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GUIDE TO ARTICLES 51 & 73

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Articles 51 and 73 with PECL Article 9:302; see also PECL Articles 9:301 and 9:306

CISG Article 51

(1) If the seller delivers only a part of the goods or if only a part of the goods delivered is in conformity with the contract, articles 46 to 50 apply in respect of the part which is missing or which does not conform.

(2) The buyer may declare the contract avoided in its entirety only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of the contract.

CISG Article 73

(1) In the case of a contract for delivery of goods by instalments, if the failure of one party to perform any of his obligations in respect of any instalment constitutes a fundamental breach of contract with respect to that instalment, the other party may declare the contract avoided with respect to that instalment.

(2) If one party's failure to perform any of his obligations in respect of any instalment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future instalments, he may declare the contract avoided for the future, provided that he does so within a reasonable time.

(3) A buyer who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract.

PECL Article 9:302 [Contract to be Performed in Parts]
(complete and revised version 1998)

If the contract is to be performed in separate parts and in relation to a part to which a counter-performance can be apportioned, there is a fundamental non-performance, the aggrieved party may exercise its right to terminate under this Section in relation to the part concerned. It may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole.

SEE ALSO:

PECL 9:301 [Right to Terminate the Contract]

(1) Party may terminate the contract if the other party's non-performance is fundamental.

(2) In the case of delay the aggrieved party may also terminate the contract under Article 8:106(3) [Notice Fixing Additional Period for Performance].

PECL Article 9:306 [Property Reduced in Value]

A party which terminates the contract may reject property previously received from the other party if its value to the first party has been fundamentally reduced as a result of the other party's non-performance.


Definitions

For information on the nature and effect of "termination" under the European Principles, go to match-up with CISG art. 81 for PECL arts. 9:305 through 9:309 and the comments and notes that accompany these provisions. For the CISG counterpart to this term, see "avoidance".

[Note: The PECL uses its own term "avoidance" but in a different context. In its Chapter 4 dealing with validity the PECL has a provision on "partial avoidance". PECL Article 4:116. It states "If a ground of avoidance [for validity reasons] affects only particular terms of a contract, the effect of [such] an avoidance is limited to those terms unless, giving due consideration to all the circumstances of the case, it is unreasonable to uphold the remaining contract."]

For the PECL definition of "non-performance", go to PECL art. 1:301(4) and the comment and notes that accompany this definition. For the PECL definition of "fundamental non-performance", see the match-up of CISG art. 25 with PECL art. 8:103.


Editorial remarks

Remedies for breach of contract where only part of the contract has been
performed: Comparison between provisions of CISG (Articles 51, 73) and
counterpart provisions of the Principles of European Contract Law

Christopher Kee [*]
July 2002

1. Introduction
2. Scheme of CISG Articles 51, 73 and PECL Article 9.302
3. Advantages and disadvantages of the different phrases
4. Conclusion

1. Introduction

CISG Articles 51 and 73 are often considered concurrently as they both deal with the scenario where only part of a contract has been performed. However, by doing so, some very important distinctions between the two articles may be overlooked. Article 51, which appears under the heading Remedies for Breach of Contract by the Seller, does as one would expect provide rights only exercisable by the buyer. The first two sub-articles of Article 73, on the other hand, are provisions common to both the seller and the buyer.[1]

A further crucial distinction within the subject matter of the two articles is the type of contract considered by each. Article 51 applies where there has been a failure to deliver part of a contract intended to be delivered as a whole. Article 73 applies to [page 281] * instalment contracts and the failure to perform an obligation in respect to an instalment.[2] Further, while in both scenarios the buyer may ultimately obtain the same remedy, the two articles follow different paths to that result.[3]

The PECL does not draw a distinction between rights of the seller and buyer in the same manner as the CISG. Nor is the PECL intended to relate solely to contracts for the sale of goods. As a consequence of the latter difference the term "delivery" makes way for "performance". At first glance, PECL Article 9:302 is most comparable to CISG Article 73 as it considers a failure of performance in the situation where " the contract is to be performed in separate parts and in relation to a part to which counter performance can be apportioned " However, as shall be discussed, this language does not exclude those circumstances contemplated by CISG Article 51. Further, despite wording which may initially indicate the contrary, and arguably unlike CISG Article 73(3),[4] PECL Article 9:302 does not release an aggrieved party of any obligations that may have accrued at the time of the failure.

