On the application of the principle of change of circumstances in the construction contract of construction project.

Abstract:The Supreme People's Court on the Application<中华人民共和国合同法>For the first time, the (II) of interpretation of certain issues clearly stipulates the principle of change of circumstances, which meets the needs of economic and social development and fills in the legislative gap. Subsequently, the Supreme People's Court issued the notice "Law [2009] No. 165", which made clear procedural provisions on how to apply the principle of change of circumstances. However, the specific application of the principle of change of circumstances in construction contracts still faces many problems, such as the problems in the legislation of the principle of change of circumstances, whether it can be agreed to exclude the application of the principle of change of circumstances and so on. Based on this, this paper first puts forward the concept of the principle of situational change, and analyzes the concept of situational change and force majeure and commercial risk from many angles, and then focuses on the applicable conditions of the principle of situational change in the construction contract, that is, the construction contract is legal and valid, there are objective facts of the change of circumstances, the change of circumstances cannot be foreseen and there is no fault, the objective facts occur after the entry into force of the contract and before the termination of performance, the continued performance of the contract will be unfair, the application of the principle of change of circumstances must go through legal procedures. Finally, in view of the above-mentioned problems existing in the application of the principle of change of circumstances in the construction contract, the paper discusses in detail how to accurately apply the principle of change of circumstances in the construction contract from the aspects of perfecting the relevant legislative work of the principle of change of circumstances, modifying the model text of the construction contract of the construction project, and implementing the typical cases of the principle of change of circumstances.

     Keywords: The principle of change of circumstances applies to force majeure commercial risk.

Foreword

Article 8 of the Contract Law stipulates: "A contract established in accordance with the law shall have legal effect on both parties. The parties shall perform their obligations in accordance with the agreement and shall not modify or terminate the contract without authorization." According to the provisions of this article and other provisions of the contract law, after the contract is established in accordance with the law, except for the statutory changes, termination conditions and the changes and termination conditions agreed upon by the parties, no party may arbitrarily change or terminate the contract, otherwise it may be liable for breach of contract. Strict compliance is of positive significance to the realization of the purpose of the contract, but in the process of contract performance, there may be various objective circumstances that make it difficult to continue to perform the contract or the purpose of the contract cannot be realized. In this case, if both parties to the contract are still strictly required to continue to perform in accordance with the original contract terms, the purpose of the contract cannot be realized, or even deviate from the purpose of the contract.

For example, after a construction enterprise and a development enterprise signed a construction contract for contracted work and materials, there was a sharp rise in steel prices, and the construction contract did not agree on whether the sharp rise in steel prices should be changed or terminated, and the law did not provide for this. If the two parties continue to implement the price agreed in the construction contract, it is unfair to the construction enterprise, and its interest relationship established on the basis of the construction contract may be unbalanced, or even cause serious losses. How to solve the problems encountered by construction enterprises has been plagued by experts and scholars in the theoretical and practical circles for a long time. It was not until the principle of change of circumstances was put forward and established as a legal principle in the form of judicial interpretation that this difficult problem was broken. Under the circumstances that the contradictions and disputes caused by the spread of the global financial crisis have been clearly reflected in the judicial field, the Supreme people's Court timely introduced the principle of change of situation, which is of great significance for effectively resolving contradictions and disputes and maintaining an honest market transaction order. it is of great significance to ensure a fair and legal investment environment, fair settlement of disputes and boost market confidence.

However, in the judicial practice of construction projects, there are still some problems, such as the uncertainty of the scope of application of the principle of change of circumstances, the strict application procedure, and the lack of a clear distinction between the applicable effects, especially for the specific application of the principle of change of circumstances, there is no clear legal provisions. Based on these problems, this paper starts with the concept of the principle of situational change, analyzes the applicable conditions of the principle of situational change in the construction contract, and discusses in detail how to accurately apply the principle of situational change in the construction contract.

