Governments of developing countries occasionally enter into economic development agreements with foreign investors who provide capital and technological expertise that may not be readily available in such countries. Besides the normal economic risk that accompanies such enterprises, investors face the additional risk that the host government may attempt unilaterally to change in its favor the terms of the agreement or even to terminate the agreement altogether and appropriate the project for itself. In order to make economic development agreements more attractive to investors, some developing countries have attempted to strengthen the security of such agreements with clauses specifying that the agreements will be governed by “general principles of law recognized by civilized nations”—a set of legal principles or rules shared by the world’s major legal systems. However, advocates of governments’ freedom to modify or terminate such agreements argue that these agreements fall within a special class of contracts known as administrative contracts, a concept that originated in French law. They assert that under the theory of administrative contracts, a government retains inherent power to modify or terminate its own contract, and that this power indeed constitutes a general principle of law. However, their argument is flawed on at least two counts.
First, in French law not all government contracts are treated as administrative contracts. Some contracts are designated as administrative by specific statute, in which case the contractor is made aware of the applicable legal rules upon entering into agreement with the government. Alternatively, the contracting government agency can itself designate a contract as administrative by including certain terms not found in private civil contracts. Moreover, even in the case of administrative contracts, French law requires that in the event that the government unilaterally modifies the terms of the contract, it must compensate the contractor for any increased burden resulting from the government’s action. In effect, the government is thus prevented from modifying those contractual terms that define the financial balance of the contract.
Second, the French law of administrative contracts, although adopted by several countries, is not so universally accepted that it can be embraced as a general principle of law. In both the United States and the United Kingdom, government contracts are governed by the ordinary law of contracts, with the result that the government can reserve the power to modify or terminate a contract unilaterally only by writing such power into the contract as a specific provision. Indeed, the very fact that termination and modification clauses are commonly found in government contracts suggests that a government’s capacity to modify or terminate agreements unilaterally derives from specific contract provisions, not from inherent state power.
1. In the passage, the author is primarily concerned with doing which one of the following?
(A) pointing out flaws in an argument provided in support of a position
(B) analyzing the weaknesses inherent in the proposed solution to a problem
(C) marshaling evidence in support of a new explanation of a phenomenon
(D) analyzing the risks inherent in adopting a certain course of action
(E) advocating a new approach to a problem that has not been solved by traditional means
2. It can be inferred from the passage that the author would be most likely to agree with which one of the following assertions regarding the “general principles of law” mentioned in lines 16-17 of the passage?
(A) They fail to take into account the special needs and interests of developing countries that enter into agreements with foreign investors.
(B) They have only recently been invoked as criteria for adjudicating disputes between governments and foreign investors.
(C) They are more compatible with the laws of France and the United States than with those of the United Kingdom.
(D) They do not assert that governments have an inherent right to modify unilaterally the terms of agreements that they have entered into with foreign investors.
(E) They are not useful in adjudicating disputes between developing countries and foreign investors.
3. The author implies that which one of the following is true of economic development agreements?
(A) They provide greater economic benefits to the governments that are parties to such agreements than to foreign investors.
(B) They are interpreted differently by courts in the United Kingdom than they are by courts in the United States.
(C) They have proliferated in recent years as a result of governments’ attempts to make them more legally secure.
(D) They entail greater risk to investors when the governments that enter into such agreements reserve the right to modify unilaterally the terms of the agreements.
(E) They have become less attractive to foreign investors as an increasing number of governments that enter into such agreements consider them governed by the law of ordinary contracts.
4. According to the author, which one of the following is true of a contract that is designated by a French government agency as an administrative contract?
(A) It requires the government agency to pay for unanticipated increases in the cost of delivering the goods and services specified in the contract.
(B) It provides the contractor with certain guarantees that are not normally provided in private civil contracts.
(C) It must be ratified by the passage of a statute.
(D) It discourages foreign companies from bidding on the contract.
(E) It contains terms that distinguish it from a private civil contract.
5. It can be inferred from the passage that under the “ordinary law of contracts” (lines 53-54), a government would have the right to modify unilaterally the terms of a contract that it had entered into with a foreign investor if which one of the following were true?
(A) The government undertook a greater economic risk by entering into the contract than did the foreign investor.
(B) The cost to the foreign investor of abiding by the terms of the contract exceeded the original estimates of such costs.
(C) The modification of the contract did not result in any increased financial burden for the investor.
(D) Both the government and the investor had agreed to abide by the general principles of law recognized by civilized nations.
(E) The contract contains a specific provision allowing the government to modify the contract.
6. In the last paragraph, the author refers to government contracts in the United States and the United Kingdom primarily in order to
(A) Cite two governments that often reserve the right to modify unilaterally contracts that they enter into with foreign investors.
(B) Support the assertion that there is no general principle of law governing contracts between private individuals and governments.
(C) Cast doubt on the alleged universality of the concept of administrative contracts.
(D) Provide examples of legal systems that might benefit from the concept of administrative contracts.
(E) Provide examples of characteristics that typically distinguish government contracts from private civil contracts.
7. Which one of the following best states the author’s main conclusion in the passage?
(A) Providing that an international agreement be governed by general principles of law is not a viable method of guaranteeing the legal security of such an agreement.
(B) French law regarding contracts is significantly different from those in the United States and the United Kingdom.
(C) Contracts between governments and private investors in most nations are governed by ordinary contract law.
(D) An inherent power of a government to modify or terminate a contract cannot be considered a general principle of law.
(E) Contracts between governments and private investors can be secured only by reliance on general principles of law.
8. The author’s argument in lines 57-62 would be most weakened if which one of the following were true?
(A) The specific provisions of government contracts often contain explicit statements of what all parties to the contracts already agree are inherent state powers.
(B) Governments are more frequently put in the position of having to modify or terminate contracts than are private individuals.
(C) Modification clauses in economic development agreements have frequently been challenged in international tribunals by foreign investors who were a party to such agreements.
(D) The general principles of law provide that modification clauses cannot allow the terms of a contract to be modified in such a way that the financial balance of the contract is affected.
(E) Termination and modification agreements are often interpreted differently by national courts than they are by international tribunals.