2. Scheme of CISG Articles 51, 73 and PECL Article 9.302

Leser describes CISG Article 51 as creating a "de facto division" in the contract.[5] This artificialdichotomy was created to promote one of the fundamental tenets of the CISG - to keep contracts "on foot." An unintended consequence has been competition with CISG Article 73. From a buyer's perspective, Article 51 offers a considerably more certain method of avoiding the offending part of the contract. [page 282]

By providing recourse to the Nachfrist provisions in CISG Articles 47 and 49(1)(b),[6] there are circumstances in which the buyer does not need to show the fundamental breach required by CISG Article 73.[7] CISG Article 51(2) also offers the buyer the ability to avoid the entire contract in instances where failure as to a part amounts to a fundamental breach of the whole contract.[8] CISG Article 73(3) would instead appear to take the curious position of forcing the buyer to elect between avoiding future or previous deliveries, although this distinction has been dismissed.[9] [page 283]

As is the case with all of buyer's remedies under the CISG, Articles 51 and 73 are both subject to the examination and notice regimes of Articles 38 and 39 (examination of the goods "within as short a period as is practicable under the circumstances" and "notice to the seller specifying the nature of [any] lack of conformity within a reasonable time after [the buyer] has discovered it or ought to have discovered it"). If buyer elects the remedy of avoidance where the goods have been delivered, Article 49(2) also requires the buyer to declare the contract avoided "within a reasonable time." Article 51 states that "articles 46 to 50 apply" to it; hence this further reasonable-time requirement is an element of an avoidance proceeding pursuant to Article 51. There is no reference to that in Article 73(1).[10] Even so, the general consensus of scholarly opinion tends to favor the buyer applying the CISG Article 51 approach in the absence of a very clearly defined instalment contract.[11]

The drafters of the PECL have avoided the competition between CISG Articles 51 and 73 by not including a specific provision that explicitly directs the parties to act in the same manner as CISG Article 51. Although using the same language of CISG Article 51, i.e., "parts", a plain reading of PECL Article 9:302 does only allow termination [12] as to the part where there has been fundamental non-performance.[13] Therefore, with the exclusion of this linguistic argument, PECL Article 9:302 does represent a shorter restatement of CISG Article 73. [page 284] However, it is important not to immediately assume that the PECL promotes the rights and remedies afforded by CISG Article 73 and by its silence condemns the approach of CISG Article 51.

3. Advantages and disadvantages of the differences of phrases

There are a number of opposing conclusions that may be drawn from using the PECL to help interpret the CISG when considering these particular articles. Those familiar with arguing around the common law doctrine of precedent will appreciate that in this instance the omission of the PECL to explicitly address a CISG Article 51 scenario does not in and of itself suggest a criticism of the approach. Whilst that view could be taken, it is suggested that the better view is that the combined PECL articles promote the CISG Article 51 position in two ways - by providing a restrictive definition of termination, and by requiring fundamental non-performance.

As was foreshadowed in the introduction to this piece, PECL Article 9:302 allows termination of the "contract as a whole" where non-performance is fundamental to the contract as a whole. However, "contract as a whole" does not, as it might initially appear, mean the entire contract. PECL Article 9:305 describes the effect of termination as it applies to all references to this word within the PECL. With two exceptions, termination of a contract as a whole will only relieve the parties of their future obligations. The article specifically leaves intact the rights and liabilities that have accrued at the date of termination. The two exceptions are where the value of property already delivered has been fundamentally reduced (PECL Article 9:306) and where recovery of property already delivered can be made (PECL Article 9:308).

