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Reproduced from "Study of the systems of private law in the EU with regard to discrimination and the creation of a European Civil Code", European Parliament, Directorate General for Research, Working Paper, Legal Affairs Series, JURI 103 EN (June 1999), Chapter I, 3-16

Salient features of European contract law

Ole Lando, Copenhagen

I. Introduction
II. The binding effect of a party's promise
III. The claim to performance
IV. Legal remedies in the event of non-performance
V. Release from liability in the event of a significant change of circumstances
VI. The principle of good faith
VII. Unfair contractual conditions

I. Introduction

1. On the way to a uniform European system of contract law

Although their systems of contract law are still highly disparate, the States of the European Union have yet to create a uniform system of general contract law. Efforts have been made in that direction. These are reflected in the Principles of European Contract Law (hereinafter referred to as the PECL), the basic rules of European contract law that were formulated by the Commission on European Contract Law.[1] In their present version, these rules relate to the conclusion of contracts, the authority of agents, substantive validity, interpretation, content, breach of contract and the rights of parties affected by a breach of contract. The work that is still being undertaken relates to rules governing majorities of creditors and debtors, the assignment of claims, the assumption of debts, set-offs, the right to charge compound interest and the statute of limitations.

2. The rules governing the conclusion of contracts, breach of contract and legal remedies for breach of contract are, to a considerable extent, consistent with the United Nations Convention on Contracts for the International Sale of Goods (CISG). In these and other domains, after conducting a comparative review of the autonomous European legal systems, the Commission based its principles on the national rules which, in its opinion, merited precedence. One example is the authority of agents, the rules governing which were inspired by the concept of Vollmacht in German law. Innovative provisions also exist here and there. The following paper relates the main decisions underlying the Principles of European Contract Law to the leading autonomous legal systems of the Member States. [page 3]

II. The binding effect of a party's promise

3. Pacta sunt servanda

A party to a contract must be able to rely on the other party keeping his part of the bargain. The binding character of contracts is therefore a basic principle in all countries. All the legal systems in the European Union vigorously uphold this principle. The obligation to comply with the terms and conditions of contracts is implied in Article 1:102 of the PECL, which proclaims freedom of contract, and in other articles, such as Article 6:111 on changes in circumstances, which provides that a party is bound to fulfil his obligations even if performance becomes more onerous (see below).

4. The desire to become legally bound

The legal systems seem to concur in the view that an agreement only becomes a binding contract if the parties have intended to become legally bound. Even when it has been accepted, a dinner invitation is morally but not legally binding. Further, the parties must have agreed on terms which are sufficiently definite. This also seems to be a common core of all European systems of contract law and is prescribed in Article 2:101 of the PECL.

5. Good faith

However, under common law as well as German, Dutch and Nordic law, it is not what a party intends in his inmost mind that binds him. People are bound by what they say, not by what they think. For this reason, Article 2:102 of the PECL provides that the intention of a party to be legally bound by contract is to be determined from the party's statements or conduct as they were reasonably understood by the other party. The decisive point is the reasonable expectation of the recipient of a declaration of intent.

6. This principle of good faith is also behind the rules on the authority of agents. In accordance with German and Nordic law, Article 3:201 of the PECL provides that the principal's authorisation of an agent to act in his name may be express or may be implied from the circumstances. A person is to be treated as having granted authority to an apparent agent if the person's statements or conduct induce a third party reasonably and in good faith to believe that the apparent agent has been granted a power of attorney.

7. Form and cause

Several of the systems based on Roman law require writing as a condition for the validity of contracts and stipulate that the contract must have a cause. However, in German and Nordic law, neither a specific form nor a cause are recognised as prerequisites of a valid contract. The Commission on European Contract Law has associated itself with the more liberal position adopted by the latter systems.

8. Consideration

The same holds true of the consideration. In English and Irish law, a promise by one party which is not supported by a consideration, i.e. a quid pro quo, is generally not binding. A promise, even if seriously meant and accepted by the promisee, will not be binding unless the promisee gives or does something ('unilateral' contract), or [page 4] promises to give or do something ('bilateral' contract), in exchange for the promise. Failure to honour a gratuitous promise is consequently non-actionable.

