EQUIVALENCE OF EXCHANGE IS DISTORTED

Case 1 ‘Canal de Craponne’

Long term agreement – devaluation of the price agreement

Early in the twentieth century, the farmers X and Y entered into a contract under which X promised to build and maintain an irrigation channel; Y was entitled to extract water at a fixed price. The contract was concluded for an unlimited period of time. Almost 100 years later, X's successors ask for an increase in the price arguing that due to inflation and a rise in the cost of maintenance as well as labour the agreed price has become completely inadequate.

Is the claim by X's successors justified? Are they, alternatively, entitled to terminate the contract?

Case 2 Extraordinary inflation

Hardship due to extraordinary inflation; hardship resulting from a foreign currency agreement

1. (a) Extraordinary inflation

2. X receives a loan from the Y-Bank. Under the agreement, the interest rate is fixed at 10 per cent for five years. In the twenty years immediately before the agreement, the rate of inflation had been relatively stable within a range of 1 to 6 per cent. In the third year after the conclusion of the agreement, the economic situation begins to destabilise and inflation rises quickly to 50 per cent.

3. Y-Bank asks for an adjustment or for a termination of the contract.

4. (b) Variation: foreign currency agreement

5. The loan agreement between X and the Y-Bank provides for repayment and interest in a foreign currency. In the ten years immediately before the agreement, the relevant exchange rate had been relatively stable within a range of 20 per cent. Subsequently, the national currency is devalued by 80 per cent compared to the foreign currency.

6. X asks for an adjustment or for a termination of the contract.