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GUIDE TO ARTICLE 81

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Article 81 with PECL Articles 9:305, 9:307, 9:308 ; see also PECL Articles 9:306, 9:309
CISG Article 81


(1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.

(2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently.

PECL Article 9:305 [Effects of Termination in General]
(complete and revised version 1998)

(1) Termination of the contract releases both parties from their obligation to effect and to receive future performance, but, subject to Articles 9:306 to 9:308, does not affect the rights and liabilities that have accrued up to the time of termination.

(2) Termination does not affect any provision of the contract for the settlement of disputes or any other provision which is to operate even after termination.

PECL Article 9:307 [Recovery of Money Paid]

On termination of the contract a party may recover money paid for a performance which it did not receive or which it properly rejected.

PECL Article 9:308 [Recovery of Property]

On termination of the contract a party which has supplied property which can be returned and for which it has not received payment or other counter-performance may recover the property.


SEE ALSO:

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.

PECL Article 9:309 [Recovery for Performance that Cannot Be Returned]

On termination of the contract a party which has rendered a performance which cannot be returned and for which it has not received payment or other counter-performance may recover a reasonable amount for the value of the performance to the other party.


Definitions

For the PECL definition of "reasonable", go to PECL art. 1:302 [Reasonableness] and the comment and notes that accompany this provision. For the CISG counterpart to the PECL concept of "termination", 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 the "effect of avoidance", PECL Article 4:116. It states: "If a ground of avoidance affects only particular terms of a contract, the effect of 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."]


Editorial remarks

Commentary on CISG Article 81 and its PECL counterparts

Francesco G. Mazzotta [1]

  1. Similarities between the counterpart provisions on the effect of contractual avoidance in the CISG and the PECL
    a. The operation of CISG Article 81
    b. The operation of PECL Article 9:305
  2. Differences between the two regimes
  3. Conclusions

1. Similarities between the counterpart provisions on the effect of contractual avoidance in the CISG and the PECL

      a. The operation of CISG Article 81

In Section IV of the Convention, entitled Effects of avoidance, Article 81 provides that an avoidance of the contract allows parties to terminate their respective obligations arising out of the contract.[2] "Avoidance is a process through which an aggrieved party, by notice to the other side, terminates the contractual obligations of the parties. If the contract is not avoided, the Convention contemplates that the basic exchange of goods and price will be completed despite a breach, with damages or other remedies to compensate for defects in the exchange."[3]

"The primary effect of the avoidance of the contract by one party is that both parties are released from their obligations to carry out the contract. The seller need not deliver the goods and the buyer need not take delivery or pay for them".[4] However, avoidance of a contract does not affect [5] any provision of the contract that governs the rights and obligations of the parties subsequent to the avoidance of the contract, nor does it eliminate the right to seek damages for breach of the contract.[6] Furthermore, the enumeration in Article 81(1) of two typical contract clauses that are not terminated by the avoidance of the contract is not exhaustive.[7] Some continuing obligations are set forth in other CISG provisions,[8] while others may be found in the contract itself [9] or may arise out of fairness considerations.[10]

As a result of the avoidance, both parties are released from their obligations [CISG Art. 81(1)]. However, it is likely that either party might be left with property that has been transferred or payment that has been made by the other. In this case, each party that has performed its own obligation can claim restitution of whatever was paid (price) or supplied (goods or something ancillary to them) under the contract, and if both parties have to make restitution, it must be done concurrently;[11] [see CISG Art. 81(2)]. Although the Convention provides that both parties may declare the contract avoided, it has been argued by commentators that the general structure of the Convention as to the buyer's obligation to return the goods may create some problems.[12]

It should be noted that the right of either party to require restitution as recognized by CISG Article 81(2) may be limited by other rules which fall outside the scope of the Convention, such as bankruptcy or other insolvency procedures, and/or exchange control laws or other restrictions on the transfer of goods or funds may prevent the transfer of the goods or money to the demanding party in a foreign country. Such limitations, however, may reduce the value of the claim for restitution, but do not affect the validity of the rights between the parties.[13]

      b. The operation of PECL Article 9:305

The PECL provisions that are relevant to this comparative analysis are to be found in Chapter 9, entitled "Particular Remedies for Non-Performance", in Section 3, entitled Termination of the Contract.[14]

The principal provisions are to be found in PECL Article 9:305, entitled Effects of Termination in General, which basically provides, much like CISG Article 81, that termination [15] releases both parties to the contract from their obligation to effectuate and receive future performance [PECL Art. 9:305(1)],[16] but that does not affect any provision of the contract for the settlement of disputes or any other provision which is to operate even after termination [PECL Art. 9:305(2)].

However, except for these basic textual similarities, the two sets of rules differ distinctly in their application.

2. Differences between the two regimes

The ability to return the goods received in substantially the condition in which one received them is "a prerequisite for avoiding a contract or demanding substitute goods. If, because he cannot return the goods, the buyer is barred from avoiding the contract or demanding substitute goods, his other remedies under the contract or the Convention (damages, reduction of price) remain unaffected."[17] CISG Article 81(2) "incorporates the idea that, as regards restitution, the avoidance of the contract undermines the basis on which either party can retain that which he has received from the other party."[18] In other words, the Convention clearly requires that whatever is exchanged between the parties because of the contract must be returned, and if this is not possible, subject to the exceptions considered by CISG Article 82, avoidance of the contract is no longer an option.[19]

PECL Articles 9:305, 9:307, 9:308 do not adopt the above approach of the Convention. Firstly, the PECL also takes into consideration contracts for services, which are beyond the scope of the CISG. Secondly, the PECL introduces the idea that there are circumstances in which it might be inappropriate to make the restitution.[20] Such an idea is not shared with the CISG. The general approach adopted by the PECL is that, upon termination of a contract, both parties are released from their duties to effect and to receive performance (PECL Art. 9:305). A restitution duty, which does not affect the right to terminate the contract, may arise only where one party has conferred a benefit on the other party without receiving the promised counter-performance in exchange.[21]

