European Contract Law and German Law (European Monographs, 86) 9789041157744, 9789041125880, 9041125884

Table of contents :
Cover
Half Title Page
Title Page
Copyright Page
Dedication
Summary of Contents
Table of Contents
List of Editors and Contributors
Preface
List of Abbreviations
List of Sources of Translated Statutes
CHAPTER 1 General Provisions
SECTION 1: SCOPE OF THE PRINCIPLES
SECTION 2: GENERAL DUTIES
SECTION 3: TERMINOLOGY AND OTHER PROVISIONS
CHAPTER 2 Formation
SECTION 1: GENERAL PROVISIONS
SECTION 2: OFFER AND ACCEPTANCE
SECTION 3: LIABILITY FOR NEGOTIATIONS
CHAPTER 3 Authority of Agents
SECTION 1: GENERAL PROVISIONS
SECTION 2: DIRECT REPRESENTATION
SECTION 3: INDIRECT REPRESENTATION
CHAPTER 4 Validity
CHAPTER 5 Interpretation
CHAPTER 6 Contents and Effects
CHAPTER 7 Performance
CHAPTER 8 Non-performance and Remedies in General
CHAPTER 9 Particular Remedies for Non-performance
SECTION 1: RIGHT TO PERFORMANCE
SECTION 2: WITHHOLDING PERFORMANCE
SECTION 3: TERMINATION OF THE CONTRACT
SECTION 4: PRICE REDUCTION
SECTION 5: DAMAGES AND INTEREST
CHAPTER 10 Plurality of Parties
SECTION 1: PLURALITY OF DEBTORS
SECTION 2: PLURALITY OF CREDITORS
CHAPTER 11 Assignment of Claims
SECTION 1: GENERAL PRINCIPLES
SECTION 2: EFFECTS OF ASSIGNMENT AS BETWEEN ASSIGNOR AND ASSIGNEE
SECTION 3: EFFECTS OF ASSIGNMENT AS BETWEEN ASSIGNEE AND DEBTOR
SECTION 4: ORDER OF PRIORITY BETWEEN ASSIGNEE AND COMPETING CLAIMANTS
CHAPTER 12 Substitution of New Debtor: Transfer of Contract/Transfer of Contractual Position
SECTION 1: SUBSTITUTION OF NEW DEBTOR
SECTION 2: TRANSFER OF CONTRACT
CHAPTER 13 Set-Off
CHAPTER 14 Prescription
SECTION 1: GENERAL PROVISION
SECTION 2: PERIODS OF PRESCRIPTION AND THEIR COMMENCEMENT
SECTION 3: EXTENSION OF PERIOD
SECTION 4: RENEWAL OF PERIODS
SECTION 5: EFFECTS OF PRESCRIPTION
SECTION 6: MODIFICATION BY AGREEMENT
CHAPTER 15 Illegality
CHAPTER 16 Conditions
CHAPTER 17 Capitalization of Interest
Bibliography
Index
Back Cover

Citation preview

European Contract Law and German Law Edited by

86

Stefan Leible & Matthias Lehmann

EUROPEAN MONOGRAPHS

European Contract Law and German Law

EUROPEAN MONOGRAPHS In the European Monographs series this book, General Principles of EU Law and European Private Law is the eighty-sixth title. The titles published in this series are listed at the end of this volume.

European Contract Law and German Law

Edited by Stefan Leible Matthias Lehmann

Published by: Kluwer Law International PO Box 316 2400 AH Alphen aan den Rijn The Netherlands Website: www.kluwerlaw.com

Sold and distributed in North, Central and South America by: Aspen Publishers, Inc. 7201 McKinney Circle Frederick, MD 21704 United States of America Email: [email protected]

Sold and distributed in all other countries by: Turpin Distribution Services Ltd Stratton Business Park Pegasus Drive, Biggleswade Bedfordshire SG18 8TQ United Kingdom Email: [email protected]

Printed on acid-free paper.

web-ISBN 978-90-411-5774-4 © 2014 Kluwer Law International BV, The Netherlands All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher. Permission to use this content must be obtained from the copyright owner. Please apply to: Permissions Department, Wolters Kluwer Legal, 76 Ninth Avenue, 7th Floor, New York, NY 10011-5201, USA. Email: [email protected] Printed and Bound by CPI Group (UK) Ltd, Croydon, CR0 4YY.

in memoriam Hannes Unberath

Summary of Contents

List of Editors and Contributors

xiii

Preface

xv

List of Abbreviations

xvii

List of Sources of Translated Statutes

xxi

CHAPTER 1 General Provisions S. Leible

1

CHAPTER 2 Formation P. Mankowski & M. Müller

57

CHAPTER 3 Authority of Agents M. Lehmann

117

CHAPTER 4 Validity T. Ackermann & J.-U. Franck

167

CHAPTER 5 Interpretation M. Lehmann & S. Gohling

275

CHAPTER 6 Contents and Effects H. Unberath

297

vii

Summary of Contents CHAPTER 7 Performance M. Schmidt-Kessel & S. Singleton

353

CHAPTER 8 Non-performance and Remedies in General B. Gsell

375

CHAPTER 9 Particular Remedies for Non-performance T.W. Dornis

451

CHAPTER 10 Plurality of Parties M. Gebauer

565

CHAPTER 11 Assignment of Claims R. Freitag

605

CHAPTER 12 Substitution of New Debtor: Transfer of Contract/Transfer of Contractual Position S. Leible

655

CHAPTER 13 Set-Off D. Looschelders & M. Makowsky

685

CHAPTER 14 Prescription A. Piekenbrock

717

CHAPTER 15 Illegality M. Lehmann

769

CHAPTER 16 Conditions M. Lehmann & S. Gohling

783

CHAPTER 17 Capitalization of Interest M. Lehmann

793

Bibliography

797

Index

821

viii

Table of Contents

List of Editors and Contributors

xiii

Preface

xv

List of Abbreviations

xvii

List of Sources of Translated Statutes

xxi

CHAPTER 1 General Provisions S. Leible

1

SECTION 1: Scope of the Principles SECTION 2: General Duties SECTION 3: Terminology and Other Provisions

1 24 31

CHAPTER 2 Formation P. Mankowski & M. Müller

57

SECTION 1: General Provisions SECTION 2: Offer and Acceptance SECTION 3: Liability for Negotiations

57 80 111

CHAPTER 3 Authority of Agents M. Lehmann

117

SECTION 1: General Provisions SECTION 2: Direct Representation SECTION 3: Indirect Representation

117 125 161

ix

Table of Contents CHAPTER 4 Validity T. Ackermann & J.-U. Franck

167

CHAPTER 5 Interpretation M. Lehmann & S. Gohling

275

CHAPTER 6 Contents and Effects H. Unberath

297

CHAPTER 7 Performance M. Schmidt-Kessel & S. Singleton

353

CHAPTER 8 Non-performance and Remedies in General B. Gsell

375

CHAPTER 9 Particular Remedies for Non-performance T.W. Dornis

451

SECTION 1: SECTION 2: SECTION 3: SECTION 4: SECTION 5:

451 471 478 522 527

Right to Performance Withholding Performance Termination of the Contract Price Reduction Damages and Interest

CHAPTER 10 Plurality of Parties M. Gebauer

565

SECTION 1: Plurality of Debtors SECTION 2: Plurality of Creditors

565 592

CHAPTER 11 Assignment of Claims R. Freitag

605

SECTION 1: General Principles

606

x

Table of Contents SECTION 2: Effects of Assignment as between Assignor and Assignee SECTION 3: Effects of Assignment as between Assignee and Debtor SECITON 4: Order of Priority between Assignee and Competing Claimants

618 631 649

CHAPTER 12 Substitution of New Debtor: Transfer of Contract/Transfer of Contractual Position S. Leible

655

SECTION 1: Substitution of New Debtor SECTION 2: Transfer of Contract

655 680

CHAPTER 13 Set-Off D. Looschelders & M. Makowsky

685

CHAPTER 14 Prescription A. Piekenbrock

717

SECTION 1: SECTION 2: SECTION 3: SECTION 4: SECTION 5: SECTION 6:

717 723 731 758 761 766

General Provision Periods of Prescription and their Commencement Extension of Period Renewal of Periods Effects of Prescription Modification by Agreement

CHAPTER 15 Illegality M. Lehmann

769

CHAPTER 16 Conditions M. Lehmann & S. Gohling

783

CHAPTER 17 Capitalization of Interest M. Lehmann

793

Bibliography

797

Index

821

xi

List of Editors and Contributors

Editors

Prof. Dr. Stefan Leible

Professor of Law at University of Bayreuth

Prof. Dr. Matthias Lehmann

Professor of Law at Martin-Luther-University of Halle-Wittenberg

Authors

Prof. Dr. Thomas Ackermann

Professor of Law at Ludwig-MaximiliansUniversity of Munich

Prof. Dr. Tim W. Dornis

Professor of Law at Leuphana University of Lüneburg

Dr. Jens-Uwe Franck

Research Fellow and lecturing Tutor in Law at Ludwig-Maximilians-University of Munich

Prof. Dr. Robert Freitag

Professor of Law at Friedrich-AlexanderUniversity of Erlangen-Nuremberg

Prof. Dr. Dirk Looschelders

Professor of Law at Heinrich-Heine-University of Düsseldorf

Prof. Dr. Martin Gebauer

Professor of Law at Eberhard-Karls-University of Tübingen

Stefan Gohling

Research Assistant at Martin-Luther-University of Halle-Wittenberg

Prof. Dr. Beate Gsell

Professor of Law at Ludwig-MaximiliansUniversity of Munich

Dr. Mark Makowsky

Research Assistant at Heinrich-HeineUniversity of Düsseldorf

Prof. Dr. Peter Mankowski

Professor of Law at University of Hamburg

xiii

List of Editors and Contributors

Michael Müller

Trainee Lawyer at the superior Court of Justice Berlin

Prof. Dr. Andreas Piekenbrock

Professor of Law at Ruprecht-Karls-University of Heidelberg

Prof. Dr. Martin SchmidtKessel

Professor of Law at University of Bayreuth

Susann Singleton

Counsel for Immigration law

Prof. Dr. Hannes Unberath

Former Professor of Law at University of Bayreuth

xiv

Preface

This book is the third volume of a series dedicated to the comparison between the Principles of European Contract Law (PECL), as elaborated by the so-called LandoGroup, and the national law of European states. So far, the books ‘Principles of European Contract law and Dutch Law’ and ‘Principles of European Contract law and Italian Law’ have been published. The idea of this series goes back to Ewoud Hondius. In the first edition, the main purpose was described as being twofold: first, to bring the PECL to the attention of a wider range of national lawyers, and second, to provide an introduction to national law of European states for foreign readers. We agree. Taking into account recent developments, we would however like to add a third purpose that the series may serve: to ‘reconnect’ the law of the European Union (EU) to that of its Member States. Within the last years, the importance of the PECL has received a tremendous upgrade due to EU law. At the horizon, one can already see an emerging EU contract law that will be built upon the PECL. The Principles, in turn, are based on the laws of the Member States from which they are distilled. Yet, the Principles are abstract and sometimes may leave doubts as to whether they truly reflect the national traditions. Indeed, one of the arguments most frequently advanced for opposing the introduction of an EU contract law is that it would not be in line with national principles of contract law. The in-depth comparison drawn in this series may serve to refute or confirm such doubts. It may give a scientific basis to a discussion that sometimes seems to be led more emotionally than rationally. Crucially, the series can serve as a yardstick to measure how far EU law has really been disconnected from the traditions of the Member States. The developments of the last years have constantly kept us from finishing the book. From the beginning, it was clear that the book should also include the third part of the PECL which had been published in 2002. Shortly after we started our work, however, European contract law began to move with a speed that is sometimes breath-taking. In 2008, the Draft Common Frame of Reference was published as an ‘Interim Outline Edition’. In 2009, the ‘Outline Edition’ and the ‘Full Edition’ followed. The DCFR incorporates the PECL ‘in a partly revised form’ (see Study Group on a European Civil Code and Research Group on EC Private Law (Acquis Group), Draft Common Frame of Reference, Interim Outline Edition, 2008, p. 7). In particular, the

xv

Preface PECL were adapted to fit the structure of a larger text that is not restricted to contract law, but includes other areas as well, such as tort or property law. Moreover, the PECL were enriched with special rules that originated in E(E)C law and respond to modern needs, such as the protection of the consumer in B2C-relations. Since the DCFR not only contained an update of the PECL, but also had the potential for directly impacting on the European legislation, we decided that this text must be included in the book, in so far as it concerns contract law. Meanwhile, in October 2011, the European Commission published a Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law (COM(2011) 635 final). This proposal is largely built upon the experience gained through the DCFR and thus indirectly also upon the PECL. After pondering over whether we should include it in this book, we ultimately refrained from doing so, mainly for two reasons. First, the project of a Common European Sales Law is a somewhat ‘moving target’ because it is already clear that the proposal will not be adopted in its initial form, but rather in an amended version. Second, the scope of the text is limited to sales law and is, therefore, much more restricted than that of the PECL which applies to all kinds of contracts. This does not exclude the fact that from this modest beginning, ultimately a new kind of optional European contract law will emerge potentially covering all sorts of contractual agreements. Should that occur, it would clearly make sense to write a comparison between this new body of law and national contract law. However, we are not yet there, so it seems justified to postpone this analysis and focus on the existing instruments on general contract law. This book could not have been completed without the efforts of many others. First of all, we would like to thank the authors who contributed to this book. Some of them who turned in their work early had to wait very long until all chapters had been concluded. We thank them for their patience. We owe a particular gratitude to those authors that came in late and filled gaps which had been created by unforeseen events such as one author having fallen ill for a long time. Many thanks to Victoria-Sophie Stracke who had helped with the formatting, to Harvey Asiedu-Akrofi for reviewing parts of the text, and to Johannes Rehahn, Stefan Gohling, Anne Eckert and Doris Leitner for their corrections. We would also like to thank the team at Kluwer for being helpful with the editing. The English translations of the German BGB have partly been taken from Basil S. Markesinis/Hannes Unberath/Angus C. Johnston, The German Law of Contract (2nd ed., Hart, Oxford 2006); Geoffrey Thomas/Gerhard Dannemann www.iuscomp.org/ gla/statutes/BGB.htm) and juris.de (www.gesetze-im-internet.de/englisch_bgb/). The copyright holders have generously allowed us to reprint these texts. Along the journey of drafting this book, we have lost one valuable author. On 28 January 2013, Professor Hannes Unberath succumbed to a long and painful disease. We had the privilege of knowing him as a brilliant researcher and sympathetic colleague. The reader will benefit from his insightful and clearly written commentary. It is a posthumous publication that will make us remember Hannes. We dedicate this book to him. Stefan Leible and Matthias Lehmann Bayreuth/Halle (Saale), 1 December 2013

xvi

List of Abbreviations

A.C.

Appeal Cases

ACQP

Acquis Principles

ABGB

Allgemeines Bürgerliches Gesetzbuch (Austrian Civil Code)

ALR 1794

Allgemeines Landrecht of 1794

arg. e

argument from

B2B

Business-to-Business

B2C

Business-to-Consumer

BGB

Bürgerliches Gesetzbuch (German Civil Code)

BGB 1900

Bürgerliches Gesetzbuch as effective from 1900

BGBl

Bundesgesetzblatt

BGE

Entscheidungen des Schweizerischen Bundesgerichts

BGH

Bundesgerichtshof (German Supreme Court)

BGHZ

Amtliche Entscheidungen des Bundesgerichtshofs in Zivilsachen

BT-Drs.

Bundestagsdrucksache

BVerfGE

Entscheidungen des Bundesverfassungsgerichts

BW

Burgerlijk Wetboek (Dutch Civil Code)

C2C

Consumer to Consumer

xvii

List of Abbreviations

c.c.

France: Code civil / Italy: codice civile / Portugal: código civil

c.p.c.

France: Code de procédure civile / Italy: codice di procedura civile

Cass. civ.

Corte di Cassazione, civil law division

CEFL

Commission on European Family Law

CESL

Common European Sales Law

cf.

confer – compare

Ch.

Chapter

CISG

United Nations Convention on Contracts for the International Sale of Goods

crit.

critical

DB

Der Betrieb

DCFR

Draft Common Frame of Reference

e.g.

exempli gratia – for example

ECHR

European Convention on Human Rights

Ed(s).

Editor(s)

ERPL

European Review of Private Law

et al.

and other

et seq.

following

EU

European Union

FamRZ

Zeitschrift für das gesamte Familienrecht

FIRA

Fontes Iuris Romani Anteiustiniana

Foro it.

Il Foro Italiano

GG

Grundgesetz (German Constitution)

HGB

Handelsgesetzbuch (Commercial Code)

HGB 1900

Handelsgesetzbuch as effective from 1900

i.e.

id est – that is

id.

idem – same author as above/before

InsO

Insolvenzordnung (German Insolvency Code)

xviii

List of Abbreviations

JW

Juristische Wochenschrift

JZ

JuristenZeitung

L.R.

Law Report

lit.

littera

LPartG

Lebenspartnerschaftsgesetz (German Civil Partnership Code)

MDR

Monatsschrift für deutsches Recht

NJW

Neue Juristische Wochenschrift

NJW-RR

Neue Juristische Wochenschrift – Rechtsprechungs-Report Zivilrecht

no./nos.

number/numbers

NVwZ

Neue Zeitschrift für Verwaltungsrecht

NZA

Neue Zeitschrift für Arbeitsrecht

OLG

Oberlandesgericht (German Higher Regional Court)

OR

Obligationenrecht (Swiss Law of Obligations)

p./pp.

page/pages

PECL

Principles of European Contract Law

PflVG

Pflichtversicherungsgesetz (German Act on Compulsory Insurance)

PICC

UNIDROIT Principles of International Commercial Contracts

publ.

publication/published

Q. B.

Queen’s Bench Division

RG

Reichsgericht (Supreme Court of the German Reich)

RGZ

Entscheidungen des Reichsgerichts in Zivilsachen

SchKG 1889

Bundesgesetz über Schuldbetreibung und Konkurs as effective from 1889 (Swiss Act on Debt Enforcement and Bankruptcy)

StGB

Strafgesetzbuch (German Criminal Code)

StVG

Straßenverkehrsgesetz (German Road Traffic Act)

xix

List of Abbreviations

SZ

Entscheidungen des österreichischen Obersten Gerichtshofes in Zivil- und Justizverwaltungssachen

TEU

Treaty on European Union

TFEU

Treaty on the Functioning of the European Union

U.C.C.

Uniform Commercial Code

ULIS

Convention relating to a Uniform Law on the International Sale of Goods

UWG

Gesetz gegen den unlauteren Wettbewerb (German Act Against Unfair Competition)

VersR

Versicherungsrecht

VVG

Versicherungsvertragsgesetz (German Act on Insurance Contracts)

WM

Wertpapier-Mitteilungen

X.

Liber extra (Liber decretalium Gregorii Papae IX.)

ZGS

Zeitschrift für das gesamte Schuldrecht

ZPO

Zivilprozessordnung (German Code of Civil Procedure)

xx

List of Sources of Translated Statutes

Translations from Basil Markesinis/Hannes Unberath/Angus C. Johnston, The German Law of Contract, 2nd. Ed., Hart, Oxford, 2006 (copyright holder Basil Markesinis):

Chapter 4

§§119–121, 123, 124, 138, 139, 142-144, 166, 242, 278, 305-310, 311a, 313, 812, 814, 818, 819 BGB

Chapter 6

§§ 117, 157, 243, 275, 328, 313, 314, 333-335, 524, 612, ,620, 632 BGB

Chapter 8

§§ 241, 242, 254, 275, 276, 278, 280, 281, 283, 293, 311a, 321, 323, 325, 326 BGB

Chapter 9

§§ 247, 249, 251-254, 280, 281, 286, 288, 349 BGB

Chapter 10

§§ 421, 422, 426 BGB

Translations from Goeffrey Thomas/ Gerhard Dannemann, available at: http://www.iuscomp.org/gla/statutes/BGB.htm

Chapter 9

§§ 241, 244-246, 275, 283-285, 311a, 313, 314, 320, 321, 323-326, 346-348, 350, 351 BGB

Chapter 14

§§ 199-212, 214-217 BGB

Translations from juris.de, available at: http://www.gesetze-im-internet.de/englisch_bgb/

Chapter 1

§§ 126, 126b, 127, 130, 150, 157, 166, 186-194, 241, 242, 278, 280, 281, 305, 311, 323 BGB, §§ 1030, 1051, 1059, 1060 ZPO, § 1 GVG, Art. 2, 92 GG

Chapter 3

§§ 168, 170-173 BGB, § 117 InsO

Chapter 5

§§ 133, 157, 305b, 305c BGB

xxi

List of Sources of Translated Statutes

Chapter 8

§ 232 BGB

Chapter 9

§§ 255, 266, 273, 274, 289, 339-345 BGB

Chapter 10

§§ 320, 351, 378, 379, 423-425, 427, 428-432, 718, 741, 747, 754, 840 BGB

Chapter 11

§§ 399, 400, 408 BGB

Chapter 12

§§ 414-418, 311 BGB, Art. 2 GG

Chapter 13

§§ 388, 391 BGB

Chapter 15

§§ 134, 139, 812, 814, 817 BGB

Chapter 16

§§ 158, 159, 162 BGB

Chapter 17

§§ 248, 289 BGB

xxii

CHAPTER 1

General Provisions S. Leible

SECTION 1:

SCOPE OF THE PRINCIPLES

Principles of European Contract Law Article 1:101: Application of the Principles (1) These Principles are intended to be applied as general rules of contract law in the European Union. (2) These Principles will apply when the parties have agreed to incorporate them into their contract or that their contract is to be governed by them. (3) These Principles may be applied when the parties: (a) have agreed that their contract is to be governed by ‘general principles of law’, the ‘lex mercatoria’ or the like; or (b) have not chosen any system or rules of law to govern their contract. (4) These Principles may provide a solution to the issue raised where the system or rules of law applicable do not do so. 1. General. This rule outlines the scope of the Principles of European Contract Law (PECL). Alongside the rather programmatic first paragraph, paragraphs 2–4 regulate different situations. 2. EU contract law. Pursuant to paragraph 1, PECL should be applied, throughout the European Union (EU), as general rules of contract law. The parties are offered a set of general rules of contract law. Wherever the general rules of contract law of Member States, are directed at individuals, organizations, EU institutions or the Court of Justice of the European Union, and are of importance in business relations within the European

1

S. Leible internal market, the PECL then provides an alternative ‘carefully designed set of rules based on the research of comparative law’ (see Lando/Beale (2000), p. 95 Comment B). 3. Parties’ choice of the principles. Under paragraph 2, the PECL apply when the contracting parties have agreed to incorporate them into their contract (1st variant), or when their contract is to be governed by them (2nd variant). a) By incorporating or including the PECL into a contract, the rules become part of the agreement. However, the contract continues to be subject to national law, which includes all of its mandatory provisions in accordance with the private international law of the state where the court that has jurisdiction is located. Thus, the PECL are subject to either the subjectively or objectively chosen applicable law. Consequently, the effect of the agreement is merely a substantive incorporation of the PECL into the respective contract regime, which is possible within the frameworks of contractual freedoms. Any mandatory provisions of the applicable law will supersede the corresponding rules in the PECL. Both legal regimes, therefore, work together. As part of the contract’s terms, the PECL are subject to review under the national rules on standard terms and conditions. This review is not precluded by the fact that the PECL have been drafted by a third party, and not by a party to the contract. The Directive on Unfair Terms in Consumer Contracts (Council Directive 93/13/ EEC) only applies to contractual terms that have not been individually negotiated (Article 3(1)). A contractual always be regarded as not having been individually negotiated where it has been drafted in advance, and where the consumer has, as a result, not been able to influence the substance of the term (Art. 3(2) Council Directive 93/13/EEC). The idea behind this conception is to protect the customer from unfair, one-sided uses of contractual freedoms. It is essential for the directive’s application that it is the other contracting party, and not the consumer, who requests the incorporation. Accordingly, it is irrelevant who drafts the terms of the contract. A review of the standard terms will, however, not take place when both parties concordantly refer to the PECL, and it is possible for both parties to influence the terms of the contract. b) Pursuant to the second variant of paragraph 2, the parties may agree that their contract will be governed by the PECL. Whether such a reference is effective does not depend on the PECL, but, rather, on the conflict of laws of the forum where the dispute is brought forward. Therefore, a distinction needs to be made as to whether the dispute is to be brought before state courts, or arbitration tribunals. aa) State courts. If an arbitration clause is not present, then the state courts have jurisdiction. These courts have to determine the law applicable to the contract, at issue, in accordance with their state’s private international law rules. These rules, thus, determine whether the choice of the PECL is effective. According to Article 3(1) of the Rome I Regulation, contractual obligations are subject to the law chosen by the parties. Whether the term ‘law’ covers only state law, or both state law and non-state law, was highly disputed when the Rome Convention was in force. In light of the historical origin, there can be no doubt that the drafters of the Rome I Regulation wanted to prohibit recourse to non-state law. Thus, a choice of PECL is not possible under the Regulation.

2

Chapter 1: General Provisions bb) Arbitral tribunals. The situation is different for arbitral tribunals. Their jurisdiction does not depend on the transfer of state authority, but rather on the parties’ authorization. Consequently, the arbitral tribunals are not obliged to enforce the state’s regulatory rules, but the parties’ wishes instead. However, it is highly disputed whether or not the rules of private international law are mandatory for arbitral tribunals (see for current opinion: Sonnenberger, in Münchener Kommentar (2010), Intr. IPR, nos. 242 et seq.). If one were to assume that arbitral tribunals are integrated into the respective national legal system, then one would conclude that they would be subject to the rules on private international law. A choice of the PECL, as the governing law of a contract, would, therefore, not be possible. However, such a view is not wholly convincing. The legitimacy of a private international law reference to the PECL results from an a fortiori argument. It is uncontested in the law of international commercial arbitration that the parties may release the arbitral tribunal from the obligation to follow any rule of law, and alternatively, empower it to reach a decision ex aequo et bono (French: amiable composition). Given that the parties wield the power to put the arbitral tribunal in the position to reach a decision on purely equitable grounds, they may also be able to select rules on decision-making in the form of non-state law, such as the PECL. Furthermore, the prevailing practice in international arbitration considers arbitral awards rendered on the lex mercatoria to be lawful. The PECL can be compared to a systematically codified fraction of the lex mercatoria. It is in this vein that the arbitration rules of the International Chamber of Commerce (ICC) in Paris, for example, permit a choice between a law and ‘rules of law’. The latter notion includes the lex mercatoria and, therefore, the PECL. But even if the PECL have been chosen, the arbitral tribunal should consider the private international law of the states where the arbitral award is to be recognized and enforced. Otherwise, the arbitral award could prove to be worthless. § 1051(1) of the German Code of Civil Procedure (Zivilprozessordnung – ZPO) allows parties to choose the ‘legal provisions’ that shall be applied to their dispute. They are also, however, free to empower an arbitrator to reach a decision ex aequo et bono (§ 1051(3) ZPO). According to some authors, regulations established by individuals are not covered by the term ‘legal provisions’ (see Canaris (2000), p. 20, who acknowledges, however, that such a choice is possible within the framework of § 1051(3) ZPO). This rigid view is not wholly convincing. According to the travaux préparatoires of the new 10th book of the ZPO, legal provisions include ‘those that were designed on (an) international level’ (see Bundesregierung (Federal Government of Germany), Draft concerning the Reform of the Law relating to Arbitral Proceedings, Bundestag document no. 13/5274, p. 52). This meant to include such regulations as the PECL (see Solomon (1997), p. 982). But even if one were to reject this view, the permissibility of decisions ex aequo et bono allows one to apply the PECL because it is in accordance with freedom of contract; a sacrosanct principle where parties are able to simply advise the arbitral tribunal to reach its decision in line with the PECL (Canaris ibid). However, the PECL are mandatory for the arbitral tribunal only to the extent that they match the principles of amiable composition, and where it is clear that the PECL will frequently meet this standard.

3

S. Leible The reviewing of an arbitral award by a national court at the enforcement stage is very limited. It is merely limited to the following grounds: (1) whether the arbitral award was based on a valid contract, (2) whether the proceedings were free from defects and (3) whether the matter in dispute can generally and objectively be submitted to arbitration. In practice, most states only review conformity of the award with public policy. As the PECL are based on comparative law, it is very unlikely that the result achieved through their application could violate public policy. Furthermore, the internationally mandatory rules, the so-called lois d’application immédiate, cannot be waived one way or the other, which, in fact, the PECL recognizes, as well (Article 1:103 PECL). Thus the lois d’application immédiate are mandatory for an arbitration tribunal if it bases its decision on the PECL. There is, therefore, no danger that an arbitral award based on the parties’ choice of the PECL will not be enforced. 4. Application without parties’ choice. Paragraph 3 states that the application of the PECL is possible even if the parties agreed on submitting their contract to either the ‘general rules’, the lex mercatoria, similar rules (subparagraph a), or, alternatively, where there is no choice of law (subparagraph b). Of sole relevance is what the parties agreed upon. Thus, it is only important to the interpretation of the contract whether or not the parties meant to apply the PECL. a) Terms that subject the contract to the ‘general principles’ (of contract law), to the lex mercatoria, or to other similar ones, are often problematic because the precise content of such general principles remains relatively vague. Therefore, it demands considerable efforts to achieve appropriate results. Pursuant to PECL Comment D (Lando/Beale (2000), pp. 96-97), paragraph 3 is supposed to induce parties, courts, and tribunals to interpret such terms as a reference to the PECL since the PECL provide ‘well considered and specific formulations of general principles of contract law based upon extensive comparative research’. Such recourse is only permitted when the following two criteria are met: First, the parties must be in a position to agree upon arrangements of this kind. However, with the Rome I Regulation in force, the state courts are forbidden to resort to ‘general rules’, or to the lex mercatoria. The arbitral tribunals’ situation is different however, because – as stated above – a choice of ‘general rules’, or the lex mercatoria, is generally accepted. As a result, arbitral awards based on this choice of law will be recognized and enforced in most legal systems. However, recourse to the Principles is unthinkable even within arbitration. The PECL may, indeed, be understood as a quasi-codification of the lex mercatoria. Nonetheless, they can, at best, reflect the contents of the lex mercatoria, as well as capture its meaning at a fixed point in time – similar to a screenshot. Further developments of the lex mercatoria are, therefore, completely disregarded. Additionally, there are considerable doubts as to whether or not the PECL are an authentic reflection of the lex mercatoria because authenticity can only be guaranteed by the drafters of the law themselves. Certainly, the drafters of the PECL are not to be considered identical to the authors of lex mercatoria. Furthermore, it is necessary to determine, through interpretation, whether the parties intended to refer to the PECL when referring to the ‘general rules’, or to the lex mercatoria. This is not self-evident since the parties could have chosen the Principles

4

Chapter 1: General Provisions immediately. An incorporation of the Principles is unlikely if the parties referred to principles of Common law, since the PECL are based on Civil law, and are not only partially different from, but, in fact, opposed to Common law solutions. Apart from that, their incorporation would be more natural when there is a reference to general rules than when the contract is subject to the lex mercatoria; because the rules of the law merchant ‘are by nature fluctuating and can hardly be put in regulations in clear rules’ (Canaris (2000), p. 27). b) Subparagraph b) is directed at the situation where the parties have not chosen the applicable law. Pursuant to PECL Comment D (Lando/Beale (2000), pp. 96-97), the courts and tribunals should then be invited to apply the general rules. Such an application would be justified, according to the Comment because the preparations that are based on comparative law and the international discussion is reflected in the PECL. Yet, none of this is entirely convincing. The Rome I Regulation does not allow recourse to non-state law. Further, in accordance with prevailing opinion, arbitral tribunals are limited by national rules on conflict of laws. § 1051(2) ZPO, for example, refers merely to the ‘law of a state’ and, thus, rules out recourse to the PECL (Krüger (2005), p. 56). 5. Source to fill gaps. Pursuant to paragraph 4, the PECL should be applied to disputes that cannot be resolved within the applicable legal system, or under applicable rules. In such a case, in accordance with PECL Comment F (Lando/Beale (2000), p. 97), the court or tribunal should be invited to use the PECL as a legal source to fill the gap. The drafters of the Comment argue that an approach of this kind would comply with the practice of many courts, to consult foreign cases, or literature, when confronted with a novel problem. Since the PECL were based on thorough and comprehensive studies on comparative law of the Member States, they would be a source, at least as relevant, as the case law and literature of a single state. This view of the drafters of the PECL Comment is also – at least if understood broadly – unconvincing. If the applicable national law does not provide a solution, then the gap must initially be filled by the basic principles of the applicable law. This does not, however, mean that the Principles could not be taken into consideration. Their use is especially appropriate in the context of the so-called comparative law method, regardless of whether this is regarded as a fifth, independent method of interpretation, or as part of the objective-teleological method. But even with courts using comparative law for interpretation of autonomous law, when it is not further determined by international agreements, and although some courts may view the comparative method as methodically necessary, this does not release them from their obligation to stick to the lex lata. The recourse to the Principles is limited by national law, by its modes of application, and by the system upon which it is based. These factors cannot be overruled by the persuasiveness of the solutions found within the Principles. Despite these restrictions, the importance of the PECL in aiding national courts with interpretation should not be underestimated. Their power is primarily based on the plausibility of the alternative solutions. If they prove to be superior to the solutions achieved when applying national law, then they could be used for the interpretation of codified law, and to, likewise, trigger further development of the law within the

5

S. Leible permissible framework and, thus, ultimately become the source of a ‘spontaneous approximation of laws’. Harmonized private law is primarily autonomous. This means that it has to be interpreted and developed based upon itself. Recent international conventions on uniform private law explicitly refer, in this context, to ‘general rules’. Thus, problems arising under the UN Convention on the International Sale of Goods (CISG), but which are not explicitly regulated, must be decided pursuant to Article 7(2) CISG ‘according to general rules, on which the convention is based’, and only for the lack of such principles under the law of the contract, such as the national law, for instance. Similar references can be found in UNIDROIT Convention on International Factoring Article 4(2), and in UNIDROIT Convention on International Financial Leasing Article 6(2). The fact that gaps in conventions are primarily filled with general rules, and only secondarily with national law, is by now accepted even when it is not explicitly highlighted in the Convention. There is, thus, no obstacle against recourse to the Principles. Such recourse has been specifically recommended in the context of the CISG’s application. At first sight, this is convincing because the CISG was notably taken into consideration during the development of the PECL. Further, the CISG originated ‘from drafters who were intensively involved in the relevant problems and, thus, offer very high professional qualifications’. Nonetheless, one has to be cautious since the CISG does not refer entirely to general rules, but, rather, only to those rules ‘that this Convention is based on’. But the CISG and the Principles are not wholly congruent. When there are differences, the use of PECL is a priori ruled out. The rules of the CISG are supreme, and only if they do not contain any rule at all, only then will a fall back upon national law be justified. Additionally, the PECL does not rank higher than any other rules brought forward in academic literature when used for the interpretation of any other codified international law agreement (Michaels (1998) p. 606). 6. Application to the contracts of public authorities. Public authorities often enter into contracts with individuals concerning the supply of goods, or for the provision of work and services. To the extent that these contracts are subject to Civil law, as expressed by the regulations of the respective public authority, the PECL can, therefore, be applied to the contract under Article 1:101. If, however, provisions of public law apply, then these laws are, of course, supreme. This is particularly the case when a public authority subjects such contracts to procurement regulations.

Draft Common Frame of Reference Article I. – 1:101: Intended field of application (1) These rules are intended to be used primarily in relation to contractual and non-contractual rights and obligations and related property matters. (2) They are not intended to be used, or used without modification or supplementation, in relation to rights and obligations of a public law nature, or in relation to: (a) the status or legal capacity of natural persons;

6

Chapter 1: General Provisions (b) wills and succession; (c) family relationships, including matrimonial and similar relationships; (d) bills of exchange, cheques and promissory notes and other negotiable instruments; (e) employment relationships; (f) the ownership of, or rights in security over, immovable property; (g) the creation, capacity, internal organisation, regulation or dissolution of companies and other bodies corporate or unincorporated; (h) matters relation primarily to procedure or enforcement. (3) Further restriction on intended fields of application are contained in later Books. General. Contrary to the PECL, the rules of the DCFR are not limited to general contract law (see paragraph 1). They also cover several special contractual types of contracts, non-contractual obligations, and various problems in property law. Additionally, the DCFR, from the outset, is designed for different purposes than PECL. It is based on the aspiration to provide a model for a civil code of the EU. If it were to be adopted, it would then be state law, or rather, supranational law. Therefore, there would be no need for a rule like Article 1:101 PECL.

German Law § 305 BGB: Incorporation of standard business terms into the contract (1) Standard business terms are all contract terms pre-formulated for more than two contracts which one party to the contract (the user) presents to the other party upon the entering into of the contract. […] (2)–(3) […] § 1051 ZPO: Applicable laws (1) The arbitral tribunal is to decide on the matter in dispute in accordance with the statutory provisions that the parties have designated as being applicable to the content of the legal dispute. 2 Unless the parties to the dispute have expressly agreed otherwise, the designation of the laws or the legal system of a specific state is to be understood as a direct referral to the rules of substantive law of this state, and not to its rules relating to the conflict of laws. (2) Where the parties to the dispute failed to determine which statutory provisions are to be applied, the arbitral tribunal is to apply the laws of that state to which the subject matter of the proceedings has the closest ties. (3) The arbitral tribunal is to take its decision based on considerations of what is fair and equitable only if the parties to the dispute have expressly authorised it to do so. The authorisation may be granted up until the time the arbitral tribunal takes such decision.

7

S. Leible (4) In all cases, the arbitral tribunal is to decide in accordance with the provisions of the agreement and is to take account of any commercial practices that may exist. § 1059 ZPO: Petition for reversal of an arbitration award (1) Only a petition for reversal of the arbitration award by a court pursuant to subsections (2) and (3) may be filed against an arbitration award. (2) An arbitration award may be reversed only if: 1. The petitioner asserts, and provides reasons for his assertion, that: a)-b) […] c) The arbitration award concerns a dispute not mentioned in the agreement as to arbitration, or not subject to the provisions of the arbitration clause, or that it contains decisions that are above and beyond the limits of the arbitration agreement; however, where that part of the arbitration award referring to points at issue that were subject to the arbitration proceedings can be separated from the part concerning points at issue that were not subject to the arbitration proceedings, only the latter part of the arbitration award may be reversed; or d) […] 2. The court determines that a) […] b) The recognition or enforcement of the arbitration award will lead to a result contrary to public order. (3)–(5) […] § 1060 ZPO: Domestic arbitration awards (1) Compulsory enforcement is an available remedy provided the arbitration award has been declared enforceable. (2) The petition for a declaration of enforceability to be issued is to be denied, while reversing the arbitration award, if one of the grounds for reversal designated in § 1059 (2) is given. […] General. Both Article 1:101 PECL and Article I.-1:101 DCFR have no direct equivalent in German law. Apart from this, see above for references to German law that were included because of the factual connections to relevant rules in German law.

Comparison and Evaluation Based on their nature as a purely private set of rules and in contrast to national, supranational, or international law, the PECL do not have any binding force. The drafters of the PECL have been fully aware of this fact. The legislative content of Article

8

Chapter 1: General Provisions 1:101 is, thus, close to zero. The rule limits itself to display the goals pursued by the drafters and would, thus, be better formulated as a preamble, like , the parallel article in the UNIDROIT Principles, for example (cf. Michaels (1998), pp. 613–619).

Principles of European Contract Law Article 1:102: Freedom of Contract (1) Parties are free to enter into a contract and to determine its contents, subject to the requirements of good faith and fair dealing, and the mandatory rules established by these Principles. (2) The parties may exclude the application of any of the Principles or derogate from or vary their effects, except as otherwise provided by these Principles. 1. Freedom of contract. The PECL recognize, in paragraph 1, the freedom of contract between the parties. Each party can decide freely if, with whom (freedom of conclusion), and with what content (freedom of content) to form a contract. 2. Restrictions to freedom of contract. Of course, there are limitations to this freedom. The bars those rules from applying where the disposition of the parties is highly concerned with justice. A first limit derives from the principles of good faith and fair dealing. Thus, no party can enforce a contract or, in particular, a contractual term, that is contrary to good faith (cf. Article 1:201 PECL). Furthermore, the contracting parties are bound to the mandatory rules of the PECL (cf. Articles 4:118, 6:105 and 8:109 PECL). Further, the contractual freedom can be limited by mandatory rules of the national law applicable to the contract (cf. Article 1:103 PECL). 3. Mandatory rules in the PECL. Paragraph 2 elaborates and refines the distinction made in paragraph 1 between mandatory and non-mandatory PECL rules. In principle, the provisions of the PECL are dispositive. Thus, on the one hand, the parties, for example, are able to explicitly, or tacitly, deviate from them by agreeing on contrary terms of contract. If the PECL rules are effectively dispensed with, then ultimately, they create an indirect effect where their normative content serves as the starting point, and, similarly, as the guideline wherever there is a need to define the precise content of the mandatory rules. However, the mandatory rules of PECL always prevail over contradicting terms of business, and over individual agreements. Yet, even the PECL are not entirely ‘indispensable’. The parties can rid themselves of them in their choice of law, for instance, by subordinating the mandatory rules of PECL to a national law. Such a partial choice of law is permissible (cf. Krüger (2005), p. 65f.) The mandatory nature of a rule can be discerned from its wording, or by its connection to another rule. In some cases, it can also be derived from the particular purpose of the rule. Article 1:102 PECL raises the fundamental question as to how a set of rules, whose validity is essentially based on the parties’ freedom of contract, can simultaneously restrict this very freedom. Due to the fact that under the Rome I Regulation the PECL cannot be applied on an objective or subjective connection, the scope of the rule

9

S. Leible is questionable. Whether or not the rules can be departed from is determined by the governing law. The PECL’s classification of rules into mandatory or non-mandatory categories can, at best, be regarded as helpful for interpretation purposes. If the parties have agreed on the application of the PECL, then in any case of doubt, it is presumed that they did not want to deviate from the rules, as far as they are mandatory. This is different when the PECL are applied by an arbitration tribunal (cf. above). If their application is based on § 1051(1) ZPO, or a comparable rule of another state as a ‘legal provision’, then their mandatory rules become the measure. In this case, the PECL become the legal framework which, on the one hand, is the foundation of the freedom of contract, and on the other, its limitation. If they are applied as a more concrete version of the standard that governs the decision ex aequo et bono (cf. § 1051(3) ZPO), then the freedom of contract is limited by the aequitas and the bonitas itself. Hence, a deviation from the PECL by the parties is only possible where the arbitrator finds that this is required by equity.

Draft Common Frame of Reference Article II. – 1:102: Party autonomy (1) Parties are free to make a contract or other juridical act and to determine its contents, subject to any applicable mandatory rules. (2) Parties may exclude the application of any of the following rules relation to contracts or other juridical acts, or the rights and obligations arising from them, or derogate from or vary their effects, except as otherwise provided. (3) […] 1. General. The rule largely corresponds to the PECL. The first two paragraphs ensure the freedom of the parties with regard to the conclusion and the content of the contract. At the same time, they highlight the dispositive nature of the rules in the DCFR, holding exceptions separate. Due to its much broader scope of application, the DCFR naturally does not speak of freedom of contract, but instead focuses on private autonomy, which extends to all legally relevant actions (cf. von Bar/Clive (2009), Introduction nos. 25–28). The resemblance in the wording of the DCFR and the PECL may not entirely obscure the considerable differences. The DCFR contains, inter alia, substantially more mandatory rules than the PECL because the DCFR reproduces and partially expands the EU rules on consumer protection. But in other aspects, the DCFR is significantly less liberal than the PECL; a fact that has been repeatedly criticized in the literature (cf. e.g., Eidenmüller/Jansen et al. (2008), pp. 537 et seq.; Wagner (2010), pp. 253 et seq.). Accordingly, there has been rightful advice against the danger of an ‘erosion of private autonomy’ (Eidenmüller (2008), pp. 80 et seq.). 2. Restrictions. According to paragraphs 1 and 2, a limit to private autonomy is set, not only by mandatory rules in the PECL, but by every mandatory rule, including mandatory rules of national law. Accordingly, the DCFR does not provide a rule corresponding to Article 1:103 PECL (see Article 1:103 PECL).

10

Chapter 1: General Provisions German Law Article 2(1) of the Federal Constitution (Grundgesetz) [Personal freedoms] Every person shall have the right to free development of his personality insofar as he does not violate the rights of others or offend against the constitutional order or the moral law. § 311 BGB: Obligations created by legal transaction and obligations similar to legal transactions. (1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract between the parties is necessary, unless otherwise provided by statute. (2)–(3) […] 1. General. Although freedom of contract is not explicitly mentioned in the Federal Constitution (‘Basic Law’ or Grundgesetz, abr. GG), it is included in the guarantee of personal freedom in GG Article 2(1) and is, thus, constitutionally protected. It includes the right to freely conclude and terminate contracts within the framework of the civil law. Thus, the parties are free to conclude or to reject a contract, and to determine its content (Freedom of contract and setting of the subject terms of contract, cf. e.g., Federal Constitutional Court (Bundesverfassungsgericht), BVerfGE (official collection of decisions) 8, 274, 328; 88, 384, 403; 89, 48, 61; 95, 267, 303 f.). At the same time, however, freedom of contract is restricted by the limits set in Article 2(1) GG. In particular, it is restricted by all laws that have been enacted in accordance with the constitution. These laws are, in turn, not free from constitutional bindings. The constitutional guarantee of freedom of contract is, thus, not an empty formula, but, rather, effectively impacts the content of private law. The Federal Constitutional Court has emphasized from the beginning that private autonomy is not only a liberty that the individual can invoke against intrusions by the state, but also one that the state has a positive obligation to protect. On the one hand, this means that the state must provide a sufficiently large scope of freedom of action for private individuals, so that they can regulate themselves and their own legal relationships. On the other hand, it follows that the state must limit that freedom to avoid a disequilibrium of forces (the so-called disturbed contractual parity between the contractual parties) where the ‘stronger’ party unilaterally dictates the term of the contract. In contrast to other legal systems (cf. Comments on Article 1:102 PECL in Lando/Beale (2000), p. 99), German law does not explicitly mention freedom of contract in the constitution, or in statutes. At times, this freedom is deduced from the § 311(1) BGB. However, this provision, instead, concerns the content and the limits of freedom of contract, and simply presupposes its existence. It sets out that the parties can create and alter obligations through legal transactions. It can be derived from the provision that the parties are generally not bound to a specific form or type of contract unless the law contains mandatory provisions. Thus, § 311(1) BGB codifies the freedom of the parties with regard to the conclusion, the form, and the content of the

11

S. Leible contract. As a matter of principle, a contract requires at least two corresponding declarations of intent (offer and acceptance; cf., partially diverging: Article 2:107 PECL). 2. Importance of freedom of contract. Freedom of contract has its biggest importance and application in the law of obligations. In other legal fields, the participants are often bound to a myriad of different mandatory rules, and types of legal institutions. Thus, for example, the parties can only create rights in rem that are explicitly provided for by the law. 3. Restrictions. Freedom of contract is limited by mandatory law. Like the PECL, the law of obligations in the BGB differs between both dispositive and mandatory law, and limits the parties’ freedom in certain areas. Additionally, there are limits imposed by provisions that exist outside of private law, as well as by public policy and good faith. Thus, a legal transaction that violates a legal prohibition is void if the law does not indicate otherwise (§ 134 BGB). Furthermore, legal transactions that violate public policy are void (§ 138(1) BGB), as are agreements not made in good faith (cf. remarks on Article 1:201 PECL).

Comparison and Evaluation German law, PECL and DCFR acknowledge the fundamental principle of freedom of contract, as do the laws of all Member States of the EU, the provisions of uniform law (cf. Article 6 CISG) and the UNIDROIT Principles. The parties are free to conclude contracts and determine their content. This freedom is, of course, limited. The precise scope of freedom of contract cannot be read out of ‘programmatic provisions’ like Article 1:102 PECL, or Article II.-1:102 DCFR, but largely depends on the special rules of contract law. The PECL proves to be more liberal than the DCFR and today’s BGB because they reflect the legal situation of private law as it was set in the 1980s. At that time, consumer law, with its various mandatory provisions, was only beginning to develop, and the protection against discrimination by rules of private law only played a marginal role.

Principles of European Contract Law Article 1:103: Mandatory Law (1) Where the law otherwise applicable so allows, the parties may choose to have their contract governed by the Principles, with the effect that national mandatory rules are not applicable. (2) Effect should nevertheless be given to those mandatory rules of national, supranational and international law which, according to the relevant rules of private international law, are applicable irrespective of the law governing the contract.

12

Chapter 1: General Provisions 1. Application of national mandatory rules. Article 1:103 PECL is based on the assumption that the parties have subjected their contract to the PECL, by a choice of law. The provision is, therefore, connected to the 2nd variant of Article 1:101(2) PECL. For the strict limitation of such a choice of law, compare it with the remarks in Article 1:101 PECL. The question, thus, arises as to how such a choice can be squared with the applicability of mandatory rules of the national law that would govern the contract in the absence of a choice of law provision (mandatory provisions in the sense of the are subject to Article 1:102 PECL). Choosing the PECL as lex contractus results, due to paragraph 2, in the total non-application of the otherwise applicable national law where, for example, neither dispositive nor mandatory provisions apply. They are, instead, substituted by the PECL with regard to all matters that lie within its material scope of application. The national law, determined by the rules of the private international law (see Article 1:106(2) PECL), applies only outside the material scope of application of the PECL, as well as to so-called ‘external gaps’ of the PECL. 2. Public policy rules. However, the PECL emphasize that a court or arbitral tribunal should give effect to the rules of national, supranational, or international law that claim to be applicable and independent from the law governing the contract. These are the so-called public policy rules, or overriding mandatory rules (lois de police or règles d’application immédiate). In providing for the application of public policy rules, the drafters of the PECL clearly exceeded their powers since the applicability of these rules results not from the chosen law, but , rather, from the private international law of the forum. Within the EU, this is provided for by Article 9 of the Rome I Regulation. Pursuant to its second paragraph, the Regulation leaves the overriding mandatory provisions of the law of the forum untouched. Moreover, according to its third paragraph, the court may give effect to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be, or have been, performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. Overriding mandatory provisions, in this sense, are applied pursuant to paragraph 1, in which all provisions regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization, are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation.

Draft Common Frame of Reference The DCFR does not contain corresponding rules because it is not a law that can be chosen by the parties, but rather a guide for better EU legislation.

German Law The autonomous German law does not contain a corresponding rule either. Article 34 of the introductory law to the German Civil Code (Einführungsgesetz zum Bürgerlichen

13

S. Leible Gesetzbuch – EGBGB), which used to transform Article 7 of the Rome Convention into German law, was repealed after the adoption of the Rome I Regulation. Now Article 9 of the Rome I Regulation directly applies.

Comparison and Evaluation The question of whether, and to what extent, parties can subject their contract to the PECL has already been discussed in the context of Article 1:101 PECL. It has also been explained there that in contrast to Article 1:103(1) PECL, the mandatory provisions of national law are applicable in any case, with the sole exception that a choice of the PECL as the governing law is possible (see remarks on Article 1:101 PECL, sub 3.). The fact that the overriding mandatory provisions of national law supersede the PECL is self-evident and independent of the view taken by the PECL themselves.

Principles of European Contract Law Article 1:104: Application to Questions of Consent (1) The existence and validity of the agreement of the parties to adopt or incorporate these Principles shall be determined by these Principles. (2) Nevertheless, a party may rely upon the law of the country in which it has its habitual residence to establish that it did not consent if it appears from the circumstances that it would not be reasonable to determine the effect of the party’s conduct in accordance with these Principles. 1. General. The 1st variant of the provision is based on the assumption of a conflict of laws choice of the PECL as law of the contract, whereas the 2nd variant is concerned with an incorporation by reference The provision is, thus, closely connected to Article 1:101(2) PECL insofar as it deals with the question relating to the conclusion and the validity of choice of the PECL. The reservations voiced, so far, against the possibility of the PECL to self-determine their application apply here, as well. With regard to the 1st variant (adoption of PECL as governing law), it is, in reality, not the PECL themselves, but rather the rules on private international law that determine the conclusion and effectiveness of a choice-of-law agreement. Even though Article 1:104(1) PECL was deliberately designed in accordance with the Articles 3(4) and 8(1) of the Rome Convention – and now Articles 3(5) and 10(1) of the Rome I Regulation -, there is no room for a regulation by the PECL. The same reservation applies with regard to the 2nd variant (incorporation of the PECL into the terms of the contract). If the parties agree on an incorporation by reference, then the conclusion and the effectiveness of such an agreement is determined by national law, including its provisions on a review of the standard terms, but not by the PECL themselves. At most, it is conceivable to use the provisions of the PECL in order to interpret the intentions of the parties.

14

Chapter 1: General Provisions 2. Exception. Paragraph 2 is designed to prevent inequities that may occur because different legal systems attribute different meaning and effect to specific behaviours demonstrated by the parties. To avoid that one party may be unexpectedly bound by an agreement based on the PECL, it is said that the determination of consent has to be made with reference to the law, in force, at its habitual residence, if it would otherwise be unreasonable to submit it to the Principles. The special provision of the second paragraph merely covers a limited excerpt of the regulatory area of the first paragraph. It refers only to the question of the conclusion of contract, but not to its effectiveness. It recreates Article 3(5) in connection with Article 10(2) Rome I Regulation.

Draft Common Frame of Reference The DCFR does not include a corresponding rule.

German Law In Germany Article 3(5) and Article 10 of the Rome I Regulation are valid. These rules correspond to Article 1:104 PECL.

Principles of European Contract Law Article 1:105: Usages and Practices (1) The parties are bound by any usage to which they have agreed and by any practice they have established between themselves. (2) The parties are bound by a usage which would be considered generally applicable by persons in the same situation as the parties, except where the application of such usage would be unreasonable. 1. General. Article 1:105 PECL binds the parties to customs and habits. Paragraph 1 concerns those customs and habits that the relevant parties have agreed on, (1st variant), and those that were, likewise, formed between them (2nd variant). Pursuant to the general rules, it can be assumed that an implied agreement is an agreement in the sense of the first paragraph. However, the customs and habits that originated between the parties also regularly become implied agreements, or lead to an alteration of contract. Thus, the content of paragraph 1 is self-explanatory and declaratory, since the binding provided in paragraph 1 already results from private autonomy (see also Article 1:102 PECL). 2. Practices established between the parties. The 2nd variant would not be merely declaratory, but may have a meaning independent of the private autonomy of the parties, where it expressly binds them to those habits that they have obeyed without any outward intention to do so, and consequently, become legally bound. Yet, this is

15

S. Leible not what the 2nd variant says, as can be gleaned from the term ‘practice’. A ‘practice’ only arises if the behaviour can honestly be viewed as having been based on a common understanding. In any case, the behaviour must allow one party to reach the conclusion that the other party understands that it has become legally bound (cf. Lando/Beale (2000), p. 104 Comment A). However, customs are generally either business practices, or manners of behaviour that are generally practiced by everyone involved in business transactions, or that have been traditionally adopted within certain business spheres for a certain amount of time. When the parties are bound to customs and habits pursuant to Article 1:105 PECL, those customs and habits supersede the applicable law, which also includes the provisions of the PECL. This does, of course, require them to not breach the mandatory laws that apply to the contract or particular legal issue. Private autonomy is limited in this respect. The (implied) agreement cannot extend further than permitted by mandatory law. Private autonomy intuitively means that the parties can refer to any custom. These customs need not be relevant in place or fact, even though the parties will, in practice, rarely refer to such customs that are not relevant. Habits that originated between the parties can change the original agreement, and can create bilateral rights and obligations that exceed the original agreement. The parties are always free to agree on changing habits that originated between them. a) Customs can also determine the legal relationship between the parties without an according agreement. Pursuant to Article 1:105(2) PECL, this is the case where an objective observer, acting in the role (and therefore with the knowledge) of the parties, would find them to be applicable, or to be inappropriate. In case of a contradiction between the habits of the parties (Article 1:105(1) PECL), and the customs upon which they did not agree (Article 1:105(2) PECL), the first has priority over the latter. Paragraph 2 is subordinate to this extent. Apart from that, customs created pursuant to paragraph 2 can coexist with those created pursuant to paragraph 1. It is also clear that customs created pursuant to paragraph 2 cannot be applied when they contradict the express conditions of the agreement (cf. Lando/Beale (2000), p. 104 Comment A). This is because the will of the parties has priority, and is only limited by mandatory law, which does not include customs – as far as they have not risen to a recognized form of customary law. b) For a quasi-objective validity of customs created pursuant to paragraph 2 to occur, it is required that someone acting in the same position of the parties would need to find them to be generally applicable. This depends largely on the object of the contract and the place of conclusion. The parties can be bound by customs that are common to several branches of business, or by customs that are only valid in a single branch. Article 1:105 PECL is applicable to local, national, and international customs. Local or national customs, which are only in force where one contractual party is located, can only be binding if this leads to adequate results. If one party chooses to act in the market of the other party, it is, thus, bound to the local customs that govern there (see examples in Lando/Beale (2000), pp. 105-106 Comment E. (1)).

16

Chapter 1: General Provisions c) Furthermore, the application of customs in a particular case must not be unreasonable. If the custom is generally accepted in trading, and obeyed by tradesmen, then this normally supports the conclusion that its application is reasonable. However, a court can disregard commonly regarded customs if it finds the application of the customs to be unreasonable. That is not only valid pursuant to paragraph 2, but it applies equally to customs that are based on the private agreements of parties (Lando/Beale (2000), p. 105 Comment D). In any case, unreasonable habits cannot arise between the parties because it would be unfair to think that they would be based on the common agreement. This outcome already results from the term ‘habit’ (see above). Additional restrictions on agreed habits are, however, not indicated, and are not supported by the wording. Because of the private autonomy of the parties, they are clearly free to include conditions that are commonly perceived as ‘inadequate’ etc., provided they do not exceed the limits of the private autonomy. 3. Determination of customs. If, and how, customs can be determined depends on the law applicable to the case. Methods include, amongst others, obtaining an expert’s opinion, reports of national and local chambers of commerce and industry, professional associations etc.

Draft Common Frame of Reference Article II. – 1:104: Usages and Practices (1) The parties to a contract are bound by any usage to which they have agreed and by any practice they have established between themselves. (2) The parties are bound by a usage which would be considered generally applicable by persons in the same situation as the parties, except where the application of such usage would be unreasonable. (3) This Article applies to other juridical acts with any necessary adaptations. General. The rule of the DCFR has almost identical wording to the rule in the PECL. Although the PECL does not speak of the parties ‘of a contract’, it is clear from their scope of application that they refer precisely to that matter. Since the DCFR also includes other legally relevant actions, Article II.-1:104(3) DCFR adds that the provision is, mutatis mutandis, also applicable to them.

German Law § 157 BGB: Interpretation of contracts Contracts are to be interpreted as required by good faith, taking customary practice into consideration.

17

S. Leible § 242 BGB: Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. § 346 HGB Commercial Practices Due consideration shall be given to prevailing commercial customs and usages concerning the significance and effect of actions and omissions among merchants. 1. Trading practices. Trading practices are habits that apply between merchants (German Commercial Code – Handelsgesetzbuch – HGB § 346). They are the common usages of trade. The terms ‘habits’ and ‘practices’ are synonyms; one can, therefore, speak of a homogenous concept of trading practices. These trading practices arise from a steady, uniform, voluntary and actual practice of the interested circles in comparable business transactions over a reasonable period of time, and on the basis of a uniform understanding of the involved parties (cf. BGH NJW 1994, 659; 2001, 2465). Correspondingly, they can be limited to a certain geographical area or commercial branch. 2. Differences to customary law. Trading practices and customary law are not the same. Although both are based on steady practice, trading practices are not based on the parties’ general conviction that certain behaviour would be required by law (opinio iuris). If such a conviction arises over time, a trading practice can, however, become customary law. A trading practice arises only when a certain practice is used within the framework of contracts between merchants. In other words, § 346 HGB is a lex specialis to § 157 BGB. But explicit and implied agreements between the parties always prevail even over trading practices. Trading practice can be used to interpret and illuminate the meaning of all actions by merchants, not only the declaration of intent, but also other behaviour, e.g., the merchant’s silence in response to a commercial confirmatory letter. In some cases, the trading practice is decisive pursuant to an explicit statutory provision (cf. for example §§ 359(1), 380, 393 HGB). 3. Mandatory law. To the extent a trading practice contradicts mandatory law, it is not valid. However, valid trading practices prevail over dispositive law. If a trading practice is against good faith, (§ 242 BGB) it is irrelevant. A review under the provisions on standard terms and conditions does not take place. 4. Trading practices and non-merchants. Amongst merchants, trading practices apply by law (§ 346 HGB). Neither the respective will nor the knowledge of the parties matters. In contrast, a trading practice is only valid for and against non-merchants if they have subjected themselves to it, or if the trading practice has become a customary practice (cf. §§ 157, 242 BGB).

Comparison and Evaluation Whereas Article 1:105(1) PECL is identical in wording with Article 9(1) CISG, Article 1:105(2) PECL is set more broadly. Article 9(2) CISG requires actual knowledge, or a

18

Chapter 1: General Provisions knowledge that can be attributed to the parties. Thus, it is left open whether or not newcomers to a branch of business are bound by customs that they cannot reasonably be expected to have known. This limit is not taken up by Article 1:105(2) PECL. In this sense, the DCFR corresponds to German law. Congruities between German law and the PECL exist also to the extent that parties are not bound to unreasonable customs. The criteria used – inadequacy, on the one hand, and violation of good faith on the other – amount to the same conclusion. It remains unclear how customs are related to private autonomy. The PECL and the DCFR seem to assume that parties are generally bound to trading practices. This clearly goes beyond the German law, which only attributes a supplementary function to the trading practices and primarily uses them for interpretation and completion of contractual gaps.

Principles of European Contract Law Article 1:106: Interpretation and Supplementation (1) These Principles should be interpreted and developed in accordance with their purposes. In particular, regard should be had to the need to promote good faith and fair dealing, certainty in contractual relationships and uniformity of application. (2) Issues within the scope of these Principles but not expressly settled by them are so far as possible to be settled in accordance with the ideas underlying the Principles. Failing this, the legal system applicable by virtue of the rules of private international law is to be applied. 1. General. Article 1:106 PECL lays down guidelines for the interpretation and completion of the PECL. ‘Interpretation’ refers to the determination of the separate rules of the PECL. ‘Completion’ is necessary if a legal question falls into the scope of application of the PECL, but the interpretation yields to no result. 2. Purposes of the PECL. Article 1:106(1) PECL states that interpretations, and the further development of the PECL, has to be aligned in their purposes. The purposes result from both the Articles themselves, and the commentaries written by their authors. A strict and narrow interpretation should be avoided. All of this conforms, in substance, with the so-called autonomous interpretation of the ‘uniform material law’ (cf. Kropholler (1975), pp. 265 et seq.). The second sentence of Article 1:106(1) PECL enumerates further criteria of interpretation. a) Article 1:201 PECL obliges the parties to act in accordance with both the requirements of good faith and fair dealing. But then, it suggests that these requirements already need to be considered after being interpreted. This is because the parties orientate their contract deliberately on the PECL, and it can, thus, be assumed that they have taken Article 1:201 PECL into account. b) Another goal is the promotion of safety in contractual relationships. What exactly is meant does not immediately spring to mind, and the commentary Lando/ Beale (2000) does not include any examples, but instead only reproduces the rule. In

19

S. Leible the end, it comes down to taking into account the law’s function to safeguard individual liberty. Parties must be able to plan their economic activity from the very beginning by relying on accepted legal principles, which must therefore govern interpretation. c) Rules of international uniform law have to be interpreted uniformly and autonomously to the largest extent possible. This also applies to the PECL. In case of doubt, priority should be given to the interpretation that corresponds best with the general ideas upon which the PECL are based, rather than to an interpretation based on any national law. This applies all the more since there is no common judicial authority that could ensure a common, autonomous application. 3. Internal and external gaps. The PECL clearly differentiates between the so-called internal and external gaps. While internal gaps concern questions that do fall within the PECL’s scope of application, but, may not be addressed explicitly in a rule, external gaps exist if a question falls outside the PECL’s scope of application. External gaps (e.g., questions of Article 4:101 PECL) are not included in Article 1:106(2) PECL. They must be dealt with separately by applying the national contract law that is subject to the rules of private international law. For internal gaps, Article 1:106(2) PECL applies. They should be filled to the greatest possible extent pursuant to the general principles of the PECL. At times, such principles have to be derived from rules that can be generalized, e.g., Articles 1:102, 1:201 PECL (principle of the freedom of contract, good faith). However prior to this, a possible analogy to individual articles must be considered because they are often a concrete embodiment of general rules. 4. Closure of gaps. For the determination and closure of gaps, the relevant customs pursuant to Article 1:105 PECL needs to be considered.

Draft Common Frame of Reference Article I. – 1:102: Interpretation and development (1) These rules are to be interpreted and developed autonomously and in accordance with their objectives and the principles underlying them. (2) They are to be read in the light of any applicable instruments guaranteeing human rights and fundamental freedoms and any applicable constitutional laws. (3) In their interpretation and development regard should be had to the need to promote: (a) uniformity of application; (b) good faith and fair dealing; and (c) legal certainty. (4) Issues within the scope of the rules but not expressly settled by them are so far as possible to be settled in accordance with the principles underlying them. (5) Where there is a general rule and a special rule applying to a particular situation within the scope of the general rule, the special rule prevails in any case of conflict.

20

Chapter 1: General Provisions General. The provisions of the DCFR largely correspond with those of the PECL. Paragraph 2 of the DCFR does not have a counterpart in the PECL. The provision reflects the much advanced constitutionalisation of the DCFR, which includes human rights as solidarity, and social responsibility as its core principles. This needs to be considered for the interpretation of the DCFR (cf. von Bar/Clive (2009), p. 14 f.). However, for the interpretation of the PECL, such fundamental principles may not be disregarded because they direct the application of any legal rule. It also must be taken into consideration that the applicable (national) constitutional law may create a tension with the principle of uniform interpretation. Finally, paragraph 5 provides that a more special rule prevails over a general rule if there is a conflict between those rules.

German Law 1. Methods of interpretation. German law lacks a rule for interpretation of statutory rules. Nevertheless, like in other European continental law systems, there exists of course a canon of methods for interpretation. Ever since Savigny, grammatical, historical, systematic, and teleological interpretations are differentiated. The starting point of every interpretation in German law is the text of a provision. The historical interpretation determines the aims and ideas of the governmental bodies and individuals participating in a legislative act at the point in time of its enactment. The systematic interpretation explores the conceptual connections of a norm with other provisions. The teleological interpretation inquires the objective purpose of the legal norm. In this context, aspects like legal certainty, or the balance of interest, play a role. Lastly, the method of comparative law interpretation is used, which is considered by some as an element of the teleological interpretation. 2. Closure of gaps. When, and after the interpretation of the provisions of PECL, a judge or arbitrator finds a particular legal issue to be unregulated, he is then obliged to close the detected gap. If the gap was not intended, he must then apply an appropriate rule by way of analogy or, using an argumentum e contrario, must exclude the possible application of a rule to the new facts. He must always respect the limits set by the constitution to the judicial law making. If the judge detects, however, that a legal rule suffers from certain deficiencies from a policy perspective, he must leave it to the legislature to remedy. 3. The principle of good faith. German law does not explicitly say that statutory interpretation must be based on good faith. Nonetheless, good faith is particularly important in the context of the teleological interpretation. Thus, the Federal Tax Court (Bundesfinanzhof) stated: ‘The intent and purpose of a law outranks its wording. In an individual case, the judge is, therefore, obliged to consider the intent and purpose with regard to the principal of good faith, to find a just and equitable solution to resolve the dispute’ (BFHE 57, 427). The most visible importance that the principle of good faith has under German law is with regard to legal relationships. Contracts, unilateral transactions, and individual declarations of intent have to be assessed in accordance with good faith (cf. §§ 133, 157 BGB). Consequently, the legal term ‘good faith’, which

21

S. Leible is not defined by the law, must be specified. This is done, in particular, by reference to the fundamental rights, which permeate in their function as ‘objective determinations of values’ of all other law. Although, from a theoretical point of view, the legislator could enact a law that would violate the good faith principle, such a violation is hardly imaginable in practice. 4. ‘Lex specialis’-principle. German law, the ‘lex specialis’-principle is instructive of how to deal with conflicts between a general rule and a more special rule. If there are two rules governing the same situation, then the specialized rule overrides the general rule (lex specialis derogat legi generali).

Comparison and Evaluation Differences between German law and the PECL arise from their different purposes, but even more so from the different ways in which they apply. The PECL can de lege lata only be applied based on the parties’ will, and in conformity with the governing national law. It is the parties’ will that determines, in the first place, the scope of application of the PECL. If gaps in the PECL exist, then one must, therefore, consider whether or not the parties have anticipated them. If they have agreed on a particular point, then there can be no regulatory gap from the very start. If they have not addressed the point, the gap has to then be filled corresponding to Article 1:106(2) PECL. The distinction between internal and external gaps under PECL is unknown in German law, which governs the relationships completely and exhaustively. This distinction is also not comparable to the differentiation in German law between de lege lata gaps and policy defects of a law.

Principles of European Contract Law Article 1:107: Application of the Principles by Way of Analogy These Principles apply with appropriate modifications to agreements to modify or end a contract, to unilateral promises and other statements and conduct indicating intention. 1. Application to agreements to alter or end contracts. Though the PECL were designed to be applied to contracts, they lack a definition of the term ‘contract’. By setting out in its first half-sentence that the PECL are also applicable to agreements in order to alter or end contracts, Article 1:107 PECL hints to an a priori understanding of the term contract as referring to those agreements that create contractual obligations. Furthermore, Article 1:107 PECL clarifies that the rules of PECL will sometimes need to be adjusted before being applied to contracts that alter or end a contractual relationship. 2. Application to declarations of intent. Moreover, many of the PECL may only be applicable to one party’s declarations of intent. The commentary refers particularly to promises that are binding without acceptance, cf. Article 2:107 PECL (Lando/Beale

22

Chapter 1: General Provisions (2000), p. 110). Additionally, other forms of voluntary declaration, or communications with legal consequences, need to be considered, like, offers and acceptances, appropriation of payments, the various notices that may be given in case of change of circumstances, notices of termination of a contract, and renunciations of rights, for example (cf. Lando/Beale (2000), p. 110 Comment A). As far as these declarations are governed by the PECL, which were originally designed for bilateral declarations of intent, it needs to be determined whether adjustments are necessary.

Draft Common Frame of Reference The DCFR does not contain a norm corresponding to Article 1:107 PECL. The authors of the DCFR considered that the statement of the PECL according to which the rules on contracts should be applied to ‘other juridical acts’ with ‘appropriate adjustment’, are too imprecise. In particular, they criticized that it remains unclear which adjustments are appropriate, and which are not (cf. von Bar/Clive (2009), Introduction, no. 52). The DCFR, therefore, introduces, wherever a deviation from the ordinary rules is necessary, provisions specific to other juridical acts (cf. e.g., Articles II.-1:101(2), II.-1:102(1)(2), II.-1:105(1) DCFR). Also, a special section is dedicated to these acts (Articles II.-4:301 to II.-4:303 DCFR).

German Law 1. General. The German Civil Code (BGB) attaches particular importance to ‘declarations of intent’. The notion encompasses offers and acceptances, and other juridical acts, as well. Numerous provisions concern their conditions and validity. A declaration of intent is the basis, and an integral part of a legal transaction. It is not, however, necessarily compatible with the transaction. It is, rather, an act of individual volition directed to have legal consequences under private law. These consequences, in principle, arise because they are wanted (BGHZ 145, 346; 149, 134). Depending on their nature, transactions may arise from one declaration of intent (e.g., avoidance, termination), or from two or more declarations of intent. At times, additional elements may be necessary (e.g., handing over an item, registration of land ownership in official registry). The provisions of §§ 103–185 BGB apply to all legal transactions under private law, but exclude all lex specialis. The declaration of intent must be differentiated from acts similar to legal transactions and from factual acts which may both also have legal relevance. 2. Acts similar to legal transactions. In contrast to declarations of intent, acts similar to legal transactions create legal consequences that arise independent of the parties’ will, which is often only directed at securing the transaction’s factual success, rather than at achieving a successful legal outcome. An example is the request for approval pursuant to § 108(2) BGB or § 177(2) BGB, the demand letter (§ 286(1) BGB), the request for remedying a defective performance pursuant to § 439(1) BGB, and several types of notices (e.g., pursuant to §§ 149 sentence 2, 170, 171(1) BGB). These acts are

23

S. Leible governed by the provisions concerning legal transactions (§§ 104–185 BGB) insofar as they are required by their purpose and characteristics, as well as the parties’ interests. 3. Factual acts. A factual act, by contrast, is a simple act not designed to have direct legal consequence, but, rather, to bring about a factual consequence. Examples include the act of taking possession of a moveable object, a simple transfer of possession, dereliction, the finding (§ 965 BGB) or the combination, intermixture and processing of different moveable objects (§§ 946–950 BGB). The provisions on declaration of intent do not apply to such factual acts.

Comparison and Evaluation In dealing with other juridical acts, German law and the PECL/DCFR largely adopt the same rules. Even though the PECL do not recognize a declaration of intent as such, they speak (much more concretely) of ‘promises’ and ‘statements indicating intention’. All texts adopt the concept of a contract being based on mutual declarations of intent. They provide for an application of unilateral declarations of intent, with the necessary adjustments.

SECTION 2:

GENERAL DUTIES

Principles of European Contract Law Article 1:201: Good Faith and Fair Dealing (1) Each party must act in accordance with good faith and fair dealing. (2) The parties may not exclude or limit this duty. 1. General. Article 1:201 PECL is a central provision in the PECL that lays down the generally acknowledged principle of good faith and fair dealing. This principle can be found in a more specified form, and in a variety of provisions (e.g., Article 2:301, Article 2:302, Articles 4.107–Article 4:109, Article 6:102, Article 8:104, Article 9:102 PECL). It is designed to secure the enforcement of generally accepted standards of decency, fairness, and reasonableness in business relations, (cf. Article 1:302 PECL) and to supplement the provisions of the PECL. However, it may take precedence over other provisions of the PECL where strict adherence would lead to a manifestly unjust result (cf. Lando/Beale (2000), p. 113 Comment B). At least when viewed conceptually, the terms ‘good faith’ and ‘fair dealing’ are distinguishable. ‘Good faith’, in the sense of the PECL, refers to probity and fair attitude, and is, therefore, characterized subjectively. The commentary under E gives the example that no one should be entitled to exercise a remedy if doing so is of no direct benefit, and the sole purpose is to harm the other party (Lando/Beale (2000), p. 115). By contrast, ‘fair dealing’ means an actual standard of fair conduct and, therefore, ultimately meets an objective standard (cf. Lando/Beale (2000), p. 114 Comment B,

24

Chapter 1: General Provisions illustration 3). Despite this distinction, in practice, the result will often depend on an overall analysis of the particular case where objective and subjective criteria are mixed, and are difficult to distinguish, if at all. The term used in Article 1:201 PECL that defines good faith has to be strictly separated from the definition of ‘good faith’ that refers to an acquirer who purchased goods or negotiable instruments without knowledge of any outstanding claims from third parties. Article 1:201 PECL does not deal with acquisition in good faith. The term ‘good faith’, in this article, is also different from the same term used in Article 3:201(3) PECL, which, there, protects a third party who believed in good faith that a representative was authorized by the legal fiction to have authority. 2. Scope of application. The principle of good faith and fair dealing applies to the conclusion of a contract, its performance, its enforcement, and to the exercise of contractual rights. Their sphere of application even reaches beyond these cases and encompasses other situations, such as when a party insists, without reason, on formalities, for example. They also extend to dishonest behavior, in general. For long-term obligations like tenancies, insurance contracts, agency and distributorship agreements, partnerships and employment agreements, the terms hold particular significance as guidelines for the parties’ behaviour (cf. Lando/Beale (2000), p. 114 Comment B, illustrations). 3. Prohibition of contradictory conduct and principle of mutual respect. Particular aspects, or ‘sub-principles’, of these principles are the prohibition of contradictory conduct, and the principle of mutual respect. The prohibition of contradictory conduct, which is similar to the Common law principle of estoppel, means that one party must not contradict its earlier declarations, or its conduct, if the other party acted in reasonable reliance of these declarations, or of this conduct. This principle underlies various provisions in the PECL (e.g., Articles 2:202(3); 2:105(4); 2:106(2); 3:201(3); 5:101(3) PECL). Yet, its importance goes beyond these particular rules. For instance, the principle prohibits a person from making a legal claim based upon the ineffectiveness of an action, where that same person caused another person to alter his standing because of the confidence that he placed in the first person’s actions. The principle of mutual respect means that each party is obliged to adhere to the reasonable standards of fair dealing, and to adequately respect the interests of the other party. Among other things, this principle becomes important when dealing with unusual events that are not addressed by the agreement or the governing law. 4. Parties bound by the principle of good faith and fair dealing. The principle of good faith and fair dealing binds the party obliged to fulfil a contractual obligation, as well as the party wanting to enforce its contractual claims when a case of non-performance by the other party arises. Good faith and fair dealing requires, for example, that a party suffering from the consequence of a breach of contract by the other party limit its damage as far as possible. In this way, the extent of the damage is reduced (cf. Article 9:505 PECL).

25

S. Leible 5. Burden of proof. Pursuant to the comment on F, the general assumption is that the conduct of the parties is in conformity with good faith (Lando/Beale (2000), p. 116). The burden of proof lies with the party claiming that the other party disregarded the principles of good faith and/or of fair dealing. This is supported by the fact that a breach of contract leads to a restriction of a formal legal position. Whoever does not accept being bound by this formal legal position must bring forth reasons to support his view. 6. Mandatory provision. Pursuant to paragraph 2, the parties cannot derogate from Article 1:201 PECL, by mutual consent. The provision is, therefore, mandatory. However, the parties have the ability to influence the interpretation of Article 1:201 PECL, through their agreements, which must be respected when specifying the vague term ‘good faith’. Thus, the parties can, for instance, agree that any breach of contract enables the other party to refuse to render its own performance, even if the breach is insignificant. In this case, the refusal to perform will not be considered to violate good faith. The parties, however, are limited insofar as they cannot make agreements that are unacceptable under the standards of good faith and fair dealing. Such agreements cannot be enforced (cf. Lando/Beale (2000), p. 116 Comment H).

Draft Common Frame of Reference Article I. – 1:108: Definitions in Annex (1) The definitions in the Annex apply for all the purposes of these rules unless the context otherwise requires. (2) Where a word is defined, other grammatical forms of the word have a corresponding meaning. Annex Good faith ‘Good faith’ is a mental attitude characterised by honesty and an absence of knowledge that an apparent situation is not the true situation. Good faith and fair dealing ‘Good faith and fair dealing’ is a standard of conduct characterized by honesty, openness and consideration for the interests of the other party to the transaction or relationship in question. (Article I. – 1:103) Article II. – 3:301: Negotiations contrary to good faith and fair dealing (1) […] (2) A person who is engaged in negotiations has a duty to negotiate in accordance with good faith and fair dealing and not to break off negotiations contrary to good faith and fair dealing. This duty may not be excluded or limited by contract. (3)–(4) […]

26

Chapter 1: General Provisions Article III. – 1:103: Good faith and fair dealing (1) A Person has a duty to act in accordance with good faith and fair dealing in performing an obligation, in exercising a right to performance, in pursuing or defending a remedy for non-performance, or in exercising a right to terminate an obligation or contractual relationship. (2) The duty may not be excluded or limited by contract or other juridical act. (3) […] General. Articles II.-3:301(2) and III.-1:103(1) DCFR corresponds to Article 1:201(1) PECL; Article III.-1:103(2) DCFR to Article 1:201(2) PECL. Although they are drafted differently from a technical perspective, in substance, the rules fully correspond to each other. This is evident when viewing the overall l importance, but is also apparent when considering the vagueness of this principle. Moreover, the DCFR is also different from the PECL (cf. Lando/Beale (2000), pp. 115-116 Comment E) concerning the terms ‘Good faith’ and ‘Good faith and fair dealing’.

German Law § 242 BGB: Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. 1. General. § 242 BGB is narrowly formulated. Read literally, the provision only regulates performance by the debtor. Yet, its content has been enormously expanded by case law and doctrine. Today, it is unanimously accepted that the principal of good faith is intrinsic to the German legal system, and permeates not only private law, but also public law and procedural law. § 242 BGB has, therefore, acquired the status of a general rule. Good faith must not only be followed by the debtor in fulfilling his promise, but by all parties involved in a legal relation. Any abuse of rights is prohibited. Thus, § 242 BGB has developed into a general principle that not only affects any exercise of rights, alongside every performance of obligations, but must also be respected in all areas of law. 2. Content. It follows from the text that the debtor has to respect good faith when performing. Thus, he is, for example, not allowed to perform at an inopportune moment. Aside from that, the debtor has to refrain from any action that could hinder the fulfilment of the obligation. Out from the principle of good faith further emerges secondary obligations for both parties, e.g., the duty to cooperate, or to protect the other party’s interests, cf. § 241(2) BGB, as well as duties of disclosure and information. The duty may even alter the contents of the obligation to perform. Over the course of the twentieth century, § 242 BGB has been interpreted by the courts to create a multitude of legal institutions that were not included verbatim in the civil code. As part of the reform on the law of obligations, in 2002, the legislature chose to codify them in the BGB. Among others, one may mention the rules on change of

27

S. Leible circumstances (§ 313 BGB), and the termination of continuing obligations for a compelling reason (§ 314 BGB). 3. Sub-principles. Apart from this, different sub-principles emerged that explain the application of the general clause in § 242 BGB to specific types of cases. For example, one such sub-principle is that any exercise contrary to one’s former conduct is impermissible (venire contra factum proprium). Another is that nobody is allowed to derive rights from dishonest conduct. It is also considered to be a part of § 242 BGB that a party can lose its rights when violating its obligations. A further sub-principle is the prohibition to pursue interests that are not worthy of protection. Moreover, it is accepted that a performance that would have to be returned immediately cannot be claimed (dolo agit, qui petit, qoud statim redditurus est). The list is not exhaustive. 4. Scope of application. § 242 BGB can extend or limit the duties that the parties have to obey as well as the manner in which the creditor can exercise his rights. The provision applies wherever there is a special legal connection between two or more parties. However, § 242 BGB does not allow the judge to base his decision solely on equity and thereby circumvent the specific provisions of the code. 5. Application ex officio. The principle of good faith does not only become relevant where it is invoked by one party, but must be followed by the judge ex officio. Thus it influences the content of the obligation, surpassing the importance of other provisions – as, for example, the interdiction of the violation of moral principles, and the interdiction of harassment.

Comparison and Evaluation The principle of good faith is an integral element of the common core of European continental contract law. The tradition of the provision goes beyond the ius commune and the principle of bona fide found in Roman contract law. In German law, as in other European continental private law systems, the principle of good faith governs the conclusion and performance of contracts, as well as the assessment of contractual rights. Though it has the function of a general principle, it can also be found in numerous specific provisions. The principle of good faith is mandatory law under the PECL, the DCFR, and under German law. Criticism under German doctrine usually does not concern the principle as such, but its broad scope, for instance under Article 1:102(1) PECL (cf. Eidenmüller/Jansen (2008), pp. 537 et seq.; Wagner (2010), pp. 253 et seq.).

Principles of European Contract Law Article 1:202: Duty to Co-operate Each party owes to the other a duty to co-operate in order to give full effect to the contract.

28

Chapter 1: General Provisions 1. General. Article 1:202 PECL obliges the parties to cooperate in order to ensure the fulfilment of the contract. Specifically, they must allow the other party to fulfil its obligations. Thus, for example, a party has to inform the other party if the other does not know that the performance of its contractual obligations may create a danger of personal injury, or damage to property for them or to third parties (cf. Lando/Beale (2000), pp. 119-120 illustrations under Comment A). The obligation to cooperate extends not only to primary obligations to perform but also to secondary obligations. Pursuant to Comment B in Lando/Beale (2000), it is not even relevant that a contractual obligation is concerned, but rather that ‘some other act which, although, does not itself constitute a failure to perform, has the effect of preventing or inhibiting performance by the other party’ is, ultimately, covered. As an example, the Comment mentions that a party fails to accept the other party’s offer to perform (Lando/Beale (2000), p. 120 Comment B). This is considered to be a violation of the obligation to cooperate if the other party has an interest in the other’s acceptance of the offer to perform. The violation of the obligation to cooperate is a breach of contract (Article 1:301(4) PECL) and, therefore, causes different legal consequences designed for non-performance. At the same time, the debtor enjoys rights and relieves pursuant Articles 7:110 and 7:111 PECL. 2. Limits to the duty to co-operate. The obligation to cooperate is limited to actions in which the other party is interested. The contract is supposed to be given full effect. Therefore, the acts or omissions of a party which it did not commit to, and likewise, that the other party has no interest in, are irrelevant. As an example, the comment mentions a failure to accept a tender of performance by the other party where that failure is of no consequence to it (cf. Lando/Beale (2000), p. 120 Comment C). A party can, pursuant to Article 9:201 PECL, refuse to cooperate if this depends upon the non-fulfilled obligations of the other party or if the other party’s nonperformance can be anticipated (Article 9:201(2) PECL).

Draft Common Frame of Reference Article III. – 1:104: Co-operation The debtor and creditor are obliged to co-operate with each other when and to the extent that this can reasonably be expected for the performance of the debtor’s obligation. General. In contrast to the PECL, the DCFR refers to the debtor and creditor. Since the PECL are only concerned with contract law, this does not result in any differences. The DCFR contains additional, numerous specifications on the obligation to cooperate. Some examples include Article IV.C.-2:103 (for service contracts), Article IV.C.-3:102 (for construction contracts), Article IV.C.-4:102 (for processing contracts), Article IV.D.-2:101 (for mandate contracts) and Article IV.E.-2:201 DCFR (for contracts of commercial agency, franchise and distributorship).

29

S. Leible German Law § 241 BGB: Duties arising from an obligation (1) […] (2) An obligation may also, depending on its contents, oblige each party to take account of the rights, legal interests and other interests of the other party. § 242 BGB: Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. 1. General. In German law, the parties cannot satisfy themselves with the mere performance of the primary obligations. Pursuant to § 242 BGB, they are obliged to cooperate to overcome obstacles to the performance by the other party, and to allow the other party the expected benefit by their performance. This results from the principle of good faith that is particularly relevant to the contractual performance. Duties to cooperate may arise where an obstacle falls into the risk-area of both parties, or if one party is dependent upon the other in an area of responsibility that is primarily assigned to it. The condition for the existence of such a duty is that it is possible for the party to provide the needed assistance without surrendering its own interests. An example is the obligation to assist in the conclusion of the contract, by obtaining an official authorization or permission, by the guardian of a person lacking legal capacity. 2. Increased duties to co-operate. To a certain extent, the duty to cooperate includes an obligation of mutual assistance. Therefore, if the debtor has interests of equal importance, these interests are less important than those held by the other party. The content of a contractual obligation determines the existence, nature and extent of the obligation. The facts in the particular case are relevant. The legal nature, the duration, as well as the intensity of the social contact in question, have to be taken into consideration. Those types of contracts that involve a stronger, personal obligation, or that have a long duration (contracts of employment, service contracts, agency agreements and partnerships) lead to an even higher duty to cooperate. 3. Duty under § 241(2) BGB. Closely connected to the duty to cooperate, but different in content is the duty under § 241(2) BGB. This duty has been derived by the courts from the principle of good faith, but was codified as a separate duty during the revision of the law of obligations, in 2002. The statute obliges each party to respect the other party’s rights, legal assets, and interests. The protection of the interest in integrity is central. Each party has an obligation of concern and care, especially for the other party’s life and health, as well as for property and other assets.

30

Chapter 1: General Provisions Comparison and Evaluation At first glance, the provisions of the PECL largely correspond with German law. This is not surprising since the obligation to cooperate ultimately originates from the principle of good faith, which is central in both the PECL and in German law (cf. remarks on Article 1:201 PECL). However, the interaction of the varied specifications of the principle threatens to undermine the priority of the parties’ agreement. An indiscriminate application thereby endangers private autonomy. The limitation of the obligation to cooperate under the DCFR to that which can ‘reasonably be expected’ also does not resolve this issue. Although this limitation cannot be found either in the PECL or in German law, it is, in fact, vital to the principle of good faith. Aside from technical drafting issues, substantive differences between the PECL and German law arise from the fact that within the latter, not every failure to cooperate results in a breach of duty. Thus, the creditor’s refusal to accept performance by the debtor is not considered to be a case of non-performance. Instead, it results in specific consequences, such as a loss of one’s own rights pursuant to §§ 280 et seq., 323 BGB.

SECTION 3:

TERMINOLOGY AND OTHER PROVISIONS

Principles of European Contract Law Article 1:301: Meaning of Terms In these Principles, except where the context otherwise requires: (1) (2) (3) (4)

‘act’ includes omission; ‘court’ includes arbitral tribunal; an ‘intentional’ act includes an act done recklessly; ‘non-performance’ denotes any failure to perform an obligation under the contract, whether or not excused, and includes delayed performance, defective performance and failure to co-operate in order to give full effect to the contract. (5) a matter is ‘material’ if it is one which a reasonable person in the same situation as one party ought to have known would influence the other party in its decision whether to contract on the proposed terms or to contract at all; (6) ‘written’ statements include communications made by telegram, telex, telefax and electronic mail and other means of communication capable of providing a readable record of the statement on both sides. 1. General. Article 1:301 PECL defines some important terms that appear frequently in the PECL. The technique to define such terms in a ‘general part’ is often used. In view of the different legal traditions and underlying understanding in other Member States of the EU, it contributes to the legal certainty and the formation of a uniform and autonomous terminology.

31

S. Leible 2. Meaning of the term ‘act’. The concept of an action does not only cover active doing, but includes omissions (cf. Articles 1:201(1) and 8:101(3) PECL). This is the case in most legal systems. 3. Meaning of the term ‘court’. The PECL are designed for both state courts and arbitral tribunals. The term ‘court’, therefore, encompasses not only state courts, but also arbitral tribunals. This is important, for instance, in Articles 4:105(3), 4:109(2), 6:106(1) and 6:111 PECL. 4. Meaning of the term ‘intentional act’. Acting intentionally requires the intent to cause a concrete consequence. However, acting intentionally also covers recklessness, where, for example, a person is aware of the possible consequences of his actions, but continues to act regardless of whether or not the consequences occur. The definition of intent is especially important for Articles 1:305(2), 4:107, 8:103(c) and 9:503 PECL. Intent and mere negligence must be differentiated. The third category of substantial non-performance, pursuant to Article 8:103 PECL, only refers to intentional rather than to negligent non-performance. Negligent, and non-intentional acts result from carelessness, such as when an actor acts without regarding the possible consequences of his actions, for example. 5. Meaning of the term ‘non-performance’. The requirement of non-performance is primarily important when considering the legal remedies (cf. Articles 1:202; 7:110; 7:111; 8:101(2); 8:104; 8:105; 8:108; 9:301; 9:304 and 9:508 PECL). The PECL considers ‘non-performance’ to be any failure to perform. It is unimportant whether performance is delayed or defective. Non-performance also includes the failure to cooperate pursuant to Article 1:202 PECL. It is irrelevant who caused the non-performance, or alternatively, who bears responsibility for it (cf. Articles 8:101(2), 8:108 PECL). The question of default is only relevant for the determination of the extent of possible remedies (cf. Articles 8:101(2), 8:108 PECL). It is necessary to distinguish between fundamental non-performance and other types of non-performance because the differences result in different legal effects (cf. Lando/Beale (2000), p. 364 Comment A on Article 8:103 PECL). 6. Meaning of the term ‘material matter’. A matter is material if one party has to assume that it would influence the decision of the other party. The parties’ subjective point of view is irrelevant since only the expectations of a reasonable party, in the same situation, matters. The term ‘material’ is important in Articles 2:208 and 2:210 PECL. ‘Material’ and ‘fundamental’ must be distinguished. A matter that is fundamental is more important than one which is only material (cf. Lando/Beale (2000), p. 124 Comment E). 7. Meaning of the term ‘written statements’. Written statements and oral statements must be distinguished. The latter includes statements on the phone or other electronic devices, such as radio, television or internet telephony, for example. However, the PECL considers statements made by telegram, telex, telefax and electronic mail to be a written statement if both sides can be provided with a readable record of the statement. A readable record that is produced by a telephone receiver which is capable of

32

Chapter 1: General Provisions converting sound into writing is not a written statement under Article 1:301(6) PECL (cf. Lando/Beale (2000), p. 125 Comment F). The definition of a written statement is important for Articles 2:106 and 2:201 PECL.

Draft Common Frame of Reference Article I. – 1:108: Definitions in Annex (1) The definitions in Annex apply for all the purposes of these rules unless the context otherwise requires. (2) Where a word is defined, other grammatical forms of the word have a corresponding meaning. Annex: ‘Conduct’ ‘Conduct’ means voluntary behaviour of any kind, verbal or nonverbal: it includes a single act or a number of acts, behaviour of a negative or passive nature (such as accepting something without protest or not doing something) and behaviour of a continuing or intermittent nature (such as exercising control over something). Article I. – 1:108: Definitions in Annex (1) The definitions in Annex apply for all the purposes of these rules unless the context otherwise requires. (2) Where a word is defined, other grammatical forms of the word have a corresponding meaning. Annex: ‘Court’ ‘Court’ includes an arbitral court. Article I. – 1:108: Definitions in Annex (1) The definitions in Annex apply for all the purposes of these rules unless the context otherwise requires. (2) Where a word is defined, other grammatical forms of the word have a corresponding meaning. Annex: ‘Non-performance’ ‘Non-performance’, in relation to an obligation, means any failure to perform the obligation, whether or not excused. It includes delayed performance and defective performance. (Article III.-1:101(3)) Article III. – 1:102: Definitions (1)–(2) […] (3) Non-performance of an obligation is any failure to perform the obligation, whether or not excused, and includes delayed performance and any other

33

S. Leible performance which is not in accordance with the terms regulating the obligation. (4)–(5) […] Article I. – 1:105: ‘In writing’ and similar expressions (1) For the purposes of these rules, a statement is ‘in writing’ if it is in textual form and in characters, which are directly legible from paper or another tangible durable medium. (2) ‘Textual form’ means a text which is expressed in alphabetical or other intelligible characters by means of any support which permits reading, recording of the information contained in the text and its reproduction in tangible form. (3) ‘Durable medium’ means any material on which information is stored so that it is accessible for future reference for a period of time adequate to the purposes of the information, and which allows the unchanged reproduction of this information. General. The authors of the DCFR have preferred to transfer the definitions into Annex 1, which is a part of the draft. One of the purposes was to make the main text more concise. Additionally, such a list can be extended without having to change the remaining text. This clarity can contribute to achieving the purpose of forming a uniform European terminology (cf. von Bar/Clive (2009), Introduction nos. 12, 64). As far as the definitions in the PECL have corresponding definitions in the DCFR (Article 1:301(3) and (5) PECL do not have an equivalent), they largely correspond in content. Whereas the PECL presuppose the term ‘act’, and only state that omissions are also covered, the DCFR extensively defines the term and illustrates examples through it. A considerably more modern provision is Article I.-1:106 DCFR, which incorporates the terms included in European Union law, such as ‘textual form’ and ‘durable medium’.

German Law § 194 BGB: Subject-matter of limitation (1) The right to demand that another person does or refrains from an act (claim) is subject to limitation. (2) […] § 241 BGB: Duties arising from an obligation (1) By virtue of an obligation an obligee is entitled to claim performance from the obligor. The performance may also consist in forbearance. (2) […]

34

Chapter 1: General Provisions Article 92 GG [Court organisation] The judicial power shall be vested in the judges; it shall be exercised by the Federal Constitutional Court, by the federal courts provided for in this Basic Law, and by the courts of the Länder. § 1 GVG (Courts Constitution Act) Judicial power shall be exercised by independent courts that are subject only to the law. § 1030 ZPO: Eligibility for arbitration (1) Any claim under property law may become the subject matter of an arbitration agreement. An arbitration agreement regarding non-pecuniary claims has legal effect insofar as the parties to the dispute are entitled to conclude a settlement regarding the subject matter of the dispute. (2) An arbitration agreement regarding legal disputes arising in the context of a tenancy relationship for residential space in Germany is invalid. This shall not apply to the extent the residential premises concerned are of the type determined in § 549 subsection (2) numbers 1 to 3 of the Civil Code (Bürgerliches Gesetzbuch, BGB). (3) Any provisions of law outside of the present Book, according to which disputes may not be subjected to arbitration proceedings, or only if specific prerequisites have been met, shall remain unaffected hereby. § 276 BGB: Responsibility of the obligor (1) The obligor is responsible for intention and negligence, if a higher or lower degree of liability is neither laid down nor to be inferred from the other subject matter of the obligation, including but not limited to the giving of a guarantee or the assumption of a procurement risk. The provisions of §§ 827 and 828 apply with the necessary modifications. (2) A person acts negligently if he fails to exercise reasonable care. (3) […] § 280 BGB: Damages for breach of duty (1) If the obligor breaches a duty arising from the obligation, the obligee may demand damages for the damage caused thereby. This does not apply if the obligor is not responsible for the breach of duty. (2) Damages for delay in performance may be demanded by the obligee only subject to the additional requirement of § 286. (3) Damages in lieu of performance may be demanded by the obligee only subject to the additional requirements of §§ 281, 282 or 283.

35

S. Leible § 150 BGB: Late and altered acceptance (1) […] (2) An acceptance with expansions, restrictions or other alterations is deemed to be a rejection combined with a new offer. § 281 BGB: Damages in lieu of performance for non-performance or failure to render performance as owed (1) To the extent that the obligor does not render performance when it is due or does not render performance as owed, the obligee may, subject to the requirements of § 280 (1), demand damages in lieu of performance, if he has without result set a reasonable period for the obligor for performance or cure. If the obligor has performed only in part, the obligee may demand damages in lieu of complete performance only if he has no interest in the part performance. If the obligor has not rendered performance as owed, the obligee may not demand damages in lieu of performance if the breach of duty is immaterial. (2)–(5) […] § 323 BGB: Revocation for non-performance or for performance not in conformity with the contract (1) If, in the case of a reciprocal contract, the obligor does not render an act of performance which is due, or does not render it in conformity with the contract, then the obligee may withdraw from the contract, if he has specified, without result, an additional period for performance or cure. (2)–(4) […] (5) If the obligor has performed in part, the obligee may withdraw from the whole contract only if he has no interest in part performance. If the obligor has not performed in conformity with the contract, the obligee may not withdraw from the contract if the breach of duty is trivial. (6) […] § 126 BGB: Written form (1) If written form is prescribed by statute, the document must be signed by the issuer with his name in his own hand, or by his notarially certified initials. (2) In the case of a contract, the signature of the parties must be made on the same document. If more than one counterpart of the contract is drawn up, it suffices if each party signs the document intended for the other party. (3)–(4) […]

36

Chapter 1: General Provisions § 126b BGB: Text form If text form is prescribed by law, the declaration must be made in a document or in another manner suitable for its permanent reproduction in writing, the person making the declaration must be named and the completion of the declaration must be shown through the reproduction of a signature of the name or otherwise. § 127 BGB: Agreed form (1) The provisions under §§ 126, 126a or 126b also apply, in case of doubt, to the form specified by legal transaction. (2) For compliance with the written form required by legal transaction, unless a different intention is to be assumed, it suffices if the message is transmitted by way of telecommunications and, in the case of a contract, by the exchange of letters. If such a form is chosen, notarial recording in accordance with § 126 may be demanded subsequently. (3) […] 1. General. The German Civil Code lacks a general provision that defines key terms at the start of the code. However, there are so-called legal definitions in the respective context, such as § 194 BGB that provide a definition of ‘claim’. The definition of other terms is presupposed by the law, like the meaning of intent in § 278 BGB, for example. 2. Meaning of the terms ‘acts’ and ‘omissions’. Human behaviour can be divided into acts and omissions, such as the failure to perform a certain action, for instance. One will search in vain for a definition of these two terms in German law. §§ 194, 241(1) BGB merely explains that omissions can be subject to an obligation in the law of obligations regardless of whether the application results from the respective contract. In many cases, an omission is only legally relevant if it violates an obligation or duty, e.g., the violation of so-called duties to implement safety precautions (Verkehrssicherungspflichten). On the other hand, acts may also trigger duties of omission. For instance, a person who violates an absolute right, or threatens to do so, can be required to omit, or forgo carrying out such an act pursuant to §§ 1004, 12, 862 BGB. 3. Meaning of the term ‘court’. A court is a body that administers justice, and exercises jurisdiction and judicial power. Aside from the state judiciary, private arbitral tribunals exist. These are private courts that settle legal disputes in lieu of state courts. This is possible within the limits of the private autonomy set by the state. Arbitration proceedings are permitted in matters listed in § 1030 ZPO. The procedure is set by §§ 1025–1066 ZPO. 4. Meaning of the term ‘intentional act’. The BGB does not include a definition of the term ‘intent’, whereas the term ‘negligence’ is legally defined in § 276(2) BGB. A person who acts negligently fails to exercise reasonable care. An act is commonly understood as being intentional if the author knowingly wanted its unlawful consequences. So-called ‘conditional intent’ (dolus eventualis), like the acceptance of the consequences without aiming for them, for instance, regularly suffices.

37

S. Leible 5. ‘Breach of contract’ and ‘breach of duty’. Before the reform of the law of obligations, in 2002, the BGB was based on the concept of a breach of contract (Vertragsverletzung), which clearly differs from the term ‘non-performance’ that is used in the PECL. A breach of contract, in the sense of the BGB at the time, comprised of impossibility, default, and a so-called positive breach of contract that is based on a violated duty of diligence during the fulfilment of a contractual obligation. However, the delivery of defective goods was not considered to be a case of non-performance; the buyer’s legal remedies in this case were exclusively based on sales law (§§ 459 et seq. BGB old version). The reform of the law of obligations, in 2002, introduced the new concept of ‘breach of duty’ (Pflichtverletzung). It included all kinds of defective performance (under the assumption of initial impossibility, § 311a BGB). This covers the violation of primary and secondary obligations to perform, as well as of duties to protect. The new general clause of § 280(1) BGB includes all cases of impossibility to perform, late performance, and positive breach of contract. 6. No differentiation between ‘material’ and ‘fundamental’. German law and PECL do not differentiate between ‘material’ and ‘fundamental’. The question of whether an acceptance under adjustments is an acceptance of the contract or, in turn, an offer in connection with the rejection of the original offer is dealt with in § 150(2) BGB. Of relevance is the result obtained when interpreting the declaration of will. Even a minor deviation from the offer can, therefore, suffice for a rejection if it was important for one of the parties (cf. BGH NJW 01, 222; commentary on Article 2:208 PECL in Lando/Beale (2000), pp. 178-179). For additional information on the German legal position regarding silence in response to a written confirmation (between merchants or in business transactions), compare with the commentary on Article 2:210 PECL in Lando/Beale (2000), pp. 185-186. Again, it is dependent upon interpretation. Silence bears no legal consequence if: its content differs by that much from the results of the negotiations; the confirming party cannot reasonably expect the other party’s consent; new conditions have been established which the recipient does not need to anticipate and are unreasonable in regard to the purpose of the business; or if the confirmation contains additional requirements. German law differentiates between material and trivial breaches of contract. Pursuant to § 323(5) 2nd sentence BGB, the creditor is only entitled to withdraw from the contract because of a breach of duty that was not trivial. What is considered material, or trivial, is determined by the facts of the particular case regarding the contents and purpose of the respective contractual obligation. Reference points to find materiality/insignificance is the breach of duty. 7. Meaning of the term ‘written form’. The BGB provides for many forms in which a declaration of intent may or must be delivered. These forms range from text form over the written form, to the notarial form. Generally, transactions in oral form are valid. More stringent form requirements can be required by law, or contract, for specific situations. The written form does not require the whole declaration to be written by hand by the declaring party. It suffices that the document is personally signed by the declaring party. In the case of a contract, both parties have to sign the same document.

38

Chapter 1: General Provisions If multiple, identically worded documents exist, it is sufficient when each party signs the document for the other party (§ 126(2) BGB). The exchange of telefax (only the telecopy is transmitted but not the original), telegram, or e-mail does not suffice for the written form. An e-mail however suffices where the law requires text form. This form merely requires that the declaration is done in such a manner that is suitable for its permanent reproduction in writing (cf. § 126b BGB). These requirements are also met by e-mail. If the written form is not required by law, but is otherwise agreed on by the parties, § 127(2) BGB provides (dispositive) simplifications. Accordingly, the form is met by telecommunication (telegram, telex, telefax, computer fax, e-mail). Contrary to § 126(2) BGB, a contract can be concluded by an exchange of letters (hand signed offer and acceptance). Furthermore, contrary to the wording of § 127(2) BGB, and also in the case the exchange of telegrams, fax and emails suffice. An agreement by telephone is not sufficient.

Comparison and Evaluation Over the span of decades, and sometimes even centuries, national legal systems were able to develop a concise and consistent terminology, without many legal definitions becoming embodied in a code. The PECL and the DCFR, however, were designed from scratch. Although they are largely based upon evaluating comparative law, they do contain numerous innovations with regard to national legal systems. It follows that neither the different legal concepts, nor the termination, directly corresponds to national legal systems. Based on their European approach, and on the principle of autonomous interpretation, it is not possible to have recourse to national terminology. In order to develop a uniform and universally accepted European terminology, the definitions are not only useful, but indispensable when compared to the situation in national legal systems that can freely dispense with them. The authors of the DCFR had good reasons to refrain from copying the definition of the term ‘material’ in Article 1:301(5) PECL. Although the term also has some relevance under the DCFR, it seems more reasonable to define this term in the respective context that it is used. Likewise, provisions such as Article 1:301(3) PECL could be omitted, which state that intentional acts include recklessness (in the sense of dolus eventualis). The respective omission is valid because only the specific context, and the legal consequences attached, determines whether negligent or only intentional acts are sufficient. Rather than the definitions, the respective rules, instead, make it clear that the PECL do not treat intentional and negligent acts in the same way (cf. Lando/Beale (2000), pp. 122-123 Comment C). From the perspective of German law, the requirements set by the PECL and the DCFR concerning the written form are not always stringent enough. When the written form serves merely to document the agreement, they may suffice. But, if they should serve to prevent thoughtless declarations of intent and rushed legal binding, (warning function) or instruction and advice by qualified persons (advisory function; in

39

S. Leible Germany provided by the notarial form, cf. § 17 BeurkG), then the mere sending of an e-mail does not suffice to fulfil these functions. After all, the PECL permit these considerations, as each definition of the terms in Article 1:301 PECL only apply if the respective context does not require another interpretation.

Principles of European Contract Law Article 1:302: Reasonableness Under these Principles reasonableness is to be judged by what persons acting in good faith and in the same situation as the parties would consider to be reasonable. In particular, in assessing what is reasonable the nature and purpose of the contract, the circumstances of the case, and the usages and practices of the trades or professions involved should be taken into account. 1. General. Reasonableness is a term that is highly significant in the PECL because it is used in numerous, special provisions. In various situations, the parties in a contractual relation are required to act reasonably. Reasonableness is, for example, relevant to determine what a party is obliged to declare or perform, whether a performance or a contractual clause meets the requirements of equity, what effort can be expected of a party and correspondingly, whether an adequate relation between effort and earnings exists, and lastly, whether the exerted remedy is adequate in view of the severity of the non-performance etc. Further articles concern with when a certain behaviour or condition is ‘inadequate’ or ‘unreasonable’ (cf. the respective listings of the particular articles in Lando/Beale (2000), pp. 126-127 Comment A). 2. Reasonableness and good faith. Pursuant to Article 1:302, the meaning of reasonableness in each individual case depends on what parties in the same situation as the directly affected parties would find to be reasonable, in accordance with good faith. The second sentence refers to particular aspects, which need to be considered, such as the nature and purpose of the contract, the circumstances of the case, and the usages and practices of the trade professions. This enumeration is not exhaustive, as the wording ‘in particular’ indicates. Thus, for instance, the nature and the purpose of the contract influence the length of the period during which a party can cancel the agreement pursuant to Article 9:303 PECL. That, ultimately, depends on whether the contract requires the aggrieved party to act quickly. The circumstances of the particular case must always be adequately respected. Thus, for example, the period of time for the cancellation of a dealership contract sine die extends (cf. Article 6:109 PECL) if the contractual relationship existed for a long time. Furthermore, the customs and habits of the respective branch of trade, and of the branch of business, must be respected because they are generally an indication of the reasonableness of a particular conduct displayed by the contracting parties (cf. these and further examples Lando/Beale (2000), p. 127 Comment B).

40

Chapter 1: General Provisions Draft Common Frame of Reference Article I. – 1:108: Definitions in Annex (1) The definitions in Annex apply for all the purposes of these rules unless the context otherwise requires. (2) Where a word is defined, other grammatical forms of the word have a corresponding meaning. Annex: ‘Reasonable’ What is ‘reasonable’ is to be objectively ascertained, having regard to the nature and purpose of what is being done, to the circumstances of the case and to any relevant usages and practices. (Article I.-1:104) General. The substance of the rule corresponds to that of the respective rule in the PECL. It is noticeable that Article 1:302 PECL sentence 1 does not have an equivalent in the DCFR. Specifically, the reference to good faith is lacking. However, this does not lead to different legal results because the definition in the Annex contains the relevant criteria that are also influenced by the principle of good faith (cf. the remarks under Article 1:201 PECL). Based on the comprehensive scope of application of the DCFR, the definition extends to all acts, and not only to contracts. Furthermore, the DCFR avoids the ambiguous ‘should’ that Article 1:302 sentence 2 PECL uses.

German Law § 157 BGB: Interpretation of contracts Contracts are to be interpreted as required by good faith, taking customary practice into consideration. § 241 BGB: Duties arising from an obligation (1) […] (2) An obligation may also, depending on its contents, oblige each party to take account of the rights, legal interests and other interests of the other party. § 242 BGB: Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. 1. General. German law does not contain a rule similar to those in the PECL and DCFR. The obligation for the parties to adjust their conduct to the principle of good faith and to respect the other party’s interests already derives from §§ 157, 242 BGB (cf. the remarks on Article 1:201 PECL).

41

S. Leible 2. ‘Adequate’ and ‘equitable’ solutions. Furthermore, the BGB requires in a multitude of norms an ‘adequate’ or ‘equitable’ solution. At times ‘equitable discretion’ functions as a benchmark for decision taking (cf. e.g., §§ 315(1); 317(1); 319(1) sentence 1; 660(1) sentence 2; 2048(1) sentence 2; 2156 BGB). a) ‘Equitable’ is a solution that is adequate, and concerns the circumstances of the particular case. What fulfils the threshold of equitableness (cf. § 315(3) first sentence BGB) is to be determined with regard to both parties’ interests, and must take into consideration the usual requirements in similar cases (cf. BGHZ 41, 279; 62, 316). At times, the law specifies other specific circumstances to be taken into account (cf. §§ 819; 1587h no. 1; 2057a(3) BGB). These lists of circumstances are normally formulated in a non-exhaustive way (‘in particular’). For certain (non-pecuniary) damages, § 253(2) BGB provides proper compensation in money. Pursuant to § 284 BGB, the claimant will be compensated only for those expenditures that he was, ‘in all fairness’, entitled to make in reliance on receiving performance. At times, a norm provides that its legal consequence does not apply if this would create an ‘undue hardship’ for the affected party (cf. §§ 1361b(1) sentence 1 and 2; 1587h no. 1; 1613(2) BGB). b) In countless cases, the BGB requires that the adequacy of a particular solution be taken into account. This concerns, on the one hand, the length of periods of time that are set by the parties, or by law to perform (cf. e.g., §§ 250, 264(2), 281(1), 286(2) no. 2, 323(2), 350(1), 637(1) BGB). On the other hand, the adequacy is, at times, relevant for the level of the compensation (cf. e.g., §§ 308 nos. 7a, b, 552(1), 590(3), 641(3) BGB). It is often relevant that the particular solution is adequate for the case or the parties (cf. e.g., §§ 239, 307(1) first sentence, (2), 343(1), 536(1), second sentence BGB). If in a service contract or contract for work, no renumeration was agreed upon, and there are no similarly employed tariffs, then the ‘usual renumeration’ has to be paid (cf. §§ 612(2), 632(2) BGB).

Comparison and Evaluation The respective context regularly determines whether something is adequate and reasonable. It is hardly determinable in the abstract. Thus, Article 1:302 PECL also fails in concisely defining the term ‘reasonableness’. The norm is satisfied by an enumeration of different criteria for determining reasonableness. In contrast to the PECL and the DCFR, German law does not have a general norm that contains definitions of key terms, even though it employs the comparable terms equity and reasonableness in numerous provisions. Undefined legal terms like reasonableness and adequacy, serve to ensure justice in each individual case. The legislator employs them because it refuses to provide more accurate specifications, and partly also because it is unable to provide them due to the immense diversity of cases. It, thereby, offers wide room for interpretation to the decision-maker. This is, however, reduced through different relevant criteria, which leads finally to a comprehensive consideration of the relevant circumstances of the particular case, if the context does not provide differently.

