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Limitation of Remedies Due to Failure of Performance Caused by Other Party: Comparison Between Provisions of the CISG and Counterpart Provisions of the Principles of European Contract Law

Allison E. Butler [*]
August 2004

  1. General interpretation and application in CISG and PECL: Limitation of Remedies Available
  2. "Acts" Constituting Failure of Performance
  3. Failure of Performance Wholly or Partially Attributable to the Creditor or Aggrieved Party
  4. Imputed Knowledge and Intention, Negligence and Bad Faith
  5. Conclusion

1. General interpretation and application in the CISG and the PECL: Limitation of Remedies Available

The content and function of Article 8:101(3) PECL [1] is similar in substance and form to its counterpart provision contained in article 80 CISG.[2] Both provisions exemplify the prohibition to contradict one's own behavior - "venire contra factum proprium" - thereby incorporating an expression of general principles of good faith and fairness.[3] Both articles however prevent entitlement to remedies if the reason for the non-performance was the result of the act(s) or omission(s) of the party seeking relief. However, Article 8:101(3) PECL provides valuable insight as to term definitions and applications therein via cross-reference to other PECL articles [4] thereby providing a supplemental source for interpreting Article 80 CISG.

2. "Acts" Constituting Failure of Performance

Under Article 8:101(3) PECL, a cross-reference to Article 1:301 PECL provides that the definition of "act" includes omission. Such acts would include failure to provide information to the other party or giving wrong or incomplete information. This understanding of the term is commonly held true in all European legal systems; [5] however, in Germany, the statutory provision which has been drafted for acts is not automatically applicable to omissions.[6] In contrast, the CISG explicitly provides for acts and omissions. Hence, both provisions provide that a party seeking relief cannot seek relief if the failure to perform was due the first party's act or omission.[7]

3. Failure of Performance Wholly or Partially Attributable to the Creditor or Aggrieved Party

There are two applicable articles in the PECL that address the issue of non-performance - Articles 1:301 and 9:504 PECL. As to the former, a creditor who directly prevents performance or the so-called mora creditoris is prevented from seeking a remedy. An illustrative example would provide that if Party A failed to perform due to its failure to give instruction within a stipulated time to Party B which prevented Party B from performing, then Party B would have a remedy against Party A. However, Party A would have no remedy against Party B. If the facts revealed that A's non-performance was due to a force majeure or unforeseen event then A is not liable for damages for its failure to instruct and B has no remedies in damages against A. In other cases, where there is also a non-performance by the debtor, the creditor may exercise the remedies for non-performance to a limited extent. However, when the loss is caused by both parties, a limitation in the whole range of remedies is warranted as to the creditor.

In most of the European systems, the rules apply where the party who has prevented performance is the non-performing party against whom the remedies may be exercised.[8] This is set forth in Article 9:504 PECL, which embodies the principle that an aggrieved party should not recover damages to the extent that its loss is caused by its own unreasonable behavior. This concept embraces three distinct situations [9] due in part to the Common Law system's legal concept of "contributory negligence" and "failure to mitigate." Most continental European legal systems do not distinguish the concepts; however, a similar result is achieved by using concepts such as causation.

Under the CISG, causation is not explicitly set forth. However, commentators' opinion has been consistent with the reasoning set forth in both PECL articles although no distinction is readily apparent.[10] The majority of the case law provides that courts have applied this concept in the event one party fails to secure financial arrangements,[11] make payment,[12] or makes payment to a third party [13] thereby precluding the remedy of avoidance or damages. At least one opinion found no causation when a seller failed to perform due to buyer's failure to pay a previous debt, finding that the terms of agreement made it irrelevant "as far as the question of the cause of the buyer's failure to perform according to Article 80 CISG is concerned."[14] Similarly, case law exists that illustrates application of degrees of negligence thereby allocating a loss between both parties.[15]

4. Imputed Knowledge and Intention, Negligence and Bad Faith

In order to neutralize the risks, imputation of actual or constructive knowledge or a legally relevant state of mind is relevant in performance of the contract pursuant to PECL Article 1:305.[16] A party that should have known or foreseen a fact is usually treated as if it had the knowledge or foresight. As such, the law of agency becomes relevant. This is due in part to the fact that performance of a contract rarely is performed by the contracting party but by its agents, employees, subcontractors and other third person.

When a contract is being made, a party is normally only fixed with the knowledge imputed to his employees or agents involved in making the contract. For the purposes of Article 1:305 PECL, knowledge or intention even of any subcontractor or other person to whom it has entrusted performance may be imputed to the party with exception.[17] Under several rules, intentional or grossly negligent behavior or bad faith by a party creates or increases his liability.[18] Even if the contracting party has not entrusted performance to a third person, a third person may nevertheless under certain conditions be entitled to perform the contract.[19] The intentional or grossly negligent behavior of a party or of a person whose state of mind is imputed to a party only refers to the act or omission which constitutes the non-performance. It is not necessary that the intention or gross negligence also extend to the consequences that may follow from the non-performance.

