Reproduced with permission of 15 Arizona Journal of International & Comparative Law (1998) 583-634

1. Introduction
2. General Principles of South African Contract Law Regarding Right to Terminate a Contract for Breach
   1. General Remarks
   2. Mora Debitoris
   3. Mora Creditoris
   4. Positive Malperformance
   5. Repudiation
   6. Impossibility Attributable to the Fault of one of the Parties
   7. Conclusion
3. Right to Terminate a Contract for Breach
   1. General Remarks
   2. Breach as Non-Fulfilment of a Condition
   3. Delay
   4. Positive Non-Performance
   5. Repudiation and Anticipatory Repudiation
   6. Impossibility Attributable to a Party
   7. Conclusion
4. General Principles of German Contract Law Regarding Right to Terminate a Contract for Breach
   1. General Remarks
   2. Impossibility
   3. Delay
   4. Repudiation
   5. Positive Breach of an Obligation
   6. Conclusion
5. UNIDROIT Principles Regarding Right to Terminate a Contract for Breach
   1. General Remarks
   2. "Non-Performance"
   3. "Non-Excused"
   4. "Fundamental"
   5. Delay
   6. Anticipatory Non-Performance
   7. Notice of Termination
   8. Additional Provisions
6. Conclusion

I. INTRODUCTION

The traditional approach to solving international commercial disputes has been to look to the domestic law of a country for the answers. This is by no means the ideal solution to the intricacies inherent in international commercial disputes and leads to a number of problems.

The first problem encountered stems from the use of private international law to find the domestic law applicable to the contract. Every scholar of private international law knows its problems of characterization, renvoi, gap, accumulation, and the like. It is not always possible to predict with certainty which legal system will be applicable and the determination of the applicable law is often a lengthy and costly affair.[1] This problem is, of course, easily overcome by including a choice of law clause in the contract.

Even if a choice of law clause is included in the contract, a second problem still remains. Most choice of law clauses provide for the application of the domestic law of a specific country to disputes arising from the contract. While domestic law is able to adequately govern and regulate domestic contracts, this is not always the case with contracts with an international flavour. International contracts introduce problems unique to their nature, such as the intricacies of goods and money crossing international borders. These contracts also require parties and lawyers of different backgrounds -- be it common law, civil law, developed, or developing countries -- to meet minds over involved issues and difficult concepts.[2]

Yet another problem exists with the potential for bias. Above and beyond the possible inadequacy of a domestic law to regulate the position to [page 583] satisfaction, the application of domestic law will often favour the party whose national law it is.

Depending on where the dispute is heard -- in the national courts of a country or before an arbitrator (whether governed by national or international arbitration rules) -- the parties may have two last options to try and avoid the above problems.[3] These options are only available where the dispute is addressed by way of arbitration, and not in national courts, as those courts must predominantly apply only their own laws or those of another country.[4] The first option available to the parties is to provide in their contract that a dispute will be resolved by "general principles of law," the lex mercatoria, or something similar. In addition to this first option, where the arbitrator is authorised to act ex aequo et bono or as an amiables compositeur,[5] he may, on his own initiative, rely on the general principles of law or the lex mercatoria.[6] The parties may provide legal certainty to their relationship by removing the contract from the domain of private international law and by regulating it with a more effective and uniform set of substantive rules, which specifically provides for the problems arising out of international trade.[7]

Although this would seem to be the ideal solution to the intricacies inherent in international commercial disputes, there has been sufficient scepticism surrounding the existence of a clearly identifiable set of general rules or lex mercatoria, to render it both uncertain and unclear, thereby not fulfilling these paramount requirements of legal rules.[8] International model laws, conventions, and organizations such as the WTO and the ICC, have made leaps and bounds toward creating an internationally uniform set of rules to govern [page 584] international trade and commercial transactions. However, these instruments are often fragmentary in nature and limited in scope, thus limiting their usefulness.[9]

The UNIDROIT General Principles of International Commercial Contracts [10] (hereinafter "UNIDROIT Principles" or "Principles") aspire to solve some of these stumbling blocks.[11] The objective of the UNIDROIT Principles is to establish a balanced set of rules designed for use throughout the world irrespective of the legal traditions and the economic and political conditions of the countries in which they are to be applied.[12] The notes to the UNIDROIT Principles provide that:

To fulfill this goal, the UNIDROIT Principles must meet a number of minimum requirements. In the first place, they should be clear and well-defined. Secondly, they should contemplate the unique character of the international commercial transactions they aim to regulate. Finally, they should be sufficiently flexible to allow for the simultaneous application of the several conventions regulating various aspects of international commercial trade.

The purpose of this paper is to examine the extent to which the UNIDROIT Principles are a "systematic and well-defined set of rules" as contemplated by the drafters. This will be done by means of a comparative study between the circumstances under which a contract may be terminated under the UNIDROIT Principles and under a number of domestic law systems and by identifying which of these legal systems is most suited to an international commercial setting. Although the focus of the paper will be mainly on the termination of the contract and the policy considerations motivating the rules of termination, the different forms of breach or non-performance giving rise thereto will be touched upon where necessary.

The domestic law systems on which this paper focuses are U.S. law, as an example of a common law system, German law as an example of a civil law system, and South African law which is a Roman Dutch common law system and [page 585] shows the characteristics of both a common law and civil law system. In addition, these countries were chosen because two of them, the United States and Germany, have commercial codes while South Africa does not.

At the outset, it must be pointed out that there is no single, simple, or universal term that describes the issue addressed in this paper accurately for all domestic legal systems. Subtle differences in the underlying foundation of the remedy influence the terms used to describe it. In explaining the foundation of the different legal system's remedies, the different national terms will be used where necessary, but in as much as the consequences of the remedies converge, the terms used in the UNIDROIT Principles will be utilised to facilitate comparison.

A distinction can generally be drawn between the avoidance of a contract and the termination thereof.[14] Avoidance is usually the only remedy available where there is a defect in the conclusion of a contract affecting its validity.[15] The effect of avoidance is that it completely extinguishes the contract ab initio, and places the parties in the position they were in prior to the conclusion of the contract as if no contract were ever concluded. The UNIDROIT Principles also make the distinction between avoidance and termination. The UNIDROIT Principles explain that avoidance takes effect retroactively and that on avoidance either party may claim restitution of whatever it has supplied under the contract, provided that it concurrently makes restitution. If it cannot make restitution in kind, it must make an allowance for what it received.[16]

Article 3.7 of the Principles provides that if there is an option between avoiding the contract and using the remedies for non-performance, the contract may not be avoided. In those situations, the remedies for non-performance must be used. Preference is given to those remedies because they are better suited and more flexible than the radical solution of avoidance.

Avoidance is not a concept foreign to national legal systems and is often also referred to as rescission or cancellation followed by restitution. [17] It is important to note that avoidance is not a synonym for restitution. Restitution is a consequence of avoidance, but, as will be seen in later discussion, may also be a consequence of termination. [page 586]

Termination, on the other hand, is a term not frequently encountered in national legal systems,[18] but is a remedy found in all three domestic law systems used in this paper. "Termination" has a very particular meaning in the UNIDROIT Principles. The availability of termination as a remedy presupposes the existence of a valid contract. Article 7.3.5 of the Principles provides as follows:

In its purest form, termination means that none of the parties may insist on specific performance. The result of an election in favour of termination is that both parties are released from their obligation to effect and receive future performance, as is clear from Article 7.3.5(1). Note that termination does not mean that restitution has to take place. It is therefore distinguishable from avoidance where restitution has to take place as a general rule. It also does not mean that an aggrieved party is automatically claiming damages. Article 7.3.5(2) clearly states only that termination does not preclude a claim for damages-not that it includes such a claim.

Finally, article 7.3.5(3) may be interpreted to mean that the contract is extinguished ex nunc, and not ab initio.[20] Not all consequences of the contract are destroyed, but only the future obligations of the parties. This provision is extremely important for international commercial contracts -- especially since the UNIDROIT Principles will frequently be enforced through arbitration proceedings. It affirms beyond a doubt that provisions of the contract meant to deal with situations arising after its termination will remain enforceable between the parties. [page 587]

After the aggrieved party has terminated the contract, he may then further choose between a claim for damages or restitution. This paper will only look at those circumstances where the aggrieved party decided not to insist on specific performance (i.e. decided to terminate the contract), but nevertheless wants to claim damages which would put the party in the position he would have been in had the contract been performed according to its terms. This particular remedy was chosen because it is the route most frequently taken by the aggrieved party after a breach of the other party. The paper does not address the situation where a party terminates a contract and subsequently claims restitution to be put in the position he would have been in had there been no contract concluded.

The discussion will now focus on the various situations under which one party to a contract may terminate that contract and subsequently claim damages from the other party. These situations arise typically where there is breach of contract by one of the parties.

Given the fact that both the United States and Germany are signatories to the United Nations Convention on the International Sale of Goods (CISG) [21] and that South Africa will undoubtedly follow suit in the near future, a comparison between the national general principles relating to sales contracts and those of the UNIDROIT Principles will be unsuitable. Where international sales contracts are the subject of dispute, the national legal systems will look to the CISG for solutions and not national law. This paper will attempt to steer clear of principles applicable to only sales contracts, although some examples may use sales contracts as their basis because they tend to make for clear illustrations.

II. GENERAL PRINCIPLES OF SOUTH AFRICAN CONTRACT LAW REGARDING THE RIGHT TO TERMINATE A CONTRACT FOR BREACH

A. General Remarks

South Africa does not have a commercial code comparable to the United States' Uniform Commercial Code (U.C.C.) or to Germany's Handelsgesetzbuch. Apart from statutes governing particular contracts or aspects thereof,[22] the general principles of South African contract law must be found in South Africa's Roman Dutch common law and case law.

South African law recognises five forms of breach of contract, namely: (i) mora debitoris (delay of the debtor); (ii) mora creditoris (delay of the [page 588] creditor); (iii) positive malperformance; (iv) repudiation; and (v) impossibility attributable to the fault of one of the parties.[23] Upon breach, the aggrieved party may have two options: either to keep the contract alive by claiming specific performance and compensation for any damage caused by the breach or alternatively, to terminate the contract and claim compensation for any damage caused by the breach. Any of the above forms of breach can potentially give rise to the right to terminate the contract. Termination does not, however, follow automatically from breach of contract. Breach of contract only gives rise to the right to terminate the contract and then only in some circumstances. The reason for this approach is that the basic principle underlying South African contract law is pacta sunt servanda and the law first and foremost tries to uphold a contract before allowing any of the parties to terminate. Additionally, as R.H. Christie aptly explains:

In accordance with its underlying principle of pacta sunt servanda, South African law only allows for the termination of a contract where there has been a material breach, or as is often stated, where the breach goes to the root of the contract. Where there is no material breach, the aggrieved party may not terminate the contract, but may only claim damages to compensate for the loss he suffered as a result of the breach in addition to insisting on specific performance and fulfilling his own obligations. Not all forms of breach use the same construction or criteria to determine the materiality of the breach and the following sections will examine the requirement for materiality as manifested in the different forms of breach. [page 589]

B. Mora Debitoris

South African law requires that two hurdles be passed before an aggrieved party may terminate the contract due to the delay of the other party. In the first place, the other party must be in delay, or as is said in South African law, in mora.[25] Secondly, the aggrieved party must have acquired the right to terminate the contract. It is the second requirement that evinces the requirement that the breach should be material.