To understand how the two approaches differ, it is important to study the PECL comment on Article 9:305, which states: "It would be also inconvenient to treat a contract which as being retrospectively cancelled in the sense that performances received must be returned or restitution made of their value. This is not appropriate where the contract was to be performed over the period of time when there can be termination for the future without undoing what has been achieved already [] Even though termination is forward looking in the way just explained, there are situations in which it is appropriate to "undo" what has taken place before termination. Thus the aggrieved party may need the right to reject a performance already received if termination means that it is of no value to it; either party may need to recover money already paid to the other party if nothing has been received in return; and either may need to be able to recover other property which has been transferred."[22]

PECL Article 9:306 provides for cases where the aggrieved party received from the other party some property whose value has been fundamentally reduced because of the other party's non-performance or because, as a result of the termination, it cannot secure the remaining performance. Restitution of the property will occur where it is useless for the party that received it. This rule clearly is not compatible with the CISG set of rules.

Also inconsistent with the CISG principles, is the rule set forth in PECL Article 9:307, which deals with the recovery of money paid. PECL Article 9:307 states: "On termination of the contract a party may recover money paid for a performance which it did not receive or which it properly rejected." Article 9:308 introduces the same principle although it deals with property other than money. Both PECL Articles 9:307 and 9:308 subject the restitution to the instance where one party has conferred a benefit but has not received the promised counter-performance. Moreover, it should be also noted that PECL Articles 9:307 and 9:308 also apply to situations, such as service contracts, where the CISG cannot be applied.

It should be noted that the PECL refers to "termination" whereas the CISG refers to "avoidance". In the comparison between CISG Article 81 and the PECL Articles 9:305, 9:307, and 9:308, the two words do have the same meaning. However, it has to be noted that the PECL also uses the term "avoidance" but in a different context. In fact, the relevant PECL provision which deals with validity issues, provides that "[i]f a ground of avoidance affects only particular terms of a contract, the effect of 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."[23]

Finally, it should be also be mentioned that neither the Convention nor the PECL have any specific provisions dealing with: (i) the expenses incurred in making restitution;[24] (ii) the rights acquired by third parties;[25] (iii) the location where the restitution must be made [26] and (iv) the buyer's responsibility when the goods that must be returned are destroyed after the effective date of a declaration of avoidance.[27]

3. Conclusions

The PECL rules do not add any tool that is useful for the construction of CISG Article 81. Instead, the PECL introduces a set of rules - the PECL rule according to which the restitution of the goods is available only if the goods do not have any value for the party who received them (9:306); the principle that restitution of the money paid is subject to the circumstance that the party who paid for a performance did not receive it or it was properly rejected (9:307); and the rule according to which the party who performed will be entitled to restitution, where possible, only in absence of payment or counter-performance by the other party - which are incompatible with the CISG.

As stated by the Commentary on PECL Article 9:307, "the Principles only give a compensatory remedy after termination, where one party has conferred a benefit on the other party but has not received the promised counter-performance in exchange. The benefit may consist of money paid (Article 9:307), other property which can be returned (Article 9:308) or some benefit which cannot be returned, e.g. services or property which has been used up (Article 9:309)."[28]

On the other hand, the CISG clearly requires restitution of whatever received as a condition to avoid the contract.[29] Such differences arise out of the different understanding regarding the retroactivity concept. While both the Sales Convention and the Principles of European Contract Law provide that avoidance of a contract does not have retroactive effect, since both expressly exclude that a terminated contract should be treated as never made, the CISG and the PECL differ on what survives after avoidance and on the regime to be applied to the performances made under the contract. These are major differences that must to be taken into consideration when comparing the CISG and PECL. It is beyond the scope of this commentary to explore which of the sets of rules might work better, although the difference between them is clear: while the CISG tends to eliminate the consequences of an already partially performed contract, the PECL tends to maintain the exchange when it is satisfactory for both parties.

[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) 509-514.]


FOOTNOTES

1. The author is an Associate in the New York office of Zini & Associates and an Associate of the Institute of International Commercial Law of the Pace University School of Law.

2. Note, however, that is "subject to any damages that may be due" [Article 81(1)]. Section IV of the Convention also includes the provisions of Article 82 (which deals with issues and effects of impossibility of restitution by buyer), Article 83 (preserving "all other remedies under the contract and the [CISG]" for a buyer who lost the right to avoid the contract) and Article 84 (obligating the seller to pay interest on the refund of price and the buyer to account for any benefits derived from the goods).

3. See Harry M. Flechtner, Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C., 8 J.L. & Com. 53, 56 (1988), also available at <http://www.cisg.law.pace.edu/cisg/biblio/flecht.html>. For literature specifically relevant to the provisions of CISG Article 81 visit <http://www.cisg.law.pace.edu/cisg/text/mono81.html>.

4. See Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the Secretariat, U.N. Document A/CONF.97/5, Article 66 (draft counterpart of CISG Article 81), available at Pace Law School Institute of International Commercial Law, Guide to C.I.S.G. Article 81 <http://http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-81.html> (visited October 27, 2001) [hereinafter Secretariat Commentary]. According to CISG Articles 51 and 73, partial avoidance is also possible: "Partial avoidance of the contract under Article 47 or 64 [draft counterpart of CISG Article 51 or 73] releases both parties from their obligations as to the part of the contract which has been avoided and give rises to restitution under paragraph (2) [CISG Article 81(2)] as to that part." Id.