These issues are not clearly established in the national law of the countries of Europe.[20] In some national laws, there is the imputation of intention, negligence and bad faith.[21] According to several provisions, a non-performing party is responsible for the culpable behavior of persons whom he has charged with performing his obligations. This also appears to have been the intent of the drafters of Article 80 CISG.[22]

The CISG fails to address culpability of agents;[23] however, Article 8 of the CISG addresses the intent of the parties.[24] Undoubtedly, PECL rules may be referred to as supplementary reference to aid in the interpretation of the CISG. This is essentially true due to the necessity for interpretation of contracts made in an international and, often, multilingual settings of a contract.[25]

5. Conclusion

A comparison of the two documents illustrates that both the CISG and the PECL adopt the prohibition to obtain remedies if the damages were the result of one's own contradictual behavior. However, it is apparent that the collective application of several articles in the PECL and illustrative examples are broader in scope and therefore provide a supplemental resource for interpreting Article 80 CISG.


FOOTNOTES

* The author received her J.D. from Loyola University School of Law, New Orleans, Louisiana, USA (Common Law Program) and her B.A. in International Relations, with honors, from the University of South Florida, Tampa, Florida, USA. She is a published author and a private practitioner in Martin County, Florida, USA.

1. PECL Article 8:101(3) states: "A party may not resort to any of the remedies set out in Chapter 9 to the extent that its own act caused the other party's non-performance."

2. CISG Article 80 states: "A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission." Notably, this article was based on a proposal by the German Democratic Republic and was unanimously adopted and included in the Convention (O.R., 386 fol, 135, fol) "out of an abundance of caution." See Jacob S. Ziegel and Claude Samson, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods (July 1981), available at <http://cisgw3.law.pace.edu/cisg/wais/db/articles/english2.html>.

3. See, e.g., Germany 25 November 1998 Supreme Court, translation and link to original textavailable at <http://cisgw3.law.pace.edu/cases/981125g1.html> (acknowledging the principles of good faith apply to Article. 80 CISG), but see, Commentary by Fritz Enderlein & Dietrich Maskow, excerpt from International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Convention on the Limitation Period in the International Sale of Goods, Oceana Publications, 1992, also available at <http://cisgw3.law.pace.edu/cisg/biblio/enderlein-art80.html>, stating that "Article 42, paragraph 2; subpara. (b) provides for a concrete manifestation of the principle of Article 80. This special norm existed before Article 80 was drafted and continues in existence, although it is consumed by the latter."

4. See generally, PECL Article 1:301(1) Meaning of Terms; PECL 1:305 Imputed Knowledge and Intentions; PECL Article 9:504 Loss Attributable to Aggrieved Party.

5. See, e.g., Austria, ABGB 861 sent. 1; Greece, Simantiras No. 555.

6. See, e.g., BHG 241, but see RB 31 March 1909, RGZ 70, 234 (241).

7. Germany 1 July 2002 Appellate Court München , translation and link to original text available at <http://cisgw3.law.pace.edu/cases/020701gl.html>; Germany, 9 July 1992, District Court Düsseldorf, available at <http://cisg3.law.pace.edu/cases/920709g1.html>; Ukraine 21 June 2002 Tribunal of International Commercial Arbitration, Ukrainian Chamber of Commerce & Trade, translation available at <http://cisgw3.law.pace.edu/cases/020621u5.html>.

8. Note, however, that in Belgian, Dutch, German, Greek and Nordic law it is not generally considered to a tekortkoming, Vertragsverletzung, or Kontraktsbrott to prevent performance by the other party. It will depend upon whether the acceptance of the performance is a main obligation (Hauptpflicht) of the creditor.

9. It embraces three distinct situations. The first is where the aggrieved party's conduct was a partial cause of the non-performance; the second, where the aggrieved party, though not in any way responsible for the non-performance itself, exacerbated its loss-producing effects by its behavior. A third situation, where the loss resulting from the non-performance could have been reduced or extinguished by appropriate steps in mitigation, is covered by PECL Article 9:505.

10. See Ziegel, supra at Note 2.

11. See Austria 6 February 1996 Supreme Court [10 Ob 518/95], 6 Vindobona Journal of International Law and Arbitration 153-168 (2002), also available at <http://cisgw3.law.pace.edu/cases/960206a3.html>.

12. See Germany 1 July 2002 Appellate Court München, translation and link to original text available at <http://cisgw3.law.pace.edu/cases/020701gl.html>.

13. See Germany 9 July 1992 District Court Düsseldorf, available at <http://cisg3.law.pace.edu/cases/920709g1.html>.

14. Germany 21 March 1996 Hamburg Arbitration proceeding, translation and link to original text available at <http://cisgw3.law.pace.edu/cases/960321g1.html>; see also, Germany 23 June 1995 Lower Court München, translation and link to original text available at <http://cisgw3.law.pace.edu/cases/950623g1.html>.

15. Russian Federation arbitration proceeding 55/1998 of 10 June 1999, translation available at <http://cisgw3.law.pace.edu/cases/990610r1.html> (arbitrators acknowledge degree of negligence on the part of the seller); see also, Israel 22 August 1993 Supreme Court (Eximin v. Textile and Footwear), available at <http://cisgw3.law.pace.edu/cases/930822i5.html> (ruling under the Hague Sales Convention (ULIS) which refers to the CISG as well "by way of analogy").