9. The Commission on European Contract Law took the view that in the business world there are promises, such as promises to pay for work or services already done, which should be enforced even in the absence of a consideration.The same applies to promises to make a gift or donation. A wealthy industrialist who announces in public that he will pay a million euros into a fund for the benefit of the wives and children of soldiers killed when serving in the peacekeeping forces in the former Yugoslavia should be held to his promise. For these reasons the Commission decided to follow the continental rule which does not require a consideration. Article 2:101 of the PECL states explicitly that the contract is considered to have been concluded "if the parties intended to be legally bound and have reached a sufficient agreement, without any further requirement". This means that the validity of a contract does not depend on its form or on a cause or consideration.

10. Can an offer be revoked before it has been accepted?

In German law an offer is binding when it reaches its recipient and in Nordic law when it comes to his knowledge. Unless the offer itself indicates that it is revocable it cannot then be revoked. However, most laws of the Union will allow a party to revoke his offer before it has been accepted. This is also the rule in Article 16 of the CISG, and the Commission on European Contract Law decided to follow suit; see Article 2:202 of the PECL.

But there are exceptions. Offers which indicate that they are irrevocable and offers which state a fixed time for their acceptance will lead their recipient to expect that they will not be revoked. This expectation is to be protected. And if in other cases it is reasonable for the recipient to rely on the offer being irrevocable, and if the recipient has acted on the basis of his reliance on the offer, it should not be revocable either. If, for instance, a subcontractor submits an offer to the contractor which the latter then uses in his bid for a construction contract, the subcontractor should not be permitted to revoke his offer.

11. Derogations from the UN law on sales contracts

Article 2:202 of the PECL follows Article 16 of the CISG, but with one important exception. Article 16(2)(a) of the CISG provides that an offer cannot be revoked if it indicates, whether by stating a fixed time for its acceptance or otherwise, that it is irrevocable. An reader of this provision might conclude that the fixing of a time limit for the acceptance of an offer would always make it irrevocable, but that is not certain. On this issue there was disagreement among the delegates who drafted Article 16 of the CISG in Vienna. The delegates from the common-law countries did not agree that the fixing of a time for acceptance should make the offer automatically irrevocable. The delegates of the civil-law countries thought it should. The outcome of the debate, although not very clear, seems to have been that the revocability or irrevocability of the offer depends upon the way in which its recipient would reasonably be expected to understand the intention of the party making the offer. This rule could give rise to legal uncertainty, and it has not been adopted by the Commission on European Contract Law. Article 2:102(3) of the PECL simply provides that the revocation of an offer is ineffective [page 5] if a fixed time was stipulated for its acceptance.

III. The claim to performance

12. The issue

Most contracts contain a promise of performance. One party undertakes to provide goods, rights or services, and the other side undertakes to pay a sum of money in return. If one party reneges on his promise, however, the problem arises as to whether that party can be sued for specific performance or only for damages arising from non-performance.

13. The basic rule governing monetary payments

The continental legal systems allow a creditor to require performance of a contractual obligation to pay money. In common law too, an action to enforce payment of an agreed sum of money is often possible, although this remedy is limited in certain respects, and such an action may be brought only when the price has been "earned" by performance; see the British and Irish Sale of Goods Acts, section 49(1). Nevertheless, in both types of legal system the creditor can tender his performance to the other party and can subsequently claim payment of the price. This is also the main rule in the PECL (see Article 9:101(1)).

14. Exceptions

But should it always apply, even though a buyer of goods or services does not want them and is unwilling to receive and pay for them?. Experience gained from common law and Scottish cases seems to indicate that there should be exceptions from the main rule. In cases other than sale of goods the rule in common law and in Scots law now appears to be that if a party repudiates a contract, and if at the date of the repudiation the other party has no legitimate interest in performing, he is confined to an action for damages, and his recovery will be subject to his obligation to mitigate his loss. The onus is on the repudiating party to show that the other party has no legitimate interest in performing.