5. The Convention only provides that these provisions will survive the avoidance of the contract, but it does not say that such clauses are valid. In fact, the validity of such provisions must be assessed according to the applicable law. See Denis Tallon, COMMENTARY ON THE INTERNATIONAL SALES LAW 601, 603 (Massimo C. Bianca & Michael Joachim Bonell eds.) 603 (1987); Jelena Vilus, INTERNATIONAL SALES OF GOODS: DUBROVNIK LECTURES 255, 256 (Petar Sarcevic & Paul Volken eds.) 1986, also available at <http://www.cisg.law.pace.edu/cisg/biblio/vilus.html> .

6. See Peter Schlechtriem, UNIFORM SALES LAW - THE UN CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS 107 (1986), also available at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem.html>, who states "[a]n avoidance only 'redirects' the main obligations of the contract; it does not void the contract ab initio. Under Article 81, damage claims for breach, dispute-settlement mechanisms (arbitration clauses), liquidated damages and penalty clauses, etc., are not affected by an avoidance (Article 81 sentence 2)." See also Filanto S.p.A. v. Chilewich International Corp., U.S. District Court, Southern District of New York, April 14 1992, available at <http://cisgw3.law.pace.edu/cases/920414u1.html>.

7. The clauses mentioned regard provisions for settlement of disputes or governing the rights and obligations of the parties consequent upon the avoidance of the contract See Secretariat Commentary supra note 4. See also Hans G. Leser, Annotations 1-20 on Article 82, in COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS 638, 640 (Peter Schlechtriem ed.) (1998).

8. See, e.g., CISG Articles 81(2), 84 and 86(1).

9. See Secretariat Commentary, supra note 4.

10. Id.

11. As to the mechanism of a "concurrent restitution" in Article 81(2), see Flechtner supra note 3, at 80. See also Denis Tallon supra note 5, at 605 who states " [t]he rule governing the suspension of the performance (Article 71) are applicable by analogy. The buyer can refuse to restore the goods if the seller does not offer to restitute the price and vice-versa by virtue of the principle that a party may suspend the performance of his obligation if it becomes apparent that the other party will not perform a substantial part of his obligations"; Hans G. Leser, supra note 7, at 641. As to the restitution/refund duty, see, e.g., HG Zürich, February 5, 1997, case HG 95 0347, available at <http://cisgw3.law.pace.edu/cases/970205s1.html>; Bezirksgericht der Saane (Zivilgericht), February 20, 1997, case T 171/95, available at <http://cisgw3.law.pace.edu/cases/970220s1.html>.

12. See Hans G. Leser, supra note 7, at 642.

13. See Secretariat Commentary, supra note 4. See also Harry M. Flechtner, supra note 3, at 67 and 81; Micheal A. Tessitore, "The U.N. Convention on International Sales and Seller's Ineffective Right of Reclamation Under the U.S. Bankruptcy Code", 35 Willamette L. Rev. 367 (1999); David Frisch, "Commercial Common Law, the United Nations Convention on the International Sale of Goods, and the Inertia of Habit", 74 Tul. L. Rev. 495; Denis Tallon supra note 5, at 606; Jelena Vilus supra note 5, at 256.

14. The relevant PECL provisions are to be found in Articles 9:305, 9:306, 9:307, 9:308 and 9:309.

15. "Termination" is the PECL's counterpart to the CISG term "Avoidance". See Comments and Notes to the PECL Articles, [hereinafter PECL Comments] also available at <http://www.cisg.law.pace.edu/cisg/text/peclcomp81.html> (visited October 27, 2001).

16. "[B]ut, subject to Articles 9:306 to 9:308, does not affect the rights an liabilities that have accrued up to the time of termination", PECL Article 9:305(1).

17. Id. at 106.

18. See Secretariat Commentary supra note 4. See M.C. Capponi, infra note 24, who states: "L'adozione del principio per cui la possibilità di operare la restituzione della prestazione ricevuta costituisce presupposto necessario della risolubilità del contratto è sembrata ispirarsi alla Saldotheorie tedesca." (The adoption of the rule that requires restitution as a necessary requirement for avoidance of a contract seems to be drawn from the German Saldotheorie). See also Giardina, in Nuove Leggi Civili Commentate 322 (1989).

19. See, e.g., OLG Koblenz, September 27, 1991, case 2 U 1899/89, available at <http://cisgw3.law.pace.edu/cases/910927g1.html>; OLG Frankfurt, September 17, 1991, case 5 U 164/90, available at <http://cisgw3.law.pace.edu/cases/910917g1.html>; OLG Düsseldorf, February 10, 1994, case 6 U 119/93, available at <http://cisgw3.law.pace.edu/cases/940210g2.html>.

20. PECL Article 9:306 states: "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." See PECL Comments, supra note 15.

21. See PECL Articles 9:307 (recovery of money paid); 9:308 (recovery of property which can be returned) and 9:309 (recovery of reasonable amount for the value of performance that cannot be returned).

22. See PECL Comments, supra note 15.

23. See PECL Article 4:116.

24. It is understood that the breaching party is liable not only for his own expenses in carrying out the restitution of the goods or money, but also for the expenses of the other party. Such expenses would constitute damages for which the party in breach is liable. However, it should be noted that Article 77 provides that the "party who relies on a breach must take such measures as are reasonable in the circumstances to mitigate the loss." If this party fails to take such measures, the breaching party may claim a reduction of the damages that may be recovered. See Peter Schlechtriem, supra note 6, at 106. See also M.C. Capponi, Comment on Article 81, in COMMENTARIO BREVE AL CODICE CIVILE 1443, 1531 (Guido Alpa & Paolo Zatti eds., 1999); Denis Tallon, supra note 5 at 605; Hans G. Leser, supra note 7.