42

Chapter 1: General Provisions This strive for justice in each individual case contrasts with the desire of those subjected to the law for legal certainty. Those subject to the law, who must live according to the law and base their transactions on it, want to know what is allowed and forbidden. To them, it is essential that the law is reliable and foreseeable. Insofar, legal certainty has the function to guarantee freedom. It serves the individual’s autonomy. The German Federal Constitutional Court has stated this in the words: Freedom requires the reliability of the legal system because freedom means above all the possibility to arrange one’s own way of life. An essential condition for freedom is that circumstances and factors which may enduringly influence one’s plans and their execution, particularly in the light of their governmental effects, must be foreseeable. (BVerfGE 60, 253, 268). This is especially true for the course of business and economic life in general. Only if risks are apparent is it possible to eliminate them, or to at least reasonably consider and calculate them. Uncertainties concerning the parties’ rights and obligations elevate the costs of business transactions. The predictability of economic acts that are based on a secure knowledge of the law is much less guaranteed in the PECL, or the DCFR, due to the exuberant use of undefined legal terms, like the term reasonableness (but also good faith, fair dealing etc.) than it is in German law, where such terms are used much more sparingly in an attempt to prevent judicial power from becoming boundless. This danger is all the more serious because the PECL and the DCFR are not based on a common legal tradition, or legal practice upon which they can fall back.

Principles of European Contract Law Article 1:303: Notice (1) Any notice may be given by any means, whether in writing or otherwise, appropriate to the circumstances. (2) Subject to paragraphs (4) and (5), any notice becomes effective when it reaches the addressee. (3) A notice reaches the addressee when it is delivered to it or to its place of business or mailing address, or, if it does not have a place of business or mailing address, to its habitual residence. (4) If one party gives notice to the other because of the other’s non-performance or because such non-performance is reasonably anticipated by the first party, and the notice is properly dispatched or given, a delay or inaccuracy in the transmission of the notice or its failure to arrive does not prevent it from having effect. The notice shall have effect from the time at which it would have arrived in normal circumstances. (5) A notice has no effect if a withdrawal of it reaches the addressee before or at the same time as the notice. (6) In this Article, ‘notice’ includes the communication of a promise, statement, offer, acceptance, demand, request or other declaration.

43

S. Leible 1. General. The provision provides the requirements for when a notice, or a different legally relevant statement, becomes effective, and under which requirements the effectiveness can be prevented by a withdrawal. 2. Notice; by any means. The term ‘notice’ in the meaning of Article 1:303 PECL covers all acts that can have legal meaning. Paragraph 6 names et al. notices and declarations, but also extends to any other statement. In principle, special formal requirements do not exist insofar as the notice is dispatched in a manner that is adequate in consideration of the circumstances (cf. paragraph 1). In individual cases, this can lead to the requirement of the written form (cf. Lando/Beale (2000), pp. 128-129 Comment B). 3. The receipt principle. In general, a notice dispatched to another party becomes effective when it reaches the other party (paragraph 2). It is not necessary that the addressee actually takes notice. It merely suffices that it has been delivered to the addressee in the normal way (cf. Lando/Beale (2000), pp. 129, 130 Comment under C, E and F). Normally, the dispatcher bears the danger of faults during the notification (cf. Article 4:104 PECL). However, according to the principles of good faith and fair dealing (Article 1:201 PECL), a party cannot complain that the notice did not reach her in time if the party deliberately avoided the acceptance (cf. Lando/Beale (2000), pp. 129, 130 Comment C, E, and F). 4. The dispatch principle in case of default. In cases of non-performance or probable non-performance, the addressee of the notice bears the risk of its loss, defectiveness, or delay during the transmission. In those situations, the notice becomes effective at the very moment it would have reached the addressee under normal circumstances. However, it is up to the declaring party to prove that the declaration had been dispatched (cf. Lando/Beale (2000), pp. 129-130 Comment D, E, and F). Such a transfer of risk towards the addressee is justified insofar as it was the addressee who gave reason for this notice. This is to be assumed if the addressee did not perform, or if there is reasonable ground to believe that he will not perform (‘reasonably anticipated’). 5. Simultaneous withdrawal. A notice does not become effective if the addressee receives a withdrawal simultaneously with the notice or at an earlier time.

Draft Common Frame of Reference Article I. – 1:109: Notice (1) This Article applies in relation to the giving of notice for any purpose under these rules. ‘Notice’ includes the communication of information or of a juridical act. (2) The notice may be given by any means appropriate to the circumstances. (3) The notice becomes effective when it reaches the addressee, unless it provides for a delayed effect. (4) The notice reaches the addressee: (a) when it is delivered to the addressee;

44

Chapter 1: General Provisions (b) when it is delivered to the addressee’s place of business, or, where there is no such place of business or the notice does not relate to the business matter, to the addressee’s habitual residence; (c) in the case of a notice transmitted by electronic means, when it can be accessed by the addressee; or (d) when it is otherwise made available to the addressee at such a place and in such a way that the addressee could reasonably be expected to obtain access to it without undue delay. (5) The notice has no effect if a revocation of it reaches the addressee before or at the same time as the notice. (6) Any reference in these rules to a notice given by or to a person includes a notice given by or to an agent of that person who has authority to give or receive it. (7) In relations between a business and a consumer the parties may not, to the detriment of the consumer, exclude the rule in paragraph (4)(c) or derogate from or vary its effects. Article III. – 3:106 Notices relating to non-performance (1) If the creditor gives notice to the debtor because the debtor’s non-performance of an obligation or because such non-performance is anticipated, and the notice is properly dispatched or given, a delay or inaccuracy in the transmission of the notice or its failure to arrive does not prevent it from having effect. (2) The notice has effect from the time at which it would have arrived in normal circumstances. General. Article I.-1:109 DCFR largely corresponds with the regulation in the PECL. Additionally, the DCFR explicitly regulates the receipt of notices transmitted by electronic means. However, the same result can be reached through appropriate interpretation of Article 1:303(3) PECL (cf. Lando/Beale (2000), pp. 128-129 Comment B, where this is presupposed). Nothing different applies to paragraph 6, which does not have an equivalent in the PECL. When taking Article 1:303(1) PECL into consideration, if necessary, and when taken in conjunction with Article 1:107 PECL, the same results can be obtained. The regulation of the DCFR is clearly preferable, because it is much more concise. Paragraph 7 also takes rules for consumer protection into consideration, which are not reflected in the PECL, and clarifies the otherwise dispositive character of Article I.-1:106 DCFR.

German Law § 130 BGB: Effectiveness of a declaration of intent to absent parties (1) A declaration of intent that is to be made to another becomes effective, if made in his absence, at the point of time when this declaration reaches him. It does

45

S. Leible not become effective if a revocation reaches the other previously or at the same time. (2)–(3) […] 1. General. German law distinguishes between declarations of intent that are made to another party, and those that are not. § 130(1) sentence 1 BGB only regulates the effectiveness of a declaration of intent made to another party among absent parties. 2. Declarations of intent not made to another party. Among the declarations of intent that are not made to another party are for instance the holographic will (§ 2247(1) BGB) or the binding promise of a reward (§ 657 BGB). Such declarations of intent are complete upon the time of their dispatch. A declaration of intent is dispatched when it is announced by the declaring party in accordance with their will (and if the declaration of intent is made to another party: towards the recipient). 3. Declarations of intent made to another party. A dispatched declaration of intent made towards another party is effective upon receipt (§ 130(1), first sentence BGB). The same is true for acts similar to legal transactions. Such a declaration of intent reaches the recipient when it enters the recipient’s sphere of influence in such a manner that one can expect the recipient to take notice according to the normal rules of social and economic life, and under the assumption of ordinary circumstances. It is not necessary that the recipient actually took notice. The risk of unusual circumstances that prevent the recipient to take notice, and those that the sender did not need to anticipate, is to be borne by the recipient. If the recipient willingly prevented the receipt, then the declaration of intent is also considered to have reached the recipient (§ 162(1) BGB). If the recipient did not arrange for the receipt, then, even though he had to anticipate receiving declarations due to his profession or his previous conduct, the sender must ensure an immediate renewed receipt, and this time with the implied effect of legal consequences (argument from § 242 BGB). However, if the sender remains inactive, then the legal consequences of the declaration do not enter into force. 4. Written declaration of intent. By analogy to § 130 BGB, a written declaration of intent that is given in the presence of another person reaches the recipient if it arrives in the recipient’s sphere of influence, and if it is possible for the recipient to take notice of the contents. This means that he needs to acquire (though not necessarily permanent: BAG, NJW 05, 1533) a power of disposition over the declaration. An oral declaration, such as one made over the phone, becomes effective, if the recipient perceives it. That is, at least, the case if the recipient fully understood the declaration. A declaration that was not, or even wrongly, understood must still be effective in order to ensure the protection of transactions where the declaring party could assume, pursuant to the relevant circumstances, that the recipient accurately and fully understood the declaration (this is disputed; another opinion finds that the acoustically, or respectively-visually correct perception, to be sufficient, BGH, WM 1989, 652). 5. Risk of delay. If a declaration of intent needs to be dispatched within a specified period of time, then it is generally the receipt that determines the declaration’s timeliness because it is previously not effective. Exceptionally, a punctual dispatch

46

Chapter 1: General Provisions suffices to meet the deadline (§§ 121(1), second sentence, 355(1), second sentence BGB, § 377(4) HGB). The declaration can, however, only be effective if it actually reaches the recipient. Thus, the recipient bears the risk of delay, but not the risk of loss. 6. Revocation. A declaration of intent does not become effective if a revocation reaches the recipient first, or at the same time. Again, it is not relevant whether the recipient took notice. Because a declaration of intent that is not made towards another person is effective upon dispatch, there is no room for a revocation. In case of a written declaration of intent made in the presence of another person, to which § 130(1) BGB applies by analogy (see above no. 4), the moment of dispatch is the moment of receipt. Therefore, a revocation is factually not possible.

Comparison and Evaluation German civil law does not know a rule regulating receipt that is as extensive as the respective rule in the PECL. § 130(1), first sentence BGB only deals with the receipt of declarations of intent addressed to an absent party. As the rule applies by analogy to acts similar to legal transactions and declarations of intent addressed to present parties, the rules of German law and the European rules do not differ, in result. The same applies to the revocation. Article 1:304(4) PECL does not have an equivalent in German law. Also, in the case of non-performance of contractual and other obligations, the general rules apply. With the exception of the few cases mentioned above, a notice is only effective at the time of receipt. In contrast, according to the PECL, a declaration of intent or other juridicial acts are effective at the point in time when they would have reached the recipient under regular circumstances, independent of a possible delay, or even a failure of receipt. From the perspective of the PECL, it is, furthermore, irrelevant whether or not the recipient is responsible for the non-performance. This considerable shift of risks towards the recipient is not convincing, even when taken into consideration that, most likely, the recipient, himself, was the motive to dispatch the declaration of intent. Furthermore, both the wording in Article 1:303 PECL and the remarks in the commentary (cf. Lando/Beale (2000), pp. 128 et seq.), fail to clarify how cases of negligent frustration of receipt should be dealt with. Based on the outstanding importance of the principle of good faith and fair dealing under the PECL, one can assume that results similar to those under German law will be reached. This is because the solution in German law is, ultimately, also based on the principle of good faith (§ 242 BGB).

Principles of European Contract Law Article 1:304: Computation of Time (1) A period of time set by a party in a written document for the addressee to reply or take other action begins to run from the date stated as the date of the

47

S. Leible document. If no date is shown, the period begins to run from the moment the document reaches the addressee. (2) Official holidays and official non-working days occurring during the period are included in calculating the period. However, if the last day of the period is an official holiday or official non-working day at the address of the addressee, or at the place where a prescribed act is to be performed, the period is extended until the first following working day in that place. (3) Periods of time expressed in days, weeks, months or years shall begin at 00.00 on the next day and shall end at 24.00 on the last day of the period; but any reply that has to reach the party who set the period must arrive, or other act which is to be done must be completed, by the normal close of business in the relevant place on the last day of the period. 1. General. If a party sets a period of time, the other party has to know the time limits within which it has to act. Likewise, the party setting the period needs to judge if the other party performed in a timely manner. Thus, provisions for the computation of time are indispensable in every legal system. 2. Starting time. If the party setting the period also sets provisions on the computation of that period, then these are the relevant provisions. This is because Article 1:304 PECL is not mandatory, but, rather, dispositive. At times, the PECL demands the setting of a reasonable period of time (cf. e.g., Article 8:106 PECL). This is relevant for the duration of the period, but not for the computation of the time. The setting of an unsuitable computation can, however, lead to an inadequacy of the period as such (cf. Lando/Beale (2000), p. 132 Comment C). If an explicit provision for the computation is not given, then the period begins to run from the date expressed as the date of the document (Article 1:304(1) PECL, first sentence), regardless of the manner of transmission. If there is no date shown on the document, then the period begins when the document reaches the addressee (Article 1:304(1) sentence 2 PECL). Cases where the period is set orally are not regulated in the PECL. Such circumstances will have to be solved using the natural presumption that the period of time runs from the moment of communication (cf. Lando/Beale (2000), p. 132 Comment B, C, D and E). 3. Non-working days. Corresponding to Article 5 of the European Convention on the Calculation of Time-Limits of 1972, Article 1:304(2) PECL states that official nonworking days (e.g., Saturdays and Sundays), and official holidays, are included in calculating the period. Again, corresponding to this Convention, this does not apply if the last day of the period is an official, non-working day, or an official holiday at the relevant place (i.e., the address of the addressee or the place where a prescribed act is to be performed). In case that it is a custom to work on official holidays in the relevant branch of business, or if there are local customs to work or not work on the respective day, then these customs overrule (cf. Article 1:105 PECL).

48

Chapter 1: General Provisions 4. From midnight to midnight. The period lasts from midnight to midnight (Article 1:304(3) sentence 1 PECL). This corresponds to Article 3 no. 1 of the European Convention. The second sentence in the PECL determines that the reaction, or the respective action, which is owed to the party setting the period, must take place before the end of usual business hours at the relevant place. Once again, the setting party’s place is relevant because it is when the juridical act is presumed to have become effective.

Draft Common Frame of Reference Article I. – 1:110: Computation of time (1) The provisions of this Article apply in relation to the computation of time for any purpose under these rules. (2) Subject of the following provisions of this Article: (a) a period expressed in hours starts at the beginning of the first hour and ends with the expiry of the last hour of the period; (b) a period expressed in days starts at the beginning of the first hour of the first day and ends with the expiry of the last hour of the last day of the period; (c) a period expressed in weeks, months or years starts at the beginning of the first hour of the first day of the period, and ends with the expiry of the last hour of whichever day in the last week, month or year is the same day of the week, or falls on the same date, as the day from which the period runs; with the qualification that if, in a period expressed in months or in years, the day on which it should expire does not occur in the last month, it ends with the expiry of the last hour of the last day of that month; (d) if a period includes part of a month, the month is considered to have thirty days for the purpose of calculation the length of the part. (3) Where a period is to be calculated from a specified event or action, then: (a) if the period is expressed in hours, the hour during which the event occurs or the action takes place is not considered to fall within the period in question; and (b) if the period is expressed in days, weeks, months or years, the day during which the event occurs or the action takes place is not considered to fall within the period in question. (4) Where a period is to be calculated from a specified time, then: (a) if the period is expressed in hours, the first hour of the period is not considered to begin at the specified time; and (b) if the period is expressed in days, weeks, months or years, the day during which the specified time arrives is considered to fall within the period in question.

49

S. Leible (5) The periods concerned include Saturdays, Sundays and public holidays, save where these are expressly excepted or where the periods are expressed in working days. (6) Where the last day of a period expressed otherwise than in hours is a Saturday, Sunday or public holiday at the place where a prescribed act is to be done, the period ends with the expiry of the last hour of the following working day. This provision does not apply to periods calculated retroactively from a given date or event. (7) Any period of two days or more is regarded as including at least two working days. (8) Where a person sends another person a document which sets a period of time within which the addressee has to reply or take other action but does not state when the period is to begin, then, in the absence of indications to the contrary, the period is calculated from the date stated as the date of the document or, if no date is stated, form the moment the document reaches the addressee. (9) In this Article: (a) ‘public holiday’ with reference to a member state, or part of member state, of the European Union means any day designated as such for the state or part in a list published in the official journal; (b) ‘working days’ means all days other than Saturdays, Sundays and public holidays. 1. End of a period. Article I.-1:110 DCFR distinguishes in its first paragraph between periods expressed in hours, days or weeks, months and years, and states that the end of the period is included in that period. Thus, the different units of time are relevant for the end of the period. A period that is expressed in hours or days ends when the last hour in that day expires. A period expressed in weeks, months or years ends with the last day of the last week/year or month that corresponds to the naming or number of the day when the period began. If, for a period expressed in months or years the respective day is not expressed, then the period will end on the last possible date of the respective month. 2. Beginning of a period. In the case that there is no agreement concerning the beginning of the set period, paragraph 8 provides the same rule as Article 1:304(1) PECL. However, the DCFR expresses the subsidiary character of the rule more clearly. Thus, the computation of time is primarily determined by the regulation chosen by the parties. One must distinguish between whether the beginning of a period is marked by a specified event (paragraph 3), or, rather, by a specified time (paragraph 4). Paragraphs 5 and 6 concern Sundays and holidays and, therefore, correspond with the PECL. Paragraph 5 explains that official non-working days and official holidays are not included in calculating the period if they are explicitly excluded, or if the period is set in working-days. In such cases, Article 1:304(2) PECL, first sentence can be disregarded. The same applies for paragraph 6, second sentence. 3. Clear and precise provisions. The provisions in the DCFR are, altogether, more clear and precise than those in the PECL. Article I.-1:110(1) DCFR firstly determines

50

Chapter 1: General Provisions that the rules for the computation of time apply in relation to the computation of time for any purpose under these rules. Article I.-1:110 DCFR starts with naming the different durations of the periods, and distinguishes further between different ways to compute the time. Paragraph 9 lastly defines the terms ‘public holiday’ and ‘working days’. The PECL also do, but instead, it is done without drafting a closer description of their scope of application. Likewise, they start in paragraph 1 by abruptly introducing a special case. Additionally, it is the commentary, and not the wording that clarifies that they are drafted as a default, and are, therefore, dispositive. Furthermore, Article 1:304(3) PECL lacks a regulation for the case if, for a certain period expressed in months or years, the relevant date to determine the expiry is not expressed.

German Law § 186 BGB: Scope of applicability The interpretation provisions of §§ 187 to 193 apply to the fixing of periods of time and dates contained in statutes, court orders and legal transactions. § 187 BGB: Beginning of a period of time (1) If a period commences on the occurrence of an event or at a point of time falling in the course of a day, then the day on which the event or point of time occurs is not included in the calculation of the period. (2) If the beginning of a day is the determining point of time for the commencement of a period, then this day is included in the calculation of the period. The same applies to the date of birth when the age of a person is calculated. § 188 BGB: End of a period of time (1) A period of time specified by days ends on the expiry of the last day of the period. (2) A period of time specified by weeks, by months or by a duration of time comprising more than one month-year, half-year, quarter-ends, in the case of § 187 (1), on the expiry of the day of the last week or of the last month which, in its designation or its number, corresponds to the day on which the event or the point of time occurs, or in the case of § 187(2), on the expiry of the day of the last week or of the last month that precedes the day which corresponds in designation or number to the first day of the period of time. (3) If, in the case of a period of time determined by months, the day on which it is due to expire does not occur in the last month, the period ends on the expiry of the last day of this month.

51

S. Leible § 189 BGB: Calculation of individual periods of time (1) A half-year is understood to mean a period of six months, a quarter is understood to mean a period of three months, and half a month is understood to mean a period of fifteen days. (2) If a period of time is specified as one or more than one whole month and a half-month, then the fifteen days shall be counted last of all. § 190 BGB: Extension of period If a period of time is extended, the new period is calculated from the expiry of the previous period. § 191 BGB: Calculation of periods of time If a period of time is determined by months or by years with the meaning that they are not required to run consecutively, a month is counted as thirty days and a year as 365 days. § 192 BGB: Beginning, middle and end of a month The beginning of the month is understood to be the first day, the middle of the month the fifteenth day, and the end of month the last day. § 193 BGB: Sundays and holidays; Saturdays If a declaration of intent is to be made or an act of performance to be done on a particular day or within a period, and if the particular day or the last day of the period falls on a Sunday, a general holiday officially recognized at the place of the declaration or performance, or on a Saturday, the next working day takes the place of this day. 1. General. The BGB provides interpretative rules for the computation of periods of time and dates in laws and contracts (§§ 187–193 BGB) that apply if neither the law, nor the parties’ agreements, include deviating provisions (§ 186 BGB). 2. Beginning of a period. The beginning of the period is determined by § 187 BGB. This rule distinguishes between different types of periods. If the period begins with a specified event, or at a specified time in a day (paragraph 1), then this day is not included in the calculation and, therefore, the period begins running the following day. If, however, the period begins with the beginning of the day, then this day is counted as a day of the period (paragraph 2 sentence 1). 3. End of a period. According to § 187 BGB, periods of time are generally calculated in full days, and not from the beginning of an event or time within a day. Periods of hours and minutes, by contrast, are timed from the exact point in time, and onwards. The end of the period differs pursuant to § 188 BGB, and is dependant on the unit of time used. If it is expressed in days, then it ends with the expiry of the last day of the period (paragraph 1). Periods expressed in weeks or months (also in years) end depending on the beginning of the period (paragraph 2). If the period begins with an

52

Chapter 1: General Provisions event or time within a day, then this day is not included in the period (see above). Therefore, the period ends on the day of the last week, or the last month, that corresponds by name or number to the day during which the event or time occurred. If the period starts with the beginning of the day, then this day is included in the period (see above), and the period ends with the expiry of the day of the last respective week or month that precedes the day that corresponds by name or number to the day that the period begins day. If the relevant day is not identified or expressed, then the period ends pursuant to paragraph 3, with the expiry of the last day of the month. If the last day is a Saturday, a Sunday, or an official holiday at the place of declaration or performance, then the period is extended to the next working day (§ 193 BGB). §§ 190-192 BGB regulate further details to ensure legal certainty.

Comparison and Evaluation German law lacks a rule corresponding to Article 1:304(1) PECL. If the setting party has not explicitly provided the beginning of the period, then this needs to be determined through interpretation. For a written setting of a period, the period begins regularly with only the receipt of the setting declaration. This is because, in any case of doubt, the assumption credits the recipient with the full amount of time. Additionally, it is up to the recipient to provide clarification as to when the period begins or ends. In support of this solution, it can be said that it is much less open to abuse than the PECL and the DCFR. However, the European rules have the advantage of clarifying the beginning of the period to the setting party because there is no vagueness concerning if and when the notice reached the recipient. The BGB, the PECL, and the DCFR respect official non-working days in the same way. It is self-evident that they are included in the computation of time. This is because §§ 187–192 BGB do not differentiate between working and non-working days. Additionally, this results from the argumentum e contrario regarding § 193 BGB. If the end of the period falls on an official non-working day or holiday, § 193 BGB declares, like the PECL and the DCFR, that the following working day will be the relevant day. Official holidays in Germany are, however, determined differently. The 3 of October, for example, is a holiday by virtue of federal law. Other holidays, by contrast, are set out by the laws of the German federal states (see their public holidays acts). The distinction drawn by German law between event based periods and expiry based periods (cf. §§ 187, 188 BGB) is unknown to the PECL and the DCFR.

Principles of European Contract Law Article 1:305: Imputed Knowledge and Intention If any person who with a party’s assent was involved in making a contract, or who was entrusted with performance by a party or performed with its assent: (a) knew or foresaw a fact, or ought to have known or foreseen it; or

53

S. Leible (b) acted intentionally or with gross negligence, or not in accordance with good faith and fair dealing, this knowledge, foresight or behaviour is imputed to the party itself. 1. General. Due to the increase in division of labour and business transactions, many contracts are no longer concluded and performed personally by the contracting parties. The conclusion of the contract often takes place through agents. The performance involves mostly employees, subcontractors and third parties who are not parties to the contract. Article 1:305 PECL intends to neutralize the resulting risks. For this purpose, factual or (by law) assumed knowledge (subparagraph a), or legally relevant subjective requirements like intent, negligence or mala fide (subparagraph b) of involved persons, is imputed to the principal. 2. Knowledge and foresight. Article 1:305 PECL uses a group-focused concept of attribution of knowledge. It is irrelevant if the acting person acted as a representative in the legal sense (cf. Articles 3:101 PECL et seq.). What matters is that they were included by one of the parties to the contract, i.e., that they were appointed by the respective party to conduct the contract negotiations, or to perform contractual obligations. It is also sufficient if the other party thought they were active for the principal if there was a legal appearance that can be attributed to the latter. The consequence of Article 1:305 PECL is that the acting person’s knowledge, and possibility to foresee certain developments, is imputed to the principal. The principal bears the burden of proving that the acting person was not involved, on its behalf, in the making or performance of the contract, and that it was also not possible to reasonably appear otherwise to the other party (cf. Lando/Beale (2000), p. 135 Comment C). 3. Intention, negligence and bad faith. Article 1:305 PECL does not only provide for an attribution of knowledge, but pursuant to lit. b, also provides for an attribution of certain subjective requirements or conducts. This is relevant, for instance, with regard to provisions that differentiate between intentional and grossly negligent behaviour, or bad faith by a party upon which a liability is created, or the liability’s extent increased, as provided in Articles 2:301(2), 4:107(2), 8:103 subparagraph (c) 9:503 PECL (cf. Lando/Beale (2000), p. 135 Comment D). The intent, negligence, or mala fide of a person, who the contracting party employed for the contractual performance, needs to extend only to the act or omission which led to the non-performance. It is not necessary that it extends to the consequences that can result from the non-performance.

Draft Common Frame of Reference Article II. – 1:105: Imputed knowledge etc. If a person who with a party’s assent was involved in making a contract or other juridical act or in exercising a right or performing an obligation under it:

54

Chapter 1: General Provisions (a) knew or foresaw a fact, or is treated as having knowledge or foresight of a fact; or (b) acted intentionally or with any other relevant state of mind this knowledge, foresight or state of mind is imputed to the party. General. The content of the DCFR rule fully corresponds with that of the PECL. For terminological precision, the provision includes ‘other juridical acts’ (cf. von Bar/Clive (2009), Introduction nos. 51 et seq.). It was, therefore, possible to omit a reference similar to that of 1:107 PECL.

German Law § 166 BGB: Absence of intent; imputed knowledge (1) Insofar as the legal consequences of a declaration of intent are influenced by an absence of intent or by knowledge or by constructive notice of certain circumstances, it is not the person of the principal, but that of the agent, that is taken into account. (2) If, in the case of a power of agency granted by a legal transaction (authority), the agent has acted in compliance with certain instructions given by the principal, then the latter may not invoke the lack of knowledge of the agent with regard to circumstances of which the principal himself knew. The same rule applies to circumstances which the principal ought to have known, insofar as constructive notice is equivalent to knowledge. § 278 BGB: Responsibility of the obligor for third parties The obligor is responsible for fault on the part of his legal representative, and of persons whom he uses to perform his obligation, to the same extent as for fault on his own part. […] 1. Application to cases of agency. The text of § 166 BGB covers only cases of agency. Since, in this context, it is only the agent who perfects the agreement of the parties, the German legislator considered that it is generally only the agent who is relevant in case of defects concerning the declaration of intent, as well as the knowledge or possibility to know certain circumstances. Paragraph 2 provides an exception from this rule, stating that if the principal knew of certain circumstances, or had to know them, then he is not allowed to hide behind an agent who is acting in good faith. The term ‘knowledge’ has to be understood broadly in order to protect the affected other party. It suffices that the principal knew about the transaction which will be undertaken, and did not interfere even though it was possible for him to do so (cf. BGHZ 50, 364, 368). 2. Application to auxiliary persons by analogy. § 166(1) BGB is applied by analogy to auxiliary persons, who – lacking authority – are not the principal’s agents, but merely his ‘representative in knowledge’. These are people who are assigned tasks by the principal within his area of business, without, however, acting as agents. An

55

S. Leible example is an auxiliary who has a significant influence on the conclusion of a transaction. An application, by analogy, is in such cases advisable, since § 166(1) BGB is based on the general principle that a person who entrusts another person with autonomous execution of certain affairs should not be relieved from his responsibility because of this collaboration. This person must, therefore, accept the attribution of knowledge that the other person acquired in this context. § 166(1) BGB is furthermore applied – as another analogy – when the knowledge or possible knowledge are, in fact, not important for consequences of the declaration of intent, but, rather, for further legal consequences (cf. e.g., §§ 640(2), 819(1), 912(1), 990 BGB). 3. Attribution of faults of auxiliary persons. Under § 278 BGB, faults of auxiliary persons in the performance of an obligation will be attributed to the debtor. In the absence of a contractual obligation, like in the context of tortious liability, for example, the acts of the auxiliary persons will be attributed to the principal only if he committed a fault in their choice or supervision. This will, however, be presumed (§ 831 BGB). § 278 BGB is based on the idea that the obligor has a responsibility towards the creditor for his business, and that auxiliary people are included. The person to benefit from the collaboration must also bear the negative consequences when, for example, the risk that the person acting in his place harms the creditor’s legally protected interests. An attribution pursuant to § 278 BGB is only possible in existing contractual obligations, and only for agents and auxiliary persons. The latter are persons who, pursuant to the facts, aid the performance of an obligation of the obligor, with his assent. The nature of the relationship between the debtor and the auxiliary person is irrelevant. A factual collaboration suffices. It is irrelevant whether the auxiliary person is economically dependent upon the principal. Consequently, a self-employed entrepreneur, who is employed by the debtor, can be an auxiliary person. The person must act within the performance of an obligation of the debtor. The attributable act, thus, has to be connected to the debtor’s sphere of obligations.

Comparison and Evaluation Like the PECL and the DCFR, German law distinguishes between the attribution of fault, on the one hand, and the attribution of knowledge, on the other. However, it does not regulate both categories within one norm, but, rather, at systematically different places; namely, in the general section of the BGB, and in the general law of obligations. The principle behind all of these norms is the same: Whoever chooses to involve other people in the conclusion, or fulfilment, of the contract has to bear the negative consequences of collaboration, and must also accept the attribution of knowledge, or fault, of his auxiliary persons. Differences exist only insofar as Article 1:305(b) PECL only covers intentional and grossly negligent infringements of the principle of good faith and fair dealing, whereas § 278 BGB covers all forms of negligence.

56

CHAPTER 2

Formation P. Mankowski & M. Müller

SECTION 1:

GENERAL PROVISIONS

Principles of European Contract Law Article 2:101: Conditions for the Conclusion of a Contract (1) A contract is concluded if: (a) the parties intend to be legally bound, and (b) they reach a sufficient agreement without any further requirement. (2) A contract need not be concluded or evidenced in writing nor is it subject to any other requirement as to form. The contract may be proved by any means, including witnesses. 1. General. (1) lays down the basic and quintessential requirements for the formation of a contract. Their number is twofold: mutual consensus and binding force on all parties concerned. 2. Exhaustive list of requirements and conclusio e contrario. The most important yet salient feature about (1) is the conclusio e contrario to be drawn: Other requirements than those listed in (1) do not exist (cf. Jansen/Zimmermann (2010) 196, 209; Pilar Perales Viscasillas (2001) 371, 373 et seq.). This exclusiveness rules out any principle of consideration (Lando/Beale (2000), p. 138, Comment D). A contract does not require that every promisee undertakes to furnish or furnishes something of value in exchange for the other party’s promise (Lando/Beale (2000), p. 138, Comment D). Nor is it necessary for a contract to generate mutual obligations of any kind whatsoever. Gratuitous promises are equally binding as are contracts comprising consideration

57

P. Mankowski & M. Müller (Lando/Beale (2000), p. 138, Comment E). A contract is defined by its mode of conclusion and does not depend on its content. Many legal orders establish some kind of causa or cause as pre-condition for binding contracts, most prominently Articles 1108; 1131–1133 Code civil in France, Belgium and Luxembourg; Articles 1325; 1343–1345 Codice civile in Italy and Article 1261 Codigó Civil in Spain (von Bar/Clive (2009), comparative survey in Notes 19–29 on Article II-4:101 DCFR). A contrario, (1) disposes of any requirement even possibly related to such approach. Likewise, a significant number of legal orders still recognize a doctrine of real contracts (von Bar/Clive (2009), comparative survey in Notes 30–40 on Article II-4:101 DCFR). It demands the execution of the ‘real’ act, e.g., delivery of a good or disbursing a loan, as pre-requisite for a binding contract. Once again, a contrario, (1) disregards this doctrine. Furthermore, reasonableness or any other substantive test needs not to be complied with in order to generate enforceable contractual promises (Lando/Beale (2000), p. 138, Comment E). Substantive or material criteria are not established. It is not for the PECL to challenge any contract on an alleged lack of soundness or sensibility or social undesirability. Residual control in order to prevent extremely one-sided agreements from being enforceable and in order to suppress one party overly exploiting the other, should be implemented by specific rules safeguarding basic standards of contractual fairness (cf. von Bar/Clive (2009), Comment E on Article II-4:101 DCFR). 3. Intention. In principle, no one shall be tied to, and bound by, his word if he has not intended to declare something binding (cf. von Bar/Clive (2009), Comment A on Article II-4:102 DCFR). Either party shall be in control of generating obligations from its own declarations. There is but one exception namely that the very existence of such intention is immaterial if the other party has reason to infer sufficient intention from the first party’s statement or other conduct by virtue of Article 2:102 PECL. Intention to be legally bound distinguishes contracts from mere social engagements or mere provisional understandings reached in the course of negotiations (von Bar/Clive (2009), Comment C on Article II-4:101 DCFR). Mere social engagements operate beneath this level. Memoranda of Understanding are contracts only insofar as parties intend them to be legally binding. Letters of Intention (even disregarding their general unilateral nature) rarely and even if so in most instances only partially, reach a like level. In principle, every person can draft his declarations freely as to whether he wishes to be legally bound or not. The declarant can assume freely as whether he wishes to be legally bound or only morally. If a party coins its statement as a mere Letter of Intention or Comfort Letter and drafts the statement accordingly, it will not generate legally binding force (Lando/Beale (2000), p. 144 Comment A to Article 2:102). Yet if instruments carrying such titles are couched in appropriate terms they might also carry legal force (Lando/Beale (2000), pp. 143–144 Comment A to Article 2:102). Advertising measures and other invitationes ad offerendum which should only entice others to make legally binding offers, generally are not based on an intention to be legally binding. They demonstrate an intention to check own resources on the one hand and the personal standing of the answering party on the other hand before entering into any legally binding contract.

58

Chapter 2: Formation 4. Consensus. Consensus is the second basic requirement for contract. This is supposed to distinguish a contract from unilateral juridical acts on the one hand and from unconcluded negotiations which have not yet led to agreement on the other hand (cf. von Bar/Clive (2009), Comment D on Article II-4:101 DCFR). However, the latter already fails the threshold of a legally binding intention. The criterion of agreement, in this context (cf. on different meanings of agreement Fauvarque-Coson/Mazeaud (2008), pp. 16 et seq.), operates as a reference to a bilateral expression of consents. Thus, it serves as placeholder for offer and acceptance according to Section 2. In addition, the criterion of sufficiency operates as a placeholder for the essentialia negotii of the contract as specified in Article 2:103 PECL. 5. No requirement of any formality. (2) asserts that contracts are not dependent on any formalities being fulfilled or observed. Observing formalities causes transaction costs. This holds particularly true for sealing, authentification by a notary or registration with a public register. Disposing of formalities reduces transaction costs, even at the expense of possible problems of proof. (2) expressly rules out any requirement that contracts ought to be in writing, in particular. Agreements orally concluded are equally binding. That the PECL do not require any kind of formalities of course does not prevent the parties from agreeing on formalities if they wish to do so. The second sentence of (2) is not a mere tautology but reveals its specific purpose in the light of the parol evidence rule prevailing in many common law jurisdictions. This rule basically dictates that in the event of a written contract the contract shall be the only permissible evidence and that other means of proving its content are not admitted in principle. Such strict observance is ruled out by (2) 2nd sentence. The positive assertion that all means of evidence and in particular witness evidence are admissible for proving a contract (i.e., both as to conclusion and as to content) rules out any restrictions. Article 2:105 PECL ought to be taken into account, though.

Draft Common Frame of Reference Article II. – 4:101: Requirements for the conclusion of a contract A contract is concluded, without any further requirement, if the parties: (a) intend to enter into a binding legal relationship or bring about some other legal effect; and (b) reach a sufficient agreement. Article II. – 1:106: Form (1) A contract or other juridical act need not be concluded, made or evidenced in writing nor is it subject to any other requirement as to form. (2) […] Despite splitting the content in two separate rules located even in different subsections, the DCFR virtually repeats almost to the letter Article 2:101 PECL. Yet it omits

59

P. Mankowski & M. Müller Article 2:101(2) 2nd clause PECL. The deviation in the wording of (a) is editorial. It illustrates the scope of application not only covering the creation of an obligation but also its transfer, alteration and termination by contract.

German Law German law does not contain direct counterparts to either (1) or (2). Nonetheless, as to substance it regulates the matters addressed in almost identical manner. Neither consideration nor causa has ever formed part of modern German law as to the conclusion of contract. However, the concept of a Rechtsgrund, though not identical but related with the aforementioned idea of causa, forms an integral part of the German law of restitution. In the past, the doctrine of real contracts found some support as to credit contracts (Darlehensvertrag), loan contracts (Leihe), deposit contracts (Verwahrung) and gifts from hand to hand (Handschenkung) but meanwhile is outdated (cf. Gehrlein/Sutschet, in Bamberger/Roth (2012), § 311 no. 11; Hennsler, in Münchener Kommentar (2009), § 688 no. 4). German law reverts to party autonomy and thus to the parties’ intentions. The requirement that statements must be intended to be legally binding is to be found in the law of Willenserklärungen (declaration of intent) where the rechtsgeschäftliche Bindungswille or Rechtsbindungswille (intention to be legally bound) stars prominently. Contract law rather features and recognizes it indirectly in the regulation of offers in § 146 BGB. Mere social engagements circumscribed as Gefälligkeiten – as opposed to Schuldverhältnis in § 241(1) BGB – in Germany, are not legally binding. The lack of a general requirement of formalities under German law can be asserted by a conclusio e contrario: A specific formality is required ex lege if and only if such requirement is expressly established. If no specific requirement is expressly established formalities are not in demand. German contract law is governed by the general principle of Formfreiheit as a sub-principle of Vertragsfreiheit, party autonomy. Exceptions and deviations from this principle of Formfreiheit need to be made expressis verbis. The in practice most important ones amongst them are to be found in § 311b(1) BGB (real estate transactions), § 766(1) BGB (promises made by guarantors) and § 550 BGB (lease of real estate). Under German law, proof is a matter for procedural law. German procedural law knows five means of proof (§§ 371 et seq. ZPO) and is not restricted by any kind of parol evidence doctrine whatsoever. In particular, witness evidence about the parties’ intention when they concluded their bargain, has always been permissible.

Comparison and Evaluation 1. Common core? Article 2:101 PECL rests on principles of contract formation which are shared by German law. Its main content to serve as a base for a conclusio e contrario is directed against the rules on formation of contracts as contained in other legal orders, particularly common law or Romanic legal orders whereas German law features

60

Chapter 2: Formation amongst the clear supporters. Dispensing with formalities also finds its counterpart in Article 11 CISG. 2. Basic requirements for contracts. The basic requirements for contracts are almost self-evident. Contracts are based on party autonomy. To bind a party without its assent would be contrary to these fundamental and axiomatic basics. Likewise, consensus goes without saying. Contracts combine mutual assent, and of course both parties have to assent to the very same contents and ingredients if they are to be bound. 3. Decision against further requirements. The decision against any further requirements, in particular consideration or cause, is a sound one. The bargain theory of contract which is underlying the requirement of consideration limits the notion of contract to synallagmatic contracts. Thus it opens up awkward struggles with regard to promises under which only one of the parties carries an obligation whereas the other party accepted and assented. Guarantees and gifts are the main examples. However, any doctrine of cause would lead into an infinite regress if applied to the very last consequence. The stripped-down approach is a pragmatic one which reflects the needs for modern-day contracting and bargaining. 4. Decision against formalities in general. Formalities are expensive. They produce transaction costs in order to comply with them. Furthermore, they exert a deterring effect and might lead to a potential suboptimum of contracting. However, they might be helpful when it comes to proving the existence or the content of a contract. Yet on aggregate the price for a general requirement of formalities would be way too high and would not conform to everyday practice. Modern-day communications are rather informal.

Principles of European Contract Law Article 2:102: Intention The intention of a party to be legally bound by contract is to be determined from the party’s statements or conduct as they were reasonably understood by the other party. 1. General. Article 2:102 PECL attempts to circumscribe the means to determine the intention required under Article 2:101(1) (a) PECL. It does not set out to define the meaning of ‘intention’, though. It addresses issues of admissible proof on the one hand and of interpretation of statements on the other hand. 2. Determination of intention. The term ‘intention’ carries the same meaning as in Article 2:101(1) (a) PECL. The central input of Article 2:102 PECL is to be found in the last words which illustrate a general principle: Statements and declarations are to be determined as they were reasonably understood by the other party. As the wording expressly points out, the understanding may draw both on the statement itself and related conduct. However, the statement or conduct must be the party’s ones meaning they are imputable to the party (contra Hellwege (2011), 665, 673). This is an example

61

P. Mankowski & M. Müller for the operation of Article 5:101(2) PECL that interpretation has to be effected according to the meaning that reasonable persons of the same kind as the concrete parties would give to the statement at stake in the concrete circumstances. In accordance with Article 5:101(1) PECL, however, the well-established principle of falsa demonstratio non nocet rules. Thus, if one party knows the other party’s actual intention, the actual intention trumps any interpretation by a neutral and objective third person (Lando/Beale (2000), p. 144 Comment B). In essence, Article 2:102 PECL represents an intermediate approach of contract founded on the respect of the given word with its root in the declarant’s will but mitigated by a principle of reliance (cf. Fauvarque-Coson/Mazeaud (2008), pp. 3 et seq.). The declarant may insert key words in his statement signalling that he does not intend to be legally bound. Labelling alone might accomplish this feat if it is outspoken enough. He who is offering a mere ‘gentlemen’s agreement’ makes clear that the level envisaged is beneath that of a binding contract. Likewise, a Letter of Intent will not carry legally binding force nor an enforceable content. Neither can the declarant under all circumstances authoritatively determine the meaning of his declaration, nor can the concrete addressee individually and subjectively determine such meaning. Reasonableness requires a more abstract standard disregarding possible personal biases and objectivating matters. This approach ought to be preferred to the alternative approach permitting a party to prove ex post that despite an apparent intention, there was no actual intention to contract on its side if only for the price of liability for carelessly misleading the other party (von Bar/Clive (2009), Comment B on Article II-4:102 DCFR). Mere silence and inactivity will generally not suffice to constitute intention as Article 2:204(2) PECL expressly states for an acceptance. However, important exceptions and deviations from this rule ought to be found in Articles 2:209 (conflicting general conditions); 2:210 (professional’s written confirmation); 3:208 PECL (third party’s right with respect to confirmation of authority). Inactivity might theoretically be classified as some kind of (negative) conduct but ordinarily it does not have the strength to convey a properly decipherable signal.

Draft Common Frame of Reference Article II. – 4:102: How intention is determined The intention of a party to enter into a binding legal relationship or bring about some other legal effect is to be determined from the party’s statements or conduct as they were reasonably understood by the other party. Article II-4:102 DCFR in substance follows almost to the letter the footprints of Article 2:102 PECL. That contract is not explicitly mentioned can be easily explained with the generally wider focus of the DCFR which is – unlike the PECL – not restricted to contracts but also designed for other obligations and juridical acts. Therefore, interpretation follows, subject to the exception of falsa demonstratio, a reasonableness standard. Silence and inactivity are, subject to the exceptions to be found in Article

62

Chapter 2: Formation II-4:209 (conflicting standard terms); Article II-4:210 DCFR (formal confirmation of contract between businesses), insignificant for the determination of a legally binding intention.

German Law Whether a party intends to be legally bound by a statement is a matter of interpretation of that very statement. The interpretation of statements under German law neither follows a strict Willenstheorie nor a strict Erklärungstheorie but is based on an intermediate doctrine which has its statutory backbone in §§ 133; 157 BGB without having been spelled expressis verbis: Statements are to be interpreted according to their understanding as a neutral and reasonable third party in the position of the concrete addressee would construe it. Notwithstanding, the principle of falsa demonstratio is recognized. Specific rules partly reaffirming, partly modifying the general doctrine are to be found in §§ 116–118 BGB, declaring the declarant’s inner reservation irrelevant, nullifying a declaration directed towards a sham transaction and a declaration intended to be in jest, however, in this last case for the price of the declarant’s liability according to § 122 BGB. For the interpretation not only the ipsissima verba of the statement itself but also related conduct of either party ought to be taken into account. Silence and inactivity generally do not constitute a legally binding intention for a contract. This rule is subject to certain explicit and implicit exceptions applying to the commerce among merchants (cf. Lando/Beale (2000), p. 170 note on German law to Article 2:204).

Comparison and Evaluation 1. Common core? As to substance Article 2:102 PECL should be regarded as common core, at least common with German law although the latter does not expressly provide a like rule. Article 4:102(2) ACQP copying Article 2:102 PECL is perhaps the best support for the contention for a commore core nature since it has borrowed from the PECL even at the price that the wording may be partially inconsistent with the general terminology which deliberately does not deviate (comments to Article 4:102 ACQP Note 6 [Reiner Schulze]). 2. Determination of intention. The way how intention is to be determined is a sound one. Including conduct and excluding any kind of parol evidence role or any restriction to the terms of the contract as such appears very reasonable. Parties can adduce every kind of evidence; yet it has to be interpreted in the light of understanding shed by the mindset of a neutral and reasonable observer. As a principle, mere silence and inactivity should not constitute attention. Otherwise the risks would be far too great, and the costs for expressly signalling lack of intention would be too pressing. On top of this, there would be the puzzling conundrum to be solved to whom such express messages should be sent in order to destroy in advance any possible impression gained from silence or inactivity.

63

P. Mankowski & M. Müller Principles of European Contract Law Article 2:103: Sufficient Agreement (1) There is sufficient agreement if the terms: (a) have been sufficiently defined by the parties so that the contract can be enforced, or (b) can be determined under these Principles. (2) However, if one of the parties refuses to conclude a contract unless the parties have agreed on some specific matter, there is no contract unless agreement on that matter has been reached. 1. General. Contracts require mutual consensus by all parties concerned. (1) sets out to circumscribe the basics of the notion of consensus and agreement whereas (2) addresses the relevance of partial objections relating to only one of the issues. 2. Sufficiently defined terms. In order to enforce a contractual term, this term has to be sufficiently defined. Unclear terms generate problems. Neither the obliged party would exactly know how to meet her obligation nor would the competent agency in case of future enforcement proceedings how to enforce the obligation. Thus, terms not clear enough even to produce an enforceable content, are no ground to proceed on at all and thus consequentially no common ground for a contract. Article 2:103(1) PECL, though not a masterpiece of formulation by using the ‘sufficient’ both in the explanans and explanandum (cf. Jansen/Zimmermann (2010), 196, 211 footnote 81), takes this insight into account. Defined terms do not need to spell out all and everything expressly. Book-length contracts consume too much transaction costs. Parties are permitted to help themselves with keywords and references if these are sufficiently clear. Default rules and other legal instruments clarifying the meaning of certain terms provide a helpful hand insofar. Most contracts belong to usual types and categories of contracts (sale of goods, supply of services), and thus indicating the respective category will be enough to convey a sufficiently definite impression if combined with a few crucial terms about price and quality. ‘Who? To whom? What? When? At which price?’, are the questions which a contract needs to answer. However, all terms can potentially matter. The test is not restricted to as to whether the ‘object’ or the price have been agreed upon, but takes a broader angle (von Bar/Clive (2009), Comment B on Article II-4:103 DCFR). 3. Assertive means. (1) (a) gives priority and primacy to the parties’ determination and definition of the terms of their agreement. If parties negotiate for a complete contract such contract will certainly be enforceable. (1) (b) underlines and pinpoints at the supplementary role the PECL could possibly serve. The PECL are default rules coming into operation where the parties have not contracted for each and every conceivable contingency. Its main purpose might even be to imply that contracts are not to be interpreted solely and exclusively in

64

Chapter 2: Formation an autonomous manner but that default rules are permitted to come into operation where the parties themselves have not sufficiently defined what they mean. 4. Party’s emphasis on a specific matter. Partial consensus might carry partial agreement as far as such consensus reaches. However, if one of the parties insists that there would not be any binding agreement at all if agreement is not reached in a specific matter, even partial consensus and accordingly any partial agreement are ruled out unless consensus as to this very matter is reached. (2) underlines that each party has the power to elevate any specific matter at will to the quality and rank of a deal-breaker. Every party may elevate any conceivable issue to a term made essential. There are no limits as to the objective importance of that matter. Each party is completely at liberty which issue it might pick upon and which matter it might elevate. Subjective importance to that party is what matters, and no control whatsoever is applied. This appears to be a rather natural consequence of party autonomy and freedom of contract. In order to avoid ex post opportunism, the party in question is required to place particular emphasis on the terms which it designates, before the conclusion of the contract. Such clear signal to the other party is necessary. Only ex ante reliance can justify attributing the respective weight to a term which would ordinarily not feature amongst the essentialia negotii. The other party must know that this term is a potential deal-breaker for the party emphasizing it.

Draft Common Frame of Reference Article II. – 4:103: Sufficient agreement (1) Agreement is sufficient if: (a) the terms of the contract have been sufficiently defined by the parties for the contract to be given effect; or (b) the terms of the contract, or the rights and obligations of the parties under it, can be otherwise sufficiently determined for the contract to be given effect. (2) If one of the parties refuses to conclude a contract unless the parties have agreed on some specific matter, there is no contract unless agreement on that matter has been reached. Article II. 4:103 DCFR copies the ideas, the concepts and even the overall structure of Article 2:103. Even (2) with its emphasis on terms made individually essential reappears. The only deviations appear to be matters of editing insofar as Article II. 4:103(1) (a) and (b) DCFR are more verbose than their PECL counterparts without adding anything crucial as to substance. Particularly the additional reference to ‘the rights and obligations of the parties under it’ seems to be superfluous. Apart from that, the substitution of ‘enforce’ for ‘be given effect’ takes into account the insight that determinability of the terms is already indispensable at the stage of voluntary performance and not limited to the potentially subsequent situation of enforcement proceedings. Besides, Article II. 4:103(1) (b) DCFR is slightly more general and less

65

P. Mankowski & M. Müller self-referential insofar as it refers not only to the sets of rules as contained in the DCFR, but to all other legal means.

German Law German law does not contain a rule exactly mirroring Article 2:103 PECL, but the content reappears if only scattered over various rules. An implication is already provided by § 145 BGB on offers which indirectly establishes some kind of Bestimmtheitsgebot. Yet the main regulation ought to be found in § 154 BGB on the evident lack of consensus. As a close second, § 155 BGB joins in regulating hidden lack of consensus. Both rules are taken as constituting a distinction between essentialia negotii and accidentalia negotii. Lack of consensus on an essentiale inevitably negates the formation of any contract; it lies outside the scope of §§ 154; 155 BGB. However, German law provides for a set of rules that can step in if an express consensus on an essentiale is missing (cf. §§ 315; 316 BGB for the determination of performance in general and §§ 612; 632 BGB for the determination of a price in particular). In contrast, both open and hidden lack of consensus on an accidentiale might be cured by an ergänzende Vertragsauslegung even though the legal presumption is to the contrary. In case of standard form contracts, § 306 BGB provides for a lex specialis as to §§ 154; 155 BGB reversing the legal presumption and generally upholding the contract (cf. Müller (2006), pp. 3 et seq.).

Comparison and Evaluation 1. Common core? Consensus as to sufficient terms and as to all terms considered to be relevant by at least one party has always been the basic requirement for asserting contracts from ancient Roman law onwards up to the present day. Both Article 2:103 PECL and German law happen to coincide on this account, so does at the international stage Article 2.1.13 UNIDROIT Principles. 2. Sufficiently defined terms. That terms have to be sufficiently defined in order to serve as the basis for an enforceable contract should go without saying. Dissensus does not carry contracts, and even hidden dissensus would give rise to severe problems. The threshold rightly is an open one. ‘Sufficiently defined’ might not be the most precise standard in the world but is as good as it gets. 3. Assertive means. Default rules are supplementary means for asserting parties’ intentions. This is a perfectly sound solution. Else default rules would lose their core value. 4. Party’s emphasis on a specific matter. Party autonomy implies that every party can put particular emphasis on any specific matter at its personal liberty. Thus it is only consequential to permit a party to make a certain term essential.

66

Chapter 2: Formation Principles of European Contract Law Article 2:104: Terms Not Individually Negotiated (1) Contract terms which have not been individually negotiated may be invoked against a party who did not know of them only if the party invoking them took reasonable steps to bring them to the other party’s attention before or when the contract was concluded. (2) Terms are not brought appropriately to a party’s attention by a mere reference to them in a contract document, even if that party signs the document. 1. General. Standard terms and conditions are a common appearance in modern-day contracting. Forms are absolutely commonplace. Every plain-minded professional will use some kind of forms. Defined boilerplates might provide for rare contingencies in a manner more pleasing the professional. Where the likelihood and probability of such event is rather minimal for the only occasional contracting party, it raises to near certainty for a repeat player. The repeat player has incentives to care even for the not so frequent event. In addition, general terms and conditions create informational asymmetry and are advantageous for the party introducing them. Signing without reading is a rather rational answer by the other party, particularly so by consumers. Nonetheless, terms not individually negotiated pose a major challenge to rules on consensus for the ordinary and traditional regulations might be too vague and might make it too easy for the party invoking them, to slip them into the contract. Exploiting the other party’s rational disinterest must not be the eventual result in virtually every contract. Thus, some burden should be put on the party invoking general terms and conditions in order to introduce them properly into the contract. This task is mastered by Article 2:104 PECL. 2. Not individually negotiated terms and general terms. While Article 2:104 PECL refers to ‘contract terms which have not been individually drafted’, Article 2:209 PECL alludes to ‘general conditions’. The term ‘general conditions’, however, is defined by reference to non-individual negotiation and, seemingly in addition, pre-formulation for an indefinite number of contracts. Nevertheless, it is submitted here that the deviations in the wording do not entail a deviation in substance. Article 2:209(3) PECL finds its counterpart in Article 3 Directive on unfair terms whereas Article 2:104 PECL is unprecedented (though, one might see a certain root in Annex 1 lit. i Directive on unfair terms). Thus, it supposedly uses non-individual negotiation merely as pars pro toto for general terms. Support for this assumption is to be found in Article II.-9:103(1) and Article II-1:110(1) DCFR. The first provision adds the element of ‘supply’. The second provision reveals that from the perspective of the drafters individual negotiation and pre-formulation for an indefinite number of contracts are closely intertwined, an aspect also to be found in Article 3(2) Directive on unfair terms. Accordingly, academics do not seem to distinguish either (see, e.g., Pfeiffer (2008b), 679, 701 et seq. obviously using the terms ‘not individually negotiated terms’, ‘pre-formulated terms’, ‘standard terms’ and ‘general terms and conditions’ (AGB) synonymously; cf. Jansen/

67

P. Mankowski & M. Müller Zimmermann (2010), 196, 220 (‘not individually negotiated terms’), 220 footnote 130 (‘general terms and conditions’); but see also Hellwege (2010), pp. 373, 388 distinguishing both terms theoretically, however, no practical example is given). 3. Defining minimum standards for incorporation. (1) lays down minimum standards required for the incorporation of general terms and conditions. It requires the party invoking them to take reasonable steps to bring them to the other party’s attention before or when the contract was concluded. Even though the rule does not distinguish among Business-to-Consumer (B2C) and Business-to-Business (B2B), the reasonableness standard should be construed to consider all relevant aspects like nature and purpose of the contract, part of which the nature of the parties is (cf. Looschelders/Makowsky, in Schmidt-Kessel (2012), pp. 227, 239). The party invoking terms not individually negotiated is requested to become active. This party cannot demand the other party to gain knowledge of the terms on its own motion. Instead, she must point to the existence of the terms and, additionally, must produce the terms to the other party (cf. as to the twofold nature of the ‘reasonable steps’ requirement Hellwege (2011), 665, 682). (1) does not define in which mode such production has to be undertaken. It does restrict the means of activity and communication. In terms of communication, the party invoking such terms must become sender whereas the other party can be content with being a mere receiver. Nonetheless, according to the express wording prior knowledge of the terms on the addressee side releases the declarant from the obligation. In addition, the addressee may waive his right to be informed about the terms (cf. Lando/Beale (2000), p. 150 Comment C). Finally, there is no paragraph comparable to Article 6:201(4) ACQP requiring a real opportunity to become acquainted to the terms in B2C contracts for the terms to be included. Therefore, it is arguable that the level of protection is lower than the one guaranteed by the current acquis (cf. Pfeiffer, in Schulze (2008), pp. 177, 180 et seq.; Pfeiffer (2008b), 679, 702; see also Hellwege (2010), pp. 377 et seq.). However, it is submitted here that the wording ‘reasonable steps to bring them to the other party’s attention’ is broad enough to even encompass this scenario (contra Pfeiffer, in Schulze (2008), pp. 177, 182; Pfeiffer (2008b), 679, 702). 4. Insufficiency of a bare reference. Pursuant to (2), terms are not brought appropriately to a party’s attention by a mere reference to them in a contract document, even if that party signs the document. Of the utmost importance is to get the emphasis right. The crucial word is ‘mere’, in the present context to be equated with ‘bare’. At first glance, (2) is particularly strict. Yet on closer inspection it reveals nothing more than the fact that a bare reference does not suffice. A bare reference puts the burden to gather the terms as such on the receiving party’s shoulders. If it was sufficient in itself the receiving party would be burdened with exerting activity whereas the party willing to introduce the terms into the contract, could lean back. This would be a reverse allocation of burdens to become active. Only incentives for the interested party to promulgate its preferred terms provide for a correct and efficient allocation. He who wants to introduce his boilerplate clauses which are present to him and ready for

68

Chapter 2: Formation distribution, should get an incentive to become active whereas the receiving party could remain passive. (2) must be seen in its context with (1). It is an illustration and important exemplification of the general statement of law made in (1). 5. Relevant point of time. General terms and conditions must be brought to the other party’s attention before or when the contract was concluded. The conclusion of the contract is the latest point in time as to when such steps can be taken. Otherwise such efforts are late, simply because they cannot help making the terms part of the contract already concluded. Subsequent introduction (for instance on the back of an invoice) does not integrate them into the original contract. The other party must be given the opportunity to refuse to conclude the contract if it does not agree with all or part of the general terms.

Draft Common Frame of Reference Article II. – 9:103: Terms not individually negotiated (1) Terms supplied by one party and not individually negotiated may be invoked against the other party only if the other party was aware of them, or if the party supplying the terms took reasonable steps to draw the other party’s attention to them, before or when the contract was concluded. (2) If a contract is to be concluded by electronic means, the party supplying any terms which have not been individually negotiated may invoke them against the other party only if they are made available to the other party in textual form. (3) For the purposes of this Article (a) ‘not individually negotiated’ has the meaning given by II. – 1:110 (Terms ‘not individually negotiated’); and (b) terms are not sufficiently brought to the other party’s attention by a mere reference to them in a contract document, even if that party signs the document. 1. General. With some minor editorial amendments Article II-9.103(1) DCFR mirrors Article 2:104(1) PECL. Yet it is doubtful whether the altered placement in the context of contents is adequate as the provision concerns consent (cf. Pfeiffer, in: Schulze (2008), pp. 177, 178). However, it more clearly than its predecessor in PECL distinguishes the requirements of ‘supplying’ and ‘not individually negotiating’ terms. Even though these criteria often coincide, this need not necessarily be the case (cf. for the distinction Pfeiffer, in: Schulze (2008), pp. 177, 183 et seq.). In contrast, Article II-9.103(2) DCFR is an innovation expressly regulating the case that the contract is concluded by electronic means. 2. Electronic means. (2) is a most welcome addition. It clarifies a matter which has arisen under the CISG. There it is hotly debated as to whether the party invoking

69

P. Mankowski & M. Müller general terms and conditions might rely on just indicating the proper link on the internet or is requested to actively produce the entire text to the other party, for instance by e-mail attachment. The German Federal Supreme Court endorses the latter approach (BGH NJW 2002, 370, 371) and has attracted much criticism (cf. SchmidtKessel (2002), 3444, 3445). (2) clearly and unambiguosly removes any doubt in this regard. It puts the burden to produce a proper set on the party invoking the terms. This has to be undertaken in textual form. Textual form is defined in Article I.-1:106(2) DCFR as a text which is expressed in alphabetical or other intelligible characters by means of any support which permits reading, recording of the information contained in the text and its reproduction in tangible form. It is a mode comparably envisaged by multiple rules of EU law (cf. e.g., Article 10(3) Directive 2000/31/EC; Article 4(2) (b) Directive 90/314/EEC; Article 5(1) Directive 2002/65/EC; Articles 36(1), 41(1) Directive 2007/ 64/EC), and has therefore been imported into Article 6:201(3) ACQP, too (cf. Pfeiffer/ Ebers, in Acquis Principles (2009), p. 305). It is not complied with by a website but requires a text which is expressed in letters and numbers and is reproduceable in unaltered shape by the receiver.

German Law According to § 305(1) BGB, general conditions feature four characteristics: formulation in advance, intention of an use for an indefinite number of contracts, supply by one party to the other and non-individual negotiation. With regard to these general conditions German law offers formally split solutions depending on as to whether the contract is a B2C or a B2B contract. For B2C contracts § 305(2) BGB establishes basically two requirements: that the general terms and conditions have been referred to by the party supplying them (not necessarily in the contract itself), and that the other party had sufficient opportunity to know about the content of these terms. In particular, the use of an internet link satisfies this requirement (BGH NJW 2006, 2976; cf. Schmidt (2011), 1633, 1638). For B2B contracts, the application of § 305(2) BGB is expressly excluded pursuant to § 310(1) BGB, and whether the general terms and conditions of one party have been included in the contract depends on the general rules of contracting and consensus in §§ 145 et seq. BGB without any specific regulation. Reasonable steps by the supplying party are not specifically required. German law does not contain any express counterpart to (2). Yet emphasizing the mere in ‘mere reference’, some parallel might unearth: § 305(2) BGB adds a second requirement to the reference, namely the other party’s opportunity to peruse and to digest the general terms and conditions. Hence, in B2C contracts a mere and bare reference not accompanied by such opportunity would not suffice even if the consumer signed the contract with the reference. Apart from that, the use of electronic means does not cause a particular inclusion rule to apply but only triggers the duty of information according to § 312g(1) 1st clause no. 4 BGB.

70

Chapter 2: Formation In addition, for both B2C and B2B contracts § 305c(1) BGB stipulates that terms that are surprising either as to their placement in the contract or their content are not incorporated into the contract. Besides, the German civil code remains silent on the issues of waiver or prior knowledge of the terms. Thus, it is hardly surprising there is no consensus as to the first case (approving e.g., Basedow, in Münchener Kommentar (2012), § 305 no. 67; disapproving e.g., Becker, in Bamberger/Roth (2012), § 305 no. 48). With respect to the latter case, there is some authority that at least among parties of the same branch of trade an exception is justified if certain terms are commonplace (cf. BGH NJW 1994, 2547). Apart from that, knowledge of terms prior to the conclusion of a contract can only be considered to the extent that a framework contract in accordance with § 305(3) BGB has been concluded before.

Comparison and Evaluation 1. Common core? Identifying a common core as to the inclusion of standard terms poses a challenge. On the one hand, Directive 93/13/EEC on unfair terms in consumer contracts has been based upon, and provided for the development of, a minimum consensus of the law of standard form contracts among the Member States. On the other hand, the directive remains silent on the issue of inclusion. As a consequence, the national laws are, by far, not harmonized. They particularly differ in their personal scope, some limiting the protection to consumers, some extending it to small enterprises and others, with more or less modifications, to all traders; they also do not accord as to the degree of notice that needs to be given to the addressee and the consequence if the declarant fails to comply with this requirement, some assuming a non-inclusion, others assuming invalidity (cf. von Bar/Clive (2009) comparative survey in Notes 1–10 to Article II-9:103 DCFR). Particularly in the context of electronic commerce, it is impossible to identify a common core as long as it remains unsettled which consequence non-compliance entails as to the requirement of making available the terms in textual form. At the international level Article 2.1.19–22 UNIDROIT Principles indicate the way. 2. Not individually negotiated terms and general terms. If the assumption that not individually negotiated terms and general terms are meant to be the same is true, DCFR provides for a plus, though, not an optimum of legal clarity as to this issue in comparison with PECL. Nonetheless, in this regard German law, with its distinct reference to all four criteria (pre-formulation, indefinite number of contracts, supply, non-individual negotiation), proves to be superior to both PECL and DCFR. However, it must be considered unsettled if these criteria are both necessary and adequate (cf. Hellwege (2010), pp. 569 et seq., ascribing relevance only to the criterion of supply). 3. Defining minimum standards for incorporation. The circumscription chosen relates to a material standard and does not spell out certain formalities. This has the advantage of being technologically neutral and thus open for future developments in communication technology.

71

P. Mankowski & M. Müller (1) rightly is founded on the doctrine of cheapest cost avoider. It seizes the party willing to invoke respective terms upon its very own interest. However, it fosters reliance on the other party’s side that there are no additional terms unless they are specifically brought to its attention. The party who possesses all the information must become active whereas the other party can lean back and is not required to invest into further investigation. This keeps transaction costs as low as possible. However, a rule like § 305(2) BGB more specific than the rule in (1) with its rather general and unspecific wording would be welcome (cf. Hellwege (2011), 665, 682). 4. Insufficiency of a bare reference. That a bare reference should not suffice as reasonable steps is to be welcomed. The party who wants to supply its boilerplates, must become active and must not burden the other party with exercising activity. The want of such activity on the other party’s side would exacerbate the general problem with boilerplate clauses. Furthermore, the sum of costs for other parties asking for the general terms would be much higher than the repeat play of simply providing these terms. The supplier of the general terms simply is by far the best (and cheapest) cost avoider. Therefore, it also seems to be adequate to even apply this rule in B2B relations (contra Looschelders/Makowsky, in Schmidt-Kessel (2012), pp. 227, 240). 5. Relevant point of time. There is no alternative as to the conclusion of contract being the latest moment for producing the terms. Anything else would violate the party autonomy of the other party. In contrast, it also seems adequate to produce the terms before the conclusion if the reference to the later contract is clear. However, as the existence of § 312g(3) BGB and the underlying provision of the consumer rights directive imply, it might be worth considering if in cases of consumer contracts in electronic commerce it was preferable to require the production of all or certain essential terms exclusively in the moment of conclusion.

Principles of European Contract Law Article 2:105: Merger Clause (1) If a written contract contains an individually negotiated clause stating that the writing embodies all the terms of the contract (a merger clause), any prior statements, undertakings or agreements which are not embodied in the writing do not form part of the contract. (2) If the merger clause is not individually negotiated it will only establish a presumption that the parties intended that their prior statements, undertakings or agreements were not to form part of the contract. This rule may not be excluded or restricted. (3) The parties’ prior statements may be used to interpret the contract. This rule may not be excluded or restricted except by an individually negotiated clause. (4) A party may by its statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on them.

72

Chapter 2: Formation 1. General. Mergers clauses are contractually limiting the ambit of the contract. They cut off any incorporation of any earlier statements of the parties prior to the final contract (cf. Pilar Perales Viscasillas (2001) 371, 374). Merger clauses are deemed particularly useful when during the negotiations the parties made promises and statements based on assumptions which were later abandoned (Lando/Beale (2000), p. 152, comment to Article 2:105). Yet pursuant to (3), prior statements might still be possible means of interpretation of the contract. Merger clauses do not per se establish contractually some kind of parol evidence doctrine. In addition, (4) operates as a specific implementation of the principle of venire contra factum proprium. 2. Individually negotiated merger clauses versus merger clauses in general terms and conditions. (1) and (2) distinguish between individually negotiated merger clauses and merger clauses in general terms and conditions. Whereas the former have full force the latter establish only a presumption that the contract shall be deemed complete in itself. This presumption is rebuttable and refutable. Parties might adduce evidence in order to prove that some inclusion of prior statements is missing in the final contract document. In order to avoid any infinite regress, the second clause of (2) inhibits contractual deviations from the first clause. 3. Exclusion of impact of merger clauses on interpretation. Although the contract is deemed complete and exhaustive insofar as contractual terms are at stake, the parties’ prior statements might still serve as valuable means of interpretation, be it as explanation for the existence of a certain term, be it as contrast what had not been included. (3) is unambiguous and strict in this regard. Else the general rules of interpretation as contained e.g., in Article 2:102 PECL could be undermined by merger clauses. Any kind of parol evidence doctrine is strictly ruled out. This is particularly emphasized by the second clause of (3) which inhibits contractual deviations from the first clause by general terms and conditions. Only individually negotiated terms depriving prior statements even of their interpretative value could do such job. The mere merger clause will not do so, and the interpretative restriction needs to be highlighted by an individual term to this avail. 4. Distinguishing between different kinds of prior statements. That a merger clause will not apply to prior statements which, though made when the contract was negotiated, are distinct and separate from the contract is not reflected in the wording, but only in the comment. It should pass scrutiny, though. Merger clauses aim at excluding from the contract what could possibly be part of the contract. They do not relate to entirely distinct and separate agreements. A merger clause in one contract will not claim any impact on a simultaneously negotiated contract between the same parties. Only prior agreements which have such a connection with the main contract that it would be natural to include them in the written contract, are subject to the merger clause (Lando/Beale (2000), p. 152 comment to Article 2:105).

73

P. Mankowski & M. Müller Draft Common Frame of Reference Article II. – 4:104: Merger clause (1) If a contract document contains an individually negotiated term stating that the document embodies all the terms of the contract (a merger clause), any prior statements, undertakings or agreements which are not embodied in the document do not form part of the contract. (2) If the merger clause is not individually negotiated it establishes only a presumption that the parties intended that their prior statements, undertakings or agreements were not to form part of the contract. This rule may not be excluded or restricted. (3) The parties’ prior statements may be used to interpret the contract. This rule may not be excluded or restricted except by an individually negotiated term. (4) A party may by statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on such statements or conduct. Article II. – 4:104: DCFR is a clone of Article 2:105.

German Law German law does not feature any counterpart to Article 2:105 PECL. Merger clauses are not so commonly used in Germany so that there did not arise any pressing need to address them explicitly in regulation. Their regulation is undertaken in part by the regulation of the law on general terms and conditions insofar as they are not individually negotiated. In the first instance, individually negotiated prior agreements always oust a non-individually negotiated merger clause according to § 305b(1) BGB. Outside this scope, the German Federal Supreme Court has repeatedly upheld such provisions arguing they only declaratorily stated a factually well-settled presumption the written provisions of a contract were exhaustive, and therefore were in accordance with § 309 no. 12 BGB (cf. BGH NJW 2000, 207, 208; BGH NJW 1985, 2329, 2331 et seq.; BGH NJW 1985, 623, 630; BGH NJW 1981, 922, 923). Legal academics, though, seem to be more sceptical invoking § 307 and § 242 BGB (cf. Looschelders/Makowsky, in: Schmidt-Kessel (2012), pp. 227, 242). However, the party invoking a deviating prior agreement is entitled to rebutt this presumption as the German law does not recognize a parol evidence rule.

Comparison and Evaluation 1. Common core? Article 2:105 PECL has an innovative touch to it. It cannot claim direct predecessors in any legal order of a European state, all of which address merger clauses unspecifically by applying their general legal doctrines on interpretation and

74

Chapter 2: Formation good faith (cf. comparative survey in von Bar/Clive (2009), Notes 1–11 on Article II.-4:104 DCFR). To address merger clauses so extensively and in detail is novel. German law in particular has not devoted so many and deep thoughts to it. It rather seems as if the rule on merger clauses has been inspired by international legislation (cf. Article 2.1.17 UNIDROIT Principles) and common law systems, in which after the dilution of the legal parol evidence rule the contractual merger clause serves as a more flexible substitute. 2. Individually negotiated merger clauses v. merger clauses in general terms and conditions. The distinction of individually negotiated and non-individually negotiated merger clauses seems to provide for adequate results. However, it might be preferable to combine this approach with an additional distinction between B2C and B2B scenarios for an even more sophisticated differentiation. It is submitted here that the consequence of full force of a merger clause is adequate for both consumers and businesses in cases of individually negotiated terms. In case of a merger clause in general terms and conditions it is submitted that presumptive force is an adequate consequence for businesses as they have to be aware of such practice. However, a consumer does not have to be aware of such practice. Thus, the merger clause should have no force. 3. Exclusion of impact of merger clauses on interpretation. Preventing merger clauses from effecting the interpretation of a contract makes sense. Contractual interpretation is directed at ascertaining the parties’ true intent. Considering all available evidence of this intent is thus generally in the parties’ best interest. However, party autonomy trumps and therefore it is justified to make this rule subject to an individual agreement to the contrary. 4. Distinguishing between different kinds of prior statements. Dispensing with any clarification in the wording that a merger clause does not concern prior statements during the negotiations with no connection to the ensuing contract is warranted. One might even argue that this issue is so evident that the respective comment seems superfluous.

Principles of European Contract Law Article 2:106: Written Modification Only (1) A clause in a written contract requiring any modification or ending by agreement to be made in writing establishes only a presumption that an agreement to modify or end the contract is not intended to be legally binding unless it is in writing. (2) A party may by its statements or conduct be precluded from asserting such a clause to the extent that the other party has reasonably relied on them. 1. General. Form clauses differ from merger clauses as they address modifications after the conclusion of the contract (see also Pilar Perales Viscasillas (2001) 371, 376). They

75

P. Mankowski & M. Müller may serve several functions. First, they can aim at the admissibility of evidence. Second, they can be meant to operate as a requisite for the validity of a modification. Third, related to the second issue but nonetheless distinguishable, they can be used as a means by a principal to protect him against oral promises of his agent. Mostly, they appear as written-form clauses but clauses commanding a stricter form than in writing are possible, too. Even though the underlying principles of merger and form clauses seem substantially related, Article 2:106 PECL other than Article 2:105 PECL does not provide for a distinct treatment of individually and non-individually negotiated terms. PECL does not distinguish either among simple written-form clauses and qualified written-form clauses. Such a qualification consists of the self-referential character of the written-form clause requiring compliance with itself if the parties intend to modify the form requirement and plays an important role under German law (cf. below). 2. Presumptive power of the form clause only. Article 2:106(1) PECL operates in two ways. First, it impliedly recognizes form clauses. As a consequence, form clauses generally cannot be struck down by the courts. Second, it restricts their effect to a refutable presumption. Therefore, a subsequent oral agreement is not necessarily without legal effect. The party invoking such an agreement may instead prove that the parties had the legally binding intention to amend the contract. 3. Illicit venire contra factum proprium. From the drafters’ perspective, the rather permissive approach as to the recognition of form clauses obviously demands another counterbalancing mechanism beyond the merely presumptive character. It can be found in (2) limiting the right of a party to invoke a form clause if this meant contradicting to prior conduct and the other party reasonably relied on that conduct.

Draft Common Frame of Reference Article II. – 4:105: Modification in certain form only (1) A term in a contract requiring any agreement to modify its terms, or to terminate the relationship resulting from it, to be in a certain form establishes only a presumption that any such agreement is not intended to be legally binding unless it is in that form. (2) A party may by statements or conduct be precluded from asserting such a term to the extent that the other party has reasonably relied on such statements or conduct. Article II-4.105 DCFR almost to the letter copies Article 2:106 PECL. The slight alterations carry editorial hallmarks only. It more clearly states that the rule also applies to other form requirements than in writing although this ought not to induce a conclusio e contrario as to the scope of the respective provision in PECL.

76

Chapter 2: Formation German Law German law does not contain a rule of legislation addressing the problem directly. The solution of the problem is left to the courts and case law. Its main importance might occur in commercial contracts simply performed with modifications but without any such modification made in writing. There are several ways to circumvent the problem, the most daring to introduce the parties abandoning the term requiring modifications to be made in a certain form, mainly writing, by going ahead without observing such form. The alteration and striking out of the form clause without observing the form is dealt with in a rather sophisticated way. The identification of bright-line rules is complicated by the partial incoherence of the judicature of the German Federal Supreme Court and the German Federal Labour Court (cf. Bloching/Ortolf, (2009), 3393 et seq.). Non-individually negotiated form clauses are subject to the primacy of individually negotiated terms according to § 305b BGB. Besides, the substantive restrictions in § 309 no. 13 BGB and § 307(1) BGB apply, the first one inhibiting any form stricter than in writing, the second one nullifying any clause that might arouse the impression even individually negotiated terms could not prevail without compliance with the form clause (cf. BAG NJW 2009, 316, 319). These principles apply regardless of the drafting of the form clause as simple or qualified. Individually negotiated simple form clauses are considered to be derogable by each subsequent oral agreement. This is even supposed to hold true if the parties are not aware of the form requirement (cf. BGH NJW 1965, 293). However, the intended operation as protection against subsequent oral modifications is recognized in case of qualified form clauses (cf. BGH NJW 1976, 1395). Whenever the form clause is valid under German law, its effect on a subsequent oral agreement needs scrutiny. If contractual interpretation does not bring an unambiguous result, § 125(2) BGB provides for nullity. After all, while German law is not very permissive as to the recognition of form clauses, it lays down a more rigid legal consequence than PECL and DCFR.

Comparison and Evaluation 1. Common core? One might be induced to assert a common core on an international level as both Article 2.1.18 UNIDROIT Principles and Article 29(2) CISG comprise substantially identical rules for the treatment of form clauses. However, such an assertion would already neglect the significant deviation from PECL and DCFR which do not arrange for a strict non-inclusion of oral agreements. The Member States of the EU do not hold a uniform position towards form clauses either. Legal orders hover between recognition and non-recognition, strict and presumptive non-inclusion, equal and different treatment of individually and non-individually negotiated form clauses, B2C and non-B2C form clauses and simple and qualified form clauses (cf. comparative survey in von Bar/Clive (2009), Notes 1–17 to Article II.-4:105 DCFR). The lowest common denominator might be seen in the common retreat of any kind of legal parol

77

P. Mankowski & M. Müller evidence rule, in the absence of which form clauses thrive and ask for treatment by legislature and judicature. 2. Presumptive power of the form clause only. To attribute only presumptive power to the form clause is a very elegant solution. It prefers substance and commercial sense to formalism. It strengthens the case of the altered and modified contract executed without caring to observe the proper form originally agreed upon for modifications. It would incur costs misspent in order to recall the exchange. The mutual execution properly evidenced the parties’ genuine intention at that time, and insofar later agreement prevails over the formerly established form clause. Yet presumptive force is still something. It properly establishes a rather high obstacle in the way of anyone who is bound to assert that mere deviation effectively lifts the clause. A clause is still a clause and principally binding. Only if parties by mutual consensus deviate from it, it should be treated as derogated. Exactly such line is established by the elegant middle-way of attributing it presumptive force but presumptive force only. 3. Illicit venire contra factum proprium. It is submitted here that paragraph (2) is a redundant rule. Attributing merely presumptive power to a form clause enables a party to rebutt the presumption. In order to do so, the party can refer to all statements and conduct that is to be considered under (2). If you accept this assumption, it does not make any difference as to the result if you rebutt the presumption established by (1) or eliminate the base for the assumption by the application of (2) in the first place. It seems that a rule like paragraph (2) is only necessary if it supplements a paragraph (1) rule commanding full force of a form clause. This view finds support by Article 29(2) CISG and Article 2.1.18 UNIDROIT Principles that both provide for full force of a form clause, subject to an express venire contra factum proprium exception. However, e.g., Article 1352 of the Italian Codice Civile only provides for presumptive power but not for a particular good faith exemption.

Principles of European Contract Law Article 2:107: Promises Binding without Acceptance A promise which is intended to be legally binding without acceptance is binding. 1. General. The entry into force of a legally binding effect intended by a party usually requires the implementation of this intention by agreement. An agreement requires acceptance of an offer, which is nothing but a qualified promise (cf. Article 2:201 PECL). Article 2:107 PECL introduces a rule granting power to a person to implement her intention without agreement and in this way without acceptance. However, such an intention needs to be determined in the first place. As a matter of course, the declarant cannot prejudice a third party’s position. 2. Application of the rules on contracts. Unilateral promises share with contracts the legally binding effect. This allows, despite its different nature, for the application of most of the rules on contracts (cf. Article 1:107 PECL). In particular, interpretation to

78

Chapter 2: Formation ascertain the precise content of the binding effect, the validity of the promise bringing about the binding effect and the consequences of acting in contradiction to it, do not ask for a special treatment. Modifications are only inevitable as to the absence of an acceptance. This mainly affects the revocability of the promise. If you cannot, for this purpose, refer to the acceptance, you have to assume general irrevocability instead (cf. Lando/Beale (2000), p. 158 Comment B on Article 2:107).

Draft Common Frame of Reference Article II. – 1:103: Binding effect (1) […] (2) A valid unilateral undertaking is binding on the person giving it if it is intended to be legally binding without acceptance. (3) […] DCFR adopts the approach of PECL as to unilateral promises in substance. It merely modifies terminology substituting ‘unilateral undertaking’ for ‘promise’ and, by the new systematic placement, prevents any artificial attempt at qualifying unilateral undertakings as a sub-category of contract. While contract as a category is flexible enough to cover both agreements producing reciprocal obligations and obligations for only one of the parties, it ought not to be used for pure unilateralism (cf. on the notion of contract Fauvarque-Cosson/Mazeaud (2008), pp. 3 et seq.). Even though national legal systems do not share a uniform approach as to this issue (cf. on a comparative survey on the notion of undertaking, respectively engagement Fauvarque-Coson/ Mazeaud (2008), pp. 26 et seq.), the term unilateral undertaking seems to be more adequate to define this phenonemon (cf. on the notion of undertaking, respectively engagement Fauvarque-Coson/Mazeaud (2008), pp. 10 et seq.).

German Law German law does not recognize unilateral undertakings in general but only in the more restrictive form of a Auslobung according to § 657 BGB. It can be characterized best as a public offer of a reward for the execution of, or refraining from, an act. It corresponds with its nature that communication to the person acting is not necessary. Thus, even without knowledge of the promise a person can acquire the claim. The requirement of an act to be carried out practically excludes gratuitous promises. Besides, the requirement of publicity excludes promises to a determinate (group of) person(s). In addition, in contrast to an offer according to § 145 BGB the Auslobung is generally revocable until the act is carried out (cf. § 658(1) BGB). Particular rules are provided for Preisausschreiben in § 661 BGB and Gewinnzusagen in § 661a BGB. The first one is a Auslobung that is meant to operate as a contest among the public. To be effective, a period of time for the act needs to be fixed in the first place. The second one establishes an obligation

79

P. Mankowski & M. Müller of a business if it has sent a communication to a consumer implying the consumer has won a prize. One might interpret this, due to its systematic placement, likewise as a special Auslobung, however, the majority view considers it to be a non-contractual obligation (cf. Lorenz (2000), 3305, 3307).

Comparison and Evaluation 1. Common core? In accordance with their liberal approach as to the conclusion of contract, PECL and DCFR also generously allow for unilateral undertakings without establishing further requirements apart from the party’s intention to legally bind herself. The German approach is less permissive generally requiring a contract to create an obligation. However, it shares a common core with PECL and DCFR at least to the extent that it is not as strongly opposed to the concept of unilateral promises as the common law. The approach of the common law generally requiring acceptance corresponds to its general idea of protecting a party against disadvantageous promises without receiving a benefit. 2. Application of the rules on contracts. Declaring the rules on contracts applicable goes hand in hand with an implied recognition of party autonomy for unilateral undertakings. This liberal approach of PECL and DCFR is most welcome. The common law and the German concept, though to a lesser extent, appear to be too paternalistic. Commercial needs call for the recognition of unilateral undertakings. The most prominent example is a letter of credit by a bank which simplifies sales transactions by enabling the seller to deliver the goods to the buyer without requiring him to insist on prompt payment. In this scenario, the issuing bank acting on account of the buyer must be, and is, bound from the very moment that the letter of credit is handed over to the seller (cf. vonBar/Clive (2009) Comment E on Article II.-1:103 DCFR).

SECTION 2:

OFFER AND ACCEPTANCE

Principles of European Contract Law Article 2:201: Offer (1) A proposal amounts to an offer if: (a) it is intended to result in a contract if the other party accepts it, and (b) it contains sufficiently definite terms to form a contract. (2) An offer may be made to one or more specific persons or to the public. (3) A proposal to supply goods or services at stated prices made by a professional supplier in a public advertisement or a catalogue, or by a display of goods, is presumed to be an offer to sell or supply at that price until the stock of goods, or the supplier’s capacity to supply the service, is exhausted.

80

Chapter 2: Formation 1. General. As offers are directed at the conclusion of a contract, it is not surprising that Article 2:201(1) PECL is couched following Article 2:101(1) PECL. The reference to a contract as the result in case of acceptance implies the existence of an intention to be legally bound as implicit element of an offer. Offers have to be sufficiently definite, too. They have to describe the essentialia negotii precisely enough. In principle, simple affirmative assent by the offeree, a simple ‘yes, I agree’ should suffice in order to conclude the contract, and thus some burden is on the offeror initiating the contracting process to provide for sufficient clarity of the envisaged content. Insofar the offer must anticipate the future contract. Nevertheless, PECL shares a relatively lenient approach as certain essentialia negotii, in particular the price, can be implied in the contract (cf. Pilar Perales Viscasillas (2001), 371, 378, 381). 2. Addressees of the offer. Adressees of the offer can be one specific person, a specific group of persons or the public in general. In order to be effective, the offer needs to be communicated to the addressee. This implicitly follows from Article 1:303(6) PECL in connection with (2), which condition the effectiveness of a notice on its receiving and comprise an offer as one example of a notice. While offers to specific persons do not involve particular problems, a proposal to the public needs careful scrutiny whether it is intended to have a legally binding effect. Such proposals can take the form of advertisements, posters, circulars, window displays, invitation for tenders or auctions (cf. von Bar/Clive (2009) Comment C on Article II.-4:201 DCFR). Assessing the existence of a legally binding intention, on the one hand, has to consider the interest of the declarant not to become subject to more obligations than he can fulfil and not to accept a contractual partner of dubious reputation when personal trust is at stake. In contrast, such an assessment may not neglect the interest of the addressee to avoid the waste of time and money. 3. Presumption against invitatio ad offerendum. (3) specifically addresses the issue of public proposals by establishing a presumption against an invitatio ad offerendum. The material scope comprises goods and services. The personal scope is restricted to a business as offeror. The underlying rationale is consumer protection (cf. Pilar Perales Viscasillas (2001), 371, 381). The presumption is supposed to be, though not clearly indicated by the wording, subject to the existence of circumstances refuting the impression of a legally binding intention (cf. Lando/Beale (2000), pp. 160-161 Comment D on Article 2:201).

Draft Common Frame of Reference Article II. – 4:201: Offer (1) A proposal amounts to an offer if: (a) it is intended to result in a contract if the other party accepts it; and (b) it contains sufficiently definite terms to form a contract. (2) An offer may be made to one or more specific persons or to the public. (3) A proposal to supply goods from stock, or a service, at a stated price made by a business in a public advertisement or a catalogue, or by a display of goods, is

81

P. Mankowski & M. Müller treated, unless the circumstances indicate otherwise, as an offer to supply at that price until the stock of goods, or the business’s capacity to supply the service, is exhausted. DCFR almost identically adopts the wording of PECL. Yet it removes any doubt that the presumption against an invitatio ad offerendum is refutable.

German Law German law does not know a general provision addressing an invitatio ad offerendum or an offerte ad incertas personas. While recognizing the possibility of a legally binding offer to the public, German law is rather restrictive. For the specific context of an auction, § 156 BGB allows for the conclusion that the auctionator’s call for bids is merely a non-binding invitatio. Proposals in an advertisement, a catalogue or a window display at a stated price are held to be non-binding (cf. Busche, in Münchener Kommentar (2012), § 145 no. 11). The nature of a ‘real offer’ (Realofferte) of a good or service (e.g., vending machine, fuel dispenser, ATM) is unsettled (cf. Busche, in Münchener Kommentar (2012), § 145 no. 12). Recently, the debate about their distinction has experienced a revival in the context of internet business posing the question whether proposals in the internet are to be dealt analogously to window displays (cf. Busche, in Münchener Kommentar (2012), § 145 no. 13). The issue is complicated by § 312g(1) no. 3 BGB requiring an electronic confirmation of the client’s order, the content of which might be interpreted, though often not intended, as a legally binding declaration of the business. Another prominent example of assuming a legally binding intention is the judicature on internet auctions that are not qualified as auctions according to § 156 BGB (cf. BGH NJW 2002, 363, 364). Even though not contractual in nature, the existence of § 657 BGB also serves as an example for an ‘offer’ to the public.

Comparison and Evaluation 1. Common core? Anticipation of the future contract by a sufficiently determined offer only requiring a simple ‘yes’ is a uniform approach (cf. Note 1 to Article II.-4:201 DCFR), and it has internationally been codified in Article 14(1) CISG. Though, legal systems tend to differ as to the admissibility of essentialia negotii being implied (cf. Pilar Perales Viscasillas (2001) 371, 378). Additionally, all legal orders accept the notion of an offer to the public. In all legal orders, it is a matter of interpretation whether a proposal to the public amounts to an offer to the public. Evidence is also to be found in Article 14(2) CISG. Nonetheless, given a certain equal set of facts, no uniform solution prevails (cf. von Bar/Clive (2009) comparative survey in Notes 3–36 on Article II.-4:201 DCFR). 2. Addressees of the offer. Allowing not only for an offer to a specific (group of) person(s) but also to the public is most welcome. This is in accordance with the party autonomy of the offeror. Not in all circumstances the rationale behind the idea of an

82

Chapter 2: Formation invitatio ad offerendum applies. Software on a computer can theoretically be downloaded infinite times, thus, there are no supply restrictions. Advance payment secures against unwillingness to pay or insolvency. 3. Presumption against an invitatio ad offerendum. It is submitted that a presumption against an invitatio ad offerendum prevents businesses from misleading customers falsely assuming the availability of goods or services at a certain price (cf. von Bar/Clive (2009) Comment D on Article II.-4:201 DCFR). Even if one is unwilling to share this assumption or reluctant to use contract law as a means to discipline businesses, one has to concede that such a presumption allocates risks and responsibilities more clearly among the parties. Clarity, however, is a core value in business relations as it reduces transaction costs. Thus, the presumption is very welcome (contra Eidenmüller, in von Bar/Schulte-Nölke/Schulze (2008), pp. 73, 77 et seq.; Jud, in Schmidt-Kessel (2009), pp. 71, 90). As to its substance, though, it is to be conceded that a restriction to B2C transactions might be preferable (cf. Jansen/Zimmermann (2010), 196, 217).

Principles of European Contract Law Article 2:202: Revocation of an Offer (1) An offer may be revoked if the revocation reaches the offeree before it has dispatched its acceptance or, in cases of acceptance by conduct, before the contract has been concluded under Article 2:205 (2) or (3). (2) An offer made to the public can be revoked by the same means as were used to make the offer. (3) However, a revocation of an offer is ineffective if: (a) the offer indicates that it is irrevocable; or (b) it states a fixed time for its acceptance; or (c) it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. 1. General. An offer is finally binding on the offeror but only as it has become effective by reaching the offeree (cf. Article 1:303(2) PECL) and irrevocable; arguably the concept of ‘reach’ involves a normative element of a reasonable chance to get to know about the offer so merely entering the sphere of the offeree may be insufficient (cf. Pilar Perales Viscasillas, (2001), 371, 394 et seq.; contra Eidenmüller, in von Bar/SchulteNölke/Schulze (2008), pp. 73, 79 et seq.). Article 2:202(1) PECL identifies the point of irrevocability at a rather late stage namely when the offeree dispatches his acceptance. In the case of an acceptance by conduct, conclusion of the contract becomes material. This operates as a reference to Article 2:205(2) and (3) PECL, the first of which further delays irrevocability as notice of the conduct to the offeror is declared relevant. This is a sufficiently clear rule (contra Jansen/Zimmermann (2010), 196, 218), though, due to its further extension of revocability arguably not the best one. The principle thus is

83

P. Mankowski & M. Müller revocability of the offer despite its intentionally binding character and, thus, PECL continues protecting party autonomy of the offeror even after the offer has been made. 2. Revocation versus withdrawal. PECL distinguishes between revocation and withdrawal of an offer. Withdrawal may occur before the offer becomes effective; revocation remains possible until acceptance is dispatched or, if acceptance by conduct is at stake, the contract is concluded (cf. Lando/Beale (2000), p. 164 Comment A on Article 2:202). This gains its particular weight insofar as even an offer expressly earmarked as irrevocable might still be subject to withdrawal pursuant to Article 1:303(5) PECL, though. The concept of withdrawal thus keeps its distinct significance even under PECL (contra Pilar Perales Viscasillas (2001), 371, 382). 3. Revocability and revocation of an offer. Revocation requires an actus contrarius. The offeror needs to vitiate and eliminate the content of his offer, but not the signs which express the message as such. It is not required that he destroys his initial message physically. Nor is he requested to use any specific wording. Laymen cannot be expected to apply the precise legal terminology. ‘Revoke’ would be perfect, but anything else expressing the same meaning in substance would suffice, too. A ‘withdrawal’ or a ‘retreat’ would do. A revocation does not need to be reasoned. Since the offeror is at liberty to revoke he is not required to give reasons for a revocation. He can do so voluntarily, but is under no obligation whatsoever. 4. Offers made to the public. The revocation of a public offer involves particular difficulties. The offeror does not, and cannot know, who has become aware of and intends to accept the offer. Therefore, requiring the revocation to reach the offeree is inadequate. In this dilemma, (3) allows for a way out. Revocation can be accomplished by the same means as were used to make the offer. 5. Irrevocable offers by denomination or ex lege. Revocability is by no means mandatory. Thus, the offeror may phrase his offer in terms that indicate irrevocability, e.g., declaring it to be a ‘firm offer’ (cf. von Bar/Clive (2009) Comment E on Article II.-4:202 DCFR). In addition, an offer is irrevocable ex lege if it states a fixed time for its acceptance. This rule is meant to conciliate the controversy as to the nature of a fixed time for acceptance. While civil law systems tend to interpret such a fixed time as a promise not to revoke the offer until the expiry of the time limit, common law systems tend to merely consider it to exclude an acceptance after the expiry of the time limit (cf. von Bar/Clive (2009) Note 5 on Article II.-4:202 DCFR; see also Pilar Perales Viscasillas (2001), 371, 384 et seq.). PECL adopts the first approach. Finally, a third exemption of the revocability rule is applied if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. The legal consequence envisaged by (3) is ineffectiveness of the revocation. This deviates from an approach that regardless of irrevocability allows for an effective revocation, though for the price of non-contractual liability (cf. von Bar/Clive (2009) Note 9 on Article II.-4:202 DCFR).

84

Chapter 2: Formation Draft Common Frame of Reference Article II. – 4:202: Revocation of offer (1) An offer may be revoked if the revocation reaches the offeree before the offeree has dispatched an acceptance or, in cases of acceptance by conduct, before the contract has been concluded. (2) An offer made to the public can be revoked by the same means as were used to make the offer. (3) However, a revocation of an offer is ineffective if: (a) the offer indicates that it is irrevocable; (b) the offer states a fixed time for its acceptance; or (c) it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. (4) Paragraph (3) does not apply to an offer if the offeror would have a right under any rule in Books II to IV to withdraw from a contract resulting from its acceptance. The parties may not, to the detriment of the offeror, exclude the application of this rule or derogate from or vary its effects. DCFR clones the first three paragraphs of PECL but adds a fourth one. It mandatorily limits the scope of the exemptions of revocability to the extent that the offeror has another right of withdrawal. It envisions a scenario where the offeror revokes his offer, this revocation is void according to (3) and the offeror falsely assuming the validity of his revocation refrains from exercising his right of withdrawal (cf. vonBar/Clive (2009) Comment H on Article II.-4:202 DCFR). However, it seems doubtful whether such a rule is necessary because the offeree needs to inform the offeror about his right of withdrawal, and if then the offeror does not make use of this right in reliance on an earlier revocation, he seems to act upon his own risk (cf. Jansen/Zimmermann (2010), 196, 223).

German Law According to § 145 BGB irrevocability of an offer is the rule, revocability the exception that needs to be sufficiently made clear by the offeror. The improper revocation of an irrevocable offer is void (cf. Busche, in Münchener Kommentar (2012), § 145 no. 1). Notwithstanding, § 130(1) BGB provides for a particular right of withdrawal. It operates as an obstacle to effectiveness if the withdrawal reaches the offeree before or at the same time of the offer. A provision substantially comparable with PECL and DCFR is to be found in § 658 BGB, though limited to the narrow scope of a Auslobung (cf. vonBar/Clive (2009), p. 158 note on German law to Article 2:107). Such an Auslobung may be revoked until the act to be rewarded is conducted. Besides, revocation must be carried out by the same means like the original offer. Finally, the offeror can renounce revocability, and fixing

85

P. Mankowski & M. Müller a time period for the act to be performed, subject to a deviant interpretation, operates as such temporary renouncement.

Comparison and Evaluation 1. Common core? PECL and DCFR, obviously inspired by Article 16 CISG and Article 2.1.4 UNIDROIT Principles, on the one hand and German law on the other hand take a different starting point as to revocability. However, they conform to each other as to the possibility of a withdrawal and the treatment of improper revocations as void. 2. An argument against revocability. Having established the intention to be legally bound in the first place and recognizing a right to withdrawal until the offer reaches the offeree in the second place, the argument can be made that thereby party autonomy of the offeror has sufficiently been considered. Having noticed the offer, the offeree might not be able to dispatch an acceptance immediately but have to take preparatory steps for a decision as to the acceptance. However, these preparatory steps can involve costs that will be frustrated if the offer is revoked in the meantime (cf. Eidenmüller, in von Bar/Schulte-Nölke/Schulze (2008), pp. 73, 78). It might be submitted that for this purpose (3) (c) works as a safeguard. Yet, on the one hand the sufficiency of this safeguard seems to be doubtful due to its not very determinate wording. And on the other hand the legal consequence envisaged seems to be over-achieving, too. A sufficient remedy for costs incurred due to reliance on the formation of a contract is provided for by the concept of culpa in contrahendo. It is well-settled that a party who has broken off negotiations contrary to good faith and fair dealing is liable for the losses caused to the other party (cf. Article 2:301 (2) PECL; Article II-3:301 (2) DCFR). There is no reason why the same should not apply when the negotiations even reached the stage of an offer that was revoked contrary to good faith. From this perspective, an approach arranging for irrevocability as a starting point seems to be preferable (contra Eidenmüller, in von Bar/Schulte-Nölke/Schulze (2008), pp. 73, 78 et seq.).

Principles of European Contract Law Article 2:203: Rejection When a rejection of an offer reaches the offeror, the offer lapses. 1. General. The offer is generally binding the offeror and tying the offeror to his word. Such binding force must find its ends, though. The most natural ending is the rejection of the offer by the offeree. Once such rejection becomes effective the offer ceases to exist, and the offeror is unbound and liberated. He regains his contractual freedom. 2. Entry into force of rejection. Article 2:203 PECL is merely concerned with ascertaining the point of time when a rejection becomes effective. It defines that a rejection becomes effective once it reaches the offeror. Conversely, this rules out that a rejection is effective when it has been formulated or when it has been sent. The offeree gains an opportunity to overtake a sent rejection before it reaches the offeror.

86

Chapter 2: Formation Arguably the concept of ‘reach’ includes a normative element of a reasonable chance to get to know about the rejection, and thus it does not suffice by itself that rejection enters the sphere of the addressee (cf. Pilar Perales Viscasillas (2001), 371, 394 et seq.; contra Eidenmüller, in von Bar/Schulte-Nölke/Schulze (2008), pp. 73, 79 et seq.). 3. Constituting rejection. Article 2:203 PECL does not define what constitutes a rejection. This term is not defined anywhere in the PECL. Yet its basic contents should be evident: A rejection entails a negative answer to the offer. It repulses the offer and does not accept it. It is not required that an all-out ‘no’ is formulated. A ‘no, but’ or a ‘generally no’ does suffice, too. In contrast, a ‘yes, but’ does not necessarily amount to a rejection but only if either the altered terms are material (cf. Article 2:208 (1) PECL) or, in case of immaterial terms, the offeror has ex ante or ex post conditioned his offer upon fully unconditional assent or the offeree has conditioned his acceptance on assent to the alterations and does not receive assent by the offeror without undue delay (cf. Article 2:208 (3) PECL).

Draft Common Frame of Reference Article II. – 4:203: Rejection of offer When a rejection of an offer reaches the offeror, the offer lapses. Article II.-4:203 DCFR to the letter copies Article 2:203 PECL.

German Law German law provides for an identical provision in the first alternative of § 146 BGB. Rejection need not be express but may be implied, too. § 150(1) BGB serves as an example by treating late acceptance as rejection, so does § 150(2) BGB with respect to a modified acceptance. Rejection does not become effective if withdrawal of it reaches the offeror before or at the same time (cf. § 130(1) BGB). Lapse of the offer not only means that it loses its binding effect and becomes revocable again, nonetheless, could be accepted before such revocation. Instead, it means that the offer automatically ceases to exist and, thus, cannot be accepted anymore (cf. BGH NJW-RR 1994, 1163, 1164).

Comparison and Evaluation 1. Common core? The rule on rejection seems to be ubiquitously the same. Rejection may be implied from the circumstances, is subject to timely withdrawal and causes the offer’s existence to cease (cf. von Bar/Clive (2009) comparative survey in Notes 1–6 on Article II.-4:204 DCFR). Article 17 CISG and Article 2.1.5 UNIDROIT Principles are evidence of this uniformity. 2. Entry into force of rejection. The moment when rejection reaches the offeror is the most sound point in time to effectuate rejection. Before the offeror is fairly supposed

87

P. Mankowski & M. Müller not to undertake any dispositions contrary to the offer without risking contractual liability. After it seems fair that he may immediately advance to look for another contractual partner without having to fear such liability. 3. Constituting rejection. In fact, a definition of rejection would be superfluous due to its self-explanatory character. Likewise, the omission of any qualification, beyond an unambiguous ‘no’, as to the rejection is justified. Anything else would run afoul party autonomy for no good reason.

Principles of European Contract Law Article 2:204: Acceptance (1) Any form of statement or conduct by the offeree is an acceptance if it indicates assent to the offer. (2) Silence or inactivity does not in itself amount to acceptance. 1. General. Article 2:204 PECL regulates the basic features of the acceptance, the counterpart to the offer from the offeree’s side. It sets out to explain what might constitute an acceptance and what not. 2. Acceptance. Acceptance is a positive, affirmative answer to the offer (cf. Pilar Perales Viscasillas (2001), 371, 386). The acceptance expresses the offeree’s assent to be legally bound. It is less ambiguous than the term agreement that is also sometimes used to express unilateral consent (cf. Fauvarque-Cosson/Mazeaud (2008), p. 18). Required is a ‘yes’, unconditional in its essence. A ‘yes, but’ may suffice according to Article 2:208 PECL and in this regard operates as an exemption to the concept of acceptance as a strictly unconditional assent (cf. for such an interpretation as exemption also Pilar Perales Viscasillas (2001) 371, 388). The first paragraph asserts that an acceptance will be binding upon the offeree regardless of its form. In particular, writing requirements are ruled out albeit not expressly. Material assent is what matters, and wins over form. Any kind of affirmative statement or affirmative conduct qualifies as acceptance. A mere acknowledgement of receipt of the offer is not sufficient, though. The acceptance is the offeree’s positive reaction to the offeror’s offer. It answers to the offer. Accordingly, a cross-offer does not qualify as acceptance since it is neither a reaction to the initial offer, nor does it express assent (cf. for the latter Kleinheisterkamp, in Vogenauer/Kleinheisterkamp (2009), Article 2.1.1 PICC Note 14, Article 2.1.6 PICC Note 1). Clickwrap is an explicit manifestation of assent, usually by clicking on an icon reading ‘I agree’ or on a box reading ‘I agree’ (Moringiello/Reynolds (2010), 175). Browsewrap do not so call, but are usually accessible through a hyperlink (Moringiello/Reynolds (2010), 175).

88

Chapter 2: Formation 3. Implicit or tacit acceptance. An acceptance does not need to be made expressly. An implicit or tacit acceptance suffices, too. Acceptance might be indicated and expressed by conduct without verbalization, and thus an express verbalization is not required. The prime example for affirmative conduct is that the offeree sets out to prepare what he is required to do under the contract. For instance, a seller assembles goods to be shipped to the offering buyer or (under a cif contract) contracts for the services of a third party carrier in order to effectuate transport to the buyer. Acceptance by performance i.e., the mere fact of commencing performance will suffice to bring about the contract (cf. Kleinheisterkamp, in Vogenauer/Kleinheisterkamp (2009), Article 2.1.6 PICC Note 6). Yet one major hindrance might bar the way for acceptance by conduct, namely that the offeror does not become aware of such acceptance, at least not within reasonable time or within the time limit fixed by the offeror for accepting the offer. At least if the offeree is aware that the offeror had no adequate means of learning of the performance with reasonable promptness and certainty good faith might oblige the offeree to give notice of his acceptance (cf. Comment 4 to Article 2.1.6 PICC; Kleinheisterkamp, in Vogenauer/Kleinheisterkamp (2009), Article 2.1.6 PICC Note 6). 4. Rule against silent acceptation. Silence and inactivity generally do not amount to any answer the less a positive one. (2) emphasizes and underlines this, thus relieving even professionals and commercial men from any legal obligation to answer in the negative if they want to avoid the conclusion of a contract after having received an offer. Offerors cannot put offerees under undue pressure in this regard. Unilateral declarations by the offeror that silence will be treated as acceptance may not deviate from (2) (cf. Pilar Perales Viscasillas (2001), 371, 387). Yet there are certain circumstances under which silence or inactivity might amount to acceptance. In particular, parties might have previously agreed that silence or inactivity might suffice. If a party is bound to utter rejection if it is unwilling to accept an offer such agreement will coerce this party to negating activity. Parties can agree that on future occasions mere silence for a certain period after the offer has reached the offeree, might be treated as an acceptance. The offeror might quasi-accept in advance particularly if the probability that offers will be acceptable to him, is much higher than the probability of inacceptable offers. Parties are free to reduce transaction costs by such means and to establish some kind of automatism if they so wish.

Draft Common Frame of Reference Article II. – 4:204: Acceptance (1) Any form of statement or conduct by the offeree is an acceptance if it indicates assent to the offer. (2) Silence or inactivity does not in itself amount to acceptance. Article II.-4:204 DCFR is a clone of Article 2:204 PECL.

89

P. Mankowski & M. Müller German Law German law does not provide for an express definition of acceptance. Yet there is agreement on the nature of acceptance as unconditional assent intended to be legally binding to an offer, regardless of its form. However, any, even immaterial, ‘but’ excludes an acceptance (cf. § 150(2) BGB). Both express and implied assent usually suffice. Yet a special provision excluding the interpretation of certain conduct as implied acceptance is to be found in § 241a BGB. If a business delivers unsolicited goods, or provides unsolicited services, to a consumer, this does not constitute any kind of claim against the consumer. The prevailing interpretation, therefore, holds the mere use or consumption of the goods not to be a conduct that allows for the assumption of acceptance (cf. Finkenauer, in Münchener Kommentar (2012), § 241a no. 3). An innovative touch has § 312g(4) BGB that in interplay with (3) impliedly denies the legally binding character of an assent if a business, in electronic commerce with a consumer, does not sufficiently make clear that it will demand a compensation for the provision of its services. Although one might argue this problem might more adequately be solved by the rules on interpretation, the German legislator held it necessary to introduce this provision in order to fight abuses that have become notorious in Germany under the term ‘Kostenfallen im Internet’ (‘cost traps in the internet’) (cf. on this topic Alexander (2012), 1985 et seq.). German law does not arrange for a general rule on the effect of silence either. Nevertheless, it is well-settled that neither silence nor inactivity usually operate as acceptance. This particularly follows a contrario from § 663 BGB merely obliging a service provider to give immediate notice and, in case of breach of this duty, consequently only entailing damages. This general rule is subject to a deviating agreement by the parties. However, §§ 307; 308 no. 5 BGB strictly limit the possibility to introduce such a modification through a standard terms contract. Notwithstanding, the general rule is modified in the commercial context by § 362 HGB. If an offer of one merchant asking for a service reaches another merchant and both are in a business relation, the offeree’s omission to answer without undue delay amounts to an acceptance. Apart from that, both individual practice established between the parties and general usages in commerce, the most important of which being the kaufmännische Bestätigungsschreiben (cf. Lando/Beale (2000), p. 186 note on German law to Article 2:210), can modify the general rule.

Comparison and Evaluation 1. Common core? The understanding of acceptance as generally unconditional assent to the offer derived from any form of statement or conduct seems to be universal (cf. von Bar/Clive (2009) comparative survey in Notes 1–5 on Article II.-4:205 DCFR). Likewise, generally denying silence any legal significance is the starting point of all legal systems (cf. von Bar/Clive (2009) comparative survey in Notes 6–15 on Article II.-4:205 DCFR). Both principles are reflected internationally by Article 18(1) CISG and Article 2.1.6(1) UNIDROIT Principles. The German rule of inertia selling finds a

90

Chapter 2: Formation common European foundation in Article 9 Directive 97/7/EC on the protection of consumers in respect to distance contracts (cf. Schulze (2006), 155, 156 et seq.). As to the formation of contract in electronic commerce, the implementation of Article 8(2) Directive 2011/83/EU on consumer rights, the base for the aforementioned § 312g(3) and (4) BGB, will bring about fully-harmonized results within the European Union. 2. Acceptance. The definition of acceptance as assent has to be read in accordance with Article 2:208. Declaring immaterial additions or alterations irrelevant as a starting point reveals that assent means material assent. This is a perfectly sound rule in accordance with the principle ‘substance over form’. In the absence of a statement to the contrary, formal assent cannot be presumed to be in the parties’ best interest. 3. Implicit or tacit acceptance. To the same extent that an offer or rejection of an offer does not have to comply with any qualification beyond their unambiguous and definite character, acceptance neither has to. Anything else would be incompatible with party autonomy of the offeree. 4. Rule against silent acceptation. The rule against silent acceptation is a sound one. It might require a signal back and thus might enhance communication costs. But this is more than outweighed by the clear signal which the offeree is required to give. Clear signals create certainty and thus reduce if not diminish or even extinguish uncertainty with its ensuing consequential costs.

Principles of European Contract Law Article 2:205: Time of Conclusion of the Contract (1) If an acceptance has been dispatched by the offeree the contract is concluded when the acceptance reaches the offeror. (2) In case of acceptance by conduct, the contract is concluded when notice of the conduct reaches the offeror. (3) If by virtue of the offer, of practices which the parties have established between themselves, or of a usage, the offeree may accept the offer by performing an act without notice to the offeror, the contract is concluded when the performance of the act begins. 1. General. The time of conclusion of the contract may be relevant in several contexts. The most natural one is the entry into force of the binding effect of the contract. Therefore, Article 2:205 PECL can be considered to be the counterpart from the perspective of the offeree to Article 2:202 PECL. Accordingly, acceptance is irrevocable and, subject to a timely withdrawal, becomes effective – and at the same time definitely legally binding – at the time set forth in Article 2:205 PECL. Besides, the rules on excessive benefit or unfair advantage (cf. Article 4:109(1) PECL), interpretation (cf. Article 5:101(2); 5:102 (b) PECL), change of circumstances (cf. Article 6:111(2) (a) and

91

P. Mankowski & M. Müller (b) PECL), place of performance (cf. Article 7:101(1) and (2) PECL), time of performance (cf. Article 7:102(3) PECL), excuse due to an impediment (cf. Article 8:108(1) PECL) and foreseeability (cf. Article 9:503 PECL) refer to the time of the conclusion of the contract. Article 2:205 distinguishes among express acceptance, implied acceptance with notice and implied acceptance without notice to the offeror. 2. Express acceptance. In case of express acceptance, acceptance must reach the offeror. Arguably the concept of ‘reach’ corresponds with the German Zugangstheorie (cf. Pilar Perales Viscasillas (2001), 371, 394 et seq.; contra Eidenmüller, in von Bar/Schulte-Nölke/Schulze (2008), pp. 73, 79 et seq.) which also involves a normative element of a reasonable chance to get to know about a declaration of intent. Therefore, acceptance merely entering the sphere of the offeror does not necessarily suffice. This receipt rule is an unambiguous denial of any kind of ‘postal rule’ considering it to be sufficient if acceptance is sent off even though it might never reach the offeror (cf. von Bar/Clive (2009) on the postal rule Note 4 on Article II.-4:205 DCFR; Treitel (2007), pp. 26 et seq.). Therefore, the transmission risk is to be borne by the offeree. 3. Implied acceptance with notice. In the absence of an express acceptance, the general rule is that notice of the conduct from which acceptance can be derived must reach the offeror. Examples of such conduct are the starting with the production, or delivery, of goods according to an order, opening a credit on behalf of the offeror or accepting unsolicited goods (cf. von Bar/Clive (2009) Comment C on Article II.-4:205 DCFR). 4. Implied acceptance without notice. (3) operates as an exemption to (2). Notice is not required in any case. By virtue of the offer, the offeror may waive notice, a matter to be determined by interpretation. A waiver of notice may also derive from a practice between offeror and offeree. Finally, usage may serve as a justification to dispense with notice. In all these cases the beginning of the performance of the act becomes decisive.

