The defendant W. and E. were partners owning a spinning mill. The defendant terminated the partnership agreement with effect from 31 May l919 and entered into negotiation with the plaintiff K in order to safeguard his share in the partnership assets. On 21 May 1919 a notarial contract was concluded between the plaintiff and the defendant which contained the following stipulations by the defendant:

The agent of the plaintiff promised to pay the price at the time of the conveyance, as to one third in 5% war loans at a price of 98%. The plaintiff was also to take over the existing raw materials at the fixed maximum prices to be assessed at the time of payment. In addition it was provided:

"If Mr. K thereby acquires the assets of the firm of B. & W. he will be prepared to employ Mr. W. as manager of the factory for a salary to be agreed upon later on, to be fixed by a contract of employment. Mr. X. will regard himself as bound by the contract until 31 December 1919."

On 12 January 1920 the plaintiff's agent wrote that the plaintiff regarded himself as bound by the agreement beyond 31 December 1919 and that he insisted on his contractual rights. The defendant replied that he regarded the matter as closed. Thereupon the plaintiff brought an action for a declaration, inter alia, that the contract of 21 May 1919 remained lawfully in existence and that the defendant continued to be bound by it:

The Landgericht, Zwickau rejected the claim but the Oberlandesgericht Dresden allowed it. On a second appeal the case was referred back to the Court of Appeal for the following

Reasons

...

The appellant objects rightly that the defence of the so-called clausula rebus sic stantibus has not been taken into account sufficiently. The Court of Appeal contented itself with the observation that it would lead to complete lawlessness in the realm of contracts if the defendant were to be accorded the right to rescind the contract because the economic conditions had changed. This fear is unfounded; it is only necessary to delimit the boundaries within which the defence deserves to be noted. The pleadings of the defendant in this respect can be regarded as correct without further proof to the following extent the sum of 600,000 which recurs in clauses 1-3 of the contract was chosen because the price of the factory undertaking was estimated at approximately this sum, with the result that the appropriate price of the defendant's share amounted to 300,000 Marks.

The court takes official notice of the depreciation of money which began in the autumn of 1919 and multiplied the price of land, machinery and shares. The plaintiff insisted already in the courts below that according to the contract the defendant was not bound to purchase anything which might cost him more later on: the performance of neither party had become more onerous; only the relative value of the mutual obligations had been altered. However, this argument does not refute the defendant's objection. It is true that the Civil Division of the Reichsgericht [references] still held in April 1921 that the offer of sale by the owner of a house, made in 1912 with binding effect until 1922, was valid despite the depreciation of the currency. This decision - which, it should be noted, was criticised by writers [references] - must not be interpreted to mean that a fundamental change of prices of itself, which does not simultaneously render the performance more onerous, never suffices to justify the defence according to para. 242 BGB of the disadvantaged party. The decision is formulated entirely with regard to the special circumstances of the particular case, which may have shown speculative features; no general principle was established, nor could it be established. In general, to use the words of Oertmann's Geschuftsgrundlage (1921) it is relevant whether the basis of the transaction, understood as the assumption at the time of the conclusion of the transaction by the parties, of the existence of certain determining circumstances, has ceased to exist. This may also happen if the balance of values is disturbed, provided that the continued equivalence of performance and counter performance was assumed. The question as to whether this occurred in the present case must be examined, and it must be done by the Court of Appeal, since in the absence of findings of fact the Reichsgericht itself is unable to decide the question. Even if the consideration will suffice normally that a depreciation of money, such as it occurred in 1919, came as a surprise for the world of commerce and could not be foreseen, it must be note that plaintiff's counsel has claimed once more in the course of the second appeal that the contract was of a gambling nature and that each party had accepted the danger of an unfavourable change of values, no matter what its causes may be.

The judgment under appeal must therefore be quashed and the case must be referred back to the Court of Appeal. For the purposes of the renewed proceedings attention must be drawn to the fact that even the Court of Appeal should hold, after a renewed examination of the facts, that the basis of the transaction had ceased to exist, it does not follow necessarily that the defendant is entitled to be released from the contract as a whole.

The first question must be whether or not the plaintiff has already performed a part of his obligation. According to the defendant, the performance of the contract by the execution of the mutual obligations is to take place in the future.

At present no more has happened than the conclusion of the contract itself; only when the partners dissolve the partner-ship, the plaintiff was to provide the defendant with 300,000 Marks, and the defendant was to assist the plaintiff to acquire the business or to give to him the excess above 300,000 Marks of the sale price of his share in the partnership. This point of view does not tally with the facts as the plaintiff sees them. He contends that on 21 May 1919, when the parties concluded the contract, it was uncertain whether as a result of the dissolution of the partnership, either by a private sale of the business to one or the other of the partners or by public auction, the share of the defendant would reach an adequate price. The fear that it might not be reached had been the motive for the defendant to enter into the contract, which had protected the defendant against this danger. If this is correct, the plaintiff, even if he should adhere definitely to a sum of 300,000 Marks as the upper limit between himself and the defendant, and if as the result of the subsequent depreciation of money, perhaps already since the autumn of 1919, a purchase price of less than 300,000 Marks was not to be envisaged any longer, would certainly have protected the defendant, for a time at least, against a dissipation of his fortune. It cannot be doubted that this is a performance. Regarded from this point of view the obligation of the plaintiff would constitute a continued obligation, which he had performed in part. If the defendant were to be released in consequence of a change of circumstances, he could not be allowed a right to rescind ex tunc but only a right to terminate the agreement for the future. He would remain contractually bound to pay an adequate remuneration in return for the performance which he received in fact.

Moreover, even if it should be held that the basis of the transaction had ceased to exist, an attempt must be made to maintain the contract with the necessary modification. This Division does not share the view that the court is empowered to interfere with the content of a transaction by means of a constitutative judgment in cases other than those in which the statute allows it exceptionally. However, before the debtor resiles from the contract or terminates it by notice because a fundamental shift has taken place of the value between performance and counter performance, he must invite the creditor to increase his performance; the debtor is only free, if the creditor refuses. This follows from the provision of para. 242 BGB, according to which the consideration of good faith is the principle yardstick of a contractual debtor. A step as serious as that of resiling from a contract of long duration on the occasion of a change of circumstances which occurred independently of the intention of both parties must not take place without giving the other party an opportunity to adapt himself to the new situation. Naturally, no such invitation need be issued, if the other party declares unequivocally that he declines to increase his performance. However, this is not yet established in the present case ... If the contract should be modified the price would have to be increased corresponding to the present depreciation of money, if a resilation of the defendant is to be avoided. Any increase in the value of the business due to any other reasons (increased demand) would constitute an advantage for the plaintiff and need not be compensated by him.

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