25. The Convention, as well as the PECL, does not provide for rights acquired by third parties. See CISG Article 4. See M.C. Capponi, id., who explains that CISG "non tratta dei diritti acquistati dai terzi, tale disciplina [Article 81] ha riguardo soltanto ai rapporti istituiti tra le parti, e alle conseguenze della loro cancellazione" (The CISG is not concerned with rights acquired by third parties as it only concerns the rights and obligations arising between the parties and the results of the avoidance of the contract). See also Alpa & Bessone, Foro It. 1980, V, 252. Comment on PECL Article 9:308 expressly states that it "deals exclusively with the relationship between the parties and not with the effect which the contract may have on the property in goods sold or bartered. Whether a creditor of the buyer, the buyer's receivers in bankruptcy, or bona fide purchaser may oppose the restitution of goods sold is to be determined by the applicable national law." See PECL Comments, supra note 15.

26. See Peter Schlechtriem, supra note 6, at 108, who states that the "place of performance for transactions following avoidance of the contract should be determined according to the provisions governing the performance of contract obligation" (footnote omitted). See also Hans G.Leser, supra note 7.

27. Id. Professor Schlechtriem proposes the following solution: "the gap-filling rules of Article 7(2) should be preferred to a hasty retreat domestic law. Articles 82 and 84(2)(b) make it clear that the impossibility or inability to make restitution are matters governed by the Uniform Law for International Sales."

28. See PECL Comments, supra note 15.

29. See Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the Secretariat, Article 67 [draft counterpart of CISG Article 82] also available at Pace Law School Institute on International Commercial Law, at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-82.html> (visited October 27, 2001). The Comment clarifies that "[t]he rule in paragraph (1) [82(1)] recognizes that the natural consequences of the avoidance of the contract or the delivery of substitute goods is the restitution of that which has been already delivered under the contract. Therefore, if the buyer cannot return the goods, or cannot return them substantially in the condition in which he received them, he loses his right to declare the contract avoided under Article 45 [draft counterpart of CISG Article 49] or to require the delivery of substitute goods under Article 42 [draft counterpart of CISG Article 46]."


Comment and notes on PECL 9:305 through 9:309

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) 419-429.


COMMENT AND NOTES: PECL Article 9:305: Effects of Termination in General

(1) Termination of the contract releases both parties from their obligation to effect and to receive future performance, but, subject to Articles 9:306 to 9:308, does not affect the rights and liabilities that have accrued up to the time of termination.

(2) Termination does not affect any provision of the contract for the settlement of disputes or any other provision which is to operate even after termination.

Comment

A. Meaning of termination

Articles 9:305 - 9:309 govern the nature and effect of termination under the Principles.

"Termination" may have several distinct consequences (see Treitel, Remedies for Breach of Contract, ch. 9):

(1) The aggrieved party may wish to refuse to perform its own obligations. It may do this on a temporary basis without terminating the contract by withholding its performance under Article 9:201, but if it wishes to ensure that it will never be called upon to perform it will have to terminate the contract permanently.

(2) The aggrieved party may wish to refuse future performance (including cure of any defective performance already made) from the other party. This will also necessitate termination of the contract.

Termination may involve nothing more than (1) and (2) where nothing has been done by either party, or where any performance made has already properly been rejected, or where the contract is to be performed in successive parts and the parts already performed are not affected. But either party may be left with property transferred by the other, or with a payment made by the other. If this is the case, then a third situation arises:

(3) Either party may wish to rid itself of a performance already received, to recover money transferred to the other party and/or to recover property, or its value, transferred to the other party; in other words, in some sense to "undo" what has taken place before the date of termination.[page 419]

B. Termination should not have retroactive effect

Termination of the contract releases both parties from their duty to effect and to receive performance. It would be very inconvenient, however, to treat a contract which has been terminated as cancelled in the sense of never having been made. First, if the contract had never been made the aggrieved party might be precluded from claiming damages for loss of its expectations, which would not seem an appropriate outcome. Article 8:102 states that a party does not lose its right to damages by exercising another remedy. Secondly, if the contract were cancelled in the sense of never having been made, this might prevent the application of dispute settlement clauses or other clauses which were clearly intended to apply even if the contract were terminated. Therefore this article states that termination is not retroactive and specifically states the position on the clauses just mentioned.

Illustration 1. The holder of a patent licences a firm in another country to make its product but forbids it to sell it under anything but the patent holder's trade mark. The licensee receives confidential information about production methods which it undertakes not to divulge so long as it is not publicly known. The contract contains a clause referring all disputes to arbitration. The licensee, in breach of the licence, markets the patented product under its own brand name, and the patent holder justifiably terminates the contract. Termination does not release the licensee from its obligation to keep the production information confidential, nor does it prevent the patent holder from seeking damages for non-performance of the contract, and the dispute must be referred to arbitration.

It would also be inconvenient to treat a contract which has been terminated as being retrospectively cancelled in the sense that performances received must be returned or restitution made of their value. This is not appropriate where the contract was to be performed over a period of time when there can be termination for the future without undoing what has been achieved already.

Illustration 2: A cleaning company is employed to clean a law firm's office for 50 weeks at 500 per week. In the 25th week the cleaning company ceases trading and the law firm justifiably terminates the contract. The first 24 weeks' work have already been paid for; the payments are not affected by the termination.

C. When performances received can be or should be returned

Even though termination is forward looking in the way just explained, there are situations in which it is appropriate to "undo" what has taken place before termination. Thus the aggrieved party may need the right to reject a performance already received if termination means that it is of no value to it; either party may need to recover money already paid to the other party if nothing has been received in return; and either may need to be able to recover other property which has been transferred. These points are dealt with in Articles 9:306, 9:307 and 9:308 respectively.[page 420]

Notes

See Notes following Article 9:309.[page 421]

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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.[page 421]

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COMMENT AND NOTES: PECL Article 9:307: Recovery of Money Paid

On termination of the contract a party may recover money paid for a performance which it did not receive or which it properly rejected.

