Adapting Contract Terms to Changed Circumstances

In contractual relations arising from public procurement, suppliers often encounter issues related to the application of Article 398 of the Civil Code of Georgia. This mainly concerns violations of contract performance deadlines caused by circumstances beyond the supplier’s fault or control. There are also cases where, after signing the contract, the cost of supplying goods increases due to fluctuations in the national currency exchange rate. Despite the supplier’s increased cost, the purchaser refuses to amend the contract price or pay the higher price.

In the case under consideration, the parties concluded a public procurement contract in 2017, which provided for the possibility of price adjustment. At the time scheduled for the first phase of goods delivery, the supplier’s costs increased by 13.193%, as determined by an expert examination report.

The public procurement contract stipulated the possibility of amendments, specifically: if at the time of settlement the exchange rate of the US dollar set by the National Bank of Georgia differed by 5% or more compared to the rate at the deadline for bid submission, the total contract price could be adjusted by the corresponding percentage upon mutual agreement of the parties. Additionally, in the case of a currency appreciation, the increase should not exceed 10% of the contract value.

The supplier repeatedly requested the purchaser to increase the contract price, but to no avail. The parties did not agree on a specific term for the purchaser’s reimbursement of the supplier’s increased costs; however, the amount shall be reimbursed upon the supplier’s request.

The claimant’s demand was to impose the cost increase arising from changes in the national currency exchange rate on the purchaser.

The court focused on the regulatory norms of sales under the Civil Code of Georgia and explained that the contract for public procurement provided for the possibility of amendments. The parties were obligated to adapt the contract terms to the changed circumstances.

“Classical examples of difficulty in fulfilling contractual obligations include: a triple price increase following legislative changes enacted after the contract was concluded, depreciation of the national currency, changes in climatic conditions directly causing obstacles to performance, etc. The initial cause of changed circumstances may be a force majeure event or other conditions that in fact complicate performance...“

Accordingly, the court fully satisfied the claimant’s claim regarding the reimbursement of the increased costs to the purchaser. The respondent has appealed the decision.

The court based its decision on Article 398 of the Civil Code of Georgia.

What does this article imply?

A fundamental change in circumstances forming the basis of the contract must occur after the contract’s conclusion. Such circumstances must have been unforeseen and unforeseeable by the parties before concluding the contract. The existence of these circumstances is beyond the supplier’s or performer’s control, implying the obligor’s lack of fault.

It is required that the changed circumstances cause extreme hardship in fulfilling the obligation. There must be a causal link between the difficulty in performance and the result. Furthermore, if the circumstances were foreseeable in advance, the parties would not have entered into the contract or would have agreed on different terms.

What does “difficulty in performance” mean?

Difficulty in performance means an objectively possible but severely burdensome fulfillment of the obligation that does not make performance impossible, under which conditions the primary legal protection for the parties’ interests is the adaptation of the contract to the changed circumstances. Beyond the change in circumstances that complicates performance, the supplier is obliged to immediately notify the purchaser/client about their occurrence or emergence, explain the difficulty in fulfillment with appropriate timing, and request adaptation of the contract to the changed circumstances (such as adjustment of the performance deadline, etc.).

In such cases, the purchaser must abide by the principles of good faith and fairness, consider the supplier’s notification, and adapt the contract accordingly. The term for fulfilling the contractual obligations shall be extended for the duration of the force majeure or other obstacles to contract performance.

Author:

Theona Kupreishvili

Georgia Advocates for the Independent Profession