The first hurdle will be met and a party will consequently be in mora when:

To determine whether performance is due, a distinction is made between mora ex re and mora ex persona. A party will be in mora ex re when the contract fixes the time for performance and the party has not performed by the agreed upon time. Mora ex re therefore does not require the obligee to notify the obligor that he will be in breach unless he fulfils his obligations within a reasonable time.[27] South African courts consistently apply this principle no matter how harsh the result may be.[28] Even where no time for performance was stipulated, the obligor will still be in mora ex re if it is clear that immediate performance was contemplated, and the immediacy was essential by reason of the subject matter of the contract or the relevant circumstances.[29] Furthermore, if no time for performance was expressly stipulated in the contract, but by necessary implication it can be shown that performance by some specific time was intended, and was essential, the obligor will be automatically in mora if, at that specific time, he has not performed.[30] Where the contract does not stipulate a time for performance and immediate performance is not possible and not contemplated, the obligor has to be placed in mora ex persona, which requires a demand by the obligee to the obligor to perform his obligations within a reasonable time.[31] Whether the demand allows the obligor a reasonable time within which to perform depends on the circumstances of each case.[32]

The mere fact that a party is in mora is not, however, a ground for termination of the contract. Being in mora is only a form of breach of contract. [page 590] Although the rules governing this aspect do not in all instances expressly provide that the delay should be material, their consequences are to the effect that the breach has to be material or that the non-performing party is aware or should be aware that timely performance is important to the aggrieved party, before the right to terminate will accrue to the aggrieved party. The aggrieved party will have the right to terminate the agreement in the following situations.

Where the contract contains a forfeiture clause (i.e. where it expressly states that if one party fails to perform a particular obligation by a specified time, the other party will be entitled to cancel the contract), the failure by the obligated party to perform at the agreed upon time is material and the aggrieved party may terminate the contract.[33] It may be argued that by expressly providing so, the parties to the contract elevated timely performance to being of the utmost importance to the contract and that any non-compliance with the clause stipulating the agreed upon time consequently constitutes a material breach.

Where the contract states expressly when the performance of a party must occur, but does not state that the other party will have the right to terminate the contract when there is delay in that performance, it then becomes necessary to decide whether time is of the essence of the contract.[34] In this situation there is already a breach, but it has not yet been determined whether that breach is material. If the breach is of the essence of the contract (or material), then it is of sufficient magnitude to justify the obligee in terminating without a prior demand for performance.[35] Whether time is of the essence of a contract is determined by looking at the nature of the contract and the surrounding circumstances. It has frequently been held that time is of the essence in what is described as a mercantile transaction.[36] A mercantile transaction is described as one in a fluctuating market or a market in which prompt delivery or payment is necessary to keep the wheels of commerce turning.[37] Greenfields Manufacturers (Temba) (Pty) Ltd. v. Royton Electrical Engineerning (Pty) Ltd.[38] explains that what is looked for is essentially a tacit term and that the nature of the tacit term is that failure to perform by the specified time entitles the other party to terminate the contract. When it is said that there is "a strong presumption that time is of the essence in a mercantile transaction proper,"[39] the Court interprets it as meaning that the circumstances in which a "'mercantile transaction proper' is concluded [page 591] and the terms thereof might afford cogent evidence that the parties had in fact agreed that 'time is of the essence."'[40]

The last situation where an aggrieved party may terminate the contract is where there is neither a forfeiture clause included in the contract, nor is time of the essence of the contract, but the aggrieved party has earned the right to terminate the contract. As the case of Microutisicos v. Swart explains,[41] where time is not of the essence of the contract, the other party can make it so by giving notice that if the obligation is not complied with by a certain date, allowing a reasonable time, he will regard the contract as at an end. This principle that time can be made of the essence by notice applies only to failure to perform what is described as an essential, vital, or important term, or a term going to the root of the contract and the law does not permit termination after notice for breach of a non-essential term.[42]

It is clear that South African law allows for the termination of a contract only where the delay was material, and that materiality is established when the parties expressly or impliedly provided that timely performance is material or, in the absence of either of these, when the aggrieved party has subsequently informed the breaching party that timely performance is an essential term.

C. Mora Creditoris

Mora creditoris is present where the obligee fails to co-operate with the obligor to the extent necessary to enable the obligor to perform.[43] After the presence of mora creditoris has been determined, South African law moves over to the principles of repudiation and allows the obligor to terminate the contract only if the failure to co-operate amounts to repudiation of the whole contract. Repudiation contains its own requirements as to materiality of the breach.[44]

D. Positive Malperformance

Positive malperformance is distinguished from delay in that the obligor does perform, but in the wrong manner. The mere presence of positive malperformance does not per se entitle the aggrieved party to summarily cancel the contract. The aggrieved party will only be entitled to terminate the contract, if, in the first place, the contract contains a forfeiture clause entitling him to terminate the contract for any specified breach or, secondly, where the breach [page 592] justifies termination.[45] In Oatorian Properties (Pty) Ltd v. Maroun,[46] Potgieter JA held that:

From this quotation it is clear that the materiality requirement for positive malperformance really encompasses two distinct branches, namely that the term breached should go to the root of the contract and that the breach should not be minor, but substantial or material. This point is illustrated by Spies v Lombard [48] where the court held that breaches by a tenant of a term that he should not damage the property were insufficiently serious to justify the landlord's termination of the contract.

South African law uses the test of the "officious bystander," amongst others, to determine whether the breach is material. Christie describes the test as follows:

The objective bystander test illustrates one way to determine the reasonableness of contract termination.[50] The aim of the test is to determine what reasonable contracting parties would agree upon in similar circumstances and [page 593] thereby to establish an objective standard of firstly, what is a vital or essential term, and secondly, whether the breach thereof is substantial. The relevant considerations looked at are the express terms of the contract and the surrounding circumstances at the time when the contract was entered into. It is important to note that this is the test used by courts to determine whether a term should be implied into a contract and that it is a strict test, since South African courts are unwilling to imply terms into contracts. Van den Berg v. Tenner [51] involved the case where two parties to an agreement agreed in a second agreement to withdraw from the first agreement after its conclusion. The plaintiff in the case had already partially performed in terms of the first agreement. The court held that, even though the second agreement did not expressly provide so, there arose from the second agreement an obligation to return that which had been delivered. In Aucamp v. Morton [52] the court was unwilling to allow termination of a contract where malperformance was easily remediable. Greenfield Manufacturers v. Royton Electrical Engineering [53] involved a case of delayed performance, rather than malperformance, but illustrates some important points regarding implied terms. The parties to the contract did not expressly agree that time was of the essence, but the respondent relied on special facts and circumstances in alleging that time was of the essence [54] and that the parties agreed tacitly that the respondent would be entitled, at its election, to repudiate the contract in the event of a failure by the appellant to perform timely. In holding that the parties did indeed so tacitly agree, the court looked at a number of circumstances, including the fact that the respondent contracted with another party to deliver the goods in question before a certain date [55] and that the appellant was aware of this.[56]

Another way of approaching the question of whether there was material malperformance or not, is by inquiring whether the obligation which was broken was so vital or material to the performance of the whole contract, that the aggrieved party could say that the foundation of the contract was destroyed.[57] It goes without saying that no single test can serve for all cases and that every case has to be judged in light of its particular facts.

In summary, South African law allows for the termination of a contract due to positive malperformance only if the malperformance was material. An objective test is used to determine whether there was material malperformance. If the parties expressly provided for strict compliance with the terms of the contract or if the seriousness of the malperformance, in light of all the [page 594] circumstances, justifies termination in the eyes of the officious bystander, the malperformance is material.

E. Repudiation

Repudiation does not involve the two tiered approach encountered above in Sections B through D where the presence of a breach has to be determined first and the severity thereof subsequently. Under South African law, repudiation is only present where one party evinces an intention no longer to be bound by the contract.[58] A dispute over one or several minor provisions in an elaborate contract should not as a rule be deemed to amount to repudiation.[59] The definition of repudiation, therefore, has the requirement of materiality already built into it. Conduct will only amount to repudiation when the conduct exhibits a deliberate and unequivocal intention no longer to be bound and such an intention will only be present when a material term of the contract is denied. An important factor in determining whether a term is of sufficient importance so that its denial will amount to repudiation is whether, had the term now denied not been agreed upon, the other party would have concluded the contract.

F. Impossibility Attributable to the Fault of one of the Parties

Impossibility attributable to the fault of one of the parties is distinguishable from the above forms of breach in that in the case of the previous forms of breach, performance is still possible, but here it is not.[60]

If the impossibility is attributable to the fault of one of the parties, that party is in breach of the contract.[61] This rule is explained by saying that there is an implied term in the contract that the parties will refrain from doing anything that will prevent them from performing.[62] The construction is therefore essentially one of breach of an implied term. A party may not plead discharge of the contract through loss of the subject matter where he, by his deliberate or negligent act, has been responsible for such loss.[63] This is distinguished from where the party had no fault, e.g., where the subject matter of the contract was [page 505] destroyed through vis major or casus fortuitus, where the destruction would then operate to discharge the contract.[64] Both negligence and intent are sufficient to form the basis of this form of breach of contract.

This form of breach does not require an additional or separate test with which to measure the materiality of the breach. The prerequisite that performance should be impossible already includes the materiality requirement.

G. Conclusion

Consistent with the principle of pacta sunt servanda, South African law allows for the termination of a contract only in extraordinary circumstances. South African law generally mandates a two tiered approach to determine whether an aggrieved party has the right to terminate the contract. It must first be established whether the breach is present, and secondly whether it is material enough to justify termination of the contract. The parties may expressly provide that any or specific breaches are material, or the circumstances may indicate the materiality, thereby also allowing for the situations where the parties themselves failed to provide for such an event in their contract.

III. GENERAL PRINCIPLES OF U.S. CONTRACT LAW REGARDING THE RIGHT TO TERMINATE A CONTRACT FOR BREACH

A. General Remarks

The U.C.C. purports to deal with all the phases which may ordinarily arise in the handling of a commercial transaction, from start to finish.[65] However, the nature of the U.C.C. makes it largely unsuitable for the comparative study undertaken in this paper. In the first place, the U.C.C. contains too much detail and focuses too specifically on enumerated types of transactions to allow for a general principle comparative study. Secondly, the U.C.C. does not cover a broad enough spectrum of transactions. The law of agency is, for example, not addressed. Article 2, which provides an exhaustive exposition of the principles of sales agreements is, as explained in the introduction, not included in this paper since the CISG already usurped the application of national law in the context of international sales agreements and Article 2 remains applicable only with regard to sales within the United States. Some references will be made to the general provisions of Article 1. [page 596]

An alternative source for the general principles of U.S. contract law on the termination of an agreement is found in U.C.C. Section 1-103 which provides that "[u]nless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant ... shall supplement its provisions."[66] The common law principles should therefore be utilised in addition to the U.C.C. In light of the fact that the UNIDROIT Principles have been compared to the Restatement Second of Contracts (hereinafter the Restatement),[67] this paper relies heavily on the general principles found in the Restatement.

Under U.S. law, any repudiation [68] and any non-performance,[69] which includes delay of presumably both the obligor and obligee and impossibility attributable to one of the parties, constitutes a breach when performance is due.[70] Although this is generally the case even though the non-performance is insubstantial,[71] the court may ignore a trifling departure from the provisions of the contract to avoid a finding of breach.[72] The mere presence of breach, however, does not entitle the aggrieved party to terminate the contract in every situation. It is generally stated that only a material failure by the other party will entitle the aggrieved party to terminate the contract.[73] United States law therefore exhibits the same two tiered approach found in South African law where the presence of a breach is determined first and then assessment of whether the breach is material enough to justify termination of the contract occurs.