Draft Common Frame of Reference Article II. – 4:205: Time of conclusion of the contract (1) If an acceptance has been dispatched by the offeree the contract is concluded when the acceptance reaches the offeror. (2) In the case of acceptance by conduct, the contract is concluded when notice of the conduct reaches the offeror. (3) If by virtue of the offer, of practices which the parties have established between themselves, or of a usage, the offeree may accept the offer by doing an act without notice to the offeror, the contract is concluded when the offeree begins to do the act. Article II.-4:205 DCFR and Article 2:205 PECL are almost identical twins. The deviation at the end of (3) is once again merely editorial.

92

Chapter 2: Formation German Law German law does not offer a general rule for the time of conclusion of a contract. The solution is to be found in § 130(1) BGB universally applying for all express and implied declarations of intent. Like an offer and rejection of an offer, acceptance, either express or implied, needs to reach the addressee to be effective and is subject to prior withdrawal. § 151, 1st clause BGB recognizes both common usage and waiver by the offeror as basis for forgoing the notice requirement. However, conduct allowing for the conclusion of acceptance is indispensable. Even though not expressly spelled out, the beginning of the conduct marks the relevant time (cf. Busche, in Münchener Kommentar (2012), § 151 no. 9).

Comparison and Evaluation 1. Common core? PECL, DCFR and German law follow the same approach as to the time of conclusion of the contract. They all differentiate among express and implied acceptance, acceptance with and without notice. Conclusion of the contract, tantamount to effectiveness of the acceptance subject to timely withdrawal, is assumed when notice of the acceptance reaches the offeror and, if notice is dispensable, the conduct amounting to acceptance begins. At the international stage, this approach is mirrored in Article 18(2) 1st clause CISG (effectiveness of acceptance); Article 18(3) CISG (dispensability of notice); Article 22 CISG (withdrawal of acceptance); Article 23 CISG (conclusion of contract) and Article 2.1.6(2) and (3); Article 2.1.10 UNIDROIT Principles. 2. Time of conclusion. The rule in PECL determining the time of conclusion is a sound one. In all conceivable scenarios it provides for legal certainty, which is particularly important due to the frequent reference of other rules to the time of conclusion. The ‘postal rule’ has never been convincing only serving as an imperfect means to counter-balance free revocability even of an irrevocable offer until the effectuation of acceptance under English law (cf. von Bar/Clive (2009) Note 10 on Article II.-4:202 DCFR). PECL elegantly solves this problem by, in accordance with the approach of CISG, separating the issues of revocability and time of conclusion und submitting them to a different point in time. Referring for the time of conclusion to the receipt of express acceptance by the offeror then seems to be the most natural solution. In the absence of particular circumstances, it would seem unfair to already bind the offeror to a contract, the coming into existence of which he has not got to know yet. Then it is consistent to apply the same solution for implied acceptance, too. However, in the cases of (3) the offeror does not have such a interest, respectively it is not worthy of protection. Then it is warranted to refer to the beginning of the conduct amounting to acceptance. This reference to its beginning is more precise than merely pointing to the carrying out of the conduct in general (cf. Jansen/Zimmermann (2010), 196, 218).

93

P. Mankowski & M. Müller Principles of European Contract Law Article 2:206: Time Limit for Acceptance (1) In order to be effective, acceptance of an offer must reach the offeror within the time fixed by it. (2) If no time has been fixed by the offeror acceptance must reach it within a reasonable time. (3) In the case of an acceptance by an act of performance under art. 2:205 (3), that act must be performed within the time for acceptance fixed by the offeror or, if no such time is fixed, within a reasonable time. 1. General. It would be incompatible with party autonomy to timelessly bind the offeror to his offer. Thus, Article 2:206 PECL arranges for a time limit for acceptance. Upon its expiration the acceptance, subject to Article 2:207 PECL, cannot become effective anymore implying that the underlying offer lapses as if it were rejected according to Article 2:203 PECL. The crucial point in time is receipt by the offeror, respectively, in case of dispensability of receipt, performance of the act representing acceptance. In this respect PECL deviate from any approach that considers despatch of acceptance to be material (cf. e.g., Article 2.1.8, 2nd clause UNIDROIT Principles). However, subject to further requirements timely despatch suffices even under PECL (cf. Article 2:207(2) PECL). 2. Fixed time. In interplay with the conditional clause of (2), paragraph (1) recognizes the primacy of party autonomy by giving priority to a time limit arranged for by the offeror. This rule finds its supplement in the first alternative of (3) in case of acceptance by an act. If the offeror sets a period of time but does not state when the period is to begin, Article 1:304(1) PECL steps in (cf. Jansen/Zimmermann (2010) 196, 219; Pilar Perales Viscasillas (2001), 371, 397). Accordingly, a period of time begins to run from the date stated as the date of the document. If no date is shown, the period begins to run from the moment the document reaches the addressee. 3. Reasonable time. In the absence of a fixed time, a reasonable time applies. According to (2) and the second alternative of (3), this applies to both express acceptance and acceptance by mere conduct. Factors to be considered in determining reasonableness are the means of communication used by the offeror and the type of contract (cf. Lando/Beale (2000), p. 175 Comment C on Article 2:206). Use of a rapid means of communication and high volatility of the relevant market reveal how crucial time is for the offeror and therefore indicate a brief time. Conversely, an offer made by regular mail and stability of a market may allow for a longer time. Unfortunately, an express rule as to the beginning of the reasonable time limit is missing. Article 1:304(1) PECL does not expressly fill the gap as according to the wording of the first clause, and nothing else can hold true for the second clause then, it only applies if the offeror sets a period of time. However, a fortiori the same ought to hold true in the absence of such a time limit, and receipt of the offer should operate as

94

Chapter 2: Formation the beginning of the reasonable time limit. On the one hand, if the offeror does not specify any period of time nor indicates a date on his offer, he does not deserve protection. On the other hand, the offeree can definitely not recognize when the offer was formulated and might even have difficulties to find out when the offer was sent.

Draft Common Frame of Reference Article II. – 4:206: Time limit for acceptance (1) An acceptance of an offer is effective only if it reaches the offeror within the time fixed by the offeror. (2) If no time has been fixed by the offeror the acceptance is effective only if it reaches the offeror within a reasonable time. (3) Where an offer may be accepted by performing an act without notice to the offeror, the acceptance is effective only if the act is performed within the time for acceptance fixed by the offeror or, if no such time is fixed, within a reasonable time. The wording of Article II.-4:206 DCFR manifests slight alterations. The unspecific, and thus possibly misunderstanding, ‘it’ in (1) and (2) is replaced by ‘the offeror’. Besides, the reference to the provision allowing for acceptance by performance of an act is omitted in favour of integration of that provision’s substance facilitating readability. Though, these formal changes do not involve substantial changes from Article 2:206 PECL.

German Law German law provides for three rules on a timely acceptance in §§ 147; 148; 151, 2nd clause BGB. The first one distinguishes between acceptance among present parties, however, extending the idea of presence to any form of real time communication (e.g., telephone, video conferences, internet chatrooms) and acceptance among absent parties. Among present parties the rule is that acceptance can be declared only immediately. This establishes a stricter standard than undue delay but is nevertheless open to considering the complexity of the offer (cf. Busche, in Münchener Kommentar (2012), § 147 no. 29). Among absent parties the benchmark is whether under ordinary circumstances the offeror could still expect the receipt of a reply. This allows for the consideration of all relevant factors, in particular the means of communication used for the offer and the nature of the market concerned. The second rule in § 148 BGB sets out to recognize fixing a time limit by the offeror, however, just looking at the wording, it is hard to assume a clear relation of specialty as to § 147 BGB. Nonetheless, it corresponds with the idea of party autonomy to recognize such specialty. A contrario § 149 BGB it follows that the material time generally is receipt of acceptance and not its despatch. The third rule in § 151, 2nd clause BGB extends the approach to implied acceptance without notice.

95

P. Mankowski & M. Müller If the offeree does not comply with the time limit, the offer lapses according to the second alternative of § 146 BGB.

Comparison and Evaluation 1. Common core? PECL, DCFR and German law approve the primacy of party autonomy by allowing for the fixing of a time by the offeror and consider receipt of acceptance material determining timeliness of acceptance. This approach is also mirrored in Article 18(2) 2nd clause CISG and, though not as to the material time, in Article 2.1.7 UNIDROIT Principles. 2. Fixed time. It is convincing to submit the time limit for acceptance to an express determination in the offer in the first place. This serves both party autonomy and legal clarity. In particular, the interplay with Article 1:304(1) PECL is convincing. In the absence of an express statement as to the expiry of the offer, the date stated as the date of the document becomes dispositive because it is evident to both parties. If the offeror even dispenses with such a date, he is not worthy of protection and the offeree may rely on the date when the offer reached him. 3. Reasonable time. In the absence of a fixed time, a reasonableness standard seems to be the only alternative. However, it seems to be debatable whether legal clarity might be better served by a rule that, even though not conclusively, enumerates relevant factors like presence of the parties, mode of communication for the offer and nature of the market for the subject of the offer. Legal clarity also seems to suggest a clarification as to the beginning of the time limit, may it be receipt of the offer as promoted here or despatch of the offer.

Principles of European Contract Law Article 2:207: Late Acceptance (1) A late acceptance is nonetheless effective as an acceptance if without delay the offeror informs the offeree that he treats it as such. (2) If a letter or other writing containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without delay, the offeror informs the offeree that it considers its offer as having lapsed. 1. General. Article 2:207 PECL modifies the general rule that late acceptance is an ineffective acceptance. At the same time, it has the implicit effect that it also automatically neutralizes the lapse of the offer.

96

Chapter 2: Formation 2. Validating late acceptance by assent. The exemption in (1) finds its justification in the idea that subjecting an offer to a time limit mainly serves the interests of the offeror. If he voluntarily dispenses with this protection, there is no reason why one should hold him to the time limit. Yet the offeree deserves some protection, too. Submitting him timelessly to an offeror’s right to validate acceptance would be incompatible with the offeree’s party autonomy and, additionally, would allow the offeror to speculate at the disadvantage of the offeree. Thus, validation of the acceptance can only be effected without delay. The term of ‘undue delay’ begins to run on receipt of acceptance and is, though ‘information’ is not expressly mentioned in Article 1:303(6) PECL, complied with only if information reaches the offeree in time. 3. Validating late acceptance by silence. The exemption in (2) is the consequence of generally considering receipt of acceptance as material point in time. To apply, the acceptance must have been sent in time, the acceptance must evince timely despatch and under ordinary circumstances it ought to have reached the offeror in time. However, this exemption does not generally release the offeree from bearing the risk of delay as to the transmission of acceptance but it shifts responsibility to the offeror. He needs to inform the offeree without delay about the lapse of the offer. If he fails to do so, his silence validates acceptance by implicitly validating the lapsed offer.

Draft Common Frame of Reference Article II. – 4:207: Late acceptance (1) A late acceptance is nonetheless effective as an acceptance if without undue delay the offeror informs the offeree that it is treated as an effective acceptance. (2) If a letter or other communication containing a late acceptance shows that it has been dispatched in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that the offer is considered to have lapsed. Editorial changes in Article II.-4:207 DCFR more clearly point out that delay may not be undue, neither in the case of (1) nor (2), and that also modern means of communication (e.g., e-mail) are covered by the rule in (2).

German Law German law provides for rules on late acceptance in §§ 149; 150(1) BGB. If acceptance was sent off in a way that it would have reached the offeror in case of regular transmission in time and if this is discernable to the offeror, it is incumbent on him to inform the offeree about the lapse of the offer without delay after receipt of acceptance unless he has already done so before. Omission or delay of the information leads to a

97

P. Mankowski & M. Müller treatment of late acceptance as timely acceptance, excluding the general lapse of the offer according to the second alternative of § 146 BGB. Outside the scope of § 149 BGB a late acceptance is treated as new offer according to § 150 (1) BGB. This makes the rules on offers applicable again enabling the former offeror now as offeree of the new offer to accept it in compliance with §§ 146 et seq. BGB. So he might not be able to validate his original offer but reach the same result by acceptance of the new offer that due to its reference to the original offer has an identical content.

Comparison and Evaluation 1. Common core? In spite of some conceptual deviations, PECL, DCFR and German law ought to come to almost identical results as to late acceptance. In case of unexpected delay of transmission, the slight restriction of the offeror’s information obligation allowing for an information before receipt of acceptance seems to be marginal. And even as far as apart from that late acceptance cannot be healed by the offeror, this ought not to lead to different results. While validation of the late acceptance has to be conducted without undue delay, acceptance of the offer originating from late acceptance has to be effected within time determined by ordinary circumstances. However, these ordinary circumstances are influenced by the fact that the original offer stems from the present offeree who, thus, can be required to reply without undue delay. Counterparts at the international stages are to be found in Article 21 CISG, though with an outdated reminiscence of a ‘postal rule’ in (1), and Article 2.1.9 UNIDROIT Principles. 2. Validating late acceptance by assent or by silence. Both exemptions provide for a sound rule as they fairly balance the offeror’s and offeree’s respective interest. From a dogmatic point of view, however, the German approach seems to be superior. In § 146 BGB, it more clearly reveals the dependency of the offer’s effectiveness upon timely, or exceptionally sufficient untimely, acceptance. Under PECL, the rule explicitly only deals with the effectiveness of acceptance. Therefore, you can only reach the desired result, by rather complicated construction, in two ways. Either you interpret Article 2:207 PECL as – and this is the approach assumed by this author – a retrospective validation of an, due to the lapse of time, ineffective offer. Or you have to interpret the offer, at the lapse of time, still effective, respectively ineffective, subject to the non-occurrence, respectively occurrence, of the conditions in Article 2:207 PECL.

Principles of European Contract Law Article 2:208: Modified Acceptance (1) A reply by the offeree which states or implies additional or different terms which would materially alter the terms of the offer is a rejection and a new offer.

98

Chapter 2: Formation (2) A reply which gives a definite assent to an offer operates as an acceptance even if it states or implies additional or different terms, provided these do not materially alter the terms of the offer. The additional or different terms then become part of the contract. (3) However, such a reply will be treated as a rejection of the offer if: (a) the offer expressly limits acceptance to the terms of the offer; or (b) the offeror objects to the additional or different terms without delay; or (c) the offeree makes its acceptance conditional upon the offeror’s assent to the additional or different terms, and the assent does not reach the offeree within a reasonable time. 1. General. The scope of application of Article 2:208 PECL is limited by Article 2:209 PECL: The battle of forms as the most important mode of introducing alterations gains specific regulation in Article 2:209 PECL. However, Article 2:208 PECL itself modifies the concept of acceptance in Article 2:204 PECL as unconditional assent, at least if you interpret assent in a formal way. 2. Material alteration. Unlike Article 19(3) CISG, Article 2:208 PECL does not provide a catalogue of aspects alterations of which are deemed material. Perhaps such task was to difficult to master in general rules designed for all types of contracts in contrast to the less cumbersome worry to undertake shaping such catalogue for contracts of sale of goods only in the CISG. Of course, any specific reference to goods would not work in the differing environment. That neither Article 19(3) CISG has been copied nor any rule resembling Article 19(3) CISG has been designed should, however, not give rise to any conclusio e contrario that it would not be permitted to instrumentalize the approach taken by Article 19(3) CISG as some kind of indicative guidance as to which kind of terms could be regarded as material. 3. General irrelevance of immaterial alterations. Immaterial alterations are generally irrelevant and are no obstacle in understanding the offeree’s definite assent as an acceptance. (2) draws this consequence which flows necessarily if material alterations are distinguished from immaterial ones. Immaterial alterations almost by definition do not matter. 4. Exceptional relevance even of immaterial alterations. (3) rules on three instances in which every alteration leads to such modified acceptance being treated as a rejection. This relates even to such alterations which in principle are not material for the purposes of (1). (3) (a) allows the offeror to elevate in extremis all and every alteration to be material if he does so ex ante in his offer. The offer establishes the framework within which the acceptance must operate. Ex ante clarifications that the offer is an ‘all or nothing’ or ‘take it or leave it’ treat are permitted as a result of party autonomy and convey a strong and unmistakeable signal which the offeree can, and should, take into account. By objective standards, alterations might not be deemed material, but the

99

P. Mankowski & M. Müller offeror in his offer has characterized all alterations as material. Mere rejection clauses in general terms and conditions might trigger (3) (a), but not insofar as Article 2:209 PECL applies. Whereas (3) (a) gives the offeror the opportunity for a preemptive strike, (3) (b) gives him an opportunity for an ex post reaction. The offeror can object to any alteration without delay and in due course. This resembles Article 19(2) 1st clause CISG. (3) (c) is subdetailing the overarching principle that an offer lapses if acceptance has not been obtained within reasonable time. If the specific rule did not exist the same result would have to be reached by virtue of Article 2:206(2) PECL. This time, roles are partially reversed with the offeree being regarded as the ‘offeror’ of the additional or different terms. (c) recognizes party autonomy insofar as the offeree by his autonomy can call for clarity. Individual claims for acceptance clarify matters considerably. Furthermore, they emphasize the importance of the alterations to the offeree.

Draft Common Frame of Reference Article II. – 4:208: Modified Acceptance (1) A reply by the offeree which states or implies additional or different terms which materially alter the terms of the offer is a rejection and a new offer. (2) A reply which gives a definite assent to an offer operates as an acceptance even if it states or implies additional or different terms, provided these do not materially alter the terms of the offer. The additional or different terms then become part of the contract. (3) However, such a reply is treated as a rejection of the offer if: (a) the offer expressly limits acceptance to the terms of the offer; (b) the offeror objects to the additional or different terms without undue delay; or (c) the offeree makes the acceptance conditional upon the offeror’s assent to the additional or different terms, and the assent does not reach the offeree within a reasonable time. Article II.-4:208 is essentially a clone of Article 2:208 PECL.

German Law § 150(2) BGB follows the same principle but is far less differentiating as it strictly preserves the concept of acceptance as unconditional assent. It evaluates any acceptance altering terms of the offer as a rejection combined with a new offer. Even an alteration of immaterial terms matters in this regard (BGH NJW 2001, 222). Consequentially, German law does not contain any rules akin to (2) and (3).

100

Chapter 2: Formation Comparison and Evaluation 1. Common core? The principle in Article 2:208 PECL reflects a common core shared by German law. In particular it reflects an international standard as mirrored in Article 19 CISG and Article 2.1.13 UNIDROIT Principles. But the detail might not reflect a common core with its dictinction between material and generally immaterial alterations and particularly with the consequential rule as contained in (3). Insofar Article 2:108 is more sophisticated and less one-size-fits-it-all than German law. 2. Material alteration. A weak point is that not the slightest attempt has been made to single out even a non-exhaustive catalogue of aspects which should be deemed material. This opens to much leeway for argumentation and thus for ex post opportunism in a crucial aspect. It would have been worth the effort to try to generalize Article 19(3) CISG. 3. General irrelevance of immaterial alterations. Immaterial alterations might qualify the assent but the material assent is the core and conveys the fundamental message. From this point of view, sticking to a formal concept of assent seems to regularly run afoul of the parties’ interests. Therefore, it is a sound starting point to declare immaterial alterations irrelevant. 4. Exceptional relevance even of immaterial alterations. The concept of immaterial alterations suggests an objective nature of materiality. Under the regime of party autonomy in contract law, however, material is, and has to be, what a party considers to be material. Even an ‘objectively’ immaterial alteration might matter to the party. Therefore, it is not only consistent but even indispensible to submit the general rule of (1) to the exemptions in (3). The first two exemptions take into account the offeror’s party autonomy, the third one the party autonomy of the offeree.

Principles of European Contract Law Article 2:209: Conflicting General Conditions (1) If the parties have reached agreement except that the offer and acceptance refer to conflicting general conditions of contract, a contract is nonetheless formed. The general conditions form part of the contract to the extent that they are common in substance. (2) However, no contract is formed if one party: (a) has indicated in advance, explicitly, and not by way of general conditions, that it does not intend to be bound by a contract on the basis of paragraph (1); or (b) without delay, informs the other party that it does not intend to be bound by such contract.

101

P. Mankowski & M. Müller (3) General conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which have not been individually negotiated between the parties. 1. General. The battle of forms is perhaps the most prominent feature in the entire context of formation of contracts. The last-shot rule and the knock-out rule are the traditional opponents to solve the conundrum, while the first-shot rule, at least within Europe, has never found much credit (cf. von Bar/Clive (2009) comparative survey in Notes 4–10 on Article II.-4:209 DCFR). With regard to general conditions, (1) generally joins the camp of the knock-out rule. It prefers commercial sense and upholding contracts over formality and execution of a doctrine of consensus to the very letter. General conditions are subjected to a special regime in order not to permit them to put too high stakes in the way of contract formation. 2. General conditions. (3) provides for an express definition of general conditions. Four characteristics are determinative. Formulation in advance means the preparation prior to the contractual negotiations. It does not require a particular form but it suffices if the terms have been formulated in mind. The use must be directed at an indefinite number of contracts. A respective intention suffices, thus even during the first use the qualification as general condition is possible. In negative respect it is required that the term is not individually negotiated between the parties. Individual negotiation calls for a real chance to influence the content of the particular term. Providing a set of terms, among which the other party may choose, does not pass this benchmark. Though not expressly mentioned, it is submitted that supply of the terms is implicitly presupposed by the criterion of non-individual negotiation. 3. Knock-out rule. The operation of the knock-out rule is twofold. In the first place, it ousts the qualification of a modification as rejection generally provided for by Article 2:208(1) PECL. Whether a general condition is material or immaterial does not affect conclusion of contract. Even in cases of material terms modified, the contract is deemed to be concluded. In the second place, it ousts the incorporation of any of the modified terms envisioned by Article 2:208(2) PECL. Instead, it strikes out the conflicting general terms on both sides. However, it incorporates all terms that comport with each other. Commonality in substance, not in form, governs. 4. Exclusion clauses. Party autonomy trumps even in the context of conflicting general conditions. Opportunities for ex ante and ex post reaction to avoid the conclusion of the contract are granted in (2). Though, ex ante reaction is subject to two qualifications. First, it must be explicit. Thus, in deviation from general interpretive principles it cannot be implied from the circumstances. Second, explicity in a general condition clause, in particular a defence clause (Abwehrklausel), does not suffice. Such a limitation is necessary because otherwise it would make Article 2:209(1) PECL become moot. Ex post reaction is restricted by the requirement of undue delay balancing the interests of the party that wants to stick to the contract and the party that does not.

102

Chapter 2: Formation Draft Common Frame of Reference Article II. – 4:209: Conflicting standard terms (1) If the parties have reached agreement except that the offer and acceptance refer to conflicting standard terms, a contract is nonetheless formed. The standard terms form part of the contract to the extent that they are common in substance. (2) However, no contract is formed if one party: (a) has indicated in advance, explicitly, and not by way of standard terms, an intention not to be bound by a contract on the basis of paragraph (1); or (b) without undue delay, informs the other party of such an intention. Article II. – 1:109: Standard terms A ‘standard term’ is a term which has been formulated in advance for several transactions involving different parties and which has not been individually negotiated by the parties. Article II. – 1:110: Terms ‘not individually negotiated’ (1) A term supplied by one party is not individually negotiated if the other party has not been able to influence its content, in particular because it has been drafted in advance, whether or not as part of standard terms. (2) If one party supplies a selection of terms to the other party, a term will not be regarded as individually negotiated merely because the other party chooses that term from that selection. (3) If it is disputed whether a term supplied by one party as part of standard terms has since been individually negotiated, that party bears the burden of proving that it has been. (4) In a contract between a business and a consumer, the business bears the burden of proving that a term supplied by the business has been individually negotiated. (5) In contracts between a business and a consumer, terms drafted by a third person are considered to have been supplied by the business, unless the consumer introduced them to the contract. DCFR substitutes the terminology ‘general condition’ for ‘standard term’ but adopts the approach of PECL in substance. It also provides for a plus of legal clarity by defining the elements of a standard term in more detail and clearly allocating the burden of proof. The widely recognized principle of consumer protection is taken into account. Two observations are worthy of mention. First, Article II.-1:110(1) DCFR is not drafted sufficiently clear as it might induce the conclusion that a term not supplied by one party is outside its scope. Even worse, following this conclusion might give rise to the next conclusion that such a term is never, or always, not individually negotiated.

103

P. Mankowski & M. Müller However, neither of these conclusions would come up to the insight that supplying a term by one party and individually negotiating it do not necessarily coincide. It is both conceivable that a term supplied by one party is individually negotiated later on, even though in the end the parties stick to it (see also Eidenmüller, in von Bar/SchulteNölke/Schulze (2008), pp. 73, 93), and that a term supplied by a neutral third person is not individually negotiated because both parties rely on the third person’s neutrality. Second, the criteria of formulation in advance and individual negotiation become intertwined to the extent that the first one seems to trigger a presumption for the second.

German Law German law does not contain a rule addressing and regulating the major problem of conflicting general terms and conditions expressly. Neither does any rule decide the conflict between the knock-out rule and the last-shot rule. The wording of the general rules, particularly § 150(2) BGB, would tentatively favour the last-shot rule. Established case law and a clear predominant opinion in legal writing have endorsed the knock-out rule, though (cf. BGH NJW 1973, 2106; Basedow, in Münchener Kommentar (2012), § 305 nos. 105 et seq.). While case law sees the foundation for this result in a ‘good faith’ reservation to § 150(2), a more convincing line of argument is based on the assumption that §§ 154; 155 BGB on the open and hidden partial dissent are leges speciales. These modify § 150(2) BGB to the extent that it only operates as a partial rejection and an offer to amend the contract if conclusion of the contract accords to the actual or hypothetical intent of the parties. However, accepting the nature of § 306(1) BGB as lex specialis as to §§ 154; 155 BGB in the context of standard contract terms (cf. Müller (2006), pp. 3 et seq.) leads to the conclusion that even regardless of the actual or hypothetical intent of the parties the contract must be deemed to be concluded. This invariably holds true for Consumer to Consumer (C2C), B2C and, regardless of the business size, B2B contracts. It would be the consequence of this approach that neither ex ante nor ex post avoidance of the conclusion of contract were possible. While the exclusion of an ex post opt out is in accordance with the general principle of pacta sunt servanda, exclusion of an ex ante avoidance of the conclusion of contract would involve an unreasonable, and arguably impermissible, obligation to contract and, therefore, must be mitigated by allowing both parties to, expressly and outside their standard terms, condition the conclusion of their contract upon full acceptance of their respective standard terms. It corresponds with the nature of partial dissent that the conflicting standard terms do not become part of the contract. While §§ 154; 155 BGB are silent on how to fill a potential gap originating from the exclusion of the conflicting standard terms, § 306(2) BGB expressly provides a solution to this issue: non-mandatory law steps in, part of which according to the prevailing view also is the concept of supplementary interpretation of contract (ergänzende Vertragsauslegung) (cf. Basedow, in Münchener Kommentar (2012), § 306 nos. 22 et seq.). Only in very rare circumstances the contract is not upheld because it is absolutely unacceptable to one of the parties (cf. Müller (2006)).

104

Chapter 2: Formation Comparison and Evaluation 1. Common core? PECL, DCFR and German law share a common core as to conflicting standard contract terms. They all deem the contract to be concluded in the first instance, and above all prefer the knock-out rule for determining the content. This approach is in accordance with Article 2.1.22 UNIDROIT Principles, though, it is controversial under CISG (cf. Pilar Perales Viscasillas (2001), 371, 390 et seq.). However, German law is reluctant to allow for an ex post opt out. 2. General conditions. (3) provides a sound definition of general conditions. Formulation in advance for an indefinite number of contracts and forgoing individual negotiation characterize the specific nature of general terms and conditions precisely. The first element represents the rationale of general terms and conditions being an increase in efficiency as transaction costs for the individual transaction are reduced. The second element represents the danger that a party is subject to an unfair shift of risk distribution due to her rational indifference to standard terms. However, this risk does not exist to the same extent if the standard terms are supplied by a third neutral party. Therefore, one might argue that the express inclusion of the element of supply by a party to the contract might be an adequate restriction, respectively, to the extent that this element is already considered to be part of the element of non-individual negotiation, a useful clarification, of the definition. 3. Knock-out rule. The structure of offer and acceptance has been developed for individually negotiated terms. It does not envisage boilerplate stuff which has not been object of negotiations. General conditions serve as a default option in case of need. They do not reach the conscious level in the minds of dealers (Mankowski, in Ferrari et al. (2012),Article 19 CISG no. 34). Dealers are interested in closing their deals and focus on the commercially relevant issues (Ben-Shahar (2004), p. 19; id. (2005) 350, 365; Wildner (2008), 1, 28). A punctual rejection of single conditions of the other party will happen only very rarely. This is due mainly to the pressure of time under which contracts are brokered in commercial reality. It is also due to the dealers generally not having the competence to alter general conditions and thus not being in a position to hope that their counterpart will have such competence (Ben-Shahar (2004), 17 et seq.; id. (2005), 350, 364 referring to Keating, (2000), 2678, 2699 et seq.). On a higher level, it would contradict the very logic underpinning of general conditions to make them subject to negotiation for every single bargain (Ben-Shahar (2004), p. 21; id. (2005), 350, 366; Mankowski, in Ferrari et al. (2012), Article 19 CISG no. 34). Accordingly, it is sensible to apply the knock-out rule and to uphold the deal to the greatest possible extent. The non-compliance of the mutual general conditions does not generally avert the formation of the contract. 4. Exclusion clauses. It comports with party autonomy to condition the formation of the contract upon objection. Any kind of obligation to contract must remain the rare exemption. It must always lie within the parties’ competence to consider any term to be a deal-breaker.

105

P. Mankowski & M. Müller Principles of European Contract Law Article 2:210: Professional’s Written Confirmation If professionals have concluded a contract but have not embodied it in a final document, and one without delay sends the other a writing which purports to be a confirmation of the contract but which contains additional or different terms, such terms will become part of the contract unless: (a) the terms materially alter the terms of the contract, or (b) the addressee objects to them without delay. 1. General. Professionals are charged with caring for their own good or bad fortune. They are deemed to have the bargaining power to oppose any steps by the other contracting party to their detriment. In particular, they are believed to be able to check whether an alleged summary of an agreement previously reached is correct. Time is of the essence, and commercial relations to a certain degree bunker on rapidity. The idea behind Article 2:210 PECL stems from, and heavily leans on, German law. It relates to the so called kaufmännisches Bestätigungsschreiben, which may not be confused with the Auftragsbestätigung that merely confirms receipt of an offer (cf. Pilar Perales Viscasillas (2001), 371, 392). 2. Prior conclusion of a contract. Article 2:210 PECL requires that a contract was concluded prior to the confirmation. Without prior agreement, Article 2:210 PECL does not come into operation. The rule does not offer a mode for the initial and original conclusion of a contract. It is only concerned with the content of the contract vis à vis a possible later alteration. 3. Written confirmation. The written confirmation operates as a substitute as to the missing embodiment of the contract in a final document. To fulfil its function to provide for clarity, it must refer to the conclusion of the contract and it must be sent in a close temporal relation with this conclusion. 4. Material versus immaterial alterations. Immaterial alterations do not matter. Insofar as the deviation from the original agreement is immaterial only the wording of the confirmation becomes relevant. But confirmation does not introduce material alterations in the parties’ contractual relationship. Article 2:210 PECL does not define what ‘material’ means. Insofar, the yardsticks as established under Article 2:208 (1) PECL might apply. 5. Addressee’s opportunity to object. The addressee can prevent terms of the confirmation which deviate from the previously reached agreement in an immaterial manner, from becoming part of the contract if he objects without delay. Accordingly, the addressee is under a burden to check the confirmation on its congruence with the previously reached agreement and to assess as to whether (immaterial) alterations which he detects, are worth fighting. He is further under a burden to phrase his

106

Chapter 2: Formation objection and to demonstrate with regard to which aspects he happens to differ. Generally, he has to become active and has to voice and communicate his objections if he happens to differ.

Draft Common Frame of Reference Article II. – 4:210: Formal confirmation of contract between businesses If businesses have concluded a contract but have not embodied it in a final document, and one without undue delay sends the other a notice in textual form on a durable medium which purports to be a confirmation of the contract but which contains additional or different terms, such terms become part of the contract unless: (a) the terms materially alter the terms of the contract; or (b) the addressee objects to them without undue delay. Article II.-4:210 DCFR is in material accordance with Article 2:210 PECL, though, terminology is updated. ‘Businesses’ replaces ‘professionals’, ‘delay’ is qualified to ‘undue delay’ and ‘notice in textual form on a durable medium’ instead of ‘writing’ matches all conceivable forms of today’s communication better.

German Law The kaufmännisches Bestätigungsschreiben is a cherished child of German law of commercial contracts, but it has never reached the level of proper codification. Accordingly, it is generally recognized, but has not gained the grace of explicit regulation yet. Case law has over the centuries moulded and shaped its requirements and legal consequences, though (most importantly RGZ 54, 176, 178–181; BGHZ 11, 1, 3–5). The requirements are (e.g., BGHZ 7, 187, 189; BGH NJW 1994, 1288): – Both parties are commercial parties or participate in professional activities. – The sender assumes a contract to have been concluded orally which is now to be fixed in writing. However, it is not necessary that a contract has been concluded in fact. Therefore, according to German law a kaufmännisches Bestätigungsschreiben cannot only be merely declaratory or constitutive by having a modifying effect but also may be constitutive as to the creation of a contract. – The kaufmännisches Bestätigungsschreiben is sent without undue delay after negotiations have been finished. – The kaufmännisches Bestätigungsschreiben is received by the addressee. If the addressee does not raise objections in due course after receiving the kaufmännisches Bestätigungsschreiben the terms of the sender’s letter will be deemed agreed

107

P. Mankowski & M. Müller upon and incorporated into the contract. Yet this is not to happen if the sender could not rely on the addressee accepting since the terms, be it deliberately or be it unconsciously, deviated from the previous agreement substantially.

Comparison and Evaluation 1. Common core? Since German law provides the model on which Article 2:210 PECL is designed, it of course takes sides with Article 2:210 PECL. Yet other legal orders do not join it (comparative survey in Ranieri (2009), pp. 240–257). The precautionary elements in Article 23(1) 3rd clause lit. c Brussels I Regulation respectively Article 25(1) 3rd clause lit. c in the new version of Brussels I, are the best evidence for the contention that the kaufmännisches Bestätigungsschreiben might to a certain degree have made its way into the world, but still is regarded as a rather Germanic institution. This might be the reason why there is no comparable rule to be found in the CISG or the UNIDROIT Principles. In an important detail Article 2:210 PECL is stricter and less liberal than German law insofar as the prior conclusion of a contract is required. 2. Prior conclusion of a contract. It is submitted that the German approach is superior to PECL because it even provides for legal clarity if there is uncertainty about whether a contract has been concluded at all. Party autonomy of the addressee is sufficiently protected against abuse by the sender since the rule only applies if contractual negotiations took place at all and the confirmation was sent in close temporal connection. 3. Written confirmation. Limiting the scope to written confirmation is too narrow with regard to modern means of communication. Any confirmation must suffice if it can provide for clarity as to the prior oral agreement. Thus, the rule ought to cover any textual form. Readability, recordability and reproductability are necessary but sufficient. 4. Material versus immaterial alterations. Distinguishing among material and immaterial alterations is a sound approach. Only if alterations are immaterial the sender can be considered to be bona fide and may reasonably rely on acceptance by silence. In contrast, the addressee faced with material alterations may reasonably abstain from objecting as it were unfair to require him to continue communication with an evidently bad faith sender. 5. Addressee’s opportunity to object. Article 2:210 PECL puts quite some burden on professionals to check incoming correspondence even after the conclusion of a contract. To a certain extent it opens up chances for ex post opportunism on the confirming party’s side. However, concluding contracts without a final summarizing document might lead to some argument afterwards if things go awkward. A written document might overcome such difficulties if it bona fide and with the best possible effort tries to summarize the agreement reached. Insofar chances for ex post opportunism are reduced on another level.

108

Chapter 2: Formation The addressee’s opportunity to object destroys any incentives for the confirming party to wilfully introduce major alterations for the confirming party has to take into account that these will be objected against so that any effort spent in this regard will be frustrated. The opportunity to object contravenes cunning planning and the worst kind of ex post opportunism on the confirming party’s side.

Principles of European Contract Law Article 2:211: Contracts not Concluded through Offer and Acceptance The rules in this section apply with appropriate adaptations even though the process of conclusion of a contract cannot be analysed into offer and acceptance. 1. General. Offer and acceptance are the traditional mode of concluding contracts (see also Pilar Perales Viscasillas (2001), 371, 376 et seq.). They are designed for a two-party setting and have as their role model simple transactions without prolonged negotiations. They envisage rather a simple question-answer-game than a multi-round game with a back and forth of communication. Even less they envisage tripartite or multi-party settings. They are unfamiliar with the contract parties expressing their mutual assent to a contract document prepared by a third person, either. The latter case might arise where a neutral notary prepares a contract document for instance for the sale of real estate, and seller and buyer both sign the document. Article 2.1.1 PICC reads: ‘A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement.’ In essence, the latter phrase resembles the constellations envisaged by Article 2:211 PECL but for its evasion towards mere conduct where still declarations of intention could be involved. 2. Closings and simultaneous executions of contracts. Yet simultaneous executions of contracts and closings have become typical for complex undertakings particularly with regard to long-time or large-scale projects. It would be futile and misspent effort to try to identify offer and acceptance in this regard whereas the mutual consensus is entirely out of any question as is the binding force on all parties concerned. Hence, the basic requirements for a contract as spelled out by Article 2:101(1) PECL are fulfilled. The key issue might be to ascertain when negotiations have reached a sufficiently definite outcome and which that is. In most closings all parties concerned sign some kind of contractual document which thereafter can serve as evidence for the intentions pursued. Yet the step from negotiatory steps and intermediate proposals to final and binding documents might be difficult to ascertain in the concrete case, too. Particularly eminent is the necessity to distinguish between mere Letters of Intent or Memoranda of Understanding (comparative survey on these phenomena e.g., by Cordero Moss, in Schulze (2007), p. 139) on the one hand and genuine contracts on the other hand. 3. Acting upon prior negotiations. Parties may also express their assent by acting upon the result of prior negotiations which have not been finalized in a formal closing. Yet the main problem is evident: to identify the content with which the contract is concluded. Still mutual consensus is needed, and parties might think differently about the outcome of their negotiations.

109

P. Mankowski & M. Müller A consequential problem might be that it is difficult to ascertain the point of time when the contract is concluded. Generally, formation of a contract by acting upon prior negotiations is only a second-best solution and should be resorted to only subsidiarily if and insofar as there is no chance to establish a contract by express or implicit statements. 4. Mutual assent to contract documents. The parties might mutually assent to a contract document prepared by a presumedly neutral third party, for instance a notary in real estate transactions. Then their mutual consensus is indubitable whilst it is impossible to identify offer and acceptance by either party. Yet the formation of the contract is reached by statements of the parties, and thus in the close vicinity of rules regulating statements. The difference to the traditional mode of concluding contracts is only a technical one and thus negligible in principle. 5. Tripartite and multi-party contracts. Traditional contract doctrine operates in a twoparty setting: The one party offers, and the other party accepts. Tripartite or multi-party contracts operate beyond such simple structure as they require consensus by every party concerned in order to become finally binding. Only in very simple negotiations it will be possible to identify one party offering and the others accepting. Furthermore, there might be additions which bear only relevance for other parties than the one initially offering. Yet still the formation of the contract is executed by statements and thus the rules on offer and acceptance might be applied insofar as possible.

Draft Common Frame of Reference Article II. – 4:211: Contracts not concluded through offer and acceptance The rules in this Section apply with appropriate adaptations even though the process of conclusion of a contract cannot be analysed into offer and acceptance. Article II.-4:211 DCFR has the same content like Article 2:211.

German Law §§ 145 et seq. BGB in German law directly address only the conclusion of contracts by offer and acceptance. They are neither exhaustive nor exclusive, though. Yet other modes of concluding contracts have not been subject of explicit regulation. The rules on offer and acceptance serve as model wherever this can be deemed appropriate, in particular where both parties assent to a contract text prepared by a third party (cf. only Merle (2005), p. 251 at 253; Bork, in Staudinger (2010), Vorbem. zu §§ 145 et seq. BGB no. 38).

Comparison and Evaluation 1. Common core? Although Article 2:211 PECL does not have a direct counterpart in German law, in substance German law mirrors its content. The regulation of offer and

110

Chapter 2: Formation acceptance serves as the starting point for governing other modes of concluding contracts. Insofar German law shares the basic approach with Article 2:211 PECL. 2. Basic idea. The basic idea underpinning Article 2:211 PECL is a welcome one. The very existence of the article points towards a world beyond offer and acceptance. 3. Lack of details. Yet the execution of the basic idea is half-baken only at best. Neither are the main instances identified which are envisaged, not even exemplarily or by way of a non-exhaustive catalogue, nor does the ‘rule’ escape the fate of being a virtual non-rule. The mere statement that the rules on offer and acceptance should govern if and insofar as they might be deemed fitting, is somewhat hapless (for a criticism of Article 2:211 PECL see Lücke (2007), 27 et seq.).

SECTION 3:

LIABILITY FOR NEGOTIATIONS

Principles of European Contract Law Article 2:301: Negotiations Contrary to Good Faith (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who has negotiated or broken off negotiations contrary to good faith and fair dealing is liable for the losses caused to the other party. (3) It is contrary to good faith and fair dealing, in particular, for a party to enter into or continue negotiations with no real intention of reaching an agreement with the other party. 1. General. Each negotiating party is in principle at liberty to break off these negotiations at will and even without giving reasons. In principle, negotiations do not carry any commitment for either party and consequentially any ensuing liability. Freedom of contract encompasses the freedom to deny the conclusion of a contract. But good faith and fair dealing are overarching principles limiting such freedom in exceptional circumstances. If a party seriously indicates and affirmatively signals that it will conclude the contract thus luring the other party into false security and into investments in the future contract, but then suddenly withdraws from the negotiations this might be contrary to good faith and fair dealing. The affirmative signal is over the edge and generates trust on the other party’s side. Disappointing this trust incurs liability. 2. Negotiation or breaking off negotiations contrary to good faith and fair dealing. (2) refers to two forms of conduct contrary to good faith and fair dealing, each of which might give rise to liability. Negotiation violates the good faith principle if a party does not, or not anymore, intend to conclude a contract. Such a party then is subject to the allegation not to have informed the counterparty about her true intention and so to have induced the other party to waste resources on a hopeless matter. This also seems to be the paradigm underlying (3).

111

P. Mankowski & M. Müller Breaking off negotiations is a distinct issue. Such breaking off usually is in accordance with the freedom to conclude a contract. Nonetheless, under certain circumstances a respective behaviour might be considered unfair. One might envisage a situation in which one party causes the other party to reasonably rely on a subsequent conclusion of a contract and the other party makes arrangements due to this reliance but finally, without any plausible reason, the first party breaks off negotiations. Liability comprises, but also is limited to, the ‘losses caused to the other party’. This means all losses that can be attributed to the breach of the duty of good faith and fair dealing. The benchmark is whether a certain damage would have been avoided, had the breaching party complied with her duty. Thus, the harmed party has to be put in the situation she would have been in if she had never relied on the conclusion of contract. Consequentially, all reliance damages are covered, however, no expectation damages can be recovered. 3. Exemplifying good faith and fair dealing. Both types of cases can appear in many practical contexts. One might imagine a M&A transaction in which the party apparently interested in the acquisition enters into negotiations to prevent the seller from carrying out the transaction with a competitor of the first party and, as time in such transactions often is of the essence, breaks off negotiations as soon as the transaction would not make sense for the competitor anymore. It is also conceivable that a lessor, in order to match the specific expectations brought forward by a potential lessee, arranges for respective investments in the property to be leased and then the lessee withdraws from the negotiations for no good reason. Or an employer might induce an employee to terminate a current employment with another employer and afterwards, contrary to his prior announcement, does not offer the employee an employment contract in his business.

Draft Common Frame of Reference Article II.-3:301: Negotiations Contrary to Good Faith (1) A person is free to negotiate and is not liable for failure to reach an agreement. (2) A person who is engaged in negotiations has a duty to negotiate in accordance with good faith and fair dealing and not to break off negotiations contrary to good faith and fair dealing. This duty may not be excluded or limited by contract. (3) A person who is in breach of the duty is liable for any loss caused to the other party by the breach. (4) It is contrary to good faith and fair dealing, in particular, for a person to enter into or continue negotiations with no real intention of reaching an agreement with the other party. Article II.-3:301 DCFR is more or less a twin of Article 3:301 PECL. Yet, by breaking up Article 3:301(2) PECL in two paragraphs, it more clearly differentiates the duty to negotiate in accordance with good faith and fair dealing from the sanctioning of its

112

Chapter 2: Formation breach. It also expressly states that the respective duty is mandatory, even though this should not serve as a reason for a conclusio e contrario under PECL.

German Law German law does not contain a direct counterpart to Article 2:301 PECL specifically and especially spelling out regulation for negotiating contrary to good faith and fair dealing. Yet § 311(2) in conjunction with § 241(2) BGB, being the codification of the more comprehensive doctrine of culpa in contrahendo, might serve as an appropriate basis for establishing like duties. These more general rules might do the trick in a like manner and to the same avail eventually. German judicature is more generous in the absence of a form requirement (cf. BGH NJW 1975, 1774) but rather reluctant if a form requirement is at stake (cf. BGH NJW 1996, 1884, 1885). The neglect of such duties triggers an award for damages under § 280(1) BGB. However, allowing for the recovery of expectation damages would run afoul of the freedom to conclude a contract because the same economic result could be achieved that would have been achieved in case of conclusion of the contract. Consequentially, only reliance damages are recoverable.

Comparison and Evaluation 1. Common core? Both negotiations contrary to good faith as a breach of duty and reliance damages as remedy are well-settled under PECL, DCFR and German law. This also is in accordance with Article 2.1.15 UNIDROIT Principles. It seems to be shared by a majority of legal systems, though, is not a uniform one on the internationel level (cf. von Bar/Clive (2009) comparative survey in Notes 1–28 on Article II.-3:301 DCFR). 2. Negotiation or breaking off negotiations contrary to good faith and fair dealing. The rule offers a well-balanced solution to the conflict between party autonomy and good faith principle. Individual freedom is the starting point. Its limitation asks for a justification. The good faith principle introduces such a justification as it recognizes reliance on the conclusion of a contract worthy of protection in such cases as have been exemplified above. The remedy, i.e., recovery of reliance damages, is a sound one, too. It puts the party harmed in the position she would have been in if she had never engaged in the contractual negotiations.

Principles of European Contract Law Article 2:302: Breach of Confidentiality (1) If confidential information is given by one party in the course of negotiations, the other party is under a duty not to disclose that information or use it for that party’s own purposes whether or not a contract is subsequently concluded.

113

P. Mankowski & M. Müller (2) The remedy for breach of this duty may include compensation for loss suffered and restitution of the benefit received by the other party. 1. General. Negotiations in preparation of a contract often involve a necessity to reveal business secrets. One might imagine a potential buyer of an enterprise who wants to know all relevant information to assess the adequate price for the sale. However, the potential seller is in a dilemma. If he does not reveal all significant information, the buyer might not be willing to carry out the transaction at all or only at a lower price. But if the seller reveals economically valuable information and the transaction is not carried out, the buyer has received a benefit without compensation at the disadvantage of the seller. Article 2:302 PECL offers, regardless of the scope of intellectual property law, a way out. It establishes a duty neither to disclose nor to use confidential information and sanctions its breach by two remedies: damages and restitution. 2. Confidentiality of information. PECL omits a definition of confidentiality. What is determinative? The party’s intent? An objective interest of confidentiality? How would this have to be determined? By the number of people knowing the information? By the existence of express duties of confidentiality for the parties having knowledge? After all, PECL pursues a reasonable approach but does not satisfyingly implement it.

Draft Common Frame of Reference Article II.-3:302: Breach of Confidentiality (1) If confidential information is given by one party in the course of negotiations, the other party is under a duty not to disclose that information or use it for its own purposes whether or not a contract is subsequently concluded. (2) In this Article, ‘confidential information’ means information which, either from its nature or the circumstances in which it was obtained, the party receiving the information knows or could reasonably be expected to know is confidential to the party. (3) A party who reasonably anticipates a breach of the duty may obtain a court order prohibiting it. (4) A party who is in breach of the duty is liable for any loss caused to the other party by the breach and may be ordered to pay over to the other party any benefit obtained by the breach. 1. General. Article II-3.302 DCFR follows the general course pre-charted by Article 2:302 PECL but adds some elements. A marked improvement in principle is (2) trying to implement some kind of definition for the crucial notion of ‘confidential information’. Also, (3) is a valuable addition reflecting on anticipated breach of duty and pointing towards injunctory relief.

114

Chapter 2: Formation 2. Confidentiality of information. Any attempt at defining or circumscribing ‘confidential information’ is highly welcome since this is a very sensitive field. (2) undertakes such an attempt. Yet the proposed definition appears rather circular since it lacks a proper definition of the key word ‘confidential’ which – even more detrimentally – is used both in the explanandum and in the explanans. (3) is another improvement on Article 2:302 PECL for it expressly lays the ground for injunctory relief. The PECL do not exclude injunctory relief but they rather permit by way of implication than expressly.

German Law German law does not contain a direct counterpart to Article 2:302 PECL specifically and expressly establishing a rule for a breach of a duty of confidentiality. Yet § 311(2) in conjunction with § 241(2) BGB might serve as an appropriate basis for establishing like duties (cf. e.g., Beaucamp (2003) 3096, 3097). These more general rules, operating as a legal transposition of the more comprehensive doctrine of culpa in contrahendo, might do the trick. Their neglect triggers an award for damages under § 280(1) BGB. In the further consequence, it is for §§ 249; 252 BGB to measure such damages. Restitution of a benefit received is not expressly provided for, but might yet again stem from the application of these general rules, too. Though, it will be usually difficult to establish causality. Apart from that, in certain cases intellectual property law might offer relief if the breach of a duty of confidentiality also amounts to the violation of an intellectual property right. In this area, restitution is a well-settled remedy (cf. e.g., § 97(2) of German copyright law or § 139(2) of German patents law). In contrast, injunctory relief is not granted by § 280(1) BGB but only to the extent property rights are at stake. Under German law, the parties are at liberty to conclude agreements governing ensuing negotiations which contain an express contractual duty not to disclose and to preserve confidentiality. This is a common appearance particularly in M&A practice. If parties agree so, a breach of such agreement would allow for damages under § 280(1) BGB. Generally, parties might be advised to spell such duties expressly.

Comparison and Evaluation 1. Common core? Although German law does not contain a direct expression its general rules provide sound and reliable ground for regulation along the lines which Article 2:302 PECL draws expressly. Insofar German law provides ample support and backing for a contention that Article 2:302 PECL mirrors standards already established in the European States. Support at the international stage is to be found in Article 2.1.16 UNIDROIT Principles. Direct and specific regulation gains the edge of explicitness. Its more detailed approach provides better guidance for informed parties and even more for generally uninformed parties. It addresses the issue at stake (the importance of which is virtually

115

P. Mankowski & M. Müller and practically undeniable) more specifically than mere generic regulation where the very issue is only ‘also’ covered. 2. Confidentiality of information. The confidentiality of information which needs protection is of course a well-known principle also in German law but has not found its way into express legislation yet, as far as private law is concerned. In particular, there has not been an attempt to define or circumscribe the ingredients of ‘confidentiality’ as concept for the purposes of private law. With necessary reservation due to the different purpose of legislation, however, useful material for interpretation is to be found in the commentaries to § 203 of the German Criminal Code since the concept of Geheimnis (secret) is closely related with the concept of confidentiality. Criteria to be considered are: a party’s intent to treat an information as confidential (Geheimhaltungswille), this intent must be recognized of being worthy of protection (Geheimhaltungsinteresse). Whether this is the case particularly depends on the nature of the information (e.g., economic value) and the people knowing the information (e.g., only few people under an express duty of confidentiality, either by contract like employees or by law like legal advisors). 3. Injunctory relief and restitution. Both injunctory relief and restitution, from a German perspective, have an innovative touch. Under German law, injunctory relief is generally limited to the protection of an absolutes Recht (absolute right). Similarly, granting restitution in the traditional law of damages always involves difficulties with causality as it is hard to prove that the harmed party would have gained the same benefit like the counterparty by its breach. Under German law, restitution as damages has found recognition only in the particular area of intellectual property law.

116

CHAPTER 3

Authority of Agents M. Lehmann

SECTION 1:

GENERAL PROVISIONS

Principles of European Contract Law Article 3:101: Scope of the Chapter (1) This Chapter governs the authority of an agent or other intermediary to bind its principal in relation to a contract with a third party. (2) This Chapter does not govern an agent’s authority bestowed by law or the authority of an agent appointed by a public or judicial authority. (3) This Chapter does not govern the internal relationship between the agent or intermediary and its principal. 1. General. a) Purpose of rules on authority. In modern life, to be represented by agents is not only convenient, but often a necessity. This necessity comes with the division of labour that is one of the main characteristics of a developed economy. Nobody can do it all by himself anymore. For many acts, others are employed who are more specialized than we are. Moreover, even those few fortunate people that are capable of caring for all their own affairs, they cannot be at different places at the same time, as is often necessary. They would need to become ‘two people’ that act as one, which is precisely what agency is about. b) Historic and comparative overview. In history, agency was not always and everywhere recognized. Roman law, for instance, did not know a general concept of agency (Zimmermann (1990), p. 47). Neither did the old German law (see Leptien, in Soergel (1999), Vor § 164 no. 7). But the changes brought about by economic development made representation indispensable. As a consequence, legal systems

117

M. Lehmann developed specific rules for that purpose. It is therefore no wonder that the PECL comprise the subject as well, even though other texts, such as the Proposal for the Common European Sales Law (COM(2011) 635 final) omit it. c) Systematic position. In Chapter 3 of PECL, agency is treated as a matter of contract law. Thereby, the Principles follow the continental tradition: The inclusion of agency into contract law is a distinctive feature of civil law. In the common law, agency is most often treated as a matter separate and outside of contract law (see, e.g., Markesinis/Munday (1992); Powell (1961); Stone (1996); American Law Institute (2006); Farnsworth (2004), § 3.12). 2. Terminology. a) Avoidance of the term agency. The Principles carefully avoid the notion ‘agency’, which is used in the English speaking world. Instead, they employ notions such as ‘representation’ or ‘authority’. The purpose of this nomenclature is to avoid any confusion with the Common law concepts. b) Authority. The term ‘authority’ is meant here as the power to bind the principal to a contract with another person. This is a legal power, not a factual situation. The English usage of the word ‘authority’ seems to be to the contrary (for this distinction, cf. Markesinis/Munday (1992), p. 9). c) Representation. The fact that a person creates rights and/or obligations for another is called ‘representation’. Representation is based on authority. d) Intermediary. There are many terms by which persons who receive authority to represent another are designated: agent, representative, broker… As a catch-all category, Article 3:101 PECL chooses the term ‘intermediary’. An intermediary is a person that intervenes in between the principal and a third party. e) Agent. In the following provisions of the PECL, the preferred expression is ‘agent’. The meaning in which it is used is the same as ‘intermediary’. 3. Scope of application. The first paragraph defines the scope of application of the Chapter. Essentially, Chapter 3 deals with the authority of intermediaries to bind the principal. Paragraph 1 gives the impression that the Chapter would be limited to the question whether an intermediary has authority and what the effects of such authority are. In reality, the scope of application of the chapter goes much further. For instance, it also deals with the liability of the intermediary that may arise from a lack of authority (Article 3:204(2) PECL). 4. Excluded matters. a) Authority granted by law or by an organ of the State. As is clarified by paragraph 2, authority that is granted by law or by a public or judicial body is not covered by Chapter 3. This kind of authority is not consensual, meaning that it is not derived from the consent given by a private person, but arises from a statute or from an act of an organ of the State. It is thus governed by entirely different rules. b) Internal relationship between principal and agent. Paragraph 3 highlights that Chapter 3 does not cover the internal relationship between principal and agent. Civil law codifications following the Roman tradition often conceive of authority as an aspect of the obligatory relationship between the principal and the agent. For instance, under the French Code civil, the term ‘mandat’ addresses both the internal relationship

118

Chapter 3: Authority of Agents between principal and agent, and the power of the agent to represent the principal vis-à-vis third parties. The authors of the PECL have decided to strictly separate both questions, thereby following the German model (see below).

Draft Common Frame of Reference Article II. – 6:101: Scope (1) This Chapter applies to the external relationships created by acts of representation – that is to say, the relationships between: (a) the principal and the third party; and (b) the representative and the third party. (2) It applies also to situations where a person purports to be a representative without actually being a representative. (3) It does not apply to the internal relationship between the representative and the principal. Article II. – 6:102: Definitions (1) A ‘representative’ is a person who has authority to affect the legal position of another person (the principal) in relation to a third party by acting on behalf of the principal. (2) The ‘authority’ of a representative is the power to affect the principal’s legal position. (3) The ‘authorisation’ of the representative is the granting or maintaining of the authority. (4) ‘Acting without authority’ includes acting beyond the scope of the authority granted. (5) A ‘third party’, in this Chapter, includes the representative who, when acting for the principal, also acts in a personal capacity as the other party to the transaction. 1. General. The provisions can be found in Book II of the DCFR ‘Contracts and other juridical acts’, at the beginning of § 6 entitled ‘Representation’. Article II.-6:101 DCFR is based on the model of Article 3:101 PECL, but deviates from it in a number of respects. Article II.-6:102 DCFR contains definitions of important terms. 2. Terminology. a) Representation. The drafters of the DCFR have preferred the term ‘Representation’ over ‘Authority’. b) Representative. The category of the ‘intermediary’ has been replaced by that of the ‘representative’. The notion ‘agent’ has also disappeared from the section on representation as it is now used in Book IV.E. Chapter 3 of the DCFR in relation to ‘Commercial Agency’. The notion ‘representative’ is defined in Article II.-6:102 (1) DCFR. The definition refers to that of ‘authority’ and is therefore not very helpful.

119

M. Lehmann However, one can conclude from it that an agent acting without authority is not a ‘representative’ for purposes of the DCFR (see von Bar/Clive (2009), Comment on Article II.-6:102 (1) DCFR, p. 415). c) Authority. The DCFR describes for the first time the term ‘authority’ in a coherent manner, see Article II.-6:102(2) DCFR. Accordingly, authority is a legal power, not a factual situation. d) Authorization. The act whereby somebody gives authority to another is called ‘authorisation’, see Article II.-6:102(3) DCFR. e) Acting without authority. The DCFR clarifies in Article II.-6:102(4) that the term ‘acting without authority’ is not limited to persons acting without having been authorized. Instead, it also covers persons to whom authority has been given, but which exceed their authority. f) Third party. Normally, the co-contractor or ‘third party’ is a person different from the principal and the agent. However, as Article II.-6:102(5) sets out, the representative may be the same person as the third party if he is simultaneously acting in a personal capacity as the other party to the transaction. In this case, the agent is acting for the principal on the one hand, and for himself on the other. Typically, a conflict of interest arises (for its solution, see Article II.-6:109(1), (2)(b) DCFR). 3. Scope of application. Article II.-6:101(1) DCFR describes the scope of the section in a new way: The subject is no longer ‘authority’, as it is in Article 3:101(1) PECL, but rather ‘the external relationship created by way of representation’. The external relationship is the antonym to the internal relationship between the representative and the principal that is expressly excluded from the section by Article II.-6:101(3) DCFR. What is exactly meant by ‘external relationship’ is explained in more detail by the following description of two relationships. Whereas the first of these two external relationships, the one between the principal and the third party, is also covered by Article 3:101(1) PECL, the second external relationship, the one between the representative and the third party, is not, because such a relationship arises only if the representative acted without or beyond its authority. The DCFR thus clarifies from the beginning that the liability of the agent towards the third party falls within the scope of the section. Article II.-6:101(2) DCFR has a similar content: It underlines that the section not only applies to cases in which there is actual authority, but also if a person pretends to act as a representative without having such authority. Similar to Article II.-6:101(1)(b) DCFR, this paragraph covers the liability of the agent, but in addition, it clarifies that the authority of the alleged representative will be checked against the provisions of this section. 4. Excluded matters. a) Matters of public law. Contrary to the provision in PECL, the DCFR does not expressly exclude authority granted by law or by an act of an organ of the State from the provisions on agency. The most probable reason is that the authors considered these questions to be excluded from the overall scope of the DCFR. Thus, Article I.-1:101(2) DCFR clarifies that ‘rights and obligations of a public law nature’ are not governed by the DCFR. Likewise, ‘matters relating primarily to procedure or

120

Chapter 3: Authority of Agents enforcement’ are excluded (Article I.-1:101(2)(h) DCFR). It is in these areas that legal authority and authority granted by an organ of the State are most relevant. b) Internal organization of companies and other bodies. Furthermore, the ‘creation, capacity, internal organisation, regulation or dissolution of companies and other bodies corporate or unincorporated’ is excluded as well (Article I.-1:101(2)(g) DCFR). These matters belong to corporate law and to insolvency law. However, the external representation of the company or other body is covered (see von Bar/Clive (2009), Comment B on Article II.-6:101 DCFR, p. 412). This is one of the questions of agency law that have the highest importance in practice.

German Law 1. General. German law deals with agency in §§ 164–181 BGB. These provisions form title 5 of Section 3 of the First Book of the German Civil Code, entitled ‘General Part’. Section 3 is entitled ‘Juridical acts’ (Rechtsgeschäfte), the heading of title 5 is ‘Representation and power of attorney’ (Vertretung und Vollmacht). 2. Absence of a general provision. The BGB refrains from applying general provisions on the scope of application, such as Article 3: 101 PECL. It also does not include definition sections in the style of the DCFR. 3. Scope of application. It results from the position in the General Part that the §§ 164–181 BGB apply to all other books of the BGB. Their scope is thus considerably wider than that of Chapter 3 of the PECL. They govern not only the law of obligations, but also property law, family law and succession law. 4. Excluded matters. a) Authority granted by law or by an organ of the State. As Chapter 3 PECL, §§ 164–181 BGB do not apply to authority granted by statute or by an organ of the state. Thus, it is recognized that the legal power of an insolvency administrator or an executor of a trust does not depend on the provisions of the BGB. These persons are not even considered as agents, but as administrators charged with a private function (Heinrichs, in Palandt (2012), Einf v § 164 no. 9; Jauernig, in Jauernig (2011), § 164 no. 13). With regard to the organs of a company (managers, board of directors), there is also some dispute as to whether one could call them ‘agents’ in the proper sense of the word (see Beuthien (1999), p. 1143). However, it is generally accepted that the provisions of the §§ 164–181 BGB apply by analogy (Schramm, in Münchener Kommentar (2012), Vor § 164 no. 9; Jauernig, in Jauernig (2011), § 164 no. 6; Ellenberger, in Palandt (2012), Einf v § 164 no. 9). b) Internal relationship between principal and agent. As Chapter 3 PECL, §§ 164–181 BGB do not cover the internal relationship between the principal and the agent. This relationship is dealt with in the other books of the BGB, mainly in Book 2 on the law of obligations. Most often, the relation will be some form of mandate (Auftrag or Geschäftsbesorgungsvertrag, §§ 662–674, § 675 BGB).

121

M. Lehmann Comparison and Evaluation Unlike the PECL and the DCFR, German law does not contain any introductory provision to the law of agency. However, such a provision seems useful in order to define the precise scope of the following provisions, as well as the excluded matters. In particular, the fact that the internal relationship between the principal and the agent is not covered deserves special mention. Regardless of these formal differences, all three texts basically cover the same issues with the exception of indirect representation (see Article 3:102 PECL). Overall, one must say that the DCFR contains the most precise provision on the scope, in spite of some redundancies. This precision is even more pronounced throughout the list of definitions contained in Article II.-6:102 DCFR.

Principles of European Contract Law Article 3:102: Categories of Representation (1) Where an agent acts in the name of a principal, the rules on direct representation apply (Section 2). It is irrelevant whether the principal’s identity is revealed at the time the agent acts or is to be revealed later. (2) Where an intermediary acts on instructions and on behalf of, but not in the name of, a principal, or where the third party neither knows nor has reason to know that the intermediary acts as an agent, the rules on indirect representation apply (Section 3). 1. General. The provision introduces a categorical distinction into the law of agency: direct and interdirect representation. 2. Direct representation. Article 3:102(1)1 PECL defines the concept of direct representation. Representation is direct if the agent acts in the name of the principal. However, this does not mean that the agent would have to disclose the identity of the principal when conducting a transaction. As is made clear by Article 3:102(1)2 PECL, the name of the principal can be left open at this point in time. In case it is not revealed later, however, the agent will be liable to the third party, see Article 3:203 PECL. In case of direct representation, Section 2 applies. 3. Indirect representation. Article 3:102(3) PECL deals with so-called indirect representation. This kind of agency is submitted to a set of provisions entirely different from that on direct representation (Section 3). Representation is indirect if the agent does not disclose at the time of contracting that she is not acting in her personal capacity, and the other party does not have any other indication that he is dealing with an agent. From the perspective of the third party, the situation presents itself like he would enter into a contract with the agent.

122

Chapter 3: Authority of Agents Draft Common Frame of Reference 1. General. The DCFR does not contain a fundamental distinction similar to the one drawn in Article 3:102 PECL. 2. Direct representation. In general, the rules of Section 6 of Book II of the DCFR apply to direct representation only. 3. Indirect representation. The only provision dealing with indirect representation is Article II.-6:106 DCFR, which will be commented on later (see Section 2, Article 3:202 PECL).

German Law 1. General. The BGB only knows direct representation, not indirect representation. 2. Direct representation. Any act of direct representation is governed by §§ 164–181 BGB. 3. Indirect representation. a) Inexistence as a legislative concept. The BGB does not contain any provisions on indirect representation. The Commercial Code (Handelsgesetzbuch – HGB) sets out some rules that deal with certain problems created by indirect representation in particular contexts (see §§ 383 et seq. HGB). But the concept as such does not exist in German private law. This results from a fundamental principle, the so-called principle of transparency (Offenkundigkeitsprinzip), which is embodied in § 164(1)1 BGB (see below on Article 3:202 PECL). Under this principle, the agent is required to make his declaration of will (e.g., offer or acceptance) in the name of the principal. Hence, undisclosed or indirect representation is not representation in the sense of the BGB. b) Existence as a practical and a doctrinal category. Although the legislator chose not to regulate indirect representation, he could not avoid the phenomenon that some persons would act for others without disclosing this fact. The absence of any rule under German law makes the subject particularly complex. Hence, it is no wonder that there is a considerable amount of research on the subject. Authors regularly use the term indirect representation (indirekte Stellvertretung) (see Jauernig, in Jauernig (2011), § 164 no. 11; Leptien, in Soergel (1999), Vor § 164 nos. 33–36; Schramm, in Münchener Kommentar (2012), Vor § 164 no. 13), even though it does not exist as a legislative concept. Against the background of comparative law, some authors have argued for approaching the regime of indirect representation to that of direct representation (see Hager (1980), Schwark (1980) pp. 777, 780). However, this view is rejected by a majority of authors (see Leptien, in Soergel (1999), Vor § 164 no. 34; Jauernig, in Jauernig (2011), § 164 no. 11; Schramm, in Münchener Kommentar (2012) Vorbemerkung § 164 no. 14). They refer not only to the text of the BGB, but also to the need for transparency of legal relationships in order to protect the legitimate interests of the other party. Thus, it is stressed that indirect representation creates legal rights and obligations only between the agent and the third party, not between the principal and

123

M. Lehmann the latter (see Leptien, in Soergel (1999), Vor § 164 no. 33; Jauernig, in Jauernig (2011), § 164 no. 11). Nevertheless, there is agreement on the need to take the special need for indirect representation into account (see Schramm, in Münchener Kommentar (2012) Vorbemerkung § 164 no. 14-23; Schilken, in Staudinger (2004), Vor § 164 nos. 35, 43: Leptien, in Soergel (1999) § 164 no. 34). c) Rules allowing or recognizing effects of indirect representation. Despite the general reluctance to accept indirect representation, the German legislator has enacted at least one rule that responds to the practical needs described. With regards to the contract of commission, § 392(2) HGB provides that claims acquired by a commission agent in the exercise of his function shall be considered to belong to his consigner (on the concept of the commission contract in German law see Markesinis/Unberath & Johnston (2006), p. 117). This rule protects the interests of the consigner, for instance, in case of insolvency proceedings against the commission agent by giving the same rights to the consigner as if he would have entered himself into the contract with the third party. In addition to this specific rule, German property law (‘Sachenrecht’) allows for some effects of indirect representation. Under § 930 BGB, an indirect representative may transfer the ownership of a good he has acquired immediately – after having been the owner for one ‘logical’ second – to the principal without giving up possession by concluding a so-called antezipiertes Besitzkonstitut (Berger, in Jauernig (2011), § 930, nos. 16–18; Leptien, in Soergel (1999), Vor § 164 no. 36; Schramm, in Münchener Kommentar (2012), Vor § 164 no. 22). Furthermore, some effects are recognized under the law of obligations as well. It is generally acknowledged that the indirect representative may claim damages for any loss suffered by the principal due to nonperformance by the other party (so-called Drittschadensliquidation, see Teichmann, in Jauernig (2011), Vorbemerkungen zu den §§ 249–253, nos. 19–20; Leptien, in Soergel (1999), Vor § 164 no. 34; Oetker, in Münchener Kommentar (2012), § 249, nos. 296–298). In this respect, the principal is also treated as if he were a party to the contract between the indirect representative and the other party. Finally, it was held that the other party may avoid a contract if it was induced by fraud on the part of the principal even if the indirect representative did not know and must not have known of it (see Hefermehl, in Soergel (1999), § 123 no. 34; Ellenberger, in Palandt (2012), § 123 no. 12; Armbrüster, in Münchener Kommentar (2012) § 123, no. 60). The list of these examples is not exhaustive. There are other cases where the special effects of indirect representation have been acknowledged (see Hager (1980), pp. 240–244). Overall, one can say that although the concept of indirect representation is not recognized as such, many of its implications are accepted by the German legislature, the courts, and doctrine (for a comparison with the English concept of undisclosed agency, see Markesinis/Unberath & Johnston (2006), pp. 110–111).

Comparison and Evaluation While the PECL recognizes indirect representation and contains a number of provisions in its respect, German law and the DCFR reject this category. Nevertheless, one cannot deny the existence of indirect representation as a phenomenon. There will always be

124

Chapter 3: Authority of Agents cases in which the agent does not disclose the fact that he is acting for another. Whether one will speak of ‘representation’ in these situations is a matter of taste. On a substantive level, it is clear that they deserve some special rules, as is evidenced by the German Commercial Code and case law. The main problem is where to put those rules: In the section on representation, or scattered throughout different books and codes? From a European perspective, it is crucial that the EU does not dispose of a substantive insolvency regulation. Therefore, there is a need to include rules on indirect agency in a common frame of reference, and it would also be useful to include them in an optional instrument that the parties can select to govern their contract.

SECTION 2:

DIRECT REPRESENTATION

Principles of European Contract Law Article 3:201: Express, Implied and Apparent Authority (1) The principal’s grant of authority to an agent to act in its name may be express or may be implied from the circumstances. (2) The agent has authority to perform all acts necessary in the circumstances to achieve the purposes for which the authority was granted. (3) A person is to be treated as having granted authority to an apparent agent if the person’s statements or conduct induce the third party reasonably and in good faith to believe that the apparent agent has been granted authority for the act performed by it. 1. General. The provision sets out how the existence and the scope of authority may be determined. 2. Express and implied authority. Paragraph 1 provides that authority does not need to be given expressly but can also be implied. The circumstances play a crucial role in determining whether implied authority has been given. 3. Scope of authority. Paragraph 2 concerns the scope of authority. It sets out that in determining the scope of authority, its purpose rather than the wording is decisive. The agent can have authority for acts even though they are not specifically mentioned in the authorization, as long as they are necessary to achieve the goal that the principal pursues with the authorization. Again, the role of the circumstances of the particular case is highlighted in the text. 4. Apparent authority. Paragraph 3 deals with apparent authority. In this case, a person has not given any or sufficient authority to the agent to perform a certain act. Nevertheless, he may be treated as having given such authority if the express conditions mentioned in the PECL are fulfilled. a) Statement or conduct. The first condition is that the person has made a statement or conducted himself in a certain way. Thus, a certain act is indispensable.

125

M. Lehmann b) Inducement of belief. The second condition is that the act has induced another person to believe that the apparent agent has (sufficient) authority. There must be a causal nexus between the act and the belief of the other person. c) Reasonable belief in good faith. The third condition is that the other person’s belief is reasonable and offered in good faith. The act must have been likely to cause a reasonable person to belief in the authority. A person that is aware of circumstances indicating that no or no sufficient authority has been given is not in good faith.

Draft Common Frame of Reference Article II. – 6:103 DCFR: Authorisation (1) The authority of a representative may be granted by the principal or by the law. (2) The principal’s authorisation may be express or implied. (3) If a person causes a third party reasonably and in good faith to believe that the person has authorised a representative to perform certain acts, the person is treated as a principal who has so authorised the apparent representative. Article II. – 6:104: Scope of authority (1) The scope of the representative’s authority is determined by the grant. (2) The representative has authority to perform all incidental acts necessary to achieve the purposes for which the authority was granted. (3) A representative has authority to delegate authority to another person (the delegate) to do acts on behalf of the principal which it is not reasonable to expect the representative to do personally. The rules of this Chapter apply to acts done by the delegate. 1. General. Article II.-6:103 DCFR closely follows the model of Article 3:201 PECL, with minor exceptions (see below comments 2, 3 and 5). Article II.-6:104 DCFR has been added to the Principles, but only the first paragraph is new. The other paragraphs incorporate rules that can be found elsewhere in the PECL. 2. Authorization by principal or by law. Article II.-6:103(1) DCFR sets out that authorization may not only be given by the principal, but also by the law. This contrasts with the PECL, which exclude legal authority from their scope (see above comment 4 a to Article 3:101 PECL). The provision clarifies that Chapter 6 of Book II of the DCFR similarly applies to such situations. 3. Express or implied authority. Article II.-6:103(2) DCFR takes up the distinction drawn in Article 3:201 PECL. It adds nothing new, but leaves out the reference to the circumstances. Indeed, this reference seems superfluous because it is clear that implied authority must always be inferred from the particular facts of the case.

126

Chapter 3: Authority of Agents 4. Apparent authority. Article II.-6:103(3) DCFR corresponds to Article 3:201(3) PECL. The two provisions differ only from a linguistic viewpoint, not in substance. 5. Scope of authority. Article II.-6:104 DCFR relates to the scope of authority in the sense of Article 3:201(2) PECL. Article II.-6:104(1) DCFR clarifies that the scope of the representative’s authority depends on the grant by the principal. There are some exceptions to that rule. For instance, Article II.-6:104(3) DCFR confers power onto the representative regardless of the principal’s wishes. Article II.-6:104(2) DCFR corresponds to Article 3:201(2) PECL. It deviates in so far as the reference to the circumstances is left out (see also above comment 3). Moreover, it speaks of ‘incidental’ acts, thereby further limiting the authority to acts that are not expressly provided for Article II.-6:104(3) will be commented under Article 3:206 PECL.

German Law § 167 BGB: Creation of power of attorney (1) A power of attorney is created by way of declaration to the person to be authorized or to the third party against whom the agency is to take place. (2) The declaration does not need to be in the form which is determined for the legal transaction to which the power of attorney relates. 1. General. The provision clarifies how authority is given to the agent. 2. Express and implied authority. The BGB does not distinguish between express and implied authority. Even so, it is generally acknowledged that authority may be express or implied (see, e.g., Jauernig, in Jauerning (2011), § 167 no. 7; Ellenberger, in Palandt (2012), § 167 no. 1; Schramm, in Münchener Kommentar (2012), § 167 no. 37). In addition, a number of statutory rules provide that a person is presumed to have authorized another under certain circumstances. For instance, § 54(1) HGB provides that a person employed in a commercial business is deemed to be authorized to enter into any transaction belonging to the business. A similar solution applies under the PECL (see Lando/Beale (2000), p. 202, Article 3:201, Comment B, Illustration 1). In German law, however, precise exceptions are provided: The sales person is not presumed to be authorized to acquire or sell land, to subscribe bills of exchange, to take loans or to conduct legal proceedings for the principal (see § 54(2) HGB). 3. Internal and external authorization. Instead of the dichotomy between express and implied authority, § 167(1) BGB chooses a different distinction which relates to the way in which authority is given. The provision spells out that a person may be authorized either by a declaration directed to the agent itself, or by a declaration to a third party, e.g., the other party to a contract. The first type is called ‘internal authority’ (Innenvollmacht), the second is called ‘external authority’ (Außenvollmacht). The consequences of internal and external authority are basically the same. Some differences exist with regard to the way in which they are interpreted (see below comment 4). The

127

M. Lehmann most important divergences between the two types of authorities relate to the way in which they can be revoked. While internal authority can be revoked by a declaration addressed either to the representative or to the third party, external authority remains in force until the third party is notified of its expiration (see § 170 BGB, reprinted below under Article 3:209 PECL). 4. Scope of authority. a) Interpretation. The BGB does not expressly deal with the scope of authority. Yet some provisions (§§ 133, 157 BGB) provide guidance on how to interpret declarations of will. Since the authorization is a declaration of will, these provisions also apply to the interpretation of the act of authorization. It follows that the scope of authority has to be determined from the viewpoint of an objective recipient of the declaration. In the case of an internal authority, the viewpoint is that of an objective agent. In the case of an external authority, the perspective to be taken is that of an objective third party. Consequently, the scope of authority is not determined as a function of the will of the principal alone. Instead, one has to take into account how the recipient must have understood the declaration. This interpretation will often lead to results similar to those achieved by the teleological interpretation prescribed in Article 3:201(2) PECL. b) Statuatory definition. Some German statutes define the scope of authority of certain types of agents. This is true, for instance, for § 49 HGB with regard to a commercial clerk (Prokurist) or for § 126(1) HGB with regard to the authority of the directors of a commercial partnership. Other examples can be found in the Act on Limited Companies (GmbH-Gesetz) and in the Act on Public Companies (Aktiengesetz). Those statutory provisions on the scope of authority of certain agents are mostly mandatory (see, e.g., § 50 HGB and § 126(2) HGB). 5. Form of authorization. Paragraph 2 of § 167 BGB makes it clear that no formal requirements apply to the authorization. This is true even if the contract entered into by the agent is subject to such requirements. For instance, a sales contract relating to land is valid only if it has been notarized (see § 311b(1) BGB). Yet the authority to buy land can be given by the principal to the agent in writing or orally. There are however some notable exceptions that have been developed by courts and authors. For instance, authority is to be given in writing if it is irrevocable, or if the representative is allowed to contract with himself (see Leptien, in Soergel (1999), § 167 no. 12; Ellenberger, in Palandt (2012), § 167 no. 2; Schramm, in Münchener Kommentar (2012), § 167 nos. 19–23). 6. Apparent authority. The BGB contains no general rules on apparent authority (but see § 370 BGB, which states that a person handing over a receipt is deemed to be authorized to receive the performance to the extent that the circumstances of which the performing party is aware do not stand in the way of assuming such authorization). However, such rules can be found in case law. Two types of situations are to be distinguished (see Jauernig, in Jauernig (2011), § 167 nos. 8–9; Ellenberger, in Palandt (2012), § 172 no. 6; Schramm, in Münchener Kommentar (2012), § 167 no. 46). In the first situation, a person knows that an apparent agent was acting in his name without authority and tolerates this conduct (Duldungsvollmacht). In the second situation, a

128

Chapter 3: Authority of Agents person causes another to belief that he has given authority to an agent, although he has not done so (Anscheinsvollmacht). The third party relying on an apparent authority will be protected under a general principle called ‘legal appearance’ (Rechtsscheinprinzip), provided that certain conditions are fulfilled. a) Statement or conduct. The person that is presumed to have given authority must have behaved in a certain way (in the same vein, Article 3:201(3) PECL). In the case of Duldungsvollmacht, the person must have knowingly tolerated the conduct of the apparent agent, meaning that he has not made any attempts to stop it, although he had the possibility to do so (see Jauernig, in Jauernig (2011), § 167 no. 8; Ellenberger, in Palandt (2012), § 172 nos. 8–9; Schramm, in Münchener Kommentar (2012), § 167 no. 47). The behaviour that is required is thus an omission. Although it is not entirely clear, it seems possible to equate this omission with ‘conduct’ under Article 3:201(3) PECL. In the case of Anscheinsvollmacht, the behaviour is either a statement or some other type of conduct by which the person causes the third party to believe in the authority of the agent. This conduct must therefore be visible to the outside world. An illustrative case is that of a manager who has given a company’s letter forms and stamp to an employee. b) Inducement of belief. Furthermore, it is required that the third party knew about the statement or conduct and inferred from it that the apparent agent has been authorized. c) Reasonable belief in good faith. There is no dispute that the third party’s belief in the authority must have been reasonable under the circumstances of the case. Furthermore, it is accepted that the other party may not rely on its belief if it must have known from the circumstances that the agent had no or insufficient authority (see Wolf/Neuner (2012), § 50 no. 92).

Comparison and Evaluation German law deviates from the PECL and the DCFR in that it does not explicitly distinguish between express and implied authority. Instead, it differentiates between authority given externally and internally. Whereas the European distinction serves only as a clarification, the German one has some practical implications, which may be a reason to prefer it. As to the scope of authority, German law does not contain any specific provision, but achieves the same results as the European texts through applying the general rules of interpretation to the authorization. The possibility of apparent authority, which is provided for by the PECL and the DCFR, is also recognized by German case law. The courts draw a distinction between Duldungsvollmacht and Anscheinsvollmacht. It is a pedagogic distinction without any other useful purpose.

129

M. Lehmann Principles of European Contract Law Article 3:202: Agent acting in Exercise of its Authority Where an agent is acting within its authority as defined by article 3:201, its acts bind the principal and the third party directly to each other. The agent itself is not bound to the third party. 1. General. The provision defines the consequence arising from the representation of a principal by an agent. In general terms, this consequence can be described as follows: the agent’s acts will have the same results as if they would have been undertaken by the principal himself. 2. Conditions. For having the result described, Article 3:202 PECL requires that three conditions are fulfilled. a) Agent. An implied condition is that the person that is acting is an ‘agent’ (on this notion, see above Article 3:201 PECL, comments 2 d and e). b) Authority. A further implied condition is that the agent has authority. The meaning of this term is defined by Article 3:201 PECL. c) Acting within its authority. Finally, the agent must act within the limits of the authority bestowed upon him. His power to bind the principal goes only as far as the latter has authorized him to act on its behalf. 3. Results. Article 3:202 PECL describes two results of representation which are interdependent. The first sentence underlines that the act of the agent has repercussions only on the relationship between the principal and the third party. It follows that the act does not create any rights or obligations between the latter and the agent. This is expressed by the second sentence.

Draft Common Frame of Reference Article II. – 6:105: When representative’s act affects principal’s legal position When the representative acts: (a) in the name of a principal or otherwise in such a way as to indicate to the third party an intention to affect the legal position of a principal; and (b) within the scope of the representative’s authority, the act affects the legal position of the principal in relation to the third party as if it had been done by the principal. It does not as such give rise to any legal relation between the representative and the third party. Article II. – 6:106: Representative acting in own name When the representative, despite having authority, does an act in the representative’s own name or otherwise in such a way as not to indicate to the third party an intention to affect the legal position of a principal, the act affects the legal position of the representative in relation to the third party as if done by the representative

130

Chapter 3: Authority of Agents in a personal capacity. It does not as such affect the legal position of the principal in relation to the third party unless this is specifically provided for by any rule of law. 1. General. Article II.-6:105 DCFR defines the conditions and the results of a valid representation. Article II.-6:106 DCFR describes the consequences if one of the conditions of representation under the DCFR is not fulfilled. 2. Conditions. Article II.-6:105 DCFR sets out two conditions for a valid representation: First, the representative must indicate to the other party of the contract that he intends to act not in his personal capacity, but for the principal. He can do so by acting in the name of the principal or in any other way, provided that his intention is clear. Second, the representative must act within the scope of the authority that has been granted to him by the principal. 3. Results. a) Conditions of representation satisfied. If the above conditions are fulfilled, the act will affect the legal position of the principal as if it had been done by the latter himself, see the first sentence of Article II.-6:105 DCFR. This means that legal rights and obligations are exclusively created between the principal and the other party to the contract. The representative will not enter into any legal relation to the latter, see the second sentence of Article II.-6:105 DCFR. b) Representative not acting in the name of the principal. If the representative omits to indicate her intention to act for the principal, the opposite results will ensue under Article II.-6:106 DCFR. A legal relation will be created exclusively between the representative and the third party as if the former had acted in his personal capacity. The act will have no effect whatsoever on the relationship between the principal and the third party, unless there are special legal provisions to the contrary. An example of such a provision can be found in the rules on benevolent intervention in another’s affairs, see Article V.-3:106(1) DCFR.

German Law § 164 BGB: Effect of agent’s declaration (1) A declaration of will which someone, within the agent’s authority which he has, gives in the principal’s name takes effect directly for and against the principal. It makes no difference whether the declaration is made expressly in the name of the principal or whether the circumstances indicate that it is made in his name. (2) If the intention to act in the name of another is not evident, the absence of an intention to act in one’s own name should not be considered. (3) The provision of paragraph 1 apply correspondingly if a declaration of will to be given as against another is made to that person’s agent. 1. General. The provision is the most important one in the title of the BGB on representation and the power of attorney. It simultaneously defines representation and

131

M. Lehmann its effects. Two fundamentally different situations are covered: First, that in which a declaration of will is made by an agent (§ 164(1) BGB), and second, the situation in which such a declaration is received by an agent (§ 164(3) BGB). The first situation is called ‘active representation’ (aktive Stellvertretung), whereas the second situation is called ‘passive representation’ (passive Stellvertretung). Both are treated equally by § 164 BGB. 2. Conditions. a) Declaration of will. As many other provisions in the General Part (Book I) of the BGB, § 164 BGB is centered on the concept of the ‘declaration of will’. It presupposes that the agent is giving or receiving such a declaration. If he makes the declaration, it must express his own will, not that of the principal. The latter’s will is, however, most often determinative for the content of the agent’s declaration. If a person is merely transmitting a declaration of will for the principal, then he is not an agent, but rather a ‘messenger’ (Bote). The difference between the two concepts is often subtle (see Leptien, in Soergel (1999), Vor § 164 nos. 42–44). Nevertheless, it is of crucial importance to distinguish between them because they have very different legal effects. A messenger does not need authority, or even legal capacity. If the messenger consciously amends the declaration he is charged to transmit, the principal is not bound by the messenger’s act. Mistakes of the messenger will not be attributed to the principal whereas mistakes of an agent will (see Leptien, in Soergel (1999), Vor § 164 no. 45; Jauernig, in Jauernig (2011), § 120 no. 2; Schramm, in Münchener Kommentar (2012), Vor § 164 no. 47). b) Given in the name of the principal. It is a principle of German law that the agent must make or receive the declaration in the name of the principal (principle of transparency or Offenkundigkeitsprinzip, see above Article 3:102 PECL, GERMAN LAW, comment 3). The BGB thus rejects the concept of undisclosed or indirect representation, which is a marked difference to the PECL (see above Article 3:102(3) PECL and comment 3 there). But the transparency requirement does not mean that the agent necessarily has to mention the principal’s name when giving or receiving the declaration. Nor is it indispensable that he mentions the fact that he is acting as an agent. As § 164(1)2 BGB shows, these facts can be derived from the circumstances. For instance, a young man bringing an elderly lady’s clothes to the dry cleaner can be presumed to act as her representative. All that is required by § 164(1)1 BGB is that the other party can discern that the person acting is not the person who shall be bound by the contract. The principle of transparency serves as a protection for the third party (see Bork (2011), no. 1378). It is however not strictly respected. Thus, some effects of indirect representation are recognized by the legislature, the judicature, and the doctrine (see above Article 3:102 PECL, GERMAN LAW, comment 3). Moreover, for certain minor day-to-day transactions in which the identity of the contractual partner is of no importance because they are performed on the spot, it is recognized that even though the agent does not disclose that he is acting for another person, the contract may be entered into between the latter and the other party. This legal construct is known under the name ‘business for whom it may concern’ (Geschäft für den, den es angeht). See Leptien, in Soergel (1999), Vor § 164 nos. 23–32; Schramm, in Münchener Kommentar (2012), § 164 nos. 47–58; Markesinis/Unberath & Johnston (2006),

132

Chapter 3: Authority of Agents p. 111). Furthermore, it is generally accepted that where a person acts for a certain business, the true owner of that business will become a party to the contract independent of whether the other party knows his identity (so-called unternehmensbezogene Geschäfte, see Leptien, in Soergel (1999), Vor § 164 no. 27; Ellenberger, in Palandt (2012), § 164 no. 2; Schramm, in Münchener Kommentar (2012), § 164 no. 23). c) Agent’s authority. Similar to the PECL, § 164(1)1 BGB requires the agent to have authority. In the case of passive representation, the authority to receive a declaration is sufficient. d) Agent acting within its authority. According to § 164(1)1 BGB, the agent must also act within the limits of his authority. 3. Results. a) Conditions of representation satisfied. The result of a valid representation is described in § 164(1)1 BGB. The declaration ‘takes effect directly for and against the principal’. This means that the rights created by the declaration will be those of the principal, but that any obligations ensuing will also be binding upon him. In case the agent receives a declaration for the principal, the effects will be on the latter (§ 164(3) BGB). The result of § 164(1)1 BGB corresponds to that of the first sentence of Article 3:202 PECL. Although the BGB does not contain a provision similar to the second sentence of Article 3:202 PECL, it does not differ from it. From the fact that the declaration has effect for and against the principal, it follows logically that it is not binding on the agent. b) Person not acting in the name of the principal. As has been set out above (see above comment 2 b), German law requires the agent to disclose to the other party that he is acting for the principal. If this condition is not fulfilled, the result will be that described in § 164(2) BGB: The intention of the agent to act for another is to be entirely disregarded. This means that the declaration will be taken as one given or received in the agent’s personal capacity. For example, if A does not disclose to B during contractual negotiations that he is intending to act as an agent of C, the contract will be entered into between A and B.

Comparison and Evaluation Although the texts differ on the effects of representation, the three sources mainly arrive at the same results. The most marked difference is their attitude towards disclosure of the representation: Whereas the PECL allow the agent to hide the fact that he wants to act not for himself but for another person, German law and the DCFR requires them to make his intention known to the other party. Thus, German law and the DCFR reject undisclosed or indirect representation, whereas the PECL allow it. The consequences will be seen later (see Article 3:301–3:304 PECL).

Principles of European Contract Law Article 3:203: Unidentified Principal If an agent enters into a contract in the name of a principal whose identity is to be revealed later, but fails to reveal that identity within a reasonable time after a request by the third party, the agent itself is bound by the contract.

133

M. Lehmann 1. General. Although the agent must act in the name of the principal, it does not matter whether her identity is revealed before or after the time of contracting, as described in Article 3:102(1)2 PECL. However, the other party has a legitimate interest to know the identity of the principal. Article 3:203 PECL recognizes this interest by providing a sanction if a request by the other party for information about the principal is not fulfilled within a reasonable time. 2. Conditions. a) Contract with unidentified principal. The first condition for the sanction is that the agent entered into a contract in the name of the principal without revealing its identity. It follows that ‘name’ and ‘identity’ are not the same concepts (see also above Article 3:102 PECL comment 2). If the agent did not even act in the name of the principal, then Article 3:301 PECL applies. b) Request by the third party. The other party to the contract must have requested that the agent reveals the identity of the principal. The PECL do not specify which form such a request must take. c) Failure of agent to comply with the request within reasonable time. The sanction only applies if the agent does not respond to the request within a reasonable timeframe. The PECL fail to identify the form and precision that the agent must use to respond to the request in order to avoid liability. 3. Result. The consequence of the agent’s failure is that she will herself become a party to the contract as though she had entered into it in a personal capacity. The fact that she had the intention to act for another will be ignored.

Draft Common Frame of Reference Article II. – 6:108 DCFR: Unidentified principal If a representative acts for a principal whose identity is to be revealed later, but fails to reveal that identity within a reasonable time after a request by the third party, the representative is treated as having acted in a personal capacity. 1. General. The provision corresponds to Article 3:203 PECL. The two provisions differ only from a linguistic viewpoint, but not in substance. 2. Linguistic differences. The word ‘agent’ has been replaced with ‘representative’ in conformity with the usual terminology of the DCFR (see Article II.-6:101 DCFR reprinted above under Article 3:101 PECL). Another difference is the usage of the expression ‘enters into a contract’ in the PECL provision, and ‘acts’ in the DCFR. This difference is explained by the scope of Book II of the DCFR which encompasses not only contracts, but ‘juridical acts’ as well. Finally, the result under the PECL provision is that the agent is ‘bound by the contract’ whereas under the DCFR, he is ‘treated as having acted in a personal capacity’. This difference is partly due again to the fact that the DCFR is not limited to contracts, and partly due to differences in style. The result of both provisions in contracts cases is the same.

134

Chapter 3: Authority of Agents German Law 1. General. The BGB does not contain any similar rule to Article 3:203 PECL, but it achieves a similar result through the strict application of other provisions. 2. Condition. Although German law does not provide for the case of the unidentified principal, it does in fact have a rule that applies if the agent acted without having proper authority from a principal (§ 179 BGB, reprinted below under Article 3: 204 PECL). According to its text, this rule applies where the principal exists and has not given proper authority, or where the principal does not exist at all. The provision has also been extended to the non-disclosure of the principal. The Federal Court has decided that if the representative fails to reveal the latter’s identity, it will then be treated as if it had not been given proper authorization by a principal (see BGH, decision of 20 March 1995 – II ZR 205/94, NJW 1995, pp. 1739, 1742). 3. Result. The representative will be liable under § 179 BGB (reprinted and commented below under Article 3:204 PECL). The consequence of § 179(1) BGB is that a contract will be entered into between the representative and the third party. At first glance, this solution corresponds to that achieved by Article 3:203 PECL. Yet, it applies only under the condition that the representative knew that he was acting without authority. In the case of non-disclosure of the principal, this means that the agent will be bound to the third party only if he knew at the time of contracting that he will not be able to reveal the identity of the principal. If he did not know of his future inability, because he believed there was a principal and that he will know his identity at a later point in time, § 179(1) BGB does not apply. Instead, § 179(2) BGB governs. This means that the representative will only have to pay damages for the loss caused by the reliance of the other party on the existence of a contract. This solution will be relevant in cases where the agent acted in good faith, for instance, where a broker was getting an order from an unidentified client who later failed to get back to him, or where the identity of the client cannot be revealed because of a computer breakdown. Moreover, the agent will not be liable at all if the other party knew or must have known of the lack of authority, see § 179(3) BGB. When applied to the case of non-disclosure, this means that any third party who knew or must have known that the representative will be unable to reveal the identity of the principal will neither have a contractual right nor a right to damages.

Comparison and Evaluation Contrary to the DCFR and PECL, German law does not contain a provision on the unidentified principal. The problem is dealt with by the courts through the application of general rules. The results achieved are even more nuanced than those under the European rules. The representative that fails to identify his principal is not automatically bound by a contract to the third party. His knowledge and the knowledge of the other party will be taken into account. The solution of German law seems to be both more efficient and more appropriate than that of its European counterparts.

135

M. Lehmann Principles of European Contract Law Article 3:204: Agent acting without or outside its Authority (1) Where a person acting as an agent acts without authority or outside the scope of its authority, its acts are not binding upon the principal and the third party. (2) Failing ratification by the principal according to Article 3:207, the agent is liable to pay the third party such damages as will place the third party in the same position as if the agent had acted with authority. This does not apply if the third party knew or could not have been unaware of the agent’s lack of authority. 1. General. The provision deals with the consequences of a lack of authority of the agent. It is the counter-provision to Article 3:202 PECL. 2. Conditions. Article 3:204 applies in two circumstances: either the agent had no authority or the agent had authority but acted beyond its limits. The agent’s liability under paragraph 2 requires that the other party did not know and could not have been aware of the lack of authority (see below comment 4). 3. Consequence for relation between principal and third party. Paragraph 1 spells out the consequence of a lack of authority for the relation betweeb the principal and the other party to the transaction. The consequence is that no such relation is created. In other words, there is no contract entered into between the two parties no matter how much the other side believed in the authority of the agent. The principal can however ratify the contract and thereby make it binding upon himself (see Article 3:207 PECL). If the agent had authority to conclude the contract but exceeded the limits of his authority, the contract will be partially void provided that it is divisible (see Lando/ Beale (2000), p. 207, Comment B). If it is not divisible, it is completely void. 4. Consequence for relation between agent and third party. Paragraph 2 provides that the agent will be liable to pay damages to the third party. Such damages must put the other side in as good a position as though a contract had been entered into with the principal. Thus, the result is similar to a contract between the agent and the third party, with the exception that the agent is not obliged to specific performance. This exception is understandable to the extent that often the agent will not dispose of the means for specific performance, e.g., because he is not the owner of the land he has sold in the name of the principal. Another difference is that the other side will not be put in a better position than if it had contracted with the principal. As an example, the comments mention that the third party could not claim any damages in case of insolvency of the principal (see Lando/Beale (2000), p. 208 Comment C). This is not entirely correct. Rather, the agent must pay the other party the equivalent of what the latter would have received as a result of the insolvency proceedings. The liability of the agent is subject, however, to one condition: that the other party did not know and could not have known about the lack of authority. If this condition is not fulfilled, i.e., if the other

136

Chapter 3: Authority of Agents party had the knowledge or at least could have had it, then there is no need for protection. The agent will thus be free from any liability.

Draft Common Frame of Reference Article II. – 6:107: Person purporting to act as representative but not having authority (1) When a person acts in the name of a principal or otherwise in such a way as to indicate to the third party an intention to affect the legal position of a principal but acts without authority, the act does not affect the legal position of the purported principal or, save as provided in paragraph (2), give rise to legal relations between the unauthorized person and the third party. (2) Failing ratification by the purported principal, the person is liable to pay the third party such damages as will place the third party in the same position as if the person had acted with authority. (3) Paragraph (2) does not apply if the third party knew or could reasonably be expected to have known of the lack of authority. 1. General. The substance of the provision is the same as that of Article 3:204 PECL. The only differences relate to the terminology and the drafting of paragraph 3. 2. Linguistic differences. a) Agent and principal. The DCFR does not use the term agent, but speaks of a ‘a person’ that ‘acts in the name of a principal or otherwise in such a way as to indicate to the third party an intention to affect the legal position of a principal’. The complicated formula is due to the fact that the DCFR defines the representative as somebody having the authority to affect the legal position of another person (the principal) in relation to a third person by acting on behalf of the principal, see Article II.-6:102(1) DCFR. Consequently, there can be no representative without authority and thus another description was needed for the case in which somebody purports to have such authority without actually having it. Also, the person in whose name the transaction was completed is called ‘purported principal’ because he has not been given authority. b) Acting without or beyond authority. From the wording of Article II.-6:107(1) DCFR, it seems that the provision would apply only in the case that the person acted without authority. Yet, Article II.-6:102(4) DCFR makes it clear that the notion also encompasses acting beyond the scope of the authority granted. There is thus no difference to Article 3:204(1) PECL. c) Consequences. Article II.-6:107(1) DCFR clarifies that the act of the unauthorized person does not affect the legal position of the purported principal. This section has the same meaning as Article 3:204(1) PECL which provides that the principal and the third party are not bound by the act of the agent. The DCFR adds that the act of the agent also does not give rise to any legal relationship between him and the third party, but this is subject to the liability provided for under Article II.-6:107(2) DCFR. This is

137

M. Lehmann no deviation from the PECL either. The DCFR merely clarifies that no contract will be entered into by the agent and the third party. Paragraph 2 corresponds to Article 3:204(2)1 PECL. 3. Additional paragraph. Paragraph 3 gives the impression of having been added to the Principles, but is in fact modeled on Article 3:204(2)2 PECL. Instead of the formulation that the third party ‘could not have been unaware’ of the lack of authority, the DCFR uses the expression ‘could [not] reasonably be expected to have known’. The latter standard, which uses a concept of ‘reasonableness’ that is characteristic of the DCFR, seems easier to meet than the one used in the PECL. But there are no indications that a real difference was intended (see also II.-6:109(1) DCFR reprinted below under Article 3:205 PECL and comment 2 there).

German Law § 179 BGB: Liability of agent without authority (1) A person who has concluded a contract as an agent is, in so far as he does not prove his authority and provided that the principal refuses to ratify the contract, obliged to the other party to effect fulfilment or compensate at the other party’s choice. (2) If the agent did not know of the lack of authority, he is only obliged to compensate for that harm which the other party suffers as a result of relying on the authority, but not beyond the amount of interest which the other party has in the effectiveness of the contract. (3) The agent is not liable if the other party knew of the lack of authority or ought to have known of it. The agent is also not liable if his legal capacity was limited, unless he acted with the consent of his legal representative. 1. General. The provision sets out a list of legal consequences of an agent lacking authority to bind the principal. It starts with the strictest liability in paragraph 1, and continues on to non-liability in paragraph 3. 2. Fulfilment or compensation. Paragraph 1 provides for harsh consequences in case of a lack of authority of the agent. It gives the other party the right to demand either the fulfilment of the contract or damages. a) Conditions. In order for these consequences to apply, several conditions must be met. The conditions are as follows: First, a person must have concluded a contract as an agent. Second, the person is not able to prove that it has been given authority by the purported principal. The burden of proof is therefore on the agent. The condition is fulfilled if he had either no authority or acted beyond the scope of his authority. The third condition results from § 179(2) BGB: The agent must have known of his lack of authority, which means that he acted on purpose. b) Consequence. In case the three aforementioned conditions are satisfied, § 179(1) BGB allows the other party to demand either that the contract is fulfilled or

138

Chapter 3: Authority of Agents that he will be compensated. The other party is free to choose the right that he will exercise. If he chooses the first option, then the agent must perform the contract as if it had acted in his personal capacity. This amounts basically to the same as saying that the contract will be entered into between the agent and the third party. There is only one exception: an arbitration clause in the agreement will not be binding upon the agent (see BGHZ 68, 360). If the other party chooses the second option, then the agent must pay compensation. Paragraph 1 means full compensation for non-performance (see Schramm, in Münchener Kommentar (2012), § 179 no. 36). At first sight, this seems to amount to the same as the PECL and the DCFR saying that he would have to place the other party in the same position as if the agent had acted with authority (see Article 3:204(2)1 PECL and Article II.-6:107(2) DCFR). Yet, there are differences. § 179(1) BGB does not draw a parallel to the situation in which a contract was closed between the principal and the third party like both the PECL and the DCFR do. Therefore, the amount of damages will not be reduced in case of insolvency of the principal (for the situation under PECL, see above under Article 3:204 PECL, comment 4). 3. Reliance damages. Paragraph 2 provides for milder consequences than paragraph 1. The agent will be liable to pay only reliance damages. a) Conditions. The conditions are the same as those of paragraph 1, but one crucial condition is added: the agent did not know of the lack of his authority. Such a situation can arise, for instance, where the principal lacked legal capacity without the agent’s knowledge. b) Consequence. If the conditions of § 179(2) BGB are fulfilled, the agent will only have to pay for the harm that the other party suffered because it relied on the authority and thus on the validity of the contract. These reliance damages are, however, limited by the damages for non-performance, or, as § 179(2) BGB puts it, the amount of interest which the other party has in the effectiveness of the contract. The following example may shed some light on the working of the provision. A, acting in the name of X, offers a book to B for EUR 60. B agrees. Later, he is offered the same book by C at a price of EUR 70. Because he trusts in the validity of the contract with X, B happily declines C’s offer. After that, B learns that A had no authority to act in the name of X and that the contract is invalid. He gets back to C, who tells him that he has already sold the book to someone else. B has no other choice than to buy the book on the open market, where he has to pay EUR 90. If A knew about the lack of authority, B would be entitled to compensation for non-performance under § 179(1) BGB. This means that he has to be put in the same position as if the contract had been performed. In that case, he would have had the book for EUR 60, whereas now he must pay EUR 90 in order to get it. Thus, the compensation would cover the difference between the two prices, which is EUR 30. If A did not know about the lack of authority, B has a claim for damages under § 179(2) BGB. This means that he has to be put in as good a position as though he had never relied on A having authority to conclude the contract in the name of X. In that case, B would most probably have entered into a contract with C. He would then have had the book for EUR 70 whereas now he is forced to pay EUR 90. Thus, the reliance damage is EUR 20. According to § 179(2) BGB, A has to pay to B reliance damages, but limited by the amount he could get as damages for non-performance. As we have seen,

139

M. Lehmann the interest of B in the performance of the contract is EUR 30, whereas his reliance damage is EUR 20. Consequently, A has to pay to B EUR 20. 4. No liability. Paragraph 3 provides the most favourable consequence from the agent’s perspective. He will be free from any liability. The provision envisages two situations in which this result comes about. a) Phrase 1. The situation of paragraph 3, phrase 1, is that the other party knew or ought to have known of the lack of authority. If this is the case, the agent owes no damages. This is so even if he himself was aware that he was not authorized to give a declaration of will in the name of the principal. The other party’s bad faith outweighs that of the agent. b) Phrase 2. According to paragraph 3, phrase 2, the agent’s act will remain without any consequences if the agent had limited legal capacity. This is the case for children between the ages of 7 to 18 years old (see §§ 2, 106 BGB). The purpose of this provision is obvious: it is to protect minors. However, the minor agent will be liable if his parents or other legal representatives acquiesced in his act.

Comparison and Evaluation Compared with the PECL and the DCFR, German law provides more differentiated consequences in the case of a lack of authority. A particularity of the BGB is that it takes the knowledge of the agent into account. In the case that he knew about his lack of authority, the BGB gives the other side an option to choose between fulfilling the contract and paying damages for non-performance. The first seems stricter than the PECL and the DCFR because it amounts to saying that a contractual relationship is created between the agent and the third party. The third party can thus even ask for specific performance. However, it has to be borne in mind that if the agent is unable to perform the obligation, he will be obliged to pay damages under the BGB. The result is thus not very different than that achieved by the PECL and the DCFR. A real difference, though, is how the damages are calculated. The European texts refer in this regard to the situation that the other party would have been in had the contract with the principal been valid. German law, however, totally abstracts from the position of the principal. This leads to a stronger liability of the agent. For instance, if the principal is insolvent, then the agent’s liability under the European texts is reduced to what the other party would have received as a result of the insolvency proceedings, whereas the agent must nevertheless fully pay up under the BGB. A major difference also follows from the fact that German law provides for an intermediate level of liability. If the agent did not know about his lack of authority, then he will only be liable for reliance damages that will be capped by the amount of damages for non-performance. No such intermediate level exists in the European texts. Finally, the BGB protects minors as agents by relieving them of any liability, subject only to the condition that their legal representatives did not acquiesce to the contract. A similar provision cannot be found in the European texts. This is understandable to the extent that they disregard issues of legal capacity. Nevertheless, it is a regrettable lacuna.

140

Chapter 3: Authority of Agents In general, the German rule seems more nuanced and sensible than its European counterparts. Specifically, it has to be welcomed that the agent’s knowledge is taken into consideration. In the case that he knew about his lack of authority, a stricter liability is more fair than if he did not know about it. The same distinction is also required by an economic analysis of the situation. The agent should not be made liable for a situation he could not foresee. Otherwise, people will be deterred from acting as an agent. Such an outcome is inefficient because it would reduce the possibilities of a division of labour.

Principles of European Contract Law Article 3:205: Conflict of Interest (1) If a contract concluded by an agent involves the agent in a conflict of interest of which the third party knew or could not have been unaware, the principal may avoid the contract according to the provisions of articles 4:112 to 4:116. (2) There is presumed to be a conflict of interest where: (a) the agent also acted as agent for the third party; or (b) the contract was with itself in its personal capacity. (3) However, the principal may not avoid the contract: (a) if it had consented to, or could not have been unaware of, the agent’s so acting; or (b) if the agent had disclosed the conflict of interest to it and it had not objected within a reasonable time. 1. General. Employing an intermediary in a transaction creates a risk to the principal because the position of the agent allows for abuse. It is often not easy to monitor the agent’s exercise of his powers. This is especially dangerous if his personal interests conflict with those of the principal. Such situations frequently arise, for instance, between a producer and his salesman if the latter will receive some benefit by selling to a certain person. Cases like this are well-known in the political and economic literature where they are considered to be key to the ‘principal-agent problem’ (see, e.g., Stiglitz (1987)). They also create serious moral problems in terms of loyalty. The law’s tendency should be to avoid any temptation of the agent to act in his own interest rather than in that of the principal. Some legal systems try to solve the problem by imposing fiduciary duties on the agent, which prohibit, inter alia, putting himself in any situation where a conflict of interest exists (see Markesinis/Munday (1992), pp. 108 et seq.). The PECL choose a different way. They give the principal a right to nullify the contract entered into by the agent provided that certain conditions are fulfilled. 2. Conflict of interest. The main requirement for the right to avoidance is that the agent was involved in a conflict of interest. There is no definition of this term in the text, only a presumption in Article 3:205(2) PECL. The comments define two types of cases in which a conflict of interest can arise (see Lando/Beale (2000), p. 209, Comment

141

M. Lehmann A). In the first case, the agent is approached by the third party who is seeking to pursue its own interest. In the second case, the agent is tempted to pursue his own interest at the expense of the principal. These two problems can be compounded into one because in the first case, the agent will typically receive an advantage from the third party and is therefore also tempted to pursue his own interests over that of the principal. This situation must be distinguished from that of an agent representing two principals at the same time who do not know of each other (see below comment 3 a). In general terms, one can say that a conflict of interest exists where the agent is torn between the obligations towards the principal and the maximization of his own utility, or between his obligations towards two different principals. Because the situations may be manifold, the definition must be open and cannot be drafted more precisely. 3. Presumptions. Paragraph 2 lists two cases in which a conflict of interest is presumed to exist. It is important to note that the cases mentioned are not the only ones, but rather the notion of ‘conflict of interest’ is an open one. Furthermore, it must be borne in mind that the presumptions can be rebutted by showing special circumstances. Such circumstances exist where it is excluded that the agent benefits in any particular way from the transaction (for an example, see Lando/Beale (2000), p. 210, Comment D). a) Agent representing both sides. The first case in which a conflict of interest is presumed to exist is where a person is employed as an agent by both parties to a transaction. It does not matter whether he receives any special benefit from either of them. Even if this were not the case, there is a serious risk that he will prefer one over the other. This presumption is based on the idea that nobody can be loyal to two masters. For this reason, both principals have a right to avoid the contract. b) Agent as contractual partner. In the second case mentioned, the agent is acting as a representative of the principal and as the other party at the same time. The contract will be entered into between the principal and the agent himself. Thus, the typical triangular relationship between principal, agent and third party is reduced to a bilateral one (principal – agent). The typical risk in this case is that the agent promotes his self-interest. Although this is by no means certain, even the remote possibility that he does so must be avoided. Therefore, the PECL give the principal a right to nullify the contract irrespective of any harm that may be done to him. 4. Awareness of the other party. If the principal avoids the contract because of a conflict of interest of the agent, then the person that is most affected is the third party. The latter cannot rely on a contract concluded, although in most cases he is not responsible for the conflict. The PECL take this fact into account by submitting the principal’s right of avoidance to the condition that the other party knew or must have known of the conflict of interest (Article 3:205(1) PECL). Yet, the exact import and justification of this requirement are unclear. The requirement is of no importance in the situation described in Article 3:205(2)(b) PECL for the very simple reason that the ‘other party’ is the agent itself, which always knows or can know about his own conflicts of interests. In the situation of Article 3:205(2)(a) PECL where the agent acted for two different principals the condition applies, but it is hard to see why. Consider the

142

Chapter 3: Authority of Agents following example: A and B authorize X as their agent without having the possibility to know of each other. If X enters into a contract on behalf of A and B, none of them has a right of avoidance since the other side did not know and could not have been aware of the conflict of interest. The result seems unjustified since X may have favoured the interests of A over B, or the other way around. It is not necessary that A or B have knowledge of the double representation. The mere possibility that X is disloyal to A or B should suffice to give both a right to nullify the contract. Thus, the only case in which the condition is justified is a conflict of interest that does not fall under Article 3:205(2)(a) or (b) PECL but nevertheless results in a right to avoid the contract under Article 3:205(1) PECL (which is possible since Article 3:205(2) PECL only creates two presumptions but does not contain an exhaustive list of cases of conflict of interest). One could imagine a case in which the agent is receiving some personal benefit from contracting with a certain party without the other party knowing of it. In this case, it makes sense to protect the third party and to exclude the right of avoidance. 5. Consequence. The consequence of the conflict of interest is that the principal can nullify the contract. This right must be exercised in conformity with Article 4:112–4:116 PECL. Thus, the principal must notify the other party (Article 4:112 PECL). Such notice must be given within reasonable time after the principal knew or ought to have known of the relevant facts from which the conflict of interest ensues (Article 4:113 PECL). Avoidance is excluded if the principal has confirmed the contract (Article 4:114 PECL). The effect of avoidance is that each party can claim what it has supplied under the contract or payment of an equivalent sum of money (Article 4:115 PECL). 6. Exceptions. Paragraph 3 provides three exceptions to the right of avoidance. The first, contained in Article 3:205(3)(a) PECL, applies where the principal agreed with the agent’s acting despite the existence of a conflict of interest. From the wording, it is clear that the consent must have been given beforehand. The second exception, also set out in Article 3:205(3)(a) PECL, becomes relevant if the agent must have known of the conflict of interest. Finally, the principal may not avoid the contract if he did not oppose the transaction although the agent had informed him of the conflict of interest, see Article 3:205(3)(b) PECL. This information can be given after the contract has been concluded. In order to maintain the right of avoidance, the principal must state his objection within a reasonable time. In all three situations, the principal does not seem particularly worthy of protection. Therefore, the balance tips in favour of the interests of the other party regarding the validity of the contract.

