What should be done if, after the signing a contract, certain circumstances arise that make it difficult to fulfil a contractual obligation?
A general principle of contract law is pacta sunt servanda, or agreements must be respected. This means that once a contract is signed, the parties are obliged to honour the agreed obligations. However, it is difficult to comply with this principle, especially when the circumstances of the contractual relationship have changed significantly since the conclusion of the contract. For example, when prices increase significantly or delivery times are significantly delayed due to unpredictable market conditions.
Given the principle of autonomy of the contracting parties, which allows them to freely regulate their contractual relations, which is limited only by the Constitution, mandatory rules and moral principles, the possibility of agreeing on how to modify the contract to suit all parties involved naturally comes to the fore.
However, an amicable solution is not always possible, or it is often difficult to reach solutions that fully satisfy all parties involved. In this case, several solutions are provided for by law, some of which are summarised below.
i) What if the circumstances of the contract change?
One possible solution is to terminate or modify the contract due to changed circumstances. This allows for the termination of a contract if, after its signature, circumstances make it difficult for one party to fulfil its obligations or impossible to achieve the purpose of the contract. In both cases, the conditions must be met that the current contract no longer meets the expectations of the parties, and it would generally be unfair to maintain the contract in force as concluded. It is important to point out here that the party wishing to terminate the contract must inform the other party of its intention to do so immediately (when it becomes aware that circumstances have arisen which justify the application of these provisions); otherwise, it may be liable for damages suffered by the other party. It is also important to note that the other party may avoid termination of the contract if it offers or agrees to modify the relevant contractual provisions, thereby allowing the contract to achieve its purpose again.
ii) What if the other party does not want to fulfil its obligation?
If simultaneous performance of the obligations of the parties is agreed and one of the parties is unwilling to perform its obligation, or if it is unwilling to perform its obligation at the same time, the other party shall be given the option of delaying performance of its obligation. This means that a party does not have to fulfil its obligation until the other party has also fulfilled its obligation.
iii) What if the other party gets into financial difficulties after the conclusion of the contract?
If one of the parties to the contract is hit by by financial difficulties after the conclusion of the contract, you have the option – if you have committed to fulfil your obligation first – to postpone the fulfilment of that obligation until the other party has fulfilled its obligation or has provided adequate performance security. This can also be invoked if the other party was in financial difficulties before the contract was signed. In that instance, you must prove that you did not know or had no duty to know about its financial difficulties.
iv) What if fulfilment of the obligation is not possible?
If neither party is responsible for an event affecting the obligation of one of the parties that makes performance of its obligation impossible, the other party is also free of its obligation and need not perform its obligation. However, if the other party has already fulfilled its obligation, it shall have the right to demand repayment of what has been given.
A similar rule applies in the case of partial impossibility of performance by one of the parties, but in that case, that party may only withdraw from the contract if the partial performance does not meet its needs; otherwise, it must maintain the contract in force.
In view of the foregoing, please note that the application of a particular institute depends on the specifics and circumstances of the case. Consequently, it is sometimes possible to apply specific instruments (the above are general provisions which apply to all contracts) which are not mentioned above. For example, specific rules apply to construction contracts, which we have already discussed in an earlier article.
Author: Tina Marciuš Ravnikar, Senior Associate