It must also be remembered that PECL Article 9:302 only allows termination in instances where there has been fundamental non-performance, or to use the CISG terminology a fundamental breach. In doing so, the PECL is similarly promoting the notion of keeping contracts "on foot." Where the failure to perform, or non-performance, is not fundamental, there are a variety of other remedies available to the innocent party. One such remedy is PECL Article 8:106, a Nachfrist - type notice. Whilst this remedy is consistent with the CISG, its applicability in this instance may not be. It is important to be mindful of the rationale that guides PECL Article 9:302 and CISG Articles 51 and 73 - where the failure to [page 285] perform or deliver a part of the contract does not compromise the purpose of the entire contract, it is would be unreasonable to allow the entire contract to be ended.[14] If one cannot find a similar theme to CISG Article 51 in the PECL generally, then this rationale may be circumvented by PECL Article 8:106. An extremely unfortunate consequence when apportioning counter-performance is frequently the relatively simple matter of identifying a monetary value.[15]

Therefore, when considering PECL Articles 9:302, 9:305 and 9:306 together and in context, it is possible to see that the same philosophy that drives CISG Article 51 emerges. Recourse is first given to what might be described as "non-drastic" remedies. If the failure to perform a part of the contract amounts to fundamental non-performance of the entire contract, then with the assistance of PECL Article 9:306, all obligations including those previously accrued can be avoided.

4. Conclusion

The PECL endorses and promotes many of the principles outlined in the CISG. Although, in this instance, the articles are not drafted in an identical or substantially similar manner, it is nonetheless possible to identify support for the notion of restricting a party's ability to unreasonably end an entire contract. [page 286]

[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 415-419.]


FOOTNOTES

* Christopher Kee is an Associate Lecturer in Law at Deakin University and is a Partner with Keelins, Melbourne Australia <ckee@keelins.com>.

1. This comparative is also published at 6 Vindobona Journal of International Commercial Law and Arbitration (2002-2) 281-286. Pagination to that publication is provided to facilitate citation to the Vindobona text.

Both CISG Articles 51 and 73 belong to the Convention's Part III: Sale of Goods. Article 51 is listed in Chapter II: Obligations of the Seller, Section III: Remedies for breach of contract by the seller. Article 73 is listed in Chapter V: Provisions Common to the Obligations of the Seller and of the Buyer, Section I: Anticipatory breach and instalment contracts.

Schlechtriem, commenting on the operation of CISG Art. 73 states that "this provision is concerned with successive deliveries, not instalment payments. By analogy, however, Article 73(2) can also apply to missed payments if they coincide with instalment deliveries. Otherwise, the entire contract may be avoided under Article 72. Article 73(2) is also applicable to other breaches by the buyer, such as not taking delivery of an instalment." P. Schlechtriem, Uniform Sales Law - The U.N. Convention on Contracts for the International Sale of Goods, (1986) at p. 96 [relevant excerpt also available on-line at <http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem-73.html>].

2. Cf. Karollus, Martin. Judicial Interpretation and Application of the CISG in Germany 1988-1994, Cornell Review of the Convention on Contracts for the International Sale of Goods (1995) 51-94 [also available at <http://cisgw3.law.pace.edu/cisg/biblio/karollus.html>]. Karollus provides a critique of the German Baden-Baden Landgericht [District Court] case of 14 August 1991 [translation available at: <http://cisgw3.law.pace.edu/cases/910814g1.html>]. This was a case where the German buyer placed an order for two tile sets A & B with an Italian seller. Both sets contained basic and decorative tiles. The basic tiles belonging to set A were non-confirming and the buyer sought to avoid the contract in respect of the entirety of set A. In a step that appears to be inconsistent with Article 51, the German Court accepted avoidance of that set, based on the rationale that without the appropriate basic tiles, the decorative tiles in set A were useless. Had Article 51 been followed strictly the only two remedies available would have been either avoidance as to the whole contract, i.e., set A and B, or avoidance as to the basic tiles of set A only. Karollus supports the court's decision as such a remedy is contemplated by Article 73, and he argues there is no reason why it should not apply to non-instalment contracts as well.

3. Cf. CISG Article 64 for seller's rights and remedies for a breach of contract by the buyer.

4. See note 9 infra.

5. Leser, Hans G., in: Schlechtriem, P. (ed.) Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd edition. Clarendon Press, Oxford, 1998 at p. 545.

