Wednesday, 22 February 2017

Currency fall is not hardship is Russia

Several days ago the Supreme Court of Russia issues its first quarterly review of its most important decisions, which had been made recently (Russian text is available on the official web site). The eighth judgment was about whether a plummeting fall of Russian currency because of Crimea crisis could be considered as hardship and thus led to conversion of a loan contract. The Court unsurprisingly gave a negative answer, confirming general reluctance to use ‘rebus sic stantibus’ doctrine. However some remarks in the ruling seem to leave a door open to use this clause as a ground for contract modification…
I suppose that the media in most of the countries have paid a lot of attention not only to inclusion of Crimea into Russian Federation and the civil war in Ukraine that followed but also to those political tensions between Russian and the USA with their European allies which led to economic sanctions put upon Russia as a state as well as on its most important companies. Not only didn’t these sanctions destroy the economy of the country but contributed to its relieve from the oil dependency. However the price paid for this immunity was quite high – the Russian currency value fell dramatically, loosing roughly two thirds of its price over just a couple of months, then bounced back, then heavily decreased again… This turbulence made it almost impossible to make long-term predictions thus affecting many businesses and their workers.
Those who took loans for buying a home found themselves in most difficult position. During the first decade of the new millennium the economy in general grew rather quickly so after several years of relative prosperity people started buying new homes. In many cases they borrowed money for the purchase and as the price of Russian currency, Rubl, had been steadily increased since the 1998th, they often prefer to take credits in euros or USA dollars. So when the Rubl exchange rate crashedat at the end of the 2014, their payments in national currency became about three times bigger. Many of these loans were secured by hypothecs of real estates people were living in, so stoppage of payments inevitably resulted in selling their homes to cover bank’s losses. Unsurprisingly some people tried to defeat themselves and an action to modify a contract on a hardship clause was one of the most popular.
 From the beginning of the 20th century the hardship clause have been used to balance interests of the parties when rapidly changing circumstances made it unfair to follow 'pacta sunt servanta' rule. One can find the clause in art. 451 of Russian Civil Code (rough translation from Russian can be taken here), which was undoubtfully influenced by the definition of hardship in art. 6.2.2 of the UNIDROIT principles of international commercial contracts. It can be easily seen that the commentary on the section expressly illustrate the ‘fundamental alteration of equilibrium’ with an example of a 50% fall of a currency value.
Despite its international origins and rich history of application, Russian courts are generally reluctant to use art. 451 to modify the contract so one can hardly find a single case where a bargain have been altered on its base. The reason for this resistance was harshly formulated in many decisions of the Russian High Arbitrage Court, which stated that in modern Russian history the fall of the currency price had occurred several times so both parties should bear it in mind when entered the contract. ‘We are in Russia, folks!’…
So there is no surprise at all that the Supreme Court in the case of a loan made in euros expressly ruled that it was the debtor who beared the risk of the exchange rate alteration. However the ratio of the decision left a lot space to try to make the same way again.
The main reason for refusing to use the clause was that ‘the [lower] court gave no single argument why the parties could not envisage the growth of the euro exchange rate’. Moreover, ‘the court gave no motives why enforcement of the contract would fundamentally alter the equilibrium of the contract’.The court stipulated that exchange rate alteration ‘in itself’ does not constitute a ‘fundamental change of equilibrium’ as, given the parties entered the contract at their own will, they expressly intended to locate the risk on the debtor. To relocate the risk the court should carefully explain its reasons and motives.
Before modifying the contract the court must thoroughly consider all the facts to determine whether the requirements of the clause are fulfilled, such as real capacity of the disadvantaging party to perform the contract without modifications. Leaving the job at one’s own will (as the debtor had done in the case) led her to diminishing ability to perform the obligation so in this particular case the party should not shift the burden on changing circumstances on the innocent creditor. Having three or more children is not as such a ground to modify a contract either because the link with the clause requisites was not proved by the plaintiff.
So the decision can arguably viewed from optimistic prospective – there is nothing wrong with law, it is just a matter of fact to prove that the circumstances in question affected the particular contract. The problem was not in court but in plaintiff.