Facts

The parties were "people's enterprises" in the former German Democratic Republic (DDR), now transformed into limited liability companies. Under the DDR's Economic Plan for 1990 the plaintiff was required to buy a large piece of machinery from an Austrian supplier, and the defendant was to pay the plaintiff the sum of 1,706,000 DDR marks, half of which the defendant was to receive from general state revenues and the other half through a bank credit. Nothing was forthcoming from the general state revenues, and the bank credit, which the defendant transferred to the plaintiff, amounted to only 376,806.90 DDR marks. The Contract Law of the DDR which was applicable to the contract at the time of its formation was repealed on 1 July 1990, but, according to the Bundesgerichtshof, remained applicable in so far as consistent with the new market economy. When the DDR was absorbed into re-united Germany, DDR-marks were converted into DM at the rate of two for one.

The plaintiff claimed the unpaid balance. The Kammergericht ordered the defendant to pay DM 451,346.55 with interest. Both parties appealed, and the case was remanded to the Kammergericht.

Reasons

The defendant's appeal:

The parties are agreed that under the contract of January 1990 the plaintiff had a claim against the defendant for 1,706,000 DDR-marks, which was reduced in amount by the 376,806.90 DDR-marks paid on 26 June 1990. The plaintiff accordingly had a claim against the defendant in the amount of 1,329,193.10 DDR-marks.

This outstanding claim has been neither met by payment nor extinguished by statute, but must be adapted in accordance with the principles of the collapse of the basis of the transaction, given that the state failed to provide the envisaged finance ...

2. The Contract Law of the DDR gives the defendant no claim for cancellation or modification of its duty to pay. The wording and purpose of para. 78 of the law, which might be thought applicable, make it clear that an economic contract can only be affected by reason of overwhelming social interests, which neither existed nor were suggested in this case

...

5. The Kammergericht was of the following view. The defendant could claim a reduction in the price under para. 242 BGB, for the maxim of good faith and fair dealing was an ethical principle of law which is applicable throughout the whole system. It is therefore applicable even to contracts formed in the DDR prior to the entry into force there of the BGB, to the extent that novel circumstances external to the contract and not arising from its own terms are involved. The change of the currency from DDR-marks to DM was irrelevant ... It was also irrelevant that the defendant had not received the full amount of the credit envisaged by the plan. It may have been true that on forming the contract the parties counted on the sale being financed as to 50% by the bank credit, but a debtor cannot successfully invoke the occurrence of unexpected difficulties in obtaining finance or the failure of a planned credit to materialise. However, it was relevant under para. 242 BGB that the defendant did not receive the promised amount from the DDR's general revenues. When the sale contract was entered into, both parties operated on the basis that the state plan provided for 50% of the finance. The intervening collapse of the state plan and the consequent impossibility of obtaining payment from the state amounted to a collapse of the basis of the transaction. After the parties were transformed into stock companies it would not be consistent with good faith and fair dealing for the defendant alone to be burdened with the loss. Thus the contract had to be modified, so that each party bore half of the loss due to the failure of the state to provided the promised moneys.

a) These observations are not in every respect correct in law.

Certainly the Kammergericht was right to hold that the rules relating to the collapse of the basis of the transaction, which follow from the principle of good faith and fair dealing, were applicable in this case. This principle is a legal principle transcending statute and immanent in all legal systems; for example, its effect may be seen in A 1 no. 2, sent. 2 of the common Protocol on the leading principles of the Treaty between the DDR and the Federal Republic for the Creation of a Monetary, Economic and Social Union, which is binding by reason of Art. 4 I 1.

b) The basis of a transaction is constituted by the common assumptions entertained by the parties at the time of the contract, or by an assumption of one of the parties, ascertainable by the other and not objected to by him, regarding the existence or future occurrence of circumstances, to the extent that the parties' intention to make the transaction is based on such assumptions [references].

aa) We need not decide whether the court below was right to hold that the change of currency in itself or the abandonment on 1 July 1990 of the provisions regarding prices in the DDR were not events such as to justify adaptation of the contract, for the court rightly held that the leading occurrence which justifies such modification is the failure of the state to provide the allocated finance, that is, an event prior to the change of currency and the repeal of the price regulations.

bb) The court below held that at the time the contract was formed the parties assumed that the "Reconstruction A" plan was a state plan which was to be financed, in accordance with the provisions of the state, as to 50% from state revenues ... It is uncontested and decisive that the plaintiff as well as the defendant assumed at the time of the contract that the financial needs would be fully met from state sources.