6. See Zeller, B. Editorial Remarks, in Guide to Articles 47 and 49(1)(b) <http://cisgw3.law.pace.edu/cisg/text/peclcomp47.html#er>.

7. See further Honnold, J., Uniform Law for International Sales under the 1980 United Nations Convention 2nd Edition. Kluwer Law and Taxation Publishers, Deventer, Boston 1991 at p. 501, where he notes that the idea of a Nachfrist notice cannot be compatible with CISG Articles 73(2) and 73(3). Honnold does, however, suggest that, in certain circumstances, for example delivery of an instalment or the failure to establish a letter of credit, it is not repugnant to all scenarios contemplated by CISG Article 73(1).

8. "The approach in CISG Art. 51 follows logically from its linkage of the right of avoidance to the gravity of the breach". Jacob S. Ziegel, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods, (July 1981) [available on-line at <http://cisgw3.law.pace.edu/cisg/text/ziegel51.html>]. That approach has been widely recognized in the case law; see, e.g., Germany 24 May 1995, Oberlandesgericht [Appellate Court] Celle [translation available at: <http://cisgw3.law.pace.edu/cases/950524g1.html>], where the court reiterated that regarding a delivery or conformity of only part of goods, the rules of CISG Articles 46 to 50 apply to the part which is missing or non-conforming under Art. 51(1) and, further, that if the seller's offer to deliver conformed with the contract, the buyer would not have the right to avoid the contract unless he could show that a partial delivery was a fundamental breach and therefore the missing part [a used printing press] entitled him to avoid the entire contract under CISG Art. 51(2).

See also, Germany 3 July 1992, Landgericht [District Court] Heidelberg [translation available on-line at <http://cisgw3.law.pace.edu/cases/920703g1.html>]. In that case, a German buyer concluded a contract for the sale of computer components with a U.S. seller, but after delivery of 5 parts had been carried out, the buyer refused payment and declared the contract avoided on the grounds that the delivery of 11 parts had been agreed. The German court held that even if delivery of 11 parts had been agreed the dispatch of only 5 parts would not entitle the buyer to declare the contract in its entirety avoided according to CISG Art. 51(2). See further, R. Koch, "The Concept of Fundamental Breach of Contract Under the U.N. Convention on Contracts for the International Sale of Goods", Review of the Convention on Contracts for the International Sale of Goods (CISG) 1998, Kluwer Law International (1999) 177-354 [also available on-line at <http://cisgw3.law.pace.edu/cisg/biblio/koch.html>].

See also, ICC Arbitration Case No. 7660 of 1994 [available at: <http://cisgw3.law.pace.edu/cases/947660i1.html>], where the arbitral tribunal noted that article 51(1) CISG provided for a partial avoidance of the contract as declared by the buyer, and that under article 51(2) CISG such partial avoidance was the rule rather than the exception in cases of partial non-performance amounting to a non-fundamental breach of the contract (article 49(1)(a) CISG). In that case, the arbitral tribunal determined that a partial avoidance under article 51(1) CISG was permissible where the defective piece of machinery formed an independent part of the contracted goods as it was in the case at issue. However, the arbitral tribunal further determined that the buyer's partial avoidance was barred by the 18-month time limit contained in the contract.

9. See further Leser, supra note 5 at p. 551. He states that often in these situations as it will be not possible to achieve the purpose of the contract as a whole, there must be a fundamental breach allowing avoidance of the entire contract despite this wording. It is, however, interesting to note that ULIS Article 75 on which CISG Article 73 is modelled did specifically refer to deliveries already made or future deliveries or both.

Cf. Schlechtriem, commenting on the operation of Art. 73(3). He states: "If, due to the interdependence of the instalments, the defective or failed performance makes past or future instalments worthless, those instalments can be avoided as well. However, this is true only if the purpose of the entire contract was clear to both parties at the conclusion of the contract (Article 73(3)). The buyer's interest in receiving complete performance must, therefore, have been recognizable to the seller." P. Schlechtriem, Uniform Sales Law - The U.N. Convention on Contracts for the International Sale of Goods, (1986) [relevant excerpt also available on-line at <http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem-73.html>].

