Economic Crisis as a Supervening Event: Legal and Economic Perspectives on Impossibility Doctrine

Abstract

The article attempts to examine the application of the impossibility doctrine toward economic crisis from the legal and economic point of view using the Asian economic crisis case. From a legal perspective,
the economic crisis occurs after the conclusion of the contract, unforeseeable at the time of the conclusion of the contract, beyond the control of the promisor, and the risk of the event was not assumed by the promisor may constitute impossibility. From the economic analysis, it is evident that the foreign lenders should bear the risk as they have relatively better ability in predicting the event’s occurrence, are in a better position to diversify risks by pooling a self-insurance, engage in risky investment (mismatch maturity investment) while international environment makes borrowers less likely to hedge their loans. It also found that foreign banks do not expose to the Indonesia economic crisis, are better position to pooling a risk, have multiple cushions from being deprived out of the market. While another justification to apply the impossibility doctrine, in this case, is to avoid bankruptcy cost. It is suggested to use tools of analysis in applying impossibility doctrine: (i) the promisor (borrower) asking to discharged could not reasonably have
prevented the event rendering his performance uneconomical, (ii) the promisee (lender) is in a better position to predict the probability of the occurrence of the event occurrence and the magnitude of the loss
if it occurred, (iii) the promisee (lender) is in a better position to pooling risk, (iv) the promisor (borrower) does not have its wealth more positively correlated with the event (i.e. depreciation), and (v) he promisor (borrower) does not make a profit out of the market movement as a whole.