Comment

A. The general approach to restitution.

Article 9:305 states the general rule that termination of a contract has no retroactive effect. It does not follow from the fact that the contract has been terminated that the party which has performed can get restitution of what it has supplied.

In many contracts a literal restoration is not possible. This applies to work and labour, services, the hiring out of goods, the letting of premises, and the carriage and custody of goods. A party which has received a performance of this kind cannot give it back. In contracts for sale or barter restoration may become impossible when the goods have perished or have been consumed or resold. In all these situations the party which has received a performance which it cannot return might restore the value of it and various legal systems provide for such a restitution.

In contrast the Principles only give a restitutionary remedy after termination, where one party has conferred a benefit on the other party but has not received the promised counter-performance in exchange. The benefit may consist of money paid (Article 9:307), other property which can be returned (Article 9:308) or some benefit which cannot be returned, e.g. services or property which has been used up (Article 9:309).

B. Restitution of money paid

Under Article 9:307 a party may claim back money which it has paid for a performance which it did not receive. This rule has general application where a party which has prepaid money rightfully rejects performance by the other party or where the latter fails to effect any performance, Article 9:301. It applies equally to contracts of sale, contracts for work and labour and contracts of lease.

C. Application to contracts to be performed in parts

Where a contract is to be performed over a period of time, or in instalments, and the performance is divisible, the rule applies to payments made in respect of so much of the performance as was not made or has been rejected.

Illustration: A has given B advance payment for the construction of 12 houses. B only builds 3 houses, and A terminates the contract. A can claim back the advance payment for the 9 houses which were not built.

If the aggrieved party is entitled to terminate under Article 9:302 in respect of a part of a contract, it may recover a payment made in respect of that part.

D. Interest

The party claiming restitution for money paid may also claim interest, Article 9:508.[page 422]

Notes

See Notes following Article 9:309.[page 423]

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COMMENT AND NOTES: PECL Article 9:308: Recovery of Property

On termination of the contract a party which has supplied property which can be returned and for which it has not received payment or other counter-performance may recover the property.

Comment

A. Restitution of property other than money

Article 9:308 provides restitution after termination where a party has supplied a performance other than money without receiving the counter-performance, and the performance can be restored. If the contract is terminated it may claim back what it has supplied under the contract.

Illustration 1: The contract called for A to deliver goods to be paid for by B upon their receipt. B did not pay for the goods when it received them. A may terminate the contract and claim back the goods from B.

B. Third-party rights are not affected

Like other Principles Article 9:308 deals exclusively with the relationship between the parties and not with the effect which the contract may have on the property in goods sold or bartered. Whether a creditor of the buyer, the buyer's receivers in bankruptcy, or a bona fide purchaser may oppose the restitution of goods sold is to be determined by the applicable national law.

C. Claims by defaulting party

The defaulting party may have transferred property to the aggrieved party before termination. If the aggrieved party can restore the property but does not do so, the court may order it to restore it or its value under Article 9:308.

D. Contracts to be performed in parts

The rule applies to contracts which are to be performed in parts. If the aggrieved party is entitled to terminate in respect of a part under Article 9:302, it may recover property transferred under that part of the contract.

E. Negotiable instruments, securities and shares

A contract for the sale or assignment of stocks, shares, investment securities, negotiable instruments and debts is often performed by delivering the warrant certificate or other instrument which gives evidence of the right. If the contract is terminated the seller or assignor should be entitled to recover the paper irrespective of whether [page 423] this paper is a negotiable instrument or not, subject to third party rights, see Comment B above.

F. Industrial and intellectual property

If a contract for the assignment of a product of the mind is terminated literal restoration of the intangible is sometimes not possible.

However, the assignment of patents, trade marks, and other legally protected intangible rights may be called off by a formal declaration or other act of the assignee and thereby returned to the assignor.

Furthermore, restoration is possible of things which attach to the intangible. Know-how and literary works are written on paper, paintings are made on canvas, sculptures cast in bronze. Tangible things which in this way materialize the product of the mind may be restored when the contract is terminated. These things often have a value.

Illustration 2: A famous artist contracts with B to make illustrations for a new edition of Homer's Odyssey to be published by B; the copyright is to rest in B. When B receives the drawings he does not pay for them. The artist may terminate the contract and claim the illustrations back; the copyright must also be revested in him.

G. Restitution in case of bad bargains

Restitution may be claimed when the aggrieved party has performed all its obligations under the contract and only the other party's obligation to pay the price remains outstanding. It does not matter that the property is worth more than was to be paid for it so that by obtaining restitution the aggrieved party escapes a bad bargain.

Illustration 3: A has sold a Renoir painting to B for US$200,000; the true value of the painting is over US$250,000. When the picture is delivered to B, he does not pay for it. A is entitled to claim back the painting.

H. Restitution is impossible or too onerous

The rules in Chapter 4 Section 1 on right to performance apply mutatis mutandis to the claim for restitution. The aggrieved party cannot claim back the goods or other tangibles when it has become impossible or would involve the defaulting party in an unreasonable effort or expense.

Illustration 4: A has painted a fresco which has been mounted on a wall in B's house and for which B has not paid A. Although it would be physically possible to dismantle the fresco the costs would be disproportionately high. A cannot claim back the fresco. Its remedy is under Article 9:309.

Notes

See Notes following Article 9:309.[page 424]

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COMMENT AND NOTES: PECL Article 9:309: Recovery for Performance that Cannot Be Returned

On termination of the contract a party which has rendered a performance which cannot be returned and for which it has not received payment or other counter-performance may recover a reasonable amount for the value of the performance to the other party.