See, e.g., Switzerland 30 November 1998, [Commercial Court] Zürich [CLOUT abstract no. 251, also available at: <http://cisgw3.law.pace.edu/cases/981130s1.html>], where that court stated that regarding avoidance in installment contracts under CISG Art. 73, installment deliveries do not have to be of the same type of goods.

10. Though CISG Article 73(2) provides that in respect of refusal of future instalments, a buyer may declare the contract avoided for the future, provided he does so within a reasonable time. See, e.g., Switzerland 5 February 1997, Handelsgericht [Commercial Court] Zürich [CLOUT no. 214, also available at <http://cisgw3.law.pace.edu/cases/970205s1.html>]. In that case, a German buyer had entered into a contract with a French seller for the delivery to Romania of 2 to 4 million liters of sunflower oil per month at a specified price. Although the buyer had paid a timely instalment for the first delivery, the seller did not ship the goods to Romania. The buyer declared the contract avoided and sued the seller for restitution of the first instalment and for damages. The Swiss court held that the buyer had a right to declare the contract avoided as the seller did not deliver the goods and this failure to perform its obligation gave reason to believe that a fundamental breach of contract was to be expected for further instalments (article 49(1)(b), 73(1) and (2) CISG).

11. Leser, supra note 5 at p. 551 and authorities cited at his n.24.

12. "Termination" is the PECL's counterpart to the CISG's term "avoidance."

13. About the terminology adopted, the PECL Comments to Article 9:302, state: " 'Termination in relation to a part' of the contract is a slightly awkward phrase, as the contract is not terminated, but it has the advantage that the general rules on termination (such as the need to give notice under Article 9:303) applies. CISG Article 73 takes the same approach." Comment B, also available on-line at <http://cisgw3.law.pace.edu/cisg/text/peclcomp51.html#9:302>.

14. See further PECL Comments to Article 9:302, Comment A [available on-line at <http://cisgw3.law.pace.edu/cisg/text/peclcomp51.html#mu>].

15. The PECL Comments to Article 9:302 make it clear that where one party's obligations consists of distinct parts and the non-performance affects only one of those parts, PECL Article 9:302 is still applicable even though payment is not made separately. See Comment C [available on-line at <http://cisgw3.law.pace.edu/cisg/text/peclcomp51.html#mu>].

Cf. Ziegel who, commenting on the operation of CISG Art. 51, points out: "Read literally, art. 51(1) suggest that the non-conforming goods may be subject to the remedy of avoidance regardless of the commercial viability of the rejected goods. UCC 2-601, by way of contrast, provides that only a 'commercial unit' may be accepted or rejected by the buyer. Presumably the Convention did not intend a different result." Jacob S. Ziegel, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods, (July 1981) [available on-line at <http://cisgw3.law.pace.edu/cisg/text/ziegel51.html>].


Comment and notes on PECL 9:302 and 9:301, 9:306

Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes 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) 411-413, 409-411, 421.


COMMENT AND NOTES: PECL Article 9:302: Contract to be Performed in Parts

If the contract is to be performed in separate parts and in relation to a part to which a counter-performance can be apportioned, there is a fundamental non-performance, the aggrieved party may exercise its right to terminate under this Section in relation to the part concerned. It may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole.

Comment

A. General principle

Where the contract calls for a series of performances by one party, each with a matching counter-performance (typically, a separate price for each performance), the contract may be seen as divisible into a series of units. If one party fails to perform one unit, the other may want to put an end to its obligation to accept performance of that unit: for instance, in a contract for services it may want to arrange for someone else to do the work. However, it may not be appropriate for the aggrieved party to have the right to terminate the whole contract because the failure may not be fundamental in relation to the whole. The unit not performed may not affect the rest of the [page 411] contract significantly, and the non-performance may not be likely to be repeated. In these circumstances, it is appropriate to allow the aggrieved party to terminate in relation to the part not performed, leaving the rest of the contract untouched. Only if the non-performance is fundamental to the whole contract should the aggrieved party be entitled to terminate the whole.

