Depending on the effect that certain event has on the performance under the contract, it can cause difficulty in fulfilling obligations, but not the entire inability to perform obligations. In such a case, one may consider the application of the change of circumstance clause (rebus sic stantibus).
The concept of changed circumstances means that the parties may:
- Modify their agreement and their obligations
- Mutually decide to terminate the agreement,
provided the following criteria are met:
- The circumstances have substantially changed in comparison to the circumstances from the effective date of the agreement,2. The change in question makes it difficult for the party to fulfill its obligations or the purpose of the contract cannot be fulfilled,
- It is obvious that the contract no longer corresponds to the expectations of the contracting parties,
- It would be, according to the general opinion, unfair to maintain it in force in its present form,
- The party in difficulty was not obliged or was not able to take into account the change of circumstances on the effective date or the party could not have avoided or overcome the difficulties,
It should not be forgotten that a party that is facing a change of circumstances must notify the other party of such a change of circumstances before the contractual obligation is due. The same applies to the request for termination of the agreement.
It is very interesting to note that criterion 2 corresponds with the concept of “Doctrine of Frustration” under the English law, although this doctrine is highly uncommon in the legal systems that belong to the civil law legal tradition, such as the Serbian legal system. In practice, this criterion has proved to be one of the most difficult ones to meet.
If the parties may not agree on the modification or termination of the contract, the party which is faced with difficulty performing and finds itself in an unfair position may seek the termination of the contract through the court.
Like in the case of force majeure, the burden of proof lies with the party claiming the change of circumstances.
However, even if all the criteria are met there may be a clear obstacle in the contract. Namely, under Serbian law, the parties have the possibility of a prior waiver of the right to terminate the contract due to changed circumstances, unless it is contrary to the principle of conscientiousness and honesty. So, before you intend to claim the change of circumstance, read through the contract carefully again, in order to determine whether you actually do have this possibility.
After the COVID-19 pandemic, we can conclude with certainty that provisions like Force Majeure, although they do not affect the commercial terms of your business relationship, should be read more carefully – just in case.