The Role of Judges in Adapting Contracts

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Question 1:

Introduction:

During the preparation of a contract, both parties have the freedom to specify a choice of law contract under which, in case of any dispute, the settlement of the contract shall be determined in accordance with the law clause of a particular jurisdiction. Therefore, whenever a dispute occurs between two parties who already specified a law clause in their contract, it is the duty of the judge to apply this law chosen by the members from the two parties. The principle of freedom of contract is normally limited as a result of concerns that arise due to public policy. For example, in case a contract consists of a law clause that is offensive to the public policy of the country where the court is situated, then the Judges do not have an obligation to apply the law.

The Concept of Public Policy

            According to (Tyler 2013), the term public policy as is applied in the enforcement of an arbitral award has a number of meanings. Different countries have their own notions of what it is, and that is why it is usually a tough topic to discuss. Providing precise definition of it is also complicated (Ozer & Seker, 2013). This is why it was described and not defined as a law principle which holds that no individual can lawfully do that, which has any tendency to harm the public good or be against the public good (Tyler, 2013). In a rather recent example, the English case of Deutsche Schachtbau-und v Ras Al Khaimah National Oil, [1987] 2 Lloyd’s Rep. 246,254, the court described public policy in the context of enforcement of an arbitral award as follows. Public policy considerations can be defined exhaustively; on the contrary, they should be approached with much caution. This is because evidence must be presented to show that elements of illegality are present, or that the enforcement of the award would cause harm to the public good (Popescu, 2013). It may also look into issues that prove that this enforcement may turn out to be offensive to the ordinary and well inform public members on whose behalf the State powers are exercised.

The most frequently quoted public policy definition is that which was featured by the U.S Circuit Court Judge Joseph Smith in the case Parsons & Whittemore Overses Co., Inc. v Societe Generale de L’Industrie de papier Rakta and bank of America, 508 F. 2nd 969 (2nd Cir., 1974). The judge held that enforcement of a foreign arbitral award might be excluded on public policy grounds on under situations where the enforcement would violate morality and justice notions of the forum. Revolving around the few definitions of public policy, the courts in Singapore and Hong Kong have held that public policy should only be left to operate under circumstances whereby the upholding of an arbitral award would result to a shock to the conscience, would be clearly harmful to the public good, or lastly would be wholly offensive to the ordinary public members who are reasonable and fully informed (Guimarães, 2012).

The New York Convention of 1958, Article V2 (b) provided that the recognition and enforcement of an arbitral award may additionally be refuted in the case where the competent authority in a Country in which the recognition and enforcement is sought realizes that the recognition and enforcement award would be the contrary of the Country’s public policy (Matisoff, 2010). Judging from the mode of drafting, it is clear that the New York Convention of 1958 did not at one time try to harmonize the public policy or even establish a common standard for international use. The 1985 UNCITRAL Model Law originated as a result of the request made by the Asian-African Legal Consultative Committee for a review of the operations of the New York Convention in 1977 (Tyler, 2013). The committee claimed that there was lack of uniformity in how the national courts approached the enforcement of awards. The committee maintained their stand. This led to the conclusion by the Secretary General of UNCITRAL that harmonizing the enforcement practices of states, as well as the judicial control of procedures would be achieved more effectively through promulgation of a uniform law rather that attempt to revise the whole New York Convention (Tyler, 2013).

Judging from the examples above, it is clear that the public policy concept as a basis for the exclusion of the enforcement of foreign arbitral awards and foreign law has many grounds (Guimarães, 2012). Some of the descriptions given for public policy however have some errors that need to be noted, such as the case where the law is made uniform when in reality it is not. The concept of public policy that may result to the exclusion of the enforcement of foreign arbitral awards and foreign law varies. First of all, it depends on the harm that may cause to the members of public (Matisoff, 2010). Some laws may create way for the oppression of specific members of public. Second, it depends on the number of people who know about it. The more the number, the more likely the law will be refused, since this is a probable cause of conflicts. Third, it depends with how closely it relates to the public policy of a country. Some laws may be a complete opposite of what the current public policy of a country features (Ozer & Seker, 2013).

Human Rights Standards and International Contract

The Human Rights Standards may also result to the denial of the enforcement of an international contract. According to Merges (2013), the end of the cold war stirred series of attempts to come up with a definition of a new world order. The international community has entered a period whereby tremendous global transition has resulted to more social problems rather than solutions. The Human Rights system was implemented so as to help protect innocent citizens of different countries from violence, poverty and unemployment among many others (Li & Ryan, 2012). International contracts may at times be created in a form that may break the rules of human rights. This is why the human rights are also considered as a major factor in judging whether the law stipulated in a contract should be enforced or not.

