Pacta sunt servanda, the principle that contractual commitments need to be honoured, is an axiom of contract law recognised throughout the world. Yet, like other legal principles, it is not absolute. It allows for exceptions where justice and fairness so require. Doctrines such as impossibility, frustration, change of circumstance, force majeure, illegality as well as rights of withdrawal lessen the binding power of contracts.
The hardship created by the Covid-19 pandemic has moved the age-old principle of pacta sunt servanda into the spotlight again. Widespread sickness, travel restrictions, isolation requirements and other public health measures have upended social and economic life, as well as many contracts. While it was primarily public law that needed to be adapted quickly and responsibly by governments, private law has also had a major role in managing the disruption the pandemic has caused to many economic relationships. The unforeseen consequences of the Covid-19 have thwarted commercial expectations and required in many cases the review of contractual commitments. When parties could not agree on how the terms of their obligations should be adapted in face of significant difficulties of performance, the question arose of whether the binding force of contracts could be loosened by one party unilaterally or by judicial decision. This created new challenges for the principle of pacta sunt servanda.
Against this background, the collection of essays assembled in this book provides a broad array of materials demonstrating the continued vitality of pacta sunt servanda in times of uncertainty. The contributors to this book examine the status and versatility of the pacta principle from different perspectives. The majority of chapters makes reference to the Covid-19 pandemic, while others look at perennial issues. Each being written by an expert in their chosen field, the fifteen chapters examine a diverse range of contexts and jurisdictions. The contractual fields under consideration include rental agreements, cryptocurrency deals, non-compete agreements, consumer contracts, property management contracts and more. Several chapters also deal with the pacta sunt servanda principle in public international law.
Owing to its origin from a conference organised by the Obligations Lab Asia of the Chinese University of Hong Kong, this book has a regional focus mainly on the laws of selected jurisdictions in East Asia and South East Asia. However, it offers much that is of interest to a comparative lawyer wherever located. While it is not possible here to provide a comprehensive outline of this book and the rich discussions it contains, four important themes and observations can be identified:
- A foundational principle with varied limitations: The pacta sunt servanda principle is universally recognised, although not always explicitly and with equal vigour. The significance of the principle in the civil codes of Asia can be primarily derived from analysing mechanisms that limit its reach, in particular the doctrines of impossibility, frustration, change of circumstances and force majeure. The book discusses specifically the scope and interrelationship of these doctrines under the new Chinese Civil Code (in a chapter written by Siyi Lin), and the Civil Codes of Japan (by Tomohiro Yoshimasa), Korea (by Boeun Chang) and Macao (by Célia F. Matias and Monica Chan). Stephen Hall’s chapter on the law in Hong Kong delves deeply into the history of the principle and identifies historical reasons why common law courts very seldom take recourse to this principle directly. Wayne Courtney’s chapter, which focuses on Singaporean law but also makes comparative excursions into English and US law, supplements this discussion with a careful analysis of frustration jurisprudence dealing with pandemics. Throughout history, there have also been close connections between contract law and international law in this area. The wording of pacta sunt servanda can be traced to Pufendorf’s major treatise, ‘De jure naturae et gentium’ (1672), and it also still makes its most prominent modern appearance as the heading of article 26 of the Vienna Convention on the Law of Treaties. Hanh Hong Pham and Huong Thi Thu Phung’s chapter deals with the circumstances in which COVID-19 can be relied upon to suspend or terminate the operation of a treaty under international law. Noble Po-kan Lo examines how China has relied on the concept of unequal treaties to undermine the binding power of historic treaties and, finally, Joel Slawotsky examines the legal issues arising from the practice of Chinese state-owned entities to provide assurance to foreign lenders of Chinese corporate debtors, and whether the Chinese State could use the essential security exception in international investment treaties to deny its liability and protect its interests. In all these varied contexts, parties (and possibly courts) seek to escape or diminish the binding force of contracts because unforeseeable subsequent events have created an imbalance that has severely affected the contractual bargain or objective.
- No revolutions during the pandemic: The pandemic illustrated vividly that circumstances can arise when unstinting insistence on performance and execution of an agreement can cause hardship and unfairness. Many jurisdictions in Asia, and elsewhere, have employed significant financial resources or used public law interventions to cushion the blow of anti-pandemic measures to the economy and individual livelihoods. As the book outlines in relation to Macao, Singapore and (in the concluding chapter written by the present author) Hong Kong, these interventions have often facilitated negotiations between the parties on whether and, if so, how existing agreements should be adapted. In contrast, courts across East Asia appear so far to have resisted the temptation of softening the pacta sunt servanda principle at scale in light of the pandemic, as several contributors to this volume identified in their research. While China’s Supreme People’s Court issued specific interpretative guidance that the force majeure and changed circumstances doctrines should be applied cautiously in the pandemic, as detailed by Lin, the higher courts in other jurisdictions have yet to confirm that the conservative approaches of the emerging first instance decisions has been correct. Once more litigation has made its way through the court hierarchies, these preliminary findings may need to be re-examined.
- Contract type can affect the pacta principle: The limits of the pacta sunt servanda principle are not immutable. Adaptations may be needed not only in situations arising between specific parties, such as where a dramatic change of circumstances upsets a contractual bargain. They can also be appropriate more broadly for certain contract types, as demonstrated in several chapters in the collection. Writing on property management contracts under the Chinese Civil Code, Jianbo Lou and Yimeng Ye demonstrate that, due to their specific social policy functions, such contracts only have soft binding force, which allows property owners to abandon such contracts more easily than other contractual agreements. Similarly, Geraint Howells argues that rights of withdrawal in consumer law, while also undermining the binding power of contracts, can be justified on consumer policy grounds. This suggests that the pacta principle may apply less strictly in some contractual contexts than others.
- The pacta principle accommodates social or regulatory signals: The strictness with which the pacta sunt servanda principle is maintained is also subject to shifting social and judicial attitudes over time, as well as changes in legislative policy. In her chapter on the validity of non-compete agreements in Taiwanese labour contracts, Yalun Yen traces how Taiwan’s Supreme Court moved over time from a largely permissive attitude to a position where it required a non-compete agreement to pass a reasonableness test. Chao Xi examines how the legal ambiguity resulting from China’s shifting regulatory positions on cryptocurrencies have challenged the Chinese courts in their approaches to determining the validity and enforceability of crypto investments and transactions. This confirms the practical advice given in Kingsley Ong’s chapter that transaction lawyers need to remain alert and responsive to changing circumstances at all times, especially during a crisis, and prepare as far as possible for the unexpected.
Taken together, the chapters in this collection offer readers new comparative perspectives on the appropriate balance between contractual certainty and flexibility in an era of social, economic and political instability. This topical book spans the divide between private law and public international law, and contains a rich contemporary discussion of long-standing principles that have received renewed attention during the Covid-19 pandemic. The essays provide arguments for the position that the limits of the pacta sunt servanda principle should be determined by taking into account not only the circumstances that exist between the parties, but also reflect, and be sensitive to, shifting community expectations on the competing demands of certainty and fairness.
Posted by Normann Witzleb, The Chinese University of Hong Kong