Illustration 1: An office cleaning company agrees to clean a law firm's office on Saturday of each week for fifty weeks at a price of 500 per week. One Saturday the cleaning company's employees hold a one day strike. The law firm may terminate in relation to that part of the contract and bring in another cleaning firm to clean the office for that week. They may not terminate the contract as a whole unless it is clear that that the strike will be repeated and that therefore there will be a fundamental non-performance, so that there is an anticipatory non-performance within Article 9:304.

Illustration 2: The contract is as in Illustration 1. The cleaning work done in the first week is completely inadequate. It is clear that the cleaning company is trying to do the work using too few employees to cover an office of that size. The cleaning company refuses to use more employees. The law firm may terminate the whole contract.

See also the comment to Article 9:306, Illustrations 1 and 2.

B. Terminology

"Termination in relation to a part" of the contract is a slightly awkward phrase, as the contract is not terminated, but it has the advantage that the general rules on termination (such as the need to give notice under Article 9:303) applies. CISG Article 73 takes the same approach.

Termination "of the contract as a whole" normally means only termination of all the future obligations on each side. See Article 9:305.

C. Performances which are divisible though not to be paid for separately

Sometimes one party's obligation to perform consists of distinct parts, and the non-performance affects only one of those parts, but the payment to be made for them is not split up into equivalent sums. If nonetheless the first party's performance is really divisible and the payment can be properly apportioned, Article 9:302 applies and termination is allowed in respect of the part affected.

Illustration 3: [A]s [in] Illustration 1 but the price is 25,000 for the fifty week period. This price was initially calculated by the cleaning company simply by multiplying the weekly charge by 50. The aggrieved party may again terminate in respect of the week missed. [page 412]

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

Where a contract is to be performed in instalments or separate parts, most systems recognise that the aggrieved party should have the right to refuse to accept, and to refuse to render its promised counter-performance for the defective instalment or part, without necessarily having the right to refuse to accept further performance of the remaining performance under the contract; but it may be entitled to refuse to accept any further performance when the non-performance affects the whole contract. This is provided, for instance by DANISH Sale of Goods Act 22, 29 and 46; FINNISH and SWEDISH Sale of Goods Act, 43, 44 (see Ramberg, Köplagen 462); IRISH Sale of Goods Act 1893, s. 31(2); UK Sale of Goods Act 1979, s. 31(2) (and in the case law similar results are reached for other contracts; see Treitel, Remedies 278); GREEK CC art. 386 (under which the aggrieved party may choose between damages and termination even with respect to parts already performed: Michaelides-Nouaros Erm. AK vol. II/1 art. 386 nos.7-14). GERMAN law does not recognise a single principle but reaches similar results. Thus in the case of a contract for delivery in instalments (Sukzessivlieferungsvertrag or Ratenlieferungsvertrag) the aggrieved party can terminate the contract with respect to the improper instalment or with respect to all future instalments. In the latter case it is often required that the aggrieved party's interest in the performance has fallen away (cf. Palandt (-Heinrichs) Intro. to 305, nos. 31-33, distinguishing the different kinds of non-performance). Virtually the same rule applies in AUSTRIAN law, see ABGB 918(2) and 920 second sent. Similar results are reached in BELGIUM, see Lefebve Rev. de Notariat Belge (1988) 266 ff.; Fontaine R.C.J.B. 1990, 382 ff.; M.E.Storme T.B.B.R/R.G.D.C 1991, 112, no. 12 ff.; Cass. 29 May 1980, Arr.Cass. no. 310, R.W. 1980-81, 1196; and in FRANCE, where according to its pouvoir souverain, the court may partially terminate the contract for a partial non-performance (Malaurie et Aynès nos. 742-744); it will take into account the divisibility of the performance. In SPANISH law termination is not necessarily retrospective (Diez-Picazo, II 724; contra; Albaladejo, II, 1 20.4.5. ITALIAN CC art. 1564 provides that in contracts for the periodical supply of goods the whole contract may be terminated if the non-performance is of major importance and leads to loss of confidence in future performance, but according to CC art. 1458(1) termination does not extend to performances already executed; on the question of partial termination see Corrado 363 ff. PORTUGUESE CC art. 434(2) provides for termination of the whole of a contract for performance by instalments or over a period of time when the ground for termination relates to the unperformed instalments. DUTCH BW art 6:265 allows the creditor in all cases to choose between termination in part or of the whole, but subject to the general principle that the failure must justify the type of termination chosen.