15. Most continental systems do not recognise restrictions upon a claim for payment of the price. The forerunner of the CISG, the Uniform Law on Contracts for the International Sale of Goods (ULIS) of 1964 provides in Article 61(2) that a seller shall not be entitled to require payment of the price by the buyer if it is in conformity with usage and reasonably possible for the seller to resell the goods. In that case the seller may only claim damages. The CISG however, has not imposed this restriction on the seller's right to perform and claim the price.

It has been reintroduced in the PECL. The underlying consideration is that a debtor should not have to pay for a performance which he does not want in cases where the creditor can easily make a cover transaction or in other cases where it would be unreasonable to oblige the debtor to pay the price. [page 6]

16. Non-monetary obligations

In common law, specific performance of a non-monetary obligation is a discretionary remedy based on equity. However, the discretion exercised by the courts is not an arbitrary discretion but one which is governed by rules. One is that specific performance will only be granted where damages are inadequate. The sale of land is a prime example. In the civil-law countries the aggrieved party's right to specific performance is generally recognised. In German law this right is regarded as axiomatic.

17. However, civil law makes exceptions too. On the Continent specific performance is not available when performance has become impossible or unlawful. In several civil- and common-law countries, specific performance will also be refused if it would be unreasonable to grant it, if, for instance, the cost of raising a ship which has sunk after it was sold would considerably exceed the value of the ship. Nor is performance available for contracts which consist in the provision of services or work of a personal character, and in several countries a performance which depends upon a personal relationship such as an agreement to establish or continue a partnership; in such a case, the defaulting partner cannot be legally compelled to play an active role in the partnership. These exceptions show that the difference between civil and common law is ultimately far smaller than might appear at first sight. Furthermore, even in the civil-law countries an aggrieved party will generally pursue an action for specific performance only if he has a particular interest in performance which damages would not satisfy.

18. The CISG formula

In spite of the many points of resemblance in results, the civil and the common lawyers did not agree on common rules when the CISG was drafted. Article 46 states that "The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement". Article 28, on theother hand, stipulates that, "If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by the Convention". In other words, the lawyers agreed to differ. Thus Article 46 of the CISG reflects the position of the civil-law countries of continental Europe, while Article 28 reflects the common-law position.

19. The PECL formula

This partition was unnecessary. The civil-law countries could have allowed the possibility of restricting specific performance to the situations for which this remedy is needed in pratice. The common-law countries could have conceded that in these situations specific performance as a genuine right, rather than a discretionary remedy (see above), is the appropriate solution. This compromise forms the basis of the formula adopted in Article 9:102(1) and (2) of the PECL.

Article 9:102(2) provides that:

"Specific performance cannot, however, be obtained where
(a) performance would be unlawful or impossible, or [page 7]
(b) performance would cause the obligor unreasonable effort or expense, or
(c) the performance consists in the provision of services or work of a personal character or depends on a personal relationship, or the aggrieved party may reasonably obtain performance from another source".

The commentary on these provisions states that that the exception defined in item (c) is explained by the consideration that an order to perform personal services or work would severely restrict a party's personal freedom. Further, such performance rendered under duress would often be unsatisfactory and, finally, it would be difficult for a court to supervise the proper enforcement of the order. The exception defined in item (d) is explained by very similar considerations. The rules governing the means and procedure for enforcing a judgment for performance are left to the national legal system. These rules differ between the civil-law and the common law-countries, and this may render the common-law phrase "specific performance", as used in Article 9:102, somewhat dubious. Nevertheless, it is used for want of a better and generally comprehensible term. [page 8]

IV. Legal remedies in the event of non-performance

20. Non-performance

The PECL rules governing breach of contract are close to those enshrined in the CISG, common law and the Nordic legal systems but in their systematic intervention they differ in some respects from the German system. In the PECL, breach of contract is called non-performance. Under the PECL system, non-performance occurs when a party fails to perform any one of its obligations under the contract. The non-performance may consist in a defective performance or in a failure to perform at the due time, whether the debtor fulfils his obligation too early, too late or not at all. It includes a violation of an accessory duty such as the duty not to disclose the other party's trade secrets. Where a party has a duty to receive or accept the other party's performance a failure to do so will also constitute non-performance.