The United Nations Human Rights council was the first to highlight the responsibilities of business to respect the human rights while engaging in contracts (Merges, 2013). In the context of investment projects, human rights must still be respected. According to a research carried out by the United Nations Human Rights council, two significant findings were recorded (Dikolli, Kulp, & Sedatole, 2013). First, the relationship between human rights and investment contracts was not well understood. Second, the human rights risks can be best dealt with if identified and dealt with at a very early stage of investment. Therefore, all investors seeking to enter into a business contract are supposed to be aware that the human rights rule also applies in their contracts as well. If the contract is not responsible, then it will not qualify in enforcing an international contract (Dikolli, Kulp, & Sedatole, 2013). The extent to which the human rights standards can affect the international contract is when it puts someone’s life at risk.

Some contracts have law clauses that are a clear violation of the human rights system. Some of the factors to consider in the creation of a responsible contract include a transparent statement of the terms (Triantis, 2010). All the terms of the contract must be disclosed clearly. The individuals who may be affected by the contract but are not part of either party should have access to a functioning non-judicial grievance mechanism. Another situation that may result to the declination of the international contract is when there is evidence that one party was forced into the contract (Dikolli, Kulp, & Sedatole, 2013). This is because it is the right of a person to choose whether or not they want to come to an agreement with a certain group or individual. If the contract features child labor, it cannot be passed since it is a violation of the Human Rights. Businesses should be given the freedom of association and hence they cannot be threatened in case they choose not to get into a contract.

Conclusion

            The concept of public policy as basis for the refusal of enforce enforcement of arbitral award can be categorized into two. First, when the law of the country does not legalize the settlement of the subject matter through arbitration. Second is when the terms of the arbitral award are contrary to the public policy of the country.

 

 

 

Question 3:

 

The Role of Judges in Adapting Contracts

When it comes to adjusting contracts, the roles of judges are wide. The international commercial contracts may be adjusted when the terms stipulated within are considered to be a violation of human rights, or when the terms are causing conflicts between the parties involved. In such instances, the judge may be forced to reconcile the content of the contract such as it reaches a limit whereby there will not be a reason for conflict (Dikolli, Kulp, & Sedatole, 2013).

At times, the contract may be disputed when one of the parties claims that it is being oppressed in the contract. There are reasons that may be excused, for example after the two parties enter into a contract, one of them realizes that the returns are not as much as they hoped. However, there are some situations that may result to an adjustment of the contract, such as complaints of being overloaded with activity by the other party (Triantis, 2010). If the complaint is something being controlled by the accused party, then the result will be for them to reconcile the terms of the contract.

The UNIDROIT Principles of International Commercial Contracts seeks to identify the situation under which the contract may be adjusted (UNIDROIT Principles, 2010). First, it is the duty of the judge to identify whether the situation at hand is indeed a qualified cause for the adjustment of the contract. Therefore, before they have ruled or made their judgment on the condition of the contract, both parties are still bound by their terms within the contract. This should proceed no matter how hard or strenuous the contract gets. Statutes in the Egyptian Civil code, specifically Article 147 states that the contract is what describes the law of the parties (UNIDROIT Principles, 2010). However, it may be revoked or altered only by mutual consent of either parties or when the law demands for it. If as a result of unpredictable events, the contract becomes onerous to the extent that it threatens the debtor with a very high loss, the judge may also act with reference to the circumstances by reducing the obligations to reasonable limits (Li & Ryan, 2012).

Once the judge has seen substantial evidence that the contract is no longer functioning as expected, he has the obligation to weigh the options. There are three options here. First, the judge may decide to revoke the contract. Second, the judge may decide to alter the contents. Third, the judge may decide to reduce the obligations such that one party does not suffer losses when unpredictable events occur (Merges, 2013). When the contract is revoked, it means that the content are no longer considered useful for the contract since it places lives at risk. If the dispute resulted as a result of lies which had just been uncovered, the contract may also be revoked as one party may claim that it was not aware of some of the conditions of the contract until just recently (UNIDROIT Principles, 2010).

If the terms of the contract are considered unfair by one of the parties, the judge may look at the evidence provided. Only after this will he agree to adjust the terms of the contract to what the other individual finds soothing or more comfortable (UNIDROIT Principles, 2010). When the terms of a contract are resulting to the suffering of one party due to unavoidable events, then the best option will be to change the terms such that their effect will not be so adverse as what would have resulted to in the first place.

Some of the factors considered by the judge in making decisions are usually analyzed with the help of a few questions. If the disadvantaged party knew about the events before finalizing the contract, but still went on with it, then the changes may be assumed (Tyler, 2013). This is because it is claimed that this party knew what it was getting into and was therefore comfortable with the terms. However, in case this party only learnt of the events after finalizing the contracts, then the best decisions to ease the situation will be reached upon by the judge (Dikolli, Kulp, & Sedatole, 2013). If the event did not reasonably taken into account by the disadvantaged party, then the party may have the judge rule in its favor. However, if they had reasonably taken the possibility of this event into account at the time of completing the contract, then there will be no case since they anticipated that this would happen.