The Restatement has a unique way of distinguishing between what the UNIDROIT Principles call "termination" and "requiring performance."[74] The Restatement draws a distinction between damages for total breach and damages for partial breach. Section 236(1) defines a claim for damages for total breach as "one for damages based on all of the injured party's remaining rights to performance."[75] In contrast, Section 236(2) defines a claim for damages for partial breach as "one for damages on only part of the injured party's remaining rights to [page 597] performance."[76] A party may claim only one or the other, or have an election between the two,[77] but may not claim both simultaneously. This prohibition on the simultaneous application of both remedies demonstrates their inconsistency with one another. A claim for partial breach implies that the contract is enforced by way of specific performance and that the aggrieved party only claims damages in as far as he suffered them. Whereas, a claim for total damages means that the contract is terminated -- i.e. no specific performance is claimed, and the aggrieved party claims damages to put him in the position he would have been in had no breach taken place.

A material breach of contract gives the aggrieved party the right to terminate the contract and either claim restitution or maintain an action for damages for total breach.[78] Where there is total breach of the contract, the aggrieved party is at liberty to treat the contract as broken and desist from any further effort on his part to perform it.[79] In other words, he may abandon the contract and recover, as damages for the breach, the benefits he would have received by a full performance.[80] Abandonment is not technically a rescission of the contract, but the mere acceptance of a situation created by the wrongdoing of the other party.[81]

In Restatement terminology, therefore, focus will be on the forms of breach which give rise to a claim for total breach. This is the closest U.S. equivalent to contract termination under the UNIDROIT Principles.

B. Breach as Non-fulfilment of a Condition

The Restatement explains breach as the non-fulfilment of a condition. According to Section 225 the non-occurrence of a condition has two possible effects on the duty subject to that condition. In the first place, it prevents performance from becoming due, at least temporarily.[82] It secondly discharges the duty when the condition can no longer occur.[83] Section 237, comment (a) explains how these effects also find application in the sphere of material failure of performance. According to Sections 237 and 238, performance or an offer of performance is a condition for the aggrieved party's remaining duty under the contract. If the other party fails to perform, the aggrieved party is not obliged to perform his own [page 598] obligation.[84] The aggrieved party immediately gets the right to suspend his own performance and ultimately, subsequent to the meeting of further requirements, to refuse to perform altogether and to claim damages for total breach if the non-performance is not justified. There is no general requirement for fault.

Only a "material failure" operates as the non-occurrence of a condition.[85] A material failure delays reciprocal performance temporarily and permanently discharges reciprocal performance if the material failure is not cured during the time in which performance can occur.[86] The presence of a material failure is, of course, a precondition for the onset of these effects. It has to be determined therefore, what a "material failure" is. Restatement Second of Contracts Section 237 refers to a "material failure" and not to the more traditional "material breach" of contract with good reason. Material failure is a broad concept including, but not limited to, breach. "Failure" could be explained as being any non-performance, defective performance, or late performance, but it also implies an absence of judgement as to where the loss caused by the failure should rest. The allocation of the loss depends upon whether or not the failure was justified, for example by impracticability.[87] If the failure was not justified, the failure amounts to a breach of contract. A non-justified material failure is the Restatement terminology used to refer to a material breach, but because "material breach" is the term more frequently used in case law, this paper utilises the latter term in the remaining discussion of United States law.

A material breach is a breach that goes to the whole consideration of the contract.[88] As a general rule, the breach of any duty that was made expressly a condition of the contract, is material.[89] The Restatement Second of Contracts Section 241 provides further that:

Comment (a) to this section warns that these are only circumstances and not rules and that Sections 237 and 238 should be applied in light of the facts of each case and with the purpose of securing for each party his expectation of an exchange of performances.[91] In O. W. Grun Roofing and Construction Co. v. Cope,[92] the Court explained the approach to the question of materiality as follows:

The tendency of the courts to refer to material breach and to substantial performance as opposite sides of the same coin is clear. There will be a material breach if a party failed substantially to perform in terms of the contract. The following discussion will show that, in addition to the rules applicable to each form of breach, these general rules also find application in their own peculiar way.

C. Delay

When performance of a duty under a contract is due, any non-performance is a breach.[94] That does not mean, however, that the aggrieved party will summarily have the right to terminate the contract. United States law will only allow termination on account of delay where time is of the essence of the contract. There are three ways in which time may be of the essence.

In the first place, time may be made of the essence of the contract by express stipulation.[95] This position is very similar to what South African law calls mora ex re.[96] When the parties so agree in their contract, then time must be regarded as of the essence both at law [97] and in equity [98] even where damages may compensate for the delay [99] and no matter how harsh or exacting the terms may be.[100] A refusal of a court to give effect to a timing term in the agreement would amount to not giving effect to the intention of the parties embodied in their contract.[101] It is not sufficient if the contract merely states a particular day for performance. If a party should fail to perform on the stated date, it only entitles the injured party to withhold his performance and gives him a claim for damages for delay, but it does not of itself discharge his remaining duties.[102] A timing clause should, in addition to merely stating a date, make clear that the parties [page 601] intended time to be of the essence.[103] It is only when the circumstances indicate that performance on the stated day was of genuine importance that the injured party's remaining duties are discharged immediately with no period of time during which they are merely suspended.[104]

There is some indication that if enforcement of the time of the essence clause in a bilateral contract will result in an excessive penalty or forfeiture, the courts will ameliorate the offender's position by the application of equitable principles.[105]

The second way in which time may be of the essence of the contract is where there is a manifestation of intention to that effect from the contract or subject matter involved,[106] or by implication from the nature of the contract or circumstances of the case.[107] Examples of the latter include, conditions arising from the nature of the subject matter of the contract [108] or the character of the interest bargained for.[109] No one rule can be formulated as to when the facts and circumstances, the nature of the subject matter of the contract, or the character of the interest bargained for make time of the essence.[110] If time becomes material to the rights and interests of the parties to any substantial degree, it will be regarded as of the essence.[111]

In this regard, Restatement Section 242 is relevant. In the case of material failure, the reciprocal performance is temporarily not due. The reciprocal performance is discharged if the material failure is not cured during the time in which performance can occur. Section 242 (a) and (b) provides the circumstances significant in determining when remaining duties are discharged.[112]

It is often said that in commercial transactions, notably those for the sale of goods, prompt performance by a party is essential or "time is of the essence." This is a particular application of the general principle that the extent to which it reasonably appears to the injured party that delay may prevent or hinder him from making reasonable substitute arrangements is a consideration in determining the effect of delay.[115]

The last way in which time may be of the essence of the contract, is where one party makes it so ex post facto.

In the ex post facto situations it is assumed that there is a time for performance and that it passed without performance. This situation is distinguishable from the first and second possibilities above in that timely performance is not essential. It is, nevertheless, possible to make timely performance essential by notifying the non-performing party to that effect.

Even where there is no agreed upon time, time may be made of the essence of the contract by one of the parties fixing a reasonable time for the completion of the contract and giving notice to the other party of an intention to abandon the contract unless it is completed within the time fixed, provided that the time allowed is reasonable. Whether the time is reasonable is a question of fact depending on the circumstances of every case.[117]

In summary it could be said that U.S. law only allows for the termination of a contract due to delay where time was of the essence of the contract. The ultimate criterion as to whether or not time is of the essence of a contract is a sufficient manifestation of intention of the parties, actual or apparent.[118]

D. Positive Non-performance

Positive non-performance is the situation where an obligor does perform, but not completely in conformance with the provisions of the contract. From this definition it is clear that even the smallest deviation from the strict terms of the contract will constitute breach. The obligee is, however, not entitled to terminate the contract for any non-performance. There has to be material or fundamental non-performance before the aggrieved party acquires this right. The requirement of fundamentalness is often explained in terms of the substantial performance doctrine.

The effect of the substantial performance doctrine is explained as follows in American Jurisprudence Section 631:

The substantial performance doctrine is arguably the positive side of the general rule that an aggrieved party may not terminate the contract unless there was a substantial breach thereof. The doctrine states that the mal-performing party may enforce the contract, although he may be limited as to what he receives in return for his defective performance.

There is authority for the statement that the substantial performance doctrine is only applicable where there has been an honest effort to perform, and not a wilful omission.[120] It is unclear why this exception should be made, since the motive of the obligor is generally not relevant to the loss the aggrieved party might suffer and U.S. law has no general requirement of fault for breach of contract. The only apparent reason for this exception is that a wilful omission or performance in bad faith could be an indication of the reluctance of the obligor to perform any remaining obligations. American Jurisprudence Section 639 reinforces this reasoning by adding that a rule which would enable a person voluntarily to abandon his contract and lose nothing thereby would have a tendency to encourage bad faith and lessen the sacredness of obligations. It is the duty of the courts to uphold and enforce the sacredness of obligations so far as it does not lead to injustice. Most courts would be unwilling to enforce a rule which undermines this principle.

As to what constitutes substantial performance, the example of construction contracts provided by American Jurisprudence Section 634 is illuminating. Section 634 explains that "there is substantial performance where all the essentials necessary to the full accomplishment of the purposes for which the thing contracted for has been constructed are performed with such an approximation to complete performance that the owner obtains substantially what is called for by the contract."[121] Whether this approximate state of completion has been reached, will depend on the facts and circumstances of each case and in light of the language of the entire contract and what has been done or omitted under it.[122] Restatement Section 243(4) provides that "a breach by non-performance gives rise to a claim for total breach only if it so substantially impairs the value of the contract to the injured party at the time of the breach that it is just in the circumstances to allow him to recover damages based on all his remaining rights [page 605] to performance."[123] The factors enumerated in Restatement Section 241 are useful in determining the materiality of the non-performance.

In summary, any non-performance of a contract amounts to breach of contract, but U.S. law allows the aggrieved party to terminate the contract after part performance only where there was a material breach of the contract.

E. Repudiation and Anticipatory Repudiation

Anticipatory breach is committed before the time for performance is due and by words or acts that evince an intention to refuse performance in the future.[124] Where a party bound by an executory contract repudiates his obligations before the time for performance, the promisee has the option to treat the contract as ended, so far as further performance is concerned, and maintain an action at once for the damages occasioned by the anticipatory breach.[125] The aggrieved party need not wait until the time for performance arrives [126] and need not complete his own performance or even offer performance in order to have the right to claim damages.[127]

Where a party refuses to recognise the existence of a contract, or does something inconsistent with its existence, including refusing to perform in accordance with the contract, these actions may be treated as a breach of the contract where it occurs after the time for performance of the contract.[128] The situation foreseen here, is where a repudiation accompanies or follows a breach by non-performance.[129]

A repudiation is a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under the Restatement Section 243.[130] The renunciation must go to the whole contract and must be absolute and unequivocal.[131] This definition of repudiation already includes the requirement of materiality in that the statement should be serious enough to give rise to a claim for total breach. In [page 606] Mobley v. New York Life Ins. Co., the requirement for fundamentalness is further explained as follows:

The words "substantially to perform" recalls the substantial performance doctrine and the principles there applicable can be meaningfully used in this regard.

F. Impossibility Attributable to a Party

Impossibility is distinguishable from frustration. Performance is still possible in the case of frustration, though that performance may be difficult. In the case of impossibility, however, performance is completely impossible.[133]

As a general rule, supervening impossibility is not an excuse for the non-performance of a contract [134] in the absence of a provision therefor.[135] Especially included within the ambit of this general rule is the situation where the fault of one of the parties gave rise to the impossibility. It is an implied condition of every contract that one party will not prevent performance by the other party.[136] This condition is implied from the duty of good faith and fair dealing. Where impossibility might have been anticipated and guarded against in the contract, or where the impossibility arises from the act or default of the promisor, the parties remain bound to the contract.[137] Therefore, where one party to a [page 607] contract makes performance, either for himself or for his counterpart, impossible, he breaches the contract.[138]

The fact that the performance is impossible, already includes the requirement that the breach should be fundamental. The non-breaching party will therefore have the right to terminate the contract upon impossibility attributable to the fault of the other party.[139]

G. Conclusion

The general principles of U.S. contract law as stated by the Restatement only allow for the termination of a contract in case of a material failure to perform, while case law generally refers to a material breach as opposed to a material failure. Termination is therefore not the first remedy available to an aggrieved party, but the exception rather than the rule due to the requirement that the breach should be material. The parties may expressly provide which forms of breach they will regard as material, but the law also allows for the determination of materiality with reference to the circumstances of each case.

