17
Danish National Report
(Hard Core Cases marked by *)
Assistant Professor, Dr. Kim Østergaard
Law Department – Copenhagen Business School
Unexpected circumstances in Danish law
1. Introduction
The main principle in Danish law is once the parties have entered into an agreement, the agreement is binding upon the parties, cf. the Danish Contract Act section 1 and DL 5-1-1. Thus, a party to a contract bears the risk, if unexpected circumstances arise after the formation of the contract. In general it requires something extraordinary if the promisor to a contract after the formation of the contract is not bound and is not liable. Another main principle in Danish law is the freedom of contract. In accordance with Danish law the parties can very well make a conditional promise, which implies if one or more conditions are not fulfilled, the parties have not entered into a valid contract or the fulfilment of the contract might be postponed.
Once the formation of the contract has taken place, the parties in general bear the risk if unexpected circumstances should arise. In dealing with unexpected circumstances the promisor to a contract can refer to section 36 of the Danish Contracts Act,[1] the doctrine of assumptions, or Section 24 of the Danish Sales of Goods Act, which deals with the question of force majeure.[2] It is generally accepted that the latter is applicable outside the scope of the Danish Sales of Goods Act. As mentioned below Danish law does not contain any default rule about hardship as opposed to the above mentioned rules, which apply as default rules. If the promisor to a contract wants to invoke hardship, the contract has to contain a rule concerning hardship. Otherwise it is not possible to invoke hardship, unless it is possible to apply section 36 of the Danish Contracts Act or the doctrine of assumptions.
Section 28 – 34 of the Danish Contracts Act contains rules about avoidance due to fraud or other sorts of foul behaviour. These rules, however, deal with issues in conjunction with contract formation, where it is crucial whether the promisee to the contract is in good faith or not. In general these rules are not applicable to unexpected circumstances which might arise after the formation of the contract.
Besides the above mentioned rules in Danish law a Danish court might use different methods of interpretation in dealing with questions of unexpected circumstances. Especially the principle of in dubio contra stipulatorem might be relevant to apply to cases concerning unexpected circumstances. I will not deal directly with this issue in conjunction with my remarks about the cases, but Danish courts do use different sorts of interpretation to set aside a contract, a provision in the contract, or just simply state the parties.agree on certain conditions.
2. Unfair contract terms
Section 36 of the Danish Contracts Act was enacted in 1975 and came into force on July 1st the same year.[3] Section 36 is a general clause. In the preparatory work to section 36 it was clearly stated that the section should cover economic crime (which was heavily debated at that time) and to protect consumers against unfair contract terms. Case law clearly shows that section 36 has been applied by Danish Courts, especially in conjunction with consumer cases. However, section 36 has been applied in numerous cases between merchants. Especially when the parties to the contract can be characterised as being respectively superior and inferior.
Section 36 was revised in 1994, and the revision came into force on January 1st 1995.[4] The wording of section 36 was changed in the sense that the expression “set aside” was replaced with the wording “can be changed or set aside”. By doing this it became possible to adjust an obligation in an upward direction. This issue is more heavily debated in conjunction with case no. 1. Directive 93/13/EC about consumer agreements was enacted in the Danish Contracts Act as section 38a, 38c, and 38d with the revision of the section 36 in 1994.
The wording of section 36 is (my translation):
“A contract may be changed or set aside as a whole or partially if it is considered unfair or against fair dealing to enforce it. This also applies to other legal transactions.
36 (2) In the application of (1) circumstances in conjunction with the formation of the contract, the content of the contract and subsequent circumstances are to be considered.”[5]
The main purpose of section 36 of the Danish Contracts Act is to have a private law rule which makes it possible to set aside an agreement (void) or to adjust an agreement. The goal is to protect consumers and other parties to a contract who might be considered to be in an inferior position compared to the other party to the contract.
The most important term in section 36 of the Danish Contracts Act is “unfair”. In this context it is worth to emphasize the latter part of subsection 2 as it contains an access to take subsequent circumstances into consideration (after the formation of the contract), if it turns out that the maintenance of the contract would be considered unfair. The question of whether a contract is unfair and thus a violation of section 36 is not a simple question to answer. Dealing with this question might include, but is not limited to, the status of the parties, deviations from non-mandatory rules and the due care and diligence of a prudent businessman and the application of standard conditions.
The application of section 36 implies that the courts have the options mentioned below, if a contract is considered unfair:
1) Certain terms in the contract might be set aside or eased.
2) The whole agreement might be set aside or eased.
3) The application of the contract might be set aside in one particular situation, but the contract is otherwise maintained.[6]
4) The contract may be changed (in accordance with the revision in 1994 as mentioned above)
3. The doctrine of assumptions
The application of the doctrine of assumptions[7] requires the fulfilment of three conditions.[8] A promisor is not bound by his promise, if his assumption was determining, perceptible, and relevant. First, an assumption is determining if the promisor would not have given the promise, if he had known at the time of the promise about the subsequent circumstances. It is worth mentioning that an assumption is clearly different from a condition, which is a part of the contract. Second, an assumption is perceptible to the promisee, if he realised or supposedly should have realised the assumption of the promisor. In the way the doctrine of assumptions has been dealt with by the courts it includes both conscious as well as unconscious assumptions. Finally the condition about relevance is more a question of risk. More precisely whether the promisee should bear the risk that the assumption fails. To determine the question of relevance one should look to issues such as what enhances commerce and its predictability.