Draft Common Frame of Reference Article II. – 6:109: Conflict of interest (1) If an act done by a representative involves the representative in a conflict of interest of which the third party knew or could reasonably be expected to have known, the principal may avoid the act according to the provisions of II. – 7:209 (Notice of avoidance) to II. – 7:213 (Partial avoidance).

143

M. Lehmann (2) There is presumed to be a conflict of interest where: (a) the representative also acted as representative for the third party; or (b) the transaction was with the representative in a personal capacity. (3) However, the principal may not avoid the act: (a) if the representative acted with the principal’s prior consent; (b) if the representative had disclosed the conflict of interest to the principal and the principal did not object within a reasonable time; or (c) if the principal otherwise knew, or could reasonably be expected to have known, of the representative’s involvement in the conflict of interest and did not object within a reasonable time. 1. General. The substance of the provision is the same as that of Article 3:205 PECL. The only differences relate to the terminology and the drafting of paragraph 3. 2. Linguistic differences. In accordance with the general terminology of the DCFR, the word ‘agent’ has been replaced with ‘representative’. Instead of the formulation that the third party ‘could not have been unaware’ of the conflict of interest, the DCFR uses the expression ‘could [not] reasonably be expected to have known’. Although the latter condition seems easier to fulfil, it is unlikely that a real difference was intended (see also comment 3 to Article II.-6:107(3) DCFR reprinted above under Article 3:204 PECL; for a criticism of the abundant use of the term ‘reasonable’ in the DCFR, see Eidenmüller/Jansen et al., (2008), 529, sub II 4, p. 536). In paragraph 2, the notion ‘contract’ has been replaced with ‘transaction’. 3. Different drafting of paragraph 3. Taking a brief look at the text, one could get the impression that Article II.-6:109(3) DCFR contains three exceptions to the right of avoidance while Article 3:205(3) PECL would only provide for two. However, it has been shown that the PECL equally set out three exceptions (see above comment 6 to Article 3:205 PECL). Article 3:205(3)(a) PECL comprises two cases, one in which the principal consents to the agent’s acting and another in which he cannot have been unaware of it. These cases have been split up into Article II.-6:109(3)(a) and (c) DCFR. In the latter provision, the situation that the principal knew of the representative’s conflict was added. It is worth noting that Article II.-6:109(3)(c) DCFR refers to possible knowledge of the conflict of interest and not to awareness of the representative’s ‘so acting’, as does Article 3:205(3)(a) PECL. The DCFR version seems more correct than the PECL’s formula.

German Law § 181 BGB: Transactions with oneself An agent cannot, except so far as he is permitted to do otherwise, undertake a legal transaction in the name of the principal with himself in his own name or as agent of a third party, unless the transaction is exclusively in fulfilment of a commitment.

144

Chapter 3: Authority of Agents 1. General. Although the expression ‘conflict of interest’ is not used in the BGB, its § 181 regulates two cases which typically give rise to such a conflict. In these cases, the law limits the authority of the agent. If the agent does not respect the limit, the result is an automatic nullity of the contract, with two exceptions applying. 2. Cases covered. Because of the far wider scope of application of the BGB, the prohibition does not only apply to contract law. It is relevant in other fields as well, such as company law, where it has special importance. a) Cases mentioned in the text. The cases mentioned in § 181 BGB are the same as those described in Article 3:205(2) PECL and Article II.-6:109 DCFR. However, § 181 BGB only covers the two instances described whereas the European texts apply more generally to any situation in which a conflict of interest exists (see above Article 3:205 PECL, comment 3). Yet on the other hand, the Germanic solution is much stricter than that of the PECL and the DCFR to the extent that it contains not only a presumption of a conflict of interest that can be rebutted: If the agent acts in one of the two situations described, then his authority will be excluded without any possibility of rebuttal. b) Excluded cases. The courts have mitigated the law’s rigid approach by not applying § 181 BGB to situations in which it can be excluded that a conflict of interest exists (see BGHZ 59, 236, 240). The paradigm case is where the transaction entered into by the agent was purely advantageous for the principal from a legal point of view (‘lediglich rechtlich vorteilhaft’). An example would be a donation made to the principal by the agent in his personal capacity. Because there is no risk that this transaction harms the interests of the principal, § 181 BGB will not be applied. It has to be borne in mind that this exception does not apply where the transaction is merely economically advantageous for the principal. Instead, it must be advantageous from a strict legal point of view. That is the case only where the principal receives a right without being imposed any obligation. c) Extension to other cases. While on the one hand the courts have denied the application of § 181 BGB where a conflict of interest can be excluded, they have at the same time extended the provision to other cases that are not covered by its wording but in which a conflict of interest nevertheless exists. A typical example is provided by the following situation: X, the agent of A, wants to sell his own shares to the latter. In order to do so, he authorizes Y as his subagent and contracts with him. This would be a simple circumvention of the law. Therefore, § 181 BGB applies (see BGH NJW 1991, 691, 692). 3. Consequence. If the provision applies, then the authority of the agent is limited. He cannot represent the principal. If he acts nevertheless, then the provision on the agent acting without authority applies (§ 177 BGB, reprinted below under Article 3:207 PECL). This means that the transaction is not binding upon the principal. Nevertheless, he has the option to ratify it. 4. Exceptions. § 181 BGB provides for two exceptions. If they are fulfilled, the authority of the agent is not limited. a) Permission. The first exception applies where the agent is permitted to do the act. Such permission can be given by law or by the principal. For companies, this

145

M. Lehmann possibility is especially relevant because the prohibition of § 181 BGB would prevent numerous transactions by the directors. Therefore, one can often find a provision in the bylaws of German corporations which exclude the application of § 181 BGB for their directors. In order for such an exclusion to be valid, it must be entered into the companies’ register (see Leptien, in Soergel (1999), § 181 no. 39; Ellenberger, in Palandt (2012), § 181 no. 21; Schramm, in Münchener Kommentar (2012), § 181 no. 50). b) Fulfilment of a commitment. The second exception applies where the agent acts with himself in order to perform an obligation he has towards the principal. In order to understand the exception’s function, one must take into account the German principle of abstraction (Abstraktionsprinzip), which distinguishes between the validity of the transaction that creates the obligation and the validity of the transaction that transfers the ownership (on this principle, see Markesinis/Unberath & Johnston (2006), pp. 27 et seq.). Example: Agent A owes principal B EUR 2,000. If he wants to fulfil his obligation, it is necessary for him – in accordance with the principle of abstraction – to enter into a new contract with B for the transfer of the money. However, because of the prohibition of § 181 BGB, he would be stopped from declaring in the name of the principal the acceptance of the transfer of EUR 2,000. The principle of abstraction thus creates a formidable obstacle to the performance of contractual obligations between agents and principals. The exception at the end of § 181 BGB is designed to overcame these obstacles. It effectively allows the agent to validly transfer the ownership of the money to the principal without requiring the latter’s permission. This exception is sensible, yet its practical application is without difficulties. In particular, intricate problems are created by some rules according to which void obligations become valid when they are fulfilled by the debtor. For instance, § 311b(1) BGB requires contracts for the sale of land to be notarized, but provides for an exception if the debtor transfers ownership of the land to the creditor. Any obligation to transfer land arising from an unnotarized contract is therefore void. However, the contract would become valid by completing the transfer. An agent could therefore be tempted to achieve this effect by transferring the land to himself. Yet according to the doctrine this shall not be possible. The unanimous opinion is that the agent cannot validate a void obligation to transfer land simply by transacting with himself (see Leptien, in Soergel (1999), § 181 no. 43; Ellenberger, in Palandt (2012), § 181 no. 22).

Comparison and Evaluation With regards to conflicts of interest, there are a number of differences between German law, on the one hand, and the PECL and the DCFR on the other. First, the European texts contain a general rule dealing with the problem. The BGB, however, provides only for two particular cases where the issue typically arises. Second, although the PECL and the DCFR also mention these cases, they allow rebutting the presumption of a conflict of interest. In contrast, German law provides for an absolute prohibition of agency in these cases without any possibility of a rebuttal. Third, the provisions in the PECL and the DCFR require that the other party knows about the conflict of interest or

146

Chapter 3: Authority of Agents could not have been unaware of it. In the BGB, this condition does not play any role. Fourth, under the PECL and the DCR, the act of the agent is valid unless avoided by the principal within a reasonable time. In German law, the transaction is automatically void, but may be confirmed by the principal. Finally, the exceptions differ to some extent. The European texts exclude the right of avoidance if the conflict of interest has been disclosed to the principal. German law does not contain such a provision. In contrast, it sets out an exception if the agent acted to fulfil an obligation. In evaluating these differences, one cannot fail to note the comparative formality and rigidity of the German approach. These features are commendable in terms of legal certainty. But the associated inflexibility leads to shortcomings. Thus, the German courts have been forced to restrict the scope of application of § 181 BGB in cases where the existence of a conflict of interest can for all practical purposes be excluded. At the same time, they had to extend the provision to situations not covered by its wording but where a conflict of interest may nevertheless arise (see above § 181 BGB comment 2 b and c). From a legislative viewpoint, it seems more efficient to lay open the true purpose of the rule instead of providing merely for two well-defined cases that are subject to restrictions and extensions that cannot be gathered from the text. Therefore, the European approach to mention the conflict of interest is to be preferred even though the concept itself is very blurry. The requirement that the other party knew or could not have been unaware of the conflict of interest is justified only in the cases that are not mentioned in Article 3:205(2) PECL and § 181 BGB (see above Article 3:205 PECL comment 4). Furthermore, the PECL and DCFR rules which give the principal a right of avoidance make more sense than the German solution which considers the transaction as void ab initio. The legitimate interests of the principal are sufficiently protected if he can nullify the contract. Finally, by requiring that he has to exercise his right of avoidance within a reasonable time after the agent has disclosed the conflict of interest, the European texts take the agent’s interests into account. The German exception concerning the fulfilment of an obligation follows from the principle of abstraction. It cannot be applied to the PECL or to the DCFR.

Principles of European Contract Law Article 3:206: Subagency An agent has implied authority to appoint a subagent to carry out tasks which are not of a personal character and which it is not reasonable to expect the agent to carry out itself. The rules of this Section apply to the subagency; acts of the subagent which are within its and the agent’s authority bind the principal and the third party directly to each other. 1. General. Agents cannot necessarily do everything by themselves. Even they sometimes need to be represented. The provision takes this fact into consideration by allowing the agent to appoint a subagent.

147

M. Lehmann 2. Conditions. The provision sets out the following conditions for the appointment of a subagent. First, the task the agent wants to transfer is not of a personal character. Second, it is unreasonable to expect that he will fulfill this task himself. It should be noted that even if these conditions are not present, the principal is still free to authorize the agent to appoint a subagent. Article 3:206 PECL contains a default rule that applies if no other permission has been given. 3. Appointment of the subagent. If the conditions of Article 3:206 PECL are fulfilled, then the agent may authorize a subagent to carry out the task. He will do so in the name of the principal and with his authority even if the principal has not given specific permission to appoint a subagent. The justification is ‘implied authority’ which the law presumes to be contained in every authorization of an agent. Furthermore, the principal is free to give special permission even where the conditions of Article 3:206 PECL are not fulfilled (see above comment 2). 4. Effects of acts of subagent. If a subagent has been validly authorized, then his acts are binding not on the agent, but directly on the principal. The rules of agency apply. However, in order for the acts of the subagent to affect the legal rights and obligations of the principal, it is not sufficient that they are within the scope of the authority of the subagent. It is also necessary that they are covered by the authority of the agent. Example: A authorizes B to manage his company, but not to sell any land. B appoints C as a subagent, giving him power to sell a piece of immovable property for A. Any sale contracted by C is not binding upon A. C is considered to be an agent acting beyond the scope of its authority. 5. Application of rules on agency. Article 3:206, phrase 2 PECL sets out that the section on agency applies to subagency. This has a number of practical consequences. A special problem arises with regard to the liability of the subagent in the case of a lack of authority. It must be borne in mind that the subagent needs double authorization by the principal to the agent and by the agent to himself (see above comment 4). If the subagent is not authorized by the agent, then he will be liable under Article 3:204 PECL. The PECL do not disclose, however, who is liable in the case that the agent did not have sufficient authority to appoint a subagent. Two solutions seem possible: either a liability of the subagent, or a liability of the agent. A strict application of the rules of agency to subagency would result in the first solution because Article 3:204 PECL implies that the person acting with regard to the third party is liable. However, this solution would ignore that the subagent is often not in a position to know about the scope of the agent’s authority. The problem has been dealt with under German law (see below, GERMAN LAW, comment 5).

Draft Common Frame of Reference See Article II.-6:104(3), reprinted under Article 3:201 PECL. 1. General. Article II.-6:104(3) is a short version of Article 3:206 PECL. It deviates in minor respects from the original.

148

Chapter 3: Authority of Agents 2. Terminology. The DCFR does not speak of ‘subagency’ or the ‘subagent’. Rather, it chooses the language to ‘delegate authority’ and the word ‘delegate’. This is due to the general avoidance of the term ‘agent’, which is left to Book IV (see above comment 2 b to Article II.-6:102 DCFR, reprinted under Article 3:101 PECL). Instead of the somewhat unclear term ‘to carry out tasks’, the DCFR uses the description ‘to do acts on behalf of the principal’. It seems that this is meant as a way of summarizing Article II.-6:105(1)(a) DCFR. 3. Conditions. As a condition for subagency, the DCFR solely requires that it would be unreasonable to expect the delegate to perform the act personally. In contrast to the PECL, it does seem to matter whether the act is of a personal character or not. Yet, any act that is of a personal character can be expected to be done personally by the delegate. Indeed, it can only be done by him. Therefore, the difference in the text does not amount to any substantial deviation. It has to be noted that the principal can give wider authority to the agent to delegate authority than is prescribed by Article II.-6:104(3) DCFR, cf. above Article 3:206 PECL, comment 2. 4. Authority to delegate authority. Article II.-6:104(3)1 DCFR gives the representative ‘authority to delegate authority’. This is a more complicated way of saying that the representative may appoint a subagent (on the reasons for the different terminology, see above comment 2). 5. Effect of acts of the delegate. The DCFR omits to say that the acts of the delegate will bind the principal and the third party directly to each other. However, the same result follows from the very idea of a delegation of authority. Thus, the result is not different from that of the PECL. 6. Application of rules on representation. Article II.-6:104(3)2 DCFR clarifies that the rules of the section on representation apply. This corresponds to Article 3:206, phrase 2 PECL. Like the PECL, the DCFR does not say who will be liable in case the agent lacked authority to delegate authority.

German Law 1. General. The BGB does not contain any rule on subagency. Nevertheless, it is understood that its title on representation and power of attorney applies to the question (see Heinrichs, in Palandt (2007), § 167 no. 12). 2. Conditions. Whether the agent may appoint a subagent under German law depends on the authority given to him by the principal. This authority must be interpreted. The decisive factor is whether the principal has an interest in the agent doing the act personally (see Heinrichs, in Palandt (2007), § 167 no. 12). The authority given to the subagent cannot be broader than that of the agent. If the agent’s authority must be exercised within a certain period of time or is revocable, the subagent’s authority will be limited in the same way.

149

M. Lehmann 13. Effects of acts of subagent. There is some dogmatic quarrel about the proper construction of subagency. While some authors think that the subagent is directly representing the principal, others take the view that he is representing the agent who, in turn, represents the principal. The courts hold that both types of agency are possible and must be distinguished (see the references given by Wolf/Neuner (2012), § 47 nos. 37 et seq.). In spite of these differences, there is no doubt that the acts of the subagent are binding upon the principal. The dispute is relevant only with regard to the liability of the subagent in the case of lack of authority of the agent (see below comment 4). 4. Application of rules on representation. As has been said, German courts and scholars submit subagency to the general rules on representation. A particular problem arises with regard to the liability of the subagent in the case of lack of authority. If the subagent has not been given authority by the agent or he acts beyond the authority given, he will be liable under § 179 BGB (reprinted above under Article 3:204 PECL). However, it is unclear who will be liable if the agent did not have any or even insufficient authority to appoint the subagent. Two different solutions have been suggested depending on the construction of subagency (see above comment 3): Those authors who consider that the subagent is representing the principal lean towards a liability of the subagent. By contrast, those authors who think the subagent is representing the agent are in favour of a joint and several liability of the agent and the subagent. The dispute has lost some of its importance since a judgment by the Federal Court (BGHZ 68, 391, 393 et seq.). In this decision, the Court distinguished between the subagent who acts in the name of the principal without mentioning that he is a mere subagent, and the subagent who discloses the subagency. In the first case, the subagent may be liable if the agent did not have authority to appoint him, in the second case, he will not. The reasoning is independent of the proper construction of subagency and is based instead on the reliance of the other party that the subagent causes. The distinction has been almost universally accepted (see, e.g., Wolf/Neuner (2012), § 51 nos. 34 et seq.; Leptien, in Soergel (1999), § 167 no. 62; Schramm, in Münchener Kommentar (2012), § 167 no. 99).

Comparison and Evaluation In contrast to the PECL and the DCFR, German law does not contain specific rules on subagency. Nevertheless, similar results are achieved by a strict application of the rules on representation. The German case law even offers a solution for the problem of liability in the case of lack of authority, which is not envisaged by the European texts. Thus, it is fair to say that German law is more sophisticated in this respect.

150

Chapter 3: Authority of Agents Principles of European Contract Law Article 3:207: Ratification by Principal (1) Where a person acting as an agent acts without authority or outside its authority, the principal may ratify the agent’s acts. (2) Upon ratification, the agent’s acts are considered as having been authorised, without prejudice to the rights of other persons. 1. General. The provision allows the principal to validate acts the agent has done without authority. It is in some sense a counter-provision to Article 3:204 PECL. According to it, if the agent lacks authority, then there are only two possibilities: either his acts are ratified by the principal, or he is liable to the first party. 2. Conditions. The conditions are the same as those of Article 3:204 PECL. 3. Ratification. Ratification means validation. The act is not described in the PECL. The comments state that ratification can be express or implied and that an express declaration must be addressed to the agent or the third party (Lando/Beale (2000), p. 213 Comment A). 4. Effect. The effect of ratification is described in paragraph 2. It is the same as if the agent’s act had been authorized from the beginning. Third party rights are exempt, without it being clear which rights are meant.

Draft Common Frame of Reference Article II. – 6:111: Ratification (1) Where a person purports to act as a representative but acts without authority, the purported principal may ratify the act. (2) Upon ratification, the act is considered as having been done with authority, without prejudice to the rights of other persons. (3) The third party who knows that an act was done without authority may by notice to the purported principal specify a reasonable period of time for ratification. If the act is not ratified within that period ratification is no longer possible. 1. General. The provision combines Article 3:207 and 3:208 PECL. 2. Linguistic differences. The changes in terminology are the same as those in other provisions (see, e.g., above comment 2 to Article II.-6:107 DCFR, reprinted under Article 3:204 PECL). 3. Conditions. The conditions summarize those of Article II.-6:107(1) DCFR.

151

M. Lehmann 4. Ratification and effect. Paragraph 1 gives a right of ratification to the principal. Paragraph 2 describes the effect. In both cases, there is no deviation from Article 3:207 PECL. 5. Rights of third party. Paragraph 3 concerns the rights of the third party. It will be commented under Article 3:208 PECL.

German Law § 177 BGB: Conclusion of contract by agent without authority (1) If someone concludes a contract in the name of another person without any agent’s authority, the effectiveness of the contract for and against the principal depends on the latter’s ratification. (2) If the other party invites the principal to make a declaration about ratification, the declaration can only take place as against him; a ratification or refusal of ratification declared as against the agent before the invitation is ineffective. The ratification can only be declared up until the expiry of two weeks after receipt of the invitation; if it is not declared, it is deemed to have been refused. 1. General. The provision contains rules on ratification and the rights of the third party. 2. Condition. The condition is the same as under § 179 BGB (reprinted above under Article 3:204 PECL). 3. Ratification and effect. Paragraph 1 makes the effectiveness of the contract that was concluded dependent on the ratification by the principal. In the meantime, the contract produces no legal effects, although it is not yet fully invalid. In doctrine, this situation is denoted with the term ‘schwebend unwirksam’ (see Wolf/Neuner (2012), § 51 no. 3). If the principal decides to ratify, he will be contractually bound to the other party and vice versa. 4. Third party rights. Paragraph 2 concerns the rights of the other party to the contract. It will be commented under Article 3:208 PECL.

Comparison and Evaluation The PECL, the DCFR, and German law do not differ with regard to ratification. They allow the principal to ratify the act. The effect is that a contract will arise as if he had authorized the agent to do the act. Any other rule would not make sense.

152

Chapter 3: Authority of Agents Principles of European Contract Law Article 3:208: Third Party’s Right with Respect to Confirmation of Authority Where the statements or conduct of the principal gave the third party reason to believe that an act performed by the agent was authorised, but the third party is in doubt about the authorisation, it may send a written confirmation to the principal or request ratification from it. If the principal does not object or answer the request without delay, the agent’s act is treated as having been authorised. 1. General. The other party to the contract may be in doubt about the authority of the agent. In this case, Article 3:208 PECL allows the party to ask the principal for confirmation or ratification of the agent’s act. The provision has to be read in conjunction with Article 3:307 PECL. 2. Conditions. Article 3:208 PECL sets out two conditions for a request of confirmation or ratification. First, the statements or conduct of the principal must have given the third party reason to believe that an act performed by the agent was authorized. Second, the third party must be in doubt about the authorization. The two requirements seem to be contradicting each other since a party that believes in the authority of the agent cannot be in doubt about it. The contradiction is enforced by the comments which require that the third party’s belief was reasonable and bona fide (cf. Lando/ Beale (2000), p. 215 Comment B). Yet it is possible to interpret the provision in a different way and thereby to avoid any contradiction: The text only requires that the third party must have had ‘reason to believe’ in the authority, and not that he has actually believed in it. Thus, the first condition must be evaluated solely on the basis of the actions of the principal whereas the second depends on the inner situation of the other party. 3. Confirmation or request. In the situation that has been described, the other party will find itself in a basic dilemma. On the one hand, given that it is unclear whether the principal has ratified the agent’s act, the other party risks to be unable to enforce its contractual rights. On the other hand, the principal may at any time ratify the act of the agent and thus create a legally binding obligation of the other party. To end this period of indeterminacy, the PECL allows the other party to send a written confirmation or a request for ratification to the principal. As it seems, only the confirmation must be in writing, not the request for ratification. This contrasts with the comments’ aim to avoid any technical distinction between the two (see Lando/Beale (2000), p. 216 Comment C, referring to confirmation under Article 2:210 PECL). 4. Consequence. The consequence of a written confirmation or of a request of ratification under the conditions set out by Article 3:208 PECL are the following: The principal must object without delay. If he does not, he will then be presumed to have authorized the act of the agent. Thus, the confirmation or request imposes a burden on him (Lando/Beale (2000), p. 215 Comment C). This burden seems justified to the extent that he gave reason to believe in the agent’s authority.

153

M. Lehmann Draft Common Frame of Reference See Article II.-6:111(3) DCFR, reprinted above under Article 3:207 PECL. 1. General. The provision shall achieve the same objective as Article 3:208 PECL, but a closer look shows many divergences. 2. Condition. Article II.-6:111(3) DCFR presupposes the third party ‘knows that an act was done without authority’. This stands in sharp contrast to Article 3:208, phrase 1 PECL, where the other party is required to be ‘in doubt about the authorization’. Apparently, the authors of the DCFR wanted to clarify that knowledge of the lack of authorization does not exclude a request for ratification. They went too far, however, in requiring actual knowledge of the third party. A party that is in doubt about the authority of the agent has much more reason to ask for a ratification than one that actually knows that an act was not authorized. 3. Notice. The DCFR does not speak of a written confirmation or a request for ratification, but simply of a ‘notice’ that the third party can send to the purported principal. Two observations can be made in this regard. First, the occasionally difficult distinction between confirmation and request for ratification is no longer necessary under the DCFR. Second, no form is specified for the notice which suggests that it can be made in writing or orally. 4. Period for ratification. Under the DCFR, the third party must specify in the notice a reasonable period of time during which the principal has to ratify the contract. The PECL do not require such a period. Instead, they require the principal to respond to a confirmation or ratification ‘without delay’. There are three differences that arise here in comparison to the PECL. First, under the DCFR, the period has to be set by the principal whereas the PECL impose the period themselves. Second, the period of the DCFR must be ‘reasonable’ whereas according to the PECL it is ‘without delay’. Third, the function of the period differs. Under the DCFR, the expiry of the period means that the principal can no longer ratify the act and thus make the contract valid. Under the PECL, the expiry of the period means that the principal is treated as if he has ratified the act. Both provisions thus solve the problem of the indeterminacy for the other party (see above comment 2) in a different way.

German Law See § 177(2) BGB, reprinted above under Article 3:207 PECL. 1. General. German law provides for a strict period of two weeks for ratification by the principal once he has been asked to ratify the act of the agent. Failure to ratify within that period results in the agent having no authority. Additionally, § 177(2) BGB provides for further legal effects of the request for ratification. 2. Change of addressee for ratification. The first part of § 177(2) BGB sets out that if a ratification has been requested by the other party, then the principal can address such

154

Chapter 3: Authority of Agents a ratification only to him. This rule is due to the distinction between internal and external authorization (Innenvollmacht and Außenvollmacht, see § 167 BGB reprinted above under Article 3:201 PECL). If the principal has the right to authorize the agent internally, it follows that he must also have the right to ratify his acts by a declaration directed at the agent. However, this is excluded once the other party has asked for ratification. In this case, the principal can only ratify the act by responding to the other party. The purpose is to avoid any new indeterminacy of the latter about the fact of ratification. 3. Invalidity of prior ratification or refusal to ratify. The law goes even further. § 177(2), second half-sentence BGB, provides that if the third party asks for a ratification, then any ratification previously declared by the principal to the agent will be ineffective. Technically, the latter ratification, presuming it has been given, already makes the contract valid under the theory of Innenvollmacht. Yet the request for ratification by the third party strips the internal ratification of all its effects and resets the situation to the one before. The principal once again has the right to choose to be bound or not to be bound by the agent’s act. This is to avoid any confusion for the other party who will often not know about the previous ratification directed at the agent. 4. Period for ratification. Unlike the DCFR, German law does not require the other party to set a period for ratification, but rather sets such a period itself. The period the law provides is two weeks beginning from the point in time when the principal has received the request for ratification from the agent. Unlike under the PECL, the consequence of the expiry of the period is not that the agent’s act would be treated as having been authorized. On the contrary, the ratification is deemed to have been refused, meaning that the act was done without authority.

Comparison and Evaluation If the third party does not know whether an act of an agent has been authorized by the principal, then it finds itself in a situation of indeterminacy. PECL and DCFR allow for a request for ratification, but provide methodologically different solutions to the problem. While PECL opts for a legally determined period of ratification, the DCFR requires the third party to set out the length of the period itself in the request for ratification. And while the PECL creates a fiction of an authorization upon the expiry of the period, the DCFR inhibits the principal to ratify the act of the agent after this point in time. German law chooses a combination of the solutions advanced in the PECL and the DCFR, but gives them its own particular twist. The BGB sets out a period for authorization similar to the PECL. However, the period is fixed to two weeks rather than merely ‘reasonable’. This enhances legal certainty. In the case that the period expires without the principal having affirmed or refused the agent’s act, the ratification is deemed to have been refused. The effect is thus the same as under the DCFR, but more succinctly described.

155

M. Lehmann Principles of European Contract Law Article 3:209: Duration of Authority (1) An agent’s authority continues until the third party knows or ought to know that: (a) the agent’s authority has been brought to an end by the principal, the agent, or both; or (b) the acts for which the authority had been granted have been completed, or the time for which it had been granted has expired; or (c) the agent has become insolvent or, where a natural person, has died or become incapacitated; or (d) the principal has become insolvent. (2) The third party is considered to know that the agent’s authority has been brought to an end under paragraph(1) (a) above if this has been communicated or publicised in the same manner in which the authority was originally communicated or publicised. (3) However, the agent remains authorised for a reasonable time to perform those acts which are necessary to protect the interests of the principal or its successors. 1. General. The provision serves two purposes. First, it describes when the authorization of an agent ends. Second, it also sets out when the third party is deemed to have known that the authorization has ended. 2. End of authorization. Article 3:209(1) PECL establishes when the authorization ends. There are generally two conditions for such an end. First, one of the grounds mentioned in lit. a – d must be fulfilled. Second, the third party must know or ought to have known of these grounds. The second condition protects the other party to the contract. In other words, once the agent’s authority has been granted by the principal, it will last as long as the third party has no reason to suspect that it has ended. 3. Knowledge of third party. Article 3:209(2) PECL creates an irrebuttable presumption that the other party knew about the end of the authorization, provided that certain conditions are fulfilled. This presumption is particularly relevant for the agent acting without authority because he will be relieved of any liability if the third party knew about the lack of authority, see Article 3:204(2) PECL. The presumption applies, however, only with regard to the specific case of Article 3:209(a) PECL, i.e. where the authorization has ended, not to other cases. 4. Extension of authorization. Even if the authorization has ended, for instance because the principal has revoked it, the agent remains authorized to do certain acts, Article 3:209(3) PECL. This is a legally created fiction. Depending on the ground of the authorization’s end, it can be dubious whether it is justified. It is, for instance, hard to see why the agent should be able to represent the principal if the latter has brought the authorization to an end, even if the act of the agent is in his interest.

156

Chapter 3: Authority of Agents Draft Common Frame of Reference Article II. –6:112: Effect of ending or restriction of authorisation (1) The authority of a representative continues in relation to a third party who knew of the authority notwithstanding the ending or restriction of the representative’s authorisation until the third party knows or can reasonably be expected to know of the ending or restriction. (2) Where the principal is under an obligation to the third party not to end or restrict the representative’s authorisation, the authority of a representative continues notwithstanding an ending or restriction of the authorisation even if the third party knows of the ending or restriction. 1. General. The provision does not deal with the grounds for the end or restriction of authorization, but only with the continuing effect of a terminated or restricted authorization with regard to a third party that is in good faith. It adds a restriction to the principal’s power to end the authorization. 2. Effect of end or restriction of authorization. Article II.-6:112(1) DCFR protects a party that does not know or is not reasonably expected to know that the representative’s authorization has ended or has been restricted. The provision creates an authority in favour of this party. 3. Effect of obligation not to end or restrict of authorization. The same fiction is used in Article II.-6:112(2) DCFR where the principal has an obligation towards the third party not to end or restrict the authority of the agent. Such an obligation may arise where the irrevocability of the mandate is necessary to properly safeguard the interests of the third party, cf. Article IV.D.-1:105 DCFR.

German Law § 168 BGB: Expiry of authority The expiry of the authority depends on the legal relationship on which its conferment is based. The authority is also revocable if the legal relationship is continued, unless this relationship leads to a different conclusion. The provision under § 167 (1) applies with the necessary modifications to the declaration of revocation. § 170 BGB: Period of effectiveness of the authority If authority is granted by declaration to a third party, it remains in force in relation to this third party until he is notified by the principal of the expiry thereof. § 171 BGB: Period of effectiveness in the case of announcement (1) If a person has announced by separate notice to a third party or by public notice that he has granted authority to another, the latter, on the basis of the

157

M. Lehmann announcement, is authorised to represent the person to that third party in the former case, and to any third party in the latter case. (2) The authority remains effective until the notice is revoked in the same manner in which it was made. § 172 BGB: Letter of authorisation (1) If the principal has delivered a letter of authorisation to the agent and the agent presents it to a third party, this is equivalent to a separate notification of authorisation by the principal. (2) The power of agency remains effective until the letter of authorisation is returned to the principal or declared to be invalid. § 173 BGB: Period of effectiveness in the case of knowledge and negligent lack of knowledge The provisions of § 170, § 171 (2) and § 172 (2) do not apply if the third party knows or ought to know of the termination of the authority when the legal transaction is entered into. § 117 Insolvency Act (Insolvenzordnung – InsO): Expiry of Authorisations (1) An authorisation granted by the debtor with respect to the property forming part of the insolvency estate shall expire upon the opening of the insolvency proceedings. (2) As far as a mandate or a management contract is deemed to continue under § 115 subsection (2), the related authority shall also be deemed to continue. (3) As long as the authorized person is not at fault in being unaware of the opening of insolvency proceedings he shall not be held liable under § 179 of the Civil Code. 1. General. German law dedicates a considerable amount of provisions to the problem of the authority’s termination, which can be explained by the fact that this question is crucial for legal certainty; a problem that is of much concern to the German legislature. The BGB starts by stating when authority expires in general (§ 168 BGB). It then mentions certain exceptional circumstances under which the authority is nevertheless deemed to continue (§§ 170–172 BGB). Finally, it makes an exception from these exceptions if the third party knew or ought to have known that the authority has been terminated. Rules for the insolvency of the principal can be found in § 117 InsO. 2. Additional rules. Supplementing these general rules are rules for certain kinds of contracts that provide for a prolongation of authority, e.g., in case of a mandate (§ 674 BGB) or a civil law company (§ 729 BGB). One rule also contains an extension of the authority in order to complete acts similar to that of Article 3:209(3) PECL and Article II.-6:112(4) DCFR, but it is limited to the specific case in which the principal dies or becomes incapacitated (see § 672, second sentence BGB). The fact that a dead person

158

Chapter 3: Authority of Agents cannot serve as an agent (see Article 3:209(1)(c) PECL) is not considered to be worth mentioning. That an incapacitated person cannot be a representative already follows from general rules (see § 165 BGB). 3. Termination of authority: Principle. § 168 BGB deals with the question of when authority ends in general. a) Independence of authority from legal relationship between principal and agent. In order to understand the provision, one must first know that it is based on a particular doctrine first spelled out by Laband (1866), and then taken over by the BGB. According to this doctrine, one has to distinguish between the legal obligations that link the principal to the agent and the authority of the agent to represent the principal. This differs from the position of other legal systems that assume the power to represent another would directly follow from a contractual relationship, e.g., a mandate (see for instance French law). Under German law, the legal relationship and the power of authority are not only considered to be different, as can be witnessed from the text of § 168 BGB, but they are also independent (‘abstrakt’) from each other according to the principle of abstraction (Abstraktionsprinzip). In the provision at hand, the principle is applied not to determine the relationship between the law of obligations and property law, but in order to donate the margin between the law of agency and the law of obligations. The effect of the principle of abstraction in this context is that any deficiency that might affect the validity of the legal relationship does not impinge upon the validity of the authority. The primary purpose of introducing this principle her is to protect the other party, but it also shields the agent who does not know about the invalidity of the relationship against any liability. b) Exception. Against the background of the principle of abstraction, the first sentence of § 168 BGB must be considered to be an exception. The provision declares that in spite of the general independence between the legal relationship and the authority, there is a certain connection between the two when the legal relationship ends because in this case, the authority is terminated as well. This rule avoids unnatural consequences of the principle of abstraction. It protects the interest of the principal who generally does not want to be represented any more once the contract with the agent has ended. c) Revocability. The second sentence of § 168 BGB, which lends itself to misunderstandings, has a simple purpose. The provision clarifies that the authority of the agent can always be revoked by the principal even if the legal relationship between the two still exists. Thus, the autonomy of the principal is preserved. The third sentence of § 168 BGB, which refers to § 167 BGB, means that the declaration by which the principal revokes the authority can be addressed either to the agent or to the third party, and is not submitted to any formal requirements. 4. Exceptions in the interest of the third party. Although the duration of authority is tied to the duration of the legal relationship between the principal and the agent (§ 168 BGB), this is not always the case. §§ 170–172 BGB list three particular sets of circumstances under which the authority is deemed to continue even though the legal relationship has come to an end. The principle of abstraction thus regains importance.

159

M. Lehmann a) Authorization addressed to third party. As has been seen, the principal can authorize the agent by either a declaration addressed to the agent himself, or by a declaration addressed to the third party (Innen- und Außenvollmacht, see § 167 BGB, reprinted above under Article 3:201 PECL). It has also been mentioned that the principal can revoke the authority in the same manner (see § 168, third sentence BGB and comment 3 c) above. Taken together, these two rules could however result in terrible confusion. Imagine that the principal, P, first declares to the third party that A will serve as his agent, and then revokes the authority by a declaration addressed only to A. The third party would obviously be deceived into believing that A still has authority. § 170 BGB avoids this situation by requiring that an authority that has been declared to the third party will continue unless it has been revoked in the same manner. b) Authority confirmed by notice to third party or to the public. There are also cases where the principal has given authority by a declaration addressed to the agent herself, but later confirms this authority by a notice to the third party or the public. The authorization here is the declaration, not the notice. Thus, if the declaration is invalid, then there would be no authority. However, § 171(1) BGB sets out that the notice prevails and the agent has authority. The purpose of this provision is to protect the third party or the public that is relying on the notice. § 171(2) BGB has the same function as § 170 BGB: If the authority granted to the agent has been terminated but this fact has not been communicated to a third party or the public, then the authority will nevertheless continue unless it has been revoked by a declaration to the third party or to the public. The difference between § 171(2) BGB and § 170 BGB is that the authority was not granted by a declaration addressed to the third party, but merely notified to that party. c) Letter of authorization. § 172 BGB contains a particularly important exception from the principle of § 168 BGB. If the authority has been granted in a letter to the agent and the agent uses this letter in front of the third party as evidence of his authorization, then this letter will have the same effect as a notice under § 171 BGB, see § 172(1) BGB. This means that the agent has authority to represent the principal even if the authorization is invalid. The agent will continue to have authority until the principal sends a new letter to the third party revoking the authorization, § 172(2) BGB. 5. Exception from exception if third party is in bad faith. According to § 173 BGB, the exceptions contained in §§ 170–172 BGB will not apply if the third party knew or ought to have known that the authority was terminated. The reason is that the third party does not need any protection in this case. 6. Insolvency of principal or agent. a) Insolvency of the agent. § 117(1) of the Insolvency Act (Insolvenzordnung – InsO) provides that any authorization given by the principal will expire in case of his insolvency. The reference in § 117(2) InsO to § 115 InsO means that the authorization continues if a suspension would cause a risk to the bankruptcy estate (see Sinz, in Uhlenbruck/Hirte/Vallender (2010), § 117 no. 13) b) Insolvency of the principal. Under German law, the insolvency of the agent will not deprive him of his authority to represent the principal. This is explained by the fact that the acts of the agent do not bind him or his patrimony, but only the principal. Hence, the legislature has considered that there would be no need to terminate the authorization. Of course, the principal remains free to end the authority where he finds fit.

160

Chapter 3: Authority of Agents Comparison and Evaluation The duration of authority of the agent is a rather complicated matter that involves the competing interests of the principal and the third party. The principal must reserve the freedom to revoke the authority while the third party needs to be protected if it can reasonably rely on the continuing power of the representative. All texts strike the balance in a similar way. However, the method to get there is quite different. German law starts from the principle that the authority ends with the termination, and then provides for certain exceptions that do not apply where the third party knew or ought to have known of the termination. The PECL and DCFR adopt the countervailing principle that authority continues until the third party knows or ought to have known of the termination. For a German lawyer, this seems like turning things top-down. But in the end, the rules of the PECL and the DCFR are considerably shorter and easier to understand than those of German law. They are also not based on the principle of abstraction that prevails under the BGB. This principle, from which various exceptions need to be made, seems unnecessary and confusing, at least in the context of agency and authority. Apart from these technical questions, substantive differences remain with regard to the problem of whether the insolvency of the agent terminates the authority. The German answer is ‘no’. This solution seems better than that of PECL since there is no valid reason as to why an insolvent person should not be able to represent others if this person has been duly authorized. Real problems occur if an insolvent person that has not been authorized represents another because this person does not have the means to respond to its liability.

SECTION 3:

INDIRECT REPRESENTATION

Principles of European Contract Law Article 3:301: Intermediaries not acting in the name of a Principal (1) Where an intermediary acts: (a) on instructions and on behalf, but not in the name, of a principal, or (b) on instructions from a principal, but the third party does not know and has no reason to know this, the intermediary and the third party are bound to each other. (2) The principal and the third party are bound to each other only under the conditions set out in Articles 3:302 to 3:304. 1. General. Section 3 of Chapter 3 deals with indirect representation. Article 3:301 PECL defines the situations in which indirect representation occurs, and the legal effects that ensue.

161

M. Lehmann 2. Definition of indirect representation. The two different situations summarized by the term ‘indirect representation’ are described by Article 3:301(1) PECL: (a) The agent informs the other party that he is acting for a principal, but does not disclose the principal’s identity; (b) The agent does not even inform the other party that she is not acting for herself, but for a different person. The consequences are the same. 3. Effects. a) On the relationship between the intermediary and the third party. The most important part of the legal consequences of indirect representation is that the intermediary and the third party will be bound to each other, Article 3:301(1) PECL. This result comes about although it is in the interest of the intermediary not to be contractually bound. The only way for him to avoid this result is to disclose that he wants to represent another and to reveal that person’s identity. b) On the relationship between the principal and the third party. Article 3:301(2) PECL adds that the principal will not be contractually bound to the third party as long as the agent does not act in his name. This is true even though the principal has authorized the agent to represent him. There are however certain exceptions from this rule that are covered by Articles 3:302–3:304 PECL.

Draft Common Frame of Reference Article II. – 6:106 DCFR: Representative acting in own name When the representative, despite having authority, does an act in the representative’s own name or otherwise in such a way as not to indicate to the third party an intention to affect the legal position of a principal, the act affects the legal position of the representative in relation to the third party as if done by the representative in a personal capacity. It does not as such affect the legal position of the principal in relation to the third party unless this is specifically provided for by any rule of law. The provision’s content is identical to that of Article 3:301 PECL. For the different terminology, see Lando/Beale (2000), pp. 220-221, and von Bar/Clive (2009), Comment B on Article II.-6:102, p. 415. What is striking is that the second sentence of the provision does not exhaustively list the cases in which the legal position of the principal is affected by indirect representation. This difference is in contrast to Article 3:301(2) PECL. The probable reason is that such cases can be found elsewhere in the law, and even possibly outside the DCFR.

German Law The situation under German law is exactly the same as under the provisions cited from PECL and DCFR (see, e.g., Ellenberger, in Palandt (2012), Einf v § 164 no. 6; Canaris (2006) § 30 I 2 pp. 455 et seq.; Wolf/Neuner (2012), § 49 no. 57). This results from the fact that the direct representative must act in the name of the principal (see § 164, reprinted above under Article 3:202 PECL). However, there is no express provision to this effect, because it was considered to be superfluous.

162

Chapter 3: Authority of Agents Comparison and Evaluation While the European texts expressly state the effects of indirect representation, German law omits such a statement. One can reasonably argue about which way of formulating the rule is better. The European approach certainly has the benefit of being clearer and more pedagogical whereas the German approach is more efficient.

Principles of European Contract Law Article 3:302: Intermediary’s Insolvency or Fundamental Non-performance to Principal If the intermediary becomes insolvent, or if it commits a fundamental nonperformance towards the principal, or if prior to the time for performance it is clear that there will be a fundamental non-performance: (a) on the principal’s demand, the intermediary shall communicate the name and address of the third party to the principal; and (b) the principal may exercise against the third party the rights acquired on the principal’s behalf by the intermediary, subject to any defences which the third party may set up against the intermediary. 1. General. The provision is an exception from Article 3:301(1) PECL. It describes certain circumstances under which the principal may draw to himself the contract entered into through indirect representation. 2. Conditions. Article 3:302 PECL applies to situations where the agent is not or will not be able to transfer to the principal what he has contractually received from the other party. Such circumstances exist where the agent is insolvent or has shown an unwillingness to fulfil his duties towards the principal, e.g. by committing a fundamental non-performance. 3. Consequences. Under the described circumstances, the principal has two rights: (a) he can demand from the agent to disclose the name of the other party; or (b) he may exercise the contractual rights acquired by the agent under Article 3:301(1) PECL. The latter option he may only pursue after having given notice to the agent and the third party about the intention to exercise his rights, Article 3:304, first sentence PECL. After such notice, the agent is no longer allowed to fulfil the contract with the third party, Article 3:304, second sentence PECL.

Draft Common Frame of Reference The DCFR does not have a comparable provision to Article 3:302 PECL. It does however, contain, a special book on the proprietary effects of the transfer of goods (book VIII DCFR). In this book, one can find a rule which protects the interests of the

163

M. Lehmann principal in the case of an indirect representation by setting out that the goods acquired by the agent belong to the principal (Article VIII.-2:302(1) DCFR). This rule has effects similar to Article 3:302 PECL when applied to the event of an insolvency of the agent because the principal will be protected by a right to separate the goods from the insolvency estate. Despite their similarity, the effects are however not the same, because the rule of the PECL also protects the principal in other circumstances. Specifically, it affords protection in case the agent has not yet acquired the goods from the other party. In this situation, the principal can equally step into the shoes of the agent and claim the goods. No such right is provided by the DCFR.

German Law § 392 Commercial Code (Handelsgesetzbuch - HGB) (1) Claims arising from a transaction by the commission agent may be asserted by the principal against the debtor only after assignment. (2) Such claims shall be deemed, however, even if they are not assigned, to be claims of the principal in the relationship between the principal and the commission agent or his creditors. § 457 HGB The shipper may assert claims resulting from an agreement which the forwarding agent has concluded in his own name for the account of the shipper only after it has been assigned to him. In relation to the creditors of the forwarding agent, however, such claims as well as what has been obtained in fulfilment of such claims shall be deemed to have been transferred to the shipper. German law does not know a provision similar to Article 3:302 PECL. For certain types of contract, however, the principal is protected through other provisions. § 392(2) of the Handelsgesetzbuch (HGB – Commercial Code) provides that with regard to a commission contract (Kommissionsvertrag), the claims of the agent against the other party are considered to be claims of the principal. This fiction only applies in the relation between the principal and the agent and in the relation between the principal and the creditors of the agent. An identical provision can be found in § 457, second sentence HGB, with regard to the freight contract, which provides that the claims of the carrier against other parties are considered to be claims of the sender in relation to the creditors of the carrier. The effect of these provisions can be described by the following example: A charges B with buying a rare book from X without disclosing his (A’s) identity. B enters into a sales contract with X; delivery of the book is postponed to a later date. Creditor C of B wants to seize B’s claim against X with regard to the book. C cannot do so, because the claim is to be considered as A’s in the relation between A and C. The protection afforded by German law is quite different from that of Article 3:302 PECL: On the one hand, the HGB provisions go much further because the principal is not only protected in the special situations of insolvency or fundamental

164

Chapter 3: Authority of Agents non-performance of the agent. On the other hand, they do not allow the principal to enforce the agent’s claim against the other party, but merely attribute the claim to his patrimony.

Comparison and Evaluation In the case of indirect representation, the principal needs protection, in particular with regard to the creditors of the agent who might try to seize the goods or contractual rights of the agent against the other party. The PECL, the DCFR and German law each choose a different way to achieve such protection. While the PECL allow the principal to vindicate the contractual rights acquired by the agent against the other party, the DCFR prefers to solve the problem by a transfer of property of the goods acquired by the agent to the principal. German law opts for a third way by merely attributing the claim of the agent to the patrimony of the principal. While this way has obvious shortcomings, the protection afforded by the DCFR and the PECL is not perfect either. The best solution would be a combination between the rules of all three texts.

Principles of European Contract Law Article 3:303: Intermediary’s Insolvency or Fundamental Non-performance to Third Party If the intermediary becomes insolvent, or if it commits a fundamental nonperformance towards the third party, or if prior to the time for performance it is clear that there will be a fundamental non-performance: (a) on the third party’s demand, the intermediary shall communicate the name and address of the principal to the third party; and (b) the third party may exercise against the principal the rights which the third party has against the intermediary, subject to any defences which the intermediary may set up against the third party and those which the principal may set up against the intermediary. 1. General. The provision applies to the same situation as described in Article 3:302 PECL. The difference to the latter rule is that Article 3:303 PECL protects the third party – not the principal, as Article 3:302 PECL does. 2. Conditions. See above, Article 3:302 PECL, comment 2. 3. Consequences. Under the circumstances described, the third party has two rights: (a) he can demand from the agent to disclose the name of the principal (b) he may exercise against the principal the contractual rights he has acquired against the agent, subject only to defences that the principal may raise against the intermediary. He may exercise the contractual rights of the agent, however, only after having given notice to the agent and the principal about the intention to exercise his rights, Article 3:304, first

165

M. Lehmann sentence PECL. After such notice, the principal is no longer allowed to render performance to the agent, Article 3:304, second sentence PECL.

Draft Common Frame of Reference The DCFR does not know a provision comparable to Article 3:303 PECL.

German Law German law does not know a provision similar to Article 3:303 PECL either.

Comparison and Evaluation While PECL protects the third party in the case of an indirect representative’s insolvency or fundamental non-performance, such protection is absent in the DCFR and in German law. The divergence is rooted in different judgments as to the appropriateness of such protection. The PECL solution is apparently driven by the goal to treat the third party on an equal footing with the principal, who is protected under such circumstances (see Article 3:302 PECL). A similar solution prevails, e.g., under Dutch and Italian law (see Busch, in: Busch et al. (2002), Article 3:303; Graziadei, in Antoniolli/Veneziano (2005), Article 3:303). The position of the DCFR and of German law is however that the third party is not worthy of such protection, because he has contracted with the agent without knowing the fact that he represents the principal or without knowing the principal’s identity. Given these circumstances, the third party could not expect to be able to bring a claim against the principal, as it was clear that its contractual partner would be the agent and not the principal. The situation of the third party is not different from that of contracting with someone who is not representing any other person: In the event of insolvency or fundamental non-performance of the contractual partner, no claims can be brought against another person. This solution might seem rigid, given that the agent indeed was acting in the interest of the principal. It does not follow, however, that the third party should in any way benefit from that fact and be able to bring claims against the principal.

Principles of European Contract Law Article 3:304: Requirement of Notice The rights under Articles 3:302 and 3:303 may be exercised only if notice of intention to exercise them is given to the intermediary and to the third party or principal, respectively. Upon receipt of the notice, the third party or the principal is no longer entitled to render performance to the intermediary. See above Article 3:302 PECL, comment 3 and 3:303 PECL, comment 3.

166

CHAPTER 4

Validity T. Ackermann & J.-U. Franck

Principles of European Contract Law Article 4:101: Matters not Covered This chapter does not deal with invalidity arising from illegality, immorality or lackof capacity. 1. General. Due to the exclusion of illegality, immorality or lack of capacity, Chapter 4 covers not all, but only some grounds of invalidity. According to the comment, these matters are often considered under the notion of vices of consent (see Lando/Beale (2000), p. 227). As there is no general consensus on what belongs into this category and at least some rules in this Chapter (in particular Article 4:109 PECL and Article 4:110 PECL) would not fit very well into it, this is no conclusive definition of the contents of Chapter 4. It is indeed hard to conceive of any short description that would capture the essence of Chapter 4. By choosing a very broad heading (‘Validity’) for Chapter 4 and narrowing down its ambit by excluding certain matters in Article 4:101 PECL, the drafters of the Principles avoided this problem. 2. Illegality and immorality. As can be seen from the comment, the Principles originally did not deal with illegal and immoral contracts in Chapter 4 because of the great variety among the European legal systems which made further research necessary (see Lando/Beale (2000), p. 227). With the introduction of Chapter 15 on illegality, this has changed. In course of a revision of the PECL, Chapter 15 would probably form a separate section in a modified Chapter 4. 3. Lack of capacity. The comment considers lack of capacity more a matter of the law of persons than of contract proper (Lando/Beale (2000), p. 227). This is a rather formal (and debatable) argument, at least as far as the capacity to contract is concerned.

167

T. Ackermann & J.-U. Franck However, from the perspective of the international business community, provisions on lack of capacity will not really be missed (de Vries (2001), p. 129).

Draft Common Frame of Reference Article II. – 7:101: Scope (1) This Chapter deals with the effects of: (a) mistake, fraud, threats, or unfair exploitation; and (b) infringement of fundamental principles or mandatory rules. (2) It does not deal with lack of capacity. (3) It applies in relation to contracts and, with any necessary adaptations, other juridical acts. 1. General. The title of Chapter 7 of the DCFR refers to ‘Grounds of invalidity’, which is more precise than ‘Validity’. In contrast to Chapter 4 of the PECL, Chapter 7 includes provisions on the infringement of fundamental principles or mandatory rules. However, it does not deal with unfair contract terms, which are treated in § 4 of Chapter 9 (‘Contents and effects of contracts’) of the DCFR. 2. Contracts and other juridical acts. While Article II.-7:101(1) and (2) DCFR are merely descriptive, Article II.-7:101(3) DCFR extends the application of the following provisions of Chapter 7 (which, according to their wording, only address contracts) to juridical acts other than contracts. This is in keeping with the general scope of Book II. However, the important question which adaptations are necessary with regard to non-contractual juridical acts remains unanswered.

German Law No equivalent provision. 1. General. The drafters of the BGB generally abstained from introducing descriptive provisions that merely summarize what can be found (or what cannot be found) in other provisions of a book, chapter or title of the BGB. Questions of invalidity are dealt with in Chapter 3 of the first Book, the General Part of the BGB. Chapter 3 is dedicated to ‘Rechtsgeschäfte’, which can be translated as ‘legal transactions’ or, in accordance with the terminology of the DCFR, ‘juridical acts’. In contrast to the opinion expressed in the comment to Article 4:101 PECL (Lando/Beale (2000), p.227), the BGB does not treat lack of capacity to contract (or to perform other juridical acts) as part of the law of persons (i.e., Chapter 1 of the first Book), but as part of the law of juridical acts (Title 1 of Chapter 3). Rules on mistake, fraud, threats, illegality and immorality can be found in Title 2 (‘Declaration of will’) of Chapter 3. Rules on unfair contract terms had originally been developed by courts from provisions in the first Book of the BGB (together with the general rule on good faith and fair dealing, § 242 BGB, which is part of the second book). However, after first having been codified in a

168

Chapter 4: Validity separate statute on unfair contract terms, they were included not in the first, but in the second book of the BGB, the law of obligations, as part of the reform of the law of obligations that entered into force in 2002. 2. Juridical act, declaration of will and contract. The concept of a ‘Rechtsgeschäft’ (juridical act) that encompasses all instruments of private autonomy takes centre-stage in the General Part of the BGB. This concept expresses the idea that these instruments pose common problems, for which common solutions are adequate that can be found in the provisions of Chapter 3 of the General Part. This is why e.g., the provisions on illegality (§ 134 BGB) or immorality (§ 138 BGB) as grounds of invalidity refer to juridical acts in general and not specifically to contracts: The drafting of §§ 134, 138 BGB as rules on juridical acts reflects the insight that illegality and immorality can affect the validity of a notice of termination of a contract or the validity of a will in the same way as the validity of a contract. Contracts are only specifically addressed where they merit special treatment. However, what may be confusing (and has given rise to subtle doctrinal distinctions) is that some provisions, namely the rules setting out the consequences of mental reservation, simulation, lack of seriousness, mistake, fraud and threats (§§ 116–124 BGB), refer to the concept of ‘Willenserklärung’ (declaration of will), i.e., to the element(s) of which a juridical act consists, and not to the juridical act itself.

Comparison and Evaluation Due to their different aims, the PECL, the DCFR and the BGB differ as to the scope of their respective rules on validity. This is obvious with regard to the grounds of invalidity covered: While a full-fledged civil code has to provide rules on lack of capacity, there were no compelling reasons for the drafters of the PECL and of the DCFR to tackle this issue. Another question is whether rules on validity should reach beyond contracts and include other instruments of private autonomy or juridical acts (according to the terminology of the DCFR) as well. At first view, this seems unnecessary in a system of rules exclusively dedicated to contracts. But issues of invalidity of a non-contractual juridical act (e.g., a notice of termination) may also arise within the ambit of contract law. In such a case, the PECL does not provide for an explicit solution, while the BGB and, although in a rather sketchy way, the DCFR do.

Principles of European Contract Law Article 4:102: Initial Impossibility A contract is not invalid merely because at the time it was concluded performance of the obligation assumed was impossible, or because a party was not entitled to dispose of the assets to which the contract relates. 1. General. Initial impossibility does not render a contract void. However, cases of initial impossibility often involve a fundamental mistake so that either party affected may avoid the contract under Article 4:103 PECL. But it follows from Article

169

T. Ackermann & J.-U. Franck 4:103(2)(b) PECL that even if there is a shared mistake with regard to the possibility of performing an obligation under the contract, a party who can be found to have taken the risk of impossibility is not entitled to avoid the contract. Therefore, a seller who sold a piece of used equipment that had already been accidentally destroyed when the contract was made, but that both parties still believed to exist in a remote construction site where the buyer, who was supposed to collect the piece, could not inspect it, has no right to avoid the contract (cf. Lando/Beale (2000), p. 234) Illustration 7 to Article 4:103 PECL; for another example see Illustration 10 to Article 4:103 PECL). In such a case, the excuse for non-performance granted by Article 8:108 PECL does not apply (Lando/Beale (2000), p. 371 Comment B to Article 8:108 PECL), and the promisor is liable for expectation damages according to Article 9:501 PECL. If however, there was a shared mistake and the promisor cannot be regarded as bearing the risk of impossibility, the promisor (and the promisee) may avoid the contract, and apart from being denied expectation damages under Article 9:501 PECL, the promisee will normally not even be entitled to reliance damages under Article 4:117 PECL (cf. Lando/ Beale (2000), p.233 Illustration 5 to Article 4:103 PECL). 2. Risk allocation. Against this background, the decisive issue in cases of initial impossibility is under which circumstances the risk of impossibility should be borne by a promisor who entered into the contract under a mistake, in particular when the parties did not agree on a contractual risk allocation. This issue is neither solved by Article 4:102 PECL nor by Article 4:103 PECL. If read together, Illustrations 5, 7 and 10 to Article 4:103 PECL in Lando/Beale (2000) suggest that there is a dividing line between the promisor acting in a private capacity (who seems to be treated rather generously) and the promisor acting in a professional capacity (who seems to be treated more strictly). But other criteria may be important as well (in particular, the promisor being in a position to know the facts whereas the promisee had no possibility of this, as mentioned in Lando/Beale (2000), p. 235 Illustration 10 to Article 4:103 PECL).

Draft Common Frame of Reference Article II. – 7:102: Initial impossibility or lack of right or authority to dispose A contract is not invalid, in whole or in part, merely because at the time it is concluded performance of any obligation assumed is impossible, or because a party has no right or authority to dispose of any assets to which the contract relates. This provision was modelled on Article 4:102 PECL and contains only insignificant amendments. As far as the rules on mistake and their consequences for the promisor’s liability in cases of initial impossibility are concerned, there is no substantial difference between the PECL and the DCFR either. In particular, the issue of risk allocation is the same under the DCFR as under the PECL.

170

Chapter 4: Validity German Law § 311a BGB: Hindrance of performance on conclusion of contract (1) It is not inconsistent with the effectiveness of a contract that the debtor does not need to perform under § 275 paragraph 1 to 3 and the hindrance to performance is already present on conclusion of the contract. (2) The creditor can demand compensation instead of performance or reimbursement of his expenses to the extent determined in § 284, according to his choice. This does not apply if the debtor did not know of the hindrance to performance on conclusion of the contract and is also not answerable for his lack of knowledge. § 281 paragraph 1 sentences 2 and 3 and paragraph 5 apply correspondingly. 1. Validity. The reform of the German law of obligations that entered into force in 2002 brought about a change in the rules on initial impossibility. According to the original concept of the BGB of 1900 (which is, however incompletely, referred to in the note to Article 4:102 PECL), a distinction between ‘objective’ and ‘subjective’ initial impossibility had to be made. In cases of objective initial impossibility (i.e., where performance was not only impossible for the promisor, but for anyone), the contract was generally void (§ 306 BGB 1900, with the exception of the sale of a non-existing right, § 437 BGB 1900), and a party was entitled to reliance damages only if the other party knew or ought to have known that performance was impossible (§ 307 BGB 1900). In cases of subjective initial impossibility (i.e., where performance was only impossible for the promisor), the contract was valid, and the promisor was strictly liable for non-performance. In the new law of obligations, this distinction has been abolished: § 311a(1) BGB makes clear that the validity of a contract is not affected by subjective or by objective initial impossibility or any other impediment that allows the promisor to refuse specific performance in accordance with § 275(2) and (3) BGB. In a system in which the promisee’s right to specific performance tends to be understood as a corollary to the promisor’s obligation, it is indeed worth stressing that the mere fact that the promisee’s right to specific performance is excluded does not imply that the underlying contractual obligation is invalid. 2. Mistake. In cases where at the time the contract was concluded, the parties were mistaken about the fact that performance is impossible, the contract can normally not be avoided under § 119 BGB (§ 119 BGB will be treated in greater detail in the section on Article 4:103 PECL). If the object promised does not exist or the service promised cannot be rendered, but either or both parties believe the opposite to be true when entering the contract, neither § 119(1) BGB nor § 119(2) BGB apply. Only if initial impossibility pertains to certain characteristics of the object and not to the existence of the object as such, can there be a mistake according to § 119(2) BGB. An unknown incurable defect of an object sold is a common instance of ‘qualitative impossibility’ where the seller entered the contract under a mistake as defined by § 119(2) BGB. However, the prevailing view is that even if such a mistake occurs, the promisor should

171

T. Ackermann & J.-U. Franck generally not be allowed to avoid the contract because this would undermine the promisor’s liability for a defective performance as set out in specific rules on sales contracts and on other types of contract (Grüneberg, in Palandt (2013), § 311a no. 15). 3. Liability. It may seem somewhat rigid that even a promisor who is innocently mistaken about the possibility of performance is denied the right to avoid the contract under the BGB. But this approach is softened by a restriction of the promisor’s liability in cases of initial impossibility: According to the 2nd sentence of § 311a(2) BGB, the promisor is excused from liability if at the time of the conclusion of the contract, she neither knew nor was answerable for not knowing the impediment to performance. This fault requirement has been criticized by some authors as incompatible with the promisor’s liability for expectation damages as provided for in the 1st sentence of § 311a(2) BGB (e.g., Lobinger (2004), pp. 279 et seq.). These authors claim that if the promisor is held responsible for entering into a contract without making sure that performance is possible (i.e., for a culpa in contrahendo), she should only be liable for reliance damages. But this argument is flawed: The promisor’s liability in cases of initial impossibility according to § 311a(2) BGB is a liability for non-performance, and as in any other case of non-performance, expectation damages are an adequate remedy (see Ernst, in Münchener Kommentar (2012), § 311a no. 15). The excuse granted by the 2nd sentence of § 311a(2) BGB is merely an exeption for cases of mistake which protects the ‘innocent’ promisor from the consequences of being bound by a contractual obligation that is impossible to perform. Though this is disputed, this protection should also extend to liability for reliance damages as provided for in § 122 BGB: While it is true that a party who avoided a contract for mistake under § 119 BGB is strictly liable for reliance damages under § 122 BGB, a strict liability rule in cases of initial impossibility based on an analogy to § 122 BGB would hardly be compatible with the limitation laid down in the 2nd sentence of § 311a(2) BGB (see Ackermann (2007), pp. 412–415). 4. Risk allocation. If the parties agreed that the risk of initial impossibility must be borne by the promisor, the promisor is strictly liable for non-performance (Grüneberg, in Palandt (2013), § 311a no. 9). However, it would not be compatible with the German legislature’s choice of the fault requirement (§ 276 BGB) as a default rule to maintain that any contractual promise implies a guarantee of the promisor’s ability to perform and, as a consequence, justifies strict liability in cases of initial impediments to performance. This idea may have been the basis of the original concept of the BGB that included strict liability for subjective impossibility. But it was rejected in the new law of obligations, as can be seen from the 2nd sentence of § 311a (2) BGB. Of course, there is a price to be paid for the increase in flexibility brought about by the introduction of the fault requirement: There is considerable uncertainty regarding the circumstances under which a promisor is answerable for her lack of knowledge about an impediment that prevents performance and that existed when the contract was made.

172

Chapter 4: Validity Comparison and Evaluation The PECL, the DCFR and the (new) BGB agree that initial impossibility does not render a contract eo ipso void. However, while the PECL and the DCFR at least in principle allow for an avoidance of the contract for mistake, the BGB denies a promisor who was mistaken about the possibility of the promised performance such a right. But this difference is less important than it seems: On the one hand, under the PECL and under the DCFR, the right to avoid the contract is excluded (and the promisor is fully liable for non-performance) if the risk of impossibility was assumed, or should be borne, by the promisor. On the other hand, the BGB relieves a promisor from liability who neither knew about the initial impossibility nor was answerable for not knowing about it. As the risk of initial impossibility should generally not be borne by a promisor who is not answerable for her lack of knowledge of the impediment, both rules seem to converge to a large extent. They also have a problem in common: Both the approach taken by the PECL/DCFR and the approach taken by the (new) German law of obligations leave some room for speculation with regard to the criteria that can be relied on in ascertaining the promisor’s responsibility.

Principles of European Contract Law Article 4:103: Fundamental Mistake as to Facts or Law (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) (i) the mistake was caused by information given by the other party; or (ii) the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error; or (iii) the other party made the same mistake, and (b) the other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms. (2) However a party may not avoid the contract if: (a) in the circumstances its mistake was inexcusable, or (b) the risk of the mistake was assumed, or in the circumstances should be borne, by it. 1. General. Article 4:103 PECL tries to balance the need for protection of a party who enters into a contract under some mistake or misapprehension and the need for security of transactions by granting the mistaken party a remedy to avoid the contract that is subject to a number of limitations. Any law of contract has to strike such a balance, for which there is no a priori solution. On the one hand, the right to avoid a

173

T. Ackermann & J.-U. Franck contract for mistake of fact or law reflects the idea that in the absence of informed consent, contracts do not contribute to the mutual benefit of the parties. On the other hand, there is a need to limit this right in order to give the parties a reliable basis for their transactions. Generally speaking, these limitations can refer to the mistake as such, to the responsibility of the party who entered into the contract under a mistake and to the responsibility of the other party. All of these aspects are covered in Article 4:103 PECL. Any remedy of this kind builds on the rules of interpretation applied to contracts. If a proper interpretation of the contract (in accordance with Chapter 5 of the PECL) provides for a solution that satisfies the needs of a party who entered into the contract under a misapprehension about the facts or the law affecting the contract, there is no basis for a recourse to the instrument of avoidance (see on the priority of interpretation Lando/Beale (2000), pp. 230–231 Comment B and Illustration 1). 2. Nature of the mistake. Any kind of misapprehension about the facts surrounding the contract or the law applicable to it is covered by Article 4:103 PECL. Only mistakes in communication are specifically mentioned in Article 4:104 PECL, according to which Article 4:103 PECL is applicable. However, according to Article 4:103(1)(b) PECL, a mistake will only allow a party to escape from the contract affected by it if the other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms. So it is not sufficient if the terms of a contract are affected by a mistake, irrespective of the seriousness of this effect. The matter concerned must rather be ‘fundamental’. The choice of the word ‘fundamental’ indicates that the mistake must pertain to something not merely ‘material’, as defined in Article 1:301(5) PECL (Lando/Beale (2000), p. 231 Comment C). As illustration 6 shows, mistakes that relate to the mere value of the object of the contract are generally not considered as fundamental even if there is a huge difference between the contract price and the market price. The question whether there is a fundamental mistake must be judged from the other party’s perspective, i.e., in order to be able to avoid the contract, the mistaken party must not only establish a causal link between her misapprehension and the contract that objectively qualifies as a fundamental mistake, but she must also show that this was known or ought to have been known by the other party. 3. The position of the other party. In cases of unilateral mistake (cases of shared mistake will be treated in no. 5 of this comment), the mistaken party is not allowed to avoid the contract if the other party is in no way accountable for the mistake. The other party’s accountability can rest on two alternative grounds: The mistake was induced by incorrect information given by the other party (Article 4:103(1)(a)(i) PECL), or contrary to good faith and fair dealing, the other party did not point out a mistake she knew or ought to have known of (Article 4:103(1)(a)(ii) PECL). In cases of incorrect information, alternative remedies have to be considered that do not require the misapprehension caused by the incorrect statement to be fundamental (see Lando/Beale (2000), p. 231 Comment D). First, if the other party was fraudulent, the mistaken party may avoid the contract under Article 4:107 PECL. Second, if the other party was not fraudulent, the mistaken party may have a right to

174

Chapter 4: Validity damages under Article 4:106 PECL. Third, the incorrect statement may give rise to a contractual obligation under Article 6:101 PECL, in which case the mistaken party will have the choice between remedies for non-performance and the remedies provided by Chapter 4 (Article 4:119 PECL). As a consequence, Article 4:103(1)(a)(i) PECL is only relevant if in the absence of fraud or fundamental non-performance of a contractual obligation derived from the other party’s statement, the mistaken party wants to avoid the contract instead of merely claiming damages under Article 4:106 PECL. If the other party did not cause the mistake by making an incorrect statement, but merely left the mistaken party’s ignorance uncorrected, neither Article 4:106 PECL applies, nor can the other party’s silence give rise to a contractual obligation. As in many cases it will be difficult to prove that the mistaken party was misled by the other party’s fraudulent non-disclosure, the possibility to avoid the contract for nondisclosure of a fundamental fact under Article 4:103(1)(a)(ii) PECL (together with the right to damages under Article 4:117 PECL) is an important remedy for the mistaken party. In such a situation, the pivotal question is whether it was contrary to reasonable standards of fair dealing to leave the mistaken party in error. The Principles start from the general proposition that a party should not be entitled to take advantage of a serious mistake by the other as to the relevant facts or law (Lando/Beale (2000), p. 232 Comment E). However, as is also acknowledged in comment E, this is different in situations where the contract is of a speculative nature or where one party has made a significant effort in order to acquire her knowledge. As far as the requirements of good faith and fair dealing regarding the disclosure of information is concerned, further reference can be made to the provision on fraud that contains a non-exhaustive list of circumstances that should be considered (Article 4:107(3) PECL). 4. The position of the mistaken party. Even if there is a fundamental mistake that is caused by the other party’s incorrect information or wrongful non-disclosure, the mistaken party is denied a remedy if her mistake was inexcusable (Article 4:103(2)(a) PECL), or if she deliberately took the risk of a mistake or should be treated as having done so (Article 4:103(2)(b) PECL). A mistake will of course be inexcusable if the other party did not cause the mistake and was under no duty to correct the mistake, so that the requirements of Article 4:103(1) PECL are not fulfilled in the first place (cf. Lando/Beale (2000), p.234 Comment I referring to Illustration 4). But this does not rule out the possibility that Article 4:103(2)(a) PECL can have an independent meaning as an exception to the remedy granted by Article 4:103(1) PECL. However, the more important exception seems to be Article 4:103(2)(b) PECL. As has already been mentioned (above Article 4:102 no. 2), in particular in cases of initial impossibility and in the absence of a contractual risk allocation, it will often be the question under which circumstances the risk of impossibility should be borne by a promisor who entered into the contract under a mistake (cf. also Lando/Beale (2000), pp. 234–235 Comment J). 5. Shared mistake. The contract may also be avoided in cases of shared mistake (Article 4:103(1)(a)(iii) PECL). Where the risk of the facts turning out to be different than anticipated by the parties was not allocated by the contract the party for whom the outcome would seriously differ from what was expected is given the right to avoid the contract. This party will, however, usually not be entitled to damages under Article

175

T. Ackermann & J.-U. Franck 4:117 PECL (see Lando/Beale (2000), p. 233 Comment F). Moreover, instead of being avoided the contract may be adjusted by the court at the request of either party (Article 4:105(3) PECL). 6. Remedies. The mistaken party has a right to avoid the contract. This right may be excluded or restricted within the limits of good faith and fair dealing (Article 4:118(2) PECL) or if an adaptation of the contract takes place (Article 4:105 PECL). In addition, the mistaken party may claim damages under Article 4:106 PECL or under Article 4:117 PECL. If the mistaken party is also entitled to damages for non-performance or any other remedy for non-performance, this does not preclude her from avoiding the contract (Article 4:119 PECL). However, she has to choose between these remedies and cannot both avoid the contract and claim damages for non-performance (see the comment on Article 4:119 PECL in Lando/Beale (2000), p. 285).

Draft Common Frame of Reference Article II. – 7:201: Mistake (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) the party, but for the mistake, would not have concluded the contract or would have done so only on fundamentally different terms and the other party knew or could reasonably be expected to have known this; and (b) the other party: (i) caused the mistake; (ii) caused the contract to be concluded in mistake by leaving the mistaken party in error, contrary to good faith and fair dealing, when the other party knew or could reasonably be expected to have known of the mistake; (iii) caused the contract to be concluded in mistake by failing to comply with a precontractual information duty or a duty to make available a means of correcting input errors; or (iv) made the same mistake. (2) However a party may not avoid the contract for mistake if: (a) the mistake was inexcusable in the circumstances; or (b) the risk of the mistake was assumed, or in the circumstances should be borne, by that party. This provision contains a significant addition to the PECL. Failure to comply with a pre-contractual information duty (as set out in Chapter 3. Section 1, and in Book IV of the DCFR) or a duty to make available means of correcting input errors (as set out in Chapter 3, Section 2 of the DCFR) is specifically mentioned as one of the situations in which the other party is accountable for the mistake (Article II.-7:201(1)(b)(iii) DCFR). The fact that in these situations other remedies may be available as well does not preclude the application of Article II.-7:201 DCFR (Article II.-3:109(4) and Article

176

Chapter 4: Validity II.-3:201(2) DCFR). The wording of this provision is somewhat ambiguous as it does not require a causal link between the infringement of the information duty and the (fundamental) mistake. However, a reasonable judge would demand such a causal link. As a result, the contract is only avoidable if a violation of a pre-contractual information duty or a duty to make available means of correcting input errors led to a fundamental mistake as defined in Article II.-7:201(1)(a) DCFR and if the remedy is not excluded under Article II.-7:201(2) DCFR. In view of the nature of the duties concerned, it does not seem likely that many cases are above the threshold of a fundamental mistake (at least as long as this threshold is taken seriously). Another change with potential significance can be found in Article II.-7:201 (1)(b)(i) DCFR, which merely requires that the other party ‘caused the mistake’, leaving out the addition ‘by information given by the other party’ that can be found in Article 4:103(1)(a)(i) PECL. The comments on Article II.-7:201 DCFR in von Bar/Clive (2009) suggest that a mistake can be caused by the other party in some way other than by the giving of false information, providing the example of the setup of a website that induces parties to make certain errors when entering into contracts through that website. However, in this example there is most likely a failure to comply with the pre-contractual duty to make available technical means for identifying and correcting input errors. Responsibility can therefore be established under Article II.7:201(1)(b)(iii) DCFR so that there is no need to broaden the scope of Article II.-7:201(1)(b)(i) DCFR as compared to the PECL equivalent in order to solve this problem. It rather seems that a vague concern that not all instances where the other party should be held accountable for a mistake have been covered has led the drafters of the provision to overshoot the mark. A mistake can be caused by almost any kind of act, even if the act is non-communicative in nature and if it is ex ante unforeseeable that the act could lead to a misapprehension (cf. Jansen/Zimmermann (2010), p. 238).

German Law § 119 BGB: Avoidability for mistake (1) A person who, when he gave a declaration of will, was mistaken about its content, or did not intend to give a declaration with this content at all, can avoid the declaration if it is to be assumed that he would not have given it if he had known the state of affairs and on a rational assessment of the case. (2) A mistake about those characteristics of a person or a thing which are regarded as significant in human affairs is deemed to be a mistake about the content of the declaration. 1. General. The BGB follows a concept of mistake that clearly differs from the concept of the Principles and of the DCFR. It goes back to Savigny’s distinction between errors that vitiate a declaration of will because they lead to a divergence between a person’s actual will and her declaration (such as a slip of the tongue), and errors in motive (such as the mistaken idea of a buyer of a painting to use it as present for a wedding that has

177

T. Ackermann & J.-U. Franck in fact been cancelled) that do generally not affect the validity of a declaration of will because in these cases, the person’s actual will conforms with her declaration (cf. on Savigny and his impact on the concept of mistake in the BGB Flume (1992), pp. 440–446). If taken literally, this distinction would imply that an error on the characteristics of the object of the contract (error in substantia) would belong to the latter category and thus not affect the validity of a declaration of will. But this was not Savigny’s position, and it is not the position that prevailed in the BGB: Apart from errors that lead to a divergence of a person’s will and her declaration (§ 119(1) BGB), the BGB recognizes certain errors about characteristics of the object of the declaration or about characteristics of the other party as relevant for the validity of the declaration of will (§ 119(2) BGB). However, the BGB-rules differ from Savigny’s original ideas as to the legal consequences of a mistake. First, if a mistake occurs that is deemed relevant under § 119 BGB the declaration of will that is affected by it (and the contract formed by this declaration and by the declaration of the other party) is not automatically void, but only avoidable. It is therefore left to the decision of the mistaken party whether the contract is upheld or not. Second, avoiding a contract for mistake comes at a price: If the other party has relied on the validity of the contract, the mistaken party is liable for reliance damages even if is she is without fault (§ 122 BGB). The mistaken party’s liability is only excluded if the other party knew or must have known of the mistake. Just as under the PECL, there is no room for application of the rules on avoidance for mistake if a proper interpretation of the declaration of will concerned leads to the conclusion that the declaration is in full conformity with the person’s intention. 2. Nature of the mistake. Whether a party may or may not avoid a contract for mistake under § 119 BGB depends on the nature of the mistake. § 119(1) BGB is closer to Article 4:104 PECL than to Article 4:103 PECL. It merely covers situations in which a person’s actual will and her declaration diverge, either because of an error in making her declaration (‘Erklärungsirrtum’, e.g., a slip of the tongue) or because of an error about the content of her declaration (‘Inhaltsirrtum’, e.g., a misunderstanding of a technical term used in a contract). Only the latter situations are comparable to the cases covered by Article 4:103 PECL. According to the Bundesgerichtshof (BGHZ 91, 324 = NJW 1984, 2279; BGHZ 109, 171, 177 = NJW 1990, 454, 456), cases where a person did not even know that her action was regarded as a declaration of will (e.g., a person signed a paper believing it was a birthday letter, when it was in fact a contract) have to be treated in the same way. As far as a comparison with Article 4:103 PECL is concerned, § 119(2) BGB is more important. This provision allows for an avoidance of a declaration of will without requiring a divergence between the person’s will and her declaration. With regard to contracts, there has to be an error on certain characteristics (‘Eigenschaftsirrtum’) of a person (which will often, though not necessarily, be the other party of a contract) or of the object of the contract (the ‘thing’ referred to in § 119(2) BGB). Such errors qualify as a ground for avoidance only if two conditions are met: First, they have to concern characteristics of the other party or the object of the contract that qualify as ‘verkehrswesentlich’, which, in a rather imprecise manner, can be translated as ‘significant for

178

Chapter 4: Validity human affairs’ or as ‘customarily regarded as essential’. Second, there must be reason to believe that the mistaken party would not have made her declaration if she had known of the real situation and if she had rationally assessed it. As to the proper understanding of what constitutes a customarily significant characteristic of the thing (or, mutatis mutandis, the person) for the purpose of § 119(2) BGB, there is some disagreement. The Reichsgericht (RGZ 64, 266, 269) and the Bundesgerichtshof (BGHZ 34, 32, 41 = NJW 1961, 772) have held that these characteristics include all physical and legal circumstances that due to their nature and durability, tend to exert influence on the valuation of the thing as judged by the public taking part in such dealings (‘Verkehrsanschauung’) if one party based her decision to enter into the contract on these characteristics and this was discernible by the other party. By definition, the value of the thing as such does not belong to these characteristics (Ellenberger, in Palandt (2013), § 119 no. 27). As a consequence, a contract cannot be avoided because of an error about the value of the object of the contract. Apart from this limitation, this definition leaves some room for speculation. In order to narrow it down, additional criteria have been developed in the case law (in particular the requirement that the characteristic concerned must directly affect the valuation of the thing, BGHZ 16, 54, 57 = NJW 1955, 349, or that only typical circumstances can be relevant, BGH DB 1972, 479, 481). However, these criteria have never been applied consistently (cf. Armbrüster, in Münchener Kommentar (2012), § 119 no. 103). Moreover, the case law has attracted criticism because it lacks a conceptual basis. There are several proposals in the literature that are meant to cure this deficit. Three concepts deserve being mentioned: According to Larenz (1989), p. 378, who starts from the old idea that § 119(2) BGB contains an exception to the rule that errors in motive are irrelevant for the validity of a declaration of will, an error about characteristics of a thing or a person must be subjectively and objectively relevant in order to qualify as a mistake that allows for avoidance. In contrast to this, Flume (1992), pp. 476–479, argues that § 119(2) BGB deals with discrepancies between the content of a juridical act (e.g., the contractual stipulation that the object sold is made of gold) and the real situation (e.g., the fact that the object is not golden). This leads him to the conclusion that despite the wording of the provision that clearly supports an objective test (‘Verkehrswesentlichkeit’), only errors relating to circumstances that are relevant under the contract made between the parties can serve as a ground for avoidance. Last but not least, inspired by comparative insights including Article 4:103 PECL, Kramer (Kramer, in Münchener Kommentar (2006), § 119 no. 113) suggests that the application of § 119(2) BGB should depend on the contractual allocation of risks. In his opinion, an error about characteristics of a thing or of a person is only relevant if the risk of being wrong about these characteristics falls within the sphere of responsibility of the other party. However, this view disregards the fact that neither § 119(2) BGB nor the other provisions on mistake indicate that the other party’s responsibility for the mistake is a pre-requisite for avoidance, as will be discussed in the next paragraph of this comment. 3. The position of the other party. The avoidability of a declaration of will under § 119 BGB does not depend on the other party being in any way accountable for the mistake of the party who made the declaration. German law does not require that the other

179

T. Ackermann & J.-U. Franck party caused the mistake or that she violated her duties following from good faith and fair dealing by leaving the party who made the declaration in error. This can be explained against the background that the other party has a right to reliance damages (§ 122(1) BGB) that is only excluded if the other party knew or must have known of the mistake (§ 122(2) BGB). So if the other party relied on a declaration of will that is affected by a mistake she is not accountable for she is adequately protected, at least as far as her reliance interest is concerned. For this reason, there is no need for a restrictive interpretation of § 119(2) BGB that contrary to the wording of this provision and to the intention of its drafters, only regards errors that fall within the sphere of responsibility of the other party as grounds for avoidance (see above, no. 2 of this comment). 4. The position of the mistaken party. If a party would not have entered a contract but for an error that qualifies as a mistake under § 119(1) or (2) BGB she may avoid her declaration of will even if she was careless in making the mistake. The question whether the mistaken party was careless or not is also irrelevant for her duty to compensate the other party for her reliance loss (§ 122 BGB). In contrast to the Principles (Article 4:103(2)(b) PECL) and to the DCFR (Article II.-7:201(2)(b) DCFR), there is no provision in the BGB according to which a contract cannot be avoided for mistake if the mistaken party has to bear the risk of the mistake. However, it is undisputed that there are such cases. A nice example of the distinctions made in the German literature regarding this issue is the triangular relationship between a surety, a creditor and a debtor: As it is the essence of suretyship that the surety takes the risk of the debtor’s inability to pay, the surety may not rely on a mistake about the debtor’s creditworthiness (Flume (1992), p. 490). However, the creditor’s error about the debtor’s creditworthiness is widely accepted as a mistake that allows the creditor to avoid her contractual promise to the debtor (RGZ 66, 385, 387; Armbrüster, in Münchener Kommentar (2012), § 119 no. 128) even though there are good reasons to doubt this position (cf. Flume (1992), pp. 486 et seq.). Finally, the creditor’s error about the surety’s ability to pay can qualify as a mistake under § 119(2) BGB that allows the creditor to avoid the contract with the surety and maybe also the contract with the debtor (Armbrüster, in Münchener Kommentar (2012), § 119 no. 128). 5. Shared mistake. If both parties share a mistake that is caught by § 119(2) BGB the remedy granted by this provision is not really helpful because the party who avoids the contract would have to compensate the other party for her reliance loss under § 122 BGB. A better solution can be found in § 313(2) BGB (cf. Ellenberger, in Palandt (2013), § 119 no. 30): According to this provision, adaptation of the contract may be demanded if material conceptions of both parties that have become the basis of the contract are found to be incorrect (for an English translation of § 313 BGB see below, Article 4:105 PECL, German Law). 6. Remedies. The mistaken party has a right to avoid her declaration of will. If the declaration is part of a contract, avoidance will also affect the contract. This remedy may be excluded or restricted by individual agreement between the parties, but not in

180

Chapter 4: Validity standard form contracts (BGH NJW 1983, 1671). If avoidance is effected (by notice, § 143 BGB) the other party is entitled to reliance damages under § 122 BGB. The relationship between avoidance for mistake and other remedies a mistaken party may be granted under the BGB will be explored in other parts of this book (see in particular the comments on Article 4:106 and 4:117 PECL concerning the mistaken party’s right to damages and on Article 4:119 PECL concerning remedies for nonperformance). However, it would be misleading not to mention here one important point that affects the practical significance of avoidance under § 119(2) BGB: According to the prevailing opinion, § 119(2) BGB is not applicable in cases where nonconforming goods were delivered under a sales contract and there was an error (of either party) about their conformity. In these cases, it is said that the specific remedies for the delivery of non-conforming goods (§§ 434 et seq. BGB) take precedence over § 119(2) BGB, at least after the risk has passed to the buyer (BGHZ 60, 319, 320; Armbrüster, in Münchener Kommentar (2012), § 119 nos. 29 et seq.; see for the opposing view Larenz/Wolf (2004), pp. 664 et seq.). Generally speaking, it is the prevailing view that avoidance under § 119(2) BGB is not available if the aggrieved party has a remedy for non-performance according to the rules on breach of contract (for a more detailed account see Article 4:119 PECL, German Law, no. 2.). It goes without saying that this position greatly reduces the impact of § 119(2) BGB.

Comparison and Evaluation The Principles and the DCFR take an approach to the doctrine of mistake that is quite different from German law. The underlying idea of § 119 BGB is to identify certain categories of mistakes that allow for avoidance of a declaration of will without attaching any importance to the question whether the other party was accountable for the mistake. However, the other party is in principle entitled to a compensation of her reliance loss if the mistaken party chooses this remedy (§ 122 BGB). By contrast, the Principles and the DCFR cover any fundamental mistake of fact or law without excluding particular categories (such as errors in motive) while requiring (with the exception of cases of mutual mistake) that the other party was accountable for the mistake either by having caused it or, contrary to good faith and fair dealing, by having left the mistaken party in error (the accountability of the other party in situations where third persons caused the mistake will be dealt with in the comment to Article 4:111 PECL). As far as the renunciation of the traditional categories of mistake in the Principles and in the DCFR is concerned, German lawyers will feel relieved that this solution spares them the difficulties they have experienced in the interpretation of § 119(2) BGB. As a contribution to legal certainty, it may seem appealing to single out certain errors about characteristics of a person or a thing as grounds for avoidance (‘Eigenschaftsirrtum’) while excluding all other errors that do not lead to a divergence between a person’s actual will and her declaration. But it has proved exceedingly difficult to find a satisfactory definition of the ‘Eigenschaftsirrtum’. However, the solution chosen in the Principles and in the DCFR is also prone to uncertainty as it is far

181

T. Ackermann & J.-U. Franck from clear what constitutes a ‘fundamental’ mistake as required by Article 4:103(1)(b) PECL and Article II.-7:201(1)(a) DCFR. According to Comment C on Article II.-7:201 DCFR in von Bar/Clive (2009), mistakes must be ‘very serious’ in order to allow parties to escape from contracts, and ‘it is not sufficient that the matter in question should have been “material” in the sense of being such as to merely influence the decision as to whether to contract or as to the terms on which to contract’. But these abstract explanations are not likely to settle any disputes over what constitutes a fundamental mistake. Comment H on Article II.-7:201 DCFR in von Bar/Clive (2009), may even add to the confusion by stating that ‘[m]istakes which relate to the mere value of the item are not usually fundamental’. As an illustration, the comment provides the example of a woman who pays ¤ 200,000 for a Chippendale desk, having read that this was the price commonly paid a few years ago, but not knowing that the market price has dropped dramatically since then. There are good reasons to deny avoidance of a contract to a party who was mistaken about the value of the object she bought (in particular, because it is essential for the functioning of markets that parties bear the risk of having agreed to pay a price above the market rate so that avoidance should be regarded as excluded by Article II.-7:201(2) (b) DCFR. However, it can hardly be said that such a mistake is not fundamental if there is a huge difference between the real and the perceived market price (cf Jansen/Zimmermann (2010), p. 239, and (with reference to the UNIDROIT Principles of International Commercial Contracts) Huber, in Vogenauer/Kleinheisterkamp (2009), Article 3.5 paragraph 8). So instead of clarifying the notion of fundamental mistake, the illustration given by the comment is rather misleading. As to the question whether it is preferable to grant relief to the mistaken party only if the other party is accountable for the mistake, the approach taken by the Principles and by the DCFR makes sure that the other party can rely on the validity of the contract and thus obtain the benefit of the bargain if she is not responsible for the mistake. This being said, one may take issue with several aspects of the drafting of these provisions. To mention just one example, it is hard to understand why the crucial question whether good faith and fair dealing requires a party to point out the relevant information to the mistaken party is answered neither in Article 4:103 PECL nor in Article II.-7:201 DCFR, but only in Article 4:107(3) PECL and in Article II.-7:205(3) DCFR, respectively, relating to fraud (cf. Eidenmüller et al. (2008), p. 700). However, the most important problem seems to be the risk of an overly broad application of Article 4:103 PECL and of Article II.-7:201 DCFR that would overemphasise the right to avoid a contract on the grounds of mistake at the expense of the reliability of contractual relationships. As these provisions cover any kind of misapprehension of a contracting party, and the limitation to ‘fundamental’ mistake is somewhat fluid, the burden of preventing an almost all-embracing right to avoidance very much lies with the definition of the responsibility of the other party for the mistake. It is open to doubt whether the categories of responsibility in Article 4:103(1)(a)(i) and (ii) PECL and in Article II.-7:201(1)(b)(i)-(iii) DCFR that apply to cases of unilateral mistake will be construed in a way that prevents an undue weakening of the principle pacta sunt servanda.

182

Chapter 4: Validity Under German law, which allows for avoidance irrespective of the other party’s innocence, the other party loses the benefit of the bargain and is only compensated for her reliance loss under § 122 BGB. At first view, there is much to be said for this solution: As a transaction affected by mistake is not socially advantageous it seems adequate not to enforce it and merely to protect the other party’s reliance interest, i.e., to compensate her for lost expenditure and for benefits foregone from alternative transactions. However, reliance damages as a remedy pose several practical difficulties (cf. Ackermann (2007), pp. 348 et seq.) that depending on the broader context of the legal system in which this remedy is applied, can reduce their efficacy as an instrument to foster reliance in the stability of contractual relationships. Considering that a distinction between the reliance interest and the expectation interest (i.e., the interest in receiving the benefit of the bargain) is not made in some European legal systems, the drafters of the Principles and of the DCFR may have been well advised to have adopted a legal regime that merely requires a decision on whether the other party’s expectation interest is protected or not and that dispenses with the intermediate category of reliance damages in cases of mistake.

Principles of European Contract Law Article 4:104: Inaccuracy in Communication An inaccuracy in the expression or transmission of a statement is to be treated as a mistake of the person which made or sent the statement and Article 4:103 applies. 1. Priority of interpretation. In order to find out whether an inaccuracy in the expression or transmission of a party’s statement caused a divergence between her statement and her true intention that may give her a right to avoid the contract under Article 4:104 PECL, a proper interpretation of the contract in accordance with Chapter 5 of the Principles (in particular Article 5:101 PECL) is necessary. If the interpretation of the contract leads to the result that the terms of the contract conform with the party’s intention there is no ground for this party for invoking mistake. Due to the rules laid down in Article 5:101(1) and (2) PECL, this may be the case even if there is a discrepancy between the party’s intention and the objective meaning of the words she used. In this regard, three situations can be distinguished: Firstly, if it is established that both parties had a common intention (e.g., they agreed on a price of EUR 10,000), Article 5:101(1) PECL gives effect to their common intention irrespective of the words used by one or both of them (e.g., one or both parties wrote the price as ‘¤ 100,000’; cf. Lando/Beale (2000), p. 242 Comment B to Article 4:104 PECL). Secondly, if one party expressed her intention inaccurately (e.g., by writing the price as ‘¤ 100,000’ while her true intention was to offer a price of EUR 10,000) and the other party was aware of the first party’s intention, the contract is to be interpreted in the way intended by the first party (Article 5:101(2) PECL; cf. Lando/Beale (2000), p. 242 Comment C to Article 4:104 PECL). Thirdly, even if the other party did not know that the first party made an inaccuracy in her statement, but could not have been unaware of the first party’s intention the contract is to be interpreted in accordance with the first party’s intention

183

T. Ackermann & J.-U. Franck (Article 5:101(2) PECL; cf. Lando/Beale (2000), p. 243 Comment E to Article 4:104 PECL). So the first party is only bound to a contract on the terms following from the objective meaning of the words she used (Article 5:101(3) PECL) if the other party (who may or may not have known of the inaccuracy of the first party’s statement; cf. Lando/Beale (2000), p. 242 Comment C to Article 4:104 PECL) was neither aware nor could not have been unaware of the intended meaning. Only in these cases the issue of avoidance arises. 2. Prerequisites of avoidance. The wording of Article 4:104 PECL (‘Article 4:103 applies’) may leave some doubt as to whether only the remedy stated in Article 4:103 PECL is referred to or the requirements of this provision also have to be met. However, the comment to Article 4:104 PECL makes entirely clear that the latter interpretation is correct (Lando/Beale (2000), pp. 242 et seq.). Against this background, an inaccuracy in the expression or transmission of a statement as such is not sufficient as a ground for avoidance. The other party must also be accountable for the inaccuracy either because she caused it (cf. Article 4:103(1)(a)(i) PECL and Lando/Beale (2000), p. 243 Comment F to Article 4:104 PECL) or because she knew or ought to have known of the inaccuracy (but not the real intention, see no. 1 of this comment) and acted against good faith and fair dealing by not pointing it out (cf. Article 4:103(1)(b) PECL and Lando/Beale (2000), p. 243 Comment D and E to Article 4:104 PECL). Moreover, relief is only allowed for mistakes which make the contract fundamentally different (cf. Article 4:103(1)(b) PECL and Lando/Beale (2000), p. 244 Comment H to Article 4:104 PECL). Finally, avoidance may be excluded on the grounds set forth by Article 4:103(2) PECL. Regarding the issue of an inaccuracy being ‘inexcusable’, the drafters of the Principles emphasize that the fact that the mistaken party was seriously at fault is not necessarily a bar to relief (Lando/Beale (2000), p. 244 Comment G to Article 4:104 PECL). These requirements do not leave much room for the right to avoid the contract (according to Eidenmüller et al. (2008), p. 701, there is no room at all for avoidance in these situations, which we believe is not the case.) 3. Transmission by third parties. If an inaccuracy occurs in the transmission of a communication by a third party without any fault on either side of the sender or of the recipient the first question to be answered is whether the sender or the addressee bears the risk of such a mistake. According to the receipt rule adopted by the Principles (Article 1:303(2) PECL), the sender normally bears this risk until the communication reaches the addressee, i.e., until it is delivered to the addressee’s place of business or mailing address or, if there is no place of business or mailing address, to her habitual residence (Article 1:303(3) PECL). So if a third party is employed by the sender in order to transmit a communication to one of the places named in Article 1:303(3) PECL, any inaccuracy by the third party has to be treated like an inaccuracy by the sender herself. However, if a communication was delivered correctly to the addressee’s place of business or mailing address, but an inaccuracy occurred during further transmission by third persons (e.g., to a place where the addressee spent her holidays) the addressee must bear the risk of a mistake. Only in the exceptional case where the dispatch rule applies (see Article 1:303(4) PECL and Lando/Beale (2000), p. 244 Comment I to

184

Chapter 4: Validity Article 4:104 PECL), the addressee has to bear this risk from the moment when the notice was dispatched.

Draft Common Frame of Reference Article II. – 7:202: Inaccuracy in communication may be treated as mistake An inaccuracy in the expression or transmission of a statement is treated as a mistake of the person who made or sent the statement. The only difference between Article 4:104 PECL and Article II.-7:202 DCFR is that in the latter provision, there is no explicit reference to the application of the general rule on mistake (Article II.-7:201 DCFR). This neither implies any substantial change in comparison to the Principles nor does it lead to less clarity as the application of Article II.-7:201 DCFR already follows from the fact that an inaccuracy is treated as a mistake.

German Law § 119 BGB: Avoidability for mistake (1) A person who, when he gave a declaration of will, was mistaken about its content, or did not intend to give a declaration with this content at all, can avoid the declaration if it is to be assumed that he would not have given it if he had known the state of affairs and on a rational assessment of the case. (2) […] § 120 BGB: Avoidability for incorrect communication A declaration of will which has been incorrectly communicated by the person or facility used for the communication can be avoided under the same prerequisite as a declaration of will given by mistake according to § 119. 1. Priority of interpretation. There is only a need to consider a ground for avoidance covered by § 119(1) BGB if the content of a person’s declaration, as interpreted in accordance with §§ 133, 157 BGB, and her actual intention diverge. With regard to the three situations discussed under the Principles (above, Article 4:104 PECL no. 1), the same results can be reached under the BGB: Firstly, regarding cases in which both parties had a common intention, but the words they used in their contract have a different objective meaning, it has long been established that the parties’ common intention prevails over the objective meaning of the words they used (‘falsa demonstratio non nocet’; cf. RGZ 99, 147, 148; BGH NJW 2008, 1658). Secondly, if one party made an inaccurate statement and the other party knew the first party’s true intention but did not point out her mistake the contract has to be interpreted in accordance with the first party’s intention (Flume (1992), pp. 451–455; Armbrüster, in Münchener Kommentar (2012), § 119 no. 49). Thirdly, if one party expressed her intention inaccurately, but the other party had to gather from the circumstances surrounding the statement the first party’s true intention (e.g., the first party wrote an offer to sell

185

T. Ackermann & J.-U. Franck for ‘¤ 1,000’, but it was apparent from the preceding negotiations that she only wanted to sell for EUR 10,000) it is again the first party’s intention that determines the content of the contract (Armbrüster, in Münchener Kommentar (2012), § 119 no. 60). These cases must be distinguished from situations where the other party knew or, considering the circumstances, should have known an inaccuracy in the first party’s statement, but not the first party’s real intention. In such a case, the first party’s statement cannot be interpreted in accordance with her intention, and in order not to bound by it, she has to invoke the remedy provided by § 119(1) BGB. However, she does not have to compensate the other party for her reliance loss (§ 122(2) BGB; cf. below, no. 2). 2. Prerequisites of avoidance. § 119(1) BGB covers situations in which a person’s actual will and her declaration diverge, either because of an error in making her declaration (‘Erklärungsirrtum’, e.g., a slip of the tongue) or because of an error about the content of her declaration (‘Inhaltsirrtum’, e.g., a misunderstanding of a technical term used in a contract). Moreover, according to the Bundesgerichtshof (BGHZ 91, 324 = NJW 1984, 2279; BGHZ 109, 171, 177 = NJW 1990, 454, 456), § 119(1) BGB is applied by analogy in cases where a person did not even know that her action was regarded as a declaration of will (e.g., a person signed a paper believing it was a birthday letter, when it was in fact a contract). If an error falls into one of these categories of mistake and if there is a causal link between a person’s mistake and her declaration of will she may avoid the declaration. There are no additional requirements. In particular, the mistake does not have to be fundamental (the reference made to ‘rational’ or ‘reasonable’ assessment at the end of § 119(1) BGB only serves the purpose to exclude cases where avoidance is sought on purely subjective grounds; cf. Armbrüster, in Münchener Kommentar (2012), § 119 no. 137). Moreover, as has already been explained (above, Article 4:103 PECL, German Law, no. 3), the avoidability of a declaration of will under § 119 BGB does not depend on the other party being in any way accountable for the mistake of the party who made the declaration. However, the other party is protected by a right to reliance damages (§ 122(1) BGB) that is only excluded if the other party knew or must have known of the mistake (§ 122(2) BGB). 3. Transmission by third parties. § 120 BGB specifically covers situations in which an inaccuracy occurred in the transmission of a declaration of will by a third party. These cases are treated in the same way as a mistake made by the sender herself. § 120 BGB is applicable insofar as the sender bears the risk of a mistake in the process of a transmission of a declaration, i.e., until the declaration becomes effective (cf. § 130(1) BGB), which leads to the same distinctions as under the Principles. Moreover, it should be stressed that according to the prevailing opinion (e.g., Flume (1992), pp. 456 et seq.), the sender does not bear the risk of a deliberate falsification of the declaration by the person who transmitted it. As a consequence, § 120 BGB does not apply in such a case, and the third party is treated like an agent without authority (‘falsus procurator’).

186

Chapter 4: Validity Comparison and Evaluation As regards inaccuracies in the expression or transmission of a statement, the Principles, the DCFR and the BGB have some basic features in common. As far as the rules of interpretation are concerned, they all give priority to the real intention of a party over the objective meaning of her words if the other party shared or knew her real intention or could be expected to have discerned it. Only if the rules of interpretation lead to a divergence between the content of a declaration and the party’s real intention there is need for relief, which is provided for in all three legal systems. Moreover, the Principles, the DCFR and the BGB share the position that an inaccuracy that occurred in the transmission of a communication by a third person has to be treated in the same way as a mistake by the sender herself. There are, however, differences between the German civil law on the one hand and the Principles and the DCFR on the other hand that follow from divergences in their general approach to the rules of mistake (as analysed above, Comparison and Evaluation comment to Article 4:103 PECL). The Principles and the DCFR only allow for avoidance if the other party is accountable for the inaccuracy, and if there is a fundamental mistake. The BGB does not know such requirements. It can afford to be more generous in granting relief to the mistaken party because relief comes at a price: The mistaken party must compensate the other party for her reliance loss (§ 122(1) BGB) unless the other party knew or must have known of the mistake (§ 122(2) BGB). The merits and the problems of such an approach have been briefly discussed in the Comparative comment to Article 4:103 PECL. As far as inaccuracies in the expression or transmission of a statement are concerned, it may be added that the German solution holds some attraction from a practical perspective because it neither requires subtle distinctions as to the ‘fundamental’ nature of a mistake nor an assessment of the other party’s accountability. Moreover, the German approach may be more suitable in a b2c relationship if the consumer does not have a right to withdraw. Imagine the case of a consumer who, without having been personally addressed before, visits the premises of a trader in another Member State where she fills in an order form by hand. If, due to a misspelling by the consumer, the order is for product X instead of product Y, the consumer can neither withdraw from the contract nor avoid the contract as the inaccuracy is not attributable to the trader under Article 4:103(1)(a) PECL and Article II.-7:201(1)(b) DCFR. Here, the much maligned approach of the German Civil Code, which allows for avoidance, but at the same time orders the mistaken party to compensate the other party for her reliance loss, has something to commend to it.”

Principles of European Contract Law Article 4:105: Adaptation of Contract (1) If a party is entitled to avoid the contract for mistake but the other party indicates that it is willing to perform, or actually does perform, the contract as it was understood by the party entitled to avoid it, the contract is to be treated

187

T. Ackermann & J.-U. Franck as if it had been concluded as the that party understood it. The other party must indicate its willingness to perform, or render such performance, promptly after being informed of the manner in which the party entitled to avoid it understood the contract and before that party acts in reliance on any notice of avoidance. (2) After such indication or performance the right to avoid is lost and any earlier notice of avoidance is ineffective. (3) Where both parties have made the same mistake, the court may at the request of either party bring the contract into accordance with what might reasonably have been agreed had the mistake not occurred. 1. Adaptation in cases of unilateral mistake. Article 4:105(1) and (2) PECL provide for an adaptation of a contract that is affected by a unilateral mistake. If after having learnt about the mistake, the other party offers to perform according to the mistaken party’s true intention there is no good reason to allow the mistaken party to avoid the contract. It would indeed be hard to distinguish this situation from cases in which a party expressed her intention inaccurately, but the other party was aware of the first party’s true intention from the beginning: In such a case, it is settled that the contract is to be interpreted in accordance with the first party’s intention (Article 5:101(2) PECL; cf. Lando/Beale (2000), p. 242 Comment C to Article 4:104 PECL and above, Article 4:104 PECL no. 1). If the other party only finds out later about the first party’s intention and offers to be bound by it the same result should be reached. In particular, the mere fact that the other party is accountable for the mistake under Article 4:103(a)(i) or (ii) PECL is no sufficient reason to allow the mistaken party to refuse to stay in a contractual relationship with the other party if this relationship is in full conformity with the mistaken party’s original intention. 2. Adaptation in cases of shared mistake. Article 4:105(3) PECL provides for an adaptation of a contract that is avoidable for shared mistake (Article 4:103(1)(a)(iii) PECL). Though the drafters of the Principles have treated adaptation in cases of shared mistake in the same provision as adaptation in cases of unilateral mistake it should not be overlooked that the nature of the problem is quite different: In cases of unilateral mistake, there is a clear-cut solution as the contract is adjusted to the mistaken party’s real intention with the other party’s consent. This rule is fairly simple to administer for a court. In cases of shared mistake, the contract may be adjusted by the court at the request of either party in such a way as to reflect the hypothetical agreement the parties would have reached but for the mistake. In such a situation, the court enjoys a large margin of discretion as to whether adaptation is appropriate at all and the way in which the contract may be adapted (cf. Lando/Beale (2000), p. 246 Comment B to Article 4:105 PECL).

188

Chapter 4: Validity Draft Common Frame of Reference Article II. – 7:203: Adaptation of contract in case of mistake (1) If a party is entitled to avoid the contract for mistake but the other party performs, or indicates a willingness to perform, the obligations under the contract as it was understood by the party entitled to avoid it, the contract is treated as having been concluded as that party understood it. This applies only if the other party performs, or indicates a willingness to perform, without undue delay after being informed of the manner in which the party entitled to avoid it understood the contract and before that party acts in reliance on any notice of avoidance. (2) After such performance or indication the right to avoid the contract is lost and any earlier notice of avoidance is ineffective. (3) Where both parties have made the same mistake, the court may at the request of either party bring the contract into accordance with what might reasonably have been agreed had the mistake not occurred. Article II.-7:203 DCFR is modelled on Article 4:105 PECL and contains only insignificant amendments.

German Law § 242 BGB: Performance in accordance with good faith A creditor is obliged to effect performance in the manner required by good faith, having regard to custom. § 313 BGB: Disturbance of foundation of transaction (1) If the circumstances which have become the foundation of the contract have seriously altered after the conclusion of the contract and if the parties would not have concluded the contract, or would have concluded it with a different content if they had foreseen this alteration, then adaptation of the contract can be demanded in so far as adherence to the unaltered contract cannot be expected of one party taking into consideration all the circumstances of the individual case and in particular the contractual or statutory division of risk. (2) It is equivalent to an alteration of the circumstances if essential preconceptions which have become the foundation of the contract turn out to be wrong. (3) If an adaptation of the contract is not possible or cannot be expected of a party, the disadvantaged party can withdraw from the contract. For long term obligation relationships, the right to terminate by notice takes the place of the right of withdrawal.

189

T. Ackermann & J.-U. Franck 1. Adaptation in cases of unilateral mistake. There is no provision in the BGB that explicitly provides for adjustment of a contract affected by unilateral mistake. However, there is virtually unanimous agreement that the other party must be allowed to hold the mistaken party bound to her real intention (‘Reurechtsausschluss’; see e.g., Armbrüster, in Münchener Kommmentar (2012), § 119 no. 141). However, views diverge as to how this can be achieved. According to the prevailing opinion (e.g., Kramer, above), this result follows from the prohibition of venire contra factum proprium which is rooted in the general principle of good faith and fair dealing (§ 242 BGB). From this perspective, a mistaken party would not act in good faith if she sought relief from the contract even though its terms were adjusted to her real intention. 2. Adaptation in cases of shared mistake. Avoidance is generally not regarded as an appropriate remedy in cases of shared mistake (see above, Article 4:103 PECL, GERMAN LAW, no. 5). If both parties are mistaken about material conceptions that have become the basis of the contract either of them may demand adaptation of the contract under § 313(1) and (2) BGB. If adaptation is not possible or not appropriate the contract may still not be avoided (which would lead to the problem that the avoiding party would have to compensate the other party for her reliance loss under § 122 BGB), but the disadvantaged party may withdraw from the contract or terminate it under § 313(3) BGB. For a judge who has to decide on whether and how to adjust a contract affected by shared mistake, the situation is largely the same as under the Principles: § 313 BGB leaves a fairly large margin of discretion that makes it difficult to predict the outcome in a given case.

Comparison and Evaluation As far as the adjustment of a contract to the mistaken party’s real intention in cases of unilateral mistake is concerned, the solution chosen by the Principles and by the DCFR reflects a position that is virtually unanimously shared in the literature on German law. However, considering the lack of a provision in the BGB that deals with the so-called ‘Reurechtsausschluss’, it has proved difficult to arrive at this result. The decision to include an explicit rule in the Principles and in the DCFR spares us these difficulties. As regards cases of shared mistake, the Principles, the DCFR and the BGB all give priority to an adjustment of the contract by the court, and the contract can only be set aside (i.e., avoided or terminated) if an adjustment is inappropriate or impossible. Despite this convergence among the legal systems compared, one might take issue with this solution: In contrast to adaptation in cases of unilateral mistake (that refers to the mistaken party’s real intention), adaptation in cases of shared mistake (that requires the reconstruction of a hypothetical bargain) is difficult to administer for a court, and the outcome is difficult to predict for the parties. Depending on the circumstances of the individual case, a ‘penalty default rule’ that does not allow for judicial adaptation may be preferable in order to provide the parties with an incentive not to leave gaps but to find ex ante solutions in their contract which may prove less costly than ex post adjustments by a court.