Overview of 1. Circumstances Change Principles

(I) the concept of the principle of change of circumstances

Root according to the Supreme People's Court "on the application.<中华人民共国合同法>Article 26 of the (II) for Interpretation of Certain Issues stipulates: "After the establishment of the contract, the objective circumstances have undergone major changes that cannot be foreseen by the parties at the time of the conclusion of the contract and are not caused by force majeure and are not commercial risks. If the parties request the people's court to modify or terminate the contract, the people's court shall, in accordance with the principle of fairness, and combined with the actual situation of the case to determine whether to change or terminate." The clause clearly stipulates that the parties to the contract shall abide by the principle of change of circumstances in the performance of the contract, and clearly states that there is a difference between change of circumstances and force majeure and commercial risk. In short, the principle of change of circumstances refers to the principle that after the contract is established in accordance with the law, there has been a significant change in the unforeseen objective circumstances due to non-parties' reasons, and it would be unfair to continue to perform the original terms of the contract, thus allowing the contract to be modified or terminated. The principle of change of circumstances is the specific application of the principle of fairness and the principle of good faith in contractual relations, the purpose of which is to exclude the obvious unfair results caused by the change of circumstances, balance and coordinate the interests between the two parties, and maintain social equity and economic circulation order.[1]

Analysis on the Concept of (II) Situation Change

1. Change of Circumstances and Force Majeure

Although there are many commonalities between change of circumstances and force majeure, for example, both are objective and unpredictable, which will affect the performance of the contract and may lead to the change or termination of the contract, etc., there are fundamental differences between the two, which are manifested in the following aspects:(1) the scope of applicable law is different: change of circumstances generally applies only to contract law; Force majeure can be applied to both contract law and tort law. (2) The applicable principles are different: the change of circumstances is the principle of contract performance, the application of the change of circumstances to solve the problem of obvious unfairness, the purpose is to maintain the balance of interests between the parties to the contract, force majeure is the principle of contract exemption, the application of force majeure to solve the problem of whether the parties can be exempted or reduced liability for breach of contract. (3) The applicable procedures are different: the applicable procedures for the change of circumstances are very strict, and the parties must apply to the court or arbitration institution, and the court or arbitration institution shall decide whether it can be applied; When force majeure is applied, the parties only need to prove the occurrence of force majeure and the result that the contract cannot be performed due to force majeure can be exempted from liability. (4) The consequences are different: the change of circumstances generally only leads to difficulties in the performance of the contract or the meaningless performance, and the continued performance makes the interests between the parties unfair.

2. Change of Circumstances and Business Risks

It is more difficult to draw the line between change of circumstances and commercial risk, mainly because the scope of commercial risk is relatively wide, and the situation that can be applied to change of circumstances, such as policy adjustment, price change, market turbulence, etc., can almost all be applied to commercial risk, and may bring adverse effects to the parties. However, there are also the following differences between the two:(1) the subjective requirements of the parties are different: the change of circumstances focuses on the risk of accident, the parties are not subjectively at fault, the result can not be attributed to either party. (2) Whether it is predictable or not: the change of circumstances is not predictable, the parties cannot foresee it, and the parties are not required to foresee it; commercial risks are predictable, that is, the parties can or should foresee the risks that will occur, but are still willing to take risks or take chances to engage in business activities. (3) The legal consequences are different: the legal consequences of the change of circumstances are the change or termination of the contract, the interests of the parties are balanced, and the commercial risk is based on the fact that the parties should foresee the occurrence of the risk at the time of the conclusion of the contract, requiring the parties to bear the legal consequences themselves.

The applicable conditions of the principle of 2. situation change in the construction contract of construction project.

Regarding the application conditions of the principle of change of circumstances, the book "The Supreme People's Court's Understanding and Application of the (II) of Judicial Interpretation of Contract Law" mentions five items:(1) the fact that there should be a change of circumstances;(2) The change of circumstances must be unforeseeable by the parties;(3) The change of circumstances must not be attributable to both parties;(4) The fact of the change of circumstances occurred after the establishment of the contract and before the performance;(5) If the validity of the contract is maintained after the change of circumstances, it will be unfair to the parties.[2]The author believes that the above-mentioned five applicable conditions are actually the summary and summary of the general theory of the theoretical circle. For a long time, the views adopted by experts and scholars in writing books are basically among the five conditions.

In the construction contract, the applicable conditions of the principle of change of circumstances are similar to other types of contracts, but they are not exactly the same. Specifically, the conditions for applying the principle of change of circumstances in construction contracts include the following:

The construction contract of (I) construction project is legal and valid.

