The change of contracting conditions and the contractual adjustment

The change of contracting conditions and the contractual adjustment

Results and predictability. These words and all that they imply are elements that are taken into consideration when establishing a long-term contractual relationship. We start with the fact that when we engage into a contract, we are obliged to make the commitments acquired in exchange for a consideration. Deliver raw material as an input supplier of a factory, the payment of a lease in a shopping center, construction of a public facility. In short, countless examples arises.

However, one of the elements that we may not analyze are those internal and/or external factors that shape the environment in which we operate, what we can call as contracting conditions, the importance of which, is that such conditions serve as a determining factor for that we can make our predictions and expected results in response to certain performance, which will ultimately influence our business decision making.

Thus, although we aspire to keep the contract conditions unchanged, sometimes unforeseeable events occur that significantly affect the context through which it was contracted and such changes have an impact on the execution of the obligations of one of the parties.

Given these elements, it is worth asking the question: How do we respond to what is agreed in the contract? The prrinciple Pacta Sunt Servanda is a well-known figure in Latin American legal practice, whose rigidity implies that the obligations must be executed in accordance with the agreement, without detriment to the change in contract conditions.

This means that if I, as a supplier, force myself to deliver such amount of raw material to my counterpart, or if as a merchant I decided to lease a store at such a price, in response to the high level of consumers, then I will have to fulfill this obligation, regardless of whether, for example, social security conditions changed radically, decreasing the frequency of consumers in the mall or making more expensive the inputs for the delivery of raw material to the counterpart. I must comply with my obligations and period, although the cost of compliance becomes more expensive, to the detriment of the expected consideration. Clearly, the above reflects a worrying imbalance in the contractual balance of the parties, significantly affecting one of them.

Now, let us ask ourselves the following question: Would the ensuing conditions have motivated me to enter into the contractual relationship? Taking into account predictability and expected results, the answer would most likely be negative. One would possibly not hire to know that the price that would have to be paid or effort to be displayed would be so high in exchange for a consideration that it would be so low for the effort deployed. And this is where the importance of the original contracting conditions lies.

Given this phenomenon, numerous theories have been used around how such conditions constitute the basis on which a contractual relationship is founded, but all agree to maintain that a change of conditions is a cause for contract modification, although it does not has stipulated the effects in the event of an unforeseeable event. Let us refer to this figure as “Theory of Unforeseen.”

The effects of this theory is to adjust the contract to the new conditions accrued, for which three possibilities have been identified: 1) Review of the clauses of the contract to adjust the benefits that allow balancing the imbalance caused by the unforeseen event; 2) Suspension of obligations, in the event that the unforeseeable event has temporary effects that subsequently allow the benefits to resume under the original conditions; and 3) Termination, if economic readjustment is not possible.

It is noteworthy that the application of this theory arises not as a counterweight to the institution of the Pacta Sunt Servanda but as a complement to it, as an exception to the rule, following social justice. Its use must occur with some caution and prudence, which has led to a doctrinal and jurisprudential configuration of a series of requirements for the invocation of such a theory.

Likewise, we highlight that the element proposed differs from force majeure or fortuitous event because in the latter the fulfillment of an obligation becomes impossible. Instead, given the theory of the unforeseen, compliance can still occur, but under extremely onerous conditions. Furthermore, force majeure or fortuitous event can be foreseen within the reasonable margin, such as a natural phenomenon or a labor strike; but, in the theory of the unforeseen, the occurrence of such an event is unpredictable, such as the outbreak of the socio-political crisis in Nicaragua. And so the theory of the unforeseen can also be distinguished from other figures such as Unjust Enrichment, mistake, injury, among others.

Therefore, we emphasize that there are legal alternatives that seek to readjust the contractual imbalance in the event of unforeseeable events, which will lead your business to have a backup tool in case of being harmed.

At CENTRAL LAW we have an experienced team of lawyers who can advise you in the most diligent and comprehensive manner in the event of unforeseeable events that affect your business.

For more information contact us at info@central-law.com

Avil Ramírez Mayorga
Associate
CENTRAL LAW
Nicaragua

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