190

Chapter 4: Validity Principles of European Contract Law Article 4:106: Incorrect Information A party which has concluded a contract relying on incorrect information given it by the other party may recover damages in accordance with Article 4:117(2) and (3) even if the information does not give rise to a fundamental mistake under Article 4:103, unless the party which gave the information had reason to believe that the information was correct. 1. General. The Principles provide various remedies for a party who entered into a contract relying on incorrect information given by the other party. First, if the other party was fraudulent, the mistaken party may avoid the contract under Article 4:107 PECL. Second, if the other party was not fraudulent, but the incorrect information led to a fundamental mistake the contract may be avoided under Article 4:103 PECL. Third, the incorrect statement may give rise to a contractual obligation under Article 6:101 PECL, in which case the mistaken party will have the choice between remedies for non-performance and the remedies provided by Chapter 4 (Article 4:119 PECL). Article 4:106 PECL provides an alternative remedy, but more importantly, in the absence of fraud, a fundamental mistake and a statement giving rise to a contractual obligation, a party who suffered a loss caused by incorrect information will only be granted relief under Article 4:106 PECL. As to the relationship between this remedy and delictual remedies for incorrect information, as may be granted by some national legal systems, the comment (Lando/Beale (2000), p. 251 Comment G to Article 4:106 PECL) takes the view that the Principles should be regarded as superseding the national law. 2. Information given by the other party. Article 4:106 PECL applies only to incorrect information given by the other party to the contract or by a third party she was responsible for under Article 4:111 PECL. Incorrect information given by third parties who do not fall under any of the categories mentioned in Article 4:111 PECL can only lead to liability of the other party to the contract under Article 4:106 PECL if the other party passed on the information in a way that showed she was adopting it (Lando/ Beale (2000), p. 249 Comment D to Article 4:106 PECL). Both the wording of the provision and the comment clearly indicate the Article 4:106 PECL does not apply to cases where the other party (or a third party she was responsible for) did not give any incorrect information but, contrary to good faith and fair dealing, withheld correct information from the mistaken party. As regards avoidance for fundamental mistake and for fraud, the PECL treat (active) misrepresentation and non-disclosure on the same footing (cf. Article 4:103(1)(a), (b) and Article 4:107 PECL). Therefore, one may wonder why a distinction is made when it comes to damages: Should not a party who suffered a loss because, contrary to good faith and fair dealing, she was left in error by the other party be able to recover her loss under the same conditions as a party who was actively misled? Unfortunately, the comment to Article 4:106 PECL does not address this issue. 3. Responsibility for incorrect information. The Principles (Lando/Beale (2000), p. 246 Comment B) start from the proposition that if there was no reason for either party

191

T. Ackermann & J.-U. Franck to know that the information was incorrect, it seems fair to leave the loss where it falls (unless there was a shared fundamental mistake according to Article 4:103 PECL). If, however, the party who gave the information cannot show that she had reason to believe that the information was true, the drafters of the PECL regard it as necessary to grant a remedy to the party who was misled. While this statement can serve as a good starting-point, it leaves something to be desired in terms of clarity and precision. The criterion chosen by the Principles (‘had reason to believe’) is over-inclusive insofar as a person who gave an information she had reason to believe to be incorrect would be held liable even if she had no reason to believe that this information would induce the other party to enter into the contract. Moreover, at least if taken literally, this criterion is under-inclusive as it does not cover cases where, despite having no reason to be suspicious, the person who gave the information accidentally knew that the information was incorrect. 4. Reliance. It is not always reasonable for a party to rely on information given to her without further enquiry. If the recipient of incorrect information had reason to check it, in which case she would have found out that it was incorrect, it would not be justified to protect her reliance. The Principles do not take account of this situation by excluding liability under Article 4:106 PECL. However, they allow for a reduction of damages (which may be a reduction to nil) according to the concept of contributory negligence under Articles 4:117(3) and 9:504 PECL (Lando/Beale (2000), p. 249 Comment C and Illustration 1 to Article 4:106 PECL). 5. Measure of damages. The party who has been misled cannot recover compensation based on the position she would have been in if the information given to her had been correct. As indicated by the reference to Article 4:117(2) PECL, merely the loss caused by the incorrect information is recoverable. This means that the aggrieved party is put into the position she would have been in if she had known the truth (Lando/Beale (2000), p. 250 Comment E to Article 4:106 PECL). If taken literally, this would imply full compensation of the reliance interest, i.e., the other party would potentially be required to put the aggrieved party into the position she would be in if she had not concluded the contract. As a consequence, even though damages under the Principles do not allow for restitution in kind but only for payment of a sum of money (Article 9:502 PECL), the aggrieved party would at least financially reach the same result as if she had avoided the contract. However, as Article 4:106 PECL is also applicable to cases where the incorrect information was neither given fraudulently, nor did it lead to a fundamental mistake, this result would threaten to undermine the limitations of the right to avoidance that follow from Article 4:103 and 4:107 PECL. Therefore, it is understandable that the drafters of the Principles sought to limit the damages the mistaken party can claim under Article 4:106 PECL. However, it is less clear where these limits should be drawn. Comment E to Article 4:106 PECL in Lando/Beale gives some indications as to what the drafters were aiming at: First, as can be seen from Illustrations 4 and 6, (Lando/Beale (2000), p. 250) damages generally include the difference in value between what the aggrieved party gave and what she received, plus recovery of consequential loss. Second, Illustration 5 (Lando/Beale (2000), p. 250) shows that losses the aggrieved party would have suffered even if the information

192

Chapter 4: Validity given to her had been correct are meant to be excluded. Third, though this is not stated explicitly in Comment E (Lando/Beale (2000), p. 250), it may be inferred from its silence on this point that the aggrieved party is not allowed to claim the lost profit from an alternative transaction she did not make because she was misled by the incorrect information given to her (for a further discussion of the measure of damages see also below, comment to Article 4:117 PECL).

Draft Common Frame of Reference Article II. – 7:204: Liability for loss caused by reliance on incorrect information (1) A party who has concluded a contract in reasonable reliance on incorrect information given by the other party in the course of negotiations has a right to damages for loss suffered as a result if the provider of the information: (a) believed the information to be incorrect or had no reasonable grounds for believing it to be correct; and (b) knew or could reasonably be expected to have known that the recipient would rely on the information in deciding whether or not to conclude the contract on the agreed terms. (2) This Article applies even if there is no right to avoid the contract. 1. General. While retaining the concept of Article 4:106 PECL, the drafters of the DCFR added some changes to the wording of the provision on damages for loss caused by incorrect information that will be explained in the following paragraphs of this comment. Moreover, it should be noted that Article II.-7:204 DCFR is not considered as superseding tortious liability for incorrect advice or information (von Bar/Clive (2009) Comment F on Article II.-7:204 DCFR). As far as liability for breach of a duty to disclose information is concerned, the DCFR differs from the PECL insofar as it provides for a specific rule in Article II.-3:109(3) DCFR. Interestingly, the right to damages that arises from this rule (see Article II.-3:501(1) DCFR) is meant to cover any ‘loss’ as described in the list of definitions prepared by the Study Group and the Acquis Group (see von Bar/Clive (2009) Comment A on Article II.-3:501 DCFR), i.e., economic loss (including loss of profit and burdens incurred) and non-economic loss. As a consequence, if the aggrieved party had not entered into a contract but for the lack of information she should have been given under Articles II.-3:101 et seq. DCFR, she can claim a compensation that fully puts her into the position she would have been in if she had not concluded the contract (though not a rescission of this contract). This is in remarkable contrast to the limited compensation offered by Article II.-7:204 DCFR in cases of incorrect information (see below, no. 5). Even more complexity is added to the pattern of liability for informational defects by the fact that Article II.-3:109 DCFR is only applicable if there is a breach of an information duty laid down in Articles II.-3:101 et seq. DCFR. As these information duties can hardly be regarded as exclusive, the question arises which remedies are available for the breach of information duties that

193

T. Ackermann & J.-U. Franck are not included in Article II.-3:101 et seq. DCFR. It has plausibly been suggested that Article II.-3:301(3) DCFR can serve as a basis (Faust (2008), p. 124), which would lead to the same measure of damages as under Article II.-3:109(3) DCFR (cf. Article II.-3:501(1) DCFR). As a result, a party who was misled by a breach of an information duty by the other party enjoys a more generous measure of damages than a party who was misled by incorrect voluntary information given to it by the other party. 2. Liability for damages and avoidance. Article 4:106 PECL states that the aggrieved party may recover damages ‘even if the information does not give rise to a fundamental mistake under Article 4:103’. In Article II.-7:204(2) DCFR, this statement on the relationship between liability of damages and avoidance is put more broadly: The lack of a right to avoid the contract does not affect the application of this Article whatever the reason is for which there is no such right. 3. Responsibility for incorrect information. In comparison to Article 4:106 PECL, Article II.-7:204(1) DCFR provides more elaborate criteria for the assessment of the question whether the party who gave the information has to bear the risk of it being incorrect. This helps to solve problems that occur in the interpretation of the PECL provision (see above, Article 4:106 PECL no. 3): The case where a party had reason to believe that the information was incorrect, but accidentally knew that it was incorrect is now covered by the first limb of the double test in Article II.-7:204(1)(a) DCFR. Moreover, Article II.-7:204(1)(b) DCFR clearly excludes the liability of a party who gave an information she had reason to believe to be incorrect, but not that this information would induce the other party to enter into the contract. Finally, the change in the wording of this part of the provision (from ‘unless … had reason to believe’ in the Principles to ‘if … had no reasonable grounds for believing’ in the DCFR) indicates that under the DCFR, the burden of proof lies with the aggrieved party and not, as under the PECL, with the party who gave the information. 4. ‘Reasonable’ reliance. By requiring ‘reasonable’ reliance (and not just reliance, as in Article 4:106 PECL), the DCFR introduces a concept that leads to an exclusion of liability in cases of ‘unreasonable’ reliance and not only to a reduction of damages according to the concept of contributory negligence, as provided for in the PECL (cf. Lando/Beale (2000), p. 249 Illustration 1 to Article 4:106 PECL and to Article II.-7:204 DCFR). 5. Measure of damages. Under the DCFR, the aggrieved party has a right to damages ‘for loss suffered as a result’ of incorrect information given to her by the other party. There is no reference to Article II.-7:214(2) and (3) DCFR, the equivalent of Article 4:117(2) and (3) PECL. However, there is no indication that this is meant as a change in substance. Comment E to Article II.-7:204 DCFR in von Bar/Clive (2009) shows that the aggrieved party is only entitled to a compensation amounting to the difference in value between what was given and what was received, plus damages for consequential loss. While this is clearly the drafters’ intention the wording of the provision is somewhat ambiguous and could have been chosen more carefully: As has already been mentioned in no. 1 of this comment, ‘loss’ as described in the Definitions prepared by the Study Group and the Acquis Group (cf. also Article III.-3:701(3) DCFR) includes

194

Chapter 4: Validity loss of profit and burdens incurred. Incorrect information may be the cause of lost profits (incorrect information may have prompted the party who relied on it to reject an alternative transaction that would have been profitable) and of burdens incurred (e.g., costs of making and performing the contract that the party who was misled concluded in reliance on incorrect information). Such an interpretation of the word ‘loss’ in Article II.-7:204 DCFR would obviously frustrate the purpose of restricting compensation to losses in value and consequential losses in order to prevent a conflict with the rules on avoidance. As this consequence is certainly not intended one has to accept that the meaning of ‘loss’ in Article II.-7:204 DCFR differs from the definition of this term by the Study Group and the Acquis Group. However, the result is a divergence between damages in cases of incorrect voluntary information and damages in cases of breach of an information duty because in the latter cases, compensation may lead to the result that the aggrieved party is financially put into the position she would have been in if she had not concluded the contract (see below, no. 1 of this comment).

German Law § 311: Obligation relationships arising from legal transactions and similar obligation relationships (1) […] (2) An obligation relationship with duties under § 241 paragraph 2 also arises from 1. the opening of contractual negotiations 2. the initiation of a contract, in which initiation one party, having regard to a possible relationship in the nature of a legal transaction, grants to the other party the possibility of exerting an effect on his rights, legal entitlements and interests, or entrusts these to him, or 3. similar business contacts. (3) […] § 241: Duties arising from obligation relationships (1) […] (2) The obligation relationship can, according to its content, oblige each party to have regard to the rights, legal entitlements and interests of the other party. § 280: Compensation for violation of duty (1) If the debtor violates a duty arising from an obligation relationship, the creditor can demand compensation for the harm arising from this. This does not apply if the debtor is not responsible for the violation of duty. (2)–(3) […]

195

T. Ackermann & J.-U. Franck 1. General. In German law, liability for loss caused by incorrect information given can be based on culpa in contrahendo (§§ 280(1), 311(2), 241(2) BGB). If the other party acted fraudulently, the party who was misled may also claim damages under tort law, particularly under § 823(2) BGB in connection with § 263 StGB, and under § 826 BGB. In particular because the subjective requirements of tortious liability are stricter than those of culpa in contrahendo (where only negligence is necessary, cf. below, no. 4) the latter rules are significantly more important than the former as a legal basis for claims for compensation of loss caused by incorrect information. Against this background, this comment will focus on the rules of culpa in contrahendo. 2. Liability for damages and avoidance. As German law generally allows for restitution in kind as a form of damages (§ 249(1) BGB) liability for culpa in contrahendo may lead to the rescission of a contract a party concluded in reliance on incorrect information given to her by the other party (the measure of damages will be examined more closely below, no. 6). Thus, a right to damages under culpa in contrahendo can be exercised to the same effect as a right to avoidance. Considering that the BGB does not provide for a right to avoidance in cases of mere negligent misrepresentation, it can easily be understood that the relationship between the rules on avoidance and culpa in contrahendo has led to a major division of opinions among courts and academics. In a line of cases that goes back several decades (cf. BGH NJW 1962, 1196), the Bundesgerichtshof has held that irrespective of the limits of the right to avoidance, the rules on culpa in contrahendo allow for a rescission of a contract in cases of negligent misrepresentation. More recent case law by several Senates of the Bundesgerichtshof (cf. for the 5th Civil Senate BGH NJW 1998, 302, 304; for the 8th Civil Senate BGH NJW 2000, 1254, 1256; and for the 10th Civil Senate BGH NJW-RR 2002, 308, 310) that is however not unanimously accepted among the judges (cf. for the 7th Civil Senate BGHZ 145, 121, 131, and for the 11th Civil Senate BGH NJW 2005, 1579, 1580) has restricted this remedy to cases in which the aggrieved party suffered an economic loss. In the German legal literature, opinions vary widely as to how this problem should be solved. Apart from those who support either the ‘old’ or the ‘new’ position taken by the Bundesgerichtshof, there are also authors who argue that as far as the rescission of contracts is concerned, the rules on culpa on contrahendo are superseded by the rules on avoidance, but that the latter rules should be extended by way of analogy to cases of negligent representation (cf. with regard to § 123 BGB, Grigoleit (1997), pp. 137 et seq., and with regard to § 119(2) BGB, Armbrüster, in Münchener Kommentar (2012), § 119 no. 120). However, there is much to be said for the traditional solution established by BGH NJW 1962, 1196. While serving the same goal of protecting free and informed decisions by the parties entering into a contract, the remedies provided by the German rules on avoidance and on culpa in contrahendo differ as to their conceptual approach: On the one hand, the basic idea of the German rules of avoidance is that certain categories of defect should allow the aggrieved party to set aside her declaration of will irrespective of the other party’s responsibility. On the other hand, the rules on culpa in contrahendo do not single out any categories of defect but they are only applicable if the other party was responsible (either by negligent or by intentional behaviour) for the defect suffered

196

Chapter 4: Validity by the aggrieved party. In view of this conceptual difference, the Bundesgerichtshof has been right to hold that liability for culpa in contrahendo is not affected by (and may go beyond) the limits of avoidability (for a more detailed discussion cf. Ackermann (2007), pp. 303 et seq.). 3. Incorrect information and non-disclosure of information. Liability for culpa in contrahendo can arise from any breach of a pre-contractual duty that follows from §§ 311(2), 241(2) BGB. As far as the informational dimension of the pre-contractual relationship is concerned (for other cases of culpa in contrahendo see below, Article 4:117 PECL, German law), it is important to note that the rules on culpa in contrahendo do not only apply if the aggrieved party was misled by incorrect information given to her by the other party but also if the aggrieved party’s informational deficit was caused by a breach of a pre-contractual duty to disclose information that was committed by the other party. Both situations are covered by the codification of the pre-contractual relationship and the duties arising from it in §§ 311(2), 241(2) BGB (Emmerich, in Münchener Kommentar (2012), § 311 no. 68), albeit in a very diffuse manner. 4. Responsibility for incorrect information. A party who gave incorrect information to her partner in the pre-contractual stage or who violated a pre-contractual duty to disclose information is not liable if she is not responsible for the violation of her duties (§ 280(1) 2 BGB), i.e., if she can prove that she neither acted intentionally nor negligently (§ 276(1) BGB; liability for third party conduct under § 278 BGB will be examined below, Article 4:111 PECL, German law). However, chances are very low that a party who committed a breach of her pre-contractual obligations will succeed in exonerating herself (cf. Emmerich, in Münchener Kommentar (2012), § 311 no. 201). 5. Reliance. The rules of culpa in contrahendo as codified in §§ 280(1), 311(2), 241(2) BGB do not require that the aggrieved party ‘reasonably’ relied on incorrect information given to her by the other party. However, the general rule on contributory negligence (§ 254 BGB) provides for a reduction of damages (which may be a reduction to nil) if the aggrieved party had reason to distrust the information she was given. 6. Measure of damages. The aggrieved party has a right to be put into the position she would have been in but for the mistake caused by incorrect information or by a violation of a duty to disclose (see § 249(1) BGB). As has already been said (above, no. 2), this includes a right of the aggrieved party to rescind the contract she concluded under the influence of her mistake. Moreover, she may recover expenditures related to the conclusion or the performance of this contract as well as lost profit of a business opportunity she missed in reliance on the contract (BGH NJW 1988, 2234, 2236). Alternatively, the aggrieved party is free to stick to the contract and to have her reliance interest (or ‘negative interest’) compensated. She may claim the difference between the price she paid and the market value of the performance she received without having to show that she would have successfully bargained for a reduced price if she had not been misled (BGH NJW 2006, 3139, 3141). In other words, she is entitled to the difference in value between performance and counter-performance as damnum emergens (see Ackermann (2007), pp. 317–320). If, however, the aggrieved party claims she would have successfully bargained for more advantageous terms in the

197

T. Ackermann & J.-U. Franck absence of a mistake (e.g., she claims she would have paid less than the market value of the performance she received), it is up to her to show that such a contract would have been concluded with the other party (BGH NJW 2006, 3139, 3141). Unfortunately, courts (including the Bundesgerichtshof) misleadingly consider such a remedy as an exceptional award of the expectation interest (or ‘positive interest’), while it is in fact an award of lucrum cessans as part of the reliance interest and thus a regular consequence of liability for culpa in contrahendo (see Ackermann (2007), pp. 314–317 and pp. 320–322). 7. Liability for culpa in contrahendo and remedies for non-performance. It should be noted that the seemingly sweeping scope of liability for culpa in contrahendo is reduced insofar as, according to the prevailing opinion, the rules on remedies for nonperformance of contractual duties supersede pre-contractual liability for culpa in contrahendo (see below, Article 4:119 PECL, GERMAN LAW).

Comparison and Evaluation The German rules on culpa in contrahendo and Article 4:106 PECL/Article II.-7:204 PECL perform different functions. On the one hand, pre-contractual liability under German law superimposes the rules on avoidance by allowing the aggrieved party to rescind the contract she entered into, or, alternatively, to claim a compensation that fully puts her into the position she would have been in but for the mistake. This can be explained against the background that the rules on avoidance provided by the BGB are widely regarded as not providing sufficient protection against informational defects. On the other hand, liability for incorrect information as established under the Principles and under the DCFR is merely meant to complement the rules on avoidance and not to interfere with them. The underlying idea is that beyond fraud and fundamental mistake, defects caused by incorrect information should, in principle, neither directly nor indirectly affect the validity of a contract, and the remedy granted should be limited accordingly, i.e., it should neither allow for rescission nor for a compensation that restores the aggrieved party to the position she would have been in if she had not entered into the contract. Considering the overall successful attempt of the Principles and the DCFR to establish a balanced approach to the remedy of avoidance (as discussed above, comment to Article 4:103 PECL), any other solution would indeed have pernicious effects. However, this idea has been executed less than perfectly both in the PECL and in the DCFR. In particular two aspects attract criticism: First, neither the Principles nor the DCFR have managed to give a concise definition of the measure of damages that adequately reflects the need to avoid any interference with the rules on avoidance. Both provisions refer to the loss caused by incorrect information (either directly, cf. Article II.-7:204 DCFR or indirectly, cf. the reference to Article 4:117(2) in Article 4:106 PECL). As has been shown in this comment, if taken literally (and interpreted strictly in accordance with the definition of ‘loss’ applicable to the DCFR), this would include a far bigger scope of compensable loss than intended by the drafters of the respective provisions. Second, both the Principles and the DCFR exhibit a major inconsistency

198

Chapter 4: Validity regarding the treatment of informational defects: If such a defect was caused by a wrongful act of the other party, i.e., by incorrect information she gave to the aggrieved party, Article 4:106 PECL and Article II.-7:204 DCFR apply. If, however, such a defect was caused by a wrongful omission of the other party, i.e., by a breach of a duty to disclose information, these provisions do not apply. Under the PECL, there seems to be no basis for a claim for damages in such a situation, while under the DCFR, there are different bases (Article II.-3:109(3) DCFR and possibly also Article II.-3:301(3) DCFR) that allow for a more generous compensation of the aggrieved party than Article II.-7:204 DCFR. Considering that such acts and omissions are treated on the same footing in the rules on avoidance, it is hard to make sense of such a distinction. Liability for the breach of a duty to disclose information should rather follow the same rules as liability for giving incorrect information.

Principles of European Contract Law Article 4:107: Fraud (1) A party may avoid a contract when it has been led to conclude it by the other party’s fraudulent representation, whether by words or conduct, or fraudulent non-disclosure of any information which in accordance with good faith and fair dealing it should have disclosed. (2) A party’s representation or non-disclosure is fraudulent if it was intended to deceive. (3) In determining whether good faith and fair dealing required that a party disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise; (b) the cost to it of acquiring the relevant information; (c) whether the other party could reasonably acquire the information for itself; and (d) the apparent importance of the information to the other party. 1. General. Article 4:107 PECL provides for avoidance if a party causes an informational deficit to the other party by deceptive behaviour. Two categories of such deceptive behaviour are distinguished: fraudulent representation and fraudulent nondisclosure notwithstanding a duty to disclose. 2. Representation. The provision covers statements as to facts and law. A party’s statement as to her intention is a false representation if she does in fact not hold that intention yet there is no misrepresentation if she subsequently merely changes her mind (Lando/Beale (2000), p. 252 Comment B). Mere sales talk and statements expressed as opinions are not representations within the meaning of the article (Lando/Beale (2000), p. 252 Comment B). A representation can be made expressly by words or implicitly by conduct (Lando/Beale (2000), p. 253 Comment C).

199

T. Ackermann & J.-U. Franck 3. Fraudulent intent. The characteristic of fraud in contrast to a mere misinformation (Article 4:106 PECL) lies in its subjective element. The wording of Article 4:107 PECL seems to be clear in this regard as the definition of ‘fraudulent’ in paragraph (2) expressly requires an intention to deceive the other party. However, according to Comment A (Lando/Beale (2000), p. 252), also ‘reckless’ behaviour may fall under the scope of ‘fraud’ which seems to contradict the aforementioned definition. The comment and the text of the provision may be reconciled if one assumes that ‘intent’ within the meaning of Article 4:107(2) PECL also includes so-called ‘conditional’ or ‘indirect’ intention (dolus eventualis), i.e., a situation where the wrongful party is aware of the material possibility that the other party will be misled, and still does not prevent the misapprehension (van Rossum, in Busch et al. (2002), p. 207). Yet this consideration does not entirely dispel the discrepancy since ‘recklessness’ may also be understood as being gross or conscious negligence but not as a subcategory of intent. Comment A in Lando/Beale (2000), distinguishes two subjective elements: (1) The wrongful party is aware that she is giving incorrect information, or at least acts recklessly in this respect, and (2) she intends to deceive, or was reckless as to the deceiving effect of her representation. Typically, if the first requirement is met this will also entail intention with respect to deception. However, in principle a wrongful party may submit as a defence that she was aware of the risk of deception through her representation but truly and innocently believed that the other party would not be deceived. 4. Reliance. A remedy presupposes that the innocent party was not ignorant as to the incorrect information but was actually influenced by it (Lando/Beale (2000), p. 253 Comment D). 5. Determinant versus incidental fraud (dolus causam dans versus dolus incidens). It cannot clearly be inferred from the wording whether the deceived party can avoid the contract only if she concluded the contract due to the fraud (dolus causam dans), or whether it is sufficient to show that without the fraud she would have concluded the contract under different terms, e.g., at a lower price (dolus incidens). The provisions on mistake include dolus incidens only if without the mistake the innocent party had agreed on ‘fundamentally’ different terms (Article 4:103(1)(b) PECL), and exclude the right to avoidance if the non-mistaken party is willing to perform according to what the mistaken party actually intended (Article 4:105 PECL). The absence of any similar restriction with respect to fraud indicates that this provision should generally apply in cases of mere dolus incidens (Iamiceli, in Antonielli/Veneziano (2005), pp. 206 et seq.). This is reinforced by the consideration in the comment that a party who acts fraudulently deserves less protection than the counterpart of a mistaken party (cf. Lando/Beale (2000), p. 255 Note 1). 6. Disclosure duty. A party has to give up an edge on information if this is required by the principle of good faith and fair dealing. It is submitted in Comment E that within the scope of Article 4:107 PECL the duty to disclose is the rule, not the exception: a party should ‘normally’ not be permitted to remain silent if she acts deliberately to deceive

200

Chapter 4: Validity the other party, that is, she must be able to provide a good reason to justify having remained silent. Paragraph (3) provides a non-exhaustive list of four factors which are supposed to represent both the interests of the party with an edge on information and of her counterpart. These criteria have to be balanced to decide if there is a duty to disclose or a right to remain silent. First, a party with special expertise is more likely to be under a duty to disclose. This will often be the case if a professional contracts with a non-professional (Lando/Beale (2000), p. 254 Comment F). This criterion thereby opens the door to considering aspects of consumer protection policy which play a particularly important role on the level of EU contract law (Fleischer (2001), pp. 959 et seq.). Second, costs of acquiring the relevant information have to be considered. This criterion stresses the necessity to consider that a duty to disclose information will undermine incentives to generate information. Thereby, sub-paragraph (3)(b) recognizes findings of the economics of information (Fleischer (2001), p. 956). Third, the easier it is for one party to acquire a piece of information, the less likely her counterpart obliged is to provide that information. That concerns for example facts with regard to a party’s own performance (Lando/Beale (2000), p. 254 Comment F). This criterion was first developed by the Swiss Federal Court and later adopted by the French contract law doctrine as ‘ignorance légitime’ (Fleischer (2001), p. 960). The fourth element expressly mentioned is the apparent importance of the information to the other party. This excludes insignificant information from a duty to disclose, and it excuses a party to which it was not recognizable that the information was important to her counterpart (Fleischer (2001), p. 961). 7. Remedies. Fraud gives the innocent party a mandatory (Article 4:118(1) PECL) right to avoid the contract. In addition she may claim damages according to Article 4:117 PECL.

Draft Common Frame of Reference Article II. – 7:205: Fraud (1) A party may avoid a contract when the other party has induced the conclusion of the contract by fraudulent misrepresentation, whether by words or conduct, or fraudulent non-disclosure of any information which good faith and fair dealing, or any pre-contractual information duty, required that party to disclose. (2) A misrepresentation is fraudulent if it is made with knowledge or belief that the representation is false and is intended to induce the recipient to make a mistake. A non-disclosure is fraudulent if it is intended to induce the person from whom the information is withheld to make a mistake. (3) In determining whether good faith and fair dealing required a party to disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise;

201

T. Ackermann & J.-U. Franck (b) the cost to the party of acquiring the relevant information; (c) whether the other party could reasonably acquire the information by other means; and (d) the apparent importance of the information to the other party. 1. General. The provision is modelled on Article 4:107 PECL. Paragraph (3) mirrors Article 4:107(3) PECL with insignificant amendments in the wording. The other paragraphs differ in certain respects which are discussed in turn. 2. Disclosure duty. Article II.-7:205 DCFR adds ‘any pre-contractual information duty’ to the principle of ‘good faith and fair dealing’ as a source for disclosure duties. The phrase refers primarily to the information duties which are derived from the aquis communautaire which are laid down in Articles II.-3:101 et seq. DCFR. 3. Fraudulent intent. Article II.-7:205(2) DCFR contains two subjective elements: First, a fraudulent party must have known or believed that her representation was false. Based on the plain meaning, ‘belief’ seems to require that a party assumes but is not certain that her representation is false. Consequently, this second alternative should be understood as covering a weaker form of direct intent than ‘knowledge’, but not situations where a party considered it merely possible that the representation is false. This interpretation is not, however, free from doubt and it may be possible that, by using this phrase, the drafters sought to include also cases of mere indirect intent or recklessness, respectively. Unfortunately, the comment remains silent on this issue. Unlike Comment A at Article 4:107 PECL (Lando/Beale (2000), p. 253), Comment D on Article II.-7:205 DCFR (von Bar/Clive (2009)) contains no statement in this respect. Second, a fraudulent party must have intended to deceive, i.e. she must have known or believed that the other party would be deceived by the misrepresentation. Again, mere recklessness or mere indirect intent, respectively, does not seem to suffice. With respect to fraudulent non-disclosure, this second subjective element applies accordingly, i.e. a party acts fraudulently only if she knew or believed that the other party errs on a particular point or suffers an informational deficit. 4. Reasonable. According to Article I.-I:104 DCFR, ‘reasonableness’ (Article II.-7:205 (3)(c) DCFR) ‘is to be objectively ascertained, having regard to the nature and purpose of what is being done, to the circumstances of the case and to any relevant usages and practices’.

German Law § 123 BGB: Avoidability because of deception […] (1) A person who has been caused to make a declaration of will by fraudulent deception […] can avoid the declaration. (2) […]

202

Chapter 4: Validity 1. General. In § 123(1) BGB ‘deception’ is conceptualized as an error in motivation caused by a manipulation of will by the other party. If a party was induced by deceptive behaviour to make a declaration of will, particularly to enter into a contract, she may avoid that declaration of will. 2. Deception may be committed by a false statement by word or conduct but also through non-disclosure of information when a party is under a duty to inform. Mere sales talk does not fall within the scope of the provision. 3. Disclosure duties. As a general rule, each party has to protect her own interests, and thus is responsible for acquiring the information she considers important to decide whether or not she should enter into a contract. However, duties to disclose may arise under the principle of good faith and fair dealing (§ 242 BGB). The German courts have shaped those disclosure duties on a case-by-case basis (for an overview see Markesinis/Unberath & Johnston (2006), pp. 307–310). The case law can be systematized roughly in three categories. First, queries by the other party must be answered correctly and comprehensively (BGHZ 74, 383, 392). Second, circumstances which are evidently of crucial importance for the other party must be disclosed without being asked, particularly if these circumstances are essential to achieve the purpose of the contract. Therefore, a seller may not for instance keep quiet about fundamental defects of goods she sells (e.g., BGH NJW 1990, 975). Third, a special relationship of trust and confidence may trigger a duty to disclose. This has been recognized by the courts in the case of familial or personal bonds (BGH NJW 1992, 300, 302), a long standing trustful business relationship (BGH MDR 1979, 730) but also on the grounds of a particular position of a professional in her trade. This last factor is regularly invoked by courts to impose a disclosure duty on car dealers (e.g., OLG Oldenburg MDR 2006, 630). 4. ‘Right to lie.’ Even though the wording of § 123(1) BGB requires unlawfulness only for ‘threat’ but not for ‘deception’, it is widely accepted that deception may nevertheless be justified under exceptional circumstances. German employment courts recognize a right on the part of an applicant to lie if a potential employer confronts her in an interview with an illegitimate question. That is, she is entitled to give an incorrect answer if asked e.g., about a current or planned pregnancy, or about a membership in a trade union (Armbrüster, in Münchener Kommentar (2012), § 123 nos. 18, 41 et seq.). 5. Fraudulent intent. § 123(1) BGB covers only deliberate misrepresentations or non-disclosure of information with the intention to cause or sustain an error. However, German courts hold that it is sufficient for ‘fraudulent’ deception that a party ‘turned a blind eye to the truth’, i.e., that she considered it possible that a statement is false (dolus eventualis, see e.g., BGHZ 117, 363, 368). Indirect intent is also sufficient with regard to the deceptive effect of the false statement on the innocent party (BGH NJW 1971, 1795, 1800). 6. Causation. The innocent party must show that she would not have concluded a contract at all or that she would only have concluded a contract under different terms (BGHZ NJW 1964, 811) or only at another point in time (BGHZ 2, 287, 299) if it hadn’t

203

T. Ackermann & J.-U. Franck been for the deception. The sufficiency of incidental fraud to avoid the contract is widely accepted but has not remained uncontested (see Ackermann (2007), pp. 309 et seq.). 7. Remedies. In addition to the right to avoidance a deceived party may also claim damages under tort law (§ 823(2) BGB in connection with § 263 StGB; § 826 BGB) and in accordance with the doctrine of culpa in contrahendo (§§ 311(2), 241(2), 280(1) BGB, see above Article 4:106, German Law). § 122 BGB is not applicable, i.e., the reliance interest of the deceiving party will not be protected in the case of avoidance.

Comparison and Evaluation The concepts of ‘fraud’ in the PECL, the DCFR, and the BGB are remarkably similar. One significant discrepancy concerns the requirement to establish ‘fraudulent intent’ which varies between ‘recklessness’ (PECL), indirect intent (dolus eventualis) (BGB), and (arguably) direct intent albeit in a somewhat weakened form (‘knowledge or belief’) (DCFR). Yet the positions of the PECL and the BGB come very close if one assigns to Article 4:107 PECL the approach of English law according to which mere negligence, albeit gross negligence, may not suffice to establish that a (false) statement was made recklessly, as long as the statement was made in the honest belief that it is true (House of Lords, Derry v. Peek (1889) 14 App Cas 337). Thus, recklessness may be shown where a party made a statement with a feeling of unease about its truth but deliberately refrained from removing her doubts (High Court of Justice, GE Commercial Finance Ltd v. Gee [2005] EWHC 2056 at paragraph 107 (Tugendhat, J.)). PECL, DCFR, and BGB share the position that a party may be under a duty to disclose information based on the principle of good faith and fair dealing. Article 4:107 PECL and Article II.-7:205(2) DCFR recognize explicit factors which have to be considered in this respect, and which arguably also form the basis of decisions of the German courts as to whether or not a duty to disclose has arisen. This approach is creditable since it reveals the rationales behind the legal concept and provides guidance for the application of the principle of good faith. The latter aspect is particularly important since the English common law traditionally does not contain a concept of good faith and fair dealing during negotiations. It is, however, regrettable that neither the PECL nor the DCFR clearly express that the duty to disclose information is not the principle but the exception which applies only under specific circumstances. The criteria which have to be considered to establish a duty to disclose can be reduced to the core question of which party can more efficiently generate and provide the information needed to make an informed contract decision. Since it is in principle each party’s own responsibility to gather information, a duty to disclose should only be established if the expenses incurred by one party are significantly lower than those incurred by the other (Grigoleit (2003), p. 214). One may doubt the wisdom of the general reference to ‘any pre-contractual information duty’ in Article II.-7:205(1) DCFR. Some of the information duties contained in Articles II.-3:101 et seq. DCFR are concerned with mere technicalities as to the contract formation or execution (e.g., Article II.-3:102(2)(b)(c), Article II.-3:104(1),

204

Chapter 4: Validity Article II.-3:105(1) DCFR). A fraudulent violation of those duties will hardly suffice to establish the necessary causal link to the contract terms agreed upon. In order to enforce certain policies (particularly anti-discrimination policy) it is appropriate to grant a party a ‘right to lie’ if she is confronted with illegitimate questions. Therefore, adding ‘unlawfulness’ as an additional criterion to Article 4:107 PECL and Article II.-7:205(2) DCFR should be considered (cf. Wagner (2007), p. 75 who argues that the attribute ‘fraudulent’ provides already for sufficient discretion to account for such considerations). The drafters of the PECL and the DCFR disapproved of a differentiation between dolus causam dans and dolus incidens as it was elaborated by the glossators from Roman sources (Zimmermann (1990), pp. 670 et seq.). Consequently, any incidental fraud enables the innocent party to avoid the contract. Moreover, she does not lose her right to avoid if the other party is willing to perform the contract under terms the deceived party would have accepted without the fraud (cf. Article 4:105 PECL and Article II.-7:203(2) DCFR). This approach follows the concept of the majority of European legal systems (Note 1 at Article 4:107 PECL in Lando/Beale (2000) and at Article II.-7:205 DCFR in von Bar/Clive (2000); but see also Iamiceli, in Antonielli/ Veneziano (2005), p. 209, and Tomás, in Vaquer (2008), pp. 67 et seq.). However, the notion of a sanctioning effect against a deceiving party as the underlying rationale for this prevailing approach is not compelling. By means of a right to avoidance, the freedom of will of a deceived party is to be protected. Therefore, she should be put in a position she would have been in had the fraud not occurred. It is true that the prevention of intentional acts may justify over-compensatory measures, yet the provisions at hand cover also non-intentional behaviour. A ‘reckless’ deception may already be considered ‘fraudulent’ according to Article 4:107 PECL. If a third person for whose acts a contracting party is not responsible commits fraud, the deceived party may avoid the contract already if the other party ‘ought to have known’ (Article 4:111(2) PECL) or ‘could reasonably be expected to have known’ (Article II.-7:208(2) DCFR) of the fraud. Furthermore, an invariable right to avoid the contract in the case of a mere dolus incidens seems to contradict the rule in Article 4:109(3) PECL and Article II.-7:207 DCFR, respectively, whereby a party who has ‘unfairly exploited’ her counterpart may avert the termination of the contract and may instead insist on an adaptation of the contract which brings it into accordance with what might have been agreed had the requirements of good faith and fair dealing been observed. It is hard to justify why a case of incidental fraud should be treated fundamentally differently from cases of unfair exploitation as covered by Article 4:109 PECL and Article II.-7:207 DCFR.

Principles of European Contract Law Article 4:108: Threats A party may avoid a contract when it has been led to conclude it by the other party’s imminent and serious threat of an act:

205

T. Ackermann & J.-U. Franck (a) which is wrongful in itself, or (b) which it is wrongful to use as a means to obtain the conclusion of the contract, unless in the circumstances the first party had a reasonable alternative. 1. General. Article 4:108 PECL applies in cases where the will of a party has been broken (vis compulsiva) but not when a party was literally forced to enter into a contract (vis absoluta), e.g., if somebody grabbed her hand and moved it. Under such circumstances a contract does not arise in the first place since the party had no intention to act and therefore, no consensus has been reached (see Article 2:201 and 2:102 PECL). In their role as market participants people are constantly constrained in their acts by market forces and competition, yet such effects are inherent to a market economy with free competition and therefore it is not legally relevant when a party feels pressured by such forces to agree to contractual terms which she does not like (Lando/Beale (2000), p. 257 Comment A). Article 4:108 PECL provides for a right to avoid if a threat (1) regards an act which is wrongful per se or a wrongful means to obtain the consent; (2) is imminent and serious; (3) has induced the party to enter into the contract; and (4) if the threatened party had no reasonable alternative. 2. Threat of an act wrongful in itself. An announced harm against a party or a third party is wrongful per se if it is unlawful, particularly if it constitutes a crime (e.g., physical violence against persons, damage to property). The announced breach of a contract may equally constitute a threat covered by Article 4:108(a) PECL. Illustrations 2 and 3 in Comment A in Lando/Beale (2000), seem to neglect the fact that a creditor may have the option to enforce the contract through legal means or to make a cover transaction which may be considered a ‘reasonable alternative’ within the meaning of the provision (cf. Eidenmüller (2007), p. 119 no. 47). If an announcement of a breach of contract typically triggered a right to avoid a subsequent agreement, the legal stability of contracts which are a result of renegotiations would be seriously weakened. Such a consequence is obviously not intended by the Principles. As it is clarified in Comment B in Lando/Beale (2000), the mere information by one party that she will not be able to fulfil the contract under the agreed conditions and consequently demands a renegotiation does not constitute a ‘threat’ but has to be recognized as a ‘warning of the inevitable’. 3. Threat of an act which is wrongful to use to obtain the promise. Article 4:108(b) PECL applies to the threat of acts which are not per se illegitimate but which are illegitimate to announce under the specific circumstances to threaten the other party. The comment mention the example of an employee who threatens her employer that she will reveal her extra-marital affair in order to gain a wage increase (Lando/Beale (2000), p. 258 Comment C). The Principles do not provide any criteria to flesh out that abstract and vague concept. It remains unclear what actually makes it unlawful to announce an act which is per se legitimate to reach an inherently legitimate objective. 4. Causation. Further requirements contained in the article serve to establish and test the causal link between the threat and the conclusion of the contract. It should be noted that the provision does not require that the victim of the threat acted due to a certain

206

Chapter 4: Validity level of fear. The Principles do not adopt the notion of a homo constantissimus whereby threatened persons should not simply submit to threats but should display a measure of constancy (cf. du Plessis (2006), p. 155). The plausibility of an alleged inducement by a threat is to be tested first by the requirement of an ‘imminent and serious threat’. Second, the existence of a ‘reasonable alternative’ indicates that the threat was not the real reason for the threatened party to have entered into the contract. The burden of proof with respect to the availability of such a ‘reasonable alternative’ lies with the threatening party (Lando/Beale (2000), p. 259 Comment E). It remains somewhat unclear from the wording and the comment whether the ‘seriousness’ of a threat and the ‘reasonableness’ of an alternative should be judged entirely subjectively, i.e., from the perspective of the threatened party, or objectively, i.e., from the perspective of a reasonable party in the position of the threatened party. Given the function of both criteria as indicators for an alleged causal connection between threat and contract, the latter interpretation seems to be preferable. A purely subjective approach would render both requirements futile as control mechanisms. 5. Determinant versus incidental threat (metus causam dans versus metus incidens). Given the distinct rules with respect to mistake (Article 4:103(1)(b); 4:105 PECL) one has – in accordance with the corresponding point as to Article 4:107 PECL (above Article 4:107 paragraph 5) – to draw the conclusion that it is sufficient for the threatened party to show that she would have concluded the contract under different terms without the unlawful threat (metus incidens). There is no need to prove that she would not have entered into the contract at all (metus causam dans). 6. Remedies. Article 4:108 PECL provides the innocent party with a mandatory (Article 4:118(1) PECL) right to avoid the contract. In addition, she may claim damages according to Article 4:117 PECL.

Draft Common Frame of Reference Article II. – 7:206: Coercion or threats (1) A party may avoid a contract when the other party has induced the conclusion of the contract by coercion or by the threat of an imminent and serious harm which it is wrongful to inflict, or wrongful to use as a means to obtain the conclusion of the contract. (2) A threat is not regarded as inducing the contract if in the circumstances the threatened party had a reasonable alternative. Article II.-7:206 DCFR is modelled on Article 4:108 PECL. The insertion of the element of ‘coercion’ as alternative to the element of a ‘threat of an imminent and serious harm’ clarifies that the provision covers also the employment of actual physical violence which does not vitiate a person’s will (e.g., through imprisonment), and more generally, situations of such dominance that one party may determine the other party’s

207

T. Ackermann & J.-U. Franck behaviour ‘by simply giving an order’ (Lando/Beale (2000), p. 258 Comment B). This spares us the somewhat artificial alternative, which is to construe an implicit threat in such situations. The rephrased second paragraph emphasizes that the availability of a ‘reasonable alternative’ has to be understood as an indicator against the existence of a causal link between threat and the conclusion of the contract.

German Law § 123 BGB: Avoidability because of […] threat (1) A person who has been caused to make a declaration of will […] unlawfully by threat can avoid the declaration. (2) […] 1. General. German law provides a party with a right to avoidance under § 123(1) BGB if her declaration of will was unlawfully induced by threat. When a person was forced by vis absoluta to conclude a contract, her conduct does not constitute a declaration of will in the first place and hence, there is no need to avoid the contract (BGH DB 1975, 2075 et seq.). 2. Threat is defined as the announcement of future harm (BGHZ 2, 287, 295). Any kind of detriment may constitute ‘harm’ in that sense and includes also the infliction of economic loss, e.g., the threat by a bank to cancel a customer’s credit facility (BGH NJW 1997, 1980, 1981) or the threat of an employer to dismiss an employee (BAG NJW 1994, 1021). It is essential that the threatened person has at least the impression that the threatening person has the power to control the occurrence of the announced harm (BGH NJW 1988, 2599, 2601). Otherwise the announcement of a future harm constitutes a mere warning (BGHZ 6, 348, 351). A threat does not have to be explicit. It is sufficient that a third party is threatened with the materialization of harm (BGHZ 25, 217, 218 et seq.). The threat must result in a dilemma for the threatened person. It does not suffice that the threatening person seeks to exploit an already existing dilemma (BGH NJW 1988, 2599, 2601). 3. Illegitimacy of threat. Legal doctrine distinguishes three categories of unlawful threats (see Markesinis/Unberath & Johnston (2006), pp. 317 et seq.). First, a threat has to be considered illegal if the means of threatening are unlawful, the paradigmatic case being a threat to commit an act classified as a crime. Likewise it is unlawful to threaten a party with a breach of a contractual obligation (BGH NJW 1995, 3052, 3053 et seq.). In contrast, it is by definition not illegitimate to threaten a person with a means which has been established by the legal order to achieve a certain objective. This concerns for example the threat to sue a person (BGHZ 79, 131, 143) or to report a crime to the police (BGHZ 25, 217, 220). It is noteworthy that the legitimacy of an announcement of a means has to be judged from the perspective of a reasonable person in the position of the threatening party. Therefore, to threaten an employee with a notice of dismissal has been accepted by courts as lawful if a reasonable employer

208

Chapter 4: Validity would have seriously considered the dismissal of the employee under the specific circumstances. As a consequence, if this condition is met, an employee may not avoid a termination agreement that she has signed in face of an announced dismissal even if the dismissal would ex post not have been upheld by the courts (BAG, NJW 2004, 2401, 2402; see also BGH NJW 2005, 2766, 2768 et seq.). Second, a threat is considered illegitimate if the desired end is unlawful. It is, however, not sufficient that the threatening person has no right to obtain a desired declaration of will from the other party. A threat is not illegitimate if the threatening person reasonably believes in the correctness of her legal position (BGH NJW 2005, 2766, 2771). Therefore, the alternative of an unlawful end only comes into play if the desired declaration of will is unlawful per se. However, under these circumstances a contract will in any case be void under § 134 BGB. That is the reason why this criterion is of hardly any practical relevance. The third and most controversial category encompasses threats in cases where neither the means nor the end is unlawful per se but where the combination of both renders a threat unlawful (see Armbrüster, in Münchener Kommentar (2012), § 123 nos. 107–110). The courts analyse whether the threatening person has a legitimate interest to achieve the end and whether or not it is adequate – given the facts of the individual case – to use the means in question for this purpose (BGHZ 2, 287, 297). It is crucial for the lawfulness of a threat that the employed means and the desired end are intimately connected. For example, when a person is suspected of having committed a crime, it may be considered lawful to announce a report of the suspicion to the police unless the person agrees to make good the damage (BAG NJW 1999, 2059, translated and reproduced as case no. 94 in Markesinis/Unberath & Johnston (2006), pp. 788–792), yet it has been considered unlawful to threaten a third person, particularly a relative of the suspected, to induce that third person to make good the damage. To threaten the third person may only be lawful if she participated in the crime or benefited from it (BGHZ 25, 217, 220 et seq., OLG Karlsruhe VersR 1992, 703, 704). 4. Subjective element. The threatening person must be aware of the fact that she is in a position to influence the other party’s conduct in her interest (dolus eventualis is sufficient). Intent with regard to unlawfulness is not required. There is judicial authority which supports the view that a threatening person must have known or at least been negligently ignorant as to the facts which make the threat unlawful (BGHZ 25, 217, 225). 5. Causation. A causal link between threat and the declaration of will is required. It is a widely accepted (Armbrüster, in Münchener Kommentar (2012), § 123 no. 112) but contested (Ackermann (2007), pp. 309 et seq.) view that it suffices that the innocent party would not have made the induced declaration of will in the same form or at the same point in time without the threat (metus incidens), i.e., metus causam dans is not required. The test is entirely subjective in nature. It is not relevant whether or not it was reasonable for the threatened party to give in to the threat. However, it may constitute an indication against causation that the announced harm is rather insignificant or that

209

T. Ackermann & J.-U. Franck the threatened party objectively had a reasonable alternative available (Schindler (2005), pp. 217–219). 6. Remedies. Besides the right of avoidance pursuant to § 123(1) BGB a party which was subjected to an unlawful threat may also claim damages under tort law (§ 823(2) BGB in connection with § 240 StGB; § 826 BGB) and in accordance with the doctrine of culpa in contrahendo (§§ 311(2), 241(2), 280(1) BGB, see above Article 4:106, German Law). § 122 BGB is not applicable, i.e. in the case of avoidance the reliance interest of the threatening party will not be protected.

Comparison and Evaluation It has to be welcomed that it is clarified in Article II-7:206 DCFR through the insertion of ‘coercion’ as an alternative element to ‘threat’ that the restriction of the freedom of will by way of actual physical violence against a person is covered by the provision as long as the person’s will is not vitiated. Article 4:108 PECL and the corresponding comment pass over this issue in silence. In the Common law world it has always been taken for granted that physical force exerted against a person may constitute duress (Probst, in Kramer/Probst (2001), p. 189). Yet this is less clear in civil law systems due to a tendency to equate physical force with vis absoluta (see e.g., Singer, in Staudinger (2012), § 123 no. 65) though the example of imprisonment illustrates that the employment of physical force may effectively urge a person to enter into a contract without there being vis absoluta. Under German law, the doctrinal response to the insight that physical force may also constitute vis compulsiva has been the consideration that the exercise of actual physical force always implies a threat of its continuation and therefore allows such conduct to be subsumed under § 123 BGB (Arnold, in Erman (2011), § 123 no. 41; see e.g., BGH DB 1975, 2075 et seq.). The approach taken in the Principles and in the DCFR as to what may constitute an illegitimate threat is hardly distinguished from German law. This has to be emphasized also with respect to the criterion of the availability of a ‘reasonable alternative’ which is mainly rooted in English common law (Eidenmüller (2007), p. 110). There the absence of a reasonable alternative arguably still serves as an independent objective requirement (see Treitel (2007), p. 445; Schindler (2005), pp. 169–171) whose roots go back to the Roman law concept of vir constans (Zimmermann (1990), pp. 653 et seq.). As should be clear from the comment to the Principles and the amended wording of Article II.-7:206(2) DCFR, under the PECL and the DCFR the criterion is employed as an objective indication for the (non-) existence of a causal link between an unlawful threat and the conclusion of a contract. Such a function it may arguably also serve under German law. Neither Article 4:108 PECL nor Article II.-7:206 DCFR lay down any criteria how to interpret the alternative of an unlawful threat where neither the means nor the end is unlawful per se but where the combination of both renders a threat unlawful. In this respect, German case law may provide illustrative material to flesh out this opentextured criterion.

210

Chapter 4: Validity PECL and DCFR also remain silent with respect to the subjective element which should be required on the side of the threatening party. Here again, the controversy with regard to the interpretation of § 123 BGB may provide arguments to fill in this gap. As has already been argued with respect to ‘fraud’ (above Article 4:107, COMPARISON AND EVALUATION) it may not be fully convincing to grant a right to avoid a contract in the case of mere incidental threat (metus incidens) because in such cases a mere adaptation of the contract or an award of damages, respectively, would suffice to rectify the loss the aggrieved party suffered. A right to avoidance would be particularly hard to justify in cases of incidental threat by third persons without the intention of the other contracting party, see Article 4:111 PECL.

Principles of European Contract Law Article 4:109: Excessive Benefit or Unfair Advantage (1) A party may avoid a contract if, at the time of the conclusion of the contract: (a) it was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill, and (b) the other party knew or ought to have known of this and, given the circumstances and purpose of the contract, took advantage of the first party’s situation in a way which was grossly unfair or took an excessive benefit. (2) Upon the request of the party entitled to avoidance, a court may if it is appropriate adapt the contract in order to bring it into accordance with what might have been agreed had the requirements of good faith and fair dealing been followed. (3) A court may similarly adapt the contract upon the request of a party receiving notice of avoidance for excessive benefit or unfair advantage, provided that this party informs the party which gave the notice promptly after receiving it and before that party has acted in reliance on it. 1. General. There is a consensus among European legal systems that contract law should in principle not be concerned with the question whether the exchanged performances are of equal objective value. Consequently, Article 4:109 PECL disapproves of the ancient doctrine of laesio enormis (lesion beyond moiety) and of theories of iustum pretium (fair price). A mere substantive excess is not sufficient to render a contract avoidable. Rather, a party has to show a procedural defect in the bargaining process, particularly that she found herself in a position of weakness or vulnerability. If the other side took advantage of such circumstances and gained a ‘grossly unfair’ advantage or an ‘excessive benefit’, the disadvantaged party may request avoidance or modification of the contract. This remedy can be understood as a manifestation of the general principle of good faith and fair dealing (Article 1:201 PECL).

211

T. Ackermann & J.-U. Franck Roots of the concept underlying this provision can be traced to the older ius commune that had developed, based on different leads in the Roman sources, the notion of metus reverentialis. Article 4:109 PECL is remarkable as an example of the re-emergence of a solution adopted in the earlier ius commune which had subsequently found its way into the English common law as the doctrine of ‘undue influence’ but came to be suppressed in the Civil law tradition (Zimmermann (2006), pp. 139 et seq.). Hence, in the continental legal systems other instruments had to be deployed to cope with that kind of procedural defects, notably in Germany the boni mores provision in § 138 BGB. The corresponding German case law is arguably the second main source which inspired Article 4:109 PECL besides the doctrine of ‘undue influence’ (Somma, in Antoniolli/Veneziano (2005), p. 215). 2. Position of weakness or vulnerability. A party who does not want to be bound by the contract as concluded has to point to some weakness, disability or need of her part which explains why she could not look after her own interests adequately when she agreed to the contract. This may be the case if the parties had a relationship of confidence and trust, and therefore one party simply relied on the advice of the other party and did not exercise her own independent judgment (Lando/Beale (2000), pp. 261–262 Comment B). Other factors included in the enumerative list are dependency, economic distress, urgent needs, improvidence, ignorance, inexperience, and lack of bargaining skill. 3. Subjective element. The party who obtains an advantage through the contract must have known of or at least been negligently ignorant with regard to the facts that gave reason to the vulnerable position of the other party. This requirement reduces legal uncertainty (Lando/Beale (2000), p. 262 Comment C). 4. Exploitation of weaker party. Article 4:109 PECL requires that the stronger party has taken a ‘grossly unfair’ advantage or an ‘excessive benefit’. As both this substantive criterion and the criterion of weakness and vulnerability of the weaker party serve as indicators for a failure in the bargaining process which led to a defect in consent (not understood in a formal but in a substantive sense), an interrelation between both requirements can be established: the more the position of weakness or vulnerability is pronounced, the less substantive a disadvantage is required (cf. du Plessis (2006), p. 170). The criterion of an ‘excessive benefit’ concerns only the extent of the deviation between the objective values of performance and counter-performance. ‘Objective value’ in this context refers to market prices. This view is approved by Comment D whereupon the criterion ‘excessive’ is supposed to exclude advantages which are the result of a general market reaction, as for instance a sudden price increase due to a shortage in supply (see Lando/Beale (2000), p. 262 Illustration 1). Under such circumstances a party does not benefit from an inherent weakness of the other party but from a normal market reaction to an external event. Article 4:109 PECL does not, however, only cover cases with an excessive disparity in terms of value for money but comprises also circumstances where a ‘grossly unfair’ advantage has been taken in other ways. This may be the case when a

212

Chapter 4: Validity party can ‘ill afford’ (Lando/Beale (2000), pp. 262–263 Comment E) a contract because the deal is somehow harmful to her, though she received a fair price. As a paradigmatic example the Dutch decision in Van Elmbt v. Feierabend is commonly referred to: An elderly widow sold her house to her adviser while she was dependent on him and in financial and mental distress. Since she actually wanted to keep the house at all costs – a fact the advisor was aware of – the contract was held to be void though the agreed price was fair (Hoge Raad, Nederlandse Jurisprudentie 1965, 104; cf. Lando/Beale (2000), p. 265 Note 5). That is, in assessing if a ‘grossly unfair’ advantage has been taken, not just the (objective) market value but also an individual monetary interest of the weaker party and arguably even a sentimental value may be considered (see, for example, Lando/Beale (2000), p. 263, Illustration 5: Seller of a house received fair market price but can no longer afford to live in the desired neighbourhood for that amount of money). The one-sidedness of a contract is not the result of an exploitation of the weaker party if she deliberately took a risk of ‘gambling and losing’ e.g., if she decided to sell the entire contents of an inherited house without having valued those items beforehand (Lando/Beale (2000), p. 263 Comment F). 5. Remedies. Article 4:109(1) PECL provides the disadvantaged party with a right to avoidance. Alternatively, by virtue of paragraph (2) she may seek adaptation of the contract by a court which will substitute fair terms for the terms which are the result of an unfair exploitation. Likewise, according to paragraph (3) a court may adapt the contract at the request of the advantaged party, provided that the request is made promptly after receiving a notice of avoidance and before the disadvantaged party has acted in reliance on it. The court may refuse to adapt the contract and declare it void instead if it considers adaptation an inappropriate remedy. This may be the case, for example, if no market price is available which may provide guidance for a judge to fix a fair price. The remedies are mandatory (Article 4:118(1) PECL). A disadvantaged party may also claim damages under Article 4:117 PECL.

Draft Common Frame of Reference Article II. – 7:207: Unfair exploitation (1) A party may avoid a contract if, at the time of the conclusion of the contract: (a) the party was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill; and (b) the other party knew or could reasonably be expected to have known this and, given the circumstances and purpose of the contract, exploited the first party’s situation by taking an excessive benefit or grossly unfair advantage. (2) Upon the request of the party entitled to avoidance, a court may if it is appropriate adapt the contract in order to bring it into accordance with what

213

T. Ackermann & J.-U. Franck might have been agreed had the requirements of good faith and fair dealing been observed. (3) A court may similarly adapt the contract upon the request of a party receiving notice of avoidance for unfair exploitation, provided that this party informs the party who gave the notice without undue delay after receiving it and before that party has acted in reliance on it. Article II.-7:207 DCFR mirrors Article 4:109 PECL with insubstantial changes in the text. The amended heading is more precise as it expresses that the provision is not primarily concerned with the essentially substantive matters of ‘excessive benefit or unfair advantage’ but with procedural defects during the pre-contractual stage. For the sake of a consistent terminology, in the third paragraph the phrase ‘without undue delay’ has been substituted for ‘promptly’.

German Law § 138 BGB: Immoral legal transaction; extortion (1) A legal transaction which violates good morals is void. (2) In particular a legal transaction is void by which someone through exploitation of the predicament, inexperience, lack of judgement or significant weakness of will of another person causes to be promised or granted to himself or a third party in return for a performance economic advantages which are conspicuously disproportionate to the performance. 1. General. Under German law, essentially § 138(2) BGB (‘extortion’ or ‘usury’) is the provision that corresponds in its function to Article 4:109 PECL in providing relief for a disadvantaged party whose weak and vulnerable position was exploited. As the courts realized that the provision could not cover all contracts where a party took advantage of a weakness of its counterpart resulting in a gross disparity between the agreed performances, they developed the category of ‘usury-like contracts’ under the general provision of § 138(1) BGB which covers cases that are analogous to those falling under § 138(2) BGB. § 138(1) BGB declares contracts void on the basis of a vague, open-textured notion of public policy and good morals (contra bonos mores). This general provision is in particular regarded as a ‘gateway’ for constitutional values, especially those embodied in the fundamental rights section of the German constitution (see with respect to this so-called ‘constitutionalisation of private law’ Markesinis/Unberath & Johnston (2006), pp. 37–43). The civil courts are constitutionally obliged to have regard to the fundamental rights as ‘guidelines’ in the interpretation and application of the general provisions such as § 138 BGB (so-called ‘indirect horizontal effect of constitutional law’). Thereby, it is up to the Constitutional Court to play the role as a guardian for weaker and vulnerable parties which are in need of specific protection.

214

Chapter 4: Validity 2. Usury (§ 138(2) BGB). The provision is the result of a deliberate decision of the drafters of the BGB to reject notions of iustum pretium and the legal concept of laesio enormis. To declare a contract void pursuant to § 138(2) BGB, a gross inadequacy between performance and counter-performance (element of substantive justice) must be the result of an exploitation of one party’s predicament, inexperience, lack of judgment or considerable weakness of will (element of procedural justice). a) Conspicuous disproportionate economic advantages. There are no general statements possible as to the extent of the required substantive unfairness. The measure for the inadequacy is the objective value of the exchanged performances; subjective interests remain disregarded (Sack/Fischinger, in Staudinger (2011), § 138 no. 206). In order to sustain the preventive effect of the provision, courts have deliberately refused to ascertain fixed rates. Otherwise, it is argued, a party could impose terms just below the threshold of ‘usury’. As a rule of thumb, where prices exceed market value by more than 100% this is regarded as ‘conspicuously disproportionate’ as required by § 138(2) BGB (see e.g., BGH NJW 2003, 1860, 1861, translated and reproduced as case no. 79 in Markesinis/Unberath & Johnston (2006), pp. 739–741). It is nevertheless important to see that for an assessment of the objective value of the performances courts have to take into account individual factors such as an extraordinary scarcity of a good in the market; specific risks for a creditor, particularly the risk of a lender not to recover the loan; or the particular type of contract. With respect to residential housing rents are already considered usurious if they exceed market rents by more than 50% (see e.g., BGHZ 135, 269, 277). b) Weakness of disadvantaged party. § 138(2) BGB specifies four factors which may account for the weakness and inferior bargaining position of the disadvantaged party and which are meant to be interpreted narrowly. A situation amounts to a ‘predicament’ if a party is in an acute need for money or goods to prevent severe economic detriments (BGH NJW 1994, 1275, 1276). In BGH NJW 2003, 1860, 1861 (translated and reproduced as case no. 79 in Markesinis/Unberath & Johnston (2006), pp. 739–741) it was held that the desire to live together with a foreign partner who was about to be deported was not sufficient to be considered a predicament. ‘Inexperience’ presupposes a lack of personal or business experience. It may occur especially with young, elderly or handicapped people. It is not sufficient to claim a lack of legal knowledge or inexperience with regard to the particular transaction (e.g., OLG Hamm NJW-RR 1993, 629, 630). When a party is not able to properly evaluate the value of performance and counter-performance in a particular situation, this may be considered a ‘lack of judgment’ according to § 138(2) BGB. This criterion protects persons with cognitive or intellectual deficiencies which are not serious enough to result in legal incapacity. A ‘significant weakness of will’ may be acknowledged where a party realizes content and consequences of a transaction but due to a reduced mental resistance she cannot act accordingly e.g., because of an addiction to drugs or alcohol. A pathological condition is not required (see e.g., BGH NJW-RR 1988, 763, 764). c) Exploitation. The party who benefits from the terms of the contract must have taken advantage of the inferior position of the other party. This presupposes that the advantaged party must have known about the inadequacy between performance and

215

T. Ackermann & J.-U. Franck counter-performance and must have consciously taken advantage of the weakness of the other party. Grossly negligent behaviour by the advantaged party does not suffice. A specific intention to exploit the other party is not required (see e.g., BGH NJW 1985, 3006, 3007). 6. ‘Usury-like’ contracts (§ 138(1) BGB). Plaintiffs have tried successfully to circumvent the rather strict requirements imposed by § 138(2) BGB and to invoke the general provision of § 138(1) BGB instead. Thus, the courts developed the legal doctrine of ‘usury-like’ contracts under § 138(1) BGB which is applied first and foremost to credit agreements. As to the substantive element the courts employ the same exchange standard as with regard to § 138(2) BGB. For example, if an agreed interest rate for a loan exceeds market rates by more than a 100% or 12 percentage points this is prima facie considered to be sufficient to show an evident inadequacy between performance and counter-performance (BGHZ 110, 336, 340, translated and reproduced as case no. 80 in Markesinis/Unberath & Johnston (2006), pp. 742–744). A substantively unfair agreement must be the result of an exploitation of a weak and vulnerable position of the disadvantaged party. The subjective requirement has been considerably relaxed by the courts as compared to § 138(2) BGB. It suffices that the superior party has carelessly ignored the fact that the other party accepted the terms only because of her ‘weak’ position (BGHZ 128, 255, 257 et seq.). In addition, courts have reversed the burden of proof in business-to-consumer transactions. An exploitation of an inferior position is presumed when a professional imposes substantively unfair terms on a consumer (BGH NJW 1995, 1019, 1022). Finally, it is important to note that the general provision of § 138(1) BGB is applied by courts to protect weaker parties not only with respect to contracts where performance is exchanged. Highly significant is also the jurisprudence as to contracts of guarantees and premarital contracts (see Markesinis/Unberath & Johnston (2006), pp. 255–259). 7. Legal consequences. Contracts contrary to § 138 BGB are void. An adaptation of the substantively unfair terms by courts is generally not provided for (BGHZ 68, 204, 207). Exceptionally, it is recognized that an excessive lease that is agreed upon contrary to § 138 BGB will be reduced to the market rent. In case of employment contracts contrary to § 138 BGB the employee can demand the usual remuneration pursuant to § 612(2) BGB. Performance which has already been exchanged in reliance on the contract has to be reversed according to the rules of unjust enrichment (§ 812(1) BGB). According to § 817 2nd sentence BGB, a wrongful party may not claim back her performance if she acted contra bonos mores. Consequently, in case of a credit contract which is contrary to § 138 BGB the borrower does not need to pay interest. The lender may claim back the loan but only after the time period of the (void) credit contract has expired (BGHZ 99, 333, 338 et seq.).

216

Chapter 4: Validity Comparison and Evaluation Article 4:109 PECL and Article II.-7:207 DCFR are very similar both in approach and structure to the German solution found with regard to usury (§ 138(2) BGB) and the category of usury-like contracts under § 138(1) BGB. The rejection of notions of iustum pretium and the legal concept of laesio enormis is conclusive for market economies with free competition. The risk of judicial intervention solely based on an apparent inadequacy of agreed performances may dissuade parties from investments since they will have no guarantee by virtue of a contract to recoup their costs. Therefore, such a legal concept would risk underinvestment and be detriment to social welfare. Consequently, it is recognized in Article 4:109 PECL, Article II.-7:207 DCFR, and § 138 BGB that a gross inadequacy of the agreed performances may only be a reason to intervene in a contractual relationship if the process of self-autonomous decisionmaking which underlies the contract has been prejudiced. The provisions commonly require a procedural defect which is substantiated by a specific vulnerability or weakness of the disadvantaged party which has been exploited. However, this is the very reason why the classification of those cases under § 138 BGB as a category of contracts contra bonos mores is conceptually less convincing than the stipulation of an independent provision for cases of ‘unfair exploitation’ in parallel to ‘fraud’ and ‘threats’. As the German experience with respect to § 138(2) BGB shows, an enumerative listing of certain types of weakness or vulnerability – even if it is a more extensive one such as that provided for in Article 4:109 PECL and Article II.-7:207 DCFR – bears the risk that some forms of weakness or vulnerability which are equally indicative for a procedural defect are not covered. For example, it is not immediately clear that a weakness in the bargaining position due to strong emotional or familial ties, as is considered to be the decisive factor in the German case law on sureties (see Markesinis/Unberath & Johnston (2006), pp. 255–257), would be covered. The irrelevance of subjective interests under German law for establishing a substantive unfairness under § 138(2) BGB operates on the one hand for the benefit of vulnerable parties. It disallows, for example, the possibility to argue that a house which was bartered for another house with a market value of less than a third had a subjectively decreased value in light of the owners predicament which forced him to leave the neighbourhood (BGH BB 1954, 175) or that a conspicuously low price for a house sold by an elderly couple was not substantively unfair since the contract was part of a broader deal which included accommodation and care for the couple. It was held that this latter aspect could only be invoked to show that the substantively unfair contract was not the result of an unfair exploitation (BGH WM 1984, 874 et seq.). Under Article 4:109 PECL and Article II.-7:207 DCFR the consideration of subjective interests under the criterion of ‘grossly unfair advantage’ does not raise similar concerns since it covers only subjective interests which operate in favour of a vulnerable party, and because the alternative criterion of ‘excessive benefit’ comprises in any case all contracts with a striking discrepancy between the objective value of performance and counter-performance.

217

T. Ackermann & J.-U. Franck However, a purely objective approach prevents a vulnerable party from arguing that sold goods had a subjectively higher value to her than the market value. Insofar as the German doctrine disapproves such argumentation under § 138(2) BGB this is arguably a result of a general scepticism prevalent in German law towards the aptness of courts to measure subjective disadvantages, particularly non-pecuniary losses, though cases such as the Dutch decision in Van Elmbt (above Article 4:109 PECL, paragraph 4) could admittedly still fall under § 138(1) BGB. There is, however, no conceptual reason to justify such a restrictive approach. The contrarian concept as it is implemented in Article 4:109 PECL and Article II.-7:207 DCFR ensures a comprehensive protection of parties in a particularly weak and vulnerable position. Since the burden of proof as to a subjective disadvantage which exceeds the difference between market value and agreed price will be on the allegedly disadvantaged party, courts may effectively prevent a misuse of such a provision. A second corrective mechanism lies in the condition that the wrongful party must have acted at least carelessly with regard to such a specific subjective disadvantage, i.e. it must have been recognizable to her. Ultimately, the relevance of subjective disadvantages to evaluate an inadequacy between performance and counter-performance is consistent with the rule that those losses are also recoverable in the case of non-performance (see Article 9:501 PECL and Article III.-3:701 DCFR). Article 4:109 PECL has been criticized first, since mere negligent ignorance with respect to a weak and vulnerable position suffices to establish an ‘exploitation’ and to provide a disadvantaged party with a remedy, and second, because of the option provided for the wrongful party to request an adaptation of the contract to circumvent the legal consequences of avoidance (cf. Wolf (2000), pp. 111–114). Both aspects are inherently connected and thus have to be evaluated together. As we have seen (above GERMAN LAW no. 7), when a contract is void under § 138 BGB, this may provide the disadvantaged party with an over-compensatory remedy due to the application of § 817 BGB in the course of the reversal of the transaction. In the case of loan sharking, for example, she may keep the loan during the agreed time period without paying any interest. Such an over-compensatory remedy, however, can only be justified in the case of intentional behaviour as required in § 138(2) BGB. Given the (deliberately) vague standard for ‘usury’ or ‘usury-like’ contracts, overcompensation will otherwise yield inefficient over-deterrence which restricts party autonomy in a disproportionate and socially undesirable manner. This may already be the case as grossly negligent behaviour suffices under the doctrine of ‘usury-like’ contracts. On the whole, the combination of a strict subjective requirement on the part of the wrongful party and a potentially over-compensatory remedy is coherent. As a drawback, there is no remedy available in the case of mere negligent behaviour which results in too few incentives to prevent the exploitation of vulnerable parties. This deficiency is avoided in Article 4:109 PECL and Article II.-7:207 DCFR as these provisions apply also in the case of mere negligent behaviour. An optimal measure of prevention can be achieved if a disadvantaged party receives full compensation. This may be ensured by an adaptation of the contract which brings it into accordance with what might have been agreed had the requirements of good faith and fair dealing been observed. Therefore, the option provided for the wrongful party to

218

Chapter 4: Validity request an adaptation is only problematic if the latter intentionally exploited the vulnerable party. The risk of an increase or reduction of a price to the market level will not effectively deter a party who deliberately seeks to exploit the inferiority of her counterpart. Thus, if one indeed agrees that it is the objective of a rule on ‘unfair exploitation’ to prevent such behaviour, Article 4:109(3) PECL and Article II.-7:207(3) DCFR should not be applicable with respect to those parties. A legal system should refuse to enforce contracts which are substantively unfair and therefore fall under a provision on ‘unfair exploitation’. Hence, per se invalidity as stipulated by German law according to § 138 BGB seems to be the appropriate legal consequence (cf. Grigoleit (2007), pp. 174 et seq.). A legitimate interest of the disadvantaged party to maintain the contractual relationship may be sufficiently protected as she may confirm the contract as such and request an adaptation which cures the unfairness. Given that the rationale behind the rules on ‘unfair exploitation’ and on ‘standard terms’ and ‘terms not individually negotiated’ respectively is quite similar, especially as both assume a procedural defect as well as a substantive one for judicial intervention, the drafters of the DCFR should have considered aligning the legal consequences and thereby prescribe that a contract is not binding on a party who bears the responsibility for an ‘unfair exploitation’ of the other party (cf. Article II.-9:408(1) DCFR).

Principles of European Contract Law Article 4:110: Unfair Terms not Individually Negotiated (1) A party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be rendered under the contract, all the other terms of the contract and the circumstances at the time the contract was concluded. (2) This Article does not apply to: (a) a term which defines the main subject matter of the contract, provided the term is in plain and intelligible language; or to (b) the adequacy in value of one party’s obligations compared to the value of the obligations of the other party. 1. General. Article 4:110 PECL provides a basis for judicial control of contract terms that are not individually negotiated. The provision essentially resembles Article 3(1) and Article 4 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (OJ L 95/29) except for the scope which is not restricted to B2C contracts but covers also contracts between private persons and commercial contracts. Due to their systematic approach to the organization of contract law rules, the Principles contain also elsewhere provisions regarding terms not individually negotiated, notably provisions on the incorporation into a contract (Article 2:104 PECL), on conflicting general

219

T. Ackermann & J.-U. Franck conditions, i.e., on the problem of the so-called ‘battle of forms’ (Article 2:209 PECL), and on the construction of such terms (Article 5:103 PECL: Contra Proferentem Rule; Article 5:104 PECL: Preference to Negotiated Terms). 2. Terms not individually negotiated. According to Comment F (Lando/Beale (2000), p. 269), a term has to be regarded as ‘individually negotiated’ when it has been the explicit subject of negotiations between the parties. Terms contained in general conditions of contract will generally be considered not individually negotiated. Terms that are drafted for a one-time use only, however, may also be covered as long as they are not individually negotiated. The fact that a term is handwritten may indicate that it was subject to individual negotiations (Lando/Beale (2000), p. 269 Comment F). 3. Main subject matter. The main subject matters of a contract and the adequacy of the price are – if transparent – excluded from the fairness test. This restriction ensures that the doctrine of iustum pretium will not be reintroduced through the backdoor of Article 4:110 PECL. According to Comment D (Lando/Beale (2000), p. 269), this restriction of the scope ‘should be interpreted strictly’. Therefore, ancillary terms which concern the price or a main subject matter – e.g., terms which allow a party to raise the price – are not excluded from judicial review (Lando/Beale (2000), p. 269 Illustration 2). 4. Standard of fairness. Terms have to be regarded as ‘unfair’ when they reveal a significant imbalance in the parties’ rights and obligations. Such an imbalance may be of an economic character, i.e., the economic consequences are significantly detrimental to one party, or of a legal nature (Lando/Beale (2000), p. 269 Comment G). The requirements of good faith and fair dealing (Article 1:201 PECL) serve as guiding principles. In contrast to the EC Directive on unfair terms in consumer contracts, the Principles do not contain an indicative (‘grey’) list of voidable clauses. Comment B mentions a need for flexibility, especially in commercial contracts, as grounds in this regard but encourages those who apply the provision to find inspiration in the list in the Annex to the EC Directive (Lando/Beale (2000), p. 266). 5. Avoidability. A party who is subject to an unfair term is entitled to avoid it. The Principles stipulate ‘voidability’ and not ‘voidness’ as legal sanction against an unfair term in order to contain the risks of legal uncertainty which go along with an open-textured general clause that operates without a black or grey list. At the same time, the Principles claim that there was no ‘material difference’ to a solution as, e.g., stated in Article 6(1) EC Directive according to which ‘Member States shall lay down that unfair terms […] shall […] not be binding’, since no judicial interference is required (Lando/Beale (2000), p. 269 Comment C). The avoidance of a term will leave the remaining parts of a contract untouched if that is possible and appropriate. In this regard there is no need to refer to Article 4:116 PECL (see Lando/Beale (2000), p. 279 Comment A to Article 4:116).

220

Chapter 4: Validity Draft Common Frame of Reference Article II. – 1:109: Standard terms A ‘standard term’ is a term which has been formulated in advance for several transactions involving different parties and which has not been individually negotiated by the parties. Article II. – 1:110: Terms ‘not individually negotiated’ (1) A term supplied by one party is not individually negotiated if the other party has not been able to influence its content, in particular because it has been drafted in advance, whether or not as part of standard terms. (2) If one party supplies a selection of terms to the other party, a term will not be regarded as individually negotiated merely because the other party chooses that term from that selection. (3) If it is disputed whether a term supplied by one party as part of standard terms has since been individually negotiated, that party bears the burden of proving that it has been. (4) In a contract between a business and a consumer, the business bears the burden of proving that a term supplied by the business has been individually negotiated. (5) In contracts between a business and a consumer, terms drafted by a third person are considered to have been supplied by the business, unless the consumer introduced them to the contract. Article II. – 9:401: Mandatory nature of following provisions The parties may not exclude the application of the provisions in this Section or derogate from or vary their effects. Article II. – 9:402: Duty of transparency in terms not individually negotiated (1) A person who supplies terms which have not been individually negotiated has a duty to ensure that they are drafted and communicated in plain, intelligible language. (2) In a contract between a business and a consumer a term which has been supplied by the business in breach of the duty of transparency imposed by paragraph (1) may on that ground alone be considered unfair. Article II. – 9:403: Meaning of ‘unfair’ in contracts between a business and a consumer In a contract between a business and a consumer, a term [which has not been individually negotiated] is unfair for the purpose of this Section if it is supplied by the business and if it significantly disadvantages the consumer, contrary to good faith and fair dealing.

221

T. Ackermann & J.-U. Franck Article II. – 9:404: Meaning of ‘unfair’ in contracts between non-business parties In a contract between parties neither of who is a business, a term is unfair for the purposes of this Section only if it is a term forming part of standard terms supplied by one party and significantly disadvantages the other party, contrary to good faith and fair dealing. Article II. – 9:405: Meaning of ‘unfair’ in contracts between businesses A term in a contract between businesses is unfair for the purposes of this Section only if it is a term forming part of standard terms supplied by one party and of such a nature that its use grossly deviates from good commercial practice, contrary to good faith and fair dealing. Article II. – 9:406: Exclusion from unfairness test (1) Contract terms are not subject to an unfairness test under this Section if they are based on: (a) provisions of the applicable law; (b) international conventions to which the Member States are parties, or to which the European Union is a party; or (c) these rules. (2) For contract terms which are drafted in plain and intelligible language, the unfairness test extends neither to the definition of the main subject matter of the contract, nor to the adequacy of the price to be paid. Article II. – 9:407: Factors to be taken into account in assessing unfairness (1) When assessing the unfairness of a contractual term for the purposes of this Section, regard is to be had to the duty of transparency under II. - 9:402 (Duty of transparency in terms not individually negotiated), to the nature of what is to be provided under the contract, to the circumstances prevailing during the conclusion of the contract, to the other terms of the contract and to the terms of any other contract on which the contract depends. (2) For the purposes of II. – 9:403 (Meaning of ‘unfair’ in contracts between a business and a consumer) the circumstances prevailing during the conclusion of the contract include the extent to which the consumer was given a real opportunity to become acquainted with the term before the conclusion of the contract. Article II. – 9:408: Effects of unfair terms (1) A term which is unfair under this Section is not binding on the party who did not supply it. (2) If the contract can reasonably be maintained without the unfair term, the other terms remain binding on the parties.

222

Chapter 4: Validity Article II. – 9:409: Exclusive jurisdiction clauses (1) A term in a contract between a business and a consumer is unfair for the purposes of this Section if it is supplied by the business and if it confers exclusive jurisdiction for all disputes arising under the contract on the court for the place where the business is domiciled. (2) Paragraph (1) does not apply if the chosen court is also the court for the place where the consumer is domiciled. Article II. – 9:410: Terms which are presumed to be unfair in contracts between a business and a consumer (1) A term in a contract between a business and a consumer is presumed to be unfair for the purposes of this Section if it is supplied by the business and if it: (a) excludes or limits the liability of a business for death or personal injury caused to a consumer through an act or omission of that business; (b) inappropriately excludes or limits the remedies, including any right to set-off, available to the consumer against the business or a third party for non-performance by the business of obligations under the contract; (c) makes binding on a consumer an obligation which is subject to a condition the fulfilment of which depends solely on the intention of the business; (d) permits a business to keep money paid by a consumer if the latter decides not to conclude the contract, or perform obligations under it, without providing for the consumer to receive compensation of an equivalent amount from the business in the reverse situation; (e) requires a consumer who fails to perform his or her obligations to pay a disproportionately high amount of damages; (f) entitles a business to withdraw from or terminate the contractual relationship on a discretionary basis without giving the same right to the consumer, or entitles a business to keep money paid for services not yet supplied in the case where the business withdraws from or terminates the contractual relationship; (g) enables a business to terminate a contractual relationship of indeterminate duration without reasonable notice, except where there are serious grounds for doing so; this does not affect terms in financial services contracts where there is a valid reason, provided that the supplier is required to inform the other contracting party thereof immediately; (h) automatically extends a contract of fixed duration unless the consumer indicates otherwise, in cases where such terms provide for an unreasonable early deadline; (i) enables a business to alter the terms of the contract unilaterally without a valid reason which is specified in the contract; this does not affect terms under which a supplier of financial services reserves the right to change the rate of interest to be paid by, or to, the consumer, or the

223

T. Ackermann & J.-U. Franck amount of other charges for financial services without notice where there is a valid reason, provided that the supplier is required to inform the consumer at the earliest opportunity and that the consumer is free to terminate the contractual relationship with immediate effect; neither does if affect terms under which a business reserves the right to alter unilaterally the conditions of a contract of indeterminate duration, provided that the business is required to inform the consumer with reasonable notice, and that the consumer is free to terminate the contractual relationship; (j) enables a business to alter unilaterally without a valid reason any characteristics of the goods, other assets or services to be provided; (k) provides that the price of goods or other assets is to be determined at the time of delivery or supply, or allows a business to increase the price without giving the consumer the right to withdraw if the increased price is too high in relation to the price agreed at the conclusion of the contract; this does not affect price-indexation clauses, where lawful, provided that the method by which prices vary is explicitly described; (l) gives a business the right to determine whether the goods, other assets or services supplied are in conformity with the contract, or gives the business the exclusive right to interpret any term of the contract; (m) limits the obligation of a business to respect commitments undertaken by its agents, or makes its commitments subject to compliance with a particular formality; (n) obliges a consumer to fulfil all his or her obligations where the business fails to fulfil its own; (o) allows a business to transfer its rights and obligations under the contract without the consumer’s consent, if this could reduce the guarantees available to the consumer; (p) excludes or restricts a consumer’s right to take legal action or to exercise any other remedy, in particular by referring the consumer to arbitration proceedings which are not covered by legal provisions, by unduly restricting the evidence available to the consumer, or by shifting a burden of proof on to the consumer; (q) allows a business, where what has been ordered is unavailable, to supply an equivalent without having expressly informed the consumer of this possibility and of the fact that the business must bear the cost of returning what the consumer has received under the contract if the consumer exercises a right to withdraw. (2) Subparagraphs (g), (i) and (k) do not apply to: (a) transactions in transferable securities, financial instruments and other products or services where the price is linked to fluctuations in a stock exchange quotation or index or a financial market rate beyond the control of the business; (b) contracts for the purchase or sale of foreign currency, traveller’s cheques or international money orders denominated in foreign currency.

224

Chapter 4: Validity 1. General. Article II.-9:401 to Article II.-9:410 DCFR contain a regime for judicial control of standard terms and contract terms which are not individually negotiated. This content and transparency control is of a mandatory character in favour of the party who did not supply the unfair term (see Article II.-9:401 and II.-9:408 DCFR). The DCFR contains elsewhere additional provisions with regard to terms not individually negotiated, notably on incorporation of such terms into a contract (Article II.-9:103), on conflicting standard terms (Article II.-4:209 DCFR), and on construction (Article II.-8:103 DCFR (contra proferentem rule) and Article II.-8:104 DCFR (Preference for negotiated terms)). 2. Scope of judicial review. As in the Principles, the judicial control is not restricted to contractual terms between a business and a consumer but is equally applicable to contracts between non-business parties and contracts between businesses yet not as to any terms ‘not individually negotiated’ but only as to clauses ‘forming part of standard terms’. ‘Standard term’ requires that a term has not been individually negotiated because it has been formulated in advance for several transactions involving different parties, and has not been amended in the course of subsequent negotiations (Article II.-1:109 DCFR). The definition is slightly broader compared with the corresponding definition of ‘general conditions of contract’ in Article 2:209(3) PECL. The latter requires that the clauses have been formulated in advance for an ‘indefinite number’ of contracts. The drafter of the DCFR considered this requirement too strict and considered it sufficient that a term has been pre-formulated for ‘several transactions’ (von Bar/Clive (2009) Note 1 on Article II.-1:109 DCFR). A party who supplied a standard term and who wants to avoid judicial control (Article II.-1:110(3) DCFR) has to prove that the terms have since been individually negotiated. For B2C contexts, Article II.-1:110(4) DCRF shifts the burden of proof in this regard onto the business. If the business wants to avoid a judicial review, it has to show that a supplied term has been individually negotiated, i.e., that real and meaningful negotiations took place whereby the consumer had a real opportunity to influence the content of the terms. Article II.-1:110(2) DCFR states that it does not suffice that a party had the chance to choose a term out of a ‘menu of terms’ (von Bar/Clive (2009) Comment C on Article II.-1:110 DCFR). Based on Article 3(2) Directive 93/13/EEC, Article II.-1:110(5) DCFR states that a term drafted by a third party (e.g., a notary) is considered to have been supplied by the business unless the latter can show that the term was introduced by the consumer (von Bar/Clive (2009) Comment E on Article II.-1:110 DCFR). Remarkably, the Study Group on a European Civil Code sought to extend the judicial control of contracts between a business and a consumer also to clauses which were individually negotiated. However, as the Acquis Group resisted this suggestion and no consensus could be reached, Article II.-9:403 DCFR is phrased in two different versions, indicated by square brackets (von Bar/Clive (2009) Comment A on Article II.-9:403 DCFR). The definition of the main subject matter of the contract and particularly the adequacy of the price are excluded from the unfairness test, provided that they are drafted transparently (Article II.-9:406(2) DCFR). This rule has to be understood as an

225

T. Ackermann & J.-U. Franck explicit illustration of the rejection of iustum pretium or laesio enormis as legal doctrines (DCFR (2009) Principles, no. 44). However, ancillary terms as to the main subject matter or the price are not excluded from judicial control. Therefore, for example price adaptation or indexation clauses may well be subject to judicial review (cf. Article II.-9:410(1)(k) DCFR). In addition, Article II.-9:406(1) DCFR stipulates that contractual terms that merely reproduce legal rules are not subject to the unfairness test since the courts who exercise judicial review of contractual standard terms should not have the power to control (indirectly) provisions of applicable law (von Bar/Clive (2009) Comment A on Article II.-9:406 DCFR). 3. Standards of unfairness. The unfairness test under the DCFR deviates in some remarkable aspects from the test under Article 4:110 PECL. In a B2C context the mere fact that a term has not been drafted and communicated in a transparent manner may be sufficient to consider this term ‘unfair’ (Article II.-9:402(2) DCFR). In other contexts, a breach of the transparency requirements laid down in Article II.-9:402(2) DCFR is to be taken into account in assessing the unfairness of a contract term (Article II.-9:407(1) DCFR). The standard of control is split up into three provisions. A term in contracts between a business and a consumer and also in contracts between non-business parties is considered ‘unfair’ provided that it ‘significantly disadvantages’ the ‘consumer’ or ‘the other party’, respectively (Article II.-9:403 and Article II.-9:404 DCFR). However, according to Comment C at Article II.-9:404 DCFR in von Bar/Clive (2009) the standard of control in B2C-contexts is supposed to be a stricter one since it is justified by an ‘unequal negotiation power’ between the parties whereas no such assumption underlies the content control in contracts between non-business parties. The unfairness test in a purely commercial context requires that a term ‘grossly deviates from good commercial practice’. This latter standard is derived from Article 3(3) Directive 2000/35/EC on combating late payment in commercial transactions. The common ground for all three unfairness standards is the reference to the principles of ‘good faith and fair dealing’ that are formulated in more detail in Article I.-1:103 DCFR. Article II.-9:407(1) DCFR contains several factors that have to be taken into account to assess whether a term is to be considered ‘unfair’. The rule is based on Article 4(1) Directive 93/13/EEC. Article II.-9:407(2) DCFR explains further the factor of ‘the circumstances prevailing during the conclusion of the contract’ and is only applicable in a B2C context. This rule according to which it has to be taken into account whether the ‘consumer was given a real opportunity to become acquainted with the term before the conclusion of the contract’ is taken from the indicative list of terms which may be regarded as unfair in the Annex of Directive 93/13/EEC where it is misplaced as subparagraph (1)(i), see Pfeiffer (1999), Anhang (Annex), no. 75. In a contract between a business and a consumer an exclusive jurisdiction clause in favour of the business constitutes a ‘black clause’ pursuant to Article II.-9:409 DCFR, that is, it must always be regarded as ‘unfair’. This rule can be traced back to the ECJ’s judgment in Oceano Grupo (C-240/98) where such a clause was considered unfair under Article 3 Directive 93/13/EEC. Moreover, a ‘grey list’ of terms that are (refutably) ‘presumed’ to be ‘unfair’ in a B2C context is contained in Article II.-9:410

226

Chapter 4: Validity DCFR. The list is modelled on the one contained in the Annex to Directive 93/13/EEC which is of ‘indicative and illustrative value’ (ECJ, C-478/99, Commission v. Sweden, at no. 22), i.e. the listed terms are technically not presumed to be unfair but the effect comes practically close to this status. Apart from some minor linguistic and systematic adjustments (some of the exceptions laid down in the second paragraph of the Annex have been incorporated in the listed terms themselves), it should be noted that the rule originally contained in subparagraph (1)(i) has been omitted from the list but can now be found in Article II.-9:407(2) DCFR, and that subparagraph (1)(q) has been added to the list. 4. Legal effect of ‘unfair terms’. The solution found in the DCFR deviates from the one provided for in Article 4:110 PECL: A term that is to be considered ‘unfair’ is not binding on the party who did not supply it (Article II.-9:408(1) DCFR). According to this ‘unilateral solution’ (von Bar/Clive (2009) Comment A on Article II.-9:408 DCFR) an unfair term may not have any legal effect for the benefit of the user or to the detriment of the other party. In contrast, the latter has the choice to invoke the clause against its user. However, a consumer who does not make an explicit decision as to whether she wishes to be bound by an unfair term, has nevertheless to be protected by the courts (von Bar/Clive (2009) see Comment B on Article II.-9:408 DCFR; Pfeiffer/ Ebers, in Aquis Principles (2009), Article 6:306 ACQP paragraphs 3 and 6). The remaining parts of the contract remain valid insofar as they may reasonably be maintained (Article II.-9:408(2) DCFR), be it that the issue addressed by the term is not essential to the contract or that a default rule may step in and fill the gap. The supplier of an unfair term may not avoid this effect by arguing that the remaining contract is less advantageous to her (von Bar/Clive (2009) Comment C on Article II.-9:408 DCFR).

German Law § 305 BGB: Incorporation of general conditions of business into contract (1) General conditions of business are all contractual conditions formulated beforehand for many contracts which one contracting party (the user) places before the other at the conclusion of a contract. It does not matter whether the provisions form an outwardly separated component of the contract or are taken into the contractual document itself, what their scope is, in what kind of written form they are composed and what form the contract takes. General conditions of business are not present in so far as the conditions of contract are negotiated individually between the contracting parties. (2)–(3) […] § 306 BGB: Legal consequences of non-incorporation and ineffectiveness (1) If general conditions of business have wholly or partially not become part of the contract or are ineffective, the contract remains effective in other respects.

227

T. Ackermann & J.-U. Franck (2) In so far as the provisions have not become part of the contract or are ineffective, the content of the contract will be determined in accordance with the statutory provisions. (3) The contract is ineffective if adhering to it, even taking into account the alteration provided for in paragraph 2, would represent an unreasonable hardship for a contracting party. § 307: Control of content (1) Provisions in general conditions of business are ineffective if they unreasonably disadvantage the user’s contracting partner in a manner contrary to the requirements of good faith. An unreasonable disadvantage can also arise from the fact that the provision is not clear and comprehensible. (2) An unreasonable disadvantage is to be assumed in case of doubt if a provision 1. cannot be reconciled with essential basic concepts of the statutory regime from which there is a deviation, or 2. so limits essential rights or duties which arise from the nature of the contract that the attainment of the purpose of the contract is endangered. (3) Paragraphs 1 and 2 as well as §§ 308 and 309 only apply for provisions in general conditions of business by which rules are agreed deviating from legal provisions or supplementing them. Other provisions can be ineffective under paragraph 1 sentence 2 in combination with paragraph 1 sentence 1. § 308 BGB: Prohibition of clauses with possibility of discretion In general conditions of business, the following in particular are ineffective 1. (Periods for acceptance and performance) a provision by which the user reserves unreasonably long or insufficiently determinate periods for the acceptance or refusal of an offer or the effecting of performance; reservation of performance only after expiry of the period for revocation or return under § 355 paragraphs 1 to 3 and § 356 is excepted from this; 2. (Additional period) a provision by which the user, deviating from the legal provisions, reserves an unreasonably long or insufficiently determinate additional period for the performance to be effected by him; 3. (Reservation of right of withdrawal) agreement of a right by the user to release himself from his duty to perform without a ground which is objectively justified and given in the contract; this does not apply for long term obligation relationships; 4. (Reservation of right of alteration) agreement of a right by the user to alter the promised performance or to deviate from it, if the agreement of the alteration or deviation, taking into consideration the interests of the user, cannot be expected of the other contracting party;

228

Chapter 4: Validity 5. (Fictitious declarations) a provision according to which a declaration by the contractual partner of the user is on the undertaking or omission of a certain act, to count as given or not given by him, unless a) the contractual partner is allowed an appropriate period for giving an express declaration and b) the user commits himself especially to draw the attention of the contractual partner at the beginning of the period to the significance of his conduct as provided for; 6. (Fictitious arrival) a provision that a declaration by the user of particular importance is to count as having reached the other contracting party; 7. (Winding up of contracts) a provision under which the user can demand, for the case in which a contracting party withdraws from the contract or terminates the contract by notice, a) an unreasonably high recompense for the exploitation or use of a thing or a right or for services effected or b) an unreasonably high reimbursement of expenses; 8. (Non-availability of performance) an agreement permissible under no 3 of a reservation by the user to release himself from the duty to fulfil the contract in the case of non-availability of the performance, if the user does not commit himself, a) to inform the contractual partner without delay about the non-availability and b) to restore counterperformance of the contractual partner without delay. § 309 BGB: Prohibition of clauses without possibility of discretion Eve n in so far as a deviation from the statutory provisions is permissible, the following are ineffective in general conditions of business: 1. (Price increases at short notice) a provision which provides for increase of the payment for goods or services which are to be delivered or carried out within four months after the conclusion of the contract; this does not apply for goods or services which are delivered or carried out within the framework of long term obligation relationships; 2. (Rights to refuse performance) a provision by which a) the right to refuse performance which belongs to the contractual partner of the user under § 320 is excluded or limited, or

229

T. Ackermann & J.-U. Franck

3.

4.

5.

6.

7.

b) a right of retention belonging to the contractual partner of the user, in so far as it is based on the same contractual relationship, is excluded or limited, and in particular is made dependent on the recognition of defects by the user; (Prohibition of set off) a provision which takes away the power from the contractual partner of the user to set off an undisputed demand or one established in a legally binding way; (Warning, setting of a period) a provision by which the user is released from the statutory obligation to warn the other contracting party or to set him a period for performance or subsequent fulfilment; (Lump sum for claims to compensation) the agreement of an all-inclusive claim by the user to compensation or to recompense for a diminution in value, if a) the lump sum exceeds the harm to be expected in the cases regulated according to the usual course of events or the diminution in value usually arising, or b) the other contracting party is not allowed expressly to prove that harm or a diminution in value did not occur at all or is substantially lower than the lump sum; (Contractual penalty) a provision by which the user is promised payment of a contractual penalty for the case of non-acceptance or delayed acceptance of the performance, of delay in payment or for the case where the other contracting party releases himself from the contract; (Exclusion of liability on violation of life, body or health and in case of gross fault) a) (Violation of life, body or health) an exclusion or a limitation of liability for harm from violation of life, body or health which is based on a negligent violation of the user’s duty or an intentional or negligent violation of the duty of a statutory representative or agent of the user; b) (Gross fault) an exclusion of limitation of liability of other harm which is based on a grossly negligent violation of duty by the user or on an intentional or grossly negligent violation of duty of a statutory representative or agent of the user; a and b do not apply for limitations of liability in the conditions of transport and tariff provisions of trams, buses and powered vehicles on regular services authorised in accordance with the Transportation of Persons Act, in so far as they do not deviate from the Regulation on general conditions of transportation

230

Chapter 4: Validity for tram and bus traffic and regular services with powered vehicles of the 27th February 1970 to the disadvantage of the passenger; b does not apply for limitations of liability for state authorised lottery or raffle contracts; 8. (Other exclusions of liability on violation of duty) a) (Exclusion of right to be released from contract) a provision which excludes or limits the right of the other contracting party to be released from the contract in the case of a violation of duty for which the user is responsible and which does not consist in a defect in the object purchased or in the work; this does not apply for the transportation conditions and tariff provisions described in no 7 under the prerequisites mentioned there; b) (Defects) a provision by which in relation to contracts about deliveries of newly manufactured things and about work services aa) (Exclusion and reference to third parties) claims against the user because of a defect are excluded altogether or with reference to individual parts, limited to the granting of claims against third parties or are made dependent on prior court claims against third parties; bb) (Limitation to subsequent fulfilment) claims against the user are limited altogether, or with reference to individual parts, to a right to subsequent fulfilment in so far as the right is not expressly reserved to the other contracting party on failure of subsequent fulfilment to reduce or, if the defects liability does not relate to building services, at his option to withdraw from the agreement; cc) (Expenses on subsequent fulfilment) the duty of the user is excluded or limited to bearing the expenses, in particular costs of transportation, road tolls, work and materials, necessary for the purpose of subsequent fulfilment; dd) (Withholding of subsequent fulfilment) the user makes subsequent fulfilment dependent on the prior payment of the full sum due or of a part of the sum due which is disproportionately high, taking the defect into consideration; ee) (Exclusive period for notification of defects) the user sets the other contracting party an exclusive period, which is shorter than the period permissible under ff, for the notification of defects which are not obvious, ff) (Reduction of limitation period) the limitation period for claims against the user in respect of a defect in the cases of § 438 paragraph 1 no 2 and § 634a paragraph 1 no 2 is reduced or, in the other cases, there is a limitation period consisting of less than a year from the statutory commencement of limitation; […]

231

T. Ackermann & J.-U. Franck 9. (Effective period of long term obligation relationships) in respect of a contractual relationship which has as its subject matter the regular delivery of goods or the regular effecting of services or work by the user, a) an effective period for the contract binding the other contracting party for longer than two years; b) a tacit lengthening by, in each case, more than a year of the contractual relationship binding the other contracting party, or c) a longer period of notice of termination than three months before the expiry of the contractual duration provided for initially or extended tacitly and which is to the disadvantage of the other contracting party; this does not apply to contracts for the delivery of things sold as related to each other, for insurance contracts and for contracts between the proprietors of copyright rights and claims and exploitation companies in the sense of the Act on the exercise of copyright rights and related protective rights; 10. (Change of contracting partner) a provision according to which in purchase, loan, service or work contracts a third party steps, or can step, into the rights and duties arising from the contract in place of the user, unless a) the third party is described by name in the provision, or b) the provision grants to the other contracting party the right to release himself from the contract; 11. (Liability of agent concluding contract) a provision by which the user imposes on an agent who concludes the contract for the other contracting party a) a personal liability or duty to indemnify without an express and separate declaration directed at this, or b) in the case of an agency without authority, a liability going beyond § 179; 12. (Burden of proof) a provision by which the user alters the burden of proof to the disadvantage of the other contracting party, in particular by a) imposing on this person the burden of proof for circumstances which lie within the area of responsibility of the user, or b) causing the other contracting party to confirm certain facts; b does not apply for acknowledgements of receipt which are signed separately or are provided with a separate qualified electronic signature; 13. (Form of notifications and declarations) a provision by which notifications or declarations which are to be given to the user or a third party are to be in a stricter form than written form or subject to special requirements as to receipt.

232

Chapter 4: Validity § 310 BGB: Area of application (1) […] §§ 308 and 309 do not apply to general conditions of business which are used as against an undertaking, a legal person under public law or a special fund under public law. § 307 paragraphs 1 and 2 also apply in cases within sentence 1 in so far as this leads to the ineffectiveness of the contractual provisions mentioned in §§ 308 and 309; appropriate account is to be taken of the customs and usages applying in trade. […] (2) §§ 308 and 309 do not apply to contracts by electricity, gas, district heating and water supply undertakings for the supply of special consumers with electrical energy, gas, district heating and water from the supply network in so far as the conditions of supply do not deviate to the disadvantage of the buyer from the Regulations about general conditions for the supply of tariff customers with electrical energy, gas, district heating and water. Sentence 1 applies correspondingly for contracts about the disposal of sewage. (3) In relation to contracts between an undertaking and a consumer (consumer contracts) the provisions of this section apply with the following provisos: 1. general conditions of business count as being inserted by the undertaking, unless they were introduced by the consumer into the contract; 2. § 305c paragraph 2 and §§ 306 and 307 to 309 of this Code […] also apply to preformulated contractual conditions when these are only intended for use on one occasion and in so far as the consumer could not have any influence on their content because of the preformulation; 3. in assessing the unreasonable disadvantage under § 307 paragraphs 1 and 2, the circumstances accompanying the conclusion of the contract must also be considered. (4) This section does not apply to contracts in the area of inheritance, family and company law or to tariff contracts or business or service agreements. In its application to labour contracts, the special features applying in labour law are to be considered as appropriate […] Tariff contracts and business and service agreements are equivalent to legal provisions in the sense of § 307 paragraph 3. 1. General. The history of judicial review of standard terms in German law goes back to the beginning of the twentieth century when the Reichsgericht started to employ the general clause of § 138 BGB (contracts contravening bonos mores) to scrutinize standard terms that were provided by a party with monopoly power or in an economically dominant position. Later, the Bundesgerichtshof subjected standard terms generally to a fairness test based on the general clause of § 242 BGB (good faith). In 1977, the Act on General Conditions of Business came into force that codified outside the BGB legal rules with regard to standard terms, thereby turning several judgedeveloped rules into statute law. In the course of the implementation of the Directive 93/13/EEC on Unfair Terms in Consumer Contracts in the year 1996 the Act was modified with respect to B2C contracts. Ultimately, the rules were reincorporated in the code as §§ 305–310 BGB on the occasion of a general reform of the law of obligations

233

T. Ackermann & J.-U. Franck that came into force in 2002. At this juncture, the provisions were slightly amended, notably the scope of application was extended to contracts of employment (cf. § 310(4) 2 BGB). 2. ‘General conditions of business’ is a literal translation of the German term Allgemeine Geschäftsbedingungen (AGB) whose definition in § 305(1) BGB determines which contractual terms may be subjected to a judicial review according to §§ 307–309 BGB. Contrary to what the literal sense of the term might suggest, § 305(1) BGB does not require that a clause is supplied by a business. Therefore, ‘general conditions of contract’ (cf. Article 2:209 PECL) might have been more appropriate in terms of terminology. a) ‘General conditions of business’ in the sense of §§ 305 et seq. BGB are characterized by several defining elements contained in § 305(1) BGB: First, a contractual term must have been ‘formulated beforehand’, i.e., the terms in question must have been readily formulated before the contract was concluded. This does not require that the terms in question are laid down beforehand in written form; it may well be enough that a party has memorized the standard terms in order to incorporate them into the (written) contract in the course of concluding an agreement (see BGH NJW 1988, 410). Moreover, it is not necessary that the party herself has formulated the clauses. Rather, it suffices that she has mandated for instance a notary or another agent to formulate a contract on her behalf (see BGH NJW 2002, 138, 139), or that she used a standard form contract provided by an interest group, or that she simply purchased one from a stationery shop. b) Secondly, contract terms are only regarded as ‘general conditions of business’ if they are formulated beforehand to be used ‘for many contracts’. Hence, it is generally not sufficient if a clause is formulated to be used only on one occasion (BGH NJW-RR 1998, 259) with the important exception of business-to-consumer contracts (see § 310(3) no. 2 BGB). It should be stressed, however, that it suffices that a party uses a standard term for the first time but intends to use it ‘for many contracts’. Therefore, there is a prima facie evidence for such an intention if form, structure and content of contractual terms create the impression that they have been formulated to be used in many contracts (Basedow, in Münchener Kommentar (2012), § 305 no. 18). c) Thirdly, the standard terms must have been placed ‘by one party before the other’. This criterion requires that the terms in question can be clearly attributed to the party who insisted to incorporate them into the contract. Consequently, if the terms are suggested by an essentially ‘neutral’ third instance, e.g., a public notary or a middleman, they cannot be considered ‘general conditions of business’. As this requirement is not consistent with the Directive on unfair terms in consumer contracts its fulfilment must be presumed in a B2C context according to § 310(3) no. 1 BGB, except for cases where it is the consumer who introduces a clause into a contract. d) Finally, terms are only considered ‘general conditions of business’ if they are not individually negotiated (§ 305(1) 3 BGB). The burden is on the user of a contractual term to prove that it was indeed individually negotiated. There are rather strict requirements stipulated in the case law in this regard (see e.g., NJW-RR 1987, 144, translated and reproduced as case no. 49 in Markesinis/Unberath & Johnston (2006),

234

Chapter 4: Validity pp. 788–792). The party who seeks to introduce a term has to ‘put it on the table’, showing that she is prepared to amend the pre-formulated term, that is, to make it subject to serious negotiations which give the other party a real possibility to influence the content of the contractual term in question. Such a defence has been accepted by courts for example in cases where a party has been confronted with a form which contained several options she could choose from (e.g., with regard to the duration of a contract, BGH NJW 1998, 1066, 1067). 3. Scope of judicial review. Judicial content control over standard contracts under German law was never limited to B2C situations but is generally applicable if ‘general conditions of business’ are used, regardless of whether the standard terms are supplied by a business or by a consumer and whether they are used vis-à-vis a business or a consumer (in contrast to the incorporation requirements pursuant to § 305(2) BGB which according to § 310(1) BGB do not apply vis-à-vis a business). However, the rules on content control are modified pursuant to § 310(1) BGB if standard terms are employed vis-à-vis a business: The ‘grey’ and ‘black’ list of clauses pursuant to §§ 308 and 309 BGB are not applicable in such a context. Furthermore, modifications as to the application in B2C contexts both as to the terms which may fall under judicial review and as to the standard of judicial control are contained in § 310(3) BGB. These modifications go back to the implementation of the Directive 93/13/EEC on unfair terms in consumer contracts. According to § 310(4) BGB different areas of the law are generally excluded from the rules on standard terms, namely the law of succession, family law, company law, and collective bargaining agreements in labour law. It is important to emphasize, though, that courts may evaluate standard terms used in these fields on the basis of the general principle of good faith and fair dealing (§ 242 BGB) that the courts initially employed for all types of contracts before the codification of rules on standard terms. The judicial content review is only applicable to terms which deviate from statutory default rules (§ 307(3) 1 BGB). This restriction whose rationale may at first glance appear a little opaque has actually two effects. First, it excludes terms that simply repeat statutory rules from the fairness test. Second and more importantly, it ensures that terms defining the main subject matter as well as the adequacy of the price are not subjected to judicial review (e.g., a term in a credit card contract according to which the bank could charge the client extra for using the credit card abroad, BGH NJW 1998, 382). However, clauses that alter the main performance in some respect are subject to full judicial control (e.g., a clause stating that the account on a prepaid telephone card expired after a fixed period, BGH NJW 2001, 2635). The same holds true for clauses which indirectly influence the price and which can easily be replaced by default rules (e.g., a term that stipulates that the bank may charge the clients for services rendered to creditors of the client in following arrest orders, BGH NJW 1999, 2276). As it is clarified by § 307(3) 2 BGB, terms which are excluded from content review pursuant to § 307(3) 1 BGB may still be regarded as unfair if phrased in a non-transparent manner. 4. Fairness test. The fairness test is structured as a combination of a general clause (§ 307(1) and (2) BGB) with a ‘grey’ list (§ 308 BGB) and a ‘black’ list (§ 309 BGB).

235

T. Ackermann & J.-U. Franck According to § 307(1) BGB, standard terms have to be regarded as unfair if they ‘unreasonably disadvantage’ the other party ‘in a manner contrary to the requirements of good faith’ (content requirement) or if they are ‘not clear and comprehensive’ (transparency requirement). The content review is further specified by two sub-general principles laid down in § 307(2) BGB according to which a term may in particularly be assumed as unreasonably disadvantaging the other party if it deviates from the gist of a statutory default rule (no. 1) or if the term restricts essential rights and duties of the parties (the so-called ‘cardinal duties’) in a way that endangers the purpose of the contract (no. 2). This approach rests upon the assumption that the codified default rules reflect a ‘fair’ or ‘efficient’ distribution of contractual risks. Therefore, the more a standard term deviates from this standard, the harder it is for the party who supplies the term to show that the clause should still be considered ‘fair’ given the particular circumstances of the transaction. The application of the fairness tests is facilitated by a black list. Any clause listed in § 309 BGB is automatically considered void. Additionally, there is an indicative (‘grey’) list of clauses laid down in § 308 BGB which are (refutably) assumed to be unfair. According to § 310(1) BGB these two lists are not applicable to standard terms used vis-à-vis a business yet courts may nevertheless consider listed terms void in commercial contexts based on the general clause (§ 307 BGB) if regard is had to trade usage. In fact if a term is listed in §§ 308 or 309 BGB this is at least partly taken by the courts as an indication of its unfairness also if used as against a business (see BGH NJW 1984, 1750, 1751). 5. Legal consequences of unfairness. A standard term which is regarded as unfair according to §§ 307–309 BGB is automatically invalid. The German courts have developed a strict rule according to which an unfair term must not be replaced by a term that conforms to the requirements of the fairness test (so-called Verbot der geltungserhaltenden Reduktion, BGH NJW 2005, 1574, 1576). This rule is based on preventive considerations. Parties supplying standard terms should be deterred from using consciously unfair terms anticipating as a ‘worst case scenario’ that a court will just cut them down to the legally acceptable level of fairness. The remainder of the contract shall in principle continue to be binding (§ 306(1) BGB). Only if it constituted an unbearable hardship to one party to force her to stick to the agreement without the invalid terms may the contract as a whole be considered void (§ 306(3) BGB). Before such a decision can be made, gaps left by unfair terms must be filled by statutory default rules (§ 306(2) BGB). If no appropriate default rules are available, a gap should be filled by determining terms in accordance with the hypothetical intention of the parties (‘terms implied in fact’; so-called ergänzende Vertragsauslegung, BGHZ 137, 153, 157).

Comparison and Evaluation 1. Structure. Under German law all provisions on ‘general conditions of business’ are collected in one section. In contrast, the corresponding PECL and DCFR provisions on

236

Chapter 4: Validity standard terms are allocated to different chapters or sections according to a systematic organization of contract law. Such an approach does indeed seem to be preferable to achieve a coherent systematization of contract law (cf. Pfeiffer (2008a), p. 178). 2. Scope. Neither under the Principles, nor under the DCFR or German law is the judicial review of standard terms reduced to a tool of ‘consumer protection policy’ but is instead in principle also applicable to business-to-business contracts. This is conceptually convincing given Akerlof’s model of adverse selection due to systematic information asymmetries (Akerlof (1970), pp. 492 et seq.) that serves as standard justification for judicial control over standard terms. Whilst a user of contractual standard terms has – as a ‘repeat player’ – sufficient incentives to invest resources in the design of her clauses, her counterparty is typically rationally ignorant towards these terms as she may contract only once with the other party, and since the value of this contract is not worth investing time and money in assessing and negotiating the contract terms, particularly given the fact that it may not be very likely that the risks the terms are dealing with will materialize just in the course of this transaction. As a consequence of this rational ignorance, there will be no competition for ‘good’ contractual standard terms, and this lack of market control will lead to an adverse selection which will result in a so-called ‘Market for Lemons’ where the standard terms with the lowest ‘quality’ will prevail, see Schäfer/Ott (2004), pp. 370–373. In the light of this model it becomes clear that it makes in principal no difference whether a person is confronted with standard terms in a private or in a business context and that, therefore, it is consistent to subject also standard terms to judicial review that are employed in a purely commercial context. Rather it is the transaction value that should be considered as the decisive factor. From a certain transaction value on it can be presumed that it is not rational ignorance that brings a party to accept one-sided standard terms. Whereas under Article 4:110 PECL judicial review generally applies to all terms which have not been individually negotiated, the definition of clauses which may be subjected to judicial control is stricter under German law as it comprises only terms which have not been individually negotiated and which have been pre-formulated to be used in many contracts and have been placed by one party before the other (‘General conditions of business’ pursuant to § 305(1) BGB). Only in consumer-tobusiness contexts the additional requirements are modified with the result that virtually all terms not individually negotiated fall within the scope of judicial review (§ 310(3) BGB). An equal differentiation can be found in the DCFR, according to which the fairness test for contracts between a business and a consumer applies in any case to all terms which have not been individually negotiated (Article II.-9:403 DCFR), whereas in other contractual contexts (see Article II.-9:404 and Article II.-9:405 DCFR) only ‘standard terms’ – which are defined in Article II.-1:109 DCFR similarly to ‘general conditions of business’ pursuant to § 305(1) BGB – are subject to judicial review. Remarkably, the drafters of the DCFR could not reach consensus if the judicial review under Article II.-9:403 DCFR should be applied also to terms individually negotiated. Such an expansion contrary to the approach taken in the Principles and in German law, as well as in the majority of the legal systems of the Member States of the

237

T. Ackermann & J.-U. Franck EU (see Note 2 at Article II.-9:403 DCFR; Pfeiffer/Ebers, in Aquis Principles (2009), Article 6:101 ACQP no. 7) unnecessarily constrained party autonomy in B2C contexts. To expand the possibility of judicial intervention in respect of individually negotiated terms deprived deals between a business and a consumer largely of legal certainty. As a consequence, it would be less attractive for a business to offer a lower price in exchange for the acceptance of unfavourable terms. However, as already pointed out, the justification for judicial control of standard terms lies in a systematic procedural deficiency in their formation due to a rational ignorance of a party towards them. Therefore, to cure this deficiency it is sufficient to ensure that the criterion of ‘individual negotiations’ is construed in a strict way which ensures that a party had a real opportunity to influence the content of the contractual term in question, see Pfeiffer (2008a), p. 184. The example of the consumer who accepts a disadvantageous contractual term in exchange for a lower price reveals, however, that ‘individual negotiations’ must not require that a certain term supplied by a business was actually amended in the course of the bargaining, see Eidenmüller (2009), p. 128. The solutions found in the Principles, the DCFR, and the BGB concur insofar as they exclude a content control of the definition of the main subject matter of a contract (e.g., the quality of sold goods or provided services) and the adequacy of the price. Such a control would be incompatible with the pricing mechanism of a market economy. 3. Fairness test. The proper functioning of an open-textured fairness test requires that courts develop a reliable case law that gives substance to the provision and thereby provides parties with a sufficient degree of legal certainty. As Article 4:110 PECL and Articles II.-9:402 et seq. DCFR for obvious reasons lack such a process of ‘fleshing out’, a comparison and evaluation is necessarily confined to formal aspects. Given that the underlying justification for judicial control is essentially the same regardless of whether standard terms are used in a B2B, B2C or C2C context, it is unfortunate not just in terms of drafting style but also for conceptual reasons that the DCFR contains three separate fairness tests which was arguably necessary to reach a compromise as to the application of judicial review in B2B-contexts, cf. Aquis Principles-Pfeiffer/Ebers (2009), Article 6:301 ACQP paragraphs 2–8; von Bar/Clive (2009) Comment A on Article II.-9:405 DCFR). However, to prevent the misleading impression that the judicial review of standard terms should rest on different ideas of fairness depending on the context, it would have been better if the DCFR drafters had contented themselves with phrasing one standard similar to the one laid down in Article 4:110 PECL or § 307(1) 1 BGB, see Eidenmüller (2009), pp. 129 et seq. Certainly such an uniform fairness test would not exclude the consideration of ‘good commercial practices’ or other necessary modifications when applied in a B2B-context (cf. § 310(1) 2 BGB). The comment to the Principles explains the abandonment of a list of ‘black’ or ‘grey’ clauses held or presumed to be unfair with the need for flexibility in commercial contexts. This is the very reason why the application of such lists is restricted in the DCFR and German law to B2C contracts that were, however, not on the agenda of the drafters of the PECL (Lando/Beale (2000), p. XXV Introduction sub 3). In the context of B2C relationships the listing of unfair clauses is indeed to be considered a useful tool to provide guidance and clarification for the application of the open-textured fairness test.