IV. GENERAL PRINCIPLES OF GERMAN CONTRACT LAW REGARDING THE RIGHT TO TERMINATE A CONTRACT FOR BREACH

A. General Remarks

In Germany, the central codification in the field of commercial law is the Handelsgesetzbuch (HGB). This code builds on the general principles found in the Burgerliches Gesetzbuch (BGB). The HGB details how the relationship between merchants differs from the relationship described in the BGB and where different principles govern commercial transactions. Any aspect not governed by the HGB must be solved in terms of the BGB.[140] The HGB does not provide general principles applicable to the termination of commercial contracts and instead the HGB provides a limited number of provisions regarding the [page 608] termination of specific contractual relationships.[141] Where relevant, reference will be made to these provisions, but the provisions on the termination of contracts found in the BGB are the main source of general provisions used in this comparative study.

German law recognises three forms of breach of contract, namely: (i) impossibility (Unmöglichkeit); (ii) delay of both the debtor and the creditor (Verzug); and (iii) the positive breach of an obligation or contractual duty (positive Forderungsverletzung) which includes repudiation or anticipatory breach. The BGB expressly provides for the first two forms, but the rules governing the positive breach of an obligation were developed by the courts when it became apparent that not all forms of breach could be characterised as either impossibility or delay. For breach of contract, German law requires fault.[142]

Breach by one of the parties does not automatically terminate the contract. Upon breach, the aggrieved party will have a claim for damages [143] and may in some cases be entitled to terminate the contract. Termination is not, however, the rule where breach is present, but will only be allowed if the requirements set by the BGB or by the courts in the case of positive non-performance are met. Although the requirements for termination are generally not expressed in terms of a requirement for materiality, a very similar effect is achieved. This phenomenon will be examined with reference to the different forms of breach.

B. Impossibility (Unmöglichkeit)

This discussion will focus only on subsequent impossibility (nachträchliche Unmöglichkeit) -- i.e. impossibility after the contract has been concluded. The reason for this limitation is that initial impossibility is not breach of contract, but rather affects the formation and validity of the contract and gives rise to the remedy of avoidance, while breach presupposes a valid contract.

The most relevant provisions of the BGB regarding impossibility are Sections 280 and 325. Section 280 is applicable to both unilateral obligations and reciprocal obligations, while Section 325 further regulates reciprocal obligations.[144] [page 609]

Sections 280 and 325 contain the two basic prerequisites required for impossibility to qualify as breach of contract, namely: (i) that performance by the obligor must become impossible after formation of the contract; and (ii) that the impossibility must be a result of circumstances imputable to the obligor.[145]

These rules apply regardless of whether the impossibility is objective or personal.[146] The impossibility must, however, be permanent.[147] Temporary impossibility is treated as delay and therefore falls under Section 284.[148] The concept of impossibility encompasses both physical impossibility and cases where the performance, though physically still possible, has become economically or otherwise so difficult that it would be contrary to the good faith rule of Section 242 to require the obligor to perform.[149] [page 610]

Not every case of impossibility gives rise to the right to terminate the contract. A general distinction is drawn between complete impossibility and partial impossibility.

In the case of complete impossibility, the obligee has a claim for compensation for any damage arising from the non-performance.[150] The purpose of the obligee's claim is to receive his positive interest, i.e. to be placed in the position he would have been in had there been no breach.[151] In the case of reciprocal obligations, the obligee is also released from his own obligation to perform.[152] In both cases, the obligee has the right to terminate the contract, subject to the provisions of Sections 246-356.[153] It is clear that complete impossibility is a very material breach indeed and it follows that the aggrieved party should have the right to terminate the contract.

In the case of partial impossibility, the obligee may accept partial performance and claim compensation for any damages arising from the non- performance.[154] The compensation is then limited to the impossible part of the performance and the obligor's obligation to perform survives for the remaining possible part.[155]

Should the aggrieved party wish to terminate the contract in the case of partial impossibility, he has to meet a further requirement. Both Section Section 280(2) and 325(1) provide that if the obligee has no "desire for the partial performance," he may demand compensation for non-performance of the entire obligation, in other words, terminate the agreement.[156] The English translation of the original German text may be somewhat misleading in that it erroneously suggests that a subjective standard is used to determine whether the aggrieved party has the right to terminate. The German phrase is "wenn die teilweise Erfüllung für ihn kein Interesse hat"[157] and may also be translated as "when the partial performance has no interest (or worth) for him." The determining standard of whether or not the performance has "worth" for the aggrieved party is an objective one.[158]

In summary, in both unilateral and reciprocal relationships, the obligee has the right to claim damages for non-performance or to rescind the contract. He may, however, only choose to terminate the contract if the performance is completely impossible or if, objectively speaking, the obligee cannot reasonably be expected to continue with the performance. Even here it is structurally not a new liability that is created, but the transformation of the obligation to perform to [page 611] the obligation to restore damage.[159] Therefore, the rules are primarily designed to enforce the existing relationship and allow termination in more narrowly defined circumstances only secondarily.[160]

C. Delay (Verzug)

The BGB regulates delayed performance as a second form of default of performance. The rules of delay are applicable only if performance is still possible. Section 275 et seq. provide the general rules applicable to delay, while Section 323 et seq. add further rules governing reciprocal obligations. The most important sections are Sections 284, 285, 286, and 326.[161] [page 612]

The three basic requirements for delay may be distilled from these provisions:

In the case of a unilateral obligation, the obligor must compensate the obligee for any damage arising from his default.[166]

The mere presence of delay does not, however, entitle the innocent party in a bilateral contract to summarily terminate the contract. Very similar to the position under South African law, the creditor may only rescind from the contract or claim damages for non-performance in very specific circumstances.

The aggrieved party may terminate the contract if, in consequence of the delay, the performance will be of no use to the innocent party,[167] i.e. the later performance would not fulfil the purpose for which the contract was concluded.[168]

Where delay per se would not frustrate the purpose of the contract, i.e. where time is not of the essence, the obligee must fix a reasonable period of grace (Nachfrist) for the obligor before resorting to either remedy.[169] The period of grace must be long enough to allow an obligor, who has already taken the [page 613] necessary preparatory steps, to perform the contract within this time.[170] The obligee must make it clear in his notice that after the period of grace he will refuse to accept any performance.[171] If the obligee has given notice and the obligor has not performed within the period of grace, the obligee may no longer claim performance.[172] The contract can now only be wound up, either by a claim for damages for non-performance, or by a claim for rescission. A claim for specific performance is expressly prohibited by Section326(1) and the options available to the aggrieved party are thereby limited. The obligee is not required at this stage to indicate whether he will rescind and claim restitution or claim damages, but he has to stay with the choice once it is unequivocally made.[173] The choice is exercised by means of a unilateral declaration [174] and must be exercised without undue delay, otherwise the aggrieved party may lose his right to rescind.[175] It is generally more favourable to claim damages.[176]

These general rules do not apply to sales transactions between merchants. Rather, taking into account the specific needs of merchants, the merchant loses his claim for specific performance and remains restricted to termination or damages for non-performance, unless, immediately after expiration of the time limit, he gives notice to the other party that he insists on specific performance.[177] Also, the merchant's right to terminate exists not only "in case of doubt," but in all cases.[178]

The obligee may combine the warning under Section284 BGB with the fixing of the period of grace under Section326 BGB, so that both can be done by one letter.[179]

The purpose of the compensation for breach is to put the aggrieved party in the position he would have been in had the obligor performed on time.[180] This [page 614] is once again the protection of the positive interest of the innocent party, which includes his profit.[181]

In summary, the mere presence of delay does not entitle the aggrieved party to terminate the contract. This may only be done in three instances. First, if, as a consequence of the delay, the performance will no longer fulfil the purpose for which the contract was concluded, the aggrieved party may terminate without giving notice to the breaching party. It may be said that in these cases, there has been material breach of the contract. Secondly, if the delay does not have this effect, the aggrieved party must give the breaching party a period of grace in which to remedy his default, failing which he may then terminate the contract. In these cases, the effect of the notice is to elevate the delay to a level of such materiality, that it justifies termination. German law takes the effect of this notice so seriously, that it precludes the possibility of claiming of specific performance. An aggrieved party would therefore be well advised to carefully consider this consequence before giving the notice. Lastly, in the case of a transaction between merchants, there is a presumption that delay is of sufficient materiality to justify termination and the aggrieved merchant must terminate the contract unless he gives notice immediately after the delay that he will insist on specific performance. This exception for merchants constitutes a major deviation from the South African and U.S. law position. Both of these countries allow the aggrieved party, even if he is a merchant, an election between terminating the contract and claiming specific performance, without the need to reserve that right by giving notice to the non-performing obligor.

D. Repudiation

Anticipatory breach of contract is usually dealt with under the provisions of delay.[182] Even though performance is not past due, the aggrieved party has the same remedies, termination or damages for non-performance, as with delay.[183] The aggrieved party will, however, have these remedies immediately upon the declaration by the debtor that he will not perform.[184] BGB Section 326(2) governs a comparable class of cases, namely if, as a consequence of the delay, performance in terms of the contract is of no use to the obligee, he [page 615] need not fix a time for performance. In such cases the obligor too must know that performance is futile, so the setting of a period for performance is dispensed with.[185] In the case of anticipatory breach, the irregularity consists of the obligor's own announced decision that he will not perform. It would be futile to set a time for performance and await it. It is, of course, required that the obligor make it unequivocally clear that he is not going to perform in terms of the contract when performance is due.[186] In this sense, German law paints a picture very similar to South African and U.S. law, where the materiality requirement for termination is already met by the mere presence of repudiation and the aggrieved party is therefore immediately entitled to terminate the contract.

E. Positive Breach of an Obligation (Positive Forderungsverletzung)

The third category of default performance is not treated in the general part of the BGB chapter on the law of obligations. The courts began to develop the general theory of breach of contract other than delay and impossibility on the basis of Section 242 BGB.[187] It is recognised today that pursuant to Sections 280, 286, 325, and 326 BGB the obligee can claim damages or, possibly, can avoid the contract if he incurs a loss because of an insufficient performance for which the obligor is responsible. Courts have applied by analogy the remedies available for impossibility and delay.[188]

The basic requirements to be met before the remedies for positive breach of an obligation are available, are the following:[189]

An insufficient performance occurs when the obligor, by action or omission, fails to comply with a contractual duty [190] and the obligee consequently incurs a loss even though the obligation was timely performed.[191] [page 616]

These qualifying factors, however, only determine whether or not there was a positive breach of contractual duty, and not whether the aggrieved party is entitled to terminate the contract. Horn, Kotz, and Leser state [192] that there is "still a difference between principal and ancillary duties as regards the legal consequences of breach: only breach of a principal duty leads to damages for non-performance of the contract as a whole or to rescission of the contract; in other cases damages are awarded to compensate for the harm actually suffered, which can admittedly exceed the value of the performance." The differentiation between principal and ancillary duties goes a long way toward expressing a requirement for a material breach, but is not foolproof. An obligor can arguably breach a principal duty of the contract, but only in some minor way. Such a trivial breach can hardly be serious enough to justify termination of the agreement, but a test looking only at whether a principal duty was breached, does not draw this distinction. Alternatively, an obligor may breach an ancillary duty but to such an extent that performance becomes worthless to the obligee. The breach should, in turn, be sufficient grounds for termination. Not all writers explain the grounds for termination in terms of principal and ancillary duties, however. An explanation more in line with that of South Africa and the United States is that the aggrieved party may only terminate the contract if the violation of the contractual duty jeopardises the whole purpose of the contract [193] to the extent that it would be unreasonable in good faith to force the creditor to continue the contractual relationship with the debtor,[194] or where the creditor has no more interest in the specific performance.[195]

A claim for the positive breach of an obligation is a residual claim -- it may only be used if the irregularity is not actionable under any other basis of claim in the BGB.[196] In the leading case considered by the Reichsgericht in 1902,[197] a gravel merchant contracted to supply gravel to a bridge builder. Payment was to be on the basis of the size of the completed bridge. The builder, however, also used gravel for construction of the approach roads, thus falsifying the payment calculation. The court held that there was no delay, nor was the payment impossible or performance defective, but held that positive breach of contract had occurred and that the supplier could rescind the contract.