ULIS arts. 45 and 75 and CISG art. 73 are similar to Article 9:302. [page 413]

Go to PECL Abbreviations || Go to PECL Bibliography || Go to full texts of Parts I & II of Principles of European Contract Law


COMMENT AND NOTES: PECL Article 9:301: Right to Terminate the Contract

(1) A party may terminate the contract if the other party's non-performance is fundamental.

(2) In the case of delay the aggrieved party may also terminate the contract under Article 8:106(3) [Notice Fixing Additional Period for Performance].

Comment

A. The underlying considerations

Whether the aggrieved party should have the right to terminate the contract in the case of a non-performance by the other party depends upon a weighing of conflicting considerations.

On the one hand, the aggrieved party may desire wide rights of termination. It will have good reasons for terminating the contract if the performance is so different from that for which it bargained that it cannot use it for its intended purpose, or if it is performed so late that its interest in it is lost. In some situations termination will be the only remedy which will properly safeguard its interests, for instance when the defaulting party is insolvent and cannot perform its obligations or pay damages. The aggrieved party may also wish to be able to terminate in less serious cases. A party which fears that the other party may not perform its obligations may wish to able to take advantage of the fact that the threat of termination is a powerful incentive to the other to perform to ensure that the other performs every obligation in complete compliance with the contract.

For the defaulting party, on the other hand, termination usually involves a serious detriment. In attempting to perform it may have incurred expenses which are now wasted. Thus it may lose all or most of its performance when there is no market for it elsewhere. When other remedies such as damages or price reduction are available these remedies will often safeguard the interests of the aggrieved party sufficiently so that termination should be avoided.

For these reasons it is a prerequisite for termination that the non-performance is fundamental in the sense defined in Article 8:103. [page 409]

Illustrations have been supplied in the comments to in Article 8:103 [Fundamental Non-Performance]

B. Action in court not required; No period of grace

As a rule termination is effective only if notice thereof is given by the aggrieved party to the defaulting party, see Article 9:303 and Article 8:106. For exceptions to this rule, see Article 8:106(3) and Article 9:303(4). Termination may be effected by the act of the aggrieved party alone; it does not have to bring an action in court in order to have the contract terminated.

If the requirements of Article 9:301 are satisfied the Principles do not provide for any period of grace to be granted to the defaulting party by a court or an arbitral tribunal.

C. The "notice" procedure.

Under Article 8:106(3), when a delay in performance does not amount to a fundamental non-performance the aggrieved party may fix an additional period of time of reasonable length for performance. If by the time the period expires the defaulting party has still not performed, the aggrieved party may treat the contract as terminated. The same applies if the defaulting party has declared that it will not perform within the period so fixed.

D. Non-performance partly due to aggrieved party's own act.

One factor which should be taken into account is the extent to which the detriment to the aggrieved party is the result of its own conduct. If the detriment was substantially due to its own conduct it might be inappropriate to say that the non-performance was fundamental.

Illustration 1: A manufacturer undertakes to install a machine for supplying molten material in a factory. After it is installed, the machine is left on to warm up ready for testing; the factory owner undertakes to provide a watchman. A slight defect causes a fire which, because the owner failed to provide a watchman, spreads and causes substantial damage to the factory. The manufacturer's non-performance was not fundamental and the factory owner cannot terminate the contract.

In other cases it may be appropriate to permit termination but to hold that the aggrieved party's conduct amounted to a non-performance itself for which the other party may claim damages.

