From assumptions to risk management.

An analysis of risk management for changing circumstances in commercial contracts, especially in the Nordic countries.

The theory of contractual risk management and the default norms of risk allocation

 

 

Contents

SHORT VERSION

 

Preface........................................................................................................................................................................................... I

Contents.................................................................................................................................................................................... III

list of abbreviations....................................................................................................................................................... IX

I        Introduction................................................................................................................................................................... 1

1       The scope of the work............................................................................................................................................................ 2

2       Method...................................................................................................................................................................................... 3

3       Terminology............................................................................................................................................................................ 9

4       Disposition............................................................................................................................................................................ 12

II       Changing circumstances As a risk................................................................................................................ 13

1       Circumstances – changed or changing?......................................................................................................................... 13

2       Changing circumstances and contract paradigms........................................................................................................ 23

3       Risk as a (basic) concept in contract law......................................................................................................................... 47

4       Conclusions.......................................................................................................................................................................... 73

III     THE Theory of contractual risk management...................................................................................... 77

1       The main trends of discussion on risk allocation.......................................................................................................... 82

2       The theories of efficient risk allocation.......................................................................................................................... 92

3       The theory of the governance of commercial transactions........................................................................................ 109

4       The theory of incomplete contracts................................................................................................................................ 136

5       An outline for the theory for contractual risk management..................................................................................... 138

IV     Contractual risk management in practice.......................................................................................... 151

1       The identification and evaluation of the default norms of risk allocation............................................................... 153

2       The contractual tools of risk management................................................................................................................... 274

V      Summary and conclusions................................................................................................................................ 277

1       Assumptions or management of risks?........................................................................................................................ 277

2       Contractual risk management........................................................................................................................................ 278

3       The implications of the risk management-approach for nordic contract law......................................................... 279

4       Conclusions........................................................................................................................................................................ 281

Bibliography........................................................................................................................................................................ 282

Index of statutes and equivalent instruments.......................................................................................... 304

Index of Cases...................................................................................................................................................................... 307

List of documents............................................................................................................................................................. 309

Index OF AUTHORS............................................................................................................................................................... 310

INDEX OF FIGURES.................................................................................................................................................................. 314

 

 


 

 

 

COMPLETE VERSION

 

Preface........................................................................................................................................................................................... I

Contents.................................................................................................................................................................................... III

list of abbreviations....................................................................................................................................................... IX

I        Introduction................................................................................................................................................................... 1

1       The scope of the work............................................................................................................................................................ 2

2       Method...................................................................................................................................................................................... 3

3       Terminology............................................................................................................................................................................ 9

4       Disposition............................................................................................................................................................................ 12

II       Changing circumstances As a risk................................................................................................................ 13

1       Circumstances – changed or changing?......................................................................................................................... 13

1.1       Changed circumstances?....................................................................................................................................... 16

1.1.1        Exceptional causes of the changes................................................................................................................ 18

1.1.1.1.... Unforeseen causes....................................................................................................................... 18

1.1.1.2.... Exogenous nature of the causes................................................................................................... 20

1.1.2        The exceptional extent of the changes.......................................................................................................... 20

1.1.2.1.... Unforeseeability of the extent of the changes................................................................................ 20

1.1.2.2.... Fundamentality of the extent of the changes................................................................................. 21

1.2       Changing circumstances?...................................................................................................................................... 22

 

2       Changing circumstances and contract paradigms........................................................................................................ 23

2.1       A Contract as a recorded momentum................................................................................................................... 28

2.1.1        The will paradigm........................................................................................................................................ 28

2.1.2        The reliance paradigm.................................................................................................................................. 30

2.2       A Contract as a process.......................................................................................................................................... 32

2.2.1        Social contract law....................................................................................................................................... 33

2.2.2        The paradigm of contract balance................................................................................................................ 34

2.2.3        The paradigm of legitimate market expectations.......................................................................................... 34

2.2.4        Relational contextual contracts.................................................................................................................... 35

2.2.5        Conclusions.................................................................................................................................................. 37

2.3       A Contract as a managed process........................................................................................................................ 38

2.4       Summary.................................................................................................................................................................... 46

 

3       Risk as a (basic) concept in contract law......................................................................................................................... 47

3.1       The definition of risk............................................................................................................................................... 47

3.1.1        Etymological and conceptual definition....................................................................................................... 48

3.1.2        Sociological definition.................................................................................................................................. 48

3.1.3        Definition in economics............................................................................................................................... 50

3.1.4        The definition in the literature for risk management.................................................................................... 51

3.1.5        The definition in jurisprudence.................................................................................................................... 51

3.1.5.1.... Definitions in contract law literature............................................................................................ 51

3.1.5.1.1.... Tore Sandvik, ‘Entreprenørrisikoen’ (1966)............................................................. 52

3.1.5.1.2.... Per Brunsvig, ‘Konstruksjonsansvar ved bygging av skip’

.................. (1973)........................................................................................................................ 53

