Concept and legal classification of frustration of contract fundamentals
The ‘frustration of contract fundamentals’ (Wegfall der Geschäftsgrundlage) is a central principle under German civil law and governs the modification or dissolution of contracts when fundamental circumstances change significantly after the conclusion of the contract. This legal concept is primarily codified in Section 313 of the German Civil Code (BGB) and plays a significant role in handling unforeseen circumstances that were neither foreseeable nor attributable to the parties at the time the contract was made.
Historical development
The concept of frustration of contract fundamentals was originally developed as unwritten customary law by the courts (notably the Reichsgericht, later the Federal Court of Justice) before being expressly incorporated into the BGB in the 2002 law of obligations reform. The rule seeks to mitigate undue hardship arising from serious disruptions to contractual relations and thus serves as a corrective to strict contractual performance obligations.
Requirements for frustration of contract fundamentals
Contract fundamentals
The contract fundamentals include the joint or individual assumptions of the contracting parties at the time the contract was concluded, which were regarded as indispensable for the contractual purpose. A distinction is made between shared (subjective) and objective fundamentals.Shared contract fundamentals are present when both parties had identical assumptions about specific circumstances, and these assumptions formed the underlying basis for concluding the contract.Objective contract fundamentals are assumed when, according to good faith, a circumstance is considered a necessary basis for the contract, even if not explicitly considered by both parties.
Significant change and unforeseeability
Adaptation under Section 313 BGB requires that the contract fundamentals have changed significantly after the contract was concluded. The change must be so severe that, weighing all circumstances, it would be unreasonable for the parties to adhere to the unchanged contract.
Moreover, the change must not have been foreseeable for either party and must not be attributable to the risk sphere of any party. Events that typically fall within the general life risk of a party generally do not result in frustration of contract fundamentals.
No precedence of other provisions
The frustration of contract fundamentals only applies if no special statutory provision applies, such as rescission due to mistake (Sections 119ff. BGB) or warranty rights. Essentially, it functions as a subsidiary remedy.
Legal consequences of frustration of contract fundamentals
Entitlement to contract adjustment
According to Section 313 (1) BGB, the disadvantaged party may request an adjustment to the contract, if adherence to the original terms is unreasonable. The adjustment is made such that, through supplementary contract interpretation, the parties reach a solution that reflects their interests and takes account of the changed circumstances.
Possibility of contract cancellation
A complete cancellation of the contract is only contemplated under Section 313 (3) BGB if adjustment is impossible or unreasonable. Dissolution of the contract is considered a last resort and is applied restrictively.
Practical examples
Classic case groups include:
- Currency reforms
- Fundamental changes in legal or political frameworks
- Unforeseeable events such as natural disasters, war, or pandemics
A frequently cited scenario is the ‘collapse of profitability’, where a long-term use relationship becomes economically pointless for one party due to unforeseeable external influences.
Distinctions from other legal instruments
Extinction of performance obligations
Frustration of contract fundamentals differs from impossibility (Section 275 BGB): While impossibility makes performance objectively permanently impossible, under Section 313 BGB performance remains possible in principle but is unreasonable due to the changed foundation.
Disruption of the basis for performance
Also to be distinguished is disruption of the performance obligation (such as default, impossibility, or warranty). Section 313 BGB only applies when specific performance disruptions are excluded.
Procedural aspects
The court only examines ex officio the requirements for the frustration of contract fundamentals if a party relies on it. The party bearing the burden of presentation and proof must specify and prove both the actual disruption to the basis of the contract and the unreasonableness of maintaining the previous arrangement.
Statutory provision: Section 313 BGB (frustration of contract fundamentals)
The statutory text is divided into three subsections:
- Subsection 1 concerns the possibility of contract adjustment.
- Subsection 2 governs cases in which a change in the fundamentals cannot be remedied by adjustment.
- Subsection 3 clarifies that annulment instead of adjustment only comes into consideration in exceptional circumstances.