The application of the principle of change of circumstances in the construction contract of the construction project must be based on the validity of the construction contract, and if the construction contract is invalid or revocable, the principle of change of circumstances does not apply. Since an invalid contract has no legal effect at the time of its conclusion, and a revocable contract already exists at the time of its conclusion, which leads to revocability, but only at the time of the conclusion of the contract due to the intent or negligence of one of the parties, there is no question of a change in objective circumstances after the conclusion of the contract.[3]

(II) there is an objective fact of change of circumstances

After the signing of the construction contract, due to various reasons, there will be some changes in the objective facts related to the contract, such as national policy adjustments, price increases, etc., these changes in objective facts can continue to perform the construction contract, how to perform an important impact, this is the so-called "situation". It is precisely because of the emergence of the "situation" that the objective situation or basis on which the contract is based will be "changed", and the parties to the contract must also clearly explain the existence of the "situation" and its impact on the construction contract when claiming the application of the principle of change of circumstances. From this point of view, the existence of "situation" is a prerequisite for the application of the principle of change of circumstances.

(III) the parties are unforeseen and not at fault for the change of circumstances

From the subjective point of view of the parties, it is impossible for him to foresee major changes in objective facts, and there is no fault. If, at the time of the conclusion of the contract, the parties can anticipate the occurrence of the objective fact, or can overcome it, for example, rain and snow may lead to delays in the construction of the project, the risk caused by the objective fact is either a commercial risk or the fault of the parties, and the principle of change of circumstances should not be applied. If the change of objective facts is caused by the fault of the parties, the fault party should bear the responsibility. If both parties are at fault, they should bear the responsibility according to the size of the fault, and the principle of change of circumstances should not be applied.

The objective fact of the change of circumstances of the (IV) occurs after the entry into force of the contract and before the termination of performance.

The application of the principle of change of circumstances has a time frame and must be after the entry into force of the construction contract and before the termination of performance. Because the objective facts that occurred before the effective date of the construction contract are determined and cannot be changed as the basis for the effective date of the contract, and before the effective date of the construction contract, the parties can renegotiate and determine the terms of the contract based on the existing objective facts. If the contract has been fulfilled, the rights and obligations of the parties have ended, regardless of whether the objective facts have changed significantly, it will not lead to unfair consequences.

It would be unfair to continue to perform the contract (V) to a change of circumstances.

In terms of the consequences of a change of circumstances, the principle of change of circumstances applies only when there is a significant change in the objective facts at the time of the conclusion of the contract and continued performance would cause a serious imbalance in the interests of the parties; it should not apply if it has a minor impact on the interests of the parties. For example, the market price of building materials changes greatly, if the two sides enter into a fixed total price contract, the market price of building materials skyrocketed, then the conclusion of the contract to determine the interest relationship will be unbalanced, if the contract continues to perform, the construction enterprise not only can not make a profit but because of the increase in costs may cause serious losses.[4]

(VI) application of the principle of change of circumstances is subject to statutory procedures.

From a procedural point of view, if the parties are unable to reach an agreement through consultation on the issue of apparent unfairness arising from the change of circumstances, they must request the court or arbitration institution to change or terminate the contract through legal procedures. If the parties change or terminate the contract without the judgment or ruling of the court or arbitration institution, they may be liable for breach of contract. According to the provisions of the Supreme People's Court's "Fa [2009] No. 165" notice, the application of the principle of change of circumstances must go through the review process. In principle, the review by the Higher People's Court is the main one. The Higher People's Court considers it necessary to report to the Supreme People's Court for review.

3. the problems existing in the application of the principle of change of circumstances in the construction contract of construction project.

(I) Problems in the Legislation of the Principle of Change of Circumstances

1. The scope of application of the principle of change of circumstances is not clear.

The determination of the scope of application of the principle of change of circumstances has become a major problem in practice. The law does not specify its scope of application, and even the jurisprudence has not yet been unified. The principle of change of circumstances established by the judicial interpretation of the Supreme Court is only stipulated in principle. In the practice of construction projects, due to major changes in certain objective circumstances, the parties intend to cancel the construction contract or change clauses that are not conducive to themselves by introducing the principle of change of circumstances, but they often suffer from being unable to determine whether the major changes in objective circumstances fall within the scope of application of the principle of change of circumstances or are limited to various risks brought about by litigation and it is difficult to initiate litigation or arbitration proceedings. Although judges or arbitrators have discretion in hearing cases, the uncertainty of the scope of application makes the outcome of the case overly dependent on the judge or arbitrator's free decision, and it is difficult to make a conclusion as to whether the balance of the interests of both parties can be truly achieved.