21. Remedies

The remedies available for non-performance essentially depend upon whether the non-performance is not excused, is excused or results from the other party's behaviour (see PECL, Article 8:101[2]). A non-performance which is not excused may give the aggrieved party the right to claim performance,[3] to claim damages, to withhold his own performance, to reduce his own performance or to terminate the contract. A non-performance which is excused does not give the aggrieved party the right to claim damages or performance. However, the other remedies mentioned above may be available to him. Non-performance is excused if the defaulting party proves that it is due to an impediment which is beyond his control and that he could not reasonably have been expected to take the impediment into account when concluding the contract or to have avoided or overcome the impediment or its consequences (see Article 8:108 of the PECL). If the non-performance is caused by the obligee's act - or omission - he may not resort to any of the remedies. He has no remedies against the obligor if he is unable to receive the performance, even when this is due to an impediment beyond his control. His failure to receive performance may in itself be a non-performance which may give the other party remedies such as the right to terminate the contract.

22. Termination for fundamental non-performance

Like the CISG and several of the Member States' systems of contract law, the PECL requires fundamental non-performance as a condition for termination of the contract by an aggrieved party (see Articles 8:103 and 9.301). Article 8:103 of the PECL defines [page 9] fundamental non-performance.[4] Article 9:301(1) provides that a party may terminate the contract if the other party's non-performance is fundamental. Article 8:103(a) gives effect to an agreement between the parties that strict adherence to the terms of the contract is essential and that any deviation from the obligation goes to the root of the contract so as to entitle the other party to be discharged from his obligations under the contract. Thus, if in a commercial leasing transaction it is stipulated that the object leased has to be made available on a certain date, when the lessee will come and pick it up, delivery on that day is of the essence of the contract, and any delay will constitute a fundamental non-performance. However, the principle of good faith enshrined in Article 1:201 may come into operation. If the non-performance is so slight that it would be unreasonable for the aggrieved party to terminate the contract, he shall not be entitled to do so.

23. Article 8:103(b) lays emphasis on the gravity of the consequences of the non-performance for the aggrieved party. It is the importance of the detriment which he suffers that matters. The model Article 25 of the CISG, which defines fundamental breach as a breach which "results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract". Art 8:103(c) applies to an intentional non-performance which gives the aggrieved party reason to believe that he cannot rely on the other party's future performance.

24. Other grounds for termination of a contract

A party's fundamental non-performance is not the only reason for termination. Article 9:301(2) provides that, in the event of a delayed performance by the other party, the aggrieved party may terminate the contract after having given notice fixing an additional period of time of reasonable length and if, at the end of that period, the other party has not performed his obligations (see Article 8:106(3)). In his notice the aggrieved party may provide that, if the other party does not perform within the period fixed by the notice, the contract shall terminate automatically. The model for this procedure is the CISG (Articles 49(1)(b) and 64(1)(b); see also Articles 47 and 63). The CISG procedure, for its part, has its origin in the Nachfrist (grace period) principle in German law.

V. Release from liability in the event of a significant change of circumstances.

25. Vis major

In most European countries a party is bound to perform his obligations under the contract even though it has become more onerous for him to do so. An exception to this rule, the pacta sunt servanda, is made in the case of vis major (i.e. force majeure), which is the term used here to denote supervening events thatmake performance impossible or quasi-impossible. [page 10] In a case of vis major the obligor will be excused for his non-performance. Although the rules are not exactly the same in all the legal systems, most of them display the following main features:

The obligor is relieved from his obligations only if performance has become impossible in law or in fact. Most legal systems also accept quasi-impossibility, where performance, though possible in fact, has become an economically unreasonable requirement. Furthermore, the legal systems require that the obligor could not reasonably be expected to take the impossibility into account at the time of the conclusion of the contract and that the impossibility of performance was due to factors beyond the control or influence of the obligor.