Illustration 2: An exclusive dealership contract between a manufacturer and a dealer is terminated because the dealer has contravened the exclusive purchase clause. However the dealer can show that it was led to purchase elsewhere by the financial demands of the manufacturer which, contrary to the terms of the agreement, had demanded payment in cash. The court should investigate the effect of each party's behaviour and, if it concludes that the manufacturer's actions led to the dealer's default, may award damages to the dealer. [page 410]

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Termination when non-performance is fundamental

The Principles determine the circumstances in which an aggrieved party may terminate the contract by reference to whether the non-performance is "fundamental". Not all systems allow the aggrieved party to terminate by giving notice. FRENCH, BELGIAN and LUXEMBOURG CCs art. 1184 requires that résolution be by judicial pronouncement, and the court must decide whether the non-performance is sufficiently important to justify ending the contract; but clauses allowing automatic termination (clauses résolutoire de plein droit) are permitted (Malaurie & Aynès, Obligations, nos. 735-759). However, as seen earlier (see the notes to Article 8:103) similar results are reached in most systems, even those which rely on judicial discretion to decide when a contract should be terminated.

2. Excused and non-excused non-performance treated alike

The Principles use the same rules for termination whether or not the non-performance was excused; the aggrieved party may give notice of termination. DUTCH BW arts. 6:74 and 6:265, NORDIC law (see Taxell, Avtal och rättsskydd 225), ULIS (for excused non-performance see art. 74), CISG (see art. 79) and Unidroit see art. 7.3.1. take a similar approach. This is a contrast to many systems in which the case of termination of a contract which has become impossible is treated separately from the case of termination because of a breach of contract. Thus in FRENCH and BELGIAN law in the case of impossibility the contract will be determined according to the theory of risks, CC arts. 1302 and 1624 (cf. Treitel, Remedies 254); in SPANISH law see CC arts. 1182 ff. and 1124. In GERMAN law a separate paragraph of the BGB, 323, applies to impossibility due to circumstances for which neither party is responsible (see Treitel, Remedies 255), and a similar approach is taken by AUSTRIAN ABGB 1147 and by GREEK CC art. 380; in ITALIAN law there is a separate regime for impossibility, CC arts. 1463-1466; and in COMMON LAW the doctrine of frustration will apply. See the notes to Article 8:108 above.

3. No additional time once right to terminate has arisen

It should be noted that the Principles do not permit the non-performing party to be given extra time once the non-performance is fundamental; compare the FRENCH and BELGIAN délai de grâce (CC art. 1184; similarly, SPANISH CC art. 1124 (3)) or relief against forfeiture in the COMMON LAW systems (in which, for instance, a tenant may be able to obtain relief against forfeiture of a lease by the landlord for non-payment of rent: see Treitel, Remedies 247).

On Article 9:301(2) see note to Article 8:106 above. [page 411]

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COMMENT AND NOTES: PECL Article 9:306: Property Reduced in Value

A party which terminates the contract may reject property previously received from the other party if its value to the first party has been fundamentally reduced as a result of the other party's non-performance.

Comment

Under many different types of contract there is a possibility that the aggrieved party may have received from the other some property which is of no value to it because of the other party's non-performance itself or because it has terminated the contract and will therefore not receive the rest of the performance. In such cases it should have the right to reject the useless property and this Article so provides.

Illustration 1: A firm of accountants agrees to lease a computerised accounts system, which requires a particular kind of computer. The lessor supplies the hardware but completely fails to supply the software. The accountants have no use for the hardware alone and may reject it.

This Article may also apply where the contract is to be performed in distinct instalments, if failure to deliver a later instalment makes the earlier instalments useless.

Illustration 2: A complete computer system is to be installed and paid for one component at a time so that it can be fitted into a new office as the building is being built. An essential item is not delivered and the buyer terminates. The buyer may reject the components already received.

In all the cases suggested the aggrieved party could in the alternative claim damages under Article 9:502 or reduction in price under Article 9:401 for the reduced value that the property received now has to it. However it will often be more convenient for it simply to return the unwanted property than to have to dispose of it some other way and, since it is by definition the aggrieved party, it seems appropriate to give it the right to reject. There will be a considerable advantage in rejecting the property if it has not yet paid for it, as it can thus avoid having to pay even a reduced price.

Notes

See Notes following Article 9:309 [Recovery for Performance that Cannot be Returned].

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Pace Law School Institute of International Commercial Law - Last updated January 8, 2007
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