2. Excessive procedures for the application of the principle of change of circumstances

According to the provisions of the judicial interpretation of the Supreme Court, the application of the principle of change of circumstances should be applied by the parties concerned, and cannot be directly determined ex officio; it should also be submitted to the higher people's court for examination and approval, and if necessary, to the Supreme people's Court for examination and approval. These procedural provisions strictly limit the application of the principle of change of circumstances, extend the trial limit to a certain extent, and increase the cost and risk of litigation. In the construction practice, it is difficult for the construction enterprises which are in a disadvantageous position to protect their rights with the help of the principle of change of circumstances.

3. The effect of the application of the principle of change of circumstances is not clearly distinguished.

The judicial interpretation of the Supreme People's Court only stipulates that the people's court shall determine whether to change or terminate the contract in accordance with the principle of fairness and the actual situation of the case, but there are no detailed provisions on the circumstances under which the change and the circumstances under which the termination. In practice, the parties can choose to apply the results that are beneficial to them in the request, but for the judges who hear the case, they must give full play to their subjective initiative, reasonably use the principle of fairness, and make accurate judgments to avoid unfair.

Whether the (II) can agree to exclude the application of the principle of change of circumstances.

The model text of the Construction Contract (GF-1999-0201) jointly formulated by the former Ministry of Construction and the State Administration for Industry and Commerce does not provide for the principle of change of circumstances. The general provisions of the model text do not provide for the application of the principle of change of circumstances, while the special provisions allow the parties to negotiate and agree. In the current construction market environment, the result of the negotiation is that in order to be able to contract the project, the construction enterprise will often compromise when signing the construction contract, and recognize the unequal clauses such as "this contract is a fixed total price contract, no matter what the situation, the total contract price shall not be adjusted" put forward by the development enterprise, which actually excludes the application of the principle of change of circumstances by agreement. On the question of whether it can be agreed to exclude the application of the principle of change of circumstances, the author believes that the principle of change of circumstances is a statutory principle, and the conditions of application of the principle of change of circumstances stated above are statutory, neither based on the application of the parties, nor can the parties agree to reduce or change the applicable conditions. Therefore, the principle of change of circumstances cannot be excluded by the parties. In practice, some of the more powerful development enterprises in the fixed price contract agreed in favor of their own terms, excluding the application of the principle of change of circumstances is not conducive to their own, in fact, is obviously unfair, the opposite party can be in accordance with the relevant provisions of the Contract Law, requiring the change of part of the terms of the fixed price contract or the termination of the fixed price contract.

4. how to apply the principle of change of circumstances in construction contracts.

(I) and Perfecting the Relevant Legislation of the Principle of Circumstances Change

The provisions of the principle of change of circumstances first appeared in the Supreme People's Court's 1993 "Summary of the National Symposium on Economic Trial Work" (Fafa [1993] No. 8)[5]This also shows that China's judicial organs have already recognized the application of the principle of change of circumstances in practice. By the time the contract law was revised, the draft contract law had provided for a change of circumstances, but it was deleted when it was finalized because of the controversy in the theoretical community at the time. In the nearly ten years from the promulgation and implementation of the Contract Law to the (II) promulgation of the judicial interpretation of the Contract Law, great changes have taken place in China's social situation, especially under the influence of the financial crisis, both the theoretical and practical circles have called for the principle of change of circumstances to be clarified in the form of legislation. Therefore, the Supreme People's Court finally formally established the principle of change of circumstances in the form of judicial interpretation. The author believes that although the establishment of the principle of change of circumstances has made great progress in legislation and interpretation, this principled provision still cannot completely solve many problems in practice. The author suggests that the legislature should clearly stipulate the relevant contents of the principle of situational change from the level of laws, regulations and rules as soon as possible, so that development enterprises, construction enterprises and other units can change from passively accepting the constraints of situational change to actively abiding by the principle of situational change.