In most legal systems vis major ends the contract. There is no room for modification of its terms and no scope for the parties to renegotiate the contract with a view to such modification. The vis major rule, however, is not mandatory. It is negotiable and in practice is often waived in standard contract terms. Article 79 of the CISG and Article 8:108 define the legal position that has been outlined here.

26. Hardship

In contracts for the performance of a continuing or recurring obligation, such as cooperation agreements, long-term construction contracts and contracts for a continuous supply of goods or services, unforeseen contingencies may make performance excessively onerous for one party, especially in times of depression or unrest. These contracts need a hardship clause which goes beyond the vis major rule. Many contracts do actually contain such a clause, but often the parties forget to provide them, or they do not find them necessary. It has been argued that a party who is then exposed to hardship must bear the consequences. However, the hardship which a party may suffer in these case is often too hard a penalty for his forgetfulness or improvidence. Many national legal systems already take this factor into account, either by means of explicit rules or by invoking the principle of good faith, as in Germany, and the rules developed from that principle concerning frustration of contract (clausula rebus sic stantibus). Such rules are unknown in common law and, as far as civil contracts are concerned, in French law too. Nor has the CISG any separate provision on hardship (see Article 79).

27. Article 6:111 of the PECL

The Commission on European Contract Law considered a hardship rule to be necessary and inserted it in Article 6:111 of the PECL.[5] As in the case of the vis major rule, the [page 11] hardship rule is not mandatory. The two rules differ in a number of respects. A party may seek relief if performance has become excessively onerous; it is not required that it has become impossible. Thus, there was hardship when a company which in 1929 had undertaken to deliver water at a fixed price to a hospital in 'times ever after,' had to continue to deliver the water after 1978, when the agreed price had become derisory as a result of inflation. There was also hardship when a gas company which in 1908 had promised to deliver gas for a period of 30 years at a fixed tariff, had to continue delivery at that price when, during the First World War, a severe shortage of the coal that was used to produce gas quadrupled its price. The PECL, however, do not provide for automatic termination of the contract in all cases. The contract may be adapted to the new conditions by negotiation between the parties (the preferable option) or, if necessary, by the competent court. Details are contained in paragraphs 2 and 3 of Article 6:111 of the PECL.

VI. The principle of good faith

28. German law

There are considerable differences in European attitudes towards good faith as a legal principle. This is most graphically illustrated if one compares German law with the common law of England. Section 242 of the German Civil Code provides that the obligor must perform his duty in accordance with the requirements of good faith and fair dealing. This provision is the kingpin, as it were, of the German law of contract Civil Code. It has been used in all areas of German law as an overriding moral imperative and has influenced the interpretation of other statutory provisions as well as tempering the rigorous individualism of the original contract law of the Civil Code. It has been used as a device for adapting the law to changes in social and moral standards.

29. The principle has operated in many fields of the law; it governs the interpretation of contracts and gives relief to a party in case of changed circumstances. On the basis of section 242, the German courts have set aside unfair contract terms, and the provision has given rise to a number of contractual obligations to observe the principles of fair play, such as a duty to cooperate, to look after the other party's interests, to provide information and to submit accounts. Other examples are forfeiture and abuse of rights, which may take many forms. Some such forms are expressed in the formula Dolo facit qui petit quod statim redditurus est, the rule which lays down that a party may not rely on a form of behaviour which is inconsistent with his own earlier conduct or impose penalties that are disproportionate to the extent of the breach by the other party. The principle of good faith is also enshrined in the other European legal codes but, apart from the Netherlands, no country has assigned to it the status it is accorded in Germany. [page 12]

30. Common Law

Common law, by contrast, does not recognise any general obligation to act in accordance with good faith and fair dealing. English courts have held an obligor to a contractual undertaking even though the obligee had no good reason to insist on performance. Furthermore, English law does not, in general, recognise unreasonableness and unfairness as grounds for the invalidity of contract terms. This rather rigorous approach adopted by English law towards observance of contractual obligations has been explained by reference to the need for predictability. It is necessary in a commercial setting that businessmen should know where they stand. Vague concepts of fairness that are liable to make judicial decisions unpredictable are to be avoided. However, we must not overlook the fact that common law often applies specific rules, which are becoming more and more numerous, to obtain the same results that other legal systems achieve with the aid of the general good-faith clause.