If the court applies the doctrine of assumptions the contract is void and it might be possible to claim damages. The doctrine of assumptions has been applied in several cases, even after the enacting of section 36 in the Danish Contracts Act.[9]
4. Force majeure
Where the application of section 36 of the Danish Contracts Act or the doctrine of assumptions might be fairly hard to predict, it is generally “easier” to demonstrate the possibilities of invoking force majeure. As mentioned above the Danish Sales of Goods Act contains in section 24 a provision about force majuere. Section 24 deals solely with the question of liability for the vendor of unascertained goods[10] and is a non-mandatory rule. The vendor or the purchaser is liable (strict liability), unless the unexpected circumstances meet the three conditions of force majeure. First the force majeure event was not predictable at the point of time when formation of the contract took place. It is by definition an unexpected circumstance. Second it is impossible to provide a similar piece of goods compared to the piece of goods in question. In practice this implies that nobody is capable of providing a similar piece of goods. Third the unexpected circumstances must be of an extraordinary and non-recurrent character such as war, natural disasters, riots, embargo, and strikes. If the event takes place on a regular basis it is not considered extraordinary.[11]
The number of cases is substantial. In general it is difficult to argue that practice is very clear or distinct. It is probably fair to state the interpretation of the three conditions has become more relaxed compared to the strict interpretation of the provision in former days.
If there is a delay the purchaser is entitled to terminate the contract, if the delay is considered fundamental. If the agreement is made between merchants any delay would be considered fundamental, unless only a small fraction of the goods in question are delayed, cf. section 21 (3) of the Danish Sales of Goods Act. Whether there is an obligation or possibility to require performance is not regulated by the Danish Sales of Goods Act. If the force majeure event prevents the vendor from performing the contract within a certain period of time, the vendor still has an obligation to deliver. If it is difficult to predict whether the force majeure event is of a temporary character, then at some point after delivery should have taken place, the obligation does not exist any longer, and the contract lapses. If it is clear that delivery of the goods in question is impossible due to frustration, the obligation to deliver will also lapse. In order to minimize the loss in conjunction with force majeure, the vendor has an obligation to inform the purchaser. Otherwise the vendor will be liable for such subsequent costs.
Today section 36 of the Danish Contracts Act is the most important source of law in dealing with the question of unexpected circumstances after the formation of a contract between the parties has taken place. The relationship between section 36 of the Danish Contracts Act and the doctrine of assumptions is not clear. In the provisional report[12] to section 36 of the Danish Contracts Act it is clearly stated that section 36 of the Danish Contracts Act offers a more suitable solution with regard to unexpected circumstances than the doctrine of assumptions. In the provisional report it is even stated that the doctrine of assumptions to a wide extent is based on a legal fiction.[13] As discussed in the remarks to case 2 the Danish Supreme Court has, for instance, not rejected that it might be possible to use the doctrine of assumptions even today. This implies that depending on the case it is possible to apply section 36 of the Danish Contracts act and/or the doctrine of assumptions.[14] Section 36 of the Danish Contracts Act is probably predominant as a source of law when it comes to cases between a superior and an inferior party to a contract. The doctrine of assumptions is thus still a part of Danish law if a case comprises questions about unexpected circumstances between merchants. There is, however, no doubt that section 36 of the Danish Contracts Act has gained “territory” at the expense of the doctrine of assumptions.
Questionaire: Unexpected Circumstances
I. Equivalence of exchange is distorted
1. (*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?
With the revision of section 36 of the Danish Contracts Act in 1994, as mentioned in the introduction, it has become possible to change an obligation in an upward direction. So far case law is scarce concerning this issue.
However, in a recent case[15] from 2004 The Danish High Court had to pass a judgment regarding a lease contract on farm land. In 1847 the original purchaser of the farm had the lease contract registered. The lease contract contained a provision by which the current owner of the farm or any future owner had the obligation to lease a particular part of the farmland until the end of 2046. The lease contract contained no provisions with respect to termination or regulation of the rent, including the question of inflation. The annual rent for a quite substantial area of farm land was DKK 10.
On September 1st 2001 the plaintiff bought the farm at which point he was fully aware of the content of the lease contract. Subsequently he filed a lawsuit against the defendant with the main claim that the lease contract should be terminated without notice, alternatively that the defendant should pay a rent in accordance with the market rent.
In accordance with section 36 of the Danish Contracts Act a contract may be modified or set aside in its entirety if it considered unreasonably to maintain the contract. In the application of section 36 of the Danish Contracts Act it is possible to take into consideration the circumstances in conjunction with the formation of the contract, the content of the contract, and subsequent circumstances.[16]
Since the plaintiff was fully aware of the content of the lease contract, The High Court decided that it was not possible to set aside the whole agreement in accordance with section 36 of the Danish Contracts Act. The plaintiff could not reasonably claim that the low payment for the farm land by any chance was an unexpected circumstance, since he was fully aware of this issue, when the formation of the contract took place. However, The High Court decided that the current rent was unfairly low, and in accordance with section 36 of the Contracts Act the rent was raised from the former rent of DKK 10 to 8000, which was the amount that a sub-leaser paid to the defendant.