Comment

A. General

It frequently happens that after a contract has been terminated one party is left with a benefit which cannot be returned - either because the benefit is the result of work which cannot be returned, or because property which has been transferred has been used up or destroyed - but for which it has not paid. The other party may have a claim for the price, but this will depend upon the agreed payment terms and the price may not yet be payable. It may have a claim for damages, but the party which has received the benefit may be the aggrieved party, or, though it is the one which has failed to perform, it may not be liable for damages because its non-performance was excused under Article 8:108. It would be unjust to allow it to retain this benefit without paying for it, and Article 9:309 requires it to pay.

Illustration 1: A contract to build a garage onto a house provides that the builder is to be paid only upon completion of the work. After doing two-thirds of the work, the builder becomes insolvent and stops work. The employer gets another builder to finish the garage. The amount the employer has to pay the second builder plus compensation for the employer's inconvenience is less than the original contract price and the employer receives a net benefit. Under Article 9:309 it must pay the first builder a reasonable sum for the work done: in this case the reasonable sum would be the net benefit the employer received from the first builder's work.

Illustration 2: A farmer employs a contractor to lay drain pipes in her field for a lump sum of 10,000. The contractor lays some of the pipes which drain part of the field. Then exceptionally bad weather causes the remaining parts of the field to become waterlogged and, because the contractor's machinery will churn up the field and damage it, the farmer tells the contractor to stop work temporarily. After serving a notice under Article 8:106, the contractor terminates. Although the farmer is not liable in damages because her non-performance was excused under Article 8:108, the contractor may recover for the pipes already laid under Article 9:309.

B. Calculating the benefit

The party which has received the benefit should not be required to pay the cost to the other of having provided it, if the net benefit to it is less, since it is only enriched by the latter amount.[page 425]

Illustration 3: [A]s [in] Illustration 2, but the contractor has not yet installed enough pipe to carry off a significant amount of water and it has used its own special type of pipe so that the drainage system cannot be completed by another contractor. The net benefit to the farmer is nil and she should not have to pay anything under Article 9:309.

Occasionally it may happen that the net benefit to the recipient is greater than the cost of providing it. Then the recipient should not be liable under this article for more than an appropriate part of the contract price.

Illustration 4: The holder of an oil concession in a foreign country employs an exploration company to make a geological survey of the concession for 250,000. After the exploration company has worked for only a short time it is prevented from completing the survey by the government of the foreign country nationalising the concession, but in that time it has found oil and because of this the owner is paid millions in compensation by the government. The exploration company should recover only a proportionate part of the exploration fee, not a proportion of the compensation.

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

These notes covers Articles 9:305 - 9:309, which together govern the effects of termination.

The various legal systems exhibit great differences in concepts and terminology in this area. The differences in the practical results obtained are not so great but are still significant.

The most apparent difference is between systems such as the FRENCH which treats résolution as essentially retrospective and those such as the COMMON LAW which sees termination (or "rescission for breach") as essentially prospective (see Treitel, Remedies 282-283). However, as the differences are sometimes more apparent than real it may be helpful to consider the effect of "termination" in the various systems in a number of factual situations:

1. Effect on claims by either party which arose before the date of termination

In "prospective" systems such as the COMMON LAW these claims are largely unproblematic: they are not affected by subsequent termination, except that if money due but as yet unpaid would in any event have to be repaid after termination, it will for obvious reasons cease to be payable (see Treitel, Contract 911). It seems likely that other systems would reach the same result even if in theory termination was retrospective; for instance, in FRENCH law for a contract à exécution successive only résiliation for the future might be ordered (see note 4 below).

In GERMAN law it used to be said that Rücktritt had a retrospective effect but this view is no longer accepted. Contractual claims for damages which arose before termination are now treated as surviving termination which is said only to end the primary duty to perform and the right to damages for loss of expectation (see, Larenz I 404; Treitel, Remedies 282 and refs. there).

In DUTCH law termination does not have a retroactive effect: BW art. 6:269. In SPANISH law some writers favour prospective termination (Diez-Picazo, II, 724), others maintain the traditional, retrospective approach (Lacruz-Delgado, II, 1, 26.206 and Albadejo II, 1, 24.45) The Supreme Court, 28 June 1977, has adopted prospective termination when past performances were unaffected. See also Unidroit art 7.3.1

2. Damages for the non-performance itself

The conceptual difficulties felt in some systems in awarding full damages for breach of a contract which has been terminated are discussed above, see note to Article 8:102. Most systems now allow full damages despite termination.

3. Effect on contract clauses intended to apply even after termination

All systems now accept that termination will not affect the application of clauses such as arbitration [page 426] clauses which were intended to apply despite termination. Eg COMMON LAW: Heyman v. Darwins [1942] A.C. 356, H.L.; FINLAND: Aurejärvi 106; FRANCE: clause compromissoire (NCPC art. 1466) and penalty clause (Malaurie & Aynès, Obligations no. 543); GERMANY, see Stein-Jonas (-Schlosser) 1025 No. 00; GREEK law, see Kerameus 171-173, with further refs, and Papanicolaou in Georgiadis & Stathopoulos II art. 389 no. 14 (1979); ITALIAN law: no specific text but see Satta 852; Cass. 5 Aug.1968 n. 2803, in Foro It., 1969, I c.445 and Cass. 27 May 1981 n.3474, in Foro It., 1982, I c.199; NETHERLANDS BW art. 6:271; PORTUGUESE CC art. 434(1); SPANISH Arbitration Act 1988 (see Bercovitz, Arbitraje, art. 1, 17 ff and Unidroit art. 7.3.5(3)..