238

Chapter 4: Validity 4. Effects of unfairness. Article 4:110 PECL foresees a right to avoidance as a remedy for a party who is confronted with an unfair term not individually negotiated. The drawback of this concept is that an efficient exercise of a right to avoidance requires that a party first, realizes her legal right and second, that she is in no way deterred from enforcing it (Wolf (2000), p. 118). This is the reason why §§ 307–309 BGB provide for per se invalidity as the legal consequence of an unfair standard term. However, there may be circumstances where a term which is overall to be considered unfair works in favour for the party who has not supplied it (see Pfeiffer/Ebers, in Aquis Principles (2009), Article 6:306 ACQP no. 8). In such a situation, the user of the clause should be barred from invoking the unfairness of its own term. Therefore, Article II.-9:408(1) DCFR stipulates a unilateral effect of unfairness of a term, according to which on the one hand, the party confronted with an unfair clause is not bound by this term and needs not expressly to raise its unfairness, whereas on the other hand, the clause may be invoked against its user.

Principles of European Contract Law Article 4:111: Third Persons (1) Where a third person for whose acts a party is responsible, or who with a party’s assent is involved in the making of a contract: (a) causes a mistake by giving information, or knows of or ought to have known of a mistake, (b) gives incorrect information, (c) commits fraud, (d) makes a threat, or (e) takes excessive benefit or unfair advantage, remedies under this Chapter will be available under the same conditions as if the behaviour or knowledge had been that of the party itself. (2) Where any other third person: (a) gives incorrect information, (b) commits fraud, (c) makes a threat, or (d) takes excessive benefit or unfair advantage, remedies under this Chapter will be available if the party knew or ought to have known of the relevant facts, or at the time of avoidance it has not acted in reliance on the contract. 1. General. The remedies provided by Chapter 4 generally address situations in which the party against whom a contract is avoided or who is liable for damages is responsible due to her own actions. Article 4:111 PECL provides a solution for cases in which a third person committed an act that would qualify as a ground for avoidance or for a right to damages if it had been committed by a party to the contract. The provision

239

T. Ackermann & J.-U. Franck draws a distinction between third persons for whom a party is responsible and third persons for whom a party is not responsible. 2. Actions by a third person for whom a party is responsible. Under Article 4:111(1) PECL, behaviour or knowledge by third person a party is responsible for is treated in the same way as the party’s own behaviour or knowledge. The crucial issue with persons a party is responsible for is treated in Comment A (Lando/Beale (2000), p. 272), albeit in a rather cursory fashion that merely reinforces the notion that this category does not only include persons acting on behalf of the contracting party against whom the remedy is sought but also persons who were involved with the party’s assent without acting for her. 3. Actions by a third person for whom a party is not responsible. Under Article 4:111(2) PECL, a contracting party may be accountable for the actions of other persons. This is the case if the party knows or should know that the other party entered into the contract under the influence of the behaviour of a third person that, had the contracting party behaved in the same way, would have provided the other party with a remedy under Chapter 4 (Lando/Beale (2000), p. 272 Comment B to Article 4:111 PECL). Alternatively, avoidance may be sought by the aggrieved party if the other party has not yet acted in reliance on the contract. This rule may come as a surprise since the underlying principle of res integra is of no relevance with regard to Article 4:103 PECL. However, considering that the party seeking avoidance has to prove that the other party has not yet acted in reliance, and that passing up another business opportunity is regarded as an act of reliance (Lando/Beale (2000), p. 273 Comment D to Article 4:111 PECL), it will be difficult to successfully invoke this limb of Article 4:111(2) PECL.

Draft Common Frame of Reference Article II. – 7:208: Third persons (1) Where a third person for whose acts a party is responsible or who with a party’s assent is involved in the making of a contract: (a) causes a mistake, or knows of or could reasonably be expected to know of a mistake; or (b) is guilty of fraud, coercion, threats or unfair exploitation, remedies under this Section are available as if the behaviour or knowledge had been that of the party. (2) Where a third person for whose acts a party is not responsible and who does not have the party’s assent to be involved in the making of a contract is guilty of fraud, coercion, threats or unfair exploitation, remedies under this Section are available if the party knew or could reasonably be expected to have known of the relevant facts, or at the time of avoidance has not acted in reliance on the contract.

240

Chapter 4: Validity This provision was modelled on Article 4:110 PECL and contains only insignificant amendments.

German Law § 123 BGB: Avoidability because of deception or threat (1) […] (2) If a third person has practised the deception, a declaration which was to be given as against another is only avoidable if he knew of the deception or ought to have known of it. […] § 278 BGB: Responsibility of debtor for third parties The debtor has to answer for fault on the part of his statutory representative and of the persons whom he uses for the fulfilment of his obligations to the same extent as for his own fault. […] § 166 BGB: Absence of intention; attribution of knowledge (1) In so far as the legal consequences of a declaration of will are influenced by absence of intention or by the fact that certain circumstances are known or ought to be known, it is the situation of the agent and not of the principal which should be considered. (2) […] 1. General. The question whether a contracting party is accountable for the behaviour of third persons only arises if there is a rule that requires this party’s accountability. Regarding the situations covered by Article 4:110 PECL and Article II.-7:208 DCFR, this is not always the case under the equivalent German rules on avoidability and liability for culpa in contrahendo. 2. Mistake and threat. If a party concluded a contract under a mistake that is relevant under § 119(1), § 119(2) or § 120 BGB (see on these provisions above, Article 4:103 PECL, GERMAN LAW, and Article 4:104 PECL, GERMAN LAW), she may avoid the contract even if the other party did not cause the mistake or was in any other way responsible for it. As a consequence, if the mistake was caused by the behaviour of a third person, the contract is avoidable, and it does not matter whether the other party was responsible for this person or knew or ought to have known of her behaviour. The same applies in cases of threat (see above, Article 4:108 PECL, GERMAN LAW). The only difference between avoidance for a mistake caused by a third person and avoidance for a threat by a third person is that in cases of mistake, the other party’s reliance interest is protected unless she knew or ought to have known of the mistake (§ 122 BGB), while in cases of threat, the other party is not protected (which has met with

241

T. Ackermann & J.-U. Franck some criticism, cf. Armbrüster, in Münchener Kommentar (2012), § 123 no. 117, who argues that § 122 BGB should be applied analogously). 3. Fraud. If a party entered into a contract under the influence of a deception by a third party, the contract may be avoided if the other contracting party knew or ought to have known of the deception (§ 123(2) 1 BGB; the second sentence of § 123(2) BGB addresses specific situations, in particular contracts for the benefit of a third party). However, it is undisputed that a person for whose behaviour the other contracting party is accountable does not qualify as a ‘third party’ under § 123(2) 1 BGB. Fraudulent behaviour by such a person must rather be treated as if the fraud had been committed by the contracting party who is responsible for her. As a consequence, the contract is avoidable under § 123(1) BGB even if the contracting party who is responsible for the person who committed the fraud neither knew nor ought to have known of the fraud. In early rulings, the Reichsgericht (RGZ 61, 207, 212; 72, 133, 135 et seq.) construed the category of ‘non-third parties’ (i.e., the category of persons whose behaviour is attributed to a contracting party so that they are not treated as third parties under § 123(2) BGB) rather narrowly and held that a contracting party was merely responsible for its agents and for other persons she had authorized to negotiate the contract. Later decisions by the Bundesgerichtshof (e.g., BGH NJW 1990, 1661, 1662; NJW 1996, 1051) opted for a broader interpretation; according to these judgments, this category includes all persons whose behaviour must be attributed to a contracting party due to a particularly close relationship between this person and the contracting party or due to other specific circumstances of the case. Against the background of § 278 BGB, a comparably broad view has been taken in the literature (e.g., Armbrüster, in Münchener Kommentar (2012), § 123 no. 64), stating that a contracting party is responsible for all persons who, with the assent of the contracting party, took part in pre-contractual negotiations. This is even said to extend to persons who took part in the negotiations without the contracting party’s actual assent but who merely appeared to be this party’s ‘person of trust’ if this appearance is attributable to the contracting party (see Kramer, above). 4. Culpa in contrahendo. Liability for culpa in contrahendo (cf. Article 1:106 PECL, GERMAN LAW) can be based on negligent misrepresentation by a third person or on a violation of a duty to disclose information by a third person if this person’s behaviour is attributable to a contracting (or rather negotiating) party under § 278 BGB. As a consequence, the attribution of fraudulent behaviour (under § 123(1) BGB) and the attribution of negligent behaviour (under culpa in contrahendo) follow the same rules (i.e., the rules discussed in no. 3 of this comment). 5. Usury. Under § 138(2) BGB (see above, Article 4:109 PECL, GERMAN LAW), the party who benefits from the terms of the contract must have consciously taken advantage of the inferior position of the other party. Furthermore, under the doctrine of ‘usury-like’ contracts that has been developed under § 138(1) BGB (cf. above, Article 4:109 PECL, GERMAN LAW, no. 6), a substantively unfair agreement is required that must be the result of an exploitation of a weak and vulnerable position of the disadvantaged party, which the superior party has at least carelessly ignored. These

242

Chapter 4: Validity requirements can only be sensibly applied in the relationship between the two contracting parties. 6. Reliance. In German law, the question whether the party against whom avoidance (or rescission) is sought has relied on the contract is not relevant as far as the granting of the remedy is concerned. However, as has already been pointed out in no. 2 of this comment, if a contract is avoided for mistake under § 119 BGB or under § 120 BGB the party against whom avoidance is sought can claim a compensation for her reliance interest unless she knew or ought to have known of the mistake (§ 122 BGB). 7. Attribution of knowledge of agents. § 166(1) BGB represents the general notion that the knowledge of persons who participate as representatives of one party in negotiations – and who, therefore, are not ‘third persons’ in the meaning of § 123(2) BGB – has to be imputed to that party. The rule is relevant as to any kind of remedy that requires an element of knowledge of the other party, e.g., in the case of § 123(1) or § 138 BGB.

Comparison and Evaluation As far as fraudulent behaviour by third parties is concerned, Article 4:111 PECL and Article II.-7:208 DCFR very much resemble the German approach under § 123 BGB. In particular, the rather generous attitude of the Bundesgerichtshof and of the German literature towards the definition of the category of persons whose behaviour is attributable to a contracting party seems to be reflected in Article 4:111(1) PECL/Article II.-7:208(1) DCFR. Both systems also share the position that fraudulent behaviour by third parties who do not belong into this category gives rise to a right to avoidance if the other contracting party knew or ought to have known of the behaviour. However, German law does not allow for avoidance on the basis of fraud by a third party merely because the other party has not yet acted in reliance on the contract. It seems indeed questionable and somewhat anachronistic to believe that a party who has not yet acted in reliance on a contract is less worthy of protection than a party who has done so. A party’s right to claim damages from the third person who is responsible for her defect in will would seem sufficient to protect her interests in such circumstances (Kramer (1999) p. 281). As regards other grounds for avoidance (or invalidity or rescission) of a contract, the most significant difference between the PECL/DCFR regime and German law occurs in the treatment of threats by third parties and of mistakes caused by third parties. In both cases, the Principles and the DCFR apply the same rules as in cases of fraud, while German law allows for avoidance without any restrictions (if the requirements of §§ 119, 120 or 123(1) BGB are met). At first view, this approach seems to give too much weight to the interests of the party who seeks avoidance. But it must not be overlooked that in cases of mistake, the other party’s reliance interest is protected by § 122 BGB if she neither knew nor ought to have known of the mistake (for a discussion of this solution see above, Article 4:103 PECL, COMPARISON AND EVALUATION). However, there is no such protection of the other party if a party declares avoidance of

243

T. Ackermann & J.-U. Franck a contract she concluded under the influence of a threat by a third party. One may take issue with this result (see above, GERMAN LAW, no. 2), but it follows from a conscious decision of the drafters of the BGB to single out threats as particularly harmful to the public interest (cf. Ackermann (2007), p. 452). This decision is understandable if we consider the case of a person who, as a member of a religious minority, is threatened by a violent group and therefore decides to sell all her belongings in order to get the means to emigrate. If this person seeks to avoid these contracts after the threat has ceased, the solution proposed by the PECL and by the DCFR requires her to prove in each case that the other contracting party knew or could be expected to know of the relevant facts, which may be difficult, if not impossible. Under the BGB, the victim is spared such efforts. With a view to historic experience, this may be preferable.

Principles of European Contract Law Article 4:112: Notice of Avoidance Avoidance must be by notice to the other party. 1. General. A party may exercise her right to avoidance by a notice to the other party. Article 4:112 PECL clarifies that contrary to the approach of some European legal systems, notably French and Italian law (see Lando/Beale (2000), pp.274–275 note) no court procedures are required. 2. Notice to the other party. Pursuant to the receipt principle as stated in Article 1:303(2) PECL, the notice becomes effective when it reaches the other party. No specific form is required (Article 1:303(1) PECL). Notice may be given in writing, orally or implicitly by any conduct that unequivocally indicates that a party no longer considers herself bound by a contract and which comes to the notice of the other party. As illustrated in the comment, a notice of avoidance does apparently not require that the factual or legal basis for an invoked right to avoidance is communicated to the other party.

Draft Common Frame of Reference Article II. – 7:209 Notice of avoidance Avoidance under this Section is effected by notice to the other party. Since this provision resembles Article 4:112 PECL, there is no need for further comment as to the content. Article II.-1:106 DCFR contains rules on form and effect of a ‘notice’ which correspond to Article 1:303 PECL.

German Law § 143 BGB: Declaration of avoidance (1) Avoidance occurs by declaration as against the opposing party. (2) The opposing party is, in the case of a contract, the other party […]

244

Chapter 4: Validity 1. General. Through a declaration of avoidance pursuant to § 143 BGB a right to avoidance may be exercised in case of mistake (§ 119 BGB) and deception or threats (§ 123 BGB). Under German law, the legal effect of other grounds for invalidity comprised in Chapter 4 of the Principles is not voidability but invalidity per se, e.g., in case of usury and usury-like contracts (§ 138 BGB) or unfair general conditions of business (§§ 307–309 BGB). 2. Declaration as against the contracting party. A notice of avoidance is a declaration of will. It becomes effective at the point in time when it reaches the other party (§ 130 BGB). No specific form is required. Though it is not necessary to use the term ‘avoid’, it must be clear from the declaration that the party wants to set aside the contract because of a defect of will (BGHZ 91, 324, 331 et seq., translated and reproduced as case no. 43 in Markesinis/Unberath & Johnston (2006), pp. 642–647). It has not been clarified yet, however, if further information needs to be provided with a notice of avoidance. Whereas the Reichsgericht did not require grounds for avoidance to be given (RGZ 65, 86, 88), the Bundesgerichtshof left this question open (BGH NJW 1966, 39). There seems to be a consensus among the majority of legal scholars that the grounds which are invoked to substantiate the right to avoidance must be recognizable to the recipient to give her a chance to assess if the declaration is substantiated and to defend her case adequately. Therefore, if the invoked grounds are unclear from the perspective of the recipient of the declaration they must be revealed (Roth, in Staudinger (2010), § 143 no. 11). A party who has declared avoidance on certain factual grounds is banned from subsequently adducing further reasons as otherwise the legitimate interests of the recipient of the declaration of avoidance would be disregarded. She may assume that the validity of the contract is only challenged on the stated reasons. Hence, a subsequent submission of arguments has to be considered a new declaration of avoidance which must be effected within the statutory time limit for avoidance (see e.g., BGH NJW-RR 1993, 948).

Comparison and Evaluation The three provisions have in common that a right to avoidance may be exercised by an extrajudicial notice which requires no specific form. This transaction cost saving solution is currently not questioned by German commentators. A notice of avoidance by conduct in the way it is illustrated in the comment at Article 4:112 PECL in Lando/Beale (2000) does not comply with German law since it is not recognizable to B in this hypothetical that A, in taking a job with another firm does not commit an ordinary breach of contract but considers herself not bound by the contract with B because of a defect in consent. Apparently as a response to this deficit, in the comment to Article II.-7:209 DCFR in von Bar/Clive (2009) an act of communication between the parties has been added to this illustration that enables B to see that A has quit the job for the very reason that she discovered B’s fraud. German law differs from Article 4:112 PECL and Article II.-7:209 DCFR as it requires that reasons are recognizable why a party wants to set aside the contract. It is

245

T. Ackermann & J.-U. Franck true that imposing requirements of reasoning entails a risk that a certain number of contracting parties in need of protection will fail to comply with these conditions and lose their right to avoidance. However, a party who receives a notice of avoidance should have the chance to react adequately. This requires at least that she knows that the other party considers the contract voidable because of a defect in consent. It has to be sufficient that this is expressed in a layman like manner. This enables the recipient to require further information. Given the plurality of legal grounds for avoidance provided by Articles 4:103 et seq. PECL and Articles II.-7:201 et seq. DCFR, the recipient of a declaration of avoidance has also a legitimate interest to know what factual basis substantiates the alleged right to avoidance. The information must suffice to put him in a position to assess on what legal grounds a right of avoidance may be based. Particularly, this enables a recipient to request an adaptation of the contract ‘promptly’ (Article 4:109(3) PECL) or ‘without undue delay’ (Article II.-7:207(3) DCFR) respectively. It may be sufficient that such information has to be given only on request. In any event, in order to ensure an effective protection of parties who are provided with a right to avoidance any formal requirements for a notice of avoidance must not be construed in a formalistic way.

Principles of European Contract Law Article 4:113: Time Limits (1) Notice of avoidance must be given within a reasonable time, with due regard to the circumstances, after the avoiding party knew or ought to have known of the relevant facts or became capable of acting freely. (2) However, a party may avoid an individual term under Article 4:110 if it gives notice of avoidance within a reasonable time after the other party has invoked the term. 1. General. Article 4:113 PECL states a general clause to define time limits applicable to all rights to avoidance. It is the rationale of these time limits to provide for security in transactions (Lando/Beale (2000), p. 275 Comment A). 2. Notice within a reasonable time. The time limit commences after the party learned or should have learned of the facts which substantiate a right to avoidance. In case of duress or undue persuasions (cf. Article 4:108 and 4:109 PECL) the commencement of the time limit also requires that the party is free of threats or undue pressure. It is not, however, a pre-requisite that the party is aware that she is entitled to avoid the contract. ‘Reasonable time’ includes time to seek (legal) advice (Lando/Beale (2000), p. 275 Comment B). 3. ‘Wait and see’ approach for avoidance of unfair terms. In the case of unfair terms according to Article 4:110 PECL a party will often only take notice of the relevance and the unfairness of a term after it is invoked by the other party. Therefore, the time limit to consider the exercise of a right to avoidance as to an individual term commences

246

Chapter 4: Validity only when the other party has invoked that term. This rule cannot be waived by a term not individually negotiated. Parties can settle a dispute on the voidability of a term by an agreement (Lando/Beale (2000), p. 276 Comment C).

Draft Common Frame of Reference Article II. – 7:210: Time A notice of avoidance under this Section is ineffective unless given within a reasonable time, with due regard to the circumstances, after the avoiding party knew or could reasonably be expected to have known of the relevant facts or became capable of acting freely. This provision takes the same approach as Article 4:113 PECL. An extension of the time limit as provided for by Article 4:113(2) PECL is not necessary since the DCFR follows a different concept with regard to the judicial review of unfair terms which are considered non-binding pursuant to Article II.-9:409 DCFR. The use of a negative phrase (‘ineffective unless’) – in contrast to the wording in Article 4:113 PECL – suggests that the burden of proof with respect to a timely notice of avoidance lies with the avoiding party.

German Law § 121 BGB: Period for avoidance (1) Avoidance must in the cases of §§ 119 and 120 occur without culpable delay (promptly) after the person entitled to avoid has acquired knowledge of the ground for avoidance. Avoidance as against an absent person counts as occurring punctually if the declaration of avoidance has been dispatched promptly. (2) Avoidance is excluded if ten years have elapsed since the giving of the declaration of will. § 124 BGB: Period for avoidance (1) Avoidance of a declaration of will which is avoidable under § 123 can only take place within a year. (2) The period begins in the case of fraudulent deception at the point in time at which the person entitled to avoid discovers the deception and in the case of threat at the point in time at which the state of compulsion ceases. The provisions of §§ 206, 210 and 211 applying to limitation of actions apply correspondingly to the running of the period. (3) Avoidance is excluded if ten years have elapsed since the giving of the declaration of will.

247

T. Ackermann & J.-U. Franck 1. General. The right to avoidance is subject to time limits. § 121 BGB is applicable in the case of mistake (§§ 119, 120 BGB) and § 124 BGB in the case of fraud or threats (§ 123 BGB). The effect of other defects in the contracting process which substantiate grounds for avoidance under the PECL is invalidity per se under German law (e.g., according to §§ 138, 307 et seq. BGB) for which reason it is not necessary to stipulate a time limit. 2. Time limit in case of mistake. The time limit to exercise a right to avoidance under §§ 119, 120 BGB commences only when the mistaken person becomes aware of her mistake. It is not sufficient that she ought to have known of the mistake or that she had mere suspicions (BGH NJW 1995, 190, 191, translated and reproduced as case no. 86 in Markesinis/Unberath & Johnston (2006), pp. 771–773). The mistaken party has to exercise her right to avoidance without undue delay. This permits her to take (legal) advice and consider her right to avoidance as this is indicated under the circumstances of the individual case (BGH NJW 2005, 1869). Courts have regarded two weeks as the upper limit (OLG Hamm NJW-RR 1990, 523; see also BAG NZA 2004, 597, 599, translated and reproduced as case no. 84 in Markesinis/Unberath & Johnston (2006), pp. 764–770). It suffices that the declaration of avoidance is dispatched on time, i.e., the mistaken party does not bear the risk of delay during delivery of the notice of declaration. § 121(3) BGB provides for an absolute time limit of ten years, i.e. the limit applies regardless of whether the party becomes aware of the mistake. 3. Time limit in the case of deception or threats. In the case of deception the time limit commences when the party realizes her mistake and the deceptive behaviour of the other party. Mere suspicion or negligent ignorance does not suffice (BGH WM 1973, 750, 751 et seq.). Threats must have ceased to influence the free will of a party, that is, they must either have materialized already (RGZ 90, 411 et seq.) or their materialization cannot be assumed anymore from the perspective of the threatened person (RGZ 60, 371, 373 et seq.). From that point onward, the deceived or threatened party has a time limit of one year to exercise her right to avoidance. §§ 206, 210, and 211 BGB, which are referred to in § 124(2) BGB provide for a suspension of the time limit in the case of force majeure, in the case of persons who are not fully legally competent, and in inheritance cases. § 124(3) BGB stipulates an absolute time limit of ten years.

Comparison and Evaluation Article 4:113 PECL and Article II.-7:210 DCFR deploy a ‘reasonableness’ clause to stipulate a limitation period which is applicable for all grounds of avoidance. Only vague guidance is provided to flesh out this open-textured criterion. Additionally, neither provision contains an absolute time limit applicable while German law provides for a limit of ten years. Vagueness as to time limits may cause serious legal uncertainty. That is the reason why most European legal systems provide for set time limits (cf. Lando/Beale (2000), p. 276 Note 1). Moreover, the uncertainty is increased because not only the length of the time limit is determined by a ‘reasonableness’ clause

248

Chapter 4: Validity but also the starting point. In contrast, under German law the actual discovery of mistake, deception etc. is required. Given these three aspects it is doubtful whether Article 4:113 PECL and Article II.-7:210 DCFR achieve the aspired objective of security of transactions. In any event, German law provides for a much higher degree in legal certainty. The rather short time limit stipulated by § 121 BGB can be explained by the fact that §§ 119, 120 BGB do not require any wrongful conduct by the non-mistaken party for a right to avoidance. Since both Article 4:103 PECL and Article II.-7:201 DCFR take a different approach in this respect, longer time limits seem to be justified. The one year period provided for by § 124 BGB seems to be reasonable. It is true that quite a few European legal systems stipulate more generous time limits (cf. Lando/Beale (2000), p. 276 Note 1). However, the longer a period is allowed for an innocent party to exercise her right to avoidance, the greater is the risk that she will ultimately not exercise the right in order to cure the original defect of consent but for opportunistic reasons. That is, the party might wait and see if the business turns out to be profitable and finally exercise her right because she realizes she has made a bad bargain irrespective of the fact which actually substantiated her right to avoidance. In fact, rather long time limits may have the effect of providing an innocent party with an over-compensatory remedy. Yet as all legal grounds for avoidance contained in Chapter 4 PECL and Book II, Chapter 7 DCFR also cover mere negligent behaviour on part of the addressee of the notice of avoidance – particularly in the case of third party acts (see Article 4:111 PECL and Article II.-7:208 DCFR) – over-compensatory remedies are not justified. This factor may be considered to determine a ‘reasonable’ time limit in the sense of Article 4:103 PECL and Article II.-7:201 DCFR but since fixed time limits are to be preferred in the interest of legal certainty, a set limit of between six months and one year appears to be a superior solution. Given the concept of Article 4:110 PECL whereby a right to avoidance is deployed as a remedy in the case of unfair terms, it is conclusive to provide for an extended time limit such as provided for in Article 4:113(2) PECL. Parties’ rational ignorance of standard terms is indeed one of the underlying rationales of the judicial control of those terms. Moreover, the rule avoids legal disputes over terms which might be of no practical relevance with respect to the bargain in question. However, the problem addressed by Article 4:113(2) PECL is avoided in the first place if per se invalidity is the legal consequence of the unfairness of terms as provided in Article II.-9:409 DCFR and §§ 307 et seq. BGB.

Principles of European Contract Law Article 4:114: Confirmation If the party which is entitled to avoid a contract confirms it, expressly or impliedly, after it knows of the ground for avoidance, or becomes capable of acting freely, avoidance of the contract is excluded. 1. General. The provision restricts the right to avoid a contract. The underlying rationale is to protect a potential addressee of a notice of avoidance who relies on the

249

T. Ackermann & J.-U. Franck contract after the innocent party already confirmed that she considers the contract binding (see Lando/Beale (2000), p.277). Confirmation can be interpreted as an application of the general principle of good faith and fair dealing as it requires that a person who wants to exercise a right must not thereby contradict her own previous conduct provided that she induced reliance from the other party (prohibition of venire contra factum proprium or ‘estoppel principle’). 2. Confirmation according to Article 4:114 PECL. Confirmation requires no specific form. The innocent party must indicate either explicitly by notice or implicitly by conduct her intention to confirm the voidable contract. Confirmation in accordance with Article 4:114 PECL presupposes that the innocent party has actual knowledge of the facts which substantiate her right to avoidance. Moreover, any threats or undue pressure must have ceased in such a way that the innocent party has become capable of acting freely. 3. Confirmation beyond Article 4:114 PECL. As it is emphasized in the comment by reference to Article 2:102 (Intention) and Article 1:201 PECL (Good Faith and Fair Dealing), Article 4:114 PECL has not to be understood as an exhaustive rule on confirmation (Lando/Beale (2000), p. 277). In fact, the addressee of a declaration of avoidance may invoke the above mentioned principle of venire contra factum proprium or estoppel, respectively, even if the requirements of Article 4:114 PECL are not met. This may especially be the case if the innocent party was only negligently ignorant as to the facts which substantiated her right to avoidance and acted in a way which had to be understood by the other party as a confirmation of the contract. 4. Restriction as to Article 4:110 PECL. As it is already clarified by Article 4:113(2) PECL, a party who is confronted with an unfair term pursuant to Article 4:110 PECL may wait and see if this voidable term will actually be invoked against her. Therefore, her tacit performance of the contract may not be considered a confirmation (Lando/Beale (2000), p. 277).

Draft Common Frame of Reference Article II. – 7:211: Confirmation If a party who is entitled to avoid a contract confirms it, expressly or impliedly, after the period of time for giving notice of avoidance has begun to run, avoidance is excluded. The approach of the provision is similar to the one taken in Article 4:114 PECL. However, considering the reference to Article II.-7:210 DCFR (‘after the period of time for giving notice of avoidance has begun to run’) the concept is substantively broader since it embodies also cases where the avoiding party ‘could reasonably be expected to have known of the relevant facts’ which substantiate her right to avoidance. As explained above (sub 3), under the Principles these cases may only be covered by the general principle of good faith and fair dealing (Article 1:201 PECL).

250

Chapter 4: Validity German Law § 144 BGB: Confirmation of avoidable legal transaction (1) Avoidance is excluded if the avoidable legal transaction is confirmed by the person entitled to make the avoidance. (2) The confirmation does not need the form determined for the legal transaction. 1. General. According to § 144 BGB a party may waive her right to avoid the contract by confirmation. The rule applies in case of mistake (§§ 119, 120 BGB) and deception or threats (§ 121 BGB). The underlying rationale of § 144 BGB is to facilitate confirmation if a contract is not void but merely voidable. If a contract is invalid per se, e.g., in the case of usury or ‘usury-like’ contracts (§ 138 BGB), or if a party has already exercised her right to avoidance, a ‘confirmation’ of the contract amounts to a renewed conclusion of the contract according to § 141 BGB. The general principle of good faith and fair dealing (§ 242 BGB) cannot be invoked in addition to § 144 BGB. Otherwise the conditions for a confirmation of a voidable contract as stated in § 144 BGB and developed by subsequent case law could be circumvented. 2. Confirmation. It is widely assumed and also accepted by adjudication (see RGZ 68, 398, 399 et seq.) but not uncontested (see Busche, in Münchener Kommentar (2012), § 144 no. 4) that a confirmation is a declaration of will which does not have to reach the other party to become effective (cf. § 130 BGB). Yet this is counterbalanced by a high standard for a confirmation by conduct that is justified by the courts on the grounds that it must not offhand be assumed that a party would waive a right. Particularly, the time limit which is provided in § 124 BGB to consider the exercise of a right of avoidance must not be undermined by a generous application of § 144 BGB. It is held, therefore, that a party’s conduct must unequivocally reveal the intention to stick to the contract even though she has a right to avoidance. It must be possible to eliminate any other possible interpretation of a party’s conduct (see e.g., BGH NJW-RR 1992, 779, 780). 3. Knowledge of the right to avoidance. A confirmation is only held to be valid if the confirming party knew of her right to avoid the contract or at least took such a right into consideration (BGHZ 129, 371, 377). The mere knowledge of the facts which substantiate the right of avoidance does not suffice. The party must have had the conception that she is in a legal position to challenge the existence of the contract (see RGZ 128, 116, 119; cf. BGH NJW-RR 1990, 817, 819 where it is expressly required that the party knew of her right to avoidance). 4. Threats. If a contract is voidable because of threats, only conduct which occurs after the coercive situation has ceased and after the party has regained her ability to act freely may be considered an implicit confirmation (BAG AP § 123 Nr. 16).

251

T. Ackermann & J.-U. Franck Comparison and Evaluation The provisions on confirmation take broadly the same approach. However, a closer look reveals that both under the Principles and the DCFR the protection of the reliance interest of the potential addressee of a declaration of avoidance has been given a much stronger weight. By contrast the requirements under German law are significantly stricter particularly with regard to an implicit confirmation. To assume a confirmation under § 144 BGB it is nowhere near enough that a party ‘could reasonably be expected to have known of the relevant facts’ (Article II.-7:210 DCFR) which substantiate her right to avoidance. Rather, she must not only have been aware of the underlying facts but must have also deduced her right of avoidance from these facts. This strict approach seems to be justified given the need for legal protection which is the reason why a party has been granted a right of avoidance in the first place.

Principles of European Contract Law Article 4:115: Effect of Avoidance On avoidance either party may claim restitution of whatever it has supplied under the contract, provided it makes concurrent restitution of whatever it has received. If restitution cannot be made in kind for any reason, a reasonable sum must be paid for what has been received. 1. General. Though the Principles do not expressly stipulate that avoidance renders a contract invalid, this consequence is stated in comment A in which also the retroactive effect of avoidance is specified (Lando/Beale (2000), pp. 277–278). If performances have already been exchanged in reliance on the contract, these have to be restored. As the Principles do not contain general rules on the restitution of unjustified enrichments, Article 4:115 PECL sets up a rudimental regime for rescission of contracts which is integrated into the law of contract. 2. Restitution. As a general rule, restitution should be made in kind. There are, however, basically three situations where this option is not available. First, an innocent third party may have acquired property rights (Lando/Beale (2000), pp. 277–278 Comment A). Second, when property has been destroyed or at least used up, it cannot be restored in the same condition as when it was transferred. As is expressly stated in note 3, such impossibility does not bar avoidance (Lando/Beale (2000), pp. 278–279). Finally, if services were performed, restitution in kind is not conceivable from the outset. In those cases, ‘a reasonable sum’ (Lando/Beale (2000), pp. 277–278 Comment A) must be paid. A reference to the general standard of ‘reasonableness’ as stated in Article 1:302 PECL is not particularly helpful to clarify questions in this regard, e.g., whether the market value of a performance or the costs actually borne by the party should be the decisive factor (cf. Iamiceli, in Antonielli/Veneziano (2005), p. 236). At this point, one has simply to accept that the Principles are not concerned with the problem of how the value is to be calculated (Lando/Beale (2000), p. 278 Note 1).

252

Chapter 4: Validity 3. Right to withhold performance. Article 4:115 PECL contains an express rule of reciprocity whereby a party may only claim restitution if she also offers restitution of received benefits to the other party. This corresponds to the ius commune principle of restitutio in integrum est reciproca (Zimmermann (2005c), p. 721). 4. Transferred property. The Principles leave open questions as to the legal consequences in respect of transferred property. This concerns the problem of whether avoidance triggers an automatic re-transfer of exchanged property or results merely in a personal right to restitution, a point which is of particular importance in the case of bankruptcy of one party (see Lando/Beale (2000), p. 278 Note 2). Moreover, the Principles deal neither with the position of third parties who may claim an interest in the property (Lando/Beale (2000), p. 278 Note 2) nor with the risk of accidental destruction of the property after the date of transfer but before the contract has been avoided (see Lando/Beale (2000), pp. 278–279 Note 3). Thus, the wording in the second sentence of Article 4:115 PECL which seems to indicate that the enrichment debtor has to bear that risk (‘for any reason’) must not be interpreted as making a reference to this (see Zimmermann (2005c), p. 722).

Draft Common Frame of Reference Article II. – 7:212: Effects of avoidance (1) A contract which may be avoided under this Section is valid until avoided but, once avoided, is retrospectively invalid from the beginning. (2) The question whether either party has a right to the return of whatever has been transferred or supplied under a contract which has been avoided under this Section, or a monetary equivalent, is regulated by the rules on unjustified enrichment. (3) The effect of avoidance under this Section on the ownership of property which has been transferred under the avoided contract is governed by the rules on the transfer of property. Article VII. – 1:101: Basic rule (1) A person who obtains an unjustified enrichment which is attributable to another’s disadvantage is obliged to that other to reverse the enrichment. (2) […] Article VII. – 2:101: Circumstances in which an enrichment is unjustified (1) An enrichment is unjustified unless: (a) the enriched person is entitled as against the disadvantaged person to the enrichment by virtue of a contract […]; or (b) the disadvantaged person consented freely and without error to the disadvantage.

253

T. Ackermann & J.-U. Franck (2) If the contract […] referred to in paragraph (1)(a) is void or avoided or otherwise rendered ineffective retrospectively, the enriched person is not entitled to the enrichment on that basis. (3) […] (4) An enrichment is also unjustified if: (a) the disadvantaged person conferred it: (i) for a purpose which is not achieved; or (ii) with an expectation which is not realised; (b) the enriched person knew of, or could reasonably be expected to know of, the purpose or expectation; and (c) the enriched person accepted or could reasonably be assumed to have accepted that the enrichment must be reversed in such circumstances. Article VII. – 2:103: Consenting or performing freely (1) If the disadvantaged person’s consent is affected by incapacity, fraud, coercion, threats or unfair exploitation, the disadvantaged person does not consent freely. (2) […] Article VIII. – 2:202: Effect of […] subsequent avoidance […] (1) […] (2) Where, after ownership has been transferred, the underlying contract or other juridicial act is avoided under Book II, Chapter 7, ownership is treated as never having passed to the transferee (retroactive proprietary effect). (3)–(4) […] Article VIII. – 6:101: Protection of ownership (1) The owner is entitled to obtain or recover possession of the goods from any person exercising physical control over these goods, unless this person has a right to possess the goods in the sense of VIII. – 1:207 (Possession by limited-right-possessor) in relation to the owner. (2)–(3) […] Article VIII. – 6:102: Recovery of goods after transfer based on […] avoided contract […] (1) Where goods are or have been transferred based on a contract […] which is […] avoided, the transferor may exercise the right of recovery under paragraph (1) of the preceding Article in order to recover physical control of the goods. (2) Where the obligation of the transferee to restore the goods to the transferor, after a transfer based on an […] avoided contract […], is one of two reciprocal obligations which have to be performed simultaneously, the transferee may, in

254

Chapter 4: Validity accordance with III. – 3:401 (Right to withhold performance of reciprocal obligation), withhold performance of the obligation to restore the goods until the transferor has tendered performance of, or has performed, the transferor’s reciprocal obligation. (3) […] Article VIII. – 7:101: Scope (1) This Chapter applies where the situations covered by the subsequent Articles occur while the goods are possessed by a person against whom, at that time, the owner is entitled to obtain or recover possession of the goods. (2)–(3) […] Article VIII. – 7:102: Loss of, or damage to, the goods during possession (1) Where the goods are lost, are destroyed or deteriorate during possession in the sense of VIII. – 7:101 (Scope), the rights of the owner resulting from such loss or damage are determined by Book VI. (2) For the purposes of this Article, intention or negligence as to possessing the goods despite the owner’s entitlement to obtain or recover possession suffice to establish accountability in the sense of Book VI, Chapter 3. 1. General. Article II.-7:212(1) DCFR states that an avoided contract is invalid ab initio. The DCFR provides two sets of rules for rescission of avoided contracts. The provisions on unjustified enrichment (Articles VII.-1:101 et seq. DCFR) serve as a general regime. It follows from the wording (‘whether’) that Article II.-7:212(2) DCFR not only refers to the legal consequences but also to the conditions of a claim resulting from unjustified enrichment. If property has been transferred under the avoided contract, certain provisions of Book VIII are of importance: First, in Article VIII.-2:202 DCFR the retroactive proprietary effect of avoidance is stipulated. Second, Articles VIII.-6:101 et seq. DCFR governs the recovery of possession of goods (rei vindicatio). Finally, Articles VIII.-7:101 et seq. DCFR are concerned with consequential questions on restitution of goods, e.g., remedies in the case of loss or damage to goods. Rights arising under provisions in Book VIII DCFR concur with those under the regime of unjustified enrichment (see Article VII.-7:101(2)(3) DCFR). 2. Rescission under the rules on unjustified enrichment. If performances have been exchanged under a contract which was subsequently avoided, typically either party has been enriched (see Article VII.-3:101 DCFR) to the other party’s disadvantage (see Article VII.-3:102 DCFR), and therefore, three elements of a claim under Article VII.-1:101 DCFR (enrichment, disadvantage, and attribution of the one to the other) are given. The question remaining is whether the enrichment is unjustified according to Article VII.-2:101 DCFR. With regard to the party who has exercised a right to avoidance this can typically be answered in the affirmative. First, as expressly stated

255

T. Ackermann & J.-U. Franck in Article VII-2:101(2) DCFR, an avoided contract does not justify anymore the enrichment of the other party. Second, the avoiding party either did not consent ‘freely’ to the disadvantage (see the corresponding definition in Article VII.-2:103 DCFR which effectively covers the grounds for avoidance under Article II.-7:205: Fraud, II.-7:206: Coercion or threats, and II.-7:207 DCFR: Unfair exploitation) or she did not consent ‘without error’ (see Article II.-7:201 DCFR: Mistake). Hence, if a party has a right to avoidance the enrichment conferred by her upon the other party is normally unjustified according to Article VII.-2:101(1) DCFR and the other party will be obliged to reverse the enrichment. The addressee of a notice of avoidance on the other hand can typically not invoke this provision as she consented ‘freely’ and ‘without error’ to the disadvantage (Article VII.-2:101(1)(b) DCFR) with the notable exception of a mutual mistake. Her misprediction in respect of the fact that the other party would subsequently avoid the contract does not amount to an ‘error’ within the meaning of Article VII.-2:101(1)(b) DCFR (cf. Swann (2006) p. 239) since it concerns only a future event whereas an ‘error’ must be as to a present matter (von Bar/Clive (2009), p. 3904). Mere mispredictions may at most be covered by Article VII.-2:101(4) DCFR. However, a party against whom avoidance is sought may arguably not rely on this provision either. It is certainly possible to subsume the constellation of an avoided contract under the wording of this provision, given that first, the party against whom avoidance is sought conferred the enrichment only for the purpose of fulfilling her contractual obligations or to obtain the counter-performance, respectively; second, the avoiding party was aware of this fact; and third, it must reasonably be assumed that the avoiding party accepted that the enrichment must be reversed in the case that the contract is avoided. This should not though come as a surprise as the text of Article VII.-2:101(4) DCFR is meant to comprise situations where services, for example, were provided under a valid (and not voidable) contract (von Bar/Clive (2009), p. 3876) but based on a frustrated expectation of wider benefits such as a transfer of a share of the family business (Swann (2006) p. 239). However, to apply Article VII.-2:101(4) DCFR to cases where the enrichment had been transferred based on a contract which subsequently has been avoided by the other party would open the door to by-passing the conditions laid down in Article VII.-2:101(1) DCFR which seem exactly to provide for the rescission of avoided contracts, and unduly broaden the scope of Article VII.-2:101(4) which appears to comprise only cases which are traditionally covered by the condictio causa data causa non secuta or condictio ob rem (Wendehorst (2006), p. 247). Thus, without any further clarification the conclusion remains that the addressee of a notice of avoidance may typically not claim back her performance under the law of unjustified enrichment (Wendehorst (2008), p. 237). Book VII of the DCFR contains elaborate provisions on the legal consequences of a claim for unjustified enrichment. Particularly, it is stipulated that in cases of non-transferable enrichments, notably if a service has been provided, in principal the monetary value has to be paid (Article VII.-5:102(1) DCFR), which is further qualified in Article VII.-5:103(1) DCFR. Detailed rules on ‘disenrichment’ can be found in Article VII.-6:101 DCFR. Roughly speaking, the obligation to reverse an enrichment lapses or is at least limited

256

Chapter 4: Validity to an obtained substitute if the enriched person was in good faith at the time of the disenrichment, that is, she neither knew nor could reasonably be expected to have known that the enrichment was or was likely to become unjustified (Article VII.-5:101(5) DCFR). If she was not in good faith, she may nevertheless invoke disenrichment according to Article VII.-6:101(2)(b) DCFR if disenrichment would also have occurred if the enrichment had been reversed (i); or if the enriched person was in good faith at the time of enrichment, the disenrichment was sustained before performance of the obligation to reverse the enrichment was due and the disenrichment resulted from the realization of a risk for which the enriched person is not to be considered responsible (ii). It is crucial to note, however, that claims for unjustified enrichment will be only of minor practical importance in respect of goods that had to be reversed and which have been destroyed or disposed of. Given the retroactive proprietary effect of avoidance, under unjustified enrichment the disadvantaged party is entitled only to recover possession of the good (condictio possessionis) according to Article VII.-5:101 (3) DCFR, and to claim the monetary value for the benefit of use of the good (see Article VII.-3:101(1)(a); VII.-5:102 DCFR; cf. Article VIII.-7:103 DCFR). If the good has been destroyed or disposed of before the contract has been avoided, neither the proprietary value nor the proceeds of a sale may be obtained since they have to be regarded as substitutes of the proprietorship, not the possessorship of the good (Wendehorst (2008), p. 225 no. 22 and p. 240). The debtor may only be obliged to compensate for a lost value for the benefit of use of the good (Article VII.-5:101(3) DCFR). 3. Rescission of transferred property (‘revindication’). Where a party avoids a contract, ownership is treated as never having passed. As a consequence of this so-called ‘retroactive proprietary effect of avoidance’ (Article VIII.-2:202(2) DCFR), possession of goods which have been transferred under an avoided contract may be recovered according to Article VIII.-6:101(1), VIII.-6:102 DCFR. Article VIII.-2:202(4) DCFR stipulates that the proprietary claim does not affect any rights to recover the goods in question on an obligatory basis, particularly under contract law or the law of unjustified enrichment. A right to withhold performance on the basis of a rule of reciprocity is provided for in Article VIII.-6:102(2) DCFR. Likewise, as a result of the retroactive proprietary effect, cases of goods transferred under an avoided contract fall within the scope of Articles VIII.-7:101 et seq. DCFR (DCFR (2009) pp. 5310 et seq.). Of particular interest in this regard is Article VIII.-7:102(1) DCFR where it is stated that an owner may have a right to reparation under Book VI in the case of loss of, or damage to a transferred good caused by the (unlawful) possessor (see Article VI.-1:101, VI.-2:206 DCFR). Pursuant to Article VIII.-7:102(2) DCFR, intention or negligence as to the possessing of a good despite the owner’s entitlement to recover possession suffices to establish accountability. On the one hand this has to be understood as a protective mechanism for the benefit of persons who obtain ownership under a voidable contract and as a choice against a general strict liability approach. As long as such ‘owner-possessors’ (Article VIII.-1:206 DCFR) are in good faith as to the possessing of the good, they are not liable for any loss of, or damage inflicted upon the good. On the other hand, as soon as an owner-possessor could

257

T. Ackermann & J.-U. Franck reasonably be expected to know that the contract under which ownership was transferred was voidable, she may be regarded as acting negligently as to the possessing of the good. Since Article VIII.-7:102(2) DCFR expressly stipulates that this ‘suffices to establish accountability in the sense of Book VI. Chapter 3’, from that point on this person will be strictly liable for any damage inflicted upon the transferred good. The comment on the DCFR emphasize that this liability for fortuitous events is mitigated by two rules of Book VI. First, pursuant to Article VI.-4:101 DCFR, a possessor in bad faith is not liable for damages due to a lack of loss causation in cases where the damage would have occurred in the same way if the goods had remained in the possession of their rightful owner. Second, particularly if a possessor is only slightly negligent as to her right to possess the good, liability might be reduced according to the general ‘fairness’ and ‘reasonability’ clause in Article VI.-6:202 DCFR (von Bar/Clive (2009), pp. 5323 et seq.).

German Law § 142 BGB: Effect of avoidance (1) If an avoidable legal transaction is avoided, it is to be regarded as void from the start. (2) A person who knew of the avoidability or ought to have known of it will, when the avoidance occurs, be treated as if he had known of the invalidity of the transaction or ought to have known of it. § 812 BGB: Claim to handing over (1) A person who obtains something without a legal ground by the performance of another or in some other way at his cost is obliged to hand it over to him. […] § 814 BGB: Knowledge of absence of obligation What is provided for the purpose of fulfilment of an obligation cannot be demanded back if the person making the performance knew that he was not obliged to make it or if the performance corresponded to a moral duty or regard to propriety. § 818 BGB: Scope of claim for enrichment (1) The duty to hand over extends to the benefits derived as well as to what the recipient obtains on the ground of an acquired right or as compensation for the destruction, damage or removal of the object obtained. (2) If handing over is not possible because of the nature of what is obtained or if the recipient is on some other ground not in a position to hand over, he must compensate for its value. (3) The duty to hand over or to compensate for value is excluded in so far as the recipient is no longer enriched.

258

Chapter 4: Validity (4) From the point in time when the case becomes pending the recipient is liable in accordance with the general provisions. § 819 BGB: Increased liability in case of knowledge and violation of statute law or morals (1) If the recipient knows of the absence of the legal ground at the time of receipt or if he discovers it later, he is obliged to hand over from the time of receipt or the obtaining of knowledge as if the claim to handing over had become pending at this time. (2) If the recipient violates a statutory prohibition or good morals by acceptance of the performance, he is under the same obligation from receipt of the performance onwards. 1. General. According to § 142(1) BGB an avoided contract is set aside ab initio (ex tunc). An exception has been stipulated in the case law with respect to some (but not all) long-term contractual relationships such as partnerships or labour contracts as soon as the parties have acted in reliance on these contracts. Since a rescission of the execution of such contractual relationships would be exceedingly difficult as typically innumerable actions have already been undertaken in reliance on their existence, it is generally recognized in the interest of legal certainty and for the protection of third parties that such agreements cannot be avoided ab initio but only from now on (ex nunc) (see Busche, in Münchener Kommentar (2012), § 142 no. 17). The rules on unjustified enrichment (§§ 812 et seq. BGB) serve as a general scheme for unwinding avoided as well as void contracts. There is some case law according to which the rules on benevolent intervention in another’s affairs under §§ 677 et seq. BGB were employed to unwind void contracts where services were provided by one party (notably in cases of void construction contracts, e.g., BGH NJW 1993, 3196). This has been widely criticized with the consideration that §§ 812 et seq. BGB contain an overriding and better equipped set of rules for rescission of void contracts (see Seiler, in Münchener Kommentar (2012), § 677 no. 48). There is, however, no adjudication applying §§ 677 et seq. BGB instead of §§ 812 et seq. BGB with regard to service contracts avoided for mistake (§ 119 BGB), deception or threats (§ 123 BGB). Due to the principles of separation and abstraction which are a peculiarity of German contract law (see Markesinis/Unberath & Johnston (2006), pp. 27–37), the avoidance of a contract of obligation (Verpflichtungsgeschäft, or ‘obligation contract’), e.g., a contract of sale, will not per se affect the validity of the agreement which actually transferred the ownership of the sold goods (Verfügungsgeschäft, or ‘disposition contract’). Therefore, as the transfer of ownership remains valid, the proprietorship must be reclaimed under § 812(1) BGB. However, in some circumstances the grounds for avoidance may also concern the transfer of ownership (cases of so-called Fehleridentität, or ‘identity in defect’). This will typically be the case when a party was induced to entering into a contract of obligation by deception or by threat, and the

259

T. Ackermann & J.-U. Franck transfer of ownership under this contract occurred still under the influence of deception or threats. It is disputed among legal scholars whether an avoidance of transfer of ownership may also be taken into consideration when the contract of obligation is voidable due to a mistake as to the quality of the subject-matter or the person pursuant to § 119(2) BGB (see Roth, in Staudinger (2010), § 142 no. 22). Avoidance of the disposition agreement has the effect that ownership is treated as never having passed to the transferee. Consequently, the rules of §§ 985 et seq. BGB come into play as rescission regulations for avoided contracts. Moreover, a party who was unfairly exploited pursuant to § 138 par. 2 BGB may also invoke § 985 BGB to claim back property she transferred in fulfilling a void contract. Finally, it is worth noting that claims for damages may concur with claims under §§ 812 et seq. BGB or §§ 985 BGB et seq. in unwinding avoided contracts. Hence, for example, a party against whom avoidance is sought on grounds of mistake (§ 119 BGB) may claim back her performance as an element of damages under § 122 BGB, and parties who were victims of fraud or threats may also invoke a tort law remedy under § 823(2) BGB in connection with § 263 StGB and § 240 StGB respectively, to claim back their performances. 2. Rescission under the rules on unjustified enrichment. When a contract has been avoided parties are obliged to return the benefits received according to § 812(1) 1, 1st alternative BGB (condictio indebiti) because the performance was made without any legal grounds ab initio (BGH NJW-RR 1993, 1463; but see also BGH NJW 2008, 1878, 1879). The reciprocity of the parties’ respective remedies in restitution follows from § 273 BGB. If a party knew at the time when she performed the contract that she had a right to avoidance and therefore could have avoided her obligation, she may not claim back her performance (§§ 814, 142(2) BGB). This exclusionary rule does not apply, however, where a party who performs is aware of the fact that the receiving party may avoid the contract but has not yet exercised her right to do so. That is because under these circumstances she is still obliged to perform (see BGH NJW 2008, 1878, 1879). If restitution in kind is impossible, e.g., in case of services supplied, the other party has to be compensated at market prices pursuant to § 818(2) BGB. If a recipient is no longer enriched, the obligation to hand back received performances or to compensate for their value is excluded according to § 818(3) BGB. However, only innocent parties may invoke disenrichment. Once a restitutionary claim becomes pending (§ 818(4) BGB) or if a recipient is aware of the voidability of the contract (§§ 819(1), § 142(2) BGB) she is liable for any damage negligently caused (§§ 292, 989 BGB). In so-called synallagmatic contracts, that is, where both parties have exchanged performances which have to be restored, adjustments apply to the rule of disenrichment (§ 818(3) BGB) if one party is no longer in a position to return a benefit she has received. According to the case law of the Reichsgericht (the leading case is RGZ 54, 137, 142) followed later by the Bundesgerichtshof (see e.g., BGHZ 145, 52, 55) the loss of a party that cannot retrieve her performance since her counterpart may invoke disenrichment (§ 818(3) BGB) is set off ipso facto with the performance she has in hand and which is claimed back by the other party (so-called Saldotheorie). Hence, in

260

Chapter 4: Validity practice it is generally the enrichment debtor who bears the risk of accidental loss (or destruction) of whatever she has received. However, under certain circumstances, e.g., if a contract is voidable because of deception or threats (§ 123 BGB) or void because of usury (§ 138(2) BGB), the Saldotheorie does not apply and, thus, the innocent party may claim back her performance – typically the paid price – even though she is not in a position to hand back the received performance (see e.g., BGHZ 146, 298, 307). 3. Claims arising from ownership (‘revindication’). Where the disposition contract, i.e., the agreement which transferred ownership of a good, has been avoided, ownership is treated as never having passed to the transferee. As a consequence, the original owner is entitled to recover possession according to § 985 BGB (rei vindicatio). Liability of possessors who acted in good faith is significantly restricted. A possessor acts in bad faith where a legal action to recover possession from her is already pending (see §§ 987, 990 BGB) or where she knows that she has no right to possess the good or where she is grossly negligent as to her right to possession (cf. § 932(2) BGB). For this second alternative to be fulfilled it suffices, for example, that a possessor was grossly negligent in ignoring the other party’s right to avoidance (see § 142(2) BGB). Owner-possessors acting in good faith have only to return the fruits taken insofar as in accordance with the rules of proper management they are not to be considered as the proceeds of the good. Apart from this, the possessor who is in good faith is neither obliged to return benefits derived from the possessed good nor to pay damages, or make any other kind of restitution (§ 993(1) BGB). A possessor who is in bad faith must return benefits derived from the goods during possession (§ 987 BGB) and must compensate the owner for damage inflicted negligently upon the good (§ 989 BGB). Further liability under tort law may only arise according to § 992 BGB if the possession has been obtained by unlawful interference with possession or by a criminal offence, e.g., by fraud pursuant to § 263 StGB. Detailed provisions with regard to expenditures on goods during possession are contained in §§ 994–1003 BGB.

Comparison and Evaluation Whereas the Principles comprise only a rudimental provision on the rescission of avoided contracts which particularly leaves open the legal consequences as to property transferred under an avoided contract, both the DCFR and the BGB contain two elaborated sets of rules in this regard, namely provisions on unjustified enrichment and claims arising out of ownership. Moreover, the Principles, the DCFR, and the BGB each contain (at least) one more set of rules for unwinding failed contracts which is concerned with the termination of the contract in cases of breach of contractual obligations, partly also with cases when a right of withdrawal protecting the consumer is exercised (see Articles 9:305 et seq. PECL, Articles III.-3:510 et seq. DCFR, and §§ 346 et seq. BGB). It is hard to justify such a multitude of legal regimes for avoidance and termination. There is no principle argument as to why the rules for unwinding a contract should distinguish between contractual relationships that fail because of a factor which occurs in the course of concluding the contract and those which fail

261

T. Ackermann & J.-U. Franck because of subsequent conduct. Based on this insight, German legal scholars have undertaken extensive efforts to synchronize the rescission of contracts under the rules on unjustified enrichment with the rules on termination. Indeed, differentiation as to the grounds for unwinding a contract may be required, but if a lesson could be learnt from German law, it appears to be preferable for a modern legal system to devise a fundamentally uniform regime for unwinding failed contracts (Zimmermann (2005c), pp. 728 et seq., 733 et seq.). However, also if one only considers the double-track regime currently provided by the DCFR and German law on the unwinding of avoided contracts, is seems difficult to explain the apparent lack of coherence. Typically, a creditor is in a significantly better position if she has a claim arising from ownership. This is particularly apparent if the other party goes bankrupt but can also be seen as, for example, the debtor may not invoke disenrichment (Article VII.-6:101 DCFR; § 818(3) BGB) or illegality (Article VII.-6:103 DCFR; cf. § 814 BGB and § 817 BGB) against a proprietary claim. The fact that fraud, threats and unfair exploitation as grounds for avoidance or invalidity per se are ‘strongly tainted’ in contrast to mistake (note 2 at Article 4:115 PECL) may explain the differentiation under German law. Under the DCFR such a distinction is avoided since Article VIII.-2:202 DCFR stipulates a retroactive proprietary effect which is applicable to all grounds for avoidance. Yet under the regime provided for in the DCFR a dividing line seems to remain between parties who sell goods and those who provide services (which also exists under German law but is of less significance there). Where a customer avoids a contract because of fraud, a seller is entitled to recover delivered goods under Article VIII.-6:101 DCFR. Under the same circumstances, a service provider has arguably no right at all to restitution under Articles VII.-1:101 et seq. DCFR since the enrichment of the customer is not ‘unjustified’ pursuant to Article VII.-2:101 DCFR. However, such a rigorous denial of any restitutionary remedy appears to be a disproportionate consequence in contrast to the more favourable position of a seller of goods and compared with the rules on the unwinding of contracts pursuant to Articles III.-3:511 et seq. DCFR (Wendehorst (2008), p. 237). Under German law, a complete denial of restitution may only be a consequence if a party fulfilled a contract knowing that she was not obliged to do so – whereupon it does not suffice that she was aware of a right to avoidance by the receiving party (§ 814 BGB) – or if the fulfilment of a contractual obligation violated statute law or good morals (§ 817 BGB). Finally, it should be noted that the liability of a possessor for damage inflicted upon a good according to Article VIII.-7:102(2) DCFR is rather harsh since negligence as to a right to possession triggers strict liability for damage inflicted upon the good. In contrast, liability under §§ 989, 990 BGB is less severe since first, ‘bad faith’ on the side of the possessor requires gross negligence as to the right to possession, and second, a possessor in bad faith is only liable for negligent acts. The comment to Article VIII.-7:102(2) DCFR respond to such criticism by referring to the option to reduce liability pursuant to the general ‘fairness’ rule of Article VI.-6:202 DCFR (von Bar/Clive (2009), Comment C on Article VI.-6:202 DCFR). Yet if the drafters of the DCFR have indeed realized that liability under Article VIII.-7:102(2) DCFR is disproportionate, especially where owner-possessors are only slightly negligent as to their right to

262

Chapter 4: Validity possession (see von Bar/Clive (2009), pp. 5323 et seq.), it is not clear why they did not address the problem at its roots.

Principles of European Contract Law Article 4:116: Partial Avoidance 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. 1. General. If invoked grounds for avoidance are only related to a part of a contract, as a matter of principle the other parts of the contract are not voidable. This rule is meant to protect the addressee of a notice of avoidance against the risk that the innocent party uses a minor mistake as an excuse to set aside the entire agreement for opportunistic reasons (see Lando/Beale (2000), pp. 279–280 Comment B). It is, therefore, up to the party who seeks to avoid an entire contract to show that it would be unreasonable to uphold remaining parts of the contract. If a party avoids an unfair clause according to Article 4:110 PECL the remaining terms of the contract remain valid pursuant to that provision; that is, there is no need for a reference to Article 4:116 PECL (see Lando/Beale (2000), p. 279 Comment A at Article 4:116 and Lando/Beale (2000), p. 270 Comment H at Article 4:110 PECL). 2. Reasonableness test and gap-filling. Reasonableness must be assessed according to the standard stated in Article 1:302 PECL. An important criterion in this respect is the new balance of the contractual duties which appears after the partial avoidance of the agreement. As a consequence of the tendency of Article 4:116 PECL towards upholding the contract, the mere fact that an avoided term was necessary to ensure the purpose of the contract does not necessarily suffice to trigger voidability of the entire contract. Rather, one should first seek to find terms to substitute the avoided terms if the contract would otherwise be incomplete. Though the Principles remain silent on the aspect of gap-filling, it should be understood that gaps remaining in a contract should be filled in primarily by way of ‘completive’ interpretation or implying a term in fact respectively (see Markesinis/Unberath & Johnston (2006), pp. 140 et seq.). That is, primarily one should seek to draw as far as possible conclusions from the parties’ actual intentions to find terms on which the parties would have agreed had they actually foreseen the partial avoidance. Yet, particularly in cases of fraud or threats it might not be possible (or not appropriate for preventive reasons) to find completing terms according to such a hypothetical intention of the parties. It should be stressed that under those circumstances courts must not insert terms which they consider reasonable. Instead, secondarily default rules of contract law may step in to complete an agreement (see Wolf (2000), p. 128). If no terms by way of ‘completive’ interpretation can be inserted and the default rules are not sufficient to ensure that the contractual purpose is achieved, it would be unreasonable to maintain the contract. Moreover, if a completed contract would

263

T. Ackermann & J.-U. Franck provide one party with a disproportionate advantage it is also unreasonable to uphold the agreement (see Lando/Beale (2000), pp. 279–280 Illustration 3). It is suggested in comment B that the behaviour of the party against whom avoidance is sought should be considered with regard to the ‘reasonableness’ test (Lando/Beale (2000), pp. 279–280). It is proposed that in cases of fraud or duress the wishes of an innocent party should be more willingly considered (Lando/Beale (2000), pp. 279–280 Comment B).

Draft Common Frame of Reference Article II. – 7:213: Partial avoidance If a ground of avoidance under this Section 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. The provision mirrors Article 4:116 PECL and therefore needs no further comment.

German Law § 139 BGB – Partial invalidity If part of a legal transaction is void, the whole transaction is void unless it can be assumed that it would have been undertaken even without the void part. 1. General. A party may declare avoidance as to a part of the contract only if the contract is still conceivable as a self-contained agreement without the avoided parts. This has to be assessed objectively with no regard to the subjective intentions of the parties. Whether the non-avoided parts of the contract may remain valid is a different question which has to be decided in accordance with the legal consequences stated in § 139 BGB (RGZ 146, 234, 236; BGH DNotZ 1984, 684, 685 et seq.). The provision is not specifically tailored to cases of voidability but applies to all grounds for nullity, that is, also in the case of usury or ‘usury-like’ contracts (§ 138 BGB). There is quite a collection of statutory exceptions according to which partial nullity does not entail nullity of the whole agreement, notably § 306 BGB which applies in cases of unfair terms not individually negotiated. 2. Presumption of overall voidness. § 139 BGB stipulates the presumption that avoidance of a part of a contract will result in invalidity of the entire agreement. However, the contract may be upheld if a reason for avoidance effects only parts of the contract and if it may be derived from the hypothetical will of the parties that they would have preferred to uphold the remaining contract if they had foreseen the partial invalidity. The burden of proof is on the party who wants to maintain the contract. § 139 BGB is a default rule, that is, parties may agree on a clause whereas the voidability of a part of the contract does not affect the validity of the entire agreement.

264

Chapter 4: Validity Comparison and Evaluation § 139 BGB stipulates a reverse rule/exception relationship as compared to Article 4:116 PECL and Article II.-7:213 DCFR. The German provision rests on the consideration that private autonomy is best protected this way as it effectively prevents a party being able to be bound by an agreement under terms which she has never intended to agree to. However, the number of statutory exceptions and the jurisprudence which broadly disregards § 139 BGB cast serious doubt as to whether this principle is indeed convincing. In German legal scholarship the scepticism towards that approach prevails. It is widely considered to be a superior concept – also in the light of the objective to protect party autonomy – to fill gaps in a contract which are caused by nullified or avoided terms in accordance with the (hypothetical) intention of the parties (see Busche, in Münchener Kommentar (2012), § 139 no. 2). As we have seen, such a concept is basically adopted by the Principles. The notion of a preferential treatment of parties which are the victims of fraud or duress as suggested by the comment to the Principles in Lando/Beale (2000) is not convincing. To consider the grounds for avoidance as a factor for the reasonableness of maintaining the contract may in fact amount to a toleration of opportunistic behaviour by innocent parties and therefore, to an over-compensatory compensation. This is generally not acceptable since all legal grounds for avoidance contained in Chapter 4 PECL and Book II, Chapter 7 DCFR – including fraud and threats – cover also mere negligent behaviour on the part of the party against whom avoidance is sought, particularly in the case of third party acts (see Article 4:111 PECL and Article II.-7:208 DCFR). Having said that, there may well be good reasons not to admit ‘completive’ interpretation for preventive reasons as is, for example, recognized under German law in the case of unfair terms not individually negotiated (above §§ 305 et seq. BGB no. 5).

Principles of European Contract Law Article 4:117: Damages (1) A party which avoids a contract under this Chapter may recover from the other party damages so as to put the avoiding party as nearly as possible into the same position as if it had not concluded the contract, provided that the other party knew or ought to have known of the mistake, fraud, threat or taking of excessive benefit or unfair advantage. (2) If a party has the right to avoid a contract under this Chapter, but does not exercise its right or has lost its right under the provisions of Articles 4:113 or 4:114, it may recover, subject to paragraph (1), damages limited to the loss caused to it by the mistake, fraud, threat or taking of excessive benefit or unfair advantage. The same measure of damages shall apply when the party was misled by incorrect information in the sense of Article 4:106. (3) In other respects, the damages shall be in accordance with the relevant provisions of Chapter 9, Section 5, with appropriate adaptations.

265

T. Ackermann & J.-U. Franck 1. General. Article 4:117 PECL stipulates pre-contractual liability in the case of mistake, fraud, threat or taking of excessive benefit or unfair advantage but not in the case of unfair terms which were not individually negotiated. The underlying rationale is that the avoidance of a contract alone may not suffice to protect the interests of an aggrieved party (comment A). Therefore, the restitutionary claim under Article 4:115 PECL and the compensatory claim under Article 4:117 PECL concur to put the aggrieved party into a position she would have been in if she had not entered into the contract in the first place. Article 4:117 PECL distinguishes between cases where the right of avoidance has been exercised (paragraph (1)) and cases where the requirements for a right to avoidance under Chapter 4 have been met but the party does not want or can no longer avoid the contract (paragraph (2)). Claims for damages under Article 4:106 PECL are contained in the second paragraph (cf. the reference to Article 4:117(2) and (3) PECL in Article 4:106 PECL). 2. Fault. Intention or negligence is required to establish liability under Article 4:117 PECL. The condition is of relevance since fault on the part of the addressee of a notice of avoidance is not necessarily required to establish a right of avoidance, namely in the case of mutual mistake (see Article 4:103(1)(a)(iii) PECL) or in the case of a defect triggered by a third party without the knowledge or negligent ignorance of the counterparty (see Article 111(2) final part PECL (‘has not acted in reliance on the contract’)). 3. Measure of damages in addition to avoidance. Under Article 4:117(1) PECL the avoiding party may claim her reliance interest, that is, she is entitled to recover the necessary compensation to put her in the position she would be in without having concluded the contract. This includes expenditures related to the conclusion of the contract (e.g., notary fees), expenditures in connection with the performance of the contract (e.g., costs of transportation) but also business opportunities missed in reliance on the contract, that is, the lost chance to conclude an alternative contract (Lando/Beale (2000), p. 282 Illustration 5). The aggrieved party may not, however, claim compensation for non-performance (i.e., her expectation interest) since the party who violates a pre-contractual duty which results in a defect with the other party typically does not give a contractual undertaking that her representations are true (see Lando/Beale (2000), pp. 281–282 Comment B). Yet, should a fraudulent statement in a particular case amount to a contractual promise pursuant to Article 6:101 PECL, or if such an effect is stipulated by statute, the aggrieved party may alternatively choose a remedy for non-performance (Article 4:119 PECL). 4. Measure of damages in addition to the contract. A party who does not or can no longer exercise her right to avoidance is only entitled to recover a fraction of her reliance interest. As it becomes clear from the wording of paragraph (2) sentence 1 (‘limited to the loss caused to it by the mistake […]’) the provision emphasizes that a causal nexus between the defect of consent on the side of the aggrieved party and her sustained damage is required. To be sure, a causal link between the avoided contract (and thereby indirectly also to the defect in consent, though incidental fraud or threat

266

Chapter 4: Validity suffices under the Principles) and any claimed loss has also to be established under paragraph (1). Yet, if the right of avoidance is actually exercised any costs related to the contractual relationship are covered in principle. However, the causation requirement is stricter under paragraph (2) sentence 1. The fact per se that a contract has been concluded (due to a defect in consent) does not suffice as a connecting factor otherwise a party could evade the rules on time limits (Article 4:113 PECL) and confirmation (Article 4:114 PECL) as she might deliberately not avoid the contract having the right to recover damages up her sleeve. Also, if the contract subsequently turns out to be a disadvantageous deal for a reason that is not inherently connected with the facts which substantiate the right to avoidance or an alternative business opportunity emerges ex post as a more favourable investment, she might effectively recover any loss which is causally linked to the fact that she concluded the voidable contract. To prevent such opportunistic conduct, Article 4:117(2) PECL excludes the recovery of any loss which is not directly related to the ground for avoidance (Lando/Beale (2000), p. 282 Comment C). Consequently, a party who sticks to a voidable agreement may not recover expenditures related to the conclusion or performance of the agreement or a decline in value caused by subsequent market developments (cf. Lando/Beale (2000), p. 283 Illustration 6) or lost profits of an alternative business opportunity. Certainly, she is not entitled to claim as damages the right to set aside the contract. First, such a claim would disregard the rationale of the restriction stipulated in paragraph (2), and second, the Principles generally do not foresee restitution in kind but only the payment of a sum of money (see Article 9:502 PECL). The aggrieved party may, however, recover the difference in value between performance and counter-performance, that is, typically the difference between the price she paid and the market value of the product she acquired. 5. Damages based on Article 4:106 PECL. The rationale described for the measure of damages in cases of voidable but not avoided contracts applies accordingly if incorrect information has been given at the pre-contractual stage which did not cause a fundamental mistake and therefore, does not suffice to trigger a right of avoidance, see above, Article 4:106 PECL. 6. Further provisions on damages. Since the Principles do not contain a general chapter on damages, Article 4:117(3) PECL refers to the provisions regarding damages for non-performance in order to close gaps left by Article 4:117 PECL. Potentially relevant are particularly the provisions on recoverable losses (Article 9:501(2) PECL), foreseeability (Article 9:503 PECL), loss attributable to aggrieved party (Article 9:504 PECL), and reduction of loss (Article 9:505 PECL).

Draft Common Frame of Reference Article II. – 7:214: Damages for loss (1) A party who has the right to avoid a contract under this Section (or who had such a right before it was lost by the effect of time limits or confirmation) is

267

T. Ackermann & J.-U. Franck entitled, whether or not the contract is avoided, to damages from the other party for any loss suffered as a result of the mistake, fraud, coercion, threats or unfair exploitation, provided that the other party knew of could reasonably be expected to have known of the ground for avoidance. (2) The damages recoverable are such as to place the aggrieved party as nearly as possible in the position in which that party would have been if the contract had not been concluded, with the further limitation that, if the party does not avoid the contract, the damages are not to exceed the loss caused by the mistake, fraud, coercion, threats or unfair exploitation. (3) In other respects the rules on damages for non-performance of a contractual obligation apply with any appropriate adaptation. Article II.-7:214 DCFR is modelled on Article 4:117 PECL with modifications as to structure and wording but not as regards content. Unlike Article 4:117(2) PECL the application of paragraph (2) is not explicitly extended to cases of liability for loss caused by reliance on incorrect information according to Article II.-7:204 DCFR (and that provision for its part, unlike Article 4:106 PECL does not contain a reference to Article II.-7:214 DCFR) but effectively the same restrictions on the recovery of reliance interest are meant to apply, see above, Article II.-7:204 DCFR, paragraph 5.

German Law General. German law does not contain a legal basis for damages which ties in with a right to avoidance. However, liability under culpa in contrahendo (§§ 311(2), 241(2), 280(1) BGB; these provisions are reproduced above Article 4:106 PECL, German Law) covers all grounds for avoidance which are foreseen under the Principles. Liability under culpa in contrahendo requires that a party enters into a contract induced by an unlawful influence of the counterparty on the decision-making process, be it through false information resulting in a mistake, or by way of fraud or threats. Therefore, this remedy comprises the grounds for avoidance under §§ 119, 120 BGB (mistake) and § 123 BGB (fraud and threats). Since invalidity of a contract pursuant to § 138 BGB in case of usury or ‘usury-like’ contracts also requires a deficiency in the contracting process, the aggrieved party cannot only invoke invalidity of the contract but may in addition claim damages under the doctrine of culpa in contrahendo (e.g., BGH NJW 2001, 1127, 1129). Finally, the stipulation of unfair terms not individually negotiated may equally trigger liability under culpa in contrahendo for having been misled about the validity of the contract (e.g., BGH NJW 1987, 639, 640). As to the requirements of the remedy and the measure of damages see above Article 4:106 PECL, GERMAN LAW.

Comparison and Evaluation There is no evident reason why liability under Article 4:117 PECL should – unlike liability under culpa in contrahendo in German law – not comprise cases of unfair terms not individually negotiated (see Wolf (2000), p. 128). With respect to Article II.-7:214

268

Chapter 4: Validity DCFR this point does not come up since Chapter 7 Section 2 DCFR does not contain a right corresponding to Article 4:110 PECL. Therefore, under the DCFR a party who invokes nullity of an unfair term not individually negotiated may in addition recover her reliance interest under Article II.-3:301(2)(3), II.-3:501 DCFR though the context of Article II.-3:301(2) DCFR might suggest that the scope of the provision is limited to the question under what circumstances a party may start or break off negotiations. Yet, in lack of an alternative provision Article II.-3:301(2) DCFR seems to be the correct legal basis to stipulate pre-contractual duties which reach beyond the immediate context of the rule (cf. Faust (2008), p. 124). Under German law, the parallel applicability of the rules on avoidance and liability of damages under culpa in contrahendo causes coordination problems. These problems are particularly apparent since an aggrieved party is entitled to restitution in kind as a form of damages, i.e., she has effectively a right to rescind a contract under culpa in contrahendo. Notwithstanding that restitution in kind is not available anyway under the Principles (see Article 9:502 PECL) or the DCFR (see the definition of ‘damages’ in the Annex to the DCFR), the integration of a special legal basis for compensation in Article 4:117 PECL and Article II.-7:214 DCFR which is expressly tied in with grounds for avoidance provides a successful structure to coordinate rights to avoidance and claims for damages. The approach taken under the Principles and the DCFR is in principle superior as it may ensure the necessary restrictions to a right to claim damages in cases where an aggrieved party does not want to avoid a voidable contract or can no longer exercise her right to avoidance because the time limit has expired (but see the criticism on the execution of the concept above, Article 106 PECL, no. 5 and COMPARISON AND EVALUATION). Whilst it is clear that an aggrieved party is not entitled to full compensation of her reliance interest if she sticks to a voidable contract, the comment to the Principles remains inexplicit as to the question of what she actually may recover (Lando/Beale (2000), pp. 281 et seq.). Especially Illustration 6 in Lando/Beale (2000) is not at all helpful to clarify that point (see Grigoleit (2007), pp. 183 et seq.). As the innocent party may recover her reliance interest, she should be put (by way of monetary compensation) in the contractual position she would be in without the defect which gave the reason for the right to avoidance. It is important to note that an aggrieved party suffered a direct economic loss caused by the contract if she received due to her defect in will a performance which is not worth the counter-performance (typically the price). Therefore, as recognized under German case law, it must be sufficient to show that the market value of the received performance is lower than the price paid to recover the difference as part of the reliance interest. Finally, Article 4:117 PECL and Article II.-7:214 DCFR should be amended by a rule which stipulates that the aggrieved party should at best be put in the position she would be in according to her misguided beliefs when she entered the contract (Grigoleit (2003), p. 222). In this sense, the recoverable reliance interest should be limited by the positive interest of the aggrieved party (Ackermann (2007), pp. 323–331).

269

T. Ackermann & J.-U. Franck Principles of European Contract Law Article 4:118: Exclusion or Restriction of Remedies (1) Remedies for fraud, threats and excessive benefit or unfair advantage-taking, and the right to avoid an unfair term which has not been individually negotiated, cannot be excluded or restricted. (2) Remedies for mistake and incorrect information may be excluded or restricted unless the exclusion or restriction is contrary to good faith and fair dealing. 1. General. Article 4:118 PECL stipulates which of the remedies provided under Chapter 4 have to be regarded as mandatory. The provision covers both rights to avoidance and rights to claim damages but does not exclude the option to settle a claim, thereby effectively waiving rights which have already arisen (Lando/Beale (2000), p. 284). 2. Mandatory remedies. Since the duty to act in accordance with good faith and fair dealing is mandatory (Article 1:201(2) PECL) and a right to avoidance under Article 4:107, 4:108, 4:109 and 4:110 PECL necessarily requires a violation of the duty of good faith and fair dealing (Lando/Beale (2000), p. 284), these remedies have to be mandatory, too, and any restriction has to be considered null and void. 3. Default remedies. Remedies on the grounds of mistake and incorrect information do not necessarily require a violation of the principle of good faith, and therefore, as a matter of principle are not considered mandatory. However, any derogating agreement might be held void as being contrary to good faith and fair dealing. The onus of proof lies on the party who seeks to invoke the nullity of such an agreement (Lando/Beale (2000), p. 284).

Draft Common Frame of Reference Article II. – 7:215: Exclusion or restriction of remedies (1) Remedies for fraud, coercion, threats and unfair exploitation cannot be excluded or restricted. (2) Remedies for mistake may be excluded or restricted unless the exclusion or restriction is contrary to good faith and fair dealing. The provision resembles Article 4:118 PECL except that remedies for incorrect information are not expressly mentioned in the second paragraph. This might suggest that liability pursuant to Article II.-7:204 DCFR could be freely excluded or varied (see Article II.-1:102(2) DCFR). However, like in Article 1:201(2) PECL it is also stipulated in Article III.-1:103(2) DCFR that the duty to act in good faith may not be excluded or limited by contract. Moreover, ‘incorrect information’ is in any case not expressly mentioned in Article II.-7:101(1)(a) DCFR (the provision which states the scope of Chapter 7 DCFR) besides ‘mistake’ and other defects of will (‘fraud, threats, or unfair

270

Chapter 4: Validity exploitation’). One may conclude, therefore, that all remedies pursuant to Article II.-7:201 to Article II.-7:204 DCFR are covered by the phrase ‘remedies for mistake’ as used in Article II.-7:215 DCFR. Pursuant to Article II.-1:102(3) DCFR, parties may ex post waive mandatory rights of which they are aware.

German Law German law does not expressly stipulate which rights are mandatory and which are to be considered as mere default rules. It is generally recognized that the right to avoidance on grounds of mistake (see Armbrüster, in Münchener Kommentar (2012), § 119 no. 140) as well as the liability for pre-contractual negligence (culpa in contrahendo) pursuant to §§ 311(2), 241(2), 280(1) BGB (see Grüneberg, in Palandt (2013), § 311 no. 58) may be excluded or varied by individually negotiated agreements. In contrast, nullity of contracts according to § 138 BGB and judicial control of standard terms according to §§ 307–309 BGB are mandatory. With respect to fraud and threats some authors submit that the right of avoidance under § 123 BGB has to regarded as being mandatory without exception (Ellenberger, in Palandt (2013), § 123 no. 1). Others, however, argue that the right should not be mandatory with respect to cases of fraud committed by a third party if the party against whom avoidance could be sought did not know but merely ought to have known about the fraud (Flume (1992), pp. 401 et seq.). A corresponding argument has not been put forward with respect to threats committed by third parties. This is apparently because under § 123 BGB a contract is voidable regardless of the question whether the third party’s threat is imputable to the other party of the contract. Such a differentiation might indicate that under German law threat is considered to be a more dangerous risk to the freedom of will than deception (cf. Wiegand (2000), p. 117).

Comparison and Evaluation An analysis of the Principles and the DCFR on the one hand and German law on the other does not reveal a substantially different approach as to the exclusion or restriction of remedies. Aside from the unsettled issue of to what extent the right to avoidance under § 123 BGB is mandatory, the PECL, the DCFR and German law arrive basically at the same conclusions. As to the remedies in case of fraud and threats there is no convincing reason why the parties to a contract should not have the freedom to agree upon which party should bear the risk of an interference by a third party on the decision-making freedom of one of the parties if the other party is not aware of the third party’s conduct. To be sure, such a term would itself only be valid if agreed voluntarily, i.e., absent fraud or threats. It is laudable that both the Principles (see Article 1:102 PECL) and the DCFR (see Article II.-1:102 DCFR) expressly state which rules or rights arising from contracts have to be considered mandatory yet this avoids the legal uncertainty one may partly face under German law only to some extent since derogating agreements may be held void if they violate the principle of good faith (Article 4:118(2) PECL; Article II.-7:215(2) DCFR).

271

T. Ackermann & J.-U. Franck In his respect, the approach taken by the Principles and the DCFR demands clarification. On the one hand, the reference to the principle of good faith is interpretable as an empowerment of the courts to a general control of the substantive fairness of those agreements similar to the judicial control of terms not individually negotiated (see Article 4:110(1) PECL; Article II.-9:403, Article II.-9:405 DCFR). Such an understanding would contradict the prevailing interpretation of the role of § 242 BGB which may not be deployed as a general legal basis for a judicial control of substantive fairness of individually negotiated terms (see Markesinis/Unberath & Johnston (2006), p. 131). On the other hand, the reference to the principle of good faith may be understood as a reference to its function as an ‘internal’ limit of rights, similarly to the principle of equitable estoppel under common law (see Markesinis/Unberath & Johnston (2006), p. 123). Consequently, based on the principle of good faith the reason why a party who agrees upon an exclusion of remedies on grounds of fraud or threat, and subsequently deceives or threatens the other party is barred from invoking the agreed exclusion of remedies because this would constitute an improper exercise of her contractual position (exceptio doli; see Wiegand (2000), pp. 158–161).

Principles of European Contract Law Article 4:119: Remedies for Non-performance A party which is entitled to a remedy under this Chapter in circumstances which afford that party a remedy for non-performance may pursue either remedy. 1. General. Remedies under Chapter 4 and those on grounds of non-performance may concur. A misleading pre-contractual statement, for instance, may on the one hand give rise to contractual obligations pursuant to Article 6:101 PECL and thus may be remedied through damages for non-performance. On the other hand, the same misrepresentation may also substantiate a right to avoidance under Article 4:103 PECL and a right to claim damages under Article 4:117 PECL. Certainly, the aggrieved party may not cumulatively pursue remedies whose legal consequences are not compatible like e.g., a right to avoidance and a claim for damages for non-performance (Lando/ Beale (2000), p. 285). It is then up to her to decide which set of remedies she wants to pursue. The comment points to the fact that usually the remedies for non-performance provide the aggrieved party with a more comprehensive measure of compensation since they include the right to claim the positive interest (Article 9:502 PECL) whereas remedies under Chapter 4 are restricted to the negative interest (Lando/Beale (2000), p. 285).

Draft Common Frame of Reference Article II. – 7:216: Overlapping remedies A party who is entitled to a remedy under this Section in circumstances which afford that party a remedy for non-performance may pursue either remedy. The provision mirrors Article 4:119 PECL and therefore needs no further comment.

272

Chapter 4: Validity German Law 1. General. German law does not contain a specific provision on the relationship between remedies for defect in consent and remedies for non-performance. 2. Remedies for non-performance and right to avoidance. A right to avoidance pursuant to § 119(1) BGB or § 123 BGB may concur with remedies for non-performance (see Singer, in Staudinger (2012), § 119 no. 85). A more intriguing point, however, is the relationship between remedies for non-performance and the right to avoid a contract under § 119(2) BGB. This is of high practical relevance since a party may on the one hand expect that an acquired product functions properly, and on the other hand will regard the usability of the product as an essential quality within the meaning of § 119(2) BGB. It is the prevailing view in the jurisprudence (BGHZ 60, 319, 320) and among legal scholars (see Armbrüster, in Münchener Kommentar (2012), § 119 nos 29 et seq.; see for the contrarian view Larenz/Wolf (2004), pp. 664 et seq.) that avoidance for mistake as to quality pursuant to § 119(2) BGB is a secondary remedy, and therefore not available when the aggrieved party has a remedy for non-performance according to the rules on breach of contract (§§ 434 et seq. BGB in case of a sale of goods or §§ 633 et seq. BGB in case of contracts to produce a work). This view is supported by the consideration that otherwise specific requirements of remedies for non-performance would be undermined (see Markesinis/Unberath & Johnston (2006), pp. 298 et seq.). Whereas § 442(1) 2 BGB excludes a buyer’s remedies when she was grossly negligent in failing to detect a defect, there is no such restriction under § 119(2) BGB. Moreover, a party can terminate a contract only for reason of a significant defect (§ 323(5) 2 BGB) and only after she has demanded subsequent performance from the seller (§ 439 BGB) or manufacturer (§ 636 BGB) without success (§ 323(1) BGB). That is, contrary to the law of mistake, the seller or manufacturer has a right to cure the defect. Finally, pursuant to § 121(2) BGB there is a maximum period of limitation of ten years in the case of a right to avoidance under § 119(2) BGB but only of two years for remedies for non-performance according to § 438(1) no. 3 BGB and § 634a(1) no. 1 BGB. 3. Remedies for non-performance and pre-contractual liability. In the context of the modernization of the German law of obligation in 2001 which resulted inter alia in the codification of the doctrine of culpa in contrahendo (§§ 311(2), 241(2), 280(1) BGB) this issue had been considered but not decided by the legislature (Kindl, in Erman (2011), § 311 no. 45). Based on considerations corresponding to those mentioned above with regard to § 119(2) BGB, it is the majority view that the applicability of the regulatory regime for non-performance – e.g., §§ 434 et seq. BGB in the case of false or misleading statements by the seller with respect to marketed goods – excludes pre-contractual liability under culpa in contrahendo (see Grüneberg, in Palandt (2013), § 311 nos 14 et seq.; see for the contrarian view e.g., Emmerich, in Münchener Kommentar (2012), § 311 nos. 95 et seq.). The Bundesgerichtshof adopted the majority view as a basic rule but recognized an exception in cases of intentional violations of pre-contractual duties (BGH NJW 2009, 2120, 2122).

273

T. Ackermann & J.-U. Franck Comparison and Evaluation The German approach of exclusivity of the rights for non-performance differs significantly from the rules established in Article 4:119 PECL and Article II.-7:216 DCFR as well as from the approach taken by most European legal systems (see notes at Article 4:119 PECL and Article II.-7:216 DCFR; Kramer, in Kramer/Probst (2001), p. 59) whereas it is shared by Article 3.7 Unidroit Principles. This exceptional stand has already been deployed as an argument against the majority view under German law (Wolf (2000), p. 127). Since remedies for defect in consent and remedies for non-performance are independent legal institutions based on distinct rationales which overlap only partly in their respective scope and which also differ in their legal consequences, mutual exclusivity and primacy of the remedies for non-performance is anything but imperative. To grant the mistaken party a free choice between different available remedies should be considered, therefore, as a conclusive solution. Yet also under the DCFR and the Principles the parallel availability of rights to avoidance for mistake and remedies for non-performance in cases of breach of contractual duties entails inconsistencies. A party may invoke her right to avoidance even if the conditions for termination on the grounds of non-performance are not met. Particularly, a party only has a right to terminate a contract (pursuant to Article 9:301 PECL or, e.g., Article IV.A.-4:201 DCFR) if the other party already had the opportunity to cure a non-conforming performance according to Article 8:104 PECL (see Huber (2001), p. 160) or Article III.-3:202(2) DCFR (see Dauner-Lieb/Quecke (2008), pp. 147 et seq.). However, the potential to bypass the requirements of a termination for non-performance by invoking a right to avoidance is weakened by the provision on adaptation of contract in case of mistake (Article 4:105 PECL; Article II.-7:203 DCFR). The option granted to an addressee of a declaration of avoidance to avert avoidance if she signals she is willing to perform the contract as it was intended by the mistaken party effectively approximates the chance to cure a non-conforming performance. Apart from that, however, it is crucial to note that the right to avoidance on the grounds of mistake according to § 119(2) BGB is much broader compared to Article 4:103 PECL, Article II.-7:201 DCFR and the approach taken by most other European legal systems as § 119(2) BGB requires neither that the party against whom avoidance is sought induced the mistake nor that they acted in any way negligently as to the misapprehension of the innocent party. Moreover, fault on the basis of the mistaken party does not exclude or restrict her right to avoidance. Thus, the potential of a right to avoidance under § 119(2) BGB to undermine the consistent and elaborated regime of remedies for breach of contract is much more significant under German law as compared to with the corresponding point under the Principles or the DCFR. Moreover, the approach taken in § 119(2) BGB is widely regarded with scepticism (see Kramer, in Münchener Kommentar (2006), § 119 no. 10). It should, therefore, be seen as a comprehensible decision by German courts to grant exclusivity to rights for nonperformance at the expense of the scope of the right to avoidance under § 119(2) BGB.

274

CHAPTER 5

Interpretation M. Lehmann & S. Gohling

Principles of European Contract Law Article 5:101: General Rules of Interpretation (1) A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words. (2) If it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party’s intention, the contract is to be interpreted in the way intended by the first party. (3) If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances. 1. General. a) Purpose of rules on interpretation. Contracts are concluded between parties who intend to be legally bound by the terms of the agreement. However, in real life it is not possible to include provisions covering all contingencies. Often, the parties have reached an agreement only on key issues (the ‘essentialia negotii’). In Institutional Economics, this phenomenon is called ‘incomplete contracting’ (see Williamson (1985), p. 178). The gaps in the agreement must be filled through interpretation. Interpretation is also required where the agreement contains contradictory or ambiguous terms. b) PECL rules on interpretation. Chapter 5 of the PECL sets out the general rules of interpretation, as well as the relevant circumstances which shall be considered. 2. Scope. a) Matters covered. Chapter 5 not only applies to contracts, but also to other acts, such as other unilateral declarations of will or amendments to an existing contract

275

M. Lehmann & S. Gohling (see Lando/Beale (2000), pp. 287–288 Comment A). Chapter 5 also covers the interpretation of standard form contracts (contracts of adhesion) insofar as the party not responsible for drafting the form had sufficient knowledge of the clauses and adhered to them (see Lando/Beale (2000), pp. 287–288 Comment A). b) Matters not covered. Chapter 5 does not include rules on filling gaps in the contract (ergänzende Vertragsauslegung). If a contract contains a gap, this gap cannot be filled by interpretation because there is no term to be interpreted. However, in this case, the rules on implied terms (Article 6:102 PECL) are applicable. They are built on similar ideas and require the same circumstances to be considered, namely the intention of the parties, the nature and purpose of the contract and the principle of good faith and fair dealing. 3. Intention of the parties. a) Overview. According to Article 5:101 PECL, the intention of the parties is of primary importance to the interpretation of the contract. The PECL thereby follow the subjective method, which is also adopted by the majority of EU Member States’ laws and by the UPICC (see also Article 4.01(1) UPICC 2010). In favour of this method, it may be argued that concluding a contract is always a voluntary act and that the intention of the parties should therefore be respected as far as possible. Nevertheless, sometimes the contractors’ intentions are unknown, which makes it necessary to use objective criteria such as reasonableness or good faith to interpret the contract (see Lando/Beale (2000), p. 288 Comment B). This way of interpretation is referred to as the objective method (Lando/Beale (2000), p. 288 Comment B). Both methods are not mutually exclusive, but have their specific areas of application. b) Common Intention Prevails (paragraph 1). Article 5:101(1) PECL stresses that the intention of the parties prevails even over words in the contract that might not be consistent with the intention of the parties. In this regard, the PECL clearly differ from the Common law’s ‘parol evidence rule’, according to which the parties’ intentions only become important if the literal meanings of the words are contrary or absurd when compared to the rest of the contract (Grey v. Pearson [1857], English Reports, Full Reprint, Vol. 10 (House of Lords), p. 1234). This rule gives the literal meaning priority over the intentions, and the judge is bound to construe the words in their ordinary sense if the precise words used are plain and unambiguous even though this might lead to a manifest injustice (Abley v. Dale [1851], in English Reports, Full Reprint, Vol. 138 (Court of Common Pleas), p. 525). In contrast, the PECL assume that in case of doubt about the content of the contract and the duties it creates, the parties’ intention shall be given priority over the literal meaning of the words. What is essential for the interpretation is the parties’ intention at the time the contract was made. If inconsistencies should later arise from some supervening circumstances unforeseen at the time of contracting, Article 6:111 PECL provides a way of adjusting and modifying the contract without the necessity of contractual interpretation (see Lando/Beale (2000), pp. 288–289 Comment B). c) Knowledge or Possible Knowledge of the Real Intention of the Other Party (paragraph 1). In everyday contracting, errors may occur. For instance, one party may use a legal term without knowing its meaning or perhaps type a wrong word in a

276

Chapter 5: Interpretation written agreement. In cases such as these, the question arises as to who shall bear the risk of using the incorrect terms or words. If one party expresses its intention wrongly or uses the wrong words, the other party can usually rely on the literal or reasonable meaning of the first party’s words, with the exceptions provided in case of avoidance (Articles 4:103 et seq. PECL). However, the PECL provide that in case the second party could not have been unaware of the first party’s actual intention, the contract is to be interpreted in the way intended by the first party (Article 5:101(2) PECL). This principle conforms to paragraph 1 because, once again, the real intention prevails over the literal meaning of the used words: The party that agrees to the contract although it knows or could not have been unaware of the actual intention of the other side actually acquiesces to this intention. This latter intention, which is known by both parties, becomes part of the agreement. 4. Objective method. a) Scope. Article 5:101(3) PECL applies where the exact intention of the parties cannot be determined, or where a common intention cannot be discerned, for instance where the parties intend to reach different purposes. Under these circumstances, objective criteria become of vital importance for the interpretation of the agreement. It must be stressed that this is only the case where the application of Article 5:103(1) and (2) PECL fails, so the interpreter is not free to choose between the subjective and the objective method – the subjective method enjoys a certain priority over the objective method. b) Content. The aim of Article 5:101(3) PECL is not to create a fictitious subject matter of the contract, but to determine the meaning that reasonable persons placed in the same circumstances as the parties would have given to the contract (see Lando/ Beale (2000), p. 289 Comment D). The term ‘reasonable persons’ means people having the same experience and belonging to the same class of people as the contracting parties (see Ferreri, in Antoniolli/Veneziano (2005), p. 253). Therefore, the relevant circumstances stated in Article 5:102 PECL should receive particular attention by the judge. The objective method must not lead to overturning the contract under the guise of interpretation with the result that the agreement is given a meaning that goes against the unequivocal will of the parties (see Lando/Beale (2000), p. 289 Comment D).

Draft Common Frame of Reference Article II. – 8:101: General Rules (1) A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words. (2) If one party intended the contract, or a term or expression used in it, to have a particular meaning, and at the time of the conclusion of the contract the other party was aware, or could reasonably be expected to have been aware, of the first party’s intention, the contract is to be interpreted in the way intended by the first party.

277

M. Lehmann & S. Gohling (3) The contract is, however, to be interpreted according to the meaning which a reasonable person would give to it: (a) if an intention cannot be established under the preceding paragraphs; or (b) if the question arises with a person, not being a part of the contract or a person who by law has no better rights than such a party, who has reasonably and in good faith relied on the contract’s apparent meaning. 1. General. The general rule on interpretation, which can be found in Article 5:101 PECL, is reproduced almost literally in Article II.-8:101 DCFR. Only some details of terminology vary. 2. Paragraph (1). Article II.-8:101(1) DCFR matches exactly Article 5:101(1) PECL. 3. Paragraph (2). The wording of Article II.-8:101(2) DCFR is slightly different from that of Article 5:101(2) PECL. The PECL only refer to contracts, whereas the DCFR also refers to terms and expressions in paragraph 2. However, given that a contract consists of terms and expressions, and given that it is therefore necessary for the interpretation of an agreement to include single terms and expressions, the change of the wording can be understood to be a mere clarification. 4. Paragraph (3). Article II.-8:101(3) DCFR partially differs from Article 5:101(3) PECL. It provides a second case in which the objective method is to be applied, apart from the case where the parties’ intention cannot be established under paragraphs 1 and 2. Under Article II.-8:101(3)(b) DCFR, the objective method is also applicable where a third party has reasonably, and in good faith, relied on the apparent objective meaning of the contract. Such a party cannot be expected to be bound by special meanings secretly attached to terms or expressions by the parties (see von Bar/Clive (2009), Comment D on Article II.-8:101, p. 556) and consequently must be protected. The comment states that the formula ‘person who by law has no better rights than such a party’ would exclude persons such as an assignee (see von Bar/Clive (2009), Comment D on Article II.-8:101, p. 556). However, this seems contradictory to Article II.-8:102(2) DCFR, where the assignee is expressly designated as a ‘person who by law has no better rights than such a party’. Since the text of the DCFR prevails over the comments, one must assume that assignees are covered by lit. b. 5. Interpretation of other juridical acts. In addition to the rules on contract, the DCFR also contains rules for the interpretation of other juridical acts, such as unilateral promises, declarations of withdrawal or revocation of a contract, and unilateral acts granting, transferring or waiving rights. These provisions are set out in Section 2 of Chapter 8 on interpretation (Articles II.-8:201 et seq. DCFR). They mainly refer to Section 1 on the interpretation of contracts, but there is also a special rule that gives more importance to the particular meaning of the declaration intended by the person making the declaration (see Article II.-8:201(2) DCFR).

278

Chapter 5: Interpretation German Law § 133 BGB: Interpretation of a Declaration of Intent When a declaration of intent is interpreted, it is necessary to ascertain the true intention rather than adhering to the literal meaning of the declaration. § 157 BGB: Interpretation of Contracts Contracts are to be interpreted as required by good faith, taking customary practice into consideration. 1. General. German law does not feature detailed judicial provisions on interpretation. Instead, it only sets out general principles in §§ 133 and 157 BGB. These rules give two different guidelines. On the one hand, § 133 BGB says that for the interpretation of a declaration of intent, the actual intention must be identified and the interpreter does not have to adhere to the literal meaning of the words used in the agreement. On the other hand, § 157 BGB states that a contract must be interpreted in consideration of good faith and customary practice. At first sight, it seems that under these rules the interpretation of declarations of intention would have to follow the actual intention, whereas for the interpretation of entire contracts good faith and common usage are crucial. Such a distinction, however, would make no sense because a contract is the result of at least two declarations of intent (see Medicus (2010), p. 105). Therefore, it is to be recognized that contracts also have to be interpreted with regard to the actual intention (see Busche, in Münchener Kommentar (2012), § 133 no. 17) and that declarations of intent have to be interpreted with regard to good faith and common usage (see BGHZ 47, p. 78). In contrast to the PECL and the DCFR, German law does not set out an order of methods which shall be applied for interpreting a contract or a declaration. It depends on the circumstances of each particular case whether the subjective or objective method of interpretation is to be used. 2. Scope. §§ 133, 157 BGB are placed in the General Part (Allgemeiner Teil) of the BGB. They therefore apply to all kinds of private legal relationships, no matter where they are regulated in the civil code. The provisions cover, for instance, family law contracts as well as testaments. They also apply to other juridical acts such as unilateral promises or undertakings intended to be binding without acceptance. 3. Objective method (normative Auslegung). The objective method applies whenever the declaration is intended for a recipient. Most declarations are addressed to a particular recipient (e.g., an offer is addressed to the offeree or a dismissal is addressed to the employee). If there is a difference between the expressed intention and the actual meaning, the responsibility lies with the person making the declaration. The recipient can only apply his or her knowledge of the situation and the circumstances, but not know the inner intention of the person who makes the statement if this intention is not expressed in the words of the declaration. The recipient usually relies on the correctness of the wording. It would be contrary to his or her legitimate interests if he or she had to bear the risk of the ambiguous or incomplete expression by the declaring party. Therefore, the declaration is to be interpreted not based on the will of the declaring

279

M. Lehmann & S. Gohling party, but from an objective viewpoint, taking into account the information that was available to the recipient for interpreting the declaration. The principle of good faith (Treu und Glauben) requires that the recipient must take into account all facts and circumstances available to him as well as any usage in order to identify what the other party actually intended to express (see Ellenberger, in Palandt (2013), § 133 no. 9). Therefore, the interpretation depends on the meaning that an objective person in the situation of the actual recipient would have given to it (objektiver Empfängerhorizont). Unilateral offers and other declarations to the public, such as articles of an open partnership or statutes of an association, are interpreted from an even more objective viewpoint. The situation of the individual recipient does not play any role. The standard here is that of an average participant or of a member of the addressed group of persons because they are given to the public and therefore are addressed to anybody depending on the circumstances (see Ellenberger, in Palandt (2013), § 133 no. 12). 4. Subjective method (natürliche Auslegung). a) No recipient in need of protection. The subjective method is to be applied if there is no other party that needs to be protected (see Brox/Walker (2012), no. 131). This is the case, for instance, where a person drafts his or her last will in the form of a testament. Only the interests of the decedent are important for the interpretation because the beneficiary receives the inheritance without any consideration. Nevertheless, if the subjective method fails in establishing the actual intention of the maker of the declaration, objective criteria and circumstances can become crucial (see Busche, in Münchener Kommentar (2012), § 133 no. 11). b) Common intention. The subjective method also applies to legal acts when both parties have understood the contract in a way that is contradictory to the objective sense of the written agreement. In this case, the common intention prevails (see Ellenberger, in Palandt (2013), § 133 no. 8). This rule is known as ‘falsa demonstratio non nocet’ (literally: ‘a false expression does not harm’). c) Lack of care. Even if the offeree is not aware of the real intention of the offeror, he is bound to what the offeror intended to say if he could have known by employing reasonable care to understand the intended meaning (see Brox/Walker (2012), no. 134). If he had doubts, he can be expected to have asked about the intended meaning and not just interpret the expression in a way which is advantageous for him. In such cases, the subjective method prevails as well.

Comparison and Evaluation European and German law apply both the subjective and the objective method to the interpretation of contracts. Whereas in the PECL and the DCFR the subjective method has priority over the objective method, the German law does not know an order of interpretation methods. Instead, the appropriate method is to be chosen depending on the particular circumstances of the individual case. In contrast to the Common law, both the European texts and the BGB admonish the interpreter not to adhere to the literal meaning of the declaration. They also agree that the subjective method shall be applied at least if there is a common intention of both parties independently of the

280

Chapter 5: Interpretation words used. The objective method under German law requires that the position of the recipient has to be taken into account and shall be objectified by paying regard to good faith and customary practice. As a result, the recipient to which the BGB refers does not differ, in practice, from the reasonable person knowing the particular circumstances to which the PECL and the DCFR refer. Generally, the European rules are more precise than the general principles of interpretation provided by the BGB, but the German law provides the interpreter with more flexibility because it allows taking into account the particular circumstances of the individual case. A difference also exists with regard to other juridical acts. The DCFR is the only text to contain specific rules on the interpretation of unilateral declarations of will. The PECL merely provide that the principles are applicable with appropriate modifications to other juridical acts (Article 1:107 PECL), while the BGB even omits this indication. Some German authors have criticized the DCFR and argued it would be preferable to apply the same rules as those applied to contracts (in the latter sense Eidenmüller/Jansen et al. (2008), p. 548). There is however a sense in distinguishing between the two, given that there are basic differences between contracts, which express a common intention, and unilateral declarations of will which only reflect the intention of one party.

Principles of European Contract Law Article 5:102: Relevant Circumstances In interpreting the contract, regard shall be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the nature and purpose of the contract; (d) the interpretation which has already been given to similar clauses by the parties and the practices they have established between themselves; (e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received; (f) usages; and (g) good faith and fair dealing. 1. Purpose. The aim of Article 5:102 PECL is to provide a catalogue of circumstances which should be considered for the interpretation of contracts. It contains a nonexhaustive list of matters that may be relevant in determining either the actual intention of the parties or the reasonable meaning of the contract. 2. Relevant circumstances. Although the list of circumstances provided by Article 5:102 PECL is not exhaustive, the drafters aimed for it to be as comprehensive as possible. Therefore, the relevant circumstances are described in an extremely general way. The idea is that all matters that could be relevant in interpreting the contract shall

281

M. Lehmann & S. Gohling be considered (Zimmermann (2010), p. 1358). The list gradually moves from circumstances that concern the parties and their contract to extrinsic considerations. a) Preliminary negotiations. An important issue for the interpretation are the preliminary negotiations between the parties, especially if the contract was preceded by long and complicated negotiations (see Lando/Beale (2000), p. 292 Comment). Since preliminary negotiations have to be taken into account under all circumstances, the PECL reject the ‘parol evidence rule’ that is widespread in the Common law and prevents a party from presenting evidence that is extrinsic to the written terms of the contract (see also above Article 5:101 comment 3 b). Preliminary negotiations play a role even if the contract contains a merger clause stipulating that the written document embodies the entirety of the contract (see Article 2:105(1) PECL). An exception applies only if both parties have agreed in an individually negotiated clause that previous negotiations may not be used for the purpose of interpretation, Article 2:105(3) 2 PECL. b) Conduct of the parties. The conduct and behaviour of the parties may also give indications about the meaning of the contract. This is true regardless of whether the conduct and behaviour occurs before or after the making of the agreement, provided that the conduct and behaviour is shared between both of them. It is not possible for one party to influence the meaning of the contract by its unilateral conduct or behaviour. c) Nature and purpose. The nature of the contract and the parties’ purpose serve as circumstances that may provide a guideline for interpretation. d) Prior interpretation of similar clauses and practices established between the parties. If the parties use the same term over again, an interpretation previously given by them must be taken into account when determining the meaning of a clause. Practices established between them and actions according to custom and usage are often hints for the parties’ intention and therefore have a decisive influence. It is remarkable that the PECL only refer to interpretations and practices by the parties. One could conclude therefore that interpretations by previous court decisions and practices by other persons in the industry do not matter. However, they may play a role under the lit. e. e) Meaning commonly given. It is possible and indeed likely that the parties employ clauses that are widely used, such as standard terms and conditions. In this case, the meaning commonly accepted, for instance through practice or court decisions, impacts on the interpretation of the clause. One must however always pay attention to the particular circumstances under which the parties acted. For instance, terms used in a particular sector of the industry or trade might have a technical meaning that is different from its ordinary meaning. f) Usages. Usages must always be regarded when a contract is interpreted, regardless of whether the parties have contracted with reference to them or whether these usages form the basis of a reasonable interpretation used to resolve an uncertainty in the meaning of the contract (see Lando/Beale (2000), p. 293 Comment). g) Good faith and fair dealing. Since each party must act in accordance with good faith and fair dealing (Article 1:201(1) PECL), these will often determine the interpretation of the contract. Good faith is connected to honesty and fairness in mind. The mentioning of fair dealing shows that an ethical concern for what is considered

282

Chapter 5: Interpretation appropriate in a certain milieu is preferable to the protection of innocent representations that a beginner in the respective trade may nurture. 3. Not-exhaustive nature. All matters shall be considered which can have influence on the interpretation. Therefore, the list of circumstances is not exhaustive, as indicated by the term ‘in particular’. Consequently, the court may also look to circumstances not mentioned by Article 5:102 if they could have had an effect on the agreement. Usages may not only be used to resolve an uncertainty in the meaning of the contract, but may also play a role in filling gaps in the agreement (see Lando/Beale (2000), p. 293 Comment). In this context, the rules on implied terms set out in Chapter 6 apply (see Article 6:102 PECL).

Draft Common Frame of Reference II. – 8:102: Relevant matters (1) In interpreting the contract, regard may be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the interpretation which has already been given by the parties to terms or expressions which are the same as, or similar to, those used in the contract and the practices they have established between themselves; (d) the meaning commonly given to such terms or expressions in the branch of activity concerned and the interpretation such terms or expressions may already have received; (e) the nature and purpose of the contract; (f) usages; and (g) good faith and fair dealing. (2) In a question with a person, not being a party to the contract or a person such as an assignee who by law has no better rights than such a party, who has reasonably and in good faith relied on the contract’s apparent meaning, regard may be had to the circumstances mentioned in sub-paragraphs (a) to (c) above only to the extent that those circumstances were known to, or could reasonably be expected to have been known to, that person. 1. General. The substance of Article II.-8:102(1) DCFR is the same as in Article 5:102 PECL. Although the wording slightly diverges at some points, this does not have material consequences. The major difference is the newly added provision of Article II.-8:102(2) DCFR, which was not contained in the PECL rule.

283

M. Lehmann & S. Gohling 2. Paragraph (1). The order of the relevant circumstances set out in Article II.-8:102(1) DCFR differs from that in the PECL. The nature and purpose of the contract has moved from the third position (Article 5:102(c) PECL) to the fifth position (Article II.8.102(1)(e) DCFR) without any effects on the substance. Paragraph (1) still provides a list with a gradual move from circumstances specific to the parties and their contract to extrinsic considerations. The reason for the change might have been that paragraph (2) refers to sub-paragraphs (a) to (c). 3. Paragraph (2). If third parties are affected by a contract and therefore have to inform themselves about its meaning, it would be unreasonable to refer to circumstances such as the negotiations or the subsequent conduct of the parties unless the third party knew of them or could reasonably be expected to have known of them (see von Bar/Clive (2009), Comment B on Article II.-8:102, p. 563). That is why Article II.-8:102 DCFR limits the factors of interpretation with regard to third parties (compare also Article II.-8:101(3) DCFR, reprinted above under Article 5:102 PECL). The rule explicitly refers to assignees as persons who have acquired contractual rights from one of the parties to the contract.

German Law Text: See §§ 133, 157 BGB, reprinted above under Article 5:101 PECL. 1. General. The German civil code sets out only basic principles of interpretation (see §§ 133, 157 BGB, reprinted above under Article 5:101 PECL). Therefore, it does not provide a list of relevant circumstances that must be followed. It only mentions the intention of the person making a declaration (§ 133 BGB) and good faith and customary practice (§ 157 BGB). This does not preclude other matters from having an effect on the interpretation. These other matters have been highlighted by the courts and by doctrine. 2. Relevant circumstances. It is accepted by case law and the literature that certain circumstance play a role in the interpretation, whether they are mentioned in §§ 133, 157 BGB or not. This concerns, in particular: a) Preliminary negotiations. Even if the parties have drafted the agreement in writing, the preliminary negotiations (whether in written form or not) shall be considered (BGHZ 63, 359, 362). b) Conduct of the parties. The conduct and behaviour of the parties play a role for the interpretation of the contract, even if they occur subsequently to its conclusion (see Larenz/Wolf (2004), § 28 no. 42). c) Anterior agreements. If the parties have previously drawn up contracts, then they might have established practices between themselves. Their contract must be interpreted in light of these practices and usages (see Busche, in Münchener Kommentar (2012), § 157 no. 21). d) Purpose and Interests. The interests of the parties and the purpose they intend to reach can be relevant as well. The interpretation shall be fair and equitable for all of the parties (BGH NJW 1994, 2228).