16. Several provisions use the criteria of knowledge, awareness, foreseeability, contemplation (see PECL Articles 1:301(5), 2:104, 3:102(2) 3:204(2), 3:205(1) and (3), 3:208, 3:209(1), 3:301(1), 4:103(1), 4:109(1), 4:111(2), 4:113(1), 4:114, 4:117(1), 6:101(2) and (3), 6:110(3), 6:111(2), 7:101(2), 8:103 subparagraph (b), 8:108(3), 9:102(3), 9:303(2) and (3), 9:503).

17. The employee or other person must have been someone who was, or who appeared to be, involved in the negotiation or performance of the contract. If a person not so related to the contract knows a relevant fact he may not be able to appreciate its relevance to the contract and thus might not report it. The burden of proving that the person for whom the contracting party is held responsible was not and did not reasonably appear to the other party to be involved in the making or performance of the contract rests on the first party.

18. See PECL Articles 2:301(2), 4:107(2), 5:101(1) and (2), 6:102, 8:103 subparagraph (c), 9:503; cf. also PECL Article 1:201(1).

19. See PECL Article 7:106. If the third person acted with the contracting party's assent (PECL Article 7:106(1) (a)) that is equivalent to an entrustment and therefore falls under PECL Article 1:305.

20. Imputation of knowledge (Article 1:305 (a)) is dealt with in rules on agency in Belgium (De Page & Dekkers I no. 52), Germany (BGB 166), Italy (Cc art. 1391) and Portugal (CC art. 259(1)). In Germany, it is held that the rule of BGB 166 on agency express a general principle: a person who entrusts another with executing certain affairs on his own responsibility will have imputed to him knowledge which the other has acquired in that context. Although there is no explicit rule in the Austrian Code, the OGH reaches the same result by reference to ABGB 1017. Austrian ABGB 1313a; Belgium: Cass. 24 January 1974, Pas. I 553 and Cass. 21 June 1979, Pas. I 1226; Denmark: Danske Lov 1683 art. 3-19-2; Germany: BGB 278 sent. 1; Greece: CC arts. 330 and 334; Italy: Cc art. 1228; Netherlands: BW art. 6:76; Portugal: CC art. 800(1)). French law reaches the same result for exclusion clauses (Malaurie & Aynès, Obligations no. 861).

Under Spanish law, there is no corresponding general rule for contractual liability, but legal writers and case law acknowledge contractual liability for acts of persons for whom the non-performing party is responsible (Diez-Picaso I paras. 724-726; Jordano Frago 561 ff.; STS 22 June 1989 (Ar. 4776); STS 1 March 1990 (Ar. 1656)), although intention probably cannot be imputed. In ENGLISH law, the question does not arise because the fact that a breach is deliberate usually does not affect a party's liability.

21. Some of the aforementioned modern codes in Civil Law countries also deal with good and bad faith. Italy and Portugal start out from the general principle set out supra (sub 1). If, however, the principal is in bad faith, he cannot invoke the agent's ignorance or good faith (Italian CC art. 1391(2) and Portuguese CC art. 259(2)).

22. The following excerpt from the Summary Records of Committee Meetings of the Diplomatic Conference at which the CISG was promulgated indicates that the reference in CISG Article 80 to a party's act or omission is intended to include the act or omission of the party's employees.

Mr. ROGNLIEN (Norway) asked whether the expression 'by his own act or omission' covered the acts and omissions not only of the party concerned but also of persons whom the party might employee in the performance of the contract. After an exchange of views in which Mr. MASKOW (German Democratic Republic), Mr. MICHIDA (Japan), Rapporteur of the Committee, Mr. KHOO (Singapore), Chairman of the Drafting Committee, and Mr. SHAFIK (Egypt) took part, the CHAIRMAN [Mr. LOEWE (Austria)] proposed that the Committee should keep the current working of article 65 bis [became article 80 CISG] on the understanding that the expression 'by his own act or omission' was unanimously recognized as covering not only the acts or omissions of the party concerned but also those of persons who might be employed by him for the purposes of the performance of the contract. It was so decided. (Official Records, p. 430).

23. Germany 24 January 1994 Appellate Court Berlin, No. 2U7418/92, UNILEX, available at <http://www.unilex.info/case.cfm?pid=case&id=46&step=Sources> (finding that CISG does not address agency law referencing CISG Article 4 thereby applying Italian law); see also, Convention on Agency in the International Sale of Goods (Geneva 17 February 1983); Albert H. Kritzer, Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, p. 86 (1989).

24. See generally, Maja Stanivukovic, Editorial remarks on the manner in which the PECL may be used to interpret or supplement CISG Article 8, available at <http://cisgw3.law.pace.edu/cisg/text/peclcomp8.html#er>.

25. CISG Article 7(1).


Pace Law School Institute of International Commercial Law - Last updated August 4, 2004
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