Any legal way out of sovereign agreement that has begotten a national crisis?

Question

A government agrees with a group of US investment funds to severely retard new (i.e. green field) housing construction for a period of X years as part of a deal whereby the investment funds buy surplus new housing left idle or unfinished after the 2008 property & construction crash. The government's idea is to use the funds' money to recapitalize banks in their state whose capacity to lend has been decimated by negative equity on their existing mortgages after the 2008 property crash. The government is hoping that once banks have funds to lend, the many unsold "for sale" homes will begin to be bought and the reduction in surplus housing stock will cause an increase in house prices in general. This will in turn lead to a gradual removal of negative equity in the mortgages in the state, more liquidity in banks' funds and an upturn in the economy in general as consumer confidence returns.

The government's plan initially works. "For Sale" signs come down from houses successfully sold. House prices start to rise as demand (more precisely, home buyers ease of getting a mortgage) rises to meet available supply of existing homes for sale. The wider economy benefits too with more new enterprises starting and an increase in expansions of existing enterprises. In fact, house prices start to rise sharply as the wider economy rebounds far quicker than the government expected. To make matters worse, the government agrees to accept a very generous quota of war refugees from Syria, Afghanistan and Ukraine. The state now has an acute scarcity of housing of all kinds for a ballooning population - yet it is "locked in" to its original agreement with the US investment funds to have minimal greenfield housing site development.

My question is can this government reasonably argue that its original sovereign agreement to build minimal new greenfield housing for X years was based on conditions prevailing at the time of that deal and that the dramatically differing new demand for new housing makes it legitimate to discontinue that deal so the state may satisfy the vivid need of its citizens for housing?

Answer 1

You can't get out of a contract just because "things are different"

Contracts are meant to be legally enforcable promises. If you don't have an "except for X" clause in your contract then you can't just end it because X happened.

It doesn't matter if you are the US government or not.

There is a doctrine of frustration in common law that ends a contract if it becomes impossible for it to be fulfilled, but impossible means impossible, not just more difficult, more expensive, or politically inconvenient. For example, if a contract requires you to export widgets to Nambambia and your country goes to war with Nambambia, the contract is frustrated.

Anyone is allowed to repudiate a contract

So, the government (or anyone else) can stop fulfilling their obligations under a contract. This gives the counterparty the option to terminate the contract (i.e., to no longer fulfil their obligations) or to affirm the contract (i.e., to insist that the contract is legally still in force). Either way, if the breach causes damage, then the counterparty can sue to recover their losses.

If they terminate the contract, then that's the end of it. If they affirm the contract, they can ask a court to order specific performance (i.e. to order the party in breach to start doing what the contract requires - failing to do so is now contempt of court). Now, orders for specific performance are rare and are usually only available where damages would not be an adequate remedy - it's not likely to be available for the situation you describe, so the court would more likely terminate the contract and award damages.

The fact that the breaching party is the US government is irrelevant - the US has waived sovereign immunity for contracts, so they are just like any other defendant.

In addition to the legal consequences described above, there will also be political and reputational fallout.

A country could change its laws to avoid paying compensation

After all, sovereign countries are … sovereign.

In theory, that would allow a country to break agreements with impunity. Except … people remember which the honest countries are and which aren’t.

A country with a reputation for reneging on its deals will find that anyone dealing with it in the future is going to charge a hefty sovereign risk premium for doing so; if they can find anyone willing to deal with them at all.

Answer 2

As the name suggests, sovereign states are sovereign. Legally, they can change their domestic laws. If doing that violates a commercial agreement they signed, then that may severely impact their credit rating in international markets. The state would have to decide if they want to accept the consequences of their actions or not.

Many countries have signed investment protection agreements, which make it even more painful for them to break individual commercial agreements.

But the commercial agreement may also include arbitration clauses. That depends on the specific case.