284

Chapter 5: Interpretation e) Good faith and customary practice. § 157 BGB expressly mentions that contracts are also to be interpreted as required by good faith, taking customary practice into consideration (see comment on §§ 133, 157 BGB, above under Article 5:101 PECL). f) Other Matters. It must be mentioned that this list of methods is not exhaustive (see Ellenberger, in Palandt (2013), § 133 no. 15).

Comparison and Evaluation Contrary to German law, the PECL and the DCFR offer a list of circumstances relevant for contract interpretation. The reason is that the courts are using the interpretation more and more for the implementation of normative ideals rather than merely to implement the actual intention of the parties (see Maultzsch (2011), p. 115). Therefore, it makes sense to guide the interpretation with codified criteria. There is, however, a risk that a judicial practice which is exclusively based on these criteria might become too schematic and inflexible. This risk is avoided by the use of a non-exhaustive list which gives the possibility to consider circumstances not explicitly mentioned. The PECL and the DCFR deliver such non-exhaustive lists with an extensive and reasoned catalogue. The DCFR gives it even more clarity by adding a paragraph on the role of third parties. German law, in contrast, is drafted in a very general and uncertain way. At the same time, it does not provide more flexibility than the European texts. Therefore, the rules of PECL and DCFR are a genuine improvement compared to the rules of the BGB.

Principles of European Contract Law Article 5:103: Contra Proferentem Rule Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred. 1. General. a) Purpose of the contra proferentem rule. It is not always possible to clarify ambiguities or contradictory terms in contracts by merely interpreting the agreement. If this situation occurs with regard to terms not individually negotiated, it shall then be the party who has drafted either the term or the entire contract unilaterally who bears the risk of any defect in the drafting (see Lando/Beale (2000), p. 294 Comment). The reason is that the supplier of the term is responsible for expressing his or her intention clearly and precisely. b) Scope of application. Article 5:103 PECL applies to contractual terms that are not individually negotiated and that cannot be interpreted in accordance with the general rules. Any term that has been negotiated individually is not covered. 2. Content of the rule. The rule states that in case of doubt, a term that is not negotiated individually is to be interpreted against the interests of the party who has supplied the term. The rule applies not only against the author of a term but also against anyone who uses pre-drafted clauses (see Lando/Beale (2000), p. 294 Comment). The salient

285

M. Lehmann & S. Gohling example of a term that is not individually negotiated is a standard form contract (contract of adhesion), regardless of whether it has been drawn up for an unlimited number of cases or for the particular occasion at hand. It is questionable whether the rule applies only if the circumstances of the case do not lead to a satisfying interpretation (in this case, it would apply only subsidiarily after unsuccessfully trying to interpret the clause with regard to the relevant matters) or whether it serves as kind of a basic rule for all terms that have not been individually negotiated. Article 5:103 PECL with its wording ‘where there is doubt’ seems to maintain that the judge shall first of all apply Article 5:101 and Article 5:102 PECL and only if doubts remain follow the contra proferentem rule. Moreover, it is unclear whether the contra proferentem rule imposes a strict result or leaves room for discretion. The provision explicitly sets out that the interpretation against the supplier ‘is to be preferred’. This may be understood as giving some leeway to the interpreter. However, it is unusual to give the judge or arbitrator discretion in the application of the law without explicit criteria on which he has to base his decision. The formula ‘is to be preferred’ should therefore be read as imposing a strict result: if the interpretation does not lead to a reliable conclusion, then the term has to be interpreted against the supplier of the term. Most authors correctly understand the contra proferentem rule as a subsidiary provision, the result of which is not discretionary (see Zimmermann (2010), pp. 1359 et seq.; Vogenauer, in Vogenauer/Kleinheisterkamp (2009), Article 4.6 nos 4 et seq.; see also von Bar/Clive (2009), comment on Article II.-8:103 DCFR, p. 565). In line with that reasoning, Article 5:103 PECL is applicable only if Article 5:101 or Article 5:102 PECL do not lead to a satisfying interpretation, and in such circumstances, the interpreter must construe the term against the party who supplied the term and cannot interpret the clause in his favour.

Draft Common Frame of Reference II. – 8:103: Interpretation against supplier of term or dominant party (1) Where there is doubt about the meaning of a term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred. (2) Where there is doubt about the meaning of any other term, and that term has been established under the dominant influence of one party, an interpretation of the term against that party is to be preferred. 1. Paragraph 1. The wording and the substance of paragraph 1 of Article II.-8:103 DCFR is the same as that in Article 5:103 PECL. A definition of terms not individually negotiated is set out in Article II.-1:110 DCFR. 2. Paragraph 2. a) Content and purpose. The provision of paragraph 2 of Article II.-8:103 DCFR is not contained in the PECL. It extends the scope of the rule to terms

286

Chapter 5: Interpretation that are individually negotiated but have been established under the dominant influence of one party. In this case, the term shall be construed against the dominant party because this is similar to the case of supplying a term unilaterally. The purpose is to protect the weaker party not by an invalidity of the term, but by an interpretative rule in its favour. b) Application. Dominant parties not only exist in B2C relationships, but also in B2B relations (see von Bar/Clive (2009), Comment on Article II.-8:103, p. 565). The rule does not apply to terms that have not been established under the influence of such a party, but were freely negotiated.

German Law § 305c BGB: Surprising and ambiguous clauses (1) […] (2) Any doubts in the interpretation of standard business terms are resolved against the user. 1. General. The German equivalent of the contra proferentem rule is set out in § 305c(2) BGB. Its purpose is to transpose Article 5(2) of the Directive 93/13/EEC on unfair terms in consumer contracts into German law. 2. Scope of application. The rule is placed in the second book – law of obligations (Recht der Schuldverhältnisse) in chapter two – standard business terms (Allgemeine Geschäftsbedingungen – AGB). Though its purpose is to transpose the Unfair Terms Directive into German law, the rule also applies to B2B contracts (BGH NJW-RR 1988, p. 114). Also covered are B2C contracts that have been drawn up unilaterally for the particular occasion (§ 310(3) no. 2 BGB). The rule does not extend to terms that have been individually negotiated since such terms can never be surprising. For rules that have been established under the undue influence of one party, § 138(2) BGB provides that they are void if they grant advantages to that party which are clearly disproportionate to the performance of this party, and if the latter has exploited the predicament, inexperience, lack of sound judgment or considerable weakness of will of another. 3. Content. § 305c(2) BGB sets out that the ambiguous or contradictory term is to be interpreted against the supplier. Mere doubts about a term’s meaning do not suffice for applying the rule. Rather, it is necessary that a plain result cannot be found by interpretation according to §§ 133, 157 BGB (see Grüneberg, in Palandt (2013), § 305c no. 15). Therefore § 305c(2) BGB applies only subsidiarily after unsuccessfully trying to interpret the clause with regard to the relevant matters (see Basedow, in Münchener Kommentar (2012), § 305c no. 29). The provision also presupposes that the clause is valid. In order to be valid, its content must not be contrary to §§ 307–309 BGB, which are similar to Article 3 and the Annex of the Unfair Terms Directive.

287

M. Lehmann & S. Gohling 4. Consequence. If the rule applies, the clause will be interpreted in disfavour of the party who proposed it.

Comparison and Evaluation PECL and German law agree that the contra proferentem rule applies to terms not individually negotiated. The scope of the DCFR rule is wider in that it also covers terms established under the dominant influence of one of the parties. However, a limited scope of application seems more logical because the rule’s primary purpose is to clarify that the supplier of a non-negotiated term is responsible for expressing his or her intention clearly. The idea to counterbalance the dominant influence of one party during the negotiations is a foreign concept in the interpretation of the contract. It should be left to other provisions rather than being included in the rules on interpretation.

Principles of European Contract Law Article 5:104: Preference to Negotiated Terms Terms which have been individually negotiated take preference over those which are not. 1. General. Purpose and Content. Sometimes parties enter into a contract on the basis of a standard form, but negotiate a term individually. Article 5:104 PECL ensures that the individually negotiated term prevails over the standard term. The reason is that the first term most accurately represents the parties’ real intention (see Lando/Beale (2000), p. 295 Comment). 2. Scope of application: a) Matters covered. Article 5:104 PECL applies to all contracts that have not been negotiated individually, but that contain some individually negotiated terms. In this case, contradictions to the standard form may arise. This often occurs when parts of contracts are transplanted from a model contract that the parties have not examined carefully (see Ferreri, in Antoniolli/Veneziano (2005), p. 263). Article 5:104 PECL applies independent by of whether the non-negotiable parts were drawn up for non-recurring or recurring use (see Zimmermann (2010), p. 1363). The term ‘individually negotiated’ includes the oral modifications of a written contract (see Lando/Beale (2000), p. 295 Comment). b) Matters not covered. The rule does not extend to contracts that have been negotiated individually as a whole. 3. Functioning. Article 5:104 PECL requires that interpretation be based on the individually negotiated terms rather than on the standard terms. This is also true where a matter is not directly covered by an individual clause, but it is clear from the latter that the parties wanted to derogate from the standard terms. The contradictory standard terms have to be considered non-existent.

288

Chapter 5: Interpretation Draft Common Frame of Reference II. – 8:104: Preference for negotiated terms Terms which have been individually negotiated take preference over those which have not. The wording and substance of Article II.-8:104 DCFR corresponds exactly to that in Article 5:104 PECL.

German Law § 305b BGB: Priority of individually agreed terms Individually agreed terms take priority over standard business terms. 1. Purpose. The purpose of the rule is to ensure that standard terms complete and complement the individually negotiated terms, but do not undermine them (see Grüneberg, in Palandt (2013), § 305b no. 1). 2. Scope of application. a) Matters covered. As part of the rules on standard business conditions, § 305b BGB applies to terms that are contradictory to individually agreed clauses in the same sense that §§ 305 et seq. BGB applies to all pre-drafted terms. The provision covers both terms in favour of the supplier of the individually agreed terms as well as terms in favour of the other party (see Grüneberg, in Palandt (2013), § 305b no. 1). b) Matters not covered. Not covered are contracts that have been negotiated individually as a whole. Also not covered are B2C contracts that have been drawn up unilaterally for the particular occasion. The rule of § 310(3) no. 2 BGB, which extends the provisions on standard terms to B2C-contracts drawn up for non-recurring use, does not apply to § 305b BGB. 3. Content. § 305b BGB gives priority to ‘individually agreed terms’ over standard terms. The meaning of the expression ‘individually agreed’ is somewhat loose. A hint at how it has to be understood comes from § 305(1) 3 BGB. According to this provision, contract terms are not to be considered standard terms if they ‘have been negotiated in detail between the parties’. Under this provision, it is accepted that even where one party introduces pre-drafted terms, they can nevertheless be individually negotiated if the other party had the actual opportunity to bring his or her influence to bear on the terms and to make his or her interests heard (see Grüneberg, in Palandt (2013), § 305 no. 20; Basedow, in Münchener Kommentar (2012), § 305 no. 35). According to the Federal Court, this requires more than just a debate (‘negotiating is more than just debating’, BGH NJW 2005, 2543 (2544)). The same applies in principle under § 305b BGB. However, the meaning of ‘individually agreed’ in § 305b BGB is a little wider than that of ‘negotiated in detail’ in § 305(1) 3 BGB. It is accepted that the first meaning also covers terms which have been negotiated only ‘in a virtual meaning’, i.e., where there has been a debate but no extensive negotiation (see Grüneberg, in Palandt (2013),

289

M. Lehmann & S. Gohling § 305b no. 2). This means that a term is also ‘individually agreed’ if it has been unilaterally introduced by one party and the other party has unsuccessfully opposed to it. Such terms therefore also prevail over standard terms. The same is true for amendments of standard terms by implication (BGH NJW 1986, 1807) and subsequently agreed terms (BGH NJW 2006, 138).

Comparison and Evaluation According to PECL, DCFR and German Law, individually negotiated terms take precedence over non-negotiated terms. The rules are nearly identical. However, the PECL and the DCFR provisions are wider in scope because they also apply to terms that have been drawn up for non-recurring use. Bearing in mind that individually negotiated terms typically represent the parties’ common intention rather than pre-drafted terms, this wider scope is preferable. There has been some insecurity in Germany when a term is individually agreed upon. In the context of § 305b BGB, this is the case even where the clause has only been subject to debate and not actually been negotiated. Indeed, it seems preferable to give preference to such a clause over a standard clause that has not even been debated.

Principles of European Contract Law Article 5:105: Reference to Contract as a Whole Terms are to be interpreted in the light of the whole contract in which they appear. 1. Purpose of the rule. A contract is an agreement that may include a number of different provisions. Nevertheless, the parties intend to be legally bound to the contract as a whole. Therefore, it is reasonable to presume that the parties meant to express themselves coherently (see Lando/Beale (2000), p. 296 Comment). Accordingly, it is necessary to understand the content of the contract in its entirety rather than to isolate clauses from each other and to interpret them out of context. 2. Scope of application. The rule is not only applicable to single contracts, but also to groups of contracts that are treated as a whole, for instance a framework contract and the various contracts made under it (see Lando/Beale (2000), p. 296 Comment). 3. Content. When interpreting a contract, it must be assumed that the terminology is used coherently except where there are indications to the contrary (see Lando/Beale (2000), p. 296 Comment). Consequently, the same term should not be given different meanings in different parts of the same contract in order to prevent contradictions from arising in the agreement. Although there is usually no hierarchy between the different elements or parts of a contract, particular emphasis should be given to any definition of terms or to a preamble (see Lando/Beale (2000), p. 296 Comment).

290

Chapter 5: Interpretation Draft Common Frame of Reference II. – 8:105: Reference to contract as a whole Terms and expressions are to be interpreted in the light of the whole contract in which they appear. Article II.-8:105 DCFR corresponds to Article 5:105 PECL in its substance and its scope of application. There is a slight difference in the wording as it also mentions expressions and not only terms. This, however, does not change the substance of the rule, but is merely a clarification (see above comment 3 on Article II.-8:101 DCFR).

German Law Text: See § 157 BGB, reprinted supra under Article 5:101 PECL. 1. General. The standard rule on interpretation contained in § 157 BGB refers to contracts that are to be interpreted in good faith. This rule also implies that contradictions must be avoided (see Busche, in Münchener Kommentar (2012), § 157 no. 6). Since a basic coherence can only be ensured by a consistent reading of a term used in different parts of the same contract, the rule also requires that terms and expressions of the agreement be interpreted in light of the whole contract in which they appear. 2. Scope of application. § 157 BGB and the rule of reference to contract as a whole are applicable to all kinds of private law relationships that fall under the German civil code.

Comparison and Evaluation PECL and DCFR provide expressly that terms in a contract are to be interpreted coherently. The same rule is implied by § 157 BGB, which requires the interpretation of contracts in good faith. One can reasonably debate about which kind of legislation is better. On the one hand, it might be said that the principle of reference to contract as a whole in the PECL and the DCFR would be unnecessary because it can also be derived from other rules, e.g., by understanding a consistent term to be a relevant circumstance in the sense of Article 1:102 PECL respectively Article II.–8:102(1) DCFR. On the other hand, the provision of more express guidelines reflects the tendency of modern projects of uniform law which amplify the rules on interpretation (see Vogenauer, in The Max Planck Encyclopedia of European Private Law, Part I (2012), pp. 976 et seq.). In the interest of legal clarity and certainty, this tendency is to be welcomed.

Principles of European Contract Law Article 5:106: Terms to Be Given Effect An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not.

291

M. Lehmann & S. Gohling 1. Purpose of the rule. The aim of contracting parties is to be legally bound to the agreed terms. Consequently, interpreting a contract should not lead to its invalidity for contraventions or illegality where an alternative interpretation is possible. This applies to the entire contract as well as to particular contractual terms. 2. Scope of application. The rule serves as a supplement to the basic rules on interpretation as set out in Articles 5:101 et seq. PECL. It is to be applied prior to the contra proferentem rule. 3. Content. Article 5:106 PECL provides that where a term or the whole contract can be interpreted in different ways, one construction leading to the term’s or contract’s invalidity and another to its validity, the latter interpretation shall prevail. This is nothing else than a particular application of the old saying ‘ut res magis valeat quam pereat’. The drafters of PECL meant this rule to include the situation where one of two interpretations would lead to an absurd result. In this case, the other must be accepted (see Lando/Beale (2000), p. 297 Comment).

Draft Common Frame of Reference II. – 8:106: Preference for interpretation which gives terms effect An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not. Article II.-8:106 DCFR corresponds to Article 5:106 PECL in wording, substance and scope of application. The rule on partial invalidity and ineffectiveness is set out in Article II.-1:108 DCFR.

German Law Text: See § 157 BGB, reprinted above under Article 5:101 PECL. 1. General. Although the BGB does not expressly provide for the principle of preference for interpretation which gives terms effect, it is generally considered to be part of § 157 BGB which requires contracts to be interpreted in good faith. If this principle is respected, an interpretation that renders the terms of the contract lawful or effective is to be preferred to one which would not lead to this result (Busche, in Münchener Kommentar (2012), § 157 no. 14; see also BGH NJW 1971, 1035). The benchmarks for validity are §§ 134 and 138 BGB, which sanction the violation of legal prohibitions and morals with the invalidity of the agreement. 2. Scope of application. The principle of preference for interpretation which gives terms effect enshrined in § 157 BGB is applicable to all kinds of private law relationships. However, it does not apply to standard terms. When assessing the validity of a standard term, German courts interpret the term in the way which is most advantageous for the party that has supplied the term. Such a method will favour the invalidity of the term (see Basedow, in Münchener Kommentar (2012), § 305c no. 20), and protect the other

292

Chapter 5: Interpretation party. Furthermore, if part of a standard term violates the law, the courts will then derive from this fact the invalidity of the whole clause (see Ellenberger, in Palandt (2013), § 133 no. 25 and § 307 no. 8). They are not allowed to consider the lawful part of the standard term as being effective (‘Verbot der geltungserhaltenden Reduktion’, see Grüneberg, in Palandt (2013), § 306 no. 6).

Comparison and Evaluation PECL and DCFR expressly provide that terms and expressions are to be interpreted coherently. In Germany, it is considered to be the same as the rule implied in § 157 BGB states that contracts are to be interpreted in good faith. Generally, the European method is to be preferred because it enhances legal clarity and certainty (see above Article 5:105 PECL, COMPARISON AND EVALUATION). However, it would have been better to place the rule of reference to contract as a whole prior to the contra proferentem rule because logically its application precedes that of the latter.

Principles of European Contract Law Article 5:107: Linguistic Discrepancies Where a contract is drawn up in two or more language versions none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up. 1. General. The provision addresses a problem that often occurs in contracts entered into between parties from different countries. Not infrequently, such agreements are drawn up in one language and then translated into another. This practice may give rise to divergences between the various language versions. Apart from the question of which law is to be applied to the interpretation of the contract, which is dealt with by Private International Law (Conflict of Laws), there will be doubt as to which version is to be preferred as the basis for interpreting the agreement. The parties themselves can provide a solution by stating that one version is to be authoritative, in which case that version will prevail (see Lando/Beale (2000), p. 298 Comment). In case they did not include such stipulation and the discrepancies on the different linguistic versions cannot be eliminated by other means – such as correcting obvious errors of translation in one version – Article 5:107 PECL applies. 2. Scope of application. a) Matters covered. The rule applies to all versions of contracts and agreements drawn up in different languages. b) Matters not covered. Not covered are contracts that explicitly contain a provision that the different versions are to be equally authoritative (see Lando/Beale (2000), p. 298 Comment; apparently disagreeing Zimmermann (2010), p. 1362). In such a case, it is neither possible nor equitable to give precedence to one version according to Article 5:107 PECL. Instead, one must decide in accordance with the

293

M. Lehmann & S. Gohling general rules on interpretation which version complies better with the common intention of the parties or, if this cannot be established, what reasonable persons would have meant (see Lando/Beale (2000), p. 298 Comment). 3. Content. The provision contains a rule of priority in favour of the version that was drafted first. Since it is likely that this version best reflects the parties’ common intention, it is to be treated as the authoritative one (see Lando/Beale (2000), p. 298 Comment). Its content takes preference over other versions drawn up later. The rule is subsidiary to the basic rules of interpretation (see Zimmermann (2010), p. 1362). This means that it can only be applied where the other rules contained in Articles 5:101 et seq. PECL do not lead to a different result. Where the original version was unilaterally drafted by one of the parties, Article 5:107 PECL must be read alongside the contra proferentem rule (see Lando/Beale (2000), p. 298 Comment). That means that an original version supplied by one party can be superseded by a later one if the latter is more favourable to the other party.

Draft Common Frame of Reference II. – 8:107: Linguistic discrepancies Where a contract document is in two or more language versions none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up. The scope of application and the content of Article II.-8:107 DCFR corresponds with Article 5:107 PECL. There is a slight change in the wording because the term ‘is drawn up’ in the first part of the PECL provision has been removed. This, however, does not affect the rule’s substance.

German Law 1. Absence of a specific provision. German law does not provide a rule on linguistic discrepancies like it is spelled out in the European texts. This can be explained by the fact that the European texts deal more naturally with international situations. In practice, the problem of different language versions appears of course also in Germany and must be dealt with by the courts. They have developed their own method of solving the problem. 2. Case law. German courts pay particular heed to the language that the parties have preferred for their negotiations and the drafting of the contract. If the negotiations have been conducted in a certain language, then they consider that one party is barred from availing from its standard terms and conditions drafted in another language (see, e.g., OLG (Court of Appeal) Hamburg, NJW 1980, 1232; OLG Hamm, NJW-RR 1995, 188). At the same time, courts also attach considerable importance to an agreement of the

294

Chapter 5: Interpretation parties on the ‘language of the contract’. The Federal Court had to decide a case where two non-Germans had conducted their entire negotiations in German and used a German standard form to enter into a contract. It held that both parties are bound by the German version regardless of whether they were actually capable of understanding it. If one of them should lack this capacity, it would then have the responsibility to seek an adequate translation (BGHZ 87, 112, 114 et seq.). Although the decision does not explicitly say so, one may understand it to mean that a translation has no authoritative value whereas only the original version does. This notion fits with the view in the literature that explains that particular attention should be paid to the original version of the contract because it is a reasonable method to establish the common intention of the parties (see Grabau (1993), pp. 121 et seq.). It has to be emphasized that the language in which the negotiations were conducted and the ‘language of the contract’ that the parties have agreed to may be different (Spellenberg, in Münchener Kommentar (2010), Article 10 Rom I-VO, no. 69). In this case, the latter must prevail. Most of the time, however, both languages will be the same.

Comparison and Evaluation In case of different language versions, PECL and the DCFR give preference to the version in which the contract was originally drawn up. German law lacks a provision on this question. The courts give primary importance to the language in which the negotiations were conducted and on which the parties have agreed. The results will almost always be the same as under the European rules. However, one could also imagine a case where the parties have drawn up the original contract in one language and then entered into a formal agreement based on another. In that case, German courts would prefer the version that the parties have formally agreed on, while it seems that PECL and DCFR would opt for the original version. The German position in this regard is too rigid and too far removed from reality. The originally drafted version will normally be a much more reliable reflection of the intentions of the parties at the time of contracting than the formal contract later agreed upon. The European solution is, thus, to be preferred. It goes without saying that laying down a specific rule of interpretation in a legal text is better than leaving the question open to the courts. Contract law should serve the aim of unity through diversity and therefore bring people with different languages closer together. It should provide a clear rule on linguistic discrepancies because those discrepancies are a specific challenge in the interpretation of contracts.

295

CHAPTER 6

Contents and Effects H. Unberath

Principles of European Contract Law Article 6:101: Statements giving rise to Contractual Obligations (1) A statement made by one party before or when the contract is concluded is to be treated as giving rise to a contractual obligation if that is how the other party reasonably understood it in the circumstances, taking into account: (a) the apparent importance of the statement to the other party; (b) whether the party was making the statement in the course of business; and (c) the relative expertise of the parties. (2) If one of the parties is a professional supplier who gives information about the quality or use of services or goods or other property when marketing or advertising them or otherwise before the contract for them is concluded, the statement is to be treated as giving rise to a contractual obligation unless it is shown that the other party knew or could not have been unaware that the statement was incorrect. (3) Such information and other undertakings given by a person advertising or marketing services, goods or other property for the professional supplier, or by a person in earlier links of the business chain, are to be treated as giving rise to a contractual obligation on the part of the professional supplier unless it did not know and had no reason to know of the information or undertaking. 1. General. The present provision specifies conditions for the inclusion of a precontractual statement by one of the parties into a contract. The rule is closely connected to the rules as to contract formation (Chapter 2) and interpretation (Chapter 5). A contract presupposes ‘sufficient agreement’ according to Article 2:101(1) PECL. Article

297

H. Unberath 2:102 PECL stipulates that the parties’ intention in contracting is to be derived from their ‘statements or conduct’ as ‘reasonably understood by the other party’. It follows from these general principles in relation to pre-contractual statements: a party’s statement is to be treated as giving rise to a contractual obligation provided that the other party could reasonably assume that it was intended to become part of the contract. Coherence within the Principles and the actual wording of paragraph (1) suggest then that its purpose is the following: Article 6:101(1) (a)-(c) PECL spell out more specific conditions than those provided for in Article 2:102 PECL as to when it appears reasonable to imply an intention to be contractually bound. Paragraphs (2) and (3) in turn appear to be specific applications of the rule in paragraph (1). 2. Remedies. The effect of treating a statement as giving rise to a contractual obligation is that all remedies relating to non-performance are available to the addressee of the statement (cf. Lando/Beale (2000), p. 300 Comment C): the party making the statement may for instance be required to perform specifically what was promised in the statement (Chapter 9, Section 1) or recover the so-called expectation interest under Article 9:502: the aggrieved party is put into the position it would have been in had the statement been performed (Lando/Beale (2000), pp. 438–439 Article 9:502, Comment A). If, however, the statement is not to be treated as giving rise to a contractual obligation it may, if ‘incorrect’ (Article 4:117 PECL), justify recovery of the aggrieved party’s reliance loss or negative interest under Article 4:106: PECL the aim of damages in this case is to put the party back into the position it would have been in had it not entered the contract. Article 4:119 PECL stipulates that the aggrieved party may pursue either remedy where a statement is giving rise to a contractual obligation and at the same time gives rise to a right of avoidance or damages under Chapter 4 (cf. Lando/Beale (2000), p. 300 Comment E). 3. Statements giving rise to a contractual obligation. The circumstances to be taken into account according to paragraph (1) in determining the nature of the statement are: (a) the apparent importance of the statement to the other party, (b) whether the party was making the statement in the course of business, and (c) the relative expertise of the parties. Comment D suggests a strict approach under criterion (a), namely that the information must have influenced the decision to enter into the contract (Lando/Beale (2000), p. 300). It goes without saying that ‘mere sales talk’ (Lando/Beale (2000), p. 300 Comment D: ‘these goods will make your customers happy’) cannot be taken to imply a contractual undertaking. Criterion (b) suggests that statements made in the course of business are more likely intended to be legally binding than other statements, while subsection (c) attaches similar weight to an excess in expertise. Both elements indicate that the rule in paragraph (1) is a generalization of paragraphs (2) and (3) which both concern professional suppliers. 4. Professional suppliers. Paragraph (2) concerns statements of professional suppliers. The rule is more specific than paragraph (1) in two respects. First, the rule applies only if the statement in question concerns the characteristics of the supplier’s principal obligation. Such statements merely extend or qualify a contractual obligation. Secondly, the statement must be intended to promote the good or service in question. Such

298

Chapter 6: Contents and Effects statements are by their very nature intended to induce a contract and to be binding. However, paragraph (2) not only mentions ‘marketing’ and ‘advertising’ but also the giving of information ‘otherwise’. It is not entirely clear whether this other way of conveying information must be of a similar nature as ‘marketing’ and ‘advertising’. According to paragraph (2) such statements ‘are to be treated’ as giving rise to a contractual obligation unless it is shown that the addressee knew or could not have been unaware that the statement was incorrect. Paragraph (3) considerably extends the supplier’s liability. The supplier is treated as having agreed to the content of statements as defined in paragraph (2) that were made by a third party, be that a person advertising or marketing services, goods or other property for the professional supplier, or by a person in earlier links of the business chain. The same rule applies in relation to ‘other undertakings’. Such statements or undertakings ‘are to be treated’ as giving rise to a contractual obligation unless the supplier did not know and had no reason to know of the information or undertaking.

Draft Common Frame of Reference Article II. – 9:102: Certain pre-contractual statements regarded as contract terms (1) A statement made by one party before a contract is concluded is regarded as a term of the contract if the other party reasonably understood it as being made on the basis that it would form part of the contract terms if a contract were concluded. In assessing whether the other party was reasonable in understanding the statement in that way account may be taken of: (a) the apparent importance of the statement to the other party; (b) whether the party was making the statement in the course of business; and (c) the relative expertise of the parties. (2) If one of the parties to a contract is a business and before the contract is concluded makes a statement, either to the other party or publicly, about the specific characteristics of what is to be supplied by that business under the contract, the statement is regarded as a term of the contract unless: (a) the other party was aware when the contract was concluded, or could reasonably be expected to have been so aware, that the statement was incorrect or could not otherwise be relied on as such a term; or (b) the other party’s decision to conclude the contract was not influenced by the statement. (3) For the purposes of paragraph (2), a statement made by a person engaged in advertising or marketing on behalf of the business is treated as being made by the business. (4) Where the other party is a consumer then, for the purposes of paragraph (2), a public statement made by or on behalf of a producer or other person in earlier links of the business chain between the producer and the consumer is treated as being made by the business unless the business, at the time of conclusion of

299

H. Unberath the contract, did not know and could not reasonably be expected to have known of it. (5) In the circumstances covered by paragraph (4) a business which at the time of conclusion of the contract did not know and could not reasonably be expected to have known that the statement was incorrect has a right to be indemnified by the person making the statement for any liability incurred as a result of that paragraph. 1. General. This provision of the DCFR is modelled on Article 6:101 PECL. Paragraph (1) mirrors Article 6:101(1) PECL with insignificant changes in the wording. The other paragraphs differ in certain respects, the most important of which are discussed in the following. 2. Professional supplier. Paragraph (2) corresponds to Article 6:101(2) PECL. Instead of the term ‘professional supplier’ the party in question is referred to as a ‘business’. Furthermore the statement in question is defined more broadly as relating to the characteristics of the principal performance and need not be specifically intended to market or advertise the good or service supplied. The difference is minimal since Article 6:101(2) PECL covers also statements made ‘otherwise’. Article 6:101(3) PECL provides for rules of imputation of third party statements to the professional supplier. These rules are more heavily qualified by the present provision. While paragraph (3) follows the PECL in respect of persons ‘engaged’ by the professional supplier, paragraph (4) limits the statements made by earlier links in the business chain to contracts with consumers. Paragraph (5) grants the supplier an indemnity against the person making the statement if the supplier did not know and could not reasonably be expected to have known that the statement was incorrect. The liability imposed on the person that made the statement appears to be strict. 3. Consumer Sales Directive. It should be noted that the Consumer Sales Directive, Directive 1999/44/EC of 25 May 1999, which applies to the sale of tangible movable items by professional suppliers to consumers (Article 1), adopts a similar approach in its Article 2. Public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling give rise to contractual liability unless the seller shows that he was not, and could not reasonably have been, aware of the statement in question, or shows that by the time of conclusion of the contract the statement had been corrected, or shows that the decision to buy the consumer goods could not have been influenced by the statement. Unlike Article 6:101(3) PECL and unlike Article II.- 9:102(4) DCFR, the Directive blends out statements made by any intermediary links in the contractual chain.

German Law 1. Statements giving rise to contractual obligations. Note 1 to Article 6:101 PECL in Lando/Beale (2000) states that paragraph 1 of that article is part of the common core of

300

Chapter 6: Contents and Effects the legal systems of the EU and in particular also represents the position of German law. This assertion must be qualified. (The reference given there to the 1997 edition of Larenz/Wolf is somewhat misleading since at the referred pp. 180–181 the authors merely discuss the general approach to imputing contractual intention.) German law does not provide for a specific rule concerning pre-contractual statements other than the actual offer and acceptance (as to which see §§ 145 et seq. BGB). Generally speaking, Article 6:101 PECL (re-)states the general rule as to interpretation and contract formation that a statement becomes part of the contract if that is how the other party reasonably understood it in the circumstances. A similar objective approach to interpretation is applied in German law. § 157 BGB stipulates that contracts are to be interpreted according to the requirements of good faith, giving consideration to common usage. The objective meaning is determined from the perspective of the addressee of the declaration (objektiver Empfängerhorizont) by taking into account the special circumstances of the position of the person making the declaration as far as they were (or should have been known) to the addressee. The method of interpretation is thus objective, taking account not only of the (written) statement of intention itself but also of the other (known) circumstances and the context in which the statement was made (see generally Larenz/Wolf (2004) § 28, pp. 507 et seq.; and for a more detailed comparative account Markesinis/Unberath & Johnston (2006), pp. 133–138). In this context statements made prior to the conclusion of the contract will give rise to a contractual obligation, if the other party could reasonably assume that the person making the statement intended to be bound by it. In assessing the intention of the parties courts will take into account whether it was apparent from an objective point of view that a certain statement was important to the other party. German law does not contain any special provision as to the relevance of the expertise or professional capacity of the supplier of a service or goods for the intention to be bound. If these factors are to be taken into account this would have to be done by applying the general principle of objective interpretation. While it seems doubtful, whether a general rule similar to Article 6:101(1)(b) and (c) PECL can be safely stated, there is some judicial authority that supports the criteria mentioned there. In relation to certain groups of cases courts more readily infer a contractual undertaking from the statement of a professional person than a statement of a person acting outside a trade or profession. The paradigmatic example is the sale of a used car by a professional dealer to a consumer, though it should be noted that the market situation is commonly regarded as special. An important factor in determining the value of a second-hand car is the distance travelled with it. If a seller passes this information on to the buyer one can understand such a statement as a mere factual information, as a binding description of the quality of the object of sale, or as a guarantee. Courts tend to treat any information given by professional car dealers in this respect as involving a guarantee to that effect and accordingly impose strict liability (see with references Unberath, in Bamberger/Roth (2007) § 276 no. 40). This is noteworthy for in German law the fault principle is the general rule (§ 276 BGB). The reasoning in these decisions is at least partly based on the position of the seller as a professional car dealer (see for instance OLG Nürnberg NJW-RR 1997, 1212, 1213, which explicitly states that a less strict

301

H. Unberath approach applies if a consumer makes the statement; cf. also BGH NJW 1981, 1268, 1268, where the court expressly relied on the ‘experience of a professional car dealer’ in inferring a contractual undertaking from what appeared to be a mere factual information; note, however, that BGH NJW 2007, 1346, 1348, leaves it open whether the approach will be followed after the reform of the BGB in 2002). Academic opinion questions with some measure of justification the reasoning in this and similar lines of cases (see e.g., Faust, in Bamberger/Roth (2007) § 437 no. 79 with references; the criticism is directed at the question whether the seller can be taken to have voluntarily undertaken strict liability not as to whether the statement is contractual, which contention on the whole meets with approval). 2. Remedies. If a statement is regarded as contractual, the usual contract remedies are available (see discussion in Chapters 8 and 9 below). If a statement does not qualify as contractual it may justify the avoidance of the contract and an award of the negative interest under the rules of culpa in contrahendo or mistake (see the comparative remarks in Chapter 4 above). As a general rule it is for the aggrieved party to decide which remedies to pursue. 3. Public statements made by professional suppliers or third parties. The German Civil Code did not contain any rules comparable to Article 6:101(3) and (4) PECL previous to the implementation of the Consumer Sales Directive 1999/44/EC of 25 May 1999, which, as explained, resembles in part Article 6:101 PECL. It was thus for the courts in the individual case to decide whether statements made by third persons could be treated as agreed also between the parties to the contract and this giving rise to a contractual obligation. No general rule had emerged in this respect when the PECL were formulated. Neither did the implementation of the Sales Directive prompt the legislator to introduce similar rules in relation to other types of contract. Statements were qualified as contractual if and only if the aggrieved party could reasonably impute a third party’s statement to the supplier of the good or service, for instance because the seller made use of the advertising material provided by the manufacturer. This approach depends on the facts of the individual case. The German legislator transposed Article 2 of the Consumer Sales Directive in § 434 BGB. According to § 434(1) 3 BGB the thing sold must be of a quality: which the purchaser can expect according to the public statements of the seller, of the manufacturer or his assistant, in particular in the advertising or in the marking about particular characteristics of the thing unless the seller did not know of the statement and also need not have known of it, it was corrected at the point in time of the conclusion of the contract in an equally valid manner, or it could not influence the decision to purchase.

These statements give rise to a contractual obligation according to the wording of § 434(1) 1 and 2 BGB even though they have not been (expressly or implicitly) agreed between the parties. As is the case with the Directive statements made by intermediate sellers in the contract chain between seller and manufacturer are not regarded as relevant.

302

Chapter 6: Contents and Effects Hence, the approach of the BGB in relation to contracts of sale between professional suppliers and consumers is in essence the same as that of the Directive and accordingly similar to Article 6:101(3) and (4) PECL. Moreover, § 434 BGB applies to all types of sales contract, i.e., is not limited to statements made by professional sellers. This is an extension of the rule in the Directive, for the latter is limited to B2C situations. Yet, it seems unlikely that persons acting outside a trade or profession will be held liable for statements made by the manufacturer (there is no authority as to the interpretation of this provision as yet). Such persons will not normally be required to be aware of statements made by the producer. Still, theoretically, courts could come to the different conclusion and hold a consumer liable.

Comparison and Evaluation 1. Common core? Article 6:101 PECL rests on general principles of contract interpretation which are shared by German law but as such hardly worth mentioning alongside the rules in Chapter 5 PECL. However, the more specific rules contained in the former provision did not match the position of German law prior to the implementation of the Consumer Sales Directive. In respect of advertising by manufacturers and producers the Lando Commission decided to propose as an EU-wide solution the approach of the Finnish and Swedish Sale of Goods Act (see Lando/Beale (2000), p. 302 Note 2) which then was to become authoritative within the scope of the Consumer Sales Directive (presuming an influence of the PECL on the Directive). This development is noteworthy from a political point of view. PECL initiated a process of convergence at European level and influenced the actual content of the rules adopted. The emerging CFR is likely to contain rules similar to Article 6:101 PECL, as noted. This political impact of the PECL rules was desired by the drafters of the PECL (Lando/Beale (2000), p. xxiii). Article 6:101 PECL can in this respect be regarded as a success. At the same time it should not be lost out of sight that the actual solution adopted was essentially novel to German law and other legal systems. The remaining question then is whether the approach adopted in Article 6:101 PECL (and the DCFR) is in fact satisfactory. It is helpful to differentiate between statements made by the contracting party and third persons. 2. Statements by the contracting party. The rationale of Article 6:101 PECL is sound if this provision is to be understood as a mere application of the general rule that a contractual obligation must be derived from the parties’ agreement (Article 2:101 and Article 2:102 PECL). By way of introduction this was suggested as the preferable reading. From this point of view the provision is indeed preferable to the solution more recently adopted in German law. For § 434(1) 3 BGB suggests that statements made by the seller may be part of the contract even though the parties did not agree in this respect (Faust, in Bamberger/Roth (2007) § 434 no. 75; whether this so-called ‘objektive Fehlerbegriff’ nevertheless rests on party intent is controversial, see Unberath (2005b), p. 14; Grigoleit/Herresthal (2003), p. 234, with references). In terms of general principle it seems highly questionable to impose contractual liability irrespective of the parties’ intention.

303

H. Unberath How then is the intention of the parties in relation to pre-contractual statements best assessed? In this respect Article 6:101(1) PECL suggests that an excess of experience by the person making the statement or the fact that it was made in the course of business should provide a strong indication that the statement is meant to imply an undertaking. This seems questionable. The mere fact that a statement was made in the course of business or uttered by a person with supreme expertise can hardly of itself suggest that the person making the statement intends to be bound by it. Such an interpretation of Article 6:101 PECL could impose a heavy burden on business and prompt disclaimers which in turn cause transaction costs. The intention to undertake a contractual obligation in such situations rather results solely from the application of subsection (a), i.e., the apparent importance of the statement to the other party: the fact that one person is more experienced than another may indicate that the statement is important to the other party who cannot check the accuracy of the statement. By contrast, Article 6:101(2) PECL is more specific and arguably more persuasive when it singles out statements that concern the actual subject-matter of the contract and aim at facilitating the contract closure. These statements obviously lend themselves to be interpreted as promises. In this respect comment D by requesting that the statement influenced the decision to enter into the contract may in fact suggest too strict an approach (Lando/Beale (2000), p. 300). A causal link between a statement and the conclusion of the contract is necessary to establish reliance loss under Article 4:117 PECL. It is doubtful whether it is appropriate to require a promisee under Article 6:101 PECL to show that he would not have entered into the contract had the statement not been intended as a binding promise. The test should rather be whether the addressee could reasonably interpret the statement as forming part of the overall contractual framework. The addressee of the statement should not be required to prove that he would not have entered into the contract but for the binding nature of the statement. Article 6:101(2) PECL further stipulates for what at first sight appears to be a strict inference of a contractual obligation regardless of the intention of the parties. So does Article 6:101(3) PECL. This follows from the use of the term ‘is to be treated’ which indicates that the statements referred to therein amount to binding promises regardless whether they could reasonably be so interpreted in the circumstances of the particular case. A strict inference does not fit easily with the rationale of the provision as a whole. To ascribe a certain statement the binding nature of a contract involves the application of rules of interpretation. The rationale of applying such rules however must surely be to determine the actual intention of the parties in a particular case. Hence, certain circumstances may justify a presumption (not more) in favour of the binding nature of a statement, which can be disproved in the individual case. It follows that the provision ought not to trump the parties’ intention established by other means or rules of interpretation. The most obvious example is the use of a disclaimer. Finally, Article 6:101 PECL, Article II.-9:102 DCFR, Article 2 of the Consumer Sales Directive and the corresponding national provisions which implant it all raise a more general difficulty. These provisions include the following caveat: the addressee’s imputed knowledge of the ‘incorrectness’ of the statement prevents its inclusion into the contract. It is not immediately obvious why this should be the case. First, the

304

Chapter 6: Contents and Effects concept of ‘correctness’ of a statement is derived from the rules on mistake and misrepresentation, while in the present context the issue is one of an undertaking to perform a deed or abstain from certain acts, in short a promise to which the rules as to performance (Chapter 8 and 9 PECL) apply. Assume that seller A promised to deliver a second-hand car and pre-contractually assured the other party B that it is fit to drive on public roads (cf. BGH NJW 2007, 759 for an illustration). As a matter of fact, the car is not fit to drive at the time of conclusion of the contract but could be made fit to drive. Is A’s pre-contractual statement ‘incorrect’? If this were the case and B happens to know this at the time of the contract, seller A would not be treated as having undertaken to deliver a car fit to drive. This result is not satisfactory because the seller reasonably appears to have assumed to remedy the defect before handing over the car. The adjective ‘incorrect’, translated into the language of performance, seems then to refer to cases, in which the performance of a promise is initially impossible. Thus, paragraph (2) suggests that in the case of initial impossibility the promisor is (strictly) liable unless the promisee knew of or could not have been unaware of the impossibility. This interpretation causes difficulty too, for it is not easy to reconcile with the PECL’s approach as to initial impossibility (discussed below, in German law, generally speaking, it corresponds to § 311a(2) BGB). But the main criticism to be levelled against these provisions concerns the use of the concept of ‘correctness’ which is misplaced in the context of performance. 3. Statements made by third parties. The approach first adopted in Article 6:101(3) PECL and followed in Article II.-9:102(4) DCFR, Article 2 of the Consumer Sales Directive and § 434(1) 3 BGB to liability arising out of statements by third parties to the contract is not beyond doubt. If one approaches Article 6:101(3) PECL from the starting point of Article 2:101 PECL it follows that these rules seek to bring out into the open the presumed intention of the parties. These provisions in essence then impute a third party’s statement relating to the subject-matter of the contract to the contracting party, i.e., the professional supplier of a service or good. The BGB stands out, as noted, in applying the same rules even to non-professional sellers. Previous to the implementation of the Directive German courts decided on a case-by-case basis whether statement made by third parties, in particular the manufacturer, could be imputed to the professional supplier. Article 6:101(3) PECL generalizes this, but the argument for such a wide-ranging imputation is weak. There seems also to be little need for such a general rule since in most cases the manufacturer will have included the relevant information also on the packaging of the product or any other additional information that the seller may wish to pass on. In these cases the supplier can be directly held responsible for the statement and there is no need to look to the statement of a party not privy to the contract. In any event it seems implausible to burden a non-professional supplier, as the BGB does, with the weight of the manufacturer’s pre-contractual statements. Likewise it seems artificial to attach importance to the statements made by other persons than the manufacturer, in particular any intermediate links in the contractual chain. The Directive is therefore to be applauded to have excluded these persons from the scope of the rule. Overall,

305

H. Unberath however, the rule appears to be an unnecessary intrusion into the general principle that it is only for the parties to the contract to create contractual obligations.

Principles of European Contract Law Article 6:102: Implied Terms In addition to the express terms, a contract may contain implied terms which stem from: (a) the intention of the parties, (b) the nature and purpose of the contract, and (c) good faith and fair dealing. 1. General. The rule is of subsidiary character (cf. Lando/Beale (2000), pp. 302–303 Comment A). In relation to a contract’s ‘express terms’ Article 6:102 PECL does not apply. ‘Express’ terms of a contract are those terms that stem from the application of the rules of interpretation contained in Chapter 5 (annotated above). Article 1:105 PECL, according to which usage and practices may become part of the contract, must also be taken into account. ‘Express’ contract terms accordingly need not be explicit so long as they can be derived from the objectively declared intention of the parties as inferred from the parties’ actual statements, their conduct or the surrounding circumstances prior to the conclusion of the contract. Article 6:102 PECL applies only if such actual party intent cannot be shown. Only then does the question of an ‘implied term’ arise. Furthermore, the PECL provide for more specific provisions regarding ‘implied terms’ in relation to the price, Article 6:104 PECL, the quality of performance, Article 6:108 PECL, and certain other situations (Article 6:105–6:107 PECL, see comment below). These provisions must also be applied first. Article 6:102 presupposes that it may be the case that the parties’ actually declared intention, the ‘express’ terms (as supplemented by the aforementioned default rules), is not satisfactory in certain respects. This then is regarded as a sufficient ground for a court or arbitral tribunal to intervene and insert additional terms into the contract. If the actually agreed terms of the contract are not satisfactory the contract is said to have a lacunae or a gap (cf. Lando/Beale (2000), p. 302 Comment A). Comment B states that not all legal systems agree that there is a need to imply terms (Lando/Beale (2000), p. 303). The purpose of Article 6:102 PECL is thus to empower a court or tribunal to insert terms into the contract and furthermore to provide guidance as to the factors to be taken into account when implying a term, i.e., how a gap in the contract ought to be closed. 2. The source of implied terms. Article 6:102 PECL mentions three sources of implied terms: intention, the nature and purpose of the contract, and good faith and fair dealing. These factors are to be considered when implying a term. These criteria are also relevant at an earlier stage in the process of implying a term (though neither the wording nor the comments point this out), namely in order to assess whether the contract has a shortcoming in the first place. Implying a term presupposes an

306

Chapter 6: Contents and Effects unsatisfactory ‘gap’ in the contract terms, as comment A in Lando/Beale (2000) stresses, and these gaps must be identified first, before one can reason as to how to close them. Arguably the factors to be taken into account are those mentioned in Article 6:102 PECL as the sources of implied terms: It is by reference to the objectively assessed purpose of the contract that one can establish that the contract will not work as the parties to it must have intended it to do. Comment C appears to suggest that the three elements of the implied term test (intention, the contract’s purpose and good faith) can be applied independently from each other (Lando/Beale (2000), p. 303). This is not beyond doubt. The ‘intention’ of the parties referred to in Article 6:102 PECL necessarily refers to the presumed, hypothetical intention of the parties. The parties’ actual intention is by definition not available to imply terms in the sense of Article 6:102. Comment C suggests that the presumed intention ought to be established taking into account the principle of good faith and the standard of reasonableness (Lando/Beale (2000), p. 303). The test accordingly is the following: what would the parties have agreed if they had considered the problem and acted reasonably? The hypothetical intention of the parties if they had considered the problem must surely be the guiding principle. The test must be qualified in two respects. First, the presumed intention of the parties can sometimes be derived from previous conduct or statements. Such an inference of a presumed idiosyncratic intention is closer to the actual intention of the parties and therefore ought to prevail even if it deviates from the objective standard of reasonableness. Secondly, the test suggested by comment C in Lando/Beale (2000), is inseparable from the other factors identified in Article 6:102 PECL, namely the nature of the contract and good faith. For it is impossible to determine the presumed intention of the parties objectively without resorting to the nature of the contract as viewed from the point of view of a reasonable person. The implied term then is an inference a reasonable person (as a matter of fact: the court, the tribunal) derives from the contract’s purpose. In the commercial context for instance the test would thus be: which implication best gives the business efficacy to the transaction as a whole which the parties to it must have intended? 3. Obligation de résultat and obligation de moyens. Comment D focuses on the distinction between an obligation de résultat and an obligation de moyens (Lando/ Beale (2000), pp. 303–304). The distinction is well developed particularly in the French law of obligations and has proven helpful also in other jurisdictions. There is little to object to adopting the distinction, for analytical purposes at any rate, in the PECL. Yet, it is difficult to see why the distinction ought to be relevant as a gloss on a provision on implied terms. Whether a contract to do something is a contract which imposes a duty to achieve a specific result, or one which requires the party to (merely) use reasonable efforts to achieve it, is of crucial importance to the parties to such a contract. It is perhaps alongside the fixing of the remuneration the most important issue to be considered when entering into the contract. It would be surprising therefore if it were not possible to determine the nature of the obligation according to the ‘express’ terms of the contract by applying the rules in Chapter 5. Hence, cases in which the parties’ actual intention cannot be derived from their statements, their conduct, or the circumstances of the individual case are rare. Useful as this passage in the comments

307

H. Unberath is, it seems misplaced as a comment to Article 6:102 PECL. Arguably, in none of the examples given by way of illustration terms needed to be implied but rather the result followed from straightforward contract interpretation under Article 5:101 PECL.

Draft Common Frame of Reference Article II. – 9:101: Terms of a contract (1) The terms of a contract may be derived from the express or tacit agreement of the parties, from rules of law or from practices established between the parties or usages. (2) Where it is necessary to provide for a matter which the parties have not foreseen or provided for, a court may imply an additional term, having regard in particular to: (a) the nature and purpose of the contract; (b) the circumstances in which the contract was concluded; and (c) the requirements of good faith and fair dealing. (3) Any term implied under paragraph (2) should, where possible, be such as to give effect to what the parties, had they provided for the matter, would probably have agreed. (4) Paragraph (2) does not apply if the parties have deliberately left a matter unprovided for, accepting the consequences of so doing. 1. General. Paragraph (1) contains the general rule of contract interpretation. Paragraphs (2)–(4) spell out the rules for implying terms that do not follow from the express or tacit agreement of the parties, from rules of law or from practices established between the parties or usages. The DCFR likewise uses the term ‘implied terms’ which has strong Common Law connotations. Paragraph (2) allows the court to imply a term and specifies the factors that ought to be taken into account in doing so. Paragraphs (3) and (4) stipulate that the court in implying a term ought to give effect where possible to the presumed intention of the parties and should abstain from correcting a deliberate decision of the parties to leave a certain issue unprovided for. 2. Comparison and evaluation. The DCFR is better structured than the PECL: it brings together in Article II.-9:101 what the PECL artificially divide into two sets of rules in two chapters, namely the rules as to express terms in Chapter 5 and the provision on implied terms in Chapter 6. Article II.-9:101 PECL improves on Article 6:102 PECL also in relation to substance. Implying a term that cannot be founded on the parties’ actual intention creates the danger of distorting the contracting parties’ will and thus potentially undermines the very basis of the contract. Article 6:102 PECL does not sufficiently underline this prerogative of private autonomy over court intervention. Unhappily, the PECL-Comments in Lando/Beale (2000) do little to disperse any fear of unwarranted

308

Chapter 6: Contents and Effects court intervention. For instance in Comment C it is stated: ‘If the contract would be very risky for one party unless a term is implied to give that party some protection, a suitable term should be implied. (Lando/Beale (2000), p. 303)’ This bold assertion, with all due respect, overlooks that the parties to the contract may have intentionally assigned the commercial risk of a transaction to one of the parties, which normally is legitimate if the price reflects the risk assumed and the purpose of the contract is speculative. In any event the power to imply terms should not be rationalized in terms of a court power to establish what it regards as just but rather as a means to determine what the parties would likely have regarded as just had they considered the issue. Article 6:102 PECL and the accompanying comments in Lando/Beale (2000) can be criticized for not giving sufficient weight to the parties’ will. Article II.-9:101 PECL is more clearly based on party autonomy. Paragraph (3) reminds the judge that all endeavours to perfect the contract terms must seek to carry out the parties’ actual intention, whether it may be reasonable or idiosyncratic. It follows that the objective standard of good faith and fair dealing (c) ought not to trump the presumed intention of the parties derived from the circumstances in which the contract was concluded (b), and ought not to modify the actually agreed purpose of the contract (a). Paragraph (4) illustrates the merely subsidiary role that the technique of implied terms ought to play. Its inclusion is helpful. Yet, the rule is self-evident if one considers that implying terms into a contract presupposes that the contract does not work as the parties meant it to do. Hence, if the parties deliberately left a matter unprovided for, it would be wrong for a court to intervene.

German Law § 157 BGB: Interpretation of contracts Contracts are to be interpreted as required by good faith and having regard to custom (Verkehrssitte). 1. General. German courts apply an objective method of interpretation in relation to express terms of the contract (see comment on Article 5:101 and Article 6:101 PECL, above). The BGB does not contain any special provision on implied terms. German courts do, however, imply terms into a contract – terms that cannot be derived from the actual intention of the parties. This technique, which performs a similar function to Article 6:102 PECL, is known under the name of ‘ergänzende Vertragsauslegung’ or ‘completive interpretation’. Completive interpretation thus comes into play when the ordinary method of interpretation produces a result which does not appear to reflect how the parties intended the contract to operate. It can be easily seen that in German law as is the case with the PECL and the DCFR the preferred way of distinguishing contract terms is by focussing upon the method used in establishing them and less on whether they are articulated in the text of the agreement or orally. 2. Completive interpretation. Completive contract interpretation applies where it is not possible to determine the (tacit or express) actual intention of the parties even if the context of the text is taken into account. If the contract contains what is commonly

309

H. Unberath referred to as a ‘gap’, the filling of this gap by means of interpretation is then based upon a hypothetical intention of the parties. Good faith is routinely referred to as a yardstick against which to test whether or not the parties would have agreed to a term if they had considered the situation. The distinction between objective contract interpretation and completive contract interpretation is a fine one and not always clearly articulated in the reasoning of court decisions. Two reasons may account for this. First of all, a judge will be more comfortable to found his decision on the actual party will rather than a presumed and hence more controversial hypothetical intention. Secondly, German courts more readily apply the standard of reasonableness or good faith when interpreting contract terms than for instance English courts. This again makes it easier to derive the desired result from ‘express’ contract terms and diminishes the need to resort to the parties’ presumed intention under an implied term approach. (See for a comparative analysis Markesinis/Unberath & Johnston (2006), pp. 138–143, and for illustration the translated decisions reproduced therein: RGZ 117, 176, 180, case no. 46; RGZ 131, 274, case no. 36; RGZ 161, 330, case no. 47; BGHZ 23, 282, case no. 48). German academics are at pains, however, to emphasize that completive interpretation does not give the judge a ‘free mandate’ to draw up contract clauses as he pleases and ascribe them to the ‘reasonable’ intentions of the parties. In filling the gap, one ought not apply a general standard of reasonableness but to draw reasonable conclusions from the parties’ actual intentions (see, e.g., Mayer-Maly/Busche, in Münchener Kommentar (2007), § 157 no. 38). On the whole, however, Article 6:102 PECL comes quite close to the test applied by German courts, while Article II.-9:101 DCFR takes account of the concerns that one may legitimately raise against judicial creativity in contract interpretation. 3. Judicial activism. Judicial activism, however, is not only at stake when a court interprets a particular contract but also at a more general level. The good faith element in ergänzende Vertragsauslegung, implying terms in fact, enabled the courts to transcend the actual intentions of the parties and imply by default terms in law, i.e., term not which the parties would have included, but which they should have included in the contract. One famous example of this approach is the development of the contract with protective effects towards third parties (see comment on Article 6:110 PECL below). This concept is based upon completive interpretation and thus § 157 BGB, though we are confronted here by rules and terms imposed by law. There can be little doubt that if either Article 6:102 PECL or Article II.-9:101 DCFR were to become binding rules, courts would seize the opportunity to discover new terms imposed by law and refine or adapt existing ones which are not satisfactory on the basis of good faith.

Principles of European Contract Law Article 6:103: Simulation When the parties have concluded an apparent contract which was not intended to reflect their true agreement, as between the parties the true agreement prevails.

310

Chapter 6: Contents and Effects 1. General. Simulation is defined in Comment A as a situation in which the parties entered into a sham agreement in order to conceal another transaction which is actually intended (Lando/Beale (2000), p. 306). Article 6:103 PECL clarifies that while the simulated agreement does not have legal effects as between the parties, they are bound by the really intended agreement. Since the purpose of contract law is to give effect to the shared intention of the parties this result comes as little surprise and seems to be universally accepted. The effect of the provision is thus similar to that of Article 5:101(1) PECL that the common intention of the parties prevails over the literal meaning of the contract term (falsa demonstratio non nocet). The difference is that in the case of simulation the parties deliberately hide their common intention, while this occurs accidentally in the situation covered by Article 5:101(1) PECL. The reason why it may be worthwhile to clarify that the truly intended agreement is valid is that the motives for concealing it are more often than not ulterior in character (cf. Lando/Beale (2000), p. 306 Comment A). Yet, since the rules as to the conclusion of a contract do not have a penal character it is perfectly sensible to abstract from the reasons for the sham transaction. If, however, the true agreement as such is objectionable, it goes without saying that this may be a reason for invalidity according to the rules as to illegality and the like. It should be noted that the PECL do not provide model rules in this respect (cf. Lando/Beale (2000), p. 306 Comment B). 2. Effect as between the parties. The legal effect of a contract is by its very nature limited to the parties to the contract. Therefore, it is only natural that the rules as to simulation likewise are confined to the contracting parties (Lando/Beale (2000), p. 307 Comment C). Whether third parties who rely on the sham transaction are entitled to remedies as against the parties to the contract arguably lies beyond the scope of contract principles. A gloss may be called for in relation to undisclosed agency, since Comment A in Lando/Beale (2000) insinuates that this situation also involves simulation in the sense of Article 6:103 PECL. In a certain respect it is true that the intermediary who acts on behalf of an undisclosed principal conceals the real beneficiary of the transaction. Yet, the intermediary intended to be bound by the agreement entered into (Article 3:301(1) PECL), which, therefore, cannot be regarded as a sham transaction. The purpose of the rules as to undisclosed agency or indirect representation rather is to provide additional rights to the third party (Article 3:303 PECL) or in some legal systems to the principal.

Draft Common Frame of Reference Article II. – 9:201: Effect of simulation (1) When the parties have concluded a contract or an apparent contract and have deliberately done so in such a way that it has an apparent effect different from the effect which the parties intend it to have, the parties’ true intention prevails. (2) However, the apparent effect prevails in relation to a person, not being a party to the contract or apparent contract or a person who by law has no better rights

311

H. Unberath than such a party, who has reasonably and in good faith relied on the apparent effect. 1. Effect as between the parties. Paragraph 1 is modelled on Article 6:103 PECL. The wording is slightly redundant (in particular it is not immediately obvious why the provision differentiates between a ‘contract’ and an ‘apparent contract’). 2. Effect as to third parties. While the drafters of Article 6:103 PECL deliberately refrained from covering the effects as to third parties because the national provisions in relations to third parties were not sufficiently similar at national level, the DCFR proposes a uniform solution. However, it is questionable whether paragraph (2) serves a useful purpose. As noted, just as the contract’s effects are as a general rule limited to the privies to it, the rules of contract law need only consider the effect of a sham transaction on the contract parties. Of course, third parties may justifiably or not rely on the sham transaction, but if such reliance ought to give rise to rights and remedies is not a question of contract law but rather an instance of tort law, culpa in contrahendo and similar regime of rules that are not based on the parties’ common intention. Paragraph (2), unsurprisingly, does not solve the dilemma. The provision does not actually determine whether the third party has any rights as against the contracting parties in cases of simulation. Paragraph (2) merely stipulates that the contract’s ‘apparent effect prevails’ in relation to a person who reasonably relies on the simulated transaction. This is puzzling, for the effect of a contract is limited to the parties to the contract: even if the sham transaction were valid it would not give rise to a contractual right of the third party (unless Article 6:110 PECL applies, see below). Hence, it is not the contract’s immediate effect that is at stake. In the ultimate analysis paragraph (2) presupposes the existence of rights independent from contract that involve the concept of reliance: then the third party may invoke the sham transaction in its favour (cf. § 916(2) of the Austrian Civil Code, ABGB).

German Law § 117 BGB - Sham transaction (1) If a declaration of will which is to be given as against another is only given as a sham with that person’s agreement, then it is void. (2) If another legal transaction is concealed by a sham transaction, the provisions effective for the concealed transaction will be applied. 1. General. According to § 117(1) BGB a declaration of will that is made with the consent of the other party only in pretence is void: sham transaction (Scheingeschäft). If, however, the parties intend to cover up a different legal transaction which they in fact intend then the actually intended legal transaction is valid and the rules applicable in respect of that particular transaction apply.

312

Chapter 6: Contents and Effects 2. Effects as between the parties. § 117 BGB distinguishes a situation in which the parties enter into a simulated contract (paragraph (1)) from the situation in which the parties enter into a sham transaction and thereby intend to conceal another actually intended transaction (paragraph (2)). Whether or not this situation is provided for in a Code is a matter of style but the analysis in § 117 BGB is correct and more complete than Article 6:103 PECL. If the parties merely pretend to enter into a contract it is not justified to hold them to the sham agreement. § 117 BGB does not deal with the rights of third parties, but this, as noted, need not be a shortcoming of the provision. It goes without saying that if for instance one of the contracting parties deliberately uses the sham transaction in order to lure a third party into a disadvantageous agreement he may be hold liable in the law of delict (§ 823 and § 826 BGB) and also criminal law (§ 263 of the Criminal Code, StGB). A common example for the application of § 117 BGB is indicating a fictitious price of land in the contract document to cover up the higher price that was actually agreed upon and as a result to avoid the accrual of tax and notarial fees on the difference between the nominal and the intended price (e.g., BGHZ 54, 62). Here, according to § 117 BGB, the contract at the indicated price is invalid; the contract at the actually intended price is in principle valid subject to further conditions (cf. Markesinis/ Unberath & Johnston (2006), p. 247): since the requirement of proper notarial authentification (§ 311b(1) BGB) is not met in respect of the concealed contract price, the contract as a whole is invalid (§ 125 1 BGB). The lack of form, however, is cured if the property is effectively transferred to the purchaser (§ 311b(1) 2 BGB).

Principles of European Contract Law Article 6:104: Determination of Price Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price. 1. Purpose of Article 6:104–6:108 PECL. Article 6:104, 6:107 and 6:108 PECL concern situations in which the parties’ agreement does not explicitly determine the content of the main obligation (Article 2:103(1)(a) PECL). As a general rule, a contract that leaves open the essentialia negotii is invalid under Article 2:101(1) PECL since it does not contain sufficient agreement. The rationale of the aforementioned provisions is to ‘save’ the contract by supplementing the parties’ seemingly incomplete will (they are indirectly referred to in Article 2:103(1)(b) PECL; cf. also Lando/Beale (2000), p. 307 Comment A). Article 6:104 and 6:108 PECL presume that parties, who intend to be bound by a contract but do not determine the price or the quality, intended a reasonable price or average quality. The term implied by using this method appears to be a term implied in law (default rules) rather than in fact: in the typical case the parties take it for granted that the performance is to have the properties flowing from applying Article 6:104 or 6:108 PECL as the case may be. The parties merely do not state their intent explicitly since they anticipate that the term will be implied in law. It is hard to imagine that the

313

H. Unberath parties forgot to give the nature of the main performance any thought (if this should indeed happen, the provisions in question would then imply terms in fact). Things are different with Article 6:107 PECL and the provision on the whole is a special instance of Article 6:103 PECL (terms implied in fact), for it is less likely that the parties considered the non-existence of the factor. If the parties considered the price, the quality, the non-existence of the factor and the court establishes that they did not agree, the contract is invalid on the ground of incompleteness and Article 6:104, 6:107 and 6:108 PECL cannot be applied to save it. Article 6:105 and 6:106(2) PECL serve a different purpose (contra Lando/Beale (2000), p. 307 Comment A to Article 6:104). They concern situations in which one of the parties or a third party is empowered to determine the content of the obligation. They too provide methods of supplementing contract terms in the absence of express stipulation. However, they do not concern situations in which at the time of the conclusion of the contract the content of the obligation was insufficiently expressed but situations in which it was deliberately (and legitimately) left open to be determined at a later stage. This is a dangerous situation for at least one of the parties who necessarily loses control over the content of the contractual obligation. Therefore, Article 6:105 and Article 6:106(2) PECL empower the court to substitute a ‘reasonable’ term in certain situations. These provisions are of a fundamentally different nature than Article 6:104, 6:107 and 6:108 PECL: Article 6:105 PECL (possibly also Article 6:106(2) PECL) are meant to embody ius cogens the purpose of which is to protect one of the parties against heteronomy. It is only Article 6:106(1) PECL that serves a similar purpose as Article 6:104, 6:107 and 6:108 PECL: it provides for a mechanism in order to save a contract that is in danger of lacking ‘sufficient agreement’ in the sense of Article 2:101(1) PECL and thus rests on similar considerations as Article 6:103 PECL. 2. Determination of price. As noted, Article 6:104 PECL presupposes that the parties did not insert an express term as to the contract price. If it clear from the circumstances in which the contract was concluded what the intended price was supposed to be then again the provision does not apply, this being a case of straightforward contract interpretation under Article 5:101 PECL. Article 6:104 PECL, likewise, cannot be applied if the parties disagreed as to what the price ought to be. According to Comment C in Lando/Beale (2000) ‘Article 6:104 may not be used to allow a court to intervene when the parties had failed to agree’. Furthermore, if the parties considered the price issue but failed to set up a meaningful price clause Article 6:104 PECL ought not to be applied: the contract is invalid (cf. Lando/Beale (2000), p. 308 Comment B). Article 6:103 PECL contains a presumption that the parties intended that a reasonable price was to be paid, which Comment B refers to as the ‘normal price’ (Lando/Beale (2000), p. 308). Contracts entered into in a situation of emergency are given as the paradigmatic example (Lando/Beale (2000), p. 308 Illustration 1). The difficulty, of course, is, for the court to define ex post what ex ante should have been a ‘reasonable’ price. The reference in Comment C to Article 1:302 PECL in Lando/Beale (2000), the definition of ‘reasonableness’, is not of great assistance since that definition replaces a vague notion with other open-textured concepts, in particular good faith.

314

Chapter 6: Contents and Effects The other factors mentioned therein, circumstances of the case, nature of the contract, trade practices and usage are of little relevance in the present context for at the stage of applying Article 6:104 PECL the court has already established that a price cannot be determined on the basis of all those factors (cf. Lando/Beale (2000), p. 308 Comment C). Comment B to Article 1:302 suggests that the price should be determined by reference to ‘comparable contracts in analogous situation’ (Lando/Beale (2000), p.127). This approach too imports manifold insecurity. The market price is not mentioned as a yard-stick, yet, where available, it seems to be the practical upshot of the foregoing test.

Draft Common Frame of Reference Article II. – 9:104: Determination of price Where the amount of the price payable under a contract cannot be determined from the terms agreed by the parties, from any other applicable rule of law or from usages or practices, the price payable is the price normally charged in comparable circumstances at the time of the conclusion of the contract or, if no such price is available, a reasonable price. Article II.-9:104 PECL was drafted with a view to Article 6:104 PECL. The condition of application and its legal effects appear to be similar. See the comparative comment below for the possible impact of differences in drafting.

German Law § 612 BGB: Remuneration (1) Remuneration is deemed to be tacitly agreed if in the circumstances the service should only be expected to be given in return for remuneration. (2) If the level of the remuneration is not determined, when a rate exists remuneration in accordance with the rate should be regarded as agreed, and when there is no rate the usual remuneration. (3) […] § 632 BGB: Remuneration (1) Remuneration is considered to be tacitly agreed if the production of the work is, in the circumstances, only to be expected in return for remuneration. (2) If the level of the remuneration is not determined, if a valuation exists remuneration in accordance with the valuation is to be regarded as agreed and in the absence of a valuation the usual remuneration. (3) […]

315

H. Unberath 1. No general rule. German law does not contain any general rule as to the implication of a price term in the absence of express or implicit party agreement. In German law in some instances even if the parties do not specify a certain price, the contract will not be void for the sake of incompleteness but the court may fix the remuneration. There are rules in the Code as to certain types of contract which imply that if no price is expressly agreed, while at the same time the performance of the contract can be expected only in return for remuneration, the parties are presumed to have agreed that the compensation is to be set under existing statutory tariffs and in the absence of such a tariff, the price is to be fixed at the level of ‘customary’ or ‘usual’ remuneration, provided it is discernable: see § 653(2) BGB on brokers’ commission and the two provisions reproduced above: § 612(2) BGB on the provision of services and labour relationships and § 632(2) PECL which applies to contracts for work and material (e.g., construction contracts). Whether the same principle applies in relation to other types of contract where no such rule is included in the Code seems doubtful. See, however, OLG Hamm NJW 1976, 1212 (reproduced and translated in Markesinis/Unberath & Johnston (2006), pp. 542–544, comment at p. 60), a decision which, in implying a term that the usual price is to be paid in a contract of sale, arguably, goes too far in supplementing the parties’ intention in respect of the purchase price (cf. Kramer, in Münchener Kommentar (2007), § 154 no. 5). 2. The method applied. The concept of ‘usual’ remuneration presupposes that contracts of a similar nature are concluded on a frequent basis. The reference contract must be analogous in respect of the quality and quantity of the performance at the time and place of the contract and the amount of the price must be common ground among those involved in the particular trade (cf. e.g., BGH NJW 2001, 151). If no such price is available neither § 612(2) nor § 632(2) BGB empower the court to otherwise fix a ‘reasonable’ price. However, courts have been willing to establish a reasonable (angemessen) price in the absence of a usual price on the basis of (completive) contract interpretation (see e.g., BGH NJW 1961, 1251; BGH NJW 1985, 1895, 1897; BGH NJW-RR 2000, 1560, 1562).

Comparison and Evaluation 1. Substance and scope of application. The approaches of the PECL, the DCFR and the BGB are similar to each other but they have a different scope of application. The ordinary rules of interpretation are to be applied first. Only if the intention of the parties cannot conclusively be determined in this way and the parties have not failed to reach agreement but simply omitted to determine the price, the respective fall-back provisions are meant to apply in order to save the contract from fatal indeterminacy. The BGB-rules deal also with the question whether the performance in question was to be undertaken against remuneration in the first place. In this respect the PECL as well as the DCFR do not contain specific rules.

316

Chapter 6: Contents and Effects The rationale of these rules is thus to promote the validity of the parties’ apparently incomplete agreement. This salvation comes at the price of uncertainty, however. For the ex post assessment of the ex ante presumably intended price on the basis of such vague criteria as ‘normal’ or ‘usual’ or ‘reasonable’ price by a court brings in its wake legal uncertainty. While a price that is usually paid can be determined at least with some measure of accuracy, it is next to impossible to assess in advance what a court will regard as the reasonable price in the absence of such circumstances. The self-restraint of the BGB in this respect, however, has not precluded the courts to insert in effect the very same rule (a price may be set even if the usual price is unavailable) as that provided for under Article 6:104 PECL and – more explicitly – Article II.-9:104 DCFR (see below, comment 2). The question whether the general rule is to be preferred to the more confined German approach does not have an obvious answer. The BGB limits the inference of a reasonable price to certain types of contract (note that cases achieving the same result for other types of contract are regarded as anomalous). Which approach is to be preferred depends on how much weight is accorded to legal certainty. However, it seems that the German legal system has not experienced any pressure to extend the confined rules; hence, commercial convenience does not appear to demand that the rule ought to be generally applied to all contracts. 2. Drafting technique. Unlike Article 6:104 PECL the corresponding Article II.-9:104 DCFR does not raise a presumption but directly refers to the ‘normal’, respectively ‘reasonable’ price. The wording of the BGB provisions can be likened to Article 6:104 (are to be treated), which is commonly understood as a rule of interpretation (cf. Busche, in Münchener Kommentar § 632 no. 20). The difference in drafting technique is minimal for as explained above (comment 1 to Article 6:104) determining the price in the absence of express terms regularly amounts to implying a term in law, i.e., establishing a default rule. Article II.-9:104 DCFR is more explicit than Article 6:104 PECL. This is not a difference in substance since the former provision merely imports two elements of the comments on the PECL provision into the actual wording. First, the provision itself clarifies the subsidiary role of Article II.-9:104: DCFR in particular ordinary rules of interpretation should be applied first before the court ought to imply a term under the provision. Second, as to the method of fixing the price, Article II.-9:104 DCFR suggests looking at the price normally charged in comparable circumstances at the time of the conclusion of the contract. Ironically enough, this is how PECL defined the reasonable price, while the DCFR reserves this concept to those instances where the ‘normal’ price is not available. It appears that in this last instance the court is given almost unfettered discretion. The BGB in contrast does not provide a rule for price determination if the ‘normal’ price is not available. However, as noted, the courts have developed a similar rule outside the code on the basis of completive contract interpretation.

317

H. Unberath Principles of European Contract Law Article 6:105: Unilateral Determination by a Party Where the price or any other contractual term is to be determined by one party whose determination is grossly unreasonable, then notwithstanding any provision to the contrary, a reasonable price or other term shall be substituted. 1. General. Article 6:105 PECL empowers a court to substitute its determination of the performance for the unilateral and grossly unreasonable determination by one of the parties (see further comment 1 to Article 6:104). 2. Policing the determination. Article 6:105 PECL presupposes the parties’ right to empower one of them to determine the price or other aspects of performance. If the contract provides for unilateral determination, consequently the party normally will be given discretion to fix the content of the obligation. Article 6:105 PECL proceeds on the assumption that the party must determine performance reasonably (cf. Lando/Beale (2000), p. 310). Reasonableness is to be established according to Article 1:302. Account may be taken of the nature of the contract, the circumstances of the case, usage and practices as well as the terms of comparable contracts. Opinion as to what is reasonable may legitimately vary. In order to ‘prevent abuse of this section’ (Lando/Beale (2000), p. 310) a court may substitute its determination only if the party’s determination is grossly unreasonable. Any contrary provision in the contract is void.

Draft Common Frame of Reference Article II. – 9:105: Unilateral determination by a party Where the price or any other contractual term is to be determined by one party and that party’s determination is grossly unreasonable then, notwithstanding any provision in the contract to the contrary, a reasonable price or other term is substituted.

German Law § 315 BGB – Determination of performance by one party1 (1) Where the content of the obligation to perform is to be determined by one party in case of doubt it is to be assumed that the determination must be reasonable. (2) […] (3) A determination that is to be reasonable is binding on the other party only if is reasonable. If it is not reasonable, a reasonable determination is substituted by a court; the same applies if the determination is unduly late.

1. Own translation.

318

Chapter 6: Contents and Effects 1. General. German law accepts that, provided this is stated in the contract itself, the price or, indeed, any other aspect of performance may be fixed at a later stage. This can be done either by one of the parties themselves acting freely (freies Belieben) or equitably (billiges Ermessen) (§ 315 BGB), or by a third party acting freely or equitably (§§ 317–319 BGB). If the parties have stipulated for equity to be respected, which is presumed, the court is empowered to review the exercise of discretion of the contracting party (§ 315(3) BGB) or of the third person (§ 319(1) BGB) and if necessary replace it with its own determination (see Markesinis/Unberath & Johnston (2006), p. 59, and for illustration the translated decision at p. 544: BGHZ 41, 271). § 316 BGB provides a special rule in relation to synallagmatic contracts. § 315 BGB further serves as the legal foundation of the control of tariffs of (monopolistic) public service providers (in the past in particular energy suppliers, as to developments after the market’s liberalization cf. BGH NJW 2007, 1672). It may be of historic interest that § 315 BGB initially was also used as the basis for the control of standard terms (exclusion clauses in particular), which later was to be derived from good faith (§ 242 BGB) but today is explicitly provided for in §§ 305–310 BGB. The right to determine the performance unilaterally according to a reasonable standard is specially provided for in certain instances (see for details Gottwald, in Münchener Kommentar (2007), § 315 no. 7). 2. Agreed standard and judicial control. The right to unilateral determination may concern the price or any other aspect of performance (for instance time of performance: BGH NW 1983, 2934). § 315(1) BGB respects the parties’ choice as to the standard that needs to be observed when unilaterally determining the contract term. The parties are free to establish by agreement the extent as to which the unilateral determination is discretionary and to which extent it is predetermined. The unilateral determination may even entail unfettered discretion (freies Belieben). Alternatively, a narrow corridor for the unilateral decision may be set up or the standard of equitable discretion (billiges Ermessen) may be established. Note, however, that contrary to its wording the clause ‘free discretion’ (‘freies Ermessen’) is taken to imply that a court may substitute the determination if it is grossly unreasonable (Gottwald, in Münchener Kommentar (2007), § 315 no. 31). According to § 315(1) BGB it is to be presumed in case of doubt that the parties agreed on the standard of reasonableness (billiges Ermessen); this is a rule of interpretation. § 315(2) BGB requires communication of the actual determination. § 315(3) BGB empowers the courts to substitute an unreasonable determination provided that the parties agreed on this standard. The court in assessing reasonableness ought to take account of the fact that the balancing of interests may not lead to one right answer but can lead to a range of legitimate results (Ermessenspielraum, e.g., BGHZ 41, 270, 280). As to the relevant factors it is necessary to differentiate according to the type and nature of the contract (for an overview Gottwald, in Münchener Kommentar (2007), § 315, nos. 54–86). The standard of unfettered discretion is, as noted, tolerated by German law, though does not appear to occur frequently in actual practice. One reason may be that it is difficult to predict whether a free determination of the performance will be

319

H. Unberath eventually upheld by a court. For it is common ground that the other party to the contract may deserve protection under the rules of public policy (§ 138 BGB) and good faith (§ 242 BGB). The absence of an agreed standard therefore cannot be simply equated with arbitrariness (for details Gottwald, in Münchener Kommentar (2007), § 315, no. 32 with references, and as to the policing of the contract in general: Markesinis/Unberath & Johnston (2006), pp. 119–133, 247–262). It is important to note that if the determination is found to be unreasonable the court is not empowered to substitute the term, for there would be no basis upon which this should occur. The contract is invalid unless the parties have stipulated otherwise. This consequence in particular suggests that the parties may be better advised to adopt the standard of ‘free discretion’ rather than ‘free choice’, which entails that the court controls the decision but intervenes only if the determination is grossly unreasonable.

Comparison and Evaluation 1. General. Article II.-9:105 DCFR is the exact copy of Article 6:105 PECL. § 315 BGB is more detailed than both (it covers not only the standard of control but also specific matters such as the exercise of the right and the situation in which the party meant to decide unduly postpones the determination). If the European rules should be extended to provide a solution to these aspects of the problem, the BGB-provisions can be regarded as adequate model rules in this respect. 2. Freedom of contract and judicial control. The main difference between the PECL and the BGB, however, concerns the scope of judicial intervention. It is helpful to distinguish between the control of the agreement to delegate the determination to one of the parties and the control of the actual unilateral decision. Article 6:105 PECL presupposes that the parties delegated the right of determination on the ground of reasonableness. It is not entirely clear whether an alternative standard of control is acceptable under the PECL but due to the mandatory nature of the provision it seems to follow that such a delegation was invalid. Hence, a court was empowered to intervene and substitute the determination even if the parties did not provide that the determination needed to be reasonable. The BGB in contrast recognizes even unfettered discretion for the unilateral determination. If, however, the determination is grossly unjust and contravenes good faith or public policy the contract is invalid. This approach is more liberal, yet potentially harsher on the parties who take the risk of invalidity if they do not set up a substantive control standard. The reason why the drafters of the PECL resorted to court intervention on the basis of reasonableness regardless of the content of the agreement may have been that the PECL themselves do not deal with the policing of the contract with a view to public policy (Article 4:101 PECL). However, since any full-fledged legal system ought to provide general mechanisms that deal with grossly unfair contract terms the approach of the BGB appears less intrusive into freedom of contract and thus ultimately more convincing. The BGB differs from the PECL also in relation to the measure of control regarding the actual unilateral decision. The PECL confine the court’s intervening power to

320

Chapter 6: Contents and Effects grossly unreasonable determinations, while the BGB provides for a reasonableness test that is not further qualified. Considering the uncertainty imported by the concept of reasonableness the PECL approach has much too recommend it. However, also German courts acknowledge that reasonableness involves a certain leeway which demands judicial self-restraint. Moreover, as noted, the parties are free to limit the court’s power to gross unreasonableness. But if they do not, the court ought to enforce the agreed standard, i.e., assess the reasonableness of the determination.

Principles of European Contract Law Article 6:106: Determination by a Third Person (1) Where the price or any other contractual term is to be determined by a third person, and it cannot or will not do so, the parties are presumed to have empowered the court to appoint another person to determine it. (2) If a price or other term fixed by a third person is grossly unreasonable, a reasonable price or term shall be substituted. 1. General. Article 6:106 PECL applies to contracts according to which a third person is to determine the price or any other contractual term (see also above, comment 1 to Article 6:104 and 6:105 respectively). 2. Third person does not intervene. Paragraph (1) contains a rule of interpretation which is meant to ‘save’ (Lando/Beale (2000), pp. 311–312 Comment A) the contract when the third party does not determine the content of performance and the parties have not set up a fall back procedure. If the parties considered this eventuality but did not want the court to intervene or the person chosen is irreplaceable, the presumption is rebutted and the contract is (or becomes) invalid. 3. Policing the determination. Paragraph (2) stipulates that the courts are empowered not only to assess the reasonableness of the third party’s determination but also to interject the terms in question if the stipulation is grossly unreasonable. Paragraph (2) does not contain the passage ‘notwithstanding any provision to the contrary’, which in Article 6:105 PECL indicates the rule’s mandatory character. Unhappily, also Comment B in Lando/Beale (2000) does not clarify whether the rule is mandatory but merely points out that ‘coherence’ with Article 6:105 PECL was intended. Hence, it is not entirely clear whether the section was meant to embody ius cogens. The actual wording suggests that a stipulation to the contrary remains valid. The test applied by a court called upon to assess the determination is the same as that in Article 6:105 PECL: gross unreasonableness. Comment B states as argument in favour of this standard that the parties ‘in choosing valuation by a third person have taken the risk of errors’ and thus judicial intervention ought to be limited (Lando/Beale (2000), p. 312).

321

H. Unberath Draft Common Frame of Reference Article II. – 9:106: Determination by a third person (1) Where a third person is to determine the price or any other contractual term and cannot or will not do so, a court may, unless this is inconsistent with the terms of the contract, appoint another person to determine it. (2) If a price or other term determined by a third person is grossly unreasonable, a reasonable price or term is substituted.

German Law § 317 BGB: Determination of performance by a third party2 (1) Where the content of the obligation to perform is to be determined by a third party in case of doubt it is to be assumed that the determination must be reasonable. (2) […] § 319 BGB: Invalidity of the determination; substitution3 (1) A determination by a third party that is to be reasonable is not binding on the contracting parties if it is manifestly unreasonable. In this case the determination is made by a court; the same applies if the third party cannot or will not make the determination or when it is unduly late. (2) If the third party has unfettered discretion as to how to determine the performance, the contract is void if the third party cannot or will not make the determination or when it is unduly late. 1. General. As to the purpose and context of these provisions see also comment 1 to § 315 BGB, above. The structure of §§ 317–319 BGB is similar to §§ 315–316 BGB. The former provisions contain more detailed regulation than the latter, which is unsurprising since involving a third person into the contractual framework increases complexity. § 317(1) BGB contains a rule of interpretation: in case of doubt the parties are taken to have agreed on a standard of reasonable determination. § 317(2) BGB considers the implications of the involvement of a multitude of persons as third party. § 318 BGB deals with the effects of mistake, threats or deception on the third person’s determination: while these deficiencies in consent are relevant also as to the third person, the right to set the contract aside is reserved to the contracting parties. § 319(1) BGB stipulates the court’s power to intervene and substitute contract terms. § 319(2) 2. Own translation. 3. Own translation.

322

Chapter 6: Contents and Effects BGB applies when the determination need not be reasonable and lays down legal effects if the determination is not made. Note that §§ 317–319 BGB are of great practical importance in relation to expert opinions and valuations (Schiedsgutachten) (see for details and areas of application Greger/Stubbe (2007), pp. 35–40, 50–52, passim). 2. Agreed standard and judicial control. § 317(1) BGB presupposes that the parties have a right to postpone the determination of performance until after the conclusion of the contract and to delegate this determination to a third party. Furthermore, the parties are free to set out the standard that the third person ought to follow in determining the contract term(s). The same considerations as to the standard of reasonableness apply as under § 315 BGB (see comment 2 to § 315 BGB, above). § 319(1) BGB sets out the consequences of a determination that is supposed to be reasonable but is manifestly unreasonable: sentence 1 clarifies that such a determination does not bind the parties, while sentence 2 substitutes the court’s determination in this case. The same rule applies if the third party’s determination is not forthcoming. Thus, as is the case with Article 6:106 PECL and § 315 BGB, the contract is saved from invalidity. The standard applied by the court in assessing the determination is not the same as in relation to assessing the unilateral determination by one of the parties under § 315 BGB. The court intervenes only if the stipulated term is manifestly unreasonable. The reason for limiting the court’s power is this: unlike the parties to the contract, who invariably will pursue their own interest, a third party is presumed to be neutral. Hence, it seems reasonable to lessen the court’s grip on the interjected contract term. (See with references to the genesis of the provision Gottwald, in Münchener Kommentar (2007), § 319 no. 2.) § 319(2) BGB concerns contracts that entitle a third person to determine performance without setting out any standard wharsoever (freies Belieben). In the absence of an agreed standard it is not possible to assess the interjected term and furthermore there is no basis on which a court could intervene and substitute its own assessment. It follows that the contract is void if the determination is not made and that if it is made a court is not empowered to assess its reasonableness. Two caveats must be added. First, the parties may provide otherwise and stipulate for instance that a court may intervene and determine the missing term, which would save the contract. Secondly, while the term may not be policed on the basis of § 319 BGB it can be found contrary to public policy (§ 138 BGB) or good faith (§ 242 BGB) which in turn can imply the invalidity of the contract as a whole (see comment 2 to § 315 BGB, above).

Comparison and Evaluation Article II.-9:106 DCFR is the exact copy of Article 6:106 PECL. §§ 317–319 BGB contain more detailed and arguably more refined rules. Generally speaking, the same considerations apply as to the rules on unilateral party determination of a contract term (see above). It suffices therefore to make three observations.

323

H. Unberath First, as already noted, the position of the BGB that the parties are free to determine the applicable standard for the determination is sound. The comments to the PECL fail to identify a reason for limiting the parties’ options. Secondly, the standard of control (if reasonableness has been agreed) is the same (or at least similar) in the BGB and the PECL: manifest or gross unreasonableness. It is submitted that the reason underlying § 319(1) BGB better captures the rationale of limiting the court’s controlling power: a third party can be presumed to act neutrally, at any rate more objectively than one of the parties to the contract. Finally, if the parties do not provide a standard for the third party’s determination, the court should abstain from interjecting a term. This rule of the BGB does not have a counterpart in the PECL, which provide for a substitution of a reasonable term in all cases. The BGB approach is to be preferred since the contracting parties are sufficiently protected by public policy and similar concepts.

Principles of European Contract Law Article 6:107: Reference to a Non Existent Factor Where the price or any other contractual term is to be determined by reference to a factor which does not exist or has ceased to exist or to be accessible, the nearest equivalent factor shall be substituted. 1. General. The provision contains a rule of interpretation when the contract refers to a ‘factor’ or index and the reference point ceases to exist. In such a case it is to be presumed that the parties intended that the nearest equivalent factor shall be substituted. Article 6:107 PECL seeks to save the contract if an unforeseen event occurs. It appears that the rule is an application of Articles 5:101 and 6:102 PECL to a special case. The provision places the burden of proof on the party that maintains that the index is irreplaceable. 2. Scope of application. The rule is primarily intended to apply to price fluctuation clauses set up in periods of inflation but can be applied to other aspects of performance (cf. Lando/Beale (2000), p. 313). The example given is that of a reference to a certain ‘category of employees’ for the duration of holidays. It is not entirely clear why the wording refers to ‘the nearest’ equivalent factor. It may be likely that parties presumably agree that an ‘equivalent’ factor is substituted because the factor after all is equivalent (for instance correctly projects inflation). Whether the parties would agree on replacing the agreed factor with a nearly equivalent factor, however, is open to doubt.

Draft Common Frame of Reference Article II. – 9:107: Reference to a non-existent factor Where the price or any other contractual term is to be determined by reference to a factor which does not exist or has ceased to exist or to be accessible, the nearest

324

Chapter 6: Contents and Effects equivalent factor is substituted unless this would be unreasonable in the circumstances in which case a reasonable price or other term is substituted. The DCFR follows Article 6:107 PECL but adds a qualification. Insofar as the text is identical the same considerations apply as in relation to the PECL provision. The extension added by the DCFR is this: if it is ‘unreasonable in the circumstances’ to substitute the nearest equivalent factor the court is empowered to substitute ‘a reasonable price or other term’. This approach then adds the court’s power to substitute ‘reasonable’ terms if an equivalent factor cannot be substituted. This technique resembles that of Articles II.-9:105 DCFR and 9:106 PECL which empowers a court to substitute reasonable terms where the parties to a contract delegated the determination of performance to one of the parties or a third person (see above). When parties insert a reference to a factor they partly derive the terms of the contract from an extra-contractual source, the indexing agency for instance. The analogy to third party determination is, however, inconclusive. From substituting the indexing agency with another equivalent agency to the determination of a reasonable price by a court seems a long way. Saving the contract is not, it should be stressed, an end in itself. Only those contracts ought to be saved which the parties presumably intended to remain binding. If it is not appropriate to substitute an equivalent factor, contrary to Article II.-9:107 DCFR, the court should not substitute reasonable terms. It is not even clear on which basis to assess the reasonableness of the term to be inserted since there is no appropriate factor to resort to. The court intervention then appears arbitrary.

German Law and Evaluation German law does not contain an equivalent rule. The reference to good faith and the foundation of the transaction in this context in the notes to the PECL is misleading, for the principal case of application of Article 6:107 PECL cannot arise in German law: price fluctuation clauses (referred to commonly as Wertsicherungsklauseln) that refer to price indices are as a general rule invalid on grounds of monetary policy (see § 1(1) Preisklauselgesetz of 7 September 2007, BGBl. I-2246, PrKG, which merely refined similar rules; see as to the changes brought about by this latest reform Kirchhoff (2007)). Article 6:107 PECL deviates in relation to price fluctuation clauses from the position of German law in a way which seems unacceptable given the public policy nature of the PrKG. § 1(2) number 1 PrKG makes an exception from invalidity if the price is adjusted due to the determination of one of the parties or a third party provided that the determination involved a margin of discretion. As explained, § 315 or § 317 BGB (the equivalents to Article 6:105 and 6:106 PECL) are applicable to such contracts. The difference between this situation and Article II.-9:107 DCFR is that the parties actually agreed on the intervention of third person or unilateral determination and it can therefore be justified to substitute the term by a court. In respect of other contract terms German courts would seek to assess the parties’ intention in the individual case. It appears that no general rule of interpretation has

325

H. Unberath emerged in this respect, which indicates that it may not be necessary, or perhaps even unsatisfactory, to establish a presumption. Article 6:107 PECL raises the more general question as to how specific a European ‘Restatement’ ought or needs to be. As the notes acknowledge there is no consensus as to the specific rule across the Member States. Unhappily, the difficult issues raised by monetary policy are not even discussed. Overall, the provision proposes a uniform rule for a very specific problem where, arguably, the ordinary rules of (objective) interpretation would have sufficed. The DCFR had done better, if it did not follow this approach, or for that matter supplement it with an even more doubtful court power to stipulate ‘reasonable’ terms.

Principles of European Contract Law Article 6:108: Quality of Performance If the contract does not specify the quality, a party must tender performance of at least average quality. 1. General. Article 6:108 PECL contains a rule of interpretation: in the absence of express stipulation it is presumed that the performance must be of at least average quality. The scope of application is not restricted as to the type of contract or performance. Thus it applies to supply contracts as well as the provision of services (Lando/Beale (2000), p. 314 mention care hire and the services of a general practitioner). The rule is a generalization of the standard applicable to generic goods in many national legal systems (Lando/Beale (2000), p. 314). Note however that, as the notes in Lando/Beale (2000) state, no Member State has in fact a statutory provision of this general nature. 2. Average quality versus reasonableness. The concept of average quality presupposes a scale of different degrees of ‘quality’. This quantitative measure does not easily match all categories of performance. Thus, in the example of the general practitioner it seems odd to characterize his service as being of ‘average quality’. If the medic realizes that he cannot conclusively diagnose an illness and refers the patient to a specialist doctor he did all that – but also no less than – was expected of him. A more open-textured concept such as reasonableness as alternative standard would have been more adequate. The relevance of reasonableness under Article 6:108 is difficult to ascertain: despite the fact that the standard is not expressly referred to, it is nevertheless suggested by the Comment as applicable (in relation to the obligation of ‘due care’ and, generally, in interpreting the term ‘average’ regard is to be had to Article 1:301 – the definition of reasonableness; the wording of fails to indicate this link).

326

Chapter 6: Contents and Effects Draft Common Frame of Reference Article II. – 9:108: Quality Where the quality of anything to be supplied or provided under the contract cannot be determined from the terms agreed by the parties, from any other applicable rule of law or from usages or practices, the quality required is the quality which the recipient could reasonably expect in the circumstances. 1. General. Article II.-9:108 DCFR refines Article 6:108 PECL. The wording is more explicit; the standard of quality is different. The provision underlines its subsidiary nature as a fall-back provision: the contract terms, rules of law, usage and practices must all be considered first before the rule of interpretation applies. The standard applicable is that of ‘reasonable expectation’. This rule is to be preferred to the approach in PECL for it more clearly expresses the underlying rationale of the rule: average quality may be salient to sale of generic goods and a few other types of contracts but, as explained above, it is difficult to apply to medical or similar services (as noted, the Comment to Article 6:108 PECL in Lando/Beale (2000) also resorts to the concept of reasonableness). Average quality may, of course, be inferred from reasonable quality, which is the more abstract concept. 2. Consumer acquis. Article II.-9:108 DCFR generalizes the approach of the Consumer Sales Directive 1999/44/EC which in Article 2(2)(d) requires for conformity with the contract that the delivered goods must ‘show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect’.

German Law and Evaluation § 243 BGB: Obligation relating to class (1) A person who is obliged to provide a thing determined only according to its class must provide a thing of average type and quality. (2) If a debtor has done what is necessary on his side to provide such a thing, the obligation relationship is limited to this thing. 1. General. In German law, as the notes to Article 6:108 PECL in Lando/Beale (2000) point out, § 243(2) BGB lays down a similar obligation in relation to the delivery of generic goods, i.e., goods defined by certain class characteristics. The approach of § 243(2) BGB is not applied by analogy to all other types of contract – the provision lays down a special rule for generic goods. Article 6:108 PECL appears anomalous from this perspective. The notes further point to § 276 BGB for the proposition that a professional person must render a ‘professionally satisfactory’ service. This provision, however, does not deal with the quality of performance in relation to the primary right to demand performance but stipulates conditions for the secondary right to recover damages

327

H. Unberath (Unberath (2007), pp. 323 et seq.) and thus is a functional equivalent to Article 8:108 PECL rather than Article 6:108 PECL. In any event the applicable standard as to professional services is not that of ‘average’ quality but that of a reasonable quality (objektive Sorgfalt). In this respect the position of German law resembles Article II.-9:108 DCFR. There is a further instance of convergence between German law and the DCFR: § 434(2) 3 BGB implements the standard of reasonable expectations provided for in Article 2(2)(d) of the Consumer Sales Directive in relation to all contracts of sale (not only consumer transactions; see above, Article 6:101 PECL comments on GERMAN LAW). 2. Reasonable expectations. The reference in Article II.-9:108 DCFR to the ‘reasonable’ expectations as to the quality of performance can be interpreted in two ways. First, the rule can simply spell out a more specific rule of (completive) interpretation. If the parties have not specifically defined quality than it goes without saying that the promisee was entitled to expect what he could ‘reasonably expect’. Since an objective standard of interpretation prevails the contract terms can effortlessly be understood to refer to what the parties may have reasonably agreed to in the circumstances (§ 157 BGB, Articles 5:101 and 6:102 PECL). This intention-based reading of Article II.-9:108 DCFR adds little if anything to the general rules of interpretation. Secondly, one could understand the provision in a fundamentally different way, namely as a rule of law. If the parties have not defined the quality aspect of performance (at all), the performance must meet the standard of reasonable expectations. Such an approach prevailed for instance at the initial stages of the legislative process of the Consumer Sales Directive but was not adopted in the end (cf. Unberath (2005), pp. 9–15 with references). This objective approach does not require that the parties agreed as to the quality that was reasonably to be expected; rather this standard is imposed by law. The difference appears to be of mainly theoretical importance, yet, it stems from different views as to the foundations of contract law (see for a similar controversy regarding the quality of goods sold: Article 6:101 PECL EVALUATION, above). Which of the two interpretations prevails in the end, will influence the overall fabric of European contract law.

Principles of European Contract Law Article 6:109: Contract for an Indefinite Period A contract for an indefinite period may be ended by either party by giving notice of reasonable length. 1. General. Article 6:109 PECL contains a core principle of contract law: the parties to a contract for an indefinite period of time may end the contract by giving reasonable notice (cf. Lando/Beale (2000), p. 316 Comment A). It follows that everlasting contracts that bind the parties in absolute terms cannot be enforced (cf. Lando/Beale (2000), p. 317 Note 1: ‘eternal agreements prohibited’). The rule, which in its most abstract form is recognized by virtually all legal systems, is rudimentarily expressed. The provision may serve as a model for a great variety of national and more specific

328

Chapter 6: Contents and Effects provisions. Regarding the concept of notice this flexibility of the restated rule need not be a shortcoming. The key tenets of the rule can nevertheless be derived from the PECL. 2. Requirements as to notice. The first, more technical requirement is the communication of the notice which is governed by Article 1:303 PECL (Lando/Beale (2000), p. 316 Comment D). There is just one requirement as to substance: the notice must be of reasonable length. What is reasonable is not further specified in the PECL: Comment C in Lando/Beale (2000) merely refers to the open-textured definition in Article 1:302. Note 2 point out that the approach of national legal systems usually differentiates between different types of contract and provides for specific time periods. It is of first importance to note that Article 6:109 PECL does not require a reason for terminating the contract. The indefinite length of the period of time during which the parties are hold to the contract is per se regarded as sufficiently burdensome and as a reason to allow the parties to dissolve the contractual bond. The Commission seems to have regarded this rationale, which is not even commented upon, as self-evident. Cases in which there was a breach of contract or more generally non-performance are distinguished at the end of Note 3 in Lando/Beale (2000): Article 6:109 PECL does not provide for termination because of non-performance since Article 9:301–9:309 PECL provide specific rules for these situations. By contrast, according to Article 6:109 PECL the contract may be terminated even if the other party’s conduct is impeccable and performance not in question.

Draft Common Frame of Reference Article III. – 1:109: Variation or termination by notice (1) A right, obligation or contractual relationship may be varied or terminated by notice by either party where this is provided for by the terms regulating it. (2) Where, in a case involving continuous or periodic performance of a contractual obligation, the terms of the contract do not say when the contractual relationship is to end or say that it will never end, it may be terminated by either party by giving a reasonable period of notice. If the performance or counter-performance is to be made at regular intervals the reasonable period of notice is not less than the interval between performances or, if longer, between counter-performances. (3) Where the parties do not regulate the effects of termination, then: (a) it has prospective effect only and does not affect any right to damages, or a stipulated payment, for non-performance of any obligation performance of which was due before termination; (b) it does not affect any provision for the settlement of disputes or any other provision which is to operate even after termination; and (c) in the case of a contractual obligation or relationship any restitutionary effects are regulated by the rules in Chapter 3, § 5, Sub-section 4 (Restitution) with appropriate adaptations.

329

H. Unberath It should be observed at the very outset that the scope of application of Article III.-1:109 DCFR is wider than that of Article 6:109 PECL. It is only paragraph (2) sentence 1 that corresponds to Article 6:109 PECL. The drafters discarded the concept of ‘a contract for an indefinite period’ in favour of the definition, ‘a case involving continuous or periodic performance of a contractual obligation’, which appears, however, unnecessarily involved. The DCFR does not deviate as to the substance of the rule in Article 6:109 PECL and the same considerations apply as those already made in relation to the latter provision. However, paragraph (2) sentence 2 contains a addition: it inserts a special rule as to the length of the period of notice in relation to contracts where performance is to be made at regular intervals. It seems doubtful whether such a degree of specificity benefits model contract rules at European level. Paragraph (1) concerns the situation where the parties themselves provided for a right of termination (or variation). Paragraph (3) contains rules for the restitutionary aspect of termination.

German Law § 314 BGB: Termination of long term obligation relationships by notice on substantial ground (1) Long-term obligation relationships can be terminated by any contracting party on a substantial ground without observing a period of notice. A substantial ground is present if, taking into consideration all the circumstances of the individual case and balancing the interests of both sides, the continuation of the contractual relationship until the agreed termination or until the expiry of a notice period cannot be expected of the party giving notice. (2) If the substantial ground consists of the violation of a duty under the contract, termination by notice is only permissible after the expiry without result of a period determined for the taking of remedial action or after a warning without result. § 323 paragraph 2 applies correspondingly. (3) The person so entitled can only terminate by notice within a reasonable period after he has obtained knowledge of the ground for termination. (4) The entitlement to demand compensation is not excluded by termination by notice. § 542 BGB: End of hiring (1) If the hiring period is not determined, any contracting party can terminate the hiring by notice in accordance with the statutory provisions. (2) […] § 620 BGB: Termination of service relationship (1) The service relationship ends with the expiry of the period for which it is entered into.

330

Chapter 6: Contents and Effects (2) If the length of the service relationship is neither determined nor capable of being deduced from the nature or the purpose of the services, each party can terminate the service relationship by notice in accordance with §§ 621 to 623. (3) […] 1. Ordinary right to give notice. So-called ‘continuing contracts’ (Dauerschuldverhältnisse) are contracts which are not fulfilled by single acts of performance on each side, but require continuing acts of performance over a period of time, such as leases (Miete), usufructuary leases (Pacht), contracts of partnership (Gesellschaft) and contracts of labour (Dienstvertrag) (see for an overview Markesinis/Unberath & Johnston (2006), pp. 149–150, 154-150, 436–437). Their essential feature is that the obligation continuingly arises during a fixed period of time or indefinitely. In the latter case, both parties may terminate the contract with effects for the future by giving notice, provided that certain time limits are observed in providing notice in advance. This right to give notice is commonly referred to as the ‘ordinary right to give notice’ and terminate such continuing contracts (ordentliche Kündigung). It does not presuppose a breach of contract by the other party. There are exceptions to the rule, mainly in order to protect a perceived weaker party. For instance, § 573 BGB requires a reasonable cause for the termination of a contract of personal accommodation by a landlord. The periods of advance notice vary according to the nature of the contract and the party seeking termination. Thus, for instance, employer and employee must respect different time limits (cf. § 622 BGB, the postponement of the effect of the termination by the employer depends upon for how many years the employee was employed). Accordingly, there is no general rule to this effect: this right of termination by notice is provided for in the sections on the respective specific type of contract. Two examples are reproduced above: § 542(1) BGB, contract of lease or rent, and § 611(2) BGB concerning the provision of services and labour relationships. See also, e.g., § 39 BGB – incorporated society, §§ 489, 605 BGB – loan, § 594a BGB – usufructruary lease, § 649 – contract of work and materials, §§ 671, 675, 676 BGB – mandate and the managing of the affairs of another, § 723 BGB – partnership, § 749 BGB. The legal relationship ends when notice is received by the other party (§ 130 BGB) and the advance period lapses. Termination operates only in respect of performances not yet due at the time of termination. It follows that performance which was due, but had not yet been rendered, must still be made. 2. Extra-ordinary right to give notice. Termination, however, is also a remedy for breach in relation to continuing contracts. It is referred to as an ‘extra-ordinary right to give notice’ (außerordentliche Kündigung). According to § 314(1) BGB, which contains what is regarded as an essential principle of personal autonomy, notice may be given for serious cause to terminate the contract without observing any term of notice (Unberath, in Bamberger/Roth (2007), § 314 no. 1). The pre-requisite of the right to give notice is a serious breach of contract (wichtiger Grund). According to § 314(1) 2 BGB, all of the circumstances of the individual case must be taken into account and, in balancing the interests of both sides, the continuation of the contractual relationship until the agreed termination date or until the expiry of a notice period cannot be

331

H. Unberath expected of the party giving notice. The general right to give notice in § 314 BGB is supplemented and to a considerable extent replaced by special rules in relation to specific instances of continuing contracts: e.g., §§ 543, 569, 581(2), 626, 723–724 BGB.

Comparison and Evaluation The general rule in Article 6:109 PECL is consistent with the position of German law. It is interesting to note that the BGB does not contain a general ordinary right to give notice applicable to all ‘continuing’ contracts, since it provides one in relation to the extra-ordinary right to give notice in § 314 BGB. However, as noted, the latter provision has a marginal scope of application due to the prevalence of special regimes of rules applicable to specific types of contracts. Likewise there is little practical need for the inclusion of a general rule such as Article 6:109 PECL given that the length of the period of advance notice varies across the different types of continuous contracts. Still, as a ‘Restatement rule’ Article 6:109 PECL adequately conveys the underlying general principle. If there is a difference between German law and the PECL it is one of emphasis. While the PECL regard the ordinary right to give notice as a fundamental tenet of freedom of contract, German law is less outspoken in this respect and merely regards the right to give notice for a serious reason (wichtiger Grund, the typical example is a breach of contract) as a key principle. The difference is of little practical impact for the Code acknowledges the right to give notice of reasonable length without special cause for all contracts of an indefinite period. It should be noted, however, that unlike the right to give notice for special cause (§ 314 BGB), the principle of reasonable notice is not absolute in German law. As explained, a landlord, for instance, can terminate a lease of residential property only for a special reason which will be closely scrutinized by the courts (§ 573).

Principles of European Contract Law Article 6:110: Stipulation in Favour of a Third Party (1) A third party may require performance of a contractual obligation when its right to do so has been expressly agreed upon between the promisor and the promisee, or when such agreement is to be inferred from the purpose of the contract or the circumstances of the case. The third party need not be identified at the time the agreement is concluded. (2) If the third party renounces the right to performance the right is treated as never having accrued to it. (3) The promisee may by notice to the promisor deprive the third party of the right to performance unless: (a) the third party has received notice from the promisee that the right has been made irrevocable, or

332

Chapter 6: Contents and Effects (b) the promisor or the promisee has received notice from the third party that the latter accepts the right. 1. General. Article 6:110 PECL regulates the conditions under which a third party is entitled to demand performance of a contract. Paragraph (1) stipulates that the right arises because and insofar as the promisor and the promisee have agreed that it should arise. Paragraph (2) stipulates that the right never arose if the third party renounces it. Paragraph (3) concerns the promisee’s power to extinguish the third party’s right: it ends once the latter receives notice of the right’s irrevocability or the promisee receives notice of the third party’s acceptance of the right. 2. Scope. Comment B in Lando/Beale (2000) clarifies that the provision is not meant to apply to agency situations or a trust which are not agreements in favour of third party in the sense of Article 6:111 PECL. Comment C in Lando/Beale (2000) seems to state the obvious by saying that the Article does not cover situations in which the promisor did not intend to give the third party any rights under the contract but where the law nevertheless extends certain effects of the contractual obligation to benefit third parties. The proviso is necessary since some legal systems rationalize certain delict duties in terms of the contract in favour of third parties (see below as to the position of German law). According to sentence 1 of paragraph (1) the third party’s right to the performance can arise because of an express term in the contract to that effect or because such a term can be inferred from the parties’ conduct or implied in fact by the usual means of interpretation (Articles 5 and 6:102 PECL). It is important to note that the parties to the contract must specifically intend to confer a right on the third party (cf. Lando/Beale (2000), p. 319 Comment F). This means that it does not suffice that the parties are merely aware of the fact that performance as a matter of fact benefits a third party they must intend to confer a right on that person. This may be the case in the following two situations: either the promisee owes the third party the same performance that he contracts for from the promisor or that he without being bound to intends to benefit the third party (for instance if he wishes to cater for a family member). A contract in favour of a third party simplifies matters for it enables the parties to directly achieve the intended result rather than enter into two separate transactions or resort to assignment techniques (cf. Lando/Beale (2000), p. 318 Comment A). The third party need not be known at the time of the contract (sentence 2 of paragraph (1)), which is mainly relevant for insurance contracts. 3. The right to performance. The promisee’s right to performance is taken for granted in Comment E. This may be self-evident as to the right to specific performance but is in fact controversial when it comes to demand damages for non-performance: is the promisee entitled to recover the third party’s loss or can the loss be imputed to the promisee on the ground that his performance interest was prejudiced? The PECL’s

333

H. Unberath position as to this right is not entirely clear (see for comparative analysis Unberath (2003)). The specific purpose of the contract in favour of third parties, however, is to confer a right to performance on the third party. The third party acquires it at the moment in time at which the contract is concluded. It is not necessary that the beneficiary accepts the right. However, if she renounces the right, paragraph (2) stipulates that it perishes and a retroactive effect of the waiver. Comment G does not give any reason for the third party’s power to extinguish the right. If the beneficiary’s right is created by the parties to the contract (paragraph (1)) it is not immediately obvious that he should be able to extinguish it. Two explanations are possible: either the third party is regarded as a further party to the contract, in which case requiring acceptance of the offer follows (cf. the position of Dutch law, Perron, in Busch et al. (2002), p. 283), or the third party is not a party to the contract but nevertheless deserves protection. This may be so because conferring a right on a person can occasionally have detrimental effects. Parties to a contract should not by their agreement harm an intended beneficiary. It follows that party autonomy demands that the latter consents to the benefit or at least does not reject it. Paragraph (2) is compatible with the multipartite contract analysis and also with the alternative analysis. In any event, the difference between presumed acceptance and requiring acceptance appears merely technical. Note that whether the beneficiary’s creditors may be able challenge the waiver is beyond the scope of the PECL (Lando/Beale (2000), p. 319 Comment F). 4. Revocation of the third party’s right. Much attention is devoted in paragraph (3) and Comment H in Lando/Beale (2000) to the question whether the beneficiary’s right may be revoked. Whether such revocation is possible once more depends on the analysis of the tripartite situation. If the third party is just another party to the contract and must accept the offer to benefit him, the right may be altered before the offer is irrevocable or has been accepted. Subsequently the beneficiary is a party to the contract and extinguishing the right requires his consent unless the contract terms provided for an option to withdraw the right. In the alternative the third party is not a party to the contract and therefore does not per se have a legally protected interest in keeping the right. The basis for justifying irrevocability is weaker, namely reliance. If this were the correct approach to paragraph (3) the third party could reasonably rely on the right once he communicated his acceptance of it or once it is declared irrevocable. As also in relation to paragraph (2), the comments do not indicate which analysis is to be preferred; the wording of paragraph (3) is compatible with both. What is remarkable, however, is that the promisor is not mentioned: the provision seems to rest on the assumption that his consent to remove the third party’s right can be taken for granted, but this is not necessarily the case.