Even though the BGB makes explicit provision for defective goods in sales contracts, this remedy remains of considerable importance. The following sections from the seventh section of the BGB, Particular obligations, First title: [page 617] Sale and Exchange, is relevant in explaining how this general remedy may still be preferred over the specialist provisions.

Under Section 459, defective performance may only be remedied by rescission of the contract and return of the money. However, there is no compensation for lost profits.[199] In contrast, the use of a claim under positive breach may result in compensation for any consequent harm.[200] It would appear that the courts do [page 618] allow a choice between a claim for positive breach and one under Section 459. For example, in the case of the poisonous horse fodder,[201] a farmer delivered horse feed which contained a poisonous component. As a result of using the feed, two horses died. The farmer complied with the requirements of the BGB and with the contractual obligations entered into in terms of the performance of the delivery, but injured the property of the creditor. The horse owner could not claim against the farmer on the grounds of impossibility (Section 280 et seq.) or delay (Section Section 320 et seq.). Performance was possible and the preconditions for delayed performance and rescission had not been met. Section 459 et seq. would allow a claim for defective goods and impose liability for a defect in the quality of the thing, but would award only the price of the fodder itself and not compensation for the harm caused. Neither would a claim under Section 463 (lack of quality) compensate the damage. Positive breach of obligation would be the only basis for such a claim (i.e. where the defective goods themselves caused damage), and this was upheld in the case. Therefore, where a seller warranted the quality of his product or acted fraudulently, Section 463 can be used to claim compensation for consequential damage, but where a seller acted negligently, the buyer will need to use this residual remedy to get his positive interest. It is therefore used as a gap-filling device to recover consequential damages which are otherwise recoverable only under the restrictive prerequisites of BGB Section 463.[202]

In summary, German law allows the termination of a contract for positive breach of a duty only where the breach was material. In determining whether the breach was material, German law uses tests, some of which are similar to those in South African and U.S. law and some which differ, but all of which lead to a similar result.

F. Conclusion

German law does not have a general requirement that breach should be material before the aggrieved party will have the right to terminate the contract. The application of the provisions of the BGB and HGB and the principles enunciated by the courts do, however, lead to results similar to those of South African and U.S. law which require a material breach of contract as a prerequisite for the right to terminate the contract. [page 619]

V. UNIDROIT PRINCIPLES REGARDING THE RIGHT TO TERMINATE A CONTRACT FOR BREACH

From the discussion of the general principles of South African, U.S., and German law, regarding the termination of a contract due to the breach of a contracting party, it appears that there are some principles common to all of the three systems.

In the first place, consistent with the principle of pacta sunt servanda, the breach must be material before the aggrieved party will have the right to terminate the contract. The right to terminate the contract is the most extreme of remedies and runs contrary to the nature of a contract. The policy of national legal systems is therefore to allow the aggrieved party to insist on specific performance by the non-performing party and to claim damages suffered as a consequence of the breach of the non-performing party to put the aggrieved party in the position he would have been in had there been no breach. Only in select situations do the national systems allow the aggrieved party to terminate the contract and claim only damages and not specific performance. To qualify as one of the select situations where an aggrieved party has the right to terminate the contract, the breach must be material.

Not all three of the legal systems express the requirement for materiality in a similar fashion or in so many words, but the application of the principles of each system lead to similar results.

In the second place, under South African and U.S. law, the aggrieved party, even upon material breach of the contract, may elect between specific performance and termination. Even though, in a limited number of situations, they go as far as saying that the materiality of the breach is presumed, they do not prescribe to the aggrieved party whether termination should take place or not. German law restricts the choice of the aggrieved party in a number of cases regarding delay.

Thirdly, any form of breach can give rise to the right to terminate a contract if it is sufficiently serious. Four forms of breach can be identified: delay, defective performance, repudiation, and impossibility attributable to the fault of one of the parties.

More generally, the three systems do not use identical constructions to explain the availability of the remedy and the applicable law is not found in identical sources or in identical formats. The unique approach followed by each system could lead to time-consuming research and uncertainty between the parties concerning their legal position.

The focus will now shift to the extent to which the UNIDROIT Principles reflect the three general principles identified above and how they improve on the disparate nature of the national legal principles. [page 620]

A. General Remarks

While national legal systems are often encumbered by a vast amount of caselaw or treaties and bear the burden of centuries of policy changes, the UNIDROIT Principles are in the unique position of starting on a clean slate. The drafters of the Principles were very much aware of this unique opportunity when they drafted the Principles.

The very first qualities of the Principles to be commended, are their conciseness and their clarity. The Principles, even without their comments, are clear, concise, and well organised. They are, furthermore, easily accessible via electronic databases and the Internet.[203]

A further laudable characteristic of the UNIDROIT Principles is their use of a set of terms not associated with any particular national legal system. When interpreting the Principles, care should therefore be taken not to approach them from the point of view of any national legal system or to summarily ascribe meanings to terms simply because they seem to coincide with existing legal terms. While the Principles contain several general contract law principles common to most national legal systems, they are still separate and independent from those national legal systems.

In this independence and uniqueness of the UNIDROIT Principles, lies also one of their biggest problems -- the lack of a frame of reference. In the case of a question on the interpretation of any of the Principles, there is very little supplemental material. This, however, is to be expected, and hopefully through the frequent use of the Principles some form of "precedent" will be built up.

The UNIDROIT Principles allow for the termination of a contract "where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance."[204] The Principles do not use the traditional term "breach," but opted instead for the more neutral term "non-performance." This neutral term includes not only breach, but also other circumstances which do not amount to what is traditionally referred to as breach, such as situations where performance becomes impossible due to circumstances not attributable to the fault of either of the parties. In this regard the Principles most resemble the Restatement which uses "material failure" in a similar way.

In Principles terminology, a breach is referred to as a "non-excused non- performance." Only a "fundamental non-excused non-performance" will allow the aggrieved party to terminate the contract and claim damages from the non-performing party. There are therefore three essential terms used and each of them is accompanied by a set of requirements. The following discussion will define each of these three terms. [page 621]

B. "Non-performance"

Article 7.1.1 defines non-performance as the "failure by a party to perform any of its obligations under the contract, including defective performance or late performance."[205] As is clear from this definition, two forms of conduct -- positive non-performance (or defective performance) and delay -- are expressly included in this definition. It is also clear, however, that these are not the only forms of conduct included in the definition. The extent of the definition's application to other forms of failure remains undetermined. Article 7.3.3 provides as follows:

The comment to this article makes clear that anticipated non-performance is to be equated with a non-performance that occurred at the time when performance fell due.[207] Where it is clear that the performance of one party will not take place, that party's conduct must be treated as if he has already failed to perform his obligations under the contract. It is required that it be clear that there will be non-performance; a suspicion, even though it may be well-founded, is not sufficient.[208] An express repudiation of the contract or circumstances that indicate that there will be non-performance will be sufficient to constitute anticipatory non-performance. The comments [209] provide the illustration of A promising to deliver oil to B by the M/S Paul in Montreal on February 3. On January 25, the M/S Paul is still two thousand kilometres from Montreal and will not arrive in Montreal before February 8 at the speed it is making. In these circumstances, B may treat the situation as if it is already 3 February and the M/S Paul has not arrived in Montreal. Although anticipatory non-performance is not expressly included in the definition of non-performance, it must be treated as such as soon as it is clear that anticipatory non-performance is present.

The comments to Article 7.1.1 state that non-performance includes all forms of defective performance as well as complete failure to perform. [page 622] Presumably, therefore, any failure whatsoever must be included in the definition of non-performance and so too must impossibility attributable to the fault of one the parties and even impossibility not so attributable.

In conclusion, the UNIDROIT Principles reflect the third general principle of national law identified above in that any of the four forms of breach can potentially give rise to the right to terminate the contract.

Non-performance is a neutral concept and does not indicate that the non-performing party will be held liable or responsible for any consequences attributable to that non-performance. The mere determination of the presence of a non-performance will not entitle the aggrieved party to claim damages from the non-performing party. Whether or not a party will be held responsible for those consequences, must be found in one of the remaining two terms identified in the crucial concept of "fundamental non-excused non-performance."

C. "Non-excused"

As was indicated above, the definition of non-performance includes all failures to perform. However, a non-performing party cannot be held responsible for the consequences attributable to his non-performance in all circumstances. The UNIDROIT Principles therefore distinguish between "non-excused" and "excused" non-performance. Although a party who has not received performance will as a rule be entitled to terminate the contract whether or not the non-performance is excused, he is not entitled to claim damages or specific performance of an excused non-performance of the other party. As may be recalled, this paper is only focusing on the situations where the aggrieved party chooses not to insist on specific performance, but to claim damages to put him in the position he would have been in had there been no breach of contract. In Principles terminology this is the situation where a party chooses to terminate the contract for non-excused non-performance. Had the performance been excused, the aggrieved party would not have been able to claim damages.

The Principles do not expressly state when non-performance is non-excused, but rather approach the issue by stating when non-performance is excused. In the first place, Article 7.1.2 provides that "[a] party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party's act or omission or by another event as to which the first party bears the risk."[210] This Article contemplates the typical situation where one party's non-performance was caused by the other's conduct. In these cases, the non-performing party's conduct is removed from the realm of "non-performance" and none of the usual consequences of non-performance arise.[211] The article also contemplates the possibility of one party's interference acting [page 623] only as a partial impediment to performance by the other party in which case it will be necessary to decide the extent to which non-performance was caused by the first party's interference and to which extent it was caused by other factors.[212]

Article 7.1.2 further contemplates the situation where the impossibility results from an event the risk of which was expressly or impliedly allocated by the contract to the party alleging non-performance.[213] It would be unreasonable to allow a party to rely on the non-performance of the other party where he bears the risk of such non-performance.

Secondly, Article 7.1.3 provides that where the parties are to perform simultaneously, either party may withhold performance until the other party tenders its performance and where the parties are to perform consecutively, the party that is to perform later may withhold its performance until the first party has performed.[214] Non-performance is therefore excused as long as the other has to perform first or tender performance.

Thirdly, unexpected external events will excuse performance. Article 7.1.7(1) provides that "[n]on-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."

In the absence of one of these three situations, the non-performance is non-excused and will give rise to a claim for damages by the aggrieved party.

D. "Fundamental"

It is not every non-excused non-performance that allows the aggrieved party to terminate the contract. The non-excused non-performance must be of a sufficiently serious nature to justify such termination and this requirement is expressed by the term "fundamental." This requirement that non-performance be fundamental reflects the first general principle of national law identified above, namely that the breach must be material. In this regard, the crucial Article 7.3.1(2) provides as follows:

The comment to Article 7.3.1 explains that whether, in the case of non-performance by one party, the other should have the right to terminate the contract, depends upon the weighing of a number of considerations.[216] The late or defective performance may be completely useless to the aggrieved party or the non-performing party's behaviour may be such that it would be unjust not to allow the aggrieved party to terminate. On the other hand, the drafters considered the serious detriment that termination may cause for the non-performing party whose expenses in preparing for and tendering performance may not be recovered. A weighing of these opposing interests, may lead to the conclusion that the non-performance is fundamental, i.e. material and not merely of minor importance. Such a conclusion may also be expressed as meaning that the interests of the aggrieved party will be more adversely affected if the contract is not terminated, than the interests of the non-performing party if it is. If this is the conclusion, the aggrieved party will have the right to terminate the contract.