3.1.5.1.3.... Ola Mestad, ‘Om force majeure og risikofordeling i kontrakt’ (1991)...................... 53

3.1.5.1.4.... Newer contract law literature.................................................................................... 54

3.1.5.2.... Definition in case law................................................................................................................... 54

3.2       Categories of risk..................................................................................................................................................... 55

3.3       Risk-terminology...................................................................................................................................................... 61

3.3.1        Berndt Godenhielm‘s “risk theory”............................................................................................................. 62

3.3.2        The concept of risk in the doctrine of failed assumptions........................................................................... 63

3.3.3        Diverse risk-terminology............................................................................................................................. 63

3.4       Conclusions.............................................................................................................................................................. 64

3.4.1        The definition of risk................................................................................................................................... 64

3.4.1.1.... Separation of the concepts of danger, risk, and liability.............................................................. 65

3.4.1.2.... Risk as part of the new system for liability in property law.......................................................... 69

3.4.1.3.... Summary...................................................................................................................................... 71

3.4.2        Suggested risk terminology.......................................................................................................................... 72

 

4       Conclusions.......................................................................................................................................................................... 73

III     THE Theory of contractual risk management...................................................................................... 77

1       The main trends of discussion on risk allocation.......................................................................................................... 82

1.1       The theory of rational choice................................................................................................................................ 82

1.2       The choice of a strategy of egoism or cooperation (risk sharing)................................................................. 87

1.3       Conclusion................................................................................................................................................................ 91

 

2       The theories of efficient risk allocation.......................................................................................................................... 92

2.1       The theory of efficient breach................................................................................................................................ 93

2.2       The theories of superior risk bearing................................................................................................................... 96

2.2.1        Posner & Rosenfield, ‘Impossibility and Related Doctrines in Contract Law:

                An Economic Analysis’ (1977)................................................................................................................... 97

2.2.2        Bruce, ‘An Economic Analysis of the Impossibility Doctrine’ (1982)..................................................... 100

2.2.3        Schäfer & Ott, ‘Lehrbuch der ökonomischen Analyse des Zivilrechts’ (1995)......................................... 100

2.2.4        Runesson, ‘Rekonstruktion av ofullständiga avtal’ (1996)........................................................................ 101

2.2.5        Critique...................................................................................................................................................... 105

2.3       Theory of efficient non-performance................................................................................................................... 107

2.4       Conclusion.............................................................................................................................................................. 109

 

3       The theory of the governance of commercial transactions........................................................................................ 109

3.1       Transaction cost economics................................................................................................................................. 110

3.1.1        The relation to the New Institutional Economics...................................................................................... 111

3.1.2        Tools of analysis........................................................................................................................................ 115

3.1.2.1.... Transaction costs....................................................................................................................... 116

3.1.2.2.... Incentives against opportunism................................................................................................. 118

3.1.2.3.... Mechanisms for ex post-adaptation........................................................................................... 119

3.2       The mechanisms of governance of commercial transactions......................................................................... 119

3.2.1        The nature of business............................................................................................................................... 121

3.2.1.1.... Asset specificity........................................................................................................................... 121

3.2.1.2.... Frequency of transaction............................................................................................................ 124

3.2.1.3.... Relation to contract typologies in legal reasoning...................................................................... 125

3.2.1.4.... Relation to contemporary contract law thinking........................................................................ 126

3.2.2        The governance mechanisms...................................................................................................................... 127

3.2.2.1.... Alternative governance mechanisms.......................................................................................... 128

3.2.2.1.1.... Market governance.................................................................................................. 128

3.2.2.1.2.... Governance by hybrids (trilateral governance)....................................................... 129

3.2.2.1.3.... Governance by hierarchies (transaction specific governance)................................. 130

3.2.2.2.... Relation to contracting practice in business transactions.......................................................... 131

3.2.2.3.... Relation to contemporary legal theories..................................................................................... 132

3.3       The relation to risk management........................................................................................................................ 133

 

4       The theory of incomplete contracts................................................................................................................................ 136


5       An outline for the theory for contractual risk management..................................................................................... 138

5.1       The compatibility of the economic theories with legal reasoning............................................................... 138

5.1.1        Fully rational vs. boundedly rational decision-making.............................................................................. 139

5.1.2        Wealth maximizing vs. governance economizing........................................................................................ 141

5.1.3        Complete versus incomplete contract........................................................................................................ 144

5.1.4        The choice of the economic theory for contractual risk management........................................................ 146

5.2       A proposal for a theory of contractual risk management.............................................................................. 147

IV     Contractual risk management in practice.......................................................................................... 151

1       The identification and evaluation of the default norms of risk allocation............................................................... 153

 

1.1       Nordic contract law.............................................................................................................................................. 154

 

1.1.1        Impossibility-oriented............................................................................................................................... 156

1.1.1.1.... The doctrine of impossibility – force majeure............................................................................ 156