31. The PECL

The PECL also operate with a general good-faith clause. Article 1:201 of the PECL expressly states that each party "must act in accordance with good faith and fair dealing". Practical applications of this rule appear in several provisions of the PECL. The concept, however, is broader than any of these specific applications. The purpose of the good-faith clause is to enforce Community-wide standards of decency, fairness and reasonableness in commercial transactions. It ultimately takes precedence over specific Principles. So even though Article 8:103(a) of the PECL states that strict compliance with obligations is of the essence of a contract, a party would not be permitted to terminate because of a trivial breach of obligation.[6] "Good faith" means an honest and fair attitude of mind. It is contrary to good faith to pursue a remedy for no reason but to harm the other party. It is an objective test, designed to ensure that each party shows due regard for the other's interests. Good faith is to be presumed. Where bad faith is alleged, the onus of proof is on the accusing party. The purpose of the principle of good faith is to strike a balance between law and equity. A law or contractual condition which is normally valid may sometimes lead to an inequitable result. There is no general rule as to whether law or equity should take precedence. It all depends on the circumstances of the individual case. Thus, strict compliance with the terms of a contract may be of the essence when the obligor knows that those of the obligee's employees who are entrusted with the control of the obligor's performance are able to see whether there is strict compliance or not but unable to judge the gravity of any deviation, however slight, from the terms of the contract. In such a case, the law takes precedence over equity. [page 13]

VII. Unfair contractual conditions

32. General remarks

Standard contracts are the result of modern mass contracting. Standard contracts make individual contract negotiations superfluous, thereby reducing transaction costs. They frequently serve as a more convenient vehicle than the terms for which the law implicitly provides. But standard terms tend to be one-sided; one party (the stipulator), who is often the seller of goods or services, will impose his terms upon the other party (the adhering party) and let the latter carry as many of the risks involved in the transaction as possible. Such contracts may provide, for example, that the stipulator is not bound by promises and statements which he or his agents have made during the contract negotiations unless they have been put down in writing and signed by the stipulator. They may enable the stipulator to raise the price of his performance between the conclusion of the contract and the delivery of the goods or services in question or provide that the adhering party remains bound by the contract, while the stipulator may postpone his performance as he sees fit; they may also contain clauses exempting the stipulator for liability for breach or imposing severe penalties on the adhering party in the event of his non-performance.

33. Consumer protection

The consumer epitomises the weaker party. Many contemporary legal systems afford the weaker party special protection against unfair conditions in standard contracts. German law has played a leading role in the development of protective mechanisms. In the fifties, the German courts, invoking section 242 of the German Civil Code, began to deliver judgments invalidating unfair clauses in consumer contracts and in contracts relating to other business transactions. The General Conditions of Business Act 1976 (Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen) consolidated the case law that had developed in this domain. Section 9 of the Act introduced a general clause, laying down that clauses in standard contracts are null and void if they infringe the principle of good faith. Sections 10 and 11 of the Act then list clauses which are automatically null and void (the 'black list' in section 11) and those which courts may review (the 'grey list' in section 10). These catalogues of clauses are only applicable to consumer contracts; section 9, on the other hand, applies to all business transactions. The grey and black lists in sections 10 and 11 do, however, influence judicial interpretations of section 9 in cases concerning general business transactions. The Gesetz über Allgemeine Geschäftsbedingungen has been a source of inspiration for many other European legal systems.

34. European Community Law

The same applies to the 1993 EEC Directive on unfair terms in consumer contracts.[7] The Directive, however, protects only consumers. A consumer is defined in Article 2 as any natural person who, in contracts covered by the Directive, is acting for purposes which are outside his trade, business or profession. Consumers in this sense are individuals who buy goods or services for their personal or household needs. Contracts between private [page 14] individuals and contracts between business enterprises and charities and other non-business organisations fall outside the scope of the Directive. Nor are contracts concluded by large and powerful enterprises with small and medium-sized traders, artisans, farmers and fishermen covered by the Directive, although their bargaining experience and skill and their position vis-à-vis the enterprise are not very different from those of the consumer. So no action has been taken yet in this domain to harmonise the European legal systems, which differ widely in their treatment of such 'weak-party contracts'.