This even-handed weighing of the interests of the non-performing party and the aggrieved party may at first sight appear unusual. When it is kept in mind that Article 7.3.1 covers both situations of excused and non-excused non-performance, the reasoning behind this approach becomes clearer. In the case of excused non-performance, the Principles must, without picking sides, decide whether it would be in the interest of both parties to keep the contract alive. The [page 625] factors to be considered in determining whether termination is allowed, should reflect the possibility of this type of neutral judgement.[217]

The determining factors must also allow for the situation where non-performance is not excused and the feeling is created that the non-performing party is somehow responsible for his non-performance. In this situation a completely neutral judgement would be unsuitable. The Principles therefore make provision for this eventuality by including in the factors to be considered a number of provisions looking specifically at the non-performing party and his frame of mind. The goal of the provisions is to protect the aggrieved party from an intentional or reckless non-performer.[218]

The first factor influencing the determination entails two distinct parts. In the first place, the aggrieved party must be substantially deprived of what it was entitled to expect at the time of the conclusion of the contract. The Principles make no further effort to explain "substantial deprivation." This is presumably a requirement similar to the substantial performance doctrine in U.S. law and the requirement that breach should go to the root of the contract in South African law. The Article then continues to provide that the aggrieved party cannot terminate the contract if the non-performing party can show that it did not foresee, and could not reasonably have foreseen, that the non-performance was fundamental for the other party.[219] Even if the non-performance is seriously detrimental to the aggrieved party, he may not terminate the contract if the non-performing party did not foresee or could not reasonably have foreseen that result. The exact interpretation to be ascribed to this exception is perplexing and two possible interpretations are present.

This exception may firstly be interpreted as an attempt to reinforce the difference between excused and non-excused non-performance. If a party did not foresee and could not reasonably have foreseen the result, it was probably attributable to an act of God and would then fall within the exception for unexpected external events. Under this interpretation, less weight should be given to the deprivation of the aggrieved party where the non-performing party's non-performance was excused.

This is not, however, the way the comments seem to interpret the exception. The comments seem to focus not on the non-performance and whether or not it was foreseeable, but on whether it was foreseeable that the non-performance would be fundamental, in other words, they focus on the consequences of the non-performance. Differently stated, they seem to say that the fundamentalness of the non-performance depends on whether or not it was foreseeable that it would be fundamental. This argument is distinctly circular.

Although the first interpretation would seem to be the more acceptable one, there is no indication that it is what the drafters had in mind. Instead of [page 626] clearing up the question, Illustration 3 accompanying Article 7.3.1(2)(a) rather adds to the confusion. A undertakes to remove waste from B's site during 1992. B fails to inform A that B has hired excavators at high cost to begin work on the site on 2 January 1993. B cannot terminate its contract with A on the ground that A had not cleared the site on 2 January. In this example, both of the possible interpretations are covered. A could not reasonably have foreseen, in the first place, that B would suffer injury and in the second place, that the injury would be fundamental. If anything, this illustration more aptly explains Article 7.3.1(2)(b).

According to Article 7.3.1(2)(b) the second factor to be considered is whether strict compliance with the obligation which has not been performed is of essence under the contract. Here it is not the actual gravity of the performance that is important, but the nature of the contractual obligation for which strict performance might be of essence.[220] Not only provisions expressly made of the essence of the contract, but also provisions that are impliedly of the essence are included here. This is a principle also found in South African, U.S., and German law and allows for not only the enforcement of the express provisions of the contract, but also for the protection of an aggrieved party where the contract fails to regulate a particular situation, but good faith or fair dealing necessitates a certain course of action. In this regard, the actions that reasonable parties would have taken in similar circumstances may be relevant.[221] The comments state that "in a contract for sale of commodities the time of delivery is normally considered to be of the essence, and in a documentary credit transaction the documents tendered must conform strictly to the terms of the credit."[222] From especially the first part of this sentence, it appears that custom may also lead to the conclusion that a specific term was of the essence of the contract. This further enforces the suggestion that the actions of reasonable parties may be relevant.

The fact that this second factor "looks not at the actual gravity of the non-performance,"[223] may imply that the perplexing first factor analysed above does look at the gravity of the non-performance.

Paragraph 2(c) is one of the provisions that focuses on the non-performing party and protects the aggrieved party against a contracting party who intentionally or recklessly fails to perform. This Article recognises that conduct of this nature will undermine the confidence the aggrieved party has put in the non-performing party and allows him to terminate their relationship. Non-performance will not always be fundamental simply because of the intentional or reckless conduct of the non-performing party. The comments warn that it may be [page 627] contrary to good faith,[224] to terminate a contract if the non-performance, even though committed intentionally, is insignificant.

Closely connected with the previous paragraph, is paragraph 2(d) which provides that conduct which gives the aggrieved party reason to believe that it cannot rely on the other party's future performance must be considered when determining whether non-performance is fundamental. An intentional breach may sometimes show that a party cannot be trusted.[225] In this case, the fact that non-performance may be of an insignificant nature, will not prevent its being fundamental. Illustration 4 [226] gives the example of A, the agent of B, who is entitled to reimbursement for expenses and submits false vouchers to B. Although the amounts claimed are insignificant, B may treat A's behaviour as a fundamental non-performance and terminate the agency contract. This illustration reveals the broad reach of the term "fundamental." A determination of fundamentalness is influenced not only by the consequences of the non-performance for the transaction at issue, but also for future transactions between the parties.

The last factor to be considered when determining whether a non-performance was fundamental, is one which should carry more weight when looking at excused non-performance, but should not be ignored completely when dealing with non-excused non-performance. Regard must be had to the extent to which a party who fails to perform, has relied on the contract and has prepared or tendered performance and how much he stands to lose should the contract be terminated. Non-performance is less likely to be treated as fundamental if it occurs late, after the preparation of performance, than if it occurs early before such preparation.[227] Whether a performance tendered or rendered can be of any benefit to the non-performing party if it is refused or has to be returned to that party is also of relevance.[228]

In conclusion, if the conduct of a party amounts to a non-excused fundamental non-performance as defined above, the other party will have the right to terminate the contract.

In addition to the general rule formulated above, the Principles expressly regulate delay and anticipatory non-performance further.

E. Delay

Before a party will be allowed to terminate the contract under the general rule discussed above, it must be determined that the non-performance is [page 628] fundamental. In the context of delay, it means, for example, that the aggrieved party informs the non-performer at the conclusion of their contract that timely performance is essential and the non-performer nevertheless proceeds to perform 3 weeks late. In this situation, and with reference with articles 7.3.1 (b) and (c), it can be safely concluded that the non-performance was fundamental and the aggrieved party will be entitled to terminate the contract.[229]

Suppose, however, that the parties only agreed that performance should take place within a reasonable time and there are no other circumstances indicating that timely performance is fundamental. One party fails to perform within a reasonable time. Are there circumstances in which the aggrieved party may terminate the contract?

According to Article 7.3.1(3), in the case of delay, "the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it under Article 7.1.5 has expired."[230] The comment to this section provides that it refers to Article 7.1.5, paragraph (3), which provides that the aggrieved party may use the Nachfrist procedure to terminate a contract which may not otherwise be terminated for delay. Article 7.1.5, paragraph 3 provides as follows:

By giving notice to the non-performing party, the aggrieved party makes timely performance an obligation which must be strictly complied with (to use the words of Article 7.3.1, paragraph (b)) and failure of the non-performing party to perform within the extended period, will be fundamental non-performance. During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages, but may not resort to any other remedy.[232] If the aggrieved party receives notice from the other party that [page 629] the latter will not perform within the additional period, or if upon expiration of the additional period performance has not been made, then the aggrieved party may resort to any remedy available under the Principles chapter on non-performance.[233] These remedies include the right to terminate the contract or, alternatively, to claim specific performance. In both cases the party may claim damages. The aggrieved party will only have the right to terminate the contract if the period of extension was reasonable.

In this last respect, the Principles differ substantially from the German procedure of Nachfrist. Under German law, if the obligee has given notice and the obligor has not performed within the period of grace, the obligee may no longer claim performance.[234] The contract may then only be wound up -- either by a claim for damages for non-performance, or by a claim for rescission. Both of these remedies amount to termination of the contract. A claim for specific performance is expressly prohibited by the Section326(1) of the BGB and the options available to the aggrieved party are limited thereby.[235] The approach taken by the Principles is preferable to the German law approach. The aggrieved party should have as many options as possible to choose from and should only be limited where the non-performing party has materially changed his position in reliance on the conduct of the aggrieved party. In this regard, the Principles more closely resemble the position taken by South African and U.S. law.

Further, it should be noted that the Principles also give the aggrieved party the right to follow the route of Nachfrist, even where the non-performance was fundamental, without the need for an extended period of notice.[236] As soon as the aggrieved party gives the extension, he (at least temporarily) loses the right to resort to any remedies except for a claim for damages during the extended period. If the non-performing party performs during the period, the aggrieved party loses the right permanently, but if the non-performing party fails to perform or indicates that it will not perform, the right to terminate the contract springs into life again.[237]

A party may not use the Nachfrist procedure when the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party.[238] In the case of a trivial non-performance, not even the use of the Nachfrist procedure will entitle the aggrieved party to terminate the contract. [page 630]

South African, U.S., and German law recognise that time is normally of the essence in mercantile transactions. The comment to Article 7.3.1 also states that "in contracts for the sale of commodities the time of delivery is normally considered to be of the essence." Article 1.8 reinforces this brief reference by providing that the parties are bound not only by any practice which they have established between themselves, but also by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable.

F. Anticipatory Non-performance

As indicated earlier, anticipatory non-performance is included in the definition of non-performance and subject to the general rules formulated above. Article 7.3.3 reaffirms this by providing that "where prior to the date of performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract."

Article 7.3.4 extends the right to termination even further. A party, who reasonably believes that there will be a fundamental non-performance by the other party, may demand adequate assurance of due performance and may meanwhile withhold its own performance.[239] Where assurance is not provided within a reasonable time, the party demanding it may terminate the contract.[240] Article 7.3.4 finds application where article 7.3.3 cannot be invoked because there is still a possibility that performance may take place.[241] What constitutes an adequate assurance will depend on the circumstances of each case.

G. Notice of termination

Article 7.3.2 provides how termination is to take place:

This Article, in effect, shifts the burden to the aggrieved party to express his dissatisfaction with the late or non-conforming performance, or face the consequence of losing his right to terminate the contract. It is not entirely clear what will happen once the aggrieved party loses his right to terminate.

