Can you win without playing cards: economic pressure, negotiating inequality and treaty challenge 

The most talked-about event at the moment is the US-Ukraine mineral agreement. The terms of the agreement are being examined in public and even certain episodes of the negotiations are being made public. The situation culminated in a meeting between the Presidents of Ukraine and the US, during which it is possible to see the two parties in different positions, namely the dominant US, which is demanding that Ukraine conclude the treaty, with a real threat of existential and economic consequences for Ukraine if the treaty is not signed. On the other side, we have Ukraine, which is being forced to sign a deal that is clearly to its detriment, and which it would never have considered signing if its existence had not been threatened.

We can look at the situation from a moral point of view, where the stronger party to the contract cannot take advantage of the weaker party's particularly bad situation, but we can also look at the situation from a legal perspective, a situation that is much closer to our everyday lives.

Imagine you are the owner of a company. The company is facing financial difficulties and the possibility of bankruptcy. You are approached by your business partners who ask you to sign a personal guarantee agreement for the company's liabilities, otherwise they will no longer work with your company, which means bankruptcy for you. As the President of the United States would say, you do not have a card to play, either you guarantee or the company ends. Eventually, the surety is signed, the company goes bankrupt and the creditor is already claiming the debt from you. Is it possible to invalidate such a surety agreement?

Even closer: you lose your job, you have young children, you have no means of livelihood, you are offered to sell your home at a price you consider inadequate, but you have no choice but to sell it quickly, otherwise you will suffer very serious consequences. Can such a contract of sale be challenged?

These agreements are not much different from the US-UKRAINE deal in everyday life, but the world is taking a dim view of the current situation, and no one is coming to the rescue of the country that is pressed against the wall. However, if you were the shareholder of the company I mentioned, or a natural person, you could, even after signing such an agreement, go to court and ask for it to be declared invalid.

The Civil Code gives you the right to rescind a contract if it was concluded under economic pressure or a real threat of such pressure. A contract may also be declared void if it was concluded by a person due to circumstances which made it necessary to conclude it on very unfavourable terms.

The case law consistently holds that in order for a transaction to be recognised as having been concluded as a result of economic pressure or a real threat, the following conditions must be met: (1) the other person demanded that the contract be concluded; (2) the threat was made on economic grounds, the occurrence of which depended on the dishonest actions of the other person; (3) the transaction was concluded on terms manifestly disadvantageous to the person concluding the transaction; and (4) the contract would not have been concluded in the absence of economic pressure.

The application of the hardship ground in business-to-business relationships requires consideration of business risk.A transaction may be declared void on this ground only if the following conditions are met: (1) circumstances beyond the control of the other party to the transaction have arisen which have forced the person to enter into the transaction on terms that are manifestly unfavourable to him; (2) the other party to the transaction has knowledge of those circumstances and has taken advantage of them by imposing his own will on the other party to the transaction.

In such cases, it is particularly important to assess the element of inequality between the parties in the agreement, where one party receives much more than the other. The criterion for identifying inequality is defined as a shocking disproportion between the benefits obtained by the parties from the contract or its terms.It is also important that, in addition to the shocking disproportion in the benefits received by the parties, the circumstances giving rise to unfairness are identified, i.e. that the stronger party has taken unfair advantage of the weaker party because of its economic weakness or disadvantage, its imprudence, inexperience, lack of bargaining experience.

International principles of contract law state that in certain cases only an objective element is sufficient to establish a fundamental inequality, i.e. the nature and purpose of the contract may be such that it is sufficient to establish a shocking disproportion in the benefits obtained by the parties from the contract.Such an interpretation of fundamental inequality is in line with the Civil Code.While it is possible in certain cases to establish a fundamental inequality merely on the basis of a disproportion between the parties' mutual obligations and the benefits they receive, where the difference is particularly shocking, the subjective circumstances which make the stronger party's dishonesty unfair should normally also be assessed.

In one way or another, the law provides that a contract may be declared void if it is the result of difficult circumstances or economic pressure, but in each case the circumstances would be examined and assessed by a court, as contracts can in principle only be declared void if there is a clearly established ground.

Lawyer Egidijus Kieras