1.1.1.2.... The doctrine of commercial impracticability.............................................................................. 160

1.1.1.3.... Norms of impossibility............................................................................................................... 160

1.1.2        Mistake-oriented........................................................................................................................................ 161

1.1.2.1.... The doctrine of mistake.............................................................................................................. 162

1.1.2.2.... The doctrine of (failed) assumptions.......................................................................................... 162

1.1.2.2.1.... Reconstruction of the hypothetical risk allocation................................................. 165

1.1.2.2.2.... Identification of typical assumptions..................................................................... 166

1.1.2.2.3.... Critique.................................................................................................................... 168

1.1.2.2.3.1.... The perception of changing circumstances....................................... 169

1.1.2.2.3.2.... The conceptualization of risks........................................................... 172

1.1.2.2.3.3.... Good or bad faith concerning risks?................................................ 173

1.1.2.2.4.... Conclusions............................................................................................................. 174

1.1.3        Reasonability-oriented............................................................................................................................... 176

1.1.3.1.... The principle of unjust enrichment............................................................................................. 176

1.1.3.2.... The adjustment of a contract according to Section 36 of the

............... Nordic Contracts Acts................................................................................................................ 177

1.1.3.2.1.... Descriptive and legal-technical analyses................................................................. 179

1.1.3.2.1.1.... Contracts between unequal business parties..................................... 182

1.1.3.2.1.2.... Contracts between equal business parties......................................... 185

1.1.3.2.2.... Normative analyses................................................................................................. 186

1.1.3.2.3.... Risk management analysis....................................................................................... 190

1.1.3.3.... Rules of adjustment of rent for business premises..................................................................... 192

1.1.3.4.... Liability for specific performance according to Sections 23 and 53 of the Nordic

...............  Sale of Goods Acts.................................................................................................................... 197

1.1.3.5.... Norms of immediate withdrawal from contract due to important reasons................................ 201

1.1.4        Process-oriented......................................................................................................................................... 204

1.1.4.1.... Norms of withdrawal from contract........................................................................................... 205

1.1.4.1.1.... Cancellation of an order........................................................................................... 208

1.1.4.1.1.1.... Contracts on sale of goods................................................................ 209

1.1.4.1.1.2.... Contracts on carriage of goods by sea............................................. 214

1.1.4.1.2.... Termination by notice............................................................................................. 215

1.1.4.1.2.1.... Agency contracts............................................................................... 215

1.1.4.1.2.2.... Contracts on the lease of business premises..................................... 217

1.1.4.1.2.3.... General principle of the right to termination of continuous

.....................  contracts by notice............................................................................ 223

1.1.4.1.2.4.... The implications of risk management............................................... 225

1.1.4.2.... The norms for the adjustment of a contract price due to

............... changed circumstances.............................................................................................................. 227

1.1.4.2.1.... The Norwegian rules for the adjustment of rent for business premises due to

.................. changed circumstances............................................................................................. 227

1.1.4.2.2.... The rules for the increase of price due to an increased risk of danger according to

.................. the Nordic Maritime Acts....................................................................................... 230

1.1.4.2.3.... The norms for the adjustment of a contract price due to

.................. changes in tax legislation.......................................................................................... 231

1.1.5        (Risk) Management-oriented..................................................................................................................... 232

1.1.5.1.... Management liability (control liability) according to Sections 27, 40 and

............... 57 of the Nordic Sale of Goods Acts........................................................................................... 233

1.1.5.1.1.... Management spheres............................................................................................... 237

1.1.5.1.1.1.... The inner sphere (performance management

..................... liability)............................................................................................. 239

1.1.5.1.1.2.... The outer sphere (contract management liability)............................. 241

1.1.5.1.1.3.... The external sphere (loss management liability)............................... 253

1.1.5.1.2.... The nature and extent of management liability........................................................ 261

1.1.5.1.3.... The risk allocation effects of management liability................................................. 265

1.1.5.2.... The liability to mitigate damages for a breach of contract according to

............... Section 70 of the NSGA.............................................................................................................. 269

 

1.2       The Principles of European Contract Law 1998............................................................................................. 271

1.3       The UNIDROIT Principles of International Commercial Contracts............................................................ 273

1.4       Is there need to change the default allocation of risks?................................................................................ 274

 

2       The contractual tools of risk management................................................................................................................... 274

V      Summary and conclusions................................................................................................................................ 277

1       Assumptions or management of risks?........................................................................................................................ 277

2       Contractual risk management........................................................................................................................................ 278

3       The implications of the risk management-approach for nordic contract law......................................................... 279

4       Conclusions........................................................................................................................................................................ 281

 

Bibliography........................................................................................................................................................................ 282

Index of statutes and equivalent instruments.......................................................................................... 304

Index of Cases...................................................................................................................................................................... 307

List of documents............................................................................................................................................................. 309

Index OF AUTHORS............................................................................................................................................................... 310

INDEX OF FIGURES.................................................................................................................................................................. 314