4. Effect on previously performed parts of a contract for successive performances

All systems now accept that where a contract for performance in successive parts or instalments is terminated after some parts of it have been performed, it may be terminated for the future without the need to undo the completed parts (see Treitel, Remedies 283). In FRENCH, BELGIAN and LUXEMBOURG law, résolution is only retroactive when the contract is to be performed at one time: for a contract à exécution successive the contract is treated as disappearing only from the date at which the debtor ceased performing or was given notice of termination by the aggrieved party. In this context the process is often termed résiliation (Malaurie & Aynès, Obligations nos. 743 and 744). In ITALIAN law termination is in principle retrospective but for contracts involving continuous or periodic performance see CC art. 1458. In PORTUGUESE law termination does not affect performances already rendered unless they are affected by the non-performance, CC art. 434(2). In SPANISH law termination is not necessarily retroactive and does not affect past performance if this is not rendered useless by the non-performance, see note 1 above.

5. Property already received and reduced in value by the subsequent non-performance

Most systems also recognise the rule embodied in Article 9:306 that the aggrieved party may reject property which has already been delivered to him, and which was itself in conformity to the contract, if the subsequent non-performance has rendered it of no use or interest to him. For instance, in GERMAN law, if the performances are inter-related either party can demand return of the earlier-delivered part. In ENGLISH and IRISH law, where a part of the goods to be delivered are defective, the buyer may reject the whole (U.K. Sale of Goods Act 1979, s. 30; for Ireland, see Forde 1.192), and this will apply even if the goods are to be delivered in instalments provided that the instalments are similarly inter-connected and thus the contract is not severable (see Gill & Dufus SA v. Berger & Co Inc [1983] 1 Lloyd's Rep. 622, reversed without reference to this point [1984] A.C. 382, H.L.; Atiyah 452). The position with severable contracts is less clear but probably there is a right to reject instalments already received if they are rendered useless by the later breach (Atiyah 455; Forde 1.198). The DANISH Sale of Goods Act, 46, and the FINNISH and SWEDISH Sale of Goods Acts 43 and 44 (see Ramberg, Köplagen 462), provide that a buyer who has received a defective instalment can reject instalments received earlier if the instalments are so inter-connected that it would be detrimental to the buyer to have to keep the earlier ones. In ITALIAN law there is no general provision but under CC art. 1672 when a construction contract is terminated the purchaser has only to pay for work done so far as it is of value to him.

6. Inability to restore property may be a bar to termination

Under some systems a party who has received property may not be permitted to terminate either the contract as a whole, where it was for a single performance, or, where it was by instalments, in relation to the part already received, if he cannot return what he has received, for instance because he has consumed or resold it. Generally this rule applies where the inability to restore is attributable to the acts of the party who received the goods: DANISH Sale of Goods Act, 57 and 58; FINNISH and SWEDISH Sale of Goods Acts, 66 (see Ramberg, Köplagen 637 f.); BELGIAN case law, e.g. C.A. Gent 22 Oct. 1970, R.W. 1970-71, 893; C.A. Liège 10 Nov. 1982, J.L. 1983, 153; GERMAN law, BGB 351; GREEK CC arts. 391-394. It does not apply when the defect constitutes a non-performance: FRENCH CC art. 1647(1); GERMAN law, BGB 351 and Enneccerus & Lehmann 169, 445-446; ENGLISH law, Rowland v. Divall [1923] 2 K.B. 500, C.A. When the inability is due to accidental destruction, solutions differ: see the discussion in Treitel, Remedies 285.

With services, in contrast, the usual rule seems to be that the fact that there is nothing to be returned does not prevent termination (ibid.). Systems differ as to whether the aggrieved party must make restitution of the value of what he received (see below).

The Principles, like AUSTRIAN and FRENCH law (see Malaurie & Aynès 762) and the DUTCH BW, do not follow this distinction. In neither case is inability to restore a bar to termination; the aggrieved party will however be expected to pay for benefits received, see below. In this the Principles differ from CISG art. 82.

7. Action for price may be the only remedy

In some systems, e.g. the COMMON LAW, there is a rule that if the claiming party has completed its [page 427] performance, or a severable part of it, the only remedy is an action for the agreed price. Thus a seller of goods who has delivered them to the buyer but has not been paid cannot terminate the contract and recover the goods but can only bring an action for the price. The only exception is if the property in the goods has not passed to the buyer, for instance because the contract provided that property would not pass until the goods were paid for (see Aluminium Industrie v. Romalpa Aluminium [1976] 1 W.L.R. 676, C.A.). DANISH Sale of Goods Act 28(2), FINNISH and SWEDISH Sale of Goods Acts, 54(4) and GREEK CC art. 531 provide the same rule and so does GERMAN BGB 454 where the seller has allowed time for payment of the purchase price. The AUSTRIAN Commercial Code is to the same effect, 4. EVHGB Art. 8 No. 21.

The Principles do not adopt this rule, but they do not deal with the rights of creditors and other third parties to oppose restoration of property delivered, see below.

8. Effect of termination on performances already received

Assuming that the right to terminate exists, what effect will termination have on performances made already? Most systems require that each party returns benefits received from the other or makes restitution of their value. However the situation is complex and the remainder of this note is devoted to it.

The position is simpler under systems which regard termination as retroactive, for then restitution of benefits appears as a natural concomitant of termination: eg FRENCH, BELGIAN and LUXEMBOURG CC arts. 1379 and 1380 read with art. 1184; GREEK CC art. 389(2); AP 661/1974, NoB 23 (1975) 275, 276 I; AP 696/1982, NoB 31 (1983) 659-660; PORTUGUESE CC arts. 434(1) and 289; SPANISH law, see note 1 above.