Significance in German contract law
Frustration of contract fundamentals serves to protect trust in fair contractual settlement, particularly in times of crisis or extreme changes in societal conditions. It expresses the principle of good faith (Section 242 BGB) and is an important tool for ensuring equitable discretion in private law.
Literature and case law
Numerous rulings by the Federal Court of Justice have further clarified the principles and requirements and illustrated their practical application. Legal literature discusses, in particular, the distinction from other adaptation mechanisms and specific issues such as attribution problems or standards for determining adaptation.
See also:
- § 313 BGB
- Contract adjustment
- Impossibility
- Disruption of contract fundamentals
- Good faith (Section 242 BGB)
Frequently asked questions
What requirements must be met for frustration of contract fundamentals?
For frustration of contract fundamentals under Section 313 BGB, it is first required that the circumstances which became the basis for the contract have changed significantly after the contract was concluded. These circumstances must have existed at the time the contract was made and have been regarded by the parties as self-evident; they must have been so significant that they were typically not explicitly regulated, but implicitly factored into the distribution of contractual risk. Furthermore, the change must neither be attributable to any party nor fall within the party’s risk sphere by the nature of the contract. Finally, it must be unreasonable for a party to be held to the unchanged contract. The assessment is always specific to the case and requires a comprehensive balancing of both parties’ interests with regard to the changed circumstances.
In which cases is frustration of contract fundamentals typically assumed?
Typical cases for frustration of contract fundamentals are situations where unforeseen events occur after the contract is concluded that have a significant impact on the basis of the contract. Examples include significant legislative changes, unforeseeable economic crises (such as the COVID-19 pandemic), the loss of regulatory prerequisites, the sudden death of a person deemed essential, or the unexpected loss of a significant use of the contractual object. However, courts apply strict standards and always require that the event was genuinely unusual and unforeseeable for both parties.
What legal consequences arise from frustration of contract fundamentals?
Frustration of contract fundamentals allows a contracting party to demand an adjustment of the contract if adherence to the original agreements would be unreasonable. Only in exceptional cases can the disadvantaged party withdraw from or terminate the contract, for example, if adjustment is not possible or reasonable. The primary legal consequence is adjustment, i.e., establishment of an appropriate solution under the new circumstances. Here, the court has considerable discretion and will decide based on good faith and the interests of both parties.
How does frustration of contract fundamentals differ from impossibility?
Whereas frustration of contract fundamentals concerns subsequent fundamental changes of circumstances which, although not rendering performance impossible, defeat the basis of the contract, impossibility (Section 275 BGB) applies where performance of the contract is objectively or subjectively no longer feasible. In the case of impossibility, the obligation to perform generally lapses, while in the case of frustration of contract fundamentals, contract adjustment is sought to restore the original equivalence of performance.
Which party bears the burden of presentation and proof for frustration of contract fundamentals?
As a rule, the party relying on frustration of contract fundamentals bears the burden of presentation and proof regarding the presence of the respective requirements. This party must specify which circumstances constituted the contract’s basis, how these subsequently changed, and why this change was unforeseeable and unreasonable for them. In addition, it must be substantiated why contract adaptation is necessary or continuing the contract is unreasonable.
Are there restrictions in Section 313 BGB regarding contractual risk assumption?
Yes, an essential restriction for frustration of contract fundamentals lies in the contractual or statutory allocation of risk. If the parties have expressly or implicitly agreed a particular allocation of risk, or if the risk is assigned by law or the nature of the contract to one party, such party cannot invoke frustration of contract fundamentals. Examples include fixed price contracts or certain risk allocation provisions in which the parties have expressly assumed the risk of unusual changes.
What role does the assessment of unreasonableness play in frustration of contract fundamentals?
Unreasonableness is the central test when applying Section 313 BGB. This means the court examines whether it is still reasonable for the disadvantaged party, in light of all circumstances, to be bound to the contract. In particular, it considers economic effects, party conduct, and, where appropriate, the interests of the counterparty. Only once the threshold of unreasonableness is exceeded is adaptation or termination of the contract possible. If unreasonableness is not established, even significant changes in circumstances do not affect the original contract.
