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Knowledge and behaviour of person for whom a party is responsible

PECL Article 1:305 [Imputed Knowledge and Intentions]
(complete and revised version 1998)

If any person who with a party's assent was involved in making a contract, or who was entrusted with performance by a party or performed with its assent:

(a) knew or foresaw a fact, or ought to have known or foreseen it; or

(b) acted intentionally or with gross negligence, or not in accordance with good faith and fair dealing,

this knowledge, foresight or behaviour is imputed to the party itself.

Comment and notes on PECL 1:305

Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the meaning of the text. The PECL notes identify civil and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, the comments and notes to this PECL provision are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 134-136.


A. Purpose

It is the common purpose of both rules to neutralize the legal risks that inhere in the modern division of labour in trade and industry. This is achieved by imputing actual or constructive knowledge or a legally relevant state of mind, such as intention, negligence or bad faith, of a person assisting in the making or performance of the contract to the contracting party to whom that assistance is rendered.

B. Scope

Under modern conditions, most contracts are not made or performed by the contracting parties personally. Rather, the parties make contracts through the agency of employees or other persons and entrust performance of their contracts to employees, agents, subcontractors and other third persons. Article 8:107, Performance Entrusted to Another, provides that a party cannot escape its obligation of performance by delegating it to another; if the obligation is not performed, the party will remain responsible. The present Article is complementary to Article 8:107. It deals with two other aspects of this modern division of labour, namely the imputation of actual or constructive knowledge of persons assisting in the making or performance of a contract to the contracting party itself (subparagraph (a)); and with the imputation of intention or gross negligence with respect to non-performance (subparagraph (b)).

C. Imputed knowledge and foresight

Several provisions use the criteria of knowledge, awareness, foreseeability, contemplation (see Articles 1:301(5), 2:104, 3:102(2) 3:204(2), 3:205(1) and (3), 3:208, 3:209(1), 3:301(1), 4:103(1), 4:109(1), 4:111(2), 4:113(1), 4:114, 4:117(1), 6:101(2) and (3), 6:110(3), 6:111(2), 7:101(2), 8:103 subparagraph (b), 8:108(3), 9:102(3), 9:303(2) and (3), 9:503). A party which should have known or foreseen a fact is usually treated as if it had the knowledge or foresight.

When the contract is being made, a party is normally only fixed with the knowledge imputed to his employees or agents involved in making the contract. Under some Articles (e.g. Article 9:303), knowledge or foreseeability at the time of non-performance is relevant. In this case, for the purposes of Article 1:305 knowledge or intention even of any subcontractor or other person to whom it has entrusted performance may be imputed to the party.

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

D. Imputed intention, negligence and bad faith

According to subparagraph (b), certain states of mind or behaviour of the person acting are also imputed to the contracting party for whom a contract has been concluded or an act of performance is rendered.

Under several rules intentional or grossly negligent behaviour or bad faith by a party creates or increases his liability (see Articles 2:301(2), 4:107(2), 5:101(1) and (2), 6:102, 8:103 subparagraph (c), 9:503; cf. also Article 1:201(1)).

Even if the contracting party has not entrusted performance to a third person, a third person may nevertheless under certain conditions be entitled to perform the contract, see Article 7:106. If the third person acted with the contracting party's assent (Article 7:106(1)(a)) that is equivalent to an entrustment and therefore falls under Article 1:305.

In contrast, if the third person has acted by virtue of a legitimate interest in the performance under Article 7:106(1)(b), that falls outside the scope of Article 1:305.

It should be noted that under these Principles liability is not generally based on the notion of fault. Only intentional or grossly negligent non-performance are therefore mentioned as attracting greater liability.

The intentional or grossly negligent behaviour of a party or of a person whose state of mind is imputed to a party only refers to the act or omission which constitutes the non-performance. It is not necessary that the intention or gross negligence also extend to the consequences that may follow from the non-performance.

NOTES: PECL 1:305: Imputed Knowledge and Intentions [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

The issues covered by Article 1:305 are not always clearly regulated in the existing national laws.

1. Imputation of knowledge

Imputation of knowledge (Article 1:305 lit. (a)) is dealt with in rules on agency in BELGIUM (De Page & Dekkers I no. 52), GERMANY (BGB 166), ITALY (CC art. 1391) and PORTUGAL (CC art. 259(1)). In Germany it is held that the rule of BGB 166 on agency expresses a general principle: a person who entrusts another with executing certain affairs on his own responsibility will have imputed to him knowledge which the other has acquired in that context (BGH 25 March 1982, BGHZ 83, 293 (296)); this principle corresponds to the idea underlying Article 1:305 lit. (a). Although there is no explicit rule in the AUSTRIAN Code, the OGH reaches the same result by reference to ABGB 1017 (OGH 13 February 1963, SZ 36/25; see Schwimann (-Apathy) ABGB 1017 No. 12). In ENGLISH and SCOTTISH law the question is also treated as one of agency (cf. Chitty 6-031 and 6-037; Treitel, Contract 319 with references). In the NORDIC countries the agent's knowledge is imputed to the principal, Kaisto s. 265.

In BELGIUM a similar rule is justified by analogy to the rule on performance entrusted to another (see Article 8:107 below). In FRANCE, a corresponding rule has apparently not yet been formulated; but it may be compatible with the solutions to be found in case law, especially in determining foreseeability of damage (cf. Viney, Effets no. 325).

In Germany (BGB 166(1), Greece (CC art. 214), Italy (CC art. 1391(1)) and Portugal (CC art. 259(1)), only the agent's state of mind is, as a rule, considered. If, however, the agent has acted according to instructions, also the principal's state of mind is considered in Germany (BGB 166(2)) and Greece (CC art. 215); by contrast, in Italy (cf. supra) and Portugal (CC art. 259(2)) only the principal is then considered. A very flexible rule has been enacted in THE NETHERLANDS: either the agent or the principal or both are taken into account, depending on the extent to which each of them took part in concluding the contract or in determining its contents (BW art. 3:66(2)).

2. Imputation of intention

In some national laws, the imputation of intention, negligence and bad faith (Article 1:305 lit. (b)) is very important in the framework of fault principle for liability. According to several provisions, a non-performing party is responsible for the culpable behaviour of persons whom he has charged with performing his obligations (AUSTRIAN ABGB 1313a; BELGIUM: Cass. 24 January 1974, Pas. I 553 and Cass. 21 June 1979, Pas. I 1226; DENMARK: Danske Lov 1683 art. 3-19-2; GERMANY: BGB 278 sent. 1; GREECE: CC arts. 330 and 334; ITALY: CC art. 1228; NETHERLANDS: BW art. 6:76; PORTUGAL: CC art. 800(1)). FRENCH law reaches the same result for exclusion clauses (Malaurie & Aynès, Obligations no. 861).

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

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

See generally Treitel, Remedies 15 and literature cited there. [page 136]

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