CAN A CONTRACT BE TERMINATED UPON A FUNDAMENTAL CHANGE OF CIRCUMSTANCES?

In the context of a rapidly developing market economy, contracts are considered a crucial legal tool that helps parties secure their legitimate interests. However, during the performance of a contract—particularly long-term ones—unforeseen events may occur that disadvantage one party, one of which is a 'fundamental change of circumstances.' To protect the interests of the affected party, and to strike a balance between the principle of maintaining the stability of contractual relations and the requirement for practical fairness and reasonableness, the legal framework for contract performance upon a fundamental change of circumstances has been established.

1. What is a fundamental change of circumstances?

"Fundamental change of circumstances" is a term indicating a basic change in circumstances during the performance of a contract, making the performance of the contract extremely difficult and affecting the interests of one party to the contract.

The 2015 Civil Code does not provide a general definition of a "fundamental change of circumstances" but only prescribes the conditions to determine what constitutes a "fundamental change of circumstances". When all statutory conditions are met, a change in circumstances arising from objective factors that affects the interests of a party in a contractual relationship will be determined as a "fundamental change of circumstances".

2. Conditions for determining a fundamental change of circumstances

2.1. The change of circumstances is due to objective reasons

Current law does not stipulate what is considered an objective reason. However, based on situations arising in practice, a reason is considered objective when it is beyond the control of a party in the contractual relationship.

These can be extraordinary risks from natural disasters, epidemics, wars, changes in socio-economic conditions, or legal policies, etc.

2.2. The change of circumstances occurs after the parties have entered into the contract

If the change of circumstances occurs before or at the time of entering into the contract, the parties are obliged to be aware of such change to agree on the contract contents accordingly or to not establish the contract in order to protect their interests.

2.3. The parties could not foresee the change of circumstances at the time of entering into the contract

This can be understood that at the time of entering into the contract, the circumstance might not have occurred, or had occurred but the parties could not foresee it.

If at the time of conclusion, the parties foresaw the risks or had a forecast about the change of circumstances but still decided to sign the contract, the parties are forced to accept the potential risks and are responsible for fully performing the agreed obligations.

In case the change occurred before the contract was established, but one or the parties did not realize it and only discovered it during the performance of the contract, the provisions on fundamental change of circumstances cannot be applied, because: The risk occurred due to the initial mistake of the parties in perceiving and evaluating the circumstances at the time of conclusion, not because it was "unforeseeable".

2.4. The circumstances change so greatly that if the parties had known in advance, the contract would not have been concluded or would have been concluded with completely different contents

To evaluate what constitutes a "great change", it is necessary to base on objective socio-economic and natural factors... along with subjective factors regarding the financial capacity and professional capacity of the parties in the contract.

A change of circumstances is considered "great" when it breaks the foundation of the contract, making the original contract no longer feasible in terms of benefits, and continuing to perform the contract would cause serious damage to one party.

2.5. Continuing to perform the contract without changing its contents would cause serious damage to one party

Serious damage is not synonymous with the parties failing to achieve the desired benefits when entering into the contract.

Current law only stipulates serious damage without providing criteria or methods to determine what kind of damage is considered serious. In practice, the parties will usually compare the results of performing the contract if no fundamental change of circumstances occurred against when a fundamental change of circumstances has occurred, to consider and evaluate the extent of the damage.

2.6. The affected party took all reasonable measures suited to the contract but failed to prevent or mitigate the impact.

Stemming from the principle of goodwill and honesty during the performance of the contract, the party whose interests are affected must apply all necessary measures within its allowable capability to minimize the impact and damage, and must prove that it has tried its best within its ability and conditions to prevent and minimize the damage. In case the party whose interests are affected is capable of preventing and minimizing the extent of the impact but fails to do so, it must bear the risk itself.

3. Performance of the contract when there is a fundamental change of circumstances

3.1. Renegotiating the contract

In case of a fundamental change of circumstances, the party whose interests are affected has the right to request the other party to renegotiate the contract within a reasonable time.

3.2. Requesting the Court to modify or terminate the contract

In case the parties cannot agree on the modification of the contract within a reasonable time, one of the parties may request the Court to:

Note: During the process of negotiating the modification or termination of the contract, or while the Court is resolving the case, the parties must continue to perform their obligations under the contract, unless otherwise agreed.

4. Can the contract be terminated when there is a fundamental change of circumstances?

Based on the aforementioned contents, a party has the right to terminate the contract upon a fundamental change of circumstances when fully meeting the following 02 conditions:

5. Distinguishing a fundamental change of circumstances from a force majeure event

5.1. Similarities

In practice, a fundamental change of circumstances and a force majeure event are easily confused because there are many similarities, such as:

5.2. Differences

5.2.1. Regarding application conditions

Applying the clause on Fundamental Change of Circumstances requires meeting more conditions compared to applying the clause on Force Majeure Event.

5.2.2. Regarding the ability to perform contractual obligations

A fundamental change of circumstances fundamentally alters the balance of contractual obligations, making the performance of contractual obligations more difficult but not impossible.

Force majeure creates a difficult circumstance to the extent that the breaching party cannot avoid and cannot overcome it, making them completely unable to perform the contractual obligations, at least for a certain period of time.

5.2.3. Regarding the purpose

The purpose of applying the clause on Fundamental Change of Circumstances is to maintain the contractual relationship on the basis of renegotiation, whereas the purpose of applying the clause on Force Majeure is to be exempt from sanctions for breaching contractual obligations.

5.2.4. Regarding legal consequences

With a fundamental change of circumstances, the affected party has the right to request a renegotiation of the contract; if the negotiation fails, they have the right to request the Court to modify or terminate the contract.

With force majeure, the affected party may be exempted from contractual obligations, or the parties may extend a reasonable time to continue performing the contract when the force majeure event ends.

The institution of performing a contract upon a fundamental change of circumstances reflects the development trend of modern contract law, aiming at the principles of fairness, goodwill, and balancing the interests between the parties. However, under the current conditions of Vietnamese law, the relevant regulations are still generalized, lacking specific guidelines on criteria to determine a fundamental change of circumstances as well as the sequence and procedures for practical application. Therefore, to ensure feasibility and effective application, creating conditions for the subjects of the contract to be more proactive in risk management, it is necessary to continue perfecting the legal basis for the performance of contracts when circumstances fundamentally change, while building uniform jurisprudence and trial practice.

DL PINNACLE LAW FIRM LLC