The maxim of Pacta Sunt Servanda
Pacta sunt servanda is an overriding feature of the law of contract. It is a Latin phrase meaning “agreements must be honoured.” Under this maxim, parties to a contract are under strict obligation to abide by the terms of their agreement. This would simply mean that performance of the respective contractual obligations must be made in spite of any circumstances which might render such performance, impossible, or possible, but considerably different from what was in the minds of the contracting parties when they had freely concluded their agreement.
The Pacta principle reflects not only natural justice, but to a greater extent, it reflects a legislative appreciation of the freedom of individuals to contract on certain agreed terms. This follows the basic principle of offer and acceptance and the resultant consensus ad idem or meeting of the minds which is essential to the formation of contract and which shall be backed-up by a legal system that enforces contracts freely entered into. The idea that contracts, by virtue of that maxim, are legally enforceable and must therefore be performed, does not necessarily ensure performance, but does increase the likelihood of performance. The importance of this maxim has been pertinently noted in Liamco v. Libya[1] where the sole Arbitrator stated: “The principle of the sanctity of contracts […] has always constituted an integral Part of most legal systems. These include those systems that are based [on] Roman law, the Napoleonic Code (e.g. article 1134) and other European civil codes, as well as Anglo-Saxon Common Law and Islamic Jurisprudence ‘Shari’a’.” However, it has been argued[2] that practice has demonstrated that on many occasions the principle of pacta servanda sunt may lead to the opposite of its aim. This can best be illustrated in cases where the circumstances surrounding performance have drastically changed so as to create an imbalance in the original risk allocation upon which the contracting parties had freely entered into the agreement. In other terms, the contracting parties, at the time of concluding the agreement are deemed to have been influenced by certain circumstances that have led to the conclusion of the agreement. Noting that the core purpose of the Pacta principle is to ensure “justice” between the contracting party, it would be unjust, if these circumstances have not materialized, to enforce performance.
To remedy the imbalance caused by a change of circumstances in contracts, the doctrine of clausula rebus sic stantibus has been introduced. This stems from the legal theory of “implied terms” which, to some extent, gives effect to the parties’ intention. According to that doctrine, an implied term is introduced into the contract by which a contract would be considered binding only as long as the circumstances, throughout the life of the contract, remain unchanged when compared to those at the time of the conclusion of such contract. By implication, fulfilment of the contractual obligations is only compulsory when circumstances and conditions remain unchanged throughout the life of the contract[3]. Of great importance to note, a minimal or a foreseeable change of circumstances will not normally negate the principle of pacta sunt servanda. Change must be fundamental and must have not been foreseen nor expected by the parties at the time of concluding their agreement and must have the effect of altering the substance of the contract. It can thus be inferred that since the contract did not explicitly cover the unexpected event or the changed circumstances that have occurred, it cannot be true to be said that the parties intended that performance would be still mandatory on the party affected by the changes.
From what I already stated above, if however, the parties have explicitly excluded all the rights arising from unexpected circumstances, one would reasonably be ready to assume that the court could neither terminate nor modify the contract. I must make it clear however; the discussions above shall not be understood, nor should it be construed as if these two doctrines are opposed to each other. In fact, in my view, and through careful review, the two doctrines are meant to complement one another, where, on the one hand, security and stability of contractual relation is important, on the other hand, it is equally important to ensure justice and equity when a radical change in circumstances occurs. Thus, relief provided in case of impossibility of performance, does, by no mean, interfere nor does it override the freedom of contract.
It is important to highlight that, under Islamic law, shari’a, the principle Pacta sunt servanda exists as an important legal concept and has a religious basis “Muslims must abide by their stipulations”. In other words, under Islamic law (Shari’a), unless the contract relates to prohibited or unlawfully items, every contract must be strictly observed. It is even held, according to the Qur’an, that the state of war by itself does not constitute a sufficient justification for contract violation[4]. Surah al-Ma’idah of the Qur’an used the word “aqd” meaning contract. The Qur’an commands Muslims to fulfil their contracts in the following words: “O those who believe, fulfil the contracts”[5] Owing to the fact that the rigid position and strict application of the pacta sunt servanda principle, in all legislations, may occasionally conflict with the concepts of natural justice, legislators and legal systems have endeavoured to introduce provisions and legal concepts dealing with changed circumstances aiming at regulating relief from performance where performance becomes impossible, or where performance remains possible but becomes more oppressive for one of the parties, being “force majeure” in civil law jurisdictions and “frustration” in common law jurisdictions.
The Author view
The author would like to argue that the principle of rebus sic stantibus, when not interpreted “literally” would effectively represent an “objective” and true construction of the Pacta principle. On analyzing the principles of the law of Contract, the parties liabilities stem mainly from consent and the parties respective obligation to perform is a direct reflection of this consent. Put differently, if one of the contracting parties is aware, or has been made aware, at the time of the contract, that performance of his obligation will be radically different to the one upon which consent has been given, would he still give his consent? The answer, of course, is “No”[6].
One of the commentators[7] stated that modification of contracts, due to changed circumstances, especially those of long duration, is neither an exception to, nor in, contradiction of the rule pacta sunt servanda. He further added that Pacta sunt servanda simply means that contracts which have legally come into existence and continue to be in force, must be observed. It means the inviolability, not un-changeability of contracts. In my view the principle of rebus sic stantibus reinforces the Pacta princile in the sense that the contracting parties’ obligations remain the same as long as the conditions and circumstances surrounding performance remain as they were at the time of the conclusion of the agreement. The effect of the principle, though narrowly used, shall be to correct the imbalance created by the changed circumstances.
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[1] See Liamco v. Libya award, April 12, 1977, Yearbook Commercial Arbitration, (1981); p. 101
[2] See Dietrich Maskow in “Hardship and Force Majeure”: 40 American Journal of Comparative Law (1992); p. 658
[3] Lord Loreburn explained in FA Tamplin v Anglo-Mexican Petroleum [1916] 2 AC 397, that the court: ‘..can infer from the nature of the contract and the surrounding circumstances that a condition which was not expressed was a foundation on which the parties contracted… were the altered conditions such that, had they thought of them, the parties would have taken their chance of them, or such that as sensible men they would have said “if that happens of course, it is all over between us”.
[4] S. E. Rayner, The Theory of Contracts in Islamic Law (London: Graham and Trotman, 1991).
[5] Qur’an, 5:1.
[6] In British Movietonews Ltd. v. London & District Cinemas, Ltd. [1952] AC 166 at p. 185 Lord Simon said: ” If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shews that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point—not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation “.
[7] Zakariya, Hasan in “Changed Circumstances and the Continued Validity of Mineral Development Contracts”: Hossain ed., Legal Aspects of the New International Economic Order, London, New York (1980); at 275. TLDB Document ID: 118400.)For any further information, or if you are interested in submitting an article to Contracts Professionals, please feel free to contact us on contact@ewconsultings.com
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