The Principals do not state whether he loses the right in perpetuam, or whether he can somehow regain the right, for example by using the provisions of Article 7.1.5. What a reasonable time is, will, of course, depend on the circumstances of each case. The notice becomes effective when it reaches the non-performing party.[243]

H. Additional provisions

One of the truly innovative provisions of the UNIDROIT Principles, which more resembles a rule found in consumer protection legislation than in commercial codes, is Article 7.1.4 which provides as follows:

This Article allows the non-performing party to unilaterally suspend and even preclude the aggrieved party's right to terminate the contract. The Article favours the preservation of the contract because it allows the non-performing party to extend the period for performance, unless timely performance is required by the agreement or the circumstances.[245]

The danger of a provision such as the one under consideration is that the aggrieved party may find itself in a position where it has to await performance pursuant to the notice of the non-performing party, even where the likelihood of actual performance is slim. To avoid this, the provisions of Article 7.1.4 require that cure must be appropriate in the circumstances. Factors relevant in determining whether cure is appropriate include: (i) whether the proposed cure promises to be successful in resolving the problem; (ii) whether the necessary or probable delay in effecting cure would be unreasonable or would itself constitute a fundamental non-performance; and (iii) whether the aggrieved party changed its position before receiving notice of cure.[246] Cure may not take place where the aggrieved party has a legitimate interest in refusing cure. The comments indicate that "legitimate interest" is narrowly interpreted to include for example situations where it is likely that the non-performing party will cause damage to person or property when attempting to cure, but not where the aggrieved party "simply decided that it does not wish to continue contractual relations."[247]

The aggrieved party is further protected by the requirement that cure should be effected promptly. The comments state that time is of the essence in the exercise of the right to cure.

The notice of cure has important implications on the right to terminate. Even where an aggrieved party has already validly terminated the contract pursuant to Article 7.3.1, the non-performing party may suspend the effect of that termination by giving notice of cure. If the non-performance is cured, the notice of termination is inoperative. If the non-performance is not cured by the time the time for cure has expired, then termination takes effect at that time. The parties may find themselves in a position where the existence of their contract depends on what is a reasonable period within which the cure must take place. Although [page 633] this could lead to a substantial amount of uncertainty, it is the only way in which a problem such as the instant one can be addressed.

In conclusion, this innovative provision is an exception to the general principle found in national law that an aggrieved party has an election between remedies available. It provides a non-performing party with a unilateral right to suspend and even extinguish the aggrieved party's right to terminate a contract.

VI. CONCLUSION

The use of national law for the solution of a dispute arising from an international commercial contract is associated with a number of problems. The conventional approaches used in international commercial contracts do not solve all the problems encountered. The UNIDROIT Principles of international commercial contracts go a long way to solving these problems by establishing a balanced set of rules designed for use throughout the world irrespective of the legal traditions and the economic and political conditions of the countries in which they are to be applied.

The Principles possess a number of characteristics, illustrating the desirability of their wide spread use in international commercial contracts. One of these characteristics is that the Principles are easily accessible and clearly and concisely drafted. Furthermore, the three most important general principles of national systems regarding an aggrieved party's right to terminate a contract for breach by the other party, are reflected in the Principles. First, they allow, in most instances, an aggrieved party the choice to elect between available remedies. They secondly restrict the availability of the right to terminate a contract to cases of material breach and this requirement is often linked to the requirement that the remedy should be reasonable -- a term widely utilised in both national law and the Principles. Lastly, all forms of breach can potentially give rise to the right to terminate a contract.

In addition to effectively including the general principles of national legal systems, the Principles contain a number of innovative characteristics. They use terminology not associated with any specific national legal system and so avoid the political and socio-economical baggage associated with national policy. They allow a non-performing party the right to unilaterally suspend the aggrieved party's right to terminate a contract.

The Principles to some extent still suffer from their novelty. Their relationship with the CISG has often been analysed, but little information is available regarding their application and effectiveness in practice in arbitration awards and the like. However, the amount of attention devoted to the Principles is an encouraging indication of their importance.

In all, the Principles present a systematic and well-defined set of rules suited to international commercial contracts and possess the necessary traits to establish themselves as an authoritative source of the elusive lex mercatoria. [page 634]

FOOTNOTES

a1. Elbe J. van Vuuren, BLC, LL.B (Pretoria), LL.M (Arizona) is completing her articles of clerkship in the International Trade Law Unit of the Johannesburg law firm Webber, Wentzel, & Bowens. This article was written as partial fulfilment of a LL.M in International Trade Law.

1. See Michael J. Bonell, The UNIDROIT Principles of International Commercial Contracts: Why? What? How?, 69 TUL.L.REV. 1121, 1123 (1995).

2. See H. Booysen, The International Sale of Goods, 17 S. AFR. Y.B. INT'L. L. 71 (1991-1992); S. Viejobueno, Private International Law Rules Relating to the Validity of International Sales Contracts, 26(2) CILSA 173, (1993).

3. See Luiz Olavo Baptista, The UNIDROIT Principles for International Commercial Law Project: Aspects of International Private Law, 69 TUL.L.REV. 1209, 1220 (1995).

4. See Bonell, supra note 1, at 1144.

5. In other words, where the arbitrator is authorised by the parties to move away from the strictness of the law in favour of natural equity.

6. See Bonell, supra note 1, at 1145.

7. See Alejandro M. Garro, The Gap-Filling Role of the UNIDROIT Principles in International Sales Law: Some Comments on the Interplay Between the Principles and the CISG, 69 TUL.L.REV. 1149, 1152 (1995) (describing how the "settlement of a dispute can be kept within its international legal habitat").

8. See Bonell, supra note 1, at 1125; see also Franco Ferrari, Defining the Sphere of Application of the 1994 "UNIDROIT Principles of International Commercial Contracts", 69 TUL.L.REV. 1225, 1230 (1995) (describing how the principles provide certainty and predictability by providing rules clarifying the vague concepts of general principles and lex mercatoria); Alejandro M. Garro, The Eason-Weinmann Colloquium on International and Comparative Law: The Contribution of the UNIDROIT Principles to the Advancement of International Commercial Arbitration, 3 TUL. J. INT'L & COMP. L. 93, 94 (1995).

9. See Garro, supra note 7, at 1153; Bonell, supra note 1, at 1124.

10. THE INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAW (UNIDROIT), THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS (1994) [hereinafter UNIDROIT PRINCIPLES].

11. See Bonell, supra note 1, at 1126.

12. UNIDROIT PRINCIPLES, supra note 10, Preamble.

13. Id.

14. Termination is also often referred to as cancellation.

15. Examples of such defects include mistake, fraud or duress. See e.g., UNIDROIT PRINCIPLES, supra note 10, at art. 3.2 (dealing with avoidance and the validity of a contract).

16. UNIDROIT PRINCIPLES, supra note 10, at art. 3.17(1) & (2).

17. See discussion infra Parts II, III, & IV.

18. South African law uses "cancellation" to refer to a strikingly similar concept. See discussion infra. On the other hand, U.S. and German law do not consistently refer to a similar concept.

19. UNIDROIT PRINCIPLES, supra note 10, at art. 7.3.5.

20. That is, the contract is not extinguished from its inception, but the future enforcement thereof by way of specific enforcement is curtailed.

21. U.N. Convention on Contracts for the International Sale of Goods, Final Act, U.N. Doc. A/CONF. 97/18 (1980).

22. See e.g., The Alienation of Land Act 68 of 1982; The Credit Agreements Act 75 of 1980; The Conventional Penalties Act 15 of 1962; The Bills of Exchange Act 34 of 1964.

23. See D. J. JOUBERT, GENERAL PRINCIPLES OF THE LAW OF CONTRACTS 201 (1987).

24. R.H. CHRISTIE, THE LAW OF CONTRACT IN SOUTH AFRICA 587 (2d ed. 1991).

25. In other words, there must be a breach of contract.

26. CHRISTIE, supra note 24, at 590.

27. Law v. Rutherford, 1924 AD 261, 262.

28. CHRISTIE, supra note 24, at 590.

29. Louw v. Trust-Administrateurs Bpk. 1971 (1) SA 896 (W), 903.

30. Id.

31. Breytenbach v. Van Wijk 1923 AD 541, 549.

32. See e.g., Nel v. Cloete 1972 (2) SA 150 (A), 166.

33. See CHRISTIE, supra note 24, at 600.

34. See id. at 601.

35. See id. at 601.

36. See id. at 602.

37. See id. at 602. South African law does not make the formal statutory distinction between civil law and commercial law as is done in Germany with the BGB and the HGB respectively.

38. Greenfield Manufacturers (Temba) (Pty) Ltd v. Royton Electrical Engineering (Pty) Ltd 1976 (2) SA 565 (A), 569.

39. Goldstein and Wolff v. Maison Blanc (Pty) Ltd 1948 (4) SA 446 (C), 453.

40. Greenfield Manufacturers, 1976 2 SA 565 (A), 569.

41. Microutsicos v. Swart 1949 3 SA 715 (A), 730.

42. See CHRISTIE, supra note 24, at 603.

43. See id.

44. See discussion infra Part II.E.

45. See CHRISTIE, supra note 24, at 606.

46. Oatarian Properties (Pty) Ltd. v. Maroun, 1973 3 SA 799 (A), 784.

47. The term "rescission" is here used as synonomous with "termination".

48. Spies v. Lombard, 1950 (3) SA 469 (A), 470.

49. CHRISTIE, supra note 24, at 609.

50. For example, whether the breach was material or not.

51. Van den Berg v. Tenner, 1975 (3) SA 268 (A).

52. Aucamp v. Morton, 1949 (3) SA 611 (A).

53. Greenfield Manufacturers v. Royton Electrical Engineering, 1976 (2) SA 566 (A).

54. Id. at 568C.

55. Id. at 569H.

56. Id. at 571H.

57. Aucamp v. Morton, 1949 (3) SA 611 (A), 619.

58. Schlinkmann v. Van Der Walt, 1947 (2) SA 900 (E), 919.

59. Id. at 919.

60. Macduff & Co., Ltd. v. Johannesburg Consolidated Investment Co., Ltd., 1924 AD 573, 600.

61. Werda Hotel (Edms) Bpk v. Daras en andere, 1989 (1) SA 854 (T), Grobbelaar N.O. v. Bosch, 1964 (3) SA 687 (E), Wireohms SA (Pty) Ltd v. Greenblatt and another, 1959 (3) 909 (C).

62. Werda Hotel, 1989 (1) SA 854 (T).

63. Grobbelaar, 1964 (3) SA 687 (E), at 691D.

64. Id. at 691C.

65. THE AMERICAN LAW INSTITUTE, NATIONAL CONFERENCE OF COMMISSIONERS OF UNIFORM STATE LAWS, General Comment, in UNIFORM COMMERCIAL CODE (1995).

66. U.C.C. Section 1.103 (1989).

67. Joseph M. Perillo, UNIDROIT Principles of International Commercial Contracts: the black letter text and a review, 63 FORDHAM L. REV. 283 (1994); Ferrari, supra note 8; Pillar Perales Viscasillas, UNIDROIT Principles of International Commercial Contracts: Sphere of Application and General Provisions, 13 ARIZ. J. INT'L & COMP. LAW 381, 386 (1996).

68. Restatement (Second) of Contracts Sections 253, 236 cmt. a (1979) [hereinafter Restatement].

69. Id. at Section 235.

70. Id.

71. Id. at Section 235 cmt. b.

72. Id.

73. Id. at ch. 10, Topic 2.

74. The requirement of performance is tantamount to claiming specific performance.

75. RESTATEMENT, supra note 68, at Section 236(1).

76. Id. at Section 236(2).

77. Id. at Section 236, cmt. a.

78. 17 AM. JUR. 2D, Contracts Section 726 (1964) [hereinafter Contracts].

79. Id.

80. Anvil Mining Co. v. Humble, 153 U.S. 540 (1894).

81. Id.

82. RESTATEMENT, supra note 68, at Section 225(1).

83. Id. at Section 225(2).

84. Id. at Section 237.

85. Id.

86. Id. at Section 237, cmt.

87. Id. at Section 237, cmt. a.

88. Contracts, supra note 78, at Section 726.

89. RESTATEMENT, supra note 68, at Section 237 cmt. a.

90. Id. at Section 241.

91. Id. at Section 241 cmt. a.

92. O.W. Grun Roofing & Construction Co. v. Cope, 529 S.W.3d 258 (Tex. Ct. App. 1975).

93. Id. at 261.

94. RESTATEMENT, supra note 68, at Section 235(2).

95. Brown v. Guarantee Trust & Safe Deposit Co., 128 U.S. 403, 413 (1988); Cheney v. Libby, 134 U.S. 68, 77 (1890); Emerson v. Slater, 63 U.S. 28, 36 (1859); Secombe v. Steele, 61 U.S. 94, 104 (1857); RESTATEMENT, supra note 68, at Section 237 cmt. d; Contracts, supra note 78, at Section 484.