35. The PECL

In the chapter on the validity of contracts and contract clauses of the PECL, Article 4:110 sets out rules on unfair contract terms.[8] These rules follow the Directive in several respects. Article 4:110(1) provides that a party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be made under the contract, all other terms of the contract and the circumstances at the time the contract was concluded. These rules are supplemented by a commentary, which sets out an indicative and non-exhaustive list of terms which may be regarded as unfair and which is reproduced in an Annex to the Directive. Unlike the Directive, however, the PECL are not limited to contracts between the enterprise and the consumer. Article 4:110 applies to all weaker parties to a contract, such as owners of small businesses, farmers, fishermen, artisans, etc. Moreover, the protection afforded by the PECL is not even confined to the archetypal weak party and may also be invoked by a large and powerful enterprise. Experience shows that such enterprises may also inadvertently subject themselves to unfair terms. Article 4:110 is, of course, mandatory; a party cannot waive its application when negotiating a contract. However, the party who is disadvantaged must take the initiative to have the clause set aside or modified.

Like Article 4(2) of the Directive, Article 4:110 of the PECL does not permit a court or an arbitrator to assess whether the main performance or the price specified in the contract [page 15] is unfair. However, the rules in chapter 4 on "procedural" unfairness may be applied to protect a disadvantaged party, notably the rules on mistake, misrepresentation, fraud, duress and excessive or grossly unfair advantage. These rules are mostly in accordance with the rules of the national legal systems of the Union. As the case law of the Member States shows, the courts tend to assume such "procedural" unfairness in cases where inequality of bargaining power between the contracting parties has resulted in gross disparity between performance and consideration. [page 16]


FOOTNOTES

1. Lando and Beale (ed.), Principles of European Contract Law, Part I: Performance, Non-performance and Remedies (1995). A German translation can be found in Drobnig and Zimmermann, 'Die Grundregeln des Europäischen Vertragsrechts, Teil I, der Kommission für Europäisches Vertragsrecht', in the Zeitschrift für europäisches Privatrecht (ZEuP), 1995, pp. 864-875. The first part of the Principles has also been published in French, edited by de Lamberterie and Tallon, as Les principes du droit européen du contrat (1997). The second Commission's findings are set out in Lando and Beale (ed.), Principles of European Contract Law, Parts I and II, The Hague, 1999. The article numbers referred to in the present text are based on that version. The third Commission is expected to complete its work in the year 2001.

2. The text reads as follows: "(1) Whenever a party does not perform an obligation under the contract and the non-performance is not excused under Art. 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9. (2) Where a party's non-performance is excused under Art. 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9 except claiming performance and damages. (3) 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."

3. See points 11 to 18 above.

4. The text reads as follows: "A non-performance of an obligation is fundamental to the contract if: (a) strict compliance with the obligation is of the essence of the contract; or (b) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; or (c) the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party's future performance."

5. The text reads as follows: "(1) A party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished. (2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or terminating it, provided that (a) the change of circumstances occurred after the time of conclusion of the contract, (b) the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract, and (c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear. (3) If the parties fail to reach agreement within a reasonable period, the court may: (a) terminate the contract at a date and on terms determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances. In either case the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing."

6. See footnote 4 above.

7. Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (OJ L 95 of 21 April 1993, p. 29).

8. The text reads as follows: "(1) A party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be rendered under the contract, all the other terms of the contract and the circumstances at the time the contract was concluded. (2) This article does not apply to: (a) a term which defines the main subject matter of the contract, provided the term is in plain and intelligible language; or to (b) the adequacy in value of one party's obligations compared to the value of the obligations of the other party."


Pace Law School Institute of International Commercial Law - Last updated November 19, 2002
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