1. Clarify the scope of application of the principle of change of circumstances

How to determine the scope of application of the principle of change of circumstances, the legislature, administrative organs and judicial organs have been trying to solve this problem, and many local governments are also actively exploring, trying to find a breakthrough from individual links. For example, on April 1, 2004, Xiamen Construction and Administration Bureau issued the Notice on Several Provisions on Further Improving the Method for Winning the Bid at the Lowest Bid Price for Construction Projects on whether the fluctuation of material prices can lead to the change of contract terms and to what extent the fluctuation range can lead to the change of contract terms. Article 4, paragraph (I), of the notice stipulates: "For the prices of steel, cement and special precious materials, if the increase or decrease within the risk range is within 10% (including 10%), the price difference shall be borne or benefited by the contractor. If the increase is more than 10% and there is no advance payment for engineering materials or the decrease is more than 10%, the price difference of more than 10% shall be borne or benefited by the employer. The price difference that occurs is charged only for the difference and taxes, not for other expenses." Clearly, the notice incorporates material price fluctuations into the scope of application of the change of circumstances principle and refines the magnitude of price fluctuations as a criterion for determining whether a change of circumstances can be applied. This has a positive guiding significance in the practical operation of the construction contract, which not only facilitates the parties to perform the construction contract, but also cleverly resolves the dispute. In recent years, in addition to Xiamen City, other provinces and cities also have such regulations. These regulations have also played an important role in judicial practice. Many judges or arbitrators will use such regulations as a reference when adjudicating cases.

In addition to material price fluctuations, the book "The Supreme People's Court on the (II) Understanding and Application of Judicial Interpretation of Contract Law" also includes factors such as soaring prices (to be quantified), loss of contract basis (such as loss of contract subject matter), substantial changes in exchange rates, and changes in national economic and trade policies into the scope of application of the principle of change of circumstances.[6]In this regard, the author suggests that the legislature, when formulating or revising the legal provisions on the principle of change of circumstances, consider bringing the scope of application of the principle of change of circumstances listed above into the scope of legal adjustment.

2. Procedures for the application of the principle of simplified change of circumstances

In view of the fact that the application procedure of the principle of change of circumstances is too strict at present, which affects the rights protection path of market entities such as construction enterprises and other inferior positions to a certain extent, and the layered audit system may increase the cost of litigation and risks, the author suggests that the legislature should specifically quantify the application scope and effect of the principle of change of circumstances and add clauses that are easy to operate and implement when formulating or revising relevant laws and regulations, by improving the system to simplify the applicable procedures, reduce the audit organs, to provide institutional protection for the parties to seek legal remedies.

3. A clear distinction between the effectiveness of the application of the principle of change of circumstances

After the change of circumstances, the interests of both parties are out of balance. If the contract continues to be performed, the interests of one party will suffer losses, or even the purpose of the contract will not be achieved. In this case, the interest-impaired party can protect itself by changing the contract or rescinding the contract. As mentioned earlier, because the law does not clearly define the application of the change of contract, the termination of the contract, in practice often appear larger disputes. In order to prevent the phenomenon of showing fairness in the performance of construction contracts, the author suggests that the applicable effect of the principle of change of circumstances should be clearly distinguished in the legislation, that is, according to the principle of strict adherence to the contract, the law gives priority to maintaining the original contractual relationship to the greatest extent: if there is a possibility of changing the contract, the contract should be changed first, the specific changes can include increase or decrease the project price, change the construction period, change engineering materials, etc; if the change of the contract does not eliminate the result of the apparent unfairness of the two parties, or if the purpose of the contract cannot be achieved, the contract shall be terminated.

(II) modification of the construction contract model text

The model text of "construction contract" has played a very good role in practice, but with the promulgation and implementation of new laws and regulations, the emergence of new objective conditions and the change of new social and economic situation, the original content should also be adjusted and improved accordingly. Among them, an important part of the adjustment and improvement is the addition of a change of circumstances clause. The author suggests that when revising the Construction Contract of Construction Project, it should be clearly stipulated in the general clause "Contract Price and Payment" that the circumstances leading to the change of circumstances occur. Both parties can propose to adjust the contract price and list the circumstances and scope of application of the change of circumstances. For details, please refer to the above explanation. Add a "change of circumstances" clause after the "force majeure" clause in the general clause, it is clearly stipulated that both parties may change or terminate the contract as a result of the change of circumstances, and set out the circumstances and scope of application of the change of circumstances, the specific content can be found in the previous description.