96. See discussion supra Part II, B.

97. Maryland Steel Co. v. United States, 235 U.S. 451 (1915).

98. See Cheney, 134 U.S. 68.

99. Slater v. Emerson, 60 U.S. 224, 238 (1956).

100. See Cheney, 134 U.S. 68, 78.

101. See id. at 78; Stinton v. Dousman, 61 U.S. 461, 466 (1857).

102. See RESTATEMENT, supra note 68, at Section 242 cmt. d.

103. See Secombe v. Steele, 61 U.S. 94, 104 (1857); RESTATEMENT, supra note 68, at Section 242(c).

104. See RESTATEMENT, supra note 68, at Section 242 cmt. d.

105. See Contracts, supra note 78, at Section 484.

106. See Brown v. Guarantee Trust & Safe Deposit Co., 128 U.S. 403, 414 (1988).

107. See Cheney v. Libby, 134 U.S. 68, 71 (1890); Secombe v. Steele, 61 U.S. 94, 104 (1857).

108. See Secombe, 61 U.S. 94, at 104.

109. See Brown, 128 U.S. 403, at 414; Secombe, 61 U.S. 94, at 104; Contracts, supra note 78, at Section 486.

110. See Contracts, supra note 78, at Section 486.

111. See id.

112. RESTATEMENT supra note 68, at Section 242(c) applies to the situation where the parties have agreed on a specific date for performance and has been discussed in the previous paragraphs, but is included here for the sake of clarity.

113. See discussion supra Part III.B (discussing breach as non-fulfilment of a condition).

114. See RESTATEMENT, supra note 68, at Section 242 cmt. (a) and (b).

115. See id. at Section 242 cmt. c.

116. Contracts, supra note 78, at Section 489.

117. See id.

118. See id. at Section 483.

119. Id. at Section 631.

120. See id. at Sections 634, 634 & 639.

121. Id. at Section 634.

122. See id. at Section 635.

123. RESTATEMENT, supra note 68, at Section 243(4).

124. See New York Life Ins. Co. v. Viglis, 297 U.S. 672 (1936).

125. See Central Trust Co. v. Chicago Auditorium Ass., 240 U.S. 581, 589 (1916).

126. See Roehm v. Horst, 178 U.S. 1, 19 (1900).

127. See Contracts, supra note 78, at Section 614; RESTATEMENT, supra note 68, at Section 253(2).

128. See Contracts, supra note 78, at Section 719.

129. See RESTATEMENT, supra note 68, at Section 243 cmt. b.

130. See id. at Section 250(a). Section 250(2) states that a repudiation is also a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach. This situation is discussed under impossibility attributable to the fault of one of the parties.

131. See Roehm v. Horst, 178 U.S. 1, 7 (1900); Dingley v. Oler, 117 U.S. 490, 503 (1886).

132. Mobley v. New York Life Ins. Co., 295 U.S. 632, 638 (1953).

133. Contracts, supra note 78, at Section 667. Impossibility attributable to the fault of the other party is sometimes referred to as implied repudiation. See e.g., Taylor v. Johnston, 15 Cal.3d 130, 539 P.2d 425, (Cal. 1975); RESTATEMENT, supra note 68, at Section 250(2). For sake of clarity and ease of comparison, this terminology will not be used.

134. See Day v. United States, 245 U.S. 159 (1917); United States v. Gleason, 175 U.S. 588 (1900).

135. See Contracts, supra note 78, at Section 673.

136. See id. at Section 702; RESTATEMENT, supra note 68, at Section 245, cmt. a.

137. See Chicago M. & S.P.R. Co. v. Hoyt, 149 U.S. 1, 14 (1893).

138. See Roehm v. Horst, 178 U.S. 1, 18 (1900); Contracts, supra note 68, at Section 679.

139. See Anvil Mining Co. v. Humble, 153 U.S. 540, 552 (1894); Central Trust Co. v. Chicago Auditorium, 240 U.S. 581, 589 (1916); Roehm, 178 U.S. at 18.

140. See GERHARD DANNEMANN, BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW, AN INTRODUCTION TO GERMAN CIVIL AND COMMERCIAL LAW (1993).

141. See e.g., BURGERLICHES GESETZBUCH (Civil Code) (Otto Palandt ed. 44th ed. 1985)[hereinafter BGB] Section 89a (providing principles on termination of an agency relationship).

142. See id. at Section 276.

143. See id.

144. The two sections provide as follows:

Section 280. Liability in case of impossibility for which one is responsible.

Section 325. Development of impossibility for which debtor is responsible.

145. If both parties are at fault, the damages will be apportioned. See BGB, supra note 141, at Sections 40, 332, 426.

146. See BGB, supra note 141, at Section 280.2.a.

147. See id.

148. See infra Part IV.C.

149. E. J. COHN, BRITISH INSTITUTE OF INTERNATIONAL AND COMPARATIVE LAW, MANUAL OF GERMAN LAW 120 (2d ed. 1968).

150. See BGB, supra note 141, at Section 280(1).

151. See BGH NJW 83,443.

152. See BGB, supra note 141, at Section 325(1).

153. See id. at Sections 280(1) & 325(1).

154. See id. at Sections 280(2) & 325(1).

155. See id. at Section 280.4.a.

156. See id. at Sections 280(2) & 325(1).

157. See id. at Sections 280(2) & 325(1).

158. See id. at Section 280.4.b.

159. Brehm JZ 74, 583.

160. The BGB extends these rules to the situation where performance due from one party under a mutual contract becomes impossible because of a circumstance for which the other party is responsible. See BGB, supra note 141, at Section 324.

161. These sections provide as follows:

Section 284. Default by debtor.

Section 285. No default if no liability.

Section 286. Compensation for default.

Section 326. Default, fixing of a period with warning of refusal.

162. BGB, supra note 141, at Section 284(1).

163. Id. at Section 285.

164. Id. at Section 284(1).

165. Id. at Section 284(2).

166. See id. at Section 286(1).

167. See id. at Section 326(2).

168. This requirement is very similar to the South African and U.S. requirement that time must be of the essence of the contract.

169. See BGB, supra note 141, at Section 326(1).

170. See DANNEMANN, supra note 140, at 29. This concept is similar to the requirement for a reasonable period of time found in common law countries and reminds of the South African rules requiring that a party be placed in mora ex persona.

171. See id. at 29.

172. See BGB, supra note 141, at Section 326(1).

173. See DANNEMANN, supra note 140, at 29; NIGEL FOSTER, GERMAN LAW & LEGAL SYSTEM 217 (1993).

174. See NORBERT HORN ET AL., GERMAN PRIVATE AND COMMERCIAL LAW 104 (Tony Weir trans., 1982).

175. See Ludwig Linder, Law of Contracts, in BUSINESS TRANSACTIONS IN GERMANY (FRG) 10-1, Section 10.04[4] (Dennis Campbell et al. eds. 1996).

176. See DANNEMAN, supra note 140, at 29.

177. HANDELSGESETZBUCH (Commercial Code) Section 376 para. 1 [hereinafter HGB].

178. This position may be contrasted with the South African position where the law is willing to recognise that time is more likely to be of the essence in a mercantile transaction, but do not go as far as prohibiting an aggrieved party to claim specific performance.

179. See DANNEMANN, supra note 140, at 29.

180. See id. at 29.

181. See FOSTER, supra note 173, at 217.

182. See HORN, supra note 174, at 104; FOSTER, supra note 173, at 217. Cf. Ingeborg Schwenzer, The Law of Contracts, in INTRODUCTION TO GERMAN LAW 173, 182 (Werner F. Ebke & Matthew W. Finkin eds., 1996) (treating anticipatory breach as a positive breach of an obligation).

183. See ENTSCHEIDUNGEN DES BUNDESGERICHTSHOFES IN ZIVILSACHEN [BGHZ] 11, 80, 84; BGHZ 49, 56, 59; FOSTER, supra note 173, at 217; HORN, supra note 174, at 104.

184. See HORN supra note 174, at 104.

185. See id.

186. See id.

187. See Schwenzer, supra note 182, at 182. BGB Section 242 provides that the debtor is bound to effect performance according to the requirements of good faith, giving consideration to common usage.

188. See FOSTER, supra note 173, at 221.

189. See id.

190. See id. at 220.

191. See Schwenzer, supra note 182, at 175; FOSTER, supra note 173, at 220.

192. See Schwenzer, supra note 174, at 106.

193. See DANNEMANN, supra note 140, at 31; COHN, supra note 149, at 112.

194. See BUSINESS TRANSACTIONS IN GERMANY, FRG, supra note 175, at Section 10.04[6][c].

195. See id.

196. See FOSTER, supra note 173, at 220; BGH NJW 1950 (1980).

197. RGZ 54, 98.

198. See BGB, supra note 141, at Sections 459, 462 & 463.

199. Compensation for damage can only be claimed under BGB Section 463 where there was express warranty of quality or deceit.

200. See FOSTER, supra note 173, at 220.

201. RGZ 66, 289.

202. See BUSINESS TRANSACTIONS IN GERMANY, FRG, supra note 175, at Section 10.04[6][c].

203. The Unidroit Homepage, (visited Apr. 4, 1998) <http://www.agora.stm.it>.

204. UNIDROIT PRINCIPLES, supra note 10, art. 7.3.1(1).

205. Id. at art. 7.1.1.

206. Id. at art. 7.3.3.

207. Id. at art. 7.3.3 cmt.

208. Id. at art. 7.3.3 cmt.

209. Id.

210. Id. at art. 7.1.2.

211. Id. at art. 7.1.2 cmt.

212. Id.

213. Id.

214. Id. at art. 7.1.2 cmt.

215. Id. at art. 7.3.1(2).

216. Id. at art. 7.3.1 cmt.

217. See e. g., id. at art. 7.3.1(a) & (e).

218. See e.g., id. at art. 7.3.1(c) & (d).

219. See id. at art. 7.3.1 cmt.

220. Id.

221. It is important to note that the Principles make extensive use of the term "reasonable" in various chapters.

222. See UNIDROIT PRINCIPLES, supra note 10, at art. 7.3.1, cmt.

223. Id.

224. See id. at art. 1.7.

225. See id. at art. 7.3.1, cmt.

226. See id. at art. 7.3.1, illus. 4.

227. See id. at art. 7.3.1, cmt.

228. See id.

229. See id. at art. 7.3.1(2)(b) & (c).

230. Id. at art. 7.3.1(3).

231. Id. at art. 7.1.5(3).

232. See id. at art. 7.1.5(2).

233. See id. at art. 7.1.5(2).

234. See BGB, supra note 141, at Section 326(1).

235. Note that this is contra South African law which even in this circumstance, still allows the aggrieved party an election between terminating the contract and claiming specific performance.

236. See UNIDROIT PRINCIPLES, supra note 10, at art. 7.1.5, cmt.

237. See id.

238. See id. at art. 7.1.5(4).

239. See id. at art. 7.3.4.

240. See id.

241. See id. at art. 7.3.4, cmt.

242. Id. at art. 7.3.2.

243. See id. at art. 1.9.2. Article 1.9.3 provides that "a notice 'reaches' a person when given to that person orally or delivered at that person's place of business or mailing address."

244. Id. at art. 7.1.4.

245. See id. at art. 7.1.4, cmt.

246. Id. at art. 7.1.4(1).

247. Id. at art. 7.1.4, cmt.