Judge authorities in facing an unexpected circumstance (force majeure)

The Civil judges’ role differs from what the administrative judge is expected to do. This difference when they are dealing with unforeseen circumstances. In a situation whereby the civil judge may adjust the terms of a contract, he may decrease the obligation of the party who was harmed or otherwise increase the obligation of the advantaged party. In the Egyptian Civil Code Article 147, it is stated that depending on the circumstances after the interests of both parties have been balanced, the judge has a choice to either return the onerous obligation to the possible extent or to leave it as it was. Similarly, article 249 recovered from the Civil Transactions Act in the United Arab Emirates No. 5/1985 states that “…the circumstances are what determined whether the judge may or may not return the onerous obligation to the possible extent. It further states that for justice to prevail, any agreement created in contrary to this becomes void. The role of the administrative judge is rather confined in the rule for partial compensation without necessarily modifying the contracts terms. The Supreme Administrative Court therefore ruled that the application of the theory stated that emergency conditions existing after the contract was already formed and it obliged the other party to participate, even if it caused it great loss, then the administrative judge is obliged to rule out an appropriate compensation without necessarily considering the modified contractual obligations.”

Many legal systems have provisions of law that guide on the adjustments of contracts. A good example is the Dutch law, which features statutory provisions allowing the revision of a contract in the case where circumstances change (Ozer & Seker, 2013). The court is granted the ability to adjust a contract, upon being requested by either one of the parties to do so. The judge may decide to modify the agreement or even terminate it in part or in its entity on the basis that an unforeseen circumstance has resulted. In this situation, the disadvantaged must prove that they cannot perform under the unmodified terms as it puts them at risk of loosing a lot. Prove needs to be something that shows that the criteria for reasonableness and fairness have changed the status of the agreement immediately after the circumstances befell (Tyler, 2013). The Dutch Civil Code provision is one of the fairest codes recorded. It features the criteria for reasonableness and fairness that help to judge if the contract should continue being used in its unmodified form. (Popescu, 2013). Most of European legal systems usually have their focus on onerous nature of performance. Article 478 of the UNIDROIT principles states that the contracts of continuing performance, if one party is faced with excessive onerous which places them at a disadvantage, the party may seek for it to be terminated (UNIDROIT Principles, 2010). Article 479 states that the termination may be avoided if both parties agree to a modification of terms to ensure that they end up equal as before (UNIDROIT Principles, 2010). Article 480 states that if the obligations of performance rely only to 1 party, then the party may request for the obligation to be reduced or even for the whole contract to be modified (UNIDROIT Principles, 2010).

The adjustment of a contract is very important in today’s society. Therefore, all parties entering into an international contract must ensure that they include a clause which enables them to adjust the contract incase the terms become uncontainable (Tyler, 2013). The availability of this clause in the contract shows that the party recognized the possibility of risks and took a step to protect itself. In a contract, anything can happen. Market inflation, currency fluctuations and also changes in law can occur. The party needs to be well aware that such things are uncontrolled but still they do happen. Therefore steps need to be taken to ensure that when it happens, not much damage will be done.

Conclusion

In general, the judges have a role to control if the contract may or may not be changed. They are the people responsible for looking at and analyzing the evidence such that it does not feature false information. If the resulting contract is indeed putting much pressure on one of the parties, then the changes really need to be made. However, if this is not the case, then the contract needs to remain as it is. The formation of a contract relies on the country of origin for both parties. The judges may settle disputes by ruling out the best options or changes to be made to the contract so that both parties view it as equal.

 

 

References

Dikolli, S. S., Kulp, S. L., & Sedatole, K. L. (2013). The Use of Contract Adjustments to Lengthen the CEO Horizon in the Presence of Internal and External Monitoring. Journal Of Management Accounting Research, 25199-229.

Guimarães, D. (2012). Scientific concepts and public policies: Semiotic-cultural obstacles concerning intergroup and intercultural relationships. Culture & Psychology, 18(3), 345-358.

Li, R., & Ryan, J. K. (2012). Inventory flexibility through adjustment contracts. International Journal Of Production Research, 50(7), 1955-1978.

Matisoff, D. C. (2010). Are international environmental agreements enforceable? implications for institutional design. International Environmental Agreements: Politics, Law & Economics, 10(3), 165-186.

Merges, R. P. (2013). Foundations and Principles Redux: A Reply to Professor Blankfein-Tabachnick. California Law Review, 101(5), 1361-1386.

Özer, B., & Şeker, G. (2013). Complexity Theory And Public Policy: A New Way To Put New Public Management And Governance In Perspective. Suleyman Demirel University Journal Of Faculty Of Economics & Administrative Sciences, 18(1), 89-102.

Popescu, L. (2013). From a holistic approach of public policy to co-governance. Theoretical & Applied Economics, 20(7), 95-108.

Triantis, G. (2010). The Evolution Of Contract Remedies (And Why Do Contracts Professors Teach Remedies First?)†. University Of Toronto Law Journal, 60(2), 643-662.

Tyler, C. W. (2013). Lawmaking in the Shadow of the Bargain: Contract Procedure as a Second-Best Alternative to Mandatory Arbitration. Yale Law Journal, 122(6), 1560-1593.

UNIDROIT Principles (2010). International Institute for the Unification of Private Law.

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