal inflation. Also Yugoslav case law before 1978 allowed for a dissolution of a contract in cases of considerable (not normal, unexpected) changes of prices.[12] In addition, the Yugoslav currency had been subject to a series of devaluations and even to hyperinflation (in the late eighties). Therefore, in my view, reasonable interpretation requires, that ‘clausula’ is applicable to contracts that have been concluded well before the enactment of the present CO of 2002, at least in cases of extraordinary changes of the value of money. The principle of monetary nominalism ‘works’ only where the currency is stabile, but inflation can render this principle inequitable, because it might contravene the principle of equal value of performances (Article 8 CO)[13] and the requirements of good faith (Article 5 CO).[14]
In the present case however, there has been no extraordinary devaluation of money, but only normal inflation, which could have been anticipated by both parties at the time of conclusion of the contract.
2.
FM: Hardship due to extraordinary inflation; hardship resulting from a foreign currency agreement
(Extraordinary inflation) A receives a loan from the B-Bank. Under the agreement, the interest rate is fixed at 10% for five years. In the last 20 years before the agreement, the rate of inflation had been relatively stable within a range of one to six percent. In the third year after the conclusion of the agreement, the economic situation begins to destabilize and inflation rises quickly to 50%.
B-Bank asks for renegotiation and adjustment of the contract.
(Variation: foreign currency agreement) The loan agreement between A and the B-Bank provides for repayment and interest in a foreign currency. In the last 10 years before the agreement, the relevant exchange rate had been relatively stable within a range of 20%. Subsequently, the national currency devaluates by 80% as compared to the foreign currency.
A asks for renegotiation and adjustment of the contract.
2.1
The B-Bank is not entitled to terminate the loan contract. Variation: A has to bear the risk of devaluation of his national currency.[15]
2.2 Change of circumstances
Slovenian law does not allow in general, for an untimely termination of contracts that have been concluded for a defined period of time, except in case of a change of circumstances.
As set out above (1.2), Article 371 CO provides that if an obligation consists of the payment of a sum of money, the debtor must pay the amount of currency in which the obligation is stipulated. There is also case law that expressly declines the possibility to invoke the ‘clausula-rule’ in case of banking contracts.[16]
2.3 Variation
The ‘clausula-rule’ of Article 112 CO does not apply to contracts, where one of the parties expressly (or implicitly) assumes a certain risk, such as in this case, the risk of devaluation of A’s national currency. Since inflation has always been problem in Yugoslavia and until recently also in Slovenia, It has been a common practice in Slovenia and before 1991 in Yugoslavia, that credit contracts provided for a foreign currency clause (DEM, USD, CHF, €).[17] In spite of high depreciation of the Yugoslav and later Slovenian currency, the case law has not allowed for adjustments of such contracts.
3.
HCG¨Government intervention; post-contractual imposition of a tax
A and B enter into a contract under which A promises to supply 120,000 liters of industrial spirit to B. Subsequently, a statute is enacted by which an alcohol tax is imposed on the sale of industrial spirit. The tax statute provides that the seller has to pay the tax. The tax is so high that it even exceeds the price that A and B have agreed upon.
Is A entitled to recover compensation for the additional costs or to cancel the contract?
3.1
Under the Slovenian law is A entitled to demand termination (dissolution) of the contract, but cannot recover the additional costs.
3.2 Change of circumstances - termination
In this case both parties have concluded the contract, based on the presumption, that there would be no changes in taxation. Therefore, the imposition of an new tax, which renders the contract for A unprofitable (he would even suffer a loss) can be considered as an extraneous change of circumstances, that gives ground for an action based on article 112 CO (‘clausula-rule’). Yugoslav case law accepted even a change in existing taxation (in the present case a new tax has been mposed) as a relevant change of circumstances; it is however unclear, how high the rise of taxes should be.[18]
3.3 Change of circumstances – adjustment of the contract
Under the Slovenian law it is not possible for A party, whose performance has become more difficult, to demand adjustment of the contract. Adjustment of the contract by the court is nevertheless possible, if the other party proposes it, or at least, if it gives its consent.[19] It is however highly unlikely, that B would buy the spirit at a considerably higher price, because his cost-profit scheme was based upon a much lower price of the spirit.
4.
LV (Unexpected benefit)
B leases business premises from A for a fixed period of 15 years. Shortly after conclusion of the contract, the character of the area changes strongly and unexpectedly: A military airport located nearby is shut down and an enormous amount of public funds is invested in the area (infrastructure etc.). As a consequence, B´s business soars and his profits are 500% of what he could reasonably have expected. By the same token, the rental value of comparable business premises in the same area rises to 500% of the amount A and B have agreed upon. A claims that the leasing price is to be adjusted accordingly or, alternatively, that the agreement is to be terminated.
Is A´s claim justified?
4.1
A is not entitled to claim the adjustment of the price. He can also not claim the termination of the contract.
4.2 Change of circumstances
Since the lease contract has been concluded for a definite period of time, it is not possible for the parties to terminate the contract before that period has elapsed, except on ground of a change of circiumstances.