Other systems under which termination is not retrospective nonetheless recognise a general duty to make restitution: DUTCH BW art. 6:271. For SCOTTISH law, under which there may be restitution of unreciprocated performances, see MacQueen 1996 Acta Juridica 176. In GERMAN law it is now held that Rücktritt does not retrospectively do away with the contract but it creates general obligations of restitution, BGB 346. In AUSTRIA ABGB 921 provides that as a result of a notice of termination because of late performance or non-performance, any consideration previously given must be returned or refunded in such a manner that neither party profits from any losses the other may suffer.

In contrast, the COMMON LAW allows only partial restitutionary remedies.

It may be helpful to consider each of the three situations covered by Articles 9:307 to 9:309 in turn.

(a) Money paid

If money has been paid before the date of termination, and assuming that it was not paid as a deposit or on terms that it would be forfeited if the contract was not performed, systems in which termination is seen as retroactive will normally allow the money to be recovered. It does not matter whether the party seeking to recover the money is the aggrieved party or the non-performing party: FRENCH law, Malaurie & Aynès, Obligations no. 376 and FRENCH and BELGIAN CC arts. 1376 - 1377; ITALIAN CC arts. 1458, 2033 and, for sales, arts. 1479(2) and 1493(1). For GERMAN, GREEK, PORTUGUESE and SPANISH law see above; DANISH law see Sale of Goods Act 57 and Ussing, Køb 164-165; FINNISH and SWEDISH law see Sale of Goods Acts, 64 and Ramberg, Köplagen 614 ff.

The COMMON LAW is more restrictive. Except in cases of frustration (now governed by Law Reform (Frustrated Contracts) Act 1943, s. 1(2)), it allows recovery by the aggrieved party only where there has been "a total failure of consideration" and by the non-performing party only where the party who had received the money can be restored to his original position (see Treitel, Remedies 284; Treitel, Contract 822-824, 906-907, and 911.

ULIS art. 78(2) and CISG art. 81(2) take the same broad approach to restitution as the Principles.

(b) Property transferred

If the property remains in the possession of the party to whom it was transferred, and is not claimed by a third party, the "retroactive" systems allow the transferor to recover it: e.g. FRENCH law, Malaurie & Aynès, Obligations no. 376 and FRENCH and BELGIAN CC art. 1379; ITALIAN CC arts. 1458(2) and 1493(2) (sales); FINNISH and SWEDISH Sale of Goods Act 64(2).

Systems differ where a third party such as a creditor of the recipient claims the property. In GERMAN law the right to the return of the property is only a "contractual" one and third parties' interests will not be affected. See also AUSTRIAN ABGB 921, second sentence; SPANISH law (Albaladejo, II, 1, 20.4.U: Supreme Court 1 October 1986); GREEK CC art. 393. The result is the opposite in FRENCH law, where the effect is in principle (but subject to important restrictions) "proprietary" (see Malaurie et Aynès, Obligations, No.143; Nicholas, 245-246; Treitel, Remedies 282). The Principles follow ULIS and CISG in leaving the question of whether the right to restitution enables the claiming party actually to recover the goods in the face of competing claims by third parties to the law applicable to the issue.[page 428]

(c) Restitution for services

"Retroactive" systems again have little difficulty in allowing either party upon termination to recover the value of services rendered under the principle of unjust enrichment. On FRENCH law, see Ghestin, Jamin & Billiau 482 ff.; BELGIAN law, Cass. 27 March 1972, Arr. Cass. 707; ITALIAN law, where there is no provision as to contracts in general (but see CC art.1672 and Cass. 5 Aug. 1988 no. 4849, in Mass. Foro It., 1988; Cass. 23 June 1982 no. 3827, in Mass. Foro It., 1982; Cass. 13.1.1972 n. 106 in Rassegna Avvocatura Stato, part I, 1972, 161); PORTUGUESE CC arts. 434(1) and, when the performance cannot be returned, 289(1); for SCOTTISH law, see Graham v. United Turkey Red Co. 1922 S.C. 583.

For this case GERMAN law has a special rule that where the counter-performance has been fixed in money this amount shall be paid: BGB 346 sent. 2 (see further Treitel, Remedies 284). GREEK law reaches the same result: Gasis in Erm.AK II/1, art.389 no. 11 (1949). In DANISH law the party who has rendered a performance which cannot be returned is not entitled to its value or the enrichment which the other party has received if he can claim the counter-performance or damages, Ussing, Alm. Del. 98. Under DUTCH BW art. 6:272 the party who has rendered performance is entitled to its value.

In SCOTLAND if a contract is frustrated the obligations of the parties under the contract cease but there may be an equitable adjustment of the rights of the parties under the principles of unjust enrichment (Cantiere San Rocco v. Clyde Shipbuilding and Engineering Co 1923 S.C. (H.L.) 105).

The COMMON LAW provides, as already mentioned, that if the claiming party has completed its performance, or a severable part of it, the only remedy is an action for the agreed price. In the situation of partial performance it distinguishes between cases of frustration (impossibility) and cases of breach. Where the contract has been frustrated, the court has discretion under Law Reform (Frustrated Contracts) Act 1943, s. 1(3) to award what are basically restitutionary awards (see the judgment of Robert Goff J in BP Exploration Co (Libya) Ltd v. Hunt [1979] 1 W.L.R. 783, though see also Lawton LJ in [1981] 1 W.L.R. 232, C.A.). Where the contract is terminated for breach, the aggrieved party may recover a reasonable sum; the defaulting party may recover nothing (see Treitel, Contract 696-699, 592).

Again the Principles follow ULIS, CISG and Unidroit art. 7.3.6(1) in taking a broad flexible approach.

Thus the Principles are broadly in accordance with those systems which take a liberal approach to restitution after termination and thus enable the court or arbitrator to order full restitution of benefits received. This normally achieves a just settlement on the facts.[page 429]

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