In this sense the contractual will of the parties (in so far as one can speak of such a thing when a planned economy is in force) rested on this common assumption.

c) The court below was also right to hold that the parties' common expectations were also frustrated in regard to the provision of the bank credit, but it proceeded to deny the defendant's invocation of the rules of collapse of the basis of the transaction, on the ground that a debtor is in principle not allowed to found on unexpected difficulties in obtaining finance when a source on which he had counted fails to materialise, this being a risk which falls within the debtor's area of risk.

On the special facts of this case this court cannot agree.

aa) The case-law certainly recognises that circumstances which clearly fall within the area of risk of one or other party, given the contractual purpose, do not entitle that party to claim that the basis of the transaction has disappeared [reference]. Thus the Bundesgerichtshof has decided that the failure of expected finance to materialise is not normally to be seen as a collapse of the basis of the transaction, since this falls within the debtor's sphere [reference]. But it must not be overlooked that these decisions were rendered against the background of a functioning market economy. In the context of a socialist planned economy matters are different. The economic units of the DDR ran no financial risk if they adhered to the plan, as it was guaranteed by the total state direction of the economy, including control of the banks. The defendant had no choice: it had to adhere to the stipulations of the plan, buy the machine and rely on the provision of the finance allocated by the plan. This was the situation at any rate at the end of 1989 and the beginning of 1990, when the contract was formed, and at that time the very quick succession of events, the collapse (mid-1990) and the speedy unification (October 1990), was not to be foreseen. Thus the defendant cannot be charged with having taken any risk at the time of the contract even with regard to the provision of credit envisaged by the plan. It had no power to influence the allocation between general revenues and credit. To refuse to adapt the contract in relation to the part that was to come from the credit, as the court below has done, would be to make the individual business's ability to claim adaptation depend on a capricious distinction drawn in the state's financing plan.

bb) The facts here, where the claimant took no risk, distinguish this case from those decided by the Bundesgerichtshof after the collapse of 1945 [references]. The appellant overstates the effect of those cases in saying that no account may be taken of the collapse of the basis of the transaction when fundamental political, economic or social changes have occurred ...

d) The defendant cannot be expected to continue to adhere to the contract with the plaintiff on the existing terms. In respect of machinery costing DM 376,806 the defendant, who already paid 376,806.90 in DDR-marks in June 1990, is now being sued for a further DM 664,597. It would be inconsistent with law and justice to grant the claim, and contrary to good faith and fair dealing to insist on it.

e) In effecting the necessary modification of the contract it must be borne in mind that it is only exceptionally that the doctrine of the collapse of the basis of the transaction leads to a total cancellation of the contractual duty; generally the contract is to be maintained so far as possible and simply adapted until it accords with the justified interests of the parties [references]. In the case of a contract formed by autonomous parties it may be right to ordain a disposition which reasonable parties would have adopted had they foreseen the eventual situation [reference], but that does not apply where the contract was imposed by the state [reference]. In cases like the present the only consideration is to effect a fair resolution of the respective losses of the parties.

The modification must take place as of the time when the basis of the transaction collapsed, that is, as of the time when it was clear that the finance was not going to be forthcoming. That was in June 1990...

We agree with the court below that it accords with the facts and the interests of the parties to effect an equal split of the loss resulting to the defendant from the collapse of the basis of the transaction. Any other modification more favourable to the defendant would be unfair to the plaintiff, for it had to obtain credit for the requisite import of the machinery in the full amount of the stipulated price...

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