Typical Cases of Applying the Principle of Circumstances Change in (III)

On the issue of how to apply the principle of change of circumstances, Judge Feng Xiaoguang of the Supreme People's Court proposed that "the method of determining abnormal price changes or adjusting the contract price should be based on the consideration standard of construction enterprises not losing money or realizing small profits. It is obviously inappropriate for the entire construction industry to have income lower than cost due to price changes."[7]Obviously, "to the construction enterprise does not lose money or realize small profits as the consideration standard" has become the standard and degree to determine the application of the principle of change of circumstances in the process of contract performance. Although this view cannot be specifically quantified in the form of laws and regulations or judicial interpretations, it can be reflected in typical judicial cases.

The author retrieved the judicial decisions on the application of the principle of change of circumstances in the national laws and regulations database, especially the judicial precedents on the application of the principle of change of circumstances in construction contracts. The only relatively close case "Changchun Foreign Economic Relations and Trade Company v. Changchun Chaoyang Real Estate Development Company for Price Disputes Caused by Change of Circumstances" was also a case before the (II) promulgation of the judicial interpretation of contract law. Through the analysis of the case, the author believes that the final judgment of the case applies the principle of change of circumstances, avoids the obvious unfair result between the two parties, is a fair judgment, is the embodiment of the function of the principle of change of circumstances, and has a good guiding role in practice.

Although the principle of change of circumstances has been established in the form of judicial interpretation, due to its strict application of procedural provisions, there are few such judicial precedents in the judicial practice of construction projects. Considering the importance of judicial precedents in guiding cases in judicial practice, the author suggests that judicial organs can accumulate precedents on the application of the principle of change of circumstances in construction contracts in practice, especially typical precedents that better balance the interests of both parties, so as to provide useful reference and reference for avoiding or resolving disputes between development enterprises and construction enterprises.

5. epilogue

The principle of change of circumstances is of positive significance to protect the legitimate interests of both parties to the contract, and will also play a more positive role in the healthy development of society and the creation of a good contract environment. The author only analyzes and expounds the concept, applicable conditions, existing problems and how to apply the principle of change of circumstances in one case of construction contract, and puts forward some suggestions from the perspective of legislation and practice, and puts forward some suggestions according to personal practical experience. It is true that the establishment and final implementation of a legal principle requires multi-angle and multi-level discussion and running-in between the theoretical and practical circles. As a legal person engaged in the lawyer business, the author is willing to complete their own work at the same time, the development and improvement of the system, to provide their own understanding and suggestions, looking forward to the early improvement of this system and in practice to obtain a wide and positive application.

This article won the second prize of Jinan lawyer's business paper selection in 2011

References:

[1]Shi Yongcai and Feng Jianping: "Analysis of some problems in the principle of change of circumstances", http://www.law-lib.com/lw/lw_view.asp?no=499

[2]Shen Deyong and Xi Xiaoming, edited by the Supreme People's Court on the understanding and application of the judicial interpretation (II) of contract law, People's Court Press, June 2009, 1st edition, pp. 191-192.

[3]Zhao Gang: "An analysis of the application of the principle of change of circumstances in construction contracts", http://www.civillaw.com.cn/article/default.asp?id=50484.

[4]Zhao Gang: "An analysis of the application of the principle of change of circumstances in construction contracts", http://www.civillaw.com.cn/article/default.asp?id=50484.

[5]Article 2, paragraph 6, of the Minutes of the National Symposium on Economic Trial (Fa [1993] No. 8) stipulates that "due to reasons that cannot be attributed to both parties, the objective circumstances based on the contract have undergone fundamental changes that cannot be foreseen by the parties, so that the performance of the original contract is obviously unfair, the contract may be changed or terminated according to the principle of change of circumstances on the application of the parties."

[6]Shen Deyong and Xi Xiaoming, edited by the Supreme People's Court on the understanding and application of the judicial interpretation (II) of contract law, People's Court Press, June 2009, 1st edition, p. 194.

[7]Judge Feng Xiaoguang proposed at the seminar on "Prevention and Resolution of Disputes Caused by Price Changes of Building Materials" sponsored by Beijing Arbitration Commission on November 25, 2008.