334

Chapter 6: Contents and Effects Draft Common Frame of Reference Article II. – 9:301: Basic rules (1) The parties to a contract may, by the contract, confer a right or other benefit on a third party. The third party need not be in existence or identified at the time the contract is concluded. (2) The nature and content of the third party’s right or benefit are determined by the contract and are subject to any conditions or other limitations under the contract. (3) The benefit conferred may take the form of an exclusion or limitation of the third party’s liability to one of the contracting parties. Article II. – 9:302: Rights, remedies and defences Where one of the contracting parties is bound to render a performance to the third party under the contract, then, in the absence of provision to the contrary in the contract: (a) the third party has the same rights to performance and remedies for nonperformance as if the contracting party was bound to render the performance under a binding unilateral promise in favour of the third party; and (b) the contracting party may assert against the third party all defences which the contracting party could assert against the other party to the contract. Article II. – 9:303: Rejection or revocation of benefit (1) The third party may reject the right or benefit by notice to either of the contracting parties, if that is done without undue delay after being notified of the right or benefit and before it has been expressly or impliedly accepted. On such rejection, the right or benefit is treated as never having accrued to the third party. (2) The contracting parties may remove or modify the contractual term conferring the right or benefit if this is done before either of them has given the third party notice that the right or benefit has been conferred. The contract determines whether and by whom and in what circumstances the right or benefit can be revoked or modified after that time. (3) Even if the right or benefit conferred is by virtue of the contract revocable or subject to modification, the right to revoke or modify is lost if the parties have, or the party having the right to revoke or modify has, led the third party to believe that it is not revocable or subject to modification and if the third party has reasonably acted in reliance on it. 1. General. The provisions in the DCFR on the contract in favour of a third party are much more detailed. Article II.-9:301 DCFR defines the scope of the concept. Article II.-9:302 DCFR contains the rules as to the rights, remedies and defences of the

335

H. Unberath promisee and the third party, while Article II.-9:303 DCFR stipulates the conditions under which the right or benefit may be rejected or revoked. 2. Scope. Article II.-9:301(1) DCFR is the functional equivalent to Article 6:110(1) PECL. The PECL proceed, as noted, on the assumption that the concept of a contract for the benefit of a third party presupposes that the third party is entitled to demand performance of the contract. The contract, in other words, confers a right on the beneficiary. According to Article II.-9:301(1) DCFR, however, it may also confer a ‘benefit’. This addition establishes a significant difference between the two sets of principles. It is not to be presumed that the DCFR intended to cover all types of situations in which a third party may accidentally benefit from a contract but rather that the term ‘benefit’ was intended to cover the operation of an exclusion clause for the benefit of a third party. This situation is expressly provided for in Article II.-9:301(3) DCFR and extends the scope of application of these provisions as compared to the PECL (see for a similar scope of application in English law Contracts (Rights of Third Parties) Act 1999). Article II.-9:301(2) DCFR states the obvious, namely that the contract defines the content of the third party’s right. 3. The right to performance. As the PECL the DCFR does not consider the promisee’s position in enforcing the contract. Article II.-9:302 DCFR sets out the third party’s right. According to Article II.-9:302(a) DCFR it is presumed that the right is of the same nature ‘as if the contracting party was bound to render the performance under a binding unilateral promise in favour of the third party’. It is not entirely clear what this passage is intended to convey. The contracting party referred to is the promisor. It seems that his obligation is not the same as a binding unilateral promise (‘as if’) but should be treated as such. If this were intended to invoke the application of the rules as to unilateral acts (Article II.4:301–4:303 DCFR), it is not apparent which aspect of those rules is actually referred to. In particular the right to reject the benefit is expressly dealt with in Article II.-9:303 DCFR. Furthermore it seems paradoxical to speak of a ‘unilateral’ promise in favour of ‘third’ party. By contrast, Article II.-9:302(b) DCFR contains the clear and, generally speaking, uncontroversial principle that the promisor may assert against the third party all defences which he could assert against the promisee. This is a helpful clarification, which also the PECL ought to have included. According to Article II.-9:303(1) DCFR the third party may reject the right or benefit. The provision is modelled on Article 6:110(2) PECL but specifies – in the interest of legal certainty – in greater detail the conditions of such a rejection (no rejection after acceptance, rejection must occur without delay). It suffices therefore to refer to comment 3 to Article 6:110, above, and to remark that the DCFR like the PECL presuppose that the beneficiary’s right (or benefit) accrues with the conclusion of the contract but that he may not be conferred the right (or benefit) against his will. 4. Revocation of the third party’s right. Article II.-9:303(2) and (3) DCFR concern the revocation of the third party’s right (or benefit). There are two significant differences to report in comparison with Article 6:110(3) PECL: first, the DCFR clearly does not rest on the multipartite contract analysis (paragraph (3)), secondly, the right to revoke the

336

Chapter 6: Contents and Effects benefit is reserved not only to the promisee but to the joint will of the contracting parties (paragraph (2)). The latter aspect gave rise to criticism in relation to the PECL who seemed to neglect the fact that the promisor too had a say in relation to the third party’s right (see above, comment 4). Article II.-9:303(2) DCFR 1 states the sound principle that before the third party has proper knowledge of the benefit to be conferred. Furthermore, since the contracting parties confer the benefit it is in their power to reserve any right to withdraw or modify it even after the third party was properly notified of it (Article II.-9:303(2). Article II.-9:303(3) DCFR puts forward a reliance based analysis of the third party’s position vis-à-vis the contracting parties – this clearly excludes the tripartite contract. Only if the beneficiaries may reasonably rely (which is further defined in that provision) on the benefit, are the parties to the contract prevented from ex post altering or extinguishing the benefit.

German Law § 328 BGB: Contract for benefit of third party (1) Performance towards a third party can be stipulated for by contract with the effect that the third party acquires the right directly to demand performance. (2) In the absence of a special provision, it must be deduced from the circumstances, in particular from the purpose of the contract, whether the third party is to acquire the right, whether the third party’s right is to arise immediately or only subject to certain prerequisites, and whether power should be reserved to the persons concluding the contract to cancel or amend the third party’s right without his consent. § 333 BGB - Rejection of right by third party If the third party rejects the right acquired from the contract as against the promisor, the right is deemed not to have been acquired. § 334 BGB - Objections by debtor against third party Objections arising from the contract also belong to the promisor as against the third party. § 335 BGB - Right of demand by recipient of promise The recipient of the promise can, in so far as no different intention on the part of the persons concluding the contract is to be assumed, also demand performance towards the third party if this person has the right to the performance. 1. General. Generally speaking, persons who enter into a contract intend to create rights and obligations that will affect them, alone, and no one else. German law allows third parties, who are not parties to the transaction, to claim the promised performance directly from the promisor if the concept of a contract for the benefit of a third party (Vertrag zugunsten Dritter) applies. The provisions reproduced above contain the

337

H. Unberath central elements of this special type of contract. (See on the following the comparative observations in Markesinis/Unberath & Johnston (2006), pp. 181–216, and for illustration the cases reproduced therein at pp. 664–683: BAG NJW 1967, 172; BGHZ 2, 94; BGHZ 46, 198; RGZ 106, 1; BGHZ 41, 95; BGHZ 52, 194; BGHZ 93, 271; RGZ 51, 403; for a detailed monographic treatment Bayer (1995)). § 328, § 329 and § 330 BGB, define the scope of application of the contract for the benefit of a third party. § 331 and § 332 BGB contain special rules for certain situations bordering on the law of succession. § 333 BGB stipulates for the third party’s right to reject the benefit. § 334 BGB clarifies that the promisor may, as a general rule, avail himself of any defences that he may invoke as against the promisee also as against the third party. Finally, § 335 BGB establishes a presumption that the promisee may enforce the contract on behalf of the third party. 2. Scope. § 328(2) BGB clarifies that a contract for the benefit of a third party need not be expressly agreed but that the intention to confer a right on the third party may be inferred from the circumstances and the nature of the contract (i.e., the usual rules as to interpretation apply). This is supplemented by presumptions of contracts in favour of a third party in §§ 329–330 BGB. When the BGB provisions were being drafted, the German legislator mainly had insurance and annuity contracts in mind – the so-called contracts for the care of third persons; but the flexibility of the main provision – § 328 BGB – allowed the courts to apply the new notion to new situations that called for this treatment. The factual situations where contracts in favour of third parties have been discovered include for instance widows’ insurance schemes and workers’ retirement benefit schemes, parent contracting with doctors for the treatment of their child, savings accounts; third parties as account holders, insurance contracts stipulating performance to third parties, carriage of goods where the consignee is treated as a third party beneficiary. Contractual privity is also relaxed and third parties are brought under the protective umbrella of the contract in other situations covered by the akin concept of a contract ‘with protective effects’ towards a third party (Vertrag mit Schutzwirkung für Dritte). We are, here, concerned with a new institution created by the courts in order to overcome two narrow provisions in the tort section of the Code (namely, no recovery in tort for negligently inflicted pure economic loss and the weak rule of vicarious liability allowing the master to avoid liability for the torts committed by his servants whenever he can prove that he selected them and supervised carefully; for details see Markesinis/Unberath (2002), pp. 58–64; 301–306; 703–705). The Vertrag mit Schutzwirkung entitles the third party to hold the promisor liable in damages for a breach of a contractual obligation with protective effects towards the claimant (functionally equivalent to duties of care in tort) but not to demand the specific performance of the contract. German courts initially utilized the notion of contract for the benefit of a third party in this area. However, the courts soon realized that § 328 BGB was based on the idea that the third person acquires a right to ask the promisor to perform the contract specifically. Therefore, the courts soon recognized that giving the third party such rights was to be achieved by judge-made law. § 328 BGB is not applied directly to these situations, as is the case with Article 6:110 PECL. Consequently, exclusion clauses that operate to the benefit of a third party, likewise, are not seen as an instance of the

338

Chapter 6: Contents and Effects contract for the benefit of a third party but that of a contract with protective effects towards third parties (BGH JZ 1962, 570). As noted, Article II.-9:301(2) DCFR includes these contracts into the scope of application of the contract in favour of a third party. 3. The right to performance. German law stipulates that, as a general rule, the promisee remains entitled to enforce the contract on behalf of the third party: § 335 BGB. This provision was later interpreted by the courts to allow the promisee to recover damages on behalf of the third party (e.g., OLGR Hamm 1998, 144). The third party’s right to enforce the contract arises with the conclusion of the contract unless the contract provides otherwise. In particular, it is not necessary for the third party to accept the benefit. This is because in German law the third party is not regarded as a party to the contract. The intention of the contracting parties is the sole controlling factor as to the legal position of the third party. According to § 328(1) BGB a contract may stipulate performance for the benefit of a third party, with the result that the third party acquires the right directly to demand performance. The contract regulates inter alia the time at which the third party’s right arises, any further conditions, or how the right is to be exercised. Party autonomy is sufficiently respected, for the third party may reject the right according to § 333 BGB, the consequence of which is that the right is regarded as if it never existed (Gottwald, in Münchener Kommentar (2007), § 328 no. 3). 4. Revocation of the third party’s right. German law leaves the answer to the question until when the third party’s right may be revoked to the parties themselves. In the absence of an express agreement, the intention of the contracting parties to retain a right to alter or revoke the intended benefits will be judged by the purpose of the contract and all relevant surrounding circumstances. Any action on the part of the beneficiary indicating that he had altered his position as a result of the promise to confer upon him a benefit does not in itself remove the contracting party’s right to annul or modify the beneficiary’s rights. Whether the right can be revoked depends on whether the parties intended it to be revocable even after the third party was notified (e.g., BGH NJW 1986, 1165, 1166). Interestingly, however, the prevailing view is this: in the absence of an express agreement it is to be presumed that the parties did not intend to allow free revocation of the third party’s right once the latter has relied on it (see with references Gottwald, in Münchener Kommentar (2007), § 328 no. 34). The Code itself does not contain any general rule in this respect but § 331(2) BGB confirms the principle just expressed. This provision, which applies where performance to a third party was promised at the event of the death of the promisee, stipulates that it is to be presumed that the beneficiary’s right irrevocably vest at the time of the promisee’s death (the provision applies to a group of significant cases such as life insurance contracts, savings accounts, and partnership agreements in favour of third parties).

339

H. Unberath Comparison and Evaluation Article 6:110 PECL, Article II.-9:301–9:303 DCFR and German law are remarkably close. It suffices to make three observations: First, in the light of the ambivalent German experience with extending the notion of contract into the realm of tort law by using the concept of the contract for the benefit of a third party it is an advantage that the PECL as well as the DCFR adopt a cautious approach: they confine the scope of the contract for the benefit of a third party to situations in which the parties intended to entitle the third party to (specifically) enforce the obligation of performance, i.e., the beneficiary is entitled to the principal benefit of the contract. A fuller account of the concept should in the interest of legal certainty supplement the general rule with presumptions in typical situations (for instance insurance), though the PECL or the CFR are perhaps not the appropriate place to develop such rules. Secondly, the DCFR and the BGB do not regard the third party as a party to the contract. Consequently, no acceptance of the benefit conferred is required. Article 6:110 PECL, likewise, does not presuppose the third party’s acceptance, yet, due to its higher level of abstraction it is more easily compatible with a multipartite contract analysis. An open-textured approach seems better suited at the level of a crossEuropean solution. In terms of substance the tripartite analysis is arguably the preferable approach. For the difficulty with the two-party-approach is that it prima facie neglects the third party’s will and treats him as a mere object of the contract between promisor and promisee. These systems must therefore provide for an additional rule to re-establish the principle of party autonomy, according to which the third party may reject the benefit intended to be conferred upon him. Finally, the two-party-approach also has implications as to the right to revoke the benefit. German law represents the extreme end of the range of possible solutions as to whether the contracting parties may alter the third party’s right: this solely depends on their intention at the time of contracting or at a later stage. In practice, however, courts tend to presume that the contract terms regularly exclude a subsequent revocation. This approach is likely to lead to similar results as the more specific rules in Article 6:111(3) PECL (which however fails to take account of the promisor) and Article II-9:303(2) and (3) DCFR.

Principles of European Contract Law Article 6:111: Change of Circumstances (1) A party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished. (2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or terminating it, provided that:

340

Chapter 6: Contents and Effects (a) the change of circumstances occurred after the time of conclusion of the contract, (b) the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract, and (c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear. (3) If the parties fail to reach agreement within a reasonable period, the court may: (a) end the contract at a date and on terms to be determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances. In either case, the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing. 1. General. Paragraph (1) reinforces the principle of pacta sunt servanda or ‘sanctity of contract’ (Lando/Beale (2000), pp. 323–324 Comment A): the parties are bound to render performance as agreed even if the cost of doing so has increased subsequently. One of the parties then simply made a bad bargain. It is not the law’s purpose to prevent a person from entering into a disadvantageous transaction but merely to give effect to a validly concluded agreement. If this were not the case and the contractual obligation was subject to the parties’ ex post approval, contracts would not be binding in any meaningful way. The purpose of paragraph (1) therefore is to remind the courts that they ought to use the powers provided to them in paragraph (3) cautiously so as not to undermine the fundament of contractual obligation (cf. Lando/Beale (2000), pp. 323 et seq. Comment A, D). Paragraph (2) introduces an obligation to enter into negotiations if the obligation of one of the parties has become ‘excessively’ more onerous than anticipated and further conditions are met. The cost of performance must have increased in relation to what the parties assumed at the time of contracting. There are two respects in which performance may become more onerous: either the cost of procuring or producing the subject-matter of the contract has increased or the value of the performance of one of the parties has decreased (cf. paragraph (1)). The situation envisaged by paragraphs (2) and (3) must be distinguished from impossibility (as to which see comment on Articles 8:108 and 9:301 PECL) on the ground that the event in question does not cause an insurmountable obstacle to performance (Comment A in Lando/Beale (2000) suggests the French term of ‘imprévision’ to underline the distinction). Article 6:111 PECL differs from the rules on mistake (as to which see notes on Article 4:103 and 4:105 PECL) in that the rule on change of circumstance presuppose that the respective event occurred after the conclusion of the contract, while mistake principles apply if it had already existed at that date (paragraph (2)(a), cf. Lando/Beale (2000), p. 325 Comment B(ii)). The legal consequence of

341

H. Unberath paragraph (2) is that the parties incur an obligation to ‘enter into negotiations with a view to adapting the contract or ending it’. Paragraph (3) empowers the courts to intervene and modify the contract terms if the parties fail to reach agreement within a reasonable period (sentence 1) and to hold a party who in bad faith refused to negotiate or broke off negotiations liable in damages for the loss caused thereby (sentence 2). The court’s intervention rests on three discretionary value judgments. First, the court must determine at when after the event it is ‘reasonable’ to intervene. Secondly, the court must then assess whether to end the contract or adapt it in the light of a ‘just and equitable’ distribution of gains and losses. Thirdly, the court may award damages if one of the parties did not fulfil the obligation to negotiate by acting contrary to ‘good faith and fair dealing’ (the obligation flows from paragraph (2) which already implies the concept of reasonableness). The reference to ‘reasonableness’ and ‘good faith’ must be read in conjunction with Article 1:201 and 1:302 PECL, which in defining these concepts also rely on open-textured concepts. Article 1:302 PECL requires for instance that a court ought to take account of the ‘circumstances of the case’. This entails wide discretion because it is for the court to assess which particular circumstance it regards as relevant. Comment C draws the correct conclusion: ‘the mechanism adopted by Article 6:111 PECL gives the courts wide powers’ (Lando/Beale (2000), p. 326). 2. Two-fold approach. Comment A in Lando/Beale (2000) explains the rationale of the rules as to change of circumstance: it were ‘impractical’ to ‘strictly’ adhere to ‘sanctity of contract’, for ‘experience’ suggested that parties frequently were ‘not sufficiently sophisticated’ or ‘too careless of their own interests’ to introduce ‘appropriate’ clauses into their contracts. Even if contracts frequently included hardship-clauses, it was unlikely that they covered all eventualities. This analysis states in short: parties conclude incomplete contracts. The PECL adopt a two-fold strategy to address the issue of incompleteness: in a first phase paragraph (2) obliges the parties to enter into negotiations if the contract does not contain ‘appropriate’ clauses and, if this is to no avail, in a second phase paragraph (3) allows the court to step in and modify the contract as it thinks appropriate if the parties ex post fail to reach agreement. Neither response is uncontroversial. As the notes in Lando/Beale (2000) convey there is no consensus among the Member States whether the courts should intervene and modify the contract. Among the systems that allow the courts to step in, most of them do not stipulate for a general obligation of the parties to re-negotiate the contract comparable to paragraph (2) (Dutch law is an example in point Busch, in Busch et al. (2002), p. 289; German law too, see below). Article 6:111 PECL stands out thus as a programmatic statement and a normative choice as to the correct approach rather than as a restatement of a common core position. It expresses the ‘Lando-Commission’s’ views as to the respective roles of the parties and the courts in enforcing contracts. The obligation to re-negotiate clearly attempts to keep the parties in charge for as long as possible but in the end the court is given wide, if unlimited, discretion to change the contract. 3. Obligation to enter negotiations. Paragraph (2) that stipulates the obligation to negotiate in order to reach an amicable agreement must be read in conjunction with

342

Chapter 6: Contents and Effects paragraph (3)(b) which provides that a party that does not take the obligation seriously must bear the cost of refusing to negotiate or breaking off negotiations in bad faith. The main question raised by paragraph (2) is whether the evaluation of the parties’ behaviour is independent from the substance of the dispute between the parties, i.e., independent from what the court ex post will consider ‘just’. If the view of the court as to the correct solution of the problem matters, the risk of incurring liability in damages is for both parties considerable: the court’s view as to the exact distribution of losses and gains is next to impossible to predict ex ante. Such an approach, however, would undermine the very essence of negotiations: in the first phase of negotiations it is the parties’ responsibility to rectify the contract’s incompleteness. The result of these negotiations is, as Comment A in Lando/Beale (2000) emphasizes, not a concern of the court: parties may adopt ‘whatever they want’. Hence, the obligation in paragraph (2) can only refer to the manner in which one of the parties behaves. This interpretation is confirmed by the terms used in Comment C: acting in ‘bad faith’ or ‘abusively’ (Lando/Beale (2000), p. 326). The example given there is that of a party that continues negotiations even though it had already entered into an ‘incompatible’ contract with a third party. It follows that it is only in extreme and obvious cases that a court will find that the obligation was not respected. The notes to Article 1:201 PECL provide further guidance as to the standard of good faith in negotiations (cf. also Busch, in Busch et al. (2002), p. 286). The cost of breaking off negotiations in bad faith according to Comment C in Lando/Beale (2000) includes the cost of bringing the action that calls for the court to intervene. Since either of the parties to that action may be hold liable another example where the obligation is breached appears to be a situation in which the claimant has not even attempted to re-negotiate before bringing the action. Note also that if the action is brought ‘unreasonably’ soon (as the court can find), the court may refuse to rule for the time being and require the parties to (continue to) negotiate. The court is given discretionary power to use any means it deems useful and which procedural national law permits (Comment D in Lando/Beale (2000) gives the example of appointing a mediator). 4. The court’s power. In phase two, after the negotiations failed, one of the parties brings an action and requires the court to settle the issue as it finds just. According to Comment D the first aim of the court ought to be to preserve the contract. If this is not possible the contract may be ended. Note, also, that the contract may be ended upon terms and the decision to end the contract involves discretion as to when the contract is ended and how much restitution is due (cf. Lando/Beale (2000), pp. 326–327 Comment D). The purpose of the change of the contract terms ought to be ‘re-establishing the balance within the contract’ and ensuring that ‘the cost imposed by the unforeseen circumstances are borne equitably by the parties’. Comment D in Lando/Beale (2000) suggests further that the court must not place the burden solely on one of the parties. In order to understand this assertion it is necessary to recall paragraph (2). There are contracts which provide that the burden of an unforeseen event ought to be borne by one of the parties, usually because that party assumed the risk of such an event. If this

343

H. Unberath is the case performance is not ‘excessively onerous’ in the sense of paragraph (2)(c) and paragraph (3) is not meant to apply. It seems then that the PECL proceed on the assumption that the distribution to one party of the financial burden of an unforeseen event is solely a matter of interpretation (Articles 5:101 and 6:102 PECL), while in the absence of an ‘express’ or ‘implied’ all-or-nothing distribution, the cost must be shared by the parties. However, since the rules of interpretation and the rules on change of circumstance overlap at the fringes and considering the abstract nature of the provision, there remain doubts as to whether it is satisfactory to rule out the court’s ability to burden just one of the parties. The court’s intervention presupposes that there is a serious disequilibrium because of the unforeseen event: the costs for one of the parties must be ‘completely exorbitant’ or ‘excessively onerous’ (Comment B in Lando/Beale (2000) gives the example of inflation and the increased cost of shipping goods round the Cape of Good Hope following an unexpected closure of the Suez Canal). The court is then entitled to ‘reduce the price or the contract quantity’ or ‘order compensatory payments’ or take whatever other measure it thinks appropriate (examples from Lando/Beale (2000), pp. 326–327 Comment D). A court ought not, however, to ‘rewrite the entire contract’ (Lando/Beale (2000), pp. 326–327 Comment D). The line between re-establishing the contract equilibrium and wholly rewriting it is a fine one. Since the parties will not be able to ensure that this limit of the court’s power is respected, the proviso depends on the hope expressed by the drafters of the PECL that the courts will use their power ‘moderately’.

Draft Common Frame of Reference Article III. – 1:110: Variation or termination by court on a change of circumstances (1) An obligation must be performed even if performance has become more onerous, whether because the cost of performance has increased or because the value of what is to be received in return has diminished. (2) If, however, performance of a contractual obligation or of an obligation arising from a unilateral juridical act becomes so onerous because of an exceptional change of circumstances that it would be manifestly unjust to hold the debtor to the obligation a court may: (a) vary the obligation in order to make it reasonable and equitable in the new circumstances; or (b) terminate the obligation at a date and on terms to be determined by the court. (3) Paragraph (2) applies only if: (a) the change of circumstances occurred after the time when the obligation was incurred, (b) the debtor did not at that time take into account, and could not reasonably be expected to have taken into account, the possibility or scale of that change of circumstances;

344

Chapter 6: Contents and Effects (c) the debtor did not assume, and cannot reasonably be regarded as having assumed, the risk of that change of circumstances; and (d) the debtor has attempted, reasonably and in good faith, to achieve by negotiation a reasonable and equitable adjustment of the terms regulating the obligation. 1. General. Article III.-1:110 DCFR is modelled on Article 6:111 PECL with significant variations. 2. Pacta sunt servanda. Paragraph (1) mirrors Article 6:111(1) PECL. The phrasing is different and uses the concept of ‘obligation’ instead of ‘contract’, in order to include non-contractual obligations arising from a unilateral juridical act. (This follows if paragraph (1) is read in conjunction with paragraph (2).) Such an obligation is akin to contract since it stems from the voluntary assumption of an undertaking (Article II.-1-101(2) 2 and Article II.-4:301 to 303 DCFR). The structure of the PECL remains unchanged otherwise. The DCFR provision likewise emphasis the binding nature of voluntary obligation in order to confine the court’s intervention to adapt the contract to cover unforeseen events to exceptional, extreme cases. 3. Obligation to enter negotiations. The most significant deviation of the DCFR from the PECL concerns the obligation to re-negotiate the contract once the unforeseen event occurs (Article 6:111(2) and (3)(b) PECL). Paragraph (3)(d) provides that the attempt of the debtor to achieve by negotiations a ‘reasonable’ adjustment is a pre-condition for court intervention (as noted the terminology is meant to cover also unilateral acts, hence the reference to the ‘debtor’). This implies an indirect obligation of the parties to take up negotiations before resorting to court action. Thus, if the debtor does not seek to reach to an amicable agreement, he will not be able to turn to the court for assistance. The obligation is merely indirect, for, unlike Article 6:111(3)(b) PECL, the DCFR does not stipulate any further sanction for failing to comply. The debtor is at a disadvantage if he fails to negotiate, but the creditor is not entitled to compensation for the debtor’s conduct. Note that Article III.-3:301 DCFR concerns the situation where the parties are already engaged in negotiations but does not stipulate an obligation to enter into negotiations. 4. Change of circumstance. Paragraph (3) expresses the conditions for the rules on change of circumstance to apply. Except for paragraph (3)(d), as to which see the previous note, the conditions of application are the same as those under Article 6:111(2) PECL. Paragraph (2) requires a ‘manifest injustices’ for the court to intervene. This again stresses the exceptional nature of this redress mechanism. The powers of the court are just as wide as under the PECL. For the court can vary the agreement or end it, as appears reasonable. The order in which the two responses to the change of circumstance appear seems to indicate the order of preference though this is not explicitly stated.

345

H. Unberath German Law § 275 BGB: Exclusion of duty to perform (1) […] (2) The debtor can refuse performance in so far as this requires expenditure which is in gross disproportion to the creditor’s interest in performance, having regard to the content of the obligation relationship and the requirement of good faith. When determining the efforts to be expected of the debtor, consideration must also be given to whether the debtor is responsible for the hindrance to performance. (3) […] § 313 BGB: Disturbance of foundation of transaction (1) If the circumstances which have become the foundation of the contract have seriously altered after the conclusion of the contract and if the parties would not have concluded the contract, or would have concluded it with a different content if they had foreseen this alteration, then adaptation of the contract can be demanded in so far as adherence to the unaltered contract cannot be expected of one party taking into consideration all the circumstances of the individual case and in particular the contractual or statutory division of risk. (2) It is equivalent to an alteration of the circumstances if essential preconceptions which have become the foundation of the contract turn out to be wrong. (3) If an adaptation of the contract is not possible or cannot be expected of a party, the disadvantaged party can withdraw from the contract. For long term obligation relationships, the right to terminate by notice takes the place of the right of withdrawal. 1. General. § 275(2) and § 313(1) and (3) BGB contain principles that on the whole are functionally equivalent to Article 6:111 PECL except in so far that the BGB does not recognize a general obligation to re-negotiate the contract after a change of circumstance occurs. § 275(1) BGB concerns impossibility, which, likewise, is distinguished from change of circumstance, while § 313(2) BGB deals with mutual mistake, i.e., events that have the same quality as a change of circumstance but which unknown to the parties are present at the conclusion of the contract. This situation is not dealt with in either Article 6:111 PECL or Article III.-1:110 DCFR and consequently will not be commented upon in the following. Whether courts ought to intervene and modify the terms of the contract when unforeseen events occur and cause performance to become more onerous to one party than was reasonably foreseeable has been subject to much debate in German law. The initial position of the BGB was that commercial certainty demanded that courts ought to abstain from interfering with the contract’s terms. It was only during the period of inflation in the 1920s that courts accepted the relevance of a change of circumstance

346

Chapter 6: Contents and Effects and progressively developed what was to become known under the name of the doctrine of the foundation of the transaction (Störung der Geschäftsgrundlage). The drafters of the Civil Code deliberately did not provide for the courts’ power to intervene. Yet, this did not prevent the more flexible new approach to prevail and gain widespread authoritative judicial and academic support. The rules were at first said to stem from the all-encompassing concept of good faith (§ 242 BGB). With the major BGB-reform of 2002 the rules have been incorporated into the Code and are now contained in § 313 (and in some respects also § 275) BGB. (For comparative observations and as to the following see Markesinis/Unberath & Johnston (2006), pp. 319–348. See, also for illustration, the translated decisions reproduced therein at pp. 792–826: RGZ 86, 397; RGZ 100, 129; RGZ 103, 328; RGZ 105, 406; RGZ 107, 78; OLG Bremen NJW 1953, 1393; BGH MDR 1953, 282; BGH NJW 1959, 2203; BGHZ 37, 44; BGHZ 61, 31; BGH NJW 1976, 565; BGH NJW 1984, 1746; BGH NJW 1993, 259.) It should be emphasized at the outset that in German law too the doctrine of pacta sunt servanda requires that a subsequent judicial change of the terms of a contract must be restricted to extreme cases. As a general rule, the debtor is required to stick to the terms of the contract. Only where it cannot reasonably be asked of one party (unzumutbar) to bear the risk of a subsequent change of events, or to bear the risk of certain assumptions as to the state of affairs when entering into the contract, does the doctrine of the foundation of the transaction come into play. 2. The court’s power. The court’s power if the foundation of the transaction is disturbed by unforeseen events is laid down in § 313(3) BGB. In the first place, an adaptation of the contract is required. Only where an adjustment of the contract terms to the new situation is not possible, may the aggrieved party withdraw from the contract. The disadvantaged party is thus granted a right to have the contract terms adapted or, in exceptional cases, a right to terminate the contract. Long-term contracts are terminated with consequences only for the future; in respect of all other contracts a reversal of any performance of the contract hitherto also takes place (under § 346 BGB). However, if § 275(2) BGB applies instead, the court does not have discretion as to the appropriate legal consequence. To the contrary, it for the promisor to decide whether to rely on the change of circumstance. If she invokes the defence of disproportionate cost of performance, the obligation to perform is suspended; if not, the duties under the contract remain unaffected. It is therefore of first importance to distinguish between the two types of situations covered by § 313 and § 275 BGB respectively. 3. Change of circumstance. The contractual distribution of risk is central to the application of § 313(1) BGB (see for details Roth, in Münchener Kommentar (2007), § 313 nos 28–41, 67–74; Unberath, in Bamberger/Roth (2007), § 313 nos. 7 et seq.). The contractual risk allocation is determined by reference, first, to the contract terms themselves and, second, in the absence of an express stipulation, by reference to general contract law principles. Ultimately this is a decision taken on the basis of policy considerations. It is difficult to state many general principles used in defining what is seen as the foundation of a transaction. The application of the doctrine depends foremost upon the facts of the individual case, yet two major lines of cases have

347

H. Unberath emerged over the years: an imbalance between performance and counter-performance and the frustration of the purpose of the contract. As a general rule, the promisor remains obliged to perform even if performance has become more burdensome than anticipated. However, if the value of the counterperformance consisting in the payment of a sum of money has changed at the level of drastic inflation, the courts tend to show more sympathy with the debtor and adapt the contract to the value at the time of entry into the contract (since RGZ 107, 78). By contrast, if the cost of procurement of the subject-matter of the contract has risen according to ordinary market fluctuation, courts as a general rule will not grant relief. The debtor is taken to have assumed the risk of any increase in cost due to a rise in the market (see e.g., BGH JZ 1978, 235, as to fluctuations in the price of oil). In this first line of authority, the promisor’s cost of performance and the value of performance to the promisee are not at issue. In the inflation example the relationship between the debtor’s cost of procuring performance and the value of performance to the creditor remains the same after the drop in the currency’s value. The imbalance results out of the relationship between the cost of performance and the value of the counter-performance. Likewise, if the oil-market rises, the value of oil for a purchaser rises in the same degree as the cost of the seller to procure it. The latter simply made a bad bargain by betting on a stable or falling market. Note, that different rules apply if the cost of performance is disproportionate in relation to the performance’ value to the creditor (below, note 4). Turning to the second main group of cases, likewise, it is only in exceptional cases that courts will step in and allow the debtor to invoke a change of circumstance in relation to the intended use of the object of the contract. Generally speaking, every party to a contract is taken to assume the risk that he will be able to make a profitable or otherwise satisfactory use of the object of the contract. Thus, § 537(1) BGB states that the lessee is not exempt from paying the rent if he is for a personal reason unable to use the rented object. Likewise, § 649 BGB entitles the employer under a contract for work and materials to terminate the contract if he no longer requires its performance; however, the contractor remains entitled to the counter-performance subject to any savings he made because he did not actually carry out the contract. However, where the unforeseen event that prevents the object being used as intended is not within the sphere of risk of either party, courts are empowered by § 313(3) BGB to intervene and adjust the contract (cf. BGH NJW 1984, 1746, where the court ordered the buyer to pay half of the profit which the seller would have made if the advent of the regime of the Ayatollahs in Iran had not made it impossible to import the beer sold). 4. Excessive cost of performance. § 275(2) BGB is difficult to distinguish from § 313(1) BGB (the former instance is sometimes rather confusingly referred to as ‘practical impossibility’ and the latter as ‘economic impossibility’). Both deal with the problem that performance has become more onerous. The decisive difference should be seen in the fact that the starting point for § 275(2) BGB is the creditor’s interest in obtaining performance, while § 313(1) BGB focuses upon the debtor’s interest in refusing performance (Unberath, in Bamberger/Roth (2007), § 275 no. 53; see for an alternative

348

Chapter 6: Contents and Effects view Ernst, in Münchener Kommentar (2007), § 275 no. 23: choice of the promisor whether to rely on § 275 or § 313 BGB). The much discussed paradigmatic example for § 275(2) BGB is that of a contract of sale regarding a ring which, after the conclusion of the contract, has fallen into a lake. Assuming that it would technically be possible to retrieve the ring, but that it would involve an excessive amount of money which would be wholly disproportionate to the value of the ring, the debtor’s cost of performance would be in gross disproportion to the creditor’s interest in the performance. By contrast, if performance has become more onerous because of a rising market (‘economic impossibility’, § 313(1)), the interest of the creditor does not remain the same but grows symmetrically to the cost of procuring performance. This is because the purported impediment to performance also makes the performance more attractive to the creditor. It is not the case, therefore, that the interest of the creditor and the effort in obtaining the performance are in any way disproportionate in the sense of § 275(2) BGB. The application of § 275(2) BGB rather than § 313 BGB yields, as noted, different legal consequences, in particular it is for the debtor to decide whether to withhold performance and not for the court to adjust the contract. However, as to the conditions of application, ‘practical impossibility’ involves the same degree of discretion as does § 313(1): § 275(2) BGB involves the court’s assessment of the ‘content of the obligation’ in the light of ‘good faith’ (see, further, as to the controversial interpretation of these conditions Markesinis/Unberath & Johnston (2006), pp. 413–418). 5. Obligation to enter negotiations. The BGB does not contain a general rule that would require the parties to re-negotiate the contract once unforeseen events arise. However, there is isolated authority to the effect that courts in assessing the need to intervene will take into account whether the parties attempted to reach an amicable agreement (see e.g., BGHZ 61, 31). Also, the accompanying notes to § 313 BGB prepared by the Ministry of Justice state that the parties are well-advised to negotiate first before they require the court to adjust the contract (Bundestag-Drucksache 14/6040, p. 176). However, the legislator refrained from introducing a general duty to negotiate as a condition for court intervention. The prevailing (though not uncontested) view is that duties to negotiate if unforeseen events occur (Neuverhandlungspflichten) generally speaking, should be rejected since they give rise to uncertainty and are difficult to enforce (see with references Dauner-Lieb/Dötsch (2003), p. 925; Unberath, in Bamberger/Roth (2007), § 313 no. 85; in favour of an obligation to negotiate e.g., Horn (1981), p. 640; see for statutory mechanisms of contract adaptation that serve to protect the weaker party: Hau (2003), pp. 261–267).

Comparison and Evaluation 1. General. Article 6:111 PECL, Article III.-1:110 DCFR and German law (in particular § 313 BGB) rest on three similar assumptions as to the role of courts when contracts do not work out due to posterior events which the parties did not reasonably foresee. The first assumption is that it may be unjust that the loss lies where it falls when a change

349

H. Unberath in circumstance occurs that is not provided for in the contract. The second presupposition is that the court should redress the imbalance that has occurred and that an intervention on the basis of an open-textured reasonableness standard is appropriate. Finally, it is common to all three approaches that the intervention of the court ought to be limited to exceptional cases and that a slight imbalance does not justify the judicial adjustment of the contract. A corollary of this last basic assumption is that the rules of interpretation and as to the implication of terms must be applied first. However, once it has been established that it were ‘unreasonable’ to hold the debtor to his obligation, the court is given wide powers to adjust the contract or end it, as the judge thinks fit. 2. Obligation to enter negotiations. The main difference between the PECL and German law concerns the scope of duties to negotiate when the change of circumstance occurs before resorting to court action. The PECL opt in favour of strict legal duties to enter negotiations, sanctioned by liability in damages; the DCFR requires an attempt of negotiations before the court intervenes but does not provide for liability; while German law as a general rule does not recognize duties to negotiate in this context. It is questionable whether duties to negotiate are of great practical significance in the situations envisaged by Article 6:111 PECL. As explained in comment 3 to Article 6:111 PECL, such duties cannot be imposed with a view to the court’s ex post resolution of the conflict, for the parties are free to reach whatever agreement. Furthermore, it can hardly objected to a party’s insistence on performing the contract as agreed (which is the general rule, Article 6:111(1) PECL). Cases in which a party’s conduct as such is abusive will be rare. But not only is the requirement of prior negotiations of little practical value it is also difficult to enforce in practice since it requires establishing bad faith, i.e., an assessment of the parties’ often concealed motivation. The main upshot of the obligation to negotiate thus seems to be to prevent the parties from resorting prematurely to court action. At least one attempt must be made to settle the issue amicably. The position in German law is similar insofar as the cost of bringing the action is concerned (§ 93 of the Code of Civil Procedure which burdens the party that started legal proceedings without cause with the cost of those proceedings; the cost of the action is the paradigmatic case of Article 6:111(3)(b) PECL). Finally, it is doubtful whether the two-fold approach under the PECL has the desired effect of increasing the parties’ responsibility to redress the imbalance themselves. The parties will be aware that if negotiations fail, the court will step in and seek to impartially distribute losses and gains among the parties. This prospect of a court ruling reduces the incentives for both sides to negotiate a new agreement. The fact that the court decision is, as noted, difficult to predict makes it even harder for the parties to estimate their respective best outcome in negotiations. 3. The court’s power. The court’s intervention is founded on the essentially sound incomplete contract analysis (cf. Unberath (2007), pp. 129–142). It is less clear, however, what the law’s best response to the imperfection is; legal systems unsurprisingly diverge in this respect. The regime of rules under scrutiny here share the view that courts should at least in extreme cases be empowered to adjust the contract to the changed circumstance or, failing that, to end it.

350

Chapter 6: Contents and Effects This (to some) paternalistic or interventionist approach is not beyond doubt. The most obvious concern is legal certainty when courts are given such wide powers. The question then is whether the gain in contractual justice justifies the loss in predictability. It is true that parties may often not sufficiently anticipate the future or provide for all eventualities. However, provisions such as Article 6:111 PECL diminish the incentive to expressly provide for situations of hardship (as Comment A acknowledges). Furthermore, while it may be true that even such clauses may contain gaps there is always the possibility that the parties themselves ex post reach an agreement as to the best way of dealing with the problems caused by an unforeseen event. The advantage of a negotiated solution in terms of economic efficiency is the following: it is the parties who best know the real cost of performance and how much they value it; hence, it is more likely that they restore the maximum value of the contract to both sides. (See as to the following Unberath (2007), pp. 229–240; as to the right to demand performance e.g., Maultzsch (2007).) To give a simple example: if the creditor values performance at a certain level, any offer by the debtor above that level should be acceptable. The debtor will make the offer, if it costs him less than procuring performance. The court however is likely to misjudge either the size of the cost or the value of performance. Contracts that are not aimed at economic efficiency will be even more difficult to ‘rescue’ by an ex post court decision. Standards such as ‘equitable distribution’, ‘good faith’, ‘reasonableness’ merely confirm that there are no hard and fast rules that would inform the court how a ‘complete’ contract ought to look like. The court’s ex post and ad hoc ruling can, in the worst case, further increase the contract’s inefficiency. Ultimately, the presumption underlying provisions such as Article 6:111 PECL seems to be that transaction costs prevent the parties from reaching an agreement (see for an overview Hau (2003), pp. 70–79). The rule that the court decides only if negotiations have failed (Article 6:111(3) PECL) can be rationalized on this ground. The existence of considerable obstacles to reach agreement could provide an argument for court intervention even in spite of the aforementioned doubts. Whether the presumption holds true, however, is difficult to assess for all types of contracts. Overall, the advice given to the courts by the comments to Article 6:111 PECL, namely to exercise the power to intervene with moderation, is worth following. The German predilection for the contractual distribution of risks in typical cases seems to have provided workable guidelines in practice, which on the whole ensure a minimum level of predictability to the contracting parties. § 275(2) BGB arguably is the better solution to the problem of an unexpected imbalance between the value of performance and the cost of performance for the simple reason that it reduces the discretion of the court in relation to the legal consequence of the change of circumstance. This approach if combined with judicial self-restraint may provide satisfactory solutions in the invariably hard cases, in which a change of circumstance has arisen.

351

CHAPTER 7

Performance M. Schmidt-Kessel & S. Singleton

1. General. Chapter 7 of the Principles of European Contract Law contains a comprehensive doctrinal treatment on performance under a contract. The provision governing place of performance is of considerable legal significance given that e.g., liability may attach if performance is effected at the wrong place. This will often denote the non-performance of a contractual obligation (see Lando/Beale (2000), p. 329) and paves the way for the imposition of remedial consequences. 2. Context of uniform law. Chapter 7 of the Principles of European Contract Law for the first time in the development of unification of contract law puts together general rules on the modalities of performance. The CISG separated the respective rules in two parts, one concerning the delivery of the goods (Articles 31–34 CISG) and the other dealing with the payment of the price (Articles 57–59 CISG); for other claims of the parties no particular rules have been established by the Convention which needs to be amended under Article 7(2) CISG. PICC and DCFR took over the idea of having one general part applicable to the modalities and contain a similar set of rules. Article 6.1.1–6.1.13 PICC assemble several rules on time and order of performance, rules on place of performance and partial performance, mode and currency of payment, costs of performance and imputation of payments; however, PICC does not contain particular rules on performance not accepted by the creditor. The rules of PECL have been taken over to the DCFR with little changes only to Articles III.-2:101–III.-2:113; a particular rule on the extinctive effect of performance was added in Article III.-2:114 DCFR. The European Commission’s draft for a Common European Sales Law then returned to a CISG-like structure by giving up a General Part on the modalities of performance by splitting up the respective rules to concretization of the duties to deliver the goods (Articles 93–97 CESL) and to pay the price (Articles 124–128 CESL); for the further duties of the parties the respective issues have to be settled ‘in accordance with the objectives and the principles underlying [the Common European Sales Law] and all its

353

M. Schmidt-Kessel & S. Singleton provisions’, see Article 4(2) CESL, which often will lead to an analogous application of Articles 93–97, 124–128 CESL to these other duties. 3. Structure of German law. The three texts of PECL, PICC and DCFR took over the codificatory idea of having a kind of general part of rules on performance, which is also found in the German codification, where §§ 262–272 BGB contain a similar list of rules on alternative performance, partial performance, performance by a third party, place of performance and time of performance (including the exclusion interim interest in case of early payment, § 272 BGB). Particular rules on the non-acceptance of a perfect tender are dealt with in §§ 293–304, 372–386 BGB. Article 7:101: Place of Performance (1) If the place of performance of a contractual obligation is not fixed by or determinable from the contract it shall be: (a) in the case of an obligation to pay money, the creditor’s place of business at the time of the conclusion of the contract; (b) in the case of an obligation other than to pay money, the debtor’s place of business at the time of conclusion of the contract. (2) If a party has more than one place of business, the place of business for the purpose of the preceding paragraph is that which has the closest relationship to the contract, having regard to the circumstances known to or contemplated by the parties at the time of conclusion of the contract. (3) If a party does not have a place of business its habitual residence is to be treated as its place of business 1. General. Article 7:101 PECL governs the place of performance and it is evident from the terms of this Article that PECL attributes considerable legal relevance to ‘contractual planning’. Notions of freedom of contract infuse and underpin this provision and the parties’ agreement will prevail over the rules in PECL on the determination of the location for performance. Likewise, § 269 (place of performance) and § 270 (place of payment) of the BGB establish non-mandatory rules as to the place of performance giving priority to individual express and implied terms. 2. Priority of the contract. First and foremost, priority is accorded to an express contractual stipulation on the place of performance. It may be inferred from the wording of this Article that the parties to a contract are encouraged to fix the place of performance themselves. The same explicitly holds true for § 269(1) BGB and – for monetary obligations – follows from the reference to cases of doubt in § 270(1) BGB. If the parties have failed to explicitly settle on the place of performance, it may be ‘determinable from the contract’ (Article 7:101) or follows ‘from the circumstances, in particular from the nature of the obligation’ (§ 269(1) BGB); for example, by virtue of a tacit agreement or it may be fixed by usage (e.g., trade usages under CISG, INCOTERMS) or practices that the parties have established amongst themselves (Article 1:105 PECL, §§ 157, 242 BGB). Lando/Beale (2000) give the example of a catering company bringing the food and catering for the party at an address provided

354

Chapter 7: Performance by the host. The establishment of the place of performance is essentially one of contractual interpretation (for German law see Zöchling-Jud, in Prütting/Wegen/ Weinreich (2012), § 270 no. 1). Under German law, § 269(3) BGB clarifies that clauses as to the costs of transport do not determine the place of performance and therefore prevents a rather manifest interpretation of such a particular clause. Where the parties have failed to make provision for this eventuality, or contractual interpretation does not yield a satisfactory answer, Article 7:101 PECL and §§ 269, 270 BGB contain residual rules geared at determining the place of performance. These clear workable rules of PECL and German law differentiate between the performance of monetary and non-monetary obligations. 3. Impact on jurisdiction. The place of performance is not only a core element of the implementation of the contract but also influences jurisdiction for court proceedings deriving from the contract. For determining the international jurisdiction within the European Union, Article 5 no 1 limb a Brussels I-Regulation (44/2001) expressly refers to the place of performance and so does § 29 ZPO on the national German level. Therefore, default rules on place of performance indirectly establish default jurisdictions for disputes between the contracting parties. As a consequence, § 29(2) ZPO brings the jurisdictional effects of an agreement on place of performance in line with the rules on jurisdiction clauses in § 38 ZPO. 4. Monetary obligations. If the obligation at issue involves payment of money, Article 7:101 (1)(a) PECL provides that the debtor must make payment at the creditor’s place of business at the time of the conclusion of the contract. A debtor has an obligation to seek out its creditor ‘wherever he may be within the four seas’ [(inter quatuor maria); (Lando/Beale (2000), p. 330 Comment E)]. This solution differs from §§ 270, 269 BGB in two important aspects: First, § 270(1) and (3) BGB refer to the creditors place of business or residence (for these criteria see Stadler, in Jauernig (2011), § 270 nos 1 et seq.) at the time of the performance and not at the time of the conclusion of the contract; the possibility to aggravate the debtor’s position by a simple move of the creditor after the contract is concluded is balanced by the obligation of the creditor to bear the extra costs and risks caused by such a move. Whereas both rules are widely of a functional equivalence, the German solution has the advantage of providing for a greater flexibility without burdening the debtor and without the need to adopt the contract. The second aspect mainly relates to the jurisdictional effects of the place of performance. To avoid a standard jurisdiction for the court at the creditor’s residence or place of business under § 29 ZPO the German legislator established the combination of the debtor’s residence or place of business as place of performance (§§ 270(4), 269(1) BGB) with a duty of the creditor to dispatch the money at his own cost and risk to the creditor (§ 270(1) BGB). Under these rules, which provide for a functional equivalent to Article 7:101 PECL, risk encompasses as well the risk of loss (ZöchlingJud, in Prütting/Wegen/Weinreich (2012), § 270 no. 8) as well as the risk of delay (Zöchling-Jud, in Prütting/Wegen/Weinreich (2012), § 270 no. 1 [also for earlier views], 7; Schmidt-Kessel, in Gebauer/Wiedmann (2010), § 270 BGB no. 22; cf. ECJ C-306/06 – Telecom). As to the modalities and currency of payment see Article 7:107 and 7:108 PECL.

355

M. Schmidt-Kessel & S. Singleton 5. Non-monetary obligations. The converse approach is adopted, if the object of performance is a non-monetary obligation. Article 7:101(b) PECL provides that in this case, the place of performance is the debtor’s place of business. This rule is a reflection of the general principle (Lando/Beale (2000), p. 330 Comment D) which stipulates that in case of doubt, the debtor is assumed to have undertaken the least burdensome obligation. The same reflection provided the guideline for the German legislator, who also referred to the debtor’s residence or place of business in § 269(1) BGB. As opposed to monetary obligations, this place of performance is not modified by a move of the debtor (BGHZ 36, 11, 15). 6. Place of business. Article 7:101 PECL as a rule refers to the place of business of the parties, which is replaced only exceptionally by the reference to the party’s habitual residence in case a party does not have a place of business (Article 7:101(3) PECL ). By contrast, §§ 269, 270 BGB opt for the opposite order of rule and exception by primarily referring to the residence of the respective party; reference to the party’s place of business presupposes that the obligation arose in the business of that party. The term ‘place of business’ evades precise definition. It connotes the idea of a party’s permanent place for conducting regular business transactions. The German term of ‘Niederlassung’ is more technically connoted (cf. the rules on branches in the EU-Directive 89/666/EWG and §§ 13–13h HGB) and presupposes either the headquarters or an acting branch of some independence. The concepts ‘place of business’ and ‘Niederlassung’ do not embrace some transient place of business; e.g., hotel rooms hired out to conduct sales negotiations. Temporary sojourns will not have the effect of establishing a place of business for the purposes of this Article (Lando/Beale (2000), p. 330; for the CISG see Honnold (1999), p. 132). 7. Habitual residence. If the party receiving performance has no place of business, then the criterion of habitual residence is employed to determine where performance is to be tendered. This is a question of fact and not of law and is conceived in terms of where the place where the party receiving performance actually lives (see Lando/Beale (2000), p. 331 Comment G). For German law, the residence under § 7 BGB – without the attribute ‘habitual’ but with the same implied connotation of habitualness (Schmitt, in Münchener Kommentar (2006) § 7 no. 19) – serves as primary criterion to determine the place of performance (see § 269 I BGB). 8. Multiple places of business. Where the recipient of performance has several places of business, the test enshrined under Article 7:101(2) for determining the place of business for the purposes of 7:101(1) is the probanda of ‘closest connection to the contract’. In determining this location, regard must be had to the circumstances known to or envisaged by both of the parties at the time of the conclusion of the contract. Consequently, account will not be had to facts known to only one of the parties or to facts which only emerged following the conclusion of the contract. In contrast, for German law there is an older view that at least in case of multiple residences (possible under § 7(2) BGB) the debtor would be free to opt for one of them (RG JW 1898, 257; followed by Krüger, in Münchener Kommentar (2012) § 269 no. 49 and Bittner, in Staudinger (2009), § 269 no. 4.

356

Chapter 7: Performance 9. Change of the place of performance. The place of performance is the party’s place of business (or as the case may be, his or her habitual residence) at the time of the conclusion of the contract, Article 7:101 PECL and § 269(1) BGB. The time of conclusion of the contract is a criterion which endures even if the party subsequently relocates to another place of business or residence (for German law see BGH NJW 1962, 109, 110). However, for obligations to pay many § 270(1) and (3) BGB deviate from the general rule referring to the residence of the creditor at the time of performance but burdening the creditor with the resulting extra costs and risks (see Krüger, in Münchener Kommentar (2012), § 270 no. 26). Furthermore, the principle of good faith and fair dealing (Article 1:201, § 242 BGB) may require the party effecting performance to accept a variation in the place of performance unless this change unreasonably inconveniences him or her. Under German law this at least holds true if performance at the place agreed becomes impossible or impracticable (OLG Celle NJW 1953, 1831; cf. RGZ 107, 121, 122). Increased costs of performance or a heightened risk of transportation attributable to the change of the place of performance must be borne by the party which has changed the place of performance. Article 7:102: Time of Performance A party has to effect its performance: (1) if a time is fixed by or determinable from the contract, at that time; (2) if a period of time is fixed by or determinable from the contract, at any time within that period unless the circumstances of the case indicate that the other party is to choose the time; (3) in any other case, within a reasonable time after the conclusion of the contract. 1. General. Any failure to perform contractual obligations on time always amounts to non-performance of a contract ushering in the application of Article 8:101 PECL. Therefore, Article 7:102 PECL conclusively determines the point in time, which makes any delay in performance a breach of contract. The two Articles together clarify that the Principles do not contain a separate concept of delay or Verzug, whereas German law differentiates between the time of performance (§ 271 BGB) and additional prerequisites for delay as such becoming a breach of contract (§ 286 BGB). As under German law time is not as such of the essence in the sense that delay would amount a fundamental breach of the contract (cf. Articles 8:103, 8:106, 9:301 PECL and §§ 314, 323 BGB). As opposed to § 271 BGB the Article does not deal with questions of early performance, on which see Article 7:103 PECL. Article 7:102 PECL virtually copies Article 33 CISG, which, however, does only apply to the seller’s obligation to deliver, whereas the time for payment is dealt with in Article 58 CISG. 2. Concurrent performance of obligations. Diverging from the rule in Article 58 CISG the PECL-regime for time of performance Article 7:102 PECL does not contain any reference as to the order of performance of reciprocal obligations. Rather, under PECL the general principle that where performances are to be rendered simultaneously (Zug um Zug under German law) is dealt with under the heading of remedies and not as an

357

M. Schmidt-Kessel & S. Singleton aspect of time of performance: Article 9:201 PECL provides that each party can withhold performance until the other party performs. This brings PECL in line with German law, which also separates the rules on time and order of performance in § 271 BGB on the one hand and §§ 273, 320 BGB on the other. 3. Time for performance set by or determinable from the contract. In the first instance an express or implied contractual stipulation as to the time of performance is determinative, once more reflecting the primary importance attached to the principle of freedom of contract under PECL. The same rule applies under German law, where § 271 BGB only applies, where no time for performance has been specified or is evident from the circumstances. The contract may either set a time for the performance of an obligation or a time may be otherwise determinable from the terms of the contract. In this case, the promisor is bound to render performance by this point in time. A specific date may be stipulated ‘delivery by 15th of October’ or it may be otherwise determinable from the terms of the contract (see Lando/Beale (2000), p. 332; Stadler, in Jauernig (2011) § 271 no. 7). The time of performance may depend on an event (‘delivery’) or on other factors including the determination by declaration of one of the parties or by custom or usage. Finally, the time of performance may follow from the circumstances deviating from the situation the default rule is modelled on (see the examples mentioned in Bittner, in Staudinger (2009), § 271 nos 14–16). 4. Performance within a period of time. Article 7:102(2) PECL applies if the terms of the contract expressly or, as the case may be impliedly, set forth that performance is to be rendered within a certain period of time. In this case, the party rendering performance may choose the time for performance and it is a self-evident proposition that performance is to be effected within the timeframe stipulated for performance. German law does not provide for an explicit rule to this effect within the BGB. However, there is agreement among courts and academic writers that § 271 BGB does not only apply to an exactly determined time for performance but to periods also (Stadler, in Jauernig (2011) § 271 no. 7). Whereas, in such a case the debtor has the right to determine the exact time for performance within the fixed period, under both legal orders the contract or surrounding circumstances may indicate that the party receiving performance is to choose the time for performance within the period. 5. Reasonable time or immediate performance. Article 7:102(3) PECL contains a residual rule which applies if the contract is silent as to the time for performance. Performance must be rendered within a reasonable time after the conclusion of the contract. This is primarily a question of fact and this answer will depend on the general circumstances of the individual case and the nature of the obligation which is to be performed. By contrast, § 271 BGB sets immediate performance as default rule. Immediate performance, means the fastest performance possible in the circumstances (Stadler, in Jauernig (2011), § 271 no. 14). Lack of fault is not sufficient (see BGH NJW 1964, 100 (prohibition of transfer of a certain foreign currency as irrelevant impediment)). In the commercial field § 358 HGB restricts immediately to the usual office hours of the merchants. Immediate performance is yet to be determined under the auspices of good faith and fair dealing (OLG München NJW-RR 1992, 818, 820). This

358

Chapter 7: Performance indeed for many cases would result in similar results as the reasonable time under Article 7:102(3) PECL. However, immediate performance tends to be the stricter standard. Article 7:103: Early Performance (1) A party may decline a tender of performance made before it is due except where acceptance of the tender would not unreasonably prejudice its interests. (2) A party’s acceptance of early performance does not affect the time fixed for the performance of its own obligation. 1. General. As a general rule under the principles of European Contract Law, a creditor is not obliged to accept a tender of advance performance i.e., tender of performance before it actually becomes due. This rule recognizes that the acceptance of early performance may cause inconvenience to a creditor or it may result in additional expenses being incurred (see Lando/Beale (2000), p. 334 Comment A). For German law § 271 BGB establishes the opposite rule, and clarifies that time of performance usually does not protect the interest of the creditor; an early tender is a good tender under German law. Inconvenience for the creditor is not seen as a sufficient reason to order otherwise. Refusal of an early tender would cause a particular breach by the creditor (mora creditoris, §§ 293–304 BGB), which reduces the enforceability of the obligation. 2. Good faith as corrective under PECL. Article 7:103 PECL will be disapplied if acceptance of early performance would not unreasonably prejudice the creditor’s interests and the precepts of good faith dictate that the creditor should not be entitled to refuse advance performance. It is generally postulated that the possibility for a creditor to reject advance performance of a monetary obligation is abrogated due to the fact that rejection in this context will constitute an abuse of his or her rights. It is averred that the creditor is unlikely to be prejudiced by receiving payment in advance of the due date. However, an exception to this principle is where interest on the payment is affected by the acceptance of early performance. 3. Early tender exceptionally not sufficient under German law. As Article 7:103 PECL § 271 BGB is not mandatory and parties are free to agree on a protective effect of time of performance in favour of the creditor. Usually in agreements on the monetary loan for interest the time for performance is seen as protecting the creditor’s legitimate interest not to be paid earlier (BGHZ 64, 278, 284; OLG Hamm NJW 1961, 1311, 1312; but see Freitag (2008), 1108 et seq. as to the consequences of the Consumer Credit Directive 2008/48/EG). As such situations remain the exception, whereas Article 7:103 PECL might be read in a much broader sense both rules do not meet functional equivalence. 4. Creditor’s duty is untouched. The creditor’s acceptance of a performance before the due date will by Article 7:103(2) PECL not affect the due date originally fixed for the rendering for the performance of his or her obligations even if the other party’s right to withhold performance is lost (Lando/Beale (2000), p. 334 Comment D). The same

359

M. Schmidt-Kessel & S. Singleton holds true under German law, where the point is rarely discussed because of the separation between time of performance and right to withhold. Article 7:104: Order of Performance To the extent that the performances of the parties can be rendered simultaneously, the parties are bound to render them simultaneously unless the circumstances indicate otherwise. 1. General. Article 7:104 PECL provides that as a general rule performances under a synallagmatic contract are to concur if this solution is workable in practice, e.g., in contract for sale, delivery and payment are to be performed concurrently. German law does not expressly deal with this rule on the level of obligations but only provides for the remedy of the exception for non-performance (exceptio non adimpleti contractus) in §§ 320, 322 BGB. However, this remedy also for German law demonstrates the general idea that obligations in a synallagmatic contract have to be performed simultaneously (Otto, in Staudinger (2009), § 320 no. 15). Within both legal orders the rule operates to obviate the risk that after one party has performed, the other party defaults when the time for its performance comes. 2. Cases for advance performance. This Article does not provide an express resolution to the question of who should perform first if simultaneous performance is impracticable. A precise general rule was deemed impossible to formulate and in any event would be invariably be riddled with exceptions. This issue is frequently resolved by having recourse to trade usages and previous course of dealing established between the parties (Article 1:105 PECL). In the absence of previous practices or trade usages, Article 6:102 PECL on implied terms may be invoked and regard will be had, inter alia, to the intentions of the parties, the nature and purpose of the contract and good faith and fair dealing. Similarly, under German law the usual instruments to amend the contract by law or in fact are to be applied (cf. Otto, in Staudinger (2009), § 320 no. 12). If simultaneous rendering of performance is not possible, e.g., a property developer cannot be expected to pay a builder brick by brick, or in a contract of employment, the employee is expected to firstly perform his work and then receive recompense in value from his or her employer, then payment must either be made in advance or upon completion of the work or at intervals (Lando/Beale (2000), p. 336). Article 7:105: Alternative Performance (1) Where an obligation may be discharged by one of alternative performances, the choice belongs to the party who is to perform, unless the circumstances indicate otherwise. (2) If the party who is to make the choice fails to do so by the time required by the contract, then: (a) if the delay in choosing is fundamental, the right to choose passes to the other party; (b) if the delay is not fundamental, the other party may give a notice fixing an additional period of reasonable length in which the party to choose must do so. If the latter fails to do so, the right to choose passes to the other party.

360

Chapter 7: Performance 1. General. This provision concerns the situation where a contractual obligation may be performed in different ways: e.g., in a lease agreement, a landlord agrees to supply water by alternative methods (Christie v. Wilson 1915 S.C. 645). §§ 262–265 BGB deal with similar ideas, which are amended by additional rules not expressly mirrored in the Principles of European Contract Law dealing with details of the choice (§ 263 BGB) and impossibility of one of the alternative performances (§ 265 BGB). 2. Scope of application. As may be drawn from the comments the scope of Article 7:105 PECL is to be understood rather broad including may cases of alternatives in the performance of an obligation. By contrast, the scope of §§ 262–265 BGB is rather narrow excluding most important cases of choice between several options from its scope of application. The regime of §§ 262–265 BGB does not apply e.g., to the concretization of an obligation to generic goods (§ 243 BGB), seller’s specification (§ 375 HGB) or the election between the remedies for breach of contract; for all these options separate rules have been developed. 3. Right to choose. The rule in Article 7:105 PECL states that the debtor has the option of choosing between the alternative modes of performing the obligation. The rule is completely in line with § 262 BGB. A variant approach will only be adopted if circumstances indicate that the other party should be given this power of election; this is mainly a matter of contract interpretation (Bittner, in Staudinger (2009), § 262 no. 20). For example, the contract may expressly state which party is entitled to choose between the alternative modes of performance or indeed, mercantile usage may prescribe which party may choose the mode of performance. Moreover, the Principles e.g., Article 7:108(3) and 7:109 PECL may indicate who is to make the choice between the alternative performances (Lando/Beale (2000), p. 337). Parties under both legal orders may leave the right to choose to a third party (Bittner, in Staudinger (2009), § 262 no. 21). 4. Delay in choosing. The party entitled to choose should exercise this right by the due date for performance. If he or she fails to do so and the delay is fundamental (see Article 8:103 PECL for the notion of ‘fundamental’ in the context of fundamental nonperformance), the remedial consequence is that the right of election passes to the other party at this point in time. If the delay in making the election is not fundamental, it can be made fundamental by the other party serving notice requiring the party to choose the mode of performance within a reasonable time. In the case that no mode of performance is elected within this timeframe, the right to choose will pass to the other party. Where alternative performance is organized by the contract as an option for the creditor German law comes to a similar conclusion in § 264(2) BGB, which only deals with a notice requirement equivalent to Article 7:105(2)(b) PECL. Without an express disposition in the codification German courts and legal writing hold that the notice requirement may be dispensable in cases of a repudiatory breach (RGZ 129. 143, 145; Bittner, in Staudinger (2009), § 264 no. 12), which leads both legal orders to equivalent results. By contrast, a debtor in delay loses its right to choose only after a judgment against him at the level of compulsory enforcement, see § 264(1) BGB. Until this time

361

M. Schmidt-Kessel & S. Singleton the debtor keeps the option, which makes it necessary for the creditor to apply for a judgment containing both alternatives. Article 7:106: Performance by a Third Person (1) Except where the contract requires personal performance the creditor cannot refuse performance by a third person if: (a) the third person acts with the assent of the debtor; or (b) the third person has a legitimate interest in performance and the debtor has failed to perform or it is clear that it will not perform at the time performance is due. (2) Performance by the third person in accordance with paragraph (1) discharges the debtor. 1. General. Performance by a third person in accordance with the terms of the contract is generally a feasible option under PECL like under §§ 267, 268 BGB. Once certain pre-requisites are satisfied, a contractual obligation may be performed by a third party. The creditor is not entitled to refuse performance by a third party and if the requirements of Article 7:106(1) PECL are satisfied, the legal effect is that the debtor is discharged from his or her obligations under the contract with the creditor. Whether performance is on the debtor’s behalf or not is irrelevant for the liberating effect of the third party’s performance (as is the qualification as vicarious performance) but may have a significant influence on the recourse of the third party against the debtor. 2. Contract is personal. If the nature of the contract or its terms require personal performance e.g., contract to write a book or paint a picture, performance cannot be tendered by someone other than the debtor of the obligation (see Lando/Beale (2000), p. 338 Comment D; Stadler, in Jauernig (2011), § 267 no. 2). This is because the creditor reposes personal confidence and trust in the personal skills and discerning abilities of the debtor and is prejudiced if the contract is not performed personally. Personal performance may be ordered by the law, for German law this is particularly the case in most services contracts (§§ 613, 664, 691 BGB) as well for board members of associations, corporations and companies (§§ 27, 713 BGB). Parties are also free to agree on personal performance (Stadler, in Jauernig (2011), § 267 no. 3) or the link to the person of the debtor is based on the purpose or characteristics of the obligation (Bittner, in Staudinger (2009), § 267 no. 4). 3. Autonomy of the third party. There is a slight divergence between the comments to Article 7:106 PECL and the state of German law concerning § 267 BGB as to servants and agents. Whereas, auxiliary persons of the debtor, whom he uses to perform his obligation (cf. § 278 BGB) or which perform explicitly on behalf of the debtor (OLG Hamburg MDR 2008, 554), are not covered by the German rule (Bittner, in Staudinger (2009), § 267 no. 5; Krüger, in Münchener Kommentar (2012), § 267 no. 10; Beuthien (1968), 323, 326; Lorenz (1968), 286, 299 et seq.), comment B to Article 7:106 PECL explicitly refers to agents and sub-contractors (Lando/Beale (2000), p. 338). Furthermore, comment C refers to Article 8:107 PECL, which makes the debtor’s duties

362

Chapter 7: Performance non-delegable and clarifies the attribution of any misbehaviour of the third person who acted with the assent of the debtor. The concepts of Article 7:106 PECL and § 267 BGB, therefore, differ as to scope: German law presupposes a certain kind of autonomous decision by the third party, while Article 7:106 PECL covers all cases in which the debtor does not act personally. While the strict dogmatical borderline established in German law seems to have prevented German lawyers from developing convincing an overall concept to explain the involvement of any third persons in the contract, the concept of PECL seems to be so broad that it might endanger the coherence of the interpretation of the criteria in Article 7:106 PECL and particularly of the ‘assent of the debtor’. Additionally, the degree of the personal link between the performance and the person of the debtor is difficult to describe with having only two categories (debtor and third persons) at hand without referring to the role (autonomous or dependant) the third person has to play within the contract. 4. Assent of debtor. Except where the contract requires personal performance by the original contracting parties, the creditor is not entitled to refuse performance if the third party performs with the debtor’s assent, Article 7:106(1)(a) PECL. The comments name as examples the debtor’s agent or a sub-contractor who has been entrusted to perform the contract (Lando/Beale (2000), p. 338 Comment B). The rationale is that the creditor will not have been unreasonably prejudiced by performance. The function of the debtor’s assent or opposition is different under German law: § 267(1) BGB clarifies, that performance by a third person is always possible as long as the debtor has not to perform himself; neither assent of the debtor nor legitimate interest are necessary for the liberating effect of such a performance. Only the opposition of the debtor becomes relevant because § 267(2) BGB opens a right of the creditor to reject the performance of the third party if the debtor objects. 5. Legitimate interest of third party. An obligation can also be performed by a third party without the debtor’s consent if the third party has a legitimate interest in performance and the debtor has failed to perform or it is clear that the debtor will not be able to perform by the due date for performance, Article 7:106(1)(b) PECL. An example would be where a surety discharges the obligation owed in order to ward off costly proceedings against the debtor which the surety would eventually have to pay (Lando/Beale (2000), p. 338 Comment B). For German law, the legitimacy of the third person’s interest to perform is of no relevance under § 267 BGB. Only in harsh cases, e.g., where accepting performance by the particular third party could not reasonably be required of the creditor, the illegitimacy of the interest of that third person may exclude the effect of § 267 BGB (Bittner, in Staudinger (2009), § 267 no. 48). However, § 268 BGB and some similar rules in other parts of the codification (§§ 1142, 1143, 1150, 1223, 1224, 1249 BGB) deal with specific cases of a legitimate interest of a third party, which is running the risk of losing its own property right in an object involved if the debtor does not perform. In such a particular case, the right to reject under § 267(2) BGB is excluded and the third party is privileged in its recourse against the debtor, § 268(3) BGB.

363

M. Schmidt-Kessel & S. Singleton 6. Discharge of the debtor. Once the pre-requisites of Article 7:106 PECL, § 267 BGB are met, due performance of the obligations by a third party discharges the debtor from liability under the contract. Under German law, this additionally presupposes the intention of the third party to fulfil the debtor’s obligation and not only an obligation of its own (BGH NJW 1986, 251); therefore, under German law, payments of sureties are usually not third party payments in the sense of § 267 BGB. Furthermore, the third party may only perform in kind (RGZ 119, 4) and may not e.g., declare set-off (OLG Celle NJOZ 2001, 2002). A creditor who refuses to accept a due performance from a third party which satisfies the stipulations in Article 7:106(2) PECL will normally have failed to perform the contract and may not have recourse to any of the remedies for non-performance enshrined in Chapter 9 PECL. Article 7:110 and 7:111 PECL dealing with creditor default will also be applicable. 7. Consequences of defective performance. If performance is not properly carried out by the third party who acted with the assent of the debtor or had a legitimate interest in performing or where there is a failure to perform, the debtor remains liable under the contract. For Article 7:106(1)(a) PECL this follows from Article 8:107 PECL; in case of Article 7:106(1)(b) PECL the same follows from the non-performance of the debtor’s obligation, which could only be excused under Article 8:108 PECL if the third parties behaviour constitutes an impediment beyond control of the debtor. For the question, whether a debtor will be liable for a defective performance by a third party which caused greater loss to the creditor than the debtor’s non-performance the comment wrongly refers to national law; this question has to be decided in application of Article 8:107, 8:108 PECL. Under German law, the debtor is not relieved (Bittner, in Staudinger (2009), § 267 no. 46; see for the earlier state of the law before 2002 Rieble (1989), 830). However, as the third party does not act as the debtor servant or agent (see Krüger, in Münchener Kommentar (2012), § 267 no. 10) fault by the third party is not attributed to the debtor, which usually will not be liable in damages. It is much debated whether defective goods delivered under § 267 BGB had to be taken back by the debtor (Bittner, in Staudinger (2009), § 267 no. 46 and Schlinker (2007), 399, 415) or by the third party (Schwab, in Dauner-Lieb/Langen (2012), § 267 no. 21 and Kreße (2007), 452, 455). 8. Refusal. The creditor may be entitled to refuse the tender of performance by a third party. This entitlement may under both legal regimes derive from the terms of the contract or from the nature of the contractual obligation. § 267 BGB provides for a right to refuse a good tender only in case of an objection of the debtor, whereas under Article 7:106 PECL, if the third party fails to obtain the assent of the debtor or cannot demonstrate any legitimate interest in performing, the creditor is also entitled to reject the tender of performance; if the creditor decides nonetheless to accept performance by a third party in these circumstances, Article 7:106 PECL and § 267 BGB do not explicitly set forth what effect it has for the debtor. In both cases the performance will be without liberating effect and restitution will depend on rules on unjustified enrichment. 9. Recourse against the debtor. Under both regimes, the third party’s possibilities to recourse against the debtor depend on the relationship between debtor and the third

364

Chapter 7: Performance party. Without any contract between them (which under German law would in many cases exclude § 267 BGB) the third party may have a recourse under the principles of negotiorum gestio (§§ 677–687 BGB [see OLG Saarbrücken, BeckRS 2005, 1460] and Book V DCFR) or applying the rules on unjustified enrichment (§§ 812–822 BGB [BGH MDR 1976, 220 (not blocked by § 814 BGB)] and Book VII DCFR). The recourse is excluded if the third party acted with the intention not to demand reimbursement. This intention would as such exclude reimbursement (Article V.–3:104(1) DCFR and § 685 BGB) and may in many cases be qualified as a donation in favour of the debtor (OLG Saarbrücken, BeckRS 2005, 1460; cf. Article IV.H.–1:101 DCFR). Article 7:107: Form of Payment (1) Payment of money due may be made in any form used in the ordinary course of business. (2) A creditor who, pursuant to the contract or voluntarily, accepts a cheque or other order to pay or a promise to pay is presumed to do so only on condition that it will be honoured. The creditor may not enforce the original obligation to pay unless the order or promise is not honoured. 1. General. According to Article 7:107 PECL, which has no explicit equivalent in the German codification(!), payment of money in pursuance of a contract can be made in a myriad of different forms, including by legal tender, bank transfer, cheque or credit card. This provision is a flexible one, taking account of commercial realities and the increasing drive towards a cashless society. Cognizance was also had of potential technological advances (to cite one example, the advance of PayPal or conversely, payment by cheque has almost been consigned to the history books) where one form of obsolete payment is supplanted by another more modern form and consequently, no attempt was made (or, indeed could be made) to lay down an exhaustive provision specifying every possible modality of payment. Businesses do not generally attribute great significance to the form of payment used provided that the form is not unusual or burdensome and is quick, easy and reliable. By contrast, for consumers the mode of payment usually matters because of the costs. German law has opted for cash payments as the general starting point (Pfeiffer, in Prütting/Wegen/Weinreich (2012), § 362 no. 11; Schlechtriem/Schmidt-Kessel (2005), no. 346), but this default rule is – usually – not mandatory. Therefore, parties are free to agree on the possible modes of payment. The necessary flexibility is then organized via a great liberality in finding such agreements. In particular, parties may agree on bank transfer (BGHZ 6, 121), for which the purely unilateral opening of a bank account is not sufficient (BGH NJW 1953, 897) but including the number to the usual letterhead of a business is (Pfeiffer, in Prütting/Wegen/Weinreich (2012), § 362 no. 11). 2. Modalities of payment. Under Article 7:107 PECL, the debtor is free to choose the most appropriate method of payment and a creditor cannot generally unilaterally require that payment be made by legal tender. There are some checks and balances placed on the debtor’s free choice; the method chosen must be one used in the ordinary

365

M. Schmidt-Kessel & S. Singleton course of business which affords a measure of creditor protection and abrogates unusual or inappropriate payments which would unreasonably burden the creditor. It is axiomatic that a specific term of the contract may override the debtor’s freedom to choose a particular mode of payment. What is ‘usual in the ordinary course of business’ will depend on the nature of the transaction at issue and any trade usages prevailing at the place of performance for the payment (Lando/Beale (2000), p. 341 Comment B). 3. Conditional acceptance. If a creditor instead of accepting cash, accepts an alternative method of payment in the form of a negotiable instrument such as a promissory note, cheque, a claim for the payment of money (by way of assignment) in order to accommodate a request by the debtor or pursuant to a contract, it is necessary to formulate a rule affording him or her a measure of protection where the substituted performance is not honoured. Article 7:106(2) PECL lays down a presumption that acceptance of cheque or other order or promise to pay is only a qualified or conditional payment, i.e., if the cheque bounces or another order to pay is not honoured, there is no payment, despite delivery of the cheque. The payer remains liable for the underlying debt. German law has developed a similar position by applying § 364(2) BGB; therefore, if the debtor assumes a new obligation to the creditor for the purpose of satisfying the latter, like acceptance of cheque or other order or promise to pay, it is not to be assumed, in case of doubt, that he is assuming the obligation in lieu of performance of contract. Both rules of interpretation are rebuttable and absolute acceptance of such kind of payment may be expressly or impliedly be agreed. The creditor undertakes an obligation not to enforce the underlying debt unless the promise or order is not honoured and the enforcement of the original claim is suspended until the substituted performance is dishonoured (paragraph 2 sent 1; BGH NJW 2000, 3344, 3345). 4. Consequence of dishonouring the substituted performance. If the substituted performance is dishonoured, the creditor is entitled to pursue a claim for the underlying debt as if no substituted performance had been accepted (Lando/Beale (2000), p. 342 Comment D; BGH NJW 2002, 1788). Interest due may be recovered. However, if the creditor does not take the necessary steps to enforce the substitute performance, e.g., creditor does not present a cheque, he is left without the original remedies for non-performance except as regards the enforcement of the payment itself. At least under German law, the debtor may have a right to withhold payment unless the dishonoured cheque has been given back (BGH WM 1996, 1037). Article 7:108: Currency of Payment (1) The parties may agree that payment shall be made only in a specified currency. (2) In the absence of such agreement, a sum of money expressed in a currency other than that of the place where payment is due may be paid in the currency of that place according to the rate of exchange prevailing there at the time when payment is due.

366

Chapter 7: Performance (3) If, in a case falling within the preceding paragraph, the debtor has not paid at the time when payment is due, the creditor may require payment in the currency of the place where payment is due according to the rate of exchange prevailing there either at the time when payment is due or at the time of actual payment. 1. General. Article 7:108 PECL concerns currency of payment issues and finds its equivalent in § 244 BGB. The ‘money of account’ is the currency in which a monetary obligation is measured and is usually ascertainable either from the contract or prevailing circumstances. The ‘money of payment’ is the currency in which the debtor actually pays. The parties usually identify the money of payment in the contract. There is no requirement that the money of account and money of payment converge. Moreover, if there is no agreement on the money of payment, the money of account will normally be the money of payment. Moreover, if the sum of money is expressed in a currency other than that of the due place of payment, Article 7:108(2) PECL and § 244(1) BGB provide that the debtor is entitled to pay in the local currency (the German rule applies beyond the wording also to payments in other countries: SchmidtKessel, in Prütting/Wegen/Weinreich (2012), §§ 244, 245 nos 15 and 16). If the debtor has not paid by the due date, the creditor under Article 7:108 PECL may require payment to be paid in the currency of the place where payment is due, whereas German law sticks the creditor to the specified currency (BGH NJW 1980, 2017; cf. BGH NJW 1958, 1390). 2. Currency of payment. The point of departure of Article 7:108 PECL is the general premise that the debtor is permitted to make payment in the local currency of the place of payment. However, Article 7:108(1) provides that the parties may stipulate that the debtor must make payment in an agreed currency (money of payment or money of account) under the contract. For German law, the same rule follows from the last half-sentence of § 244(1) BGB. 3. Determination of rate of exchange. The Principles and the BGB enshrine the rule that the debtor has the option of making payment in the currency where payment is due rather than the currency of payment. This is subject to the rule enshrined in Article 7:108(2) PECL and § 244(1) BGB. However, the debtor’s right of conversion is not permitted to lessen the extent of its pecuniary obligation. Article 7:108(2) PECL provides that the rate of exchange for the conversion is the one prevailing at the due place of payment at the time when payment is due. The Article also embraces cases of early performance of a monetary obligation (cf. Article 7:103 PECL). § 244(2) BGB follows a more pragmatic line and refers to the exchange rate at the time of the actual payment. 4. Delayed payment. A thorny issue is when there is a delay in making payment and the agreed currency of payment or the currency at the due place of payment has depreciated. Two questions arise: what date determinates the rate of exchange for conversion (the date when the debt becomes payable as opposed to the date of actual payment) and, which party is to assume the risk of currency depreciation. As regards the former, Article 7:108(3) PECL has adopted a ‘third way’ and has not plumped for

367

M. Schmidt-Kessel & S. Singleton either of these mutually exclusive alternatives. Instead, it provides that the creditor is entitled to choose between the exchange rate prevailing at the date of maturity or the date of actual payment. This solution imbues equitable notions and reflects the idea that the creditor should not bear the risk of currency depreciation, given that it could have taken measures to offset any potential losses attributable to a currency devaluation (Lando/Beale (2000), p. 345). Article 7:108(3) PECL therefore lays down a rule that the risk of the fall in value of currency must be borne by the defaulting debtor. By contrast, German law clearly differentiates between determining the rate of exchange and the consequences of delay: Also in cases of delay the general rule of § 244(2) BGB applies according to which the time of the actual payment is decisive. The consequences of an exchange rate to the detriment of the creditor are dealt with under the particular rules on delay, which provide for separate claims for interest (§§ 288, 286 BGB) and damages for delay (§§ 280, 286 BGB). The latter also covers the risk of currency depreciation. Generally, any agreement of the parties to the contrary will supplant the rules in Article 7:108(3) PECL and § 244 BGB (and the consequences of delay), however, in certain cases clauses of such a kind may be judged as unfair under § 307 BGB. 5. Exchange restrictions. The application of Article 7:108 PECL or § 244 BGB may be precluded if exchange controls are in operation. Article 7:109: Appropriation of Performance (1) Where a party has to perform several obligations of the same nature and the performance tendered does not suffice to discharge all of the obligations, then subject to paragraph 4 the party may at the time of its performance declare to which obligation the performance is to be appropriated. (2) If the performing party does not make such a declaration, the other party may within a reasonable time appropriate the performance to such obligation as it chooses. It shall inform the performing party of the choice. However, any such appropriation to an obligation which: (a) is not yet due, or (b) is illegal, or (c) is disputed, is invalid. (3) In the absence of an appropriation by either party, and subject to paragraph 4, the performance is appropriated to that obligation which satisfies one of the following criteria in the sequence indicated: the obligation which is due or is the first to fall due; the obligation for which the creditor has the least security; the obligation which is the most burdensome for the debtor the obligation which has arisen first. If none of the preceding criteria applies, the performance is appropriated proportionately to all obligations.

368

Chapter 7: Performance (4) In the case of a monetary obligation, a payment by the debtor is to be appropriated, first, to expenses, secondly, to interest, and thirdly, to principal, unless the creditor makes a different appropriation. 1. General. Article 7:109 PECL concerns the case where several different performances under one or several contracts are owed by the debtor to the creditor and the performance tendered does not discharge all of the obligations owed. This provision is particularly apposite in the case of monetary obligations. Paragraphs (1) and (3) copies § 366 BGB but modifies the whole approach by adding a right for the creditor to appropriate the performance, if the debtor remains silent in Article 7:109(2) PECL. Article 7:109(4) PECL is based on ideas which for German law can be found in § 367 BGB; however, the creditor here has a right to appropriate, which is unknown to German law. 2. Right to appropriate performance. As a general rule, in the absence of an agreement to the contrary or in a case falling under Article 7:109(4) PECL and § 367 BGB which stipulate the order of appropriation of payment of a monetary obligation (expenses-interest-principal), the debtor may, when rendering performance, appropriate a performance to a particular obligation. The debtor under both Articles must make a communication to the creditor of his or her intention to appropriate performance and declare which obligation is thereby discharged. A communication of this type may also be inferred, e.g., in the case of prescribed claims, it may be inferred that the debtor appropriated performance to the obligations that were not time barred. A further (and self-evident) case of an implied appropriation is the identity of one amount due and the amount paid (cf. BGH NJW 2001, 3781). 3. Right to appropriate not exercised by the debtor. Where the debtor has not exercised his or her right of appropriation, the right to appropriate a performance is vested in the creditor by Article 7:109(2) PECL, which grossly deviates from the solution in § 366 BGB. The creditor must exercise this right within a reasonable time and the precepts of good faith dictate that notice of this intention must be communicated to the debtor which is merely declaratory. This entails that the appropriation is not invalidated by the failure to give notice, but it may give rise to a right to claim compensation. The communicatory solution is not really coherent with paragraph (3), because it would leave the debtor in uncertainty as to the effects of the payment and abets manipulative practices. Furthermore, the main consequence of Article 7:109(2) PECL is the necessity for the debtor to clarify its position even if it is completely in line with Article 7:109(3) PECL. The solution in § 366 BGB is completely different and not open to a unilateral appropriation by the creditor (BGH NJW 2001, 3781, 3782); a creditor who deviates from the default rule (or the deviating from the appropriation by the debtor) breaches the duty to accept performance under § 293 BGB (Schreiber, in Soergel (2010) § 366 no. 7). 4. Appropriation by law. Paragraph (3) is a residual rule regulating the appropriation of performance if the parties have not resolved this issue under contract or have failed to exercise a right of appropriation. Therefore, it fulfils the same function as the

369

M. Schmidt-Kessel & S. Singleton identical rule in § 366(2) BGB. However, due to the separate right of the creditor to deviate from paragraph (3) where the debtor has not made use of his right under paragraph (1), the actual scope of application is much narrower. Article 7:109(3) PECL and § 366 BGB enumerate the same sets of criteria (first due, least security, most burdensome, arisen first) in identical order. If none of these requisites are applicable, then the performance is appropriated proportionately to all obligations. 5. Appropriation to a part of a single obligation. Article 7:109 PECL and § 366 BGB start from the premise that there are several divisible obligations in existence. They, however, apply accordingly to cases where partial payment of a debt needs to be appropriated to part of a debt (Lando/Beale (2000), p. 350; Pfeiffer, in Prütting/ Wegen/Weinreich (2012), § 366 no. 8). 6. Monetary obligations. For obligations to pay money, Article 7:109(4) PECL and § 367 BGB deal with the relationship between cost, interest and the principal amount. If the payment by the debtor does not suffice to fulfil all three parts of the obligation it is to be appropriated, first, to expenses, second, to interest, and third, to principal. Both Articles modify the general rules to the detriment of the debtor, who is deprived of his right to appropriate in the cases covered. The difference between both rules is, that Article 7:109(4) PECL is not mandatory for the creditor, whereas § 367 BGB is, which only leaves open the possibility to deviate by agreement. For consumer credit agreements § 497(3) BGB changes the order into appropriation first, to expenses, second, to principal, and thirdly, to interest. Article 7:110: Property Not Accepted (1) A party who is left in possession of tangible property other than money because of the other party’s failure to accept or retake the property must take reasonable steps to protect and preserve the property. (2) The party left in possession may discharge its duty to deliver or return: (a) by depositing the property on reasonable terms with a third person to be held to the order of the other party, and notifying the other party of this; or (b) by selling the property on reasonable terms after notice to the other party, and paying the net proceeds to that party. (3) Where, however, the property is liable to rapid deterioration or its preservation is unreasonably expensive, the party must take reasonable steps to dispose of it. It may discharge its duty to deliver or return by paying the net proceeds to the other party. (4) The party left in possession is entitled to be reimbursed or to retain out of the proceeds of sale any expenses reasonably incurred. 1. Ambit. The quintessence of the Article is a specific instance of an impediment to performance and concerns the situation where one party fails to accept or retake corporeal property. It thereby takes over the traditional continental of mora creditoris (breach by the creditor) idea and deals with two important remedies for this kind of breach, the right to deposit and the right to sell; German law deals with these remedies

370

Chapter 7: Performance in §§ 372–386 BGB and § 373 HGB. However, as a consequence of the common law tradition of the interplay of contract and bailment in such a situation Article 7:110(1) PECL starts with stating the – from a continental perspective – self-evident duty to preserve the goods. This ambit of this Article is confined to the failure to accept a non–monetary performance. The rejection of a pecuniary obligation is dealt with in Article 7:110 PECL. 2. Cases covered. This Article primarily embraces three diffuse events and in a departure from the CISG bundles all the pertinent cases into one all embracing provision. The first factual matrix envisaged by this Article is where debtor makes a tender of performance (e.g., delivery under a sales contract) and the creditor refuses to accept delivery. Another pertinent factual configuration is where the buyer, after the property has been delivered, is entitled to reject the goods. In this case, the buyer has a duty to preserve and protect the goods delivered. This Article also applies in the context of the unravelling of an avoided contract, where one party has an obligation to restitute the goods and the contractual counterparty refuses to accept the return of the property. Comment A explicitly states, that for the purposes of this Article, it were immaterial whether the failure to accept the property constitutes non-performance of an obligation; however, this only refers to dogmatic concepts of German origin which are not shared by the Principles of European Contract Law. 3. Excuses for the creditor. It is axiomatic that the creditor is entitled to reject a tender of performance if it is made at an unreasonable hour and insist that performance should be tendered at a more suitable hour. This state of affair will not trigger the application of Article 7:110 PECL as it usually does not trigger the respective German law rules. The precepts of good faith or indeed an implied term under the contract (Article 6:102 PECL; commercial usage; § 157 BGB) would dictate that delivery should be made at a more opportune hour (Article 1:201 PECL, § 242 BGB). For German commercial cases § 358 HGB explicitly states that a proper tender presupposes an offer within the usual office hours. 4. Duty of preservation and protection. The party who is left in possession is not discharged from the duty to deliver or return the goods. By contrast, a duty to reasonably preserve and protect the property is imposed by Article 7:110 PECL on the party who, against his or her volition, remains in possession of the corporeal property. German law provides for an explicit rule in that respect only in case of defective goods sold between merchants, § 379(1) HGB. It seems to be axiomatic that in these circumstances the party concerned cannot willy-nilly divest himself or herself of all responsibility towards the property in question and is not entitled to simply cast it aside or expose it to damage; however, German law provides for an exception to that rule for immovable property and registered ships, § 303 BGB. The duty to preserve and protect is under both regimes restricted by the criterion of reasonableness and in this context, reasonable measures may include taking the goods back and storing them or depositing the goods in a warehouse. Regard will also be had to the nature of the goods (e.g., are they susceptible to rapid deterioration) and their value in determining the extent of the duty of preservation.

371

M. Schmidt-Kessel & S. Singleton 5. Discharge by deposit. The debtor’s obligation may be discharged by depositing the goods in a warehouse held to the order of the other, Article 7:110(2)(a) PECL. German law establishes two kinds of depositing with different consequences. The one under § 372–382 BGB leads to a complete discharge of the debtor if he waives his right to take the back the goods from the depository, § 378 BBGB. This kind of depositing only applies to money, securities and other documents as well as valuables, § 372 BGB, and the depository office is not a warehouse but usually the local court (see the reference to the Regional Acts in Fetzer, in Münchener Kommentar (2012), § 372 no. 16; the former Federal Act has been abolished in 2010). However, in commercial cases deposit is also possible at a warehouse or another depositary, which is sufficiently safe, § 373(1) HGB. However, this deposit does not discharge the debtor completely but only allows him to delegate his duties as to the goods to a third person. 6. Discharge by sale. The second remedy of the debtor as involuntary bailee of the goods provided for in Article 7:110(2)(b) PECL and §§ 383–386 BGB, § 373(2)-(5) HGB is the right to sell the goods on behalf of the creditor (see for a comparative study Telkamp (2010)) upon giving reasonable notice to him (Article 7:110(2)(b) PECL, § 384 BGB, § 373(2) HGB). This requirement takes account of the interests of the creditor. In the case of perishable goods, little or no notice may be required as it may be impracticable to require it given that in these circumstances time is of the essence. Whereas Article 7:110(2) PECL does not regulate the details of the sale, German law does in a rather formalistic manner: Generally, the sale is only possible in a public auction, § 383 BGB, § 373(2) HGB. If the goods have a current price at the stock exchange or market, the debtor may effect the sale by private agreement at the current price through a commercial broker officially authorized to effect such sales or through a person authorized to sell by public auction, § 385 BGB, § 373(2) HGB. In noncommercial cases the debtor is not discharged by the sale but the proceeds replace the goods as object of the obligation; the proceeds have then to be paid to the creditor or deposited under §§ 372–382 BGB. In commercial cases the debtor may base the sale either on the general rules or on § 373(2) HGB and is than acting as an agent for the creditor, who owes the return of the proceeds under agency rules (§ 667 BGB). In both cases, the debtor is usually entitled to set off a claim against the creditor’s claim for the net proceeds. 7. Reimbursement of expenses incurred. The party left unwillingly in possession is entitled to recover reasonable expenses incurred, Article 7:110(4) PECL, §§ 304, 381, 386 BGB, § 373(3) HGB. If the right of resale is exercised, the debtor may retain costs reasonably incurred from the entire proceeds of sale 8. Relation of self-help sale to other legal remedies. The creditor not accepting delivery of the goods usually is in breach of his obligation to accept delivery and to pay the price. This may lead to debtor’s rights to terminate the contract and claim damages. The relationship between these remedies is not always entirely clear. Whereas under German law, the debtor has to choose either the right to sell or termination plus damages (Emmerich, in Münchener Kommentar (2012), Vor § 281 no. 50), the situation under the Principles of European Contract Law is difficult to decide. On the

372

Chapter 7: Performance one hand, Commont F to Article 7:110 PECL explicitly formulates that other remedies remain unaffected, on the other hand a sale under the damages regime presupposes a previous termination of the contract, Article 9:506 PECL, which would exclude the self-help sale under Article 7:110 PECL. The second solution seems to be favourable as being the more coherent one (see Telkamp (2010), p. 150). When deciding between the two options, the debtor has to consider the disadvantages and advantages of the self-help sale (plus the claim for the price) as opposed to termination plus damages. Under the Principles of European Contract Law, the self-help sale will usually be the less difficult way to enforce the debtor’s performance interest, i.e., the claim for the price. By contrast, German law will usually lead to the solution of termination plus damages, if fault of the creditor in not accepting delivery can be demonstrated. 9. Perishable goods or goods unreasonably expensive to preserve. Where the goods have a short shelf life and are in danger of imminent deterioration, the duty of preservation extends to selling the goods (no notification necessary), Article 7:110(3) PECL. The same proposition holds true if the goods are unreasonably expensive to preserve. Here, the value of the goods is of primary importance. If the cost of storage exceeds the value of the goods, then invariably, the goods are unreasonably expensive to preserve. Article 7:110(3) PECL also embraces the cases where the goods take up too much storage space which the debtor urgently requires (Lando/Beale (2000), p. 353). This duty of the debtor to sell on behalf of the creditor was taken over from Article 88(2) CISG. By contrast, German law has not established such a duty, but only provides for debtors rights to sell in § 383 BGB, § 379(2) HGB and some particular rules like §§ 419(3), 535(3) HGB (carrier’s right to sell). Only in exceptional cases courts might base a debtor’s duty to sell on the principle of good faith and fair dealing in § 242 BGB (Fetzer, in Münchener Kommentar (2012), § 383 no. 4). This right of resale is under both legal orders imbued with notions of reasonableness and the debtor must balance the value of the goods on the one hand and the trouble and expense of finding a favourable opportunity to sell on the other. Article 7:111: Money not Accepted Where a party fails to accept money properly tendered by the other party, that party may after notice to the first party discharge its obligation to pay by depositing the money to the order of the first party in accordance with the law of the place where payment is due. 1. General. This provision complements the previous Article and concerns the refusal of a creditor to accept payment; it is mirrored by the German rules in §§ 372–382 BGB, § 373 HGB only applying to goods and negotiable instruments, § 381(2) HGB. Again, the debtor’s liability is not discharged by the refusal, who may have a defence against the creditor’s claims for interest and damages (Article 8:101(3) PECL and SchmidtKessel, in Dauner-Lieb/Langen (2012), § 293 no. 23). The debtor does not have to renew the tender of performance and is entitled, after giving notice to the creditor, to deposit the money to the order of the creditor by any means in accordance with law of place where payment is due. This will have the effect of releasing the debtor from his

373

M. Schmidt-Kessel & S. Singleton or her obligation to make payment and bar potential claims by creditor for the interest due; German law additionally presupposes the creditor waiving his right to take back the money, § 378 BGB. In accordance with the precepts of good faith and fair dealing under Article 1:201 PECL, reasonable notice is required both with respect to the mode of communication and the time for reply. German law only obliges the debtor to notify the deposition yet effected, § 374(2) BGB. 2. Scope of application. This Article applies to both the creditor’s refusal to accept due performance under the contract e.g., agreement to pay price for the goods and to secondary obligations to pay e.g., payment of damages in accordance with Chapter 9 Section 5 (Lando/Beale (2000), p. 318). The same is true for the respective rules from the German codification, which only differentiates as to the object of the obligation and not concerning it legal basis. Article 7:112: Costs of Performance Each party shall bear the costs of performance of its obligations General. This Article provides that each party is responsible for the costs associated with performance. These costs may include money transfers, insurance etc. and must be borne by the performing party unless a contrary agreement was made (e.g., online retailers usually require the customer to pay shipping costs). German law does not provide for a general rule as to the distribution of costs. Rather, the several rules on place and modes for performance are seen to include a rule as to costs (cf. Krüger, in Münchener Kommentar (2012), § 269 no. 54). If one would develop a more general rule it would be more or less identical with Article 7:112 PECL.

374

CHAPTER 8

Non-performance and Remedies in General B. Gsell

Principles of European Contract Law Article 8:101: Remedies Available (1) Whenever a party does not perform an obligation under the contract and the non-performance is not excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9. (2) Where a party’s non-performance is excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9 except claiming performance and damages. (3) A party may not resort to any of the remedies set out in Chapter 9 to the extent that its own act caused the other party’s non-performance. 1. General. This introductory provision to Chapters 8 and 9 states some important basic principles underlying the entire set of rules on remedies in cases of nonperformance. First, paragraph 1 follows the unitary concept of non-performance stipulated in Article 1:301 PECL in that it does not differentiate between the various forms of breach of obligation, particularly between delay in performance and defective performance, entitling the aggrieved party to any remedy set out in Chapter 9. Second, paragraph 1 states that the whole range of remedies provided in Chapter 9 is available to the creditor only if the non-performance is not excused on the basis of an impediment under Article 8:108 PECL. Finally, paragraph 1 implies that in principle it is up to the creditor to decide which of the available remedies is chosen.

375

B. Gsell Paragraph 2, by excluding performance and damages, limits the choice of remedies where non-performance is excused due to an impediment under Article 8:108 PECL. Paragraph 3 curtails the creditor’s rights where non-performance is caused by the creditor’s own act, by reason that giving the creditor a remedy would contravene the general principle of good faith and fair dealing (see Article 1:201 PECL). 2. Unitary concept of non-performance. The unitary concept of non-performance underlying the PECL embraces any kind of breach of contract, be it a total failure to perform, late performance, defective performance, or a performance effected too early. Furthermore, this concept covers the violation of an accessory duty, including the failure to cooperate in order to give full effect to the contract (see Article 1:301 PECL). Finally, non-performance disregards whether the failure to properly perform is excused due to an impediment under Article 8:108 PECL, thereby including even cases of force majeure. The unitary concept of non-performance underlying the PECL is basically modelled on the CISG (see Articles 25, 45, 61 CISG: ‘breach of contract’) and is shared by the UNIDROIT Principles (see Article 7.1.1 PICC: ‘non-performance’). The question of whether there is a breach of contract depends on the contents and effects of the contract, which are to be determined according to the general rules set out in Chapters 6 and 7, as well as the special provisions on performance contained in Chapter 7. 3. Choice of remedies. The remedies set out in Chapter 9 and referred to in Article 8:101(1) PECL are as follows: the right to performance (Article 9:101–9:102 PECL), the right to withhold performance (Article 9:201 PECL), the right to terminate the contract (Article 9:301 PECL), the right to price reduction (Article 9:401 PECL), and the right to damages (Article 9:501 PECL). Although the choice of remedy is basically up to the creditor, it should be noted that specific requirements must be met for each remedy. Therefore, the creditor may not have access to the whole range of remedies in any given case of non-excused non-performance. 4. Excused non-performance. In cases of non-performance excused due to an impediment under Article 8:108 PECL, the choice of remedy is restricted by Article 8:101(2) PECL, which bars the creditor from claiming performance or damages. Among the remaining remedies–namely, the right to withhold performance (Article 9:201 PECL), the right to terminate the contract (Article 9:301 PECL), and the right to price reduction (Article 9:401 PECL)–the right to withhold performance has the least stringent prerequisites and is therefore the most easily available (see comment on Article 9:101(2) PECL, below). 5. Non-performance caused by creditor. Barring the creditor from resorting to any remedy to the extent that the creditor’s own act caused the other party’s nonperformance, paragraph 3 contains a specification of the general principle of good faith and fair dealing stipulated in Article 1:201 PECL. Insofar as the creditor is responsible for the non-performance, he may not resort to the remedies provided in Chapter 9. Moreover, since a party’s failure to properly cooperate in itself constitutes a violation of duty (see Article 1:202 PECL), the other party in fact may have recourse to the

376

Chapter 8: Non-performance and Remedies in General remedies set out in Chapter 9. However, the comments (Lando/Beale (2000), p. 359) emphasize that paragraph 3 does not require that the creditor be liable for causing the non-performance. Even though the failure to properly cooperate is due to unexpected circumstances (see illustration 4: air crash) and therefore excused under Article 8:108 PECL, the creditor will still be barred from resorting to any remedy set out in Chapter 9. The comments (Lando/Beale (2000), p. 360) mention mora creditoris (default of acceptance) as the most obvious situation covered by paragraph 3, but stress that there are other possible cases. Such cases include, for example, a non-conforming performance caused by wrong or incomplete information given by the other party, who thereby violates his duty to give information. Paragraph 3 encompasses situations of mixed responsibility, in which both parties contribute to the non-performance. The comments (Lando/Beale (2000), p. 360) explain that in such cases, the creditor may exercise remedies for nonperformance to a limited extent only, implying that the restriction is to be proportionate to the extent of the creditor’s part in causing the debtor’s non-performance. However, Article 8:101(3) PECL is considerably vague. First, the provision leaves open the question of how exactly to measure the curtailment of the creditor’s rights in situations of mixed responsibility. Second, it does not explain how the proper adjustment of one of the creditor’s remedies would influence his other remedies or even remedies available to the counterparty, particularly those arising from a violation of the duty to cooperate (Article 1:202 PECL). Furthermore, the outcome of the illustration proposed in the comments (Lando/Beale (2000), p. 361 Illustration 5) is doubtable: A agreed to carry B’s glassware to Paris. The glass, which had not been properly packed by B, is subjected to rough handling by A. Some heavy pieces of thick glass would not have broken if they had been properly packed. The comments (Lando/Beale (2000), p. 361) differentiate between the fragile glass and the thick glass. Regarding the fragile glass, the comments (Lando/Beale (2000), p. 361) hold that B can both refuse to pay the carriage charges and recover damages; with respect to the heavy glass, however, B is denied any remedy. This outcome is questionable in two respects. First, it implies that B holds no responsibility for the breaking of the fragile glass. Even though the rough handling in itself would have ruined the fragile glass, this does not necessarily mean that the deficient packing was of no effect. The comments (Lando/Beale (2000), p. 361) simply do not give enough information to determine how seriously the lack of proper packing affected the safe transport of the glass. This becomes clear if one supposes that even under correct handling, the fragile glass would have been ruined due to the lack of proper packing. In other words, it is entirely plausible that both parties are responsible for the destruction of the fragile glass. But if so, why award B the full amount of damages? Second, on the flip side, it does not seem fully satisfactory that B is considered the only one responsible for the perishing of the heavy glass. Even though the rough handling alone would not have been sufficient to cause the breaking of the heavy glass, this does not mean that it was of no effect whatsoever. Here, the comments (Lando/Beale (2000), p. 361) once again fail to give enough information. If one assumes that the improper packing alone would not have caused the breaking of the heavy glass, it becomes clear that the case of the heavy glass might also be one of

377

B. Gsell mixed responsibility, justifying only a partial and not total curtailing of the creditor’s rights.

Draft Common Frame of Reference Article III. – 3:101: Remedies available (1) If an obligation is not performed by the debtor and the non-performance is not excused, the creditor may resort to any of the remedies set out in this Chapter. (2) If the debtor’s non-performance is excused, the creditor may resort to any of those remedies except enforcing specific performance and damages. (3) The creditor may not resort to any of those remedies to the extent that the creditor caused the debtor’s non-performance. This provision is clearly modelled on Article 8:101 PECL and contains, with some differences in wording, the same basic principles. However, the scope of Book III of the DCFR is broader than that of the PECL insofar as it covers not only contractual obligations but essentially all traditional obligations of a patrimonial nature in the field of private law, such as obligations arising from unilateral promises, pre-contractual negotiations, benevolent intervention in another’s affairs, damage caused to another, and unjustified enrichment (for more details see von Bar/Clive (2209), Comments B and D on Article 11 I.-1:101(1), pp. 669 et seq.; see also Article III-1:102(1),(5) DCFR). Accordingly, the scope of III.-3:101 DCFR, in contrast to Article 8:101 PECL, extends to non-contractual obligations. Still, some of the remedies set out in Chapter 3 DCFR presuppose a contractual relationship, or at least a contractual context. Thus, Article III.-3:501(1) DCFR expressly states that Section 5 on termination applies only to contractual obligations and contractual relationships. Even though there is no corresponding provision with regard to Section 6 on price reduction, it is difficult to imagine a non-contractual situation in which price reduction could be sought. The comments on Section 6 do not contain any corresponding illustration, either.

German Law § 241 BGB: Duties arising from obligation relationship (1) By virtue of the obligation relationship, the creditor is entitled to demand performance from the debtor. Performance can also consist in an omission. (2) The obligation relationship can, according to its content, oblige each party to have regard to the rights, legal entitlements and interests of the other party.

378

Chapter 8: Non-performance and Remedies in General § 280 BGB: Compensation for violation of duty (1) If the debtor violates a duty arising from an obligation relationship, the creditor can demand compensation for the harm arising from this. This does not apply if the debtor is not responsible for the violation of duty. (2) The creditor can only demand compensation for delay in performance under the additional prerequisite of § 286. (3) The creditor can only demand compensation instead of performance under the additional prerequisites of § 281, § 282 or § 283. § 311a BGB: Hindrance to performance on conclusion of contract (1) lt is not inconsistent with the effectiveness of a contract that the debtor does not need to perform under § 275 paragraphs 1 to 3 and the hindrance to performance is already present on conclusion of the contract. (2) The creditor can demand compensation instead of performance or reimbursement of his expenses to the extent determined in § 284, according to his choice. This does not apply if the debtor did not know of the hindrance to performance on conclusion of the contract and is also not answerable for his lack of knowledge. § 281 paragraph 1 sentences 2 and 3 and paragraph 5 apply correspondingly. § 275 BGB: Exclusion of duty to perform (1) The claim to performance is excluded in so far as this is impossible for the debtor or for anyone. (2) The debtor can refuse performance in so far as this requires expenditure which is in gross disproportion to the creditor’s interest in performance, having regard to the content of the obligation relationship and the requirement of good faith. When determining the efforts to be expected of the debtor, consideration must also be given to whether the debtor is responsible for the hindrance to performance. (3) The debtor can further refuse performance if he has to effect performance personally, and on balancing the hindrance to his performance, together with the creditor’s interest in performance, the debtor cannot be expected to do this. (4) The creditor’s rights are determined in accordance with §§ 280, 283 to 285, 311a and 326. § 254 BGB: Contributory fault (1) If fault on the part of the victim has contributed to the origin of the harm, the duty to compensate as well as the extent of the compensation to be provided depends on the circumstances, and in particular on the extent to which the harm has been predominantly caused by the one or the other party.

379

B. Gsell (2) This also applies if the victim’s fault is limited to the fact that he has omitted to draw the debtor’s attention to the risk of an unusually high level of harm of which the debtor neither knew nor ought to have known, or that he has omitted to avert the harm or to reduce it. The provisions of § 278 apply correspondingly. § 293 BGB: Delay in acceptance The creditor falls into delay when he does not accept the performance offered to him. § 323 BGB: Withdrawal because performance not carried out or not carried out in accordance with contract (1)–(5) […] (6) Withdrawal is excluded if the creditor is solely or overwhelmingly responsible for a circumstance that would entitle him to withdraw or if a circumstance for which the debtor is not responsible occurs at a time at which the creditor is in delay in acceptance. § 326 BGB: Release from counter-performance and withdrawal in case of exclusion of duty to per form (1) If the debtor does not need to perform under § 275 paragraphs 1 to 3, the claim to counter-performance lapses; in the case of partial performance § 441 paragraph 3 applies correspondingly. Sentence 1 does not apply if the debtor does not need to effect subsequent fulfilment under § 275 paragraphs 1 to 3 in the case of performance not in accordance with the contract. (2) If the creditor is solely or overwhelmingly responsible for a circumstance on the basis of which the debtor does not need to perform under § 275 paragraphs 1 to 3 or if this circumstance for which the debtor is not responsible occurs at a time when the creditor is in delay in acceptance, the debtor retains the claim to counter-performance. He must however allow to be reckoned against him what he saves as a result of release from performance or acquires by some other use of his power to work or wilfully refrains from acquiring. 1. No entirely unitary concept of non-performance. a) German law does not follow an entirely unitary concept of breach of contract. However, the reform of the Law of Obligations in 2002 changed the previous system considerably and aligned it to the unitary concept underlying the PECL, the CISG, and now the DCFR. The general provisions on non-performance contained in the old BGB followed a classification based not on remedies but on different types of irregularities of performance. Yet these

380

Chapter 8: Non-performance and Remedies in General general rules specifically named only impossibility and delay in payment as irregularities to be remedied. As to other forms of breach of contract, such as defective performance and breach of ancillary duties, the prevailing academic opinion and court practice (see with references Olzen, in Staudinger (2005), Intro to §§ 241 et seq. no. 211; Huber (1999), Vol. 1, § 2 IV 1; § 3 II 3 a, c) held that the Civil Code did not provide for general rules, particularly not for a general principle of liability in damages. These situations, classified under the collective terms of positive breach of contract (positive Vertragsverletzung) and positive malperformance (positive Forderungsverletzung), were therefore governed by rules that had to be developed outside the Code’s explicit provisions. However, with regard to certain types of contracts, such as sales contracts and contracts for work, there existed special sets of provisions dealing with defective performance. These special systems of remedies were basically regarded as independent from the general rules, which led to a complicated two-track system. Particularly with regard to cases of latent defects, it was difficult to draw an exact line between the two systems. Therefore, grounds for the recovery of damages for consequential loss (Mangelfolgeschaden) exceeding the difference in value between the tendered nonconforming performance and a (hypothetical) conforming performance were doubtable. Evidence suggesting that the asserted lack of a general principle of liability in damages in the Code was due to a misinterpretation of historical legislative intentions (see Huber (1999), Vol. 1, § 3 II 3 a) had no effect on the law in practice. b) Today, the BGB’s general rules on non-performance (§§ 275 et seq. BGB) still lack any provision resembling Article 8:101 PECL. However, with regard to damages, § 280(1) BGB states a general principle in which any breach of duty (Pflichtverletzung) entitles the creditor to damages for loss arising from this breach, unless the debtor is not responsible for it. In contrast to the prevailing interpretation of the old Code, this general principle covers essentially every form of breach of contract (delay in performance, impossibility, defective performance, and violation of an accessory duty; see § 241(2) BGB). As with the DCFR, even the breach of non-contractual obligations is covered. Parallel to the PECL and the DCFR, the Pflichtverletzung is to be determined without regard to whether the debtor is excused. During the legislative reform process, some even proposed using the term ‘non-performance’ (Nichterfüllung) to circumscribe the unitary concept of breach of duty. This idea was ultimately rejected because it was uncertain whether Nichterfüllung could be understood as an umbrella term with a broad enough meaning to include not only non-delivery but also other irregularities of performance, particularly defective performance (see Huber (1999), Vol. 1, § 1 I 2). c) Even though the new concept of Pflichtverletzung comes close to the unitary concept of non-performance underlying the PECL and the DCFR, some traces of the old structure can still be found in the reformed German Code. Thus, in contrast to the PECL and the DCFR, the German Civil Code’s provisions on remedies for breach of duty still follow a classification based on type of irregularity. This does not seem totally unjustified, since the prerequisites of a certain remedy vary depending on the type of irregularity. To take one example: in order to give the defaulting party a last chance to properly perform a contract, German law requires the setting of an additional period for performance (Nachfrist) as a general prerequisite for terminating the contract (Rücktritt, § 323 BGB). The same is true regarding the right to the recovery of ‘damages in lieu

381

B. Gsell of performance’ (Schadensersatz statt der Leistung, § 281 BGB), which mainly awards the value of the promised performance. Under this approach, it is understandable that the Code deals with impossibility of performance in separate provisions (§§ 326(5), 283 BGB), which dispense with the requirement of an additional period for performance, since offering the debtor a last chance to perform is futile when it is clear that he will be unable to do so. However, one can wonder why the general exception clauses, which are contained in §§ 323(2) and 281(2) BGB and which dispense with the requirement of an additional period for performance, were not designed to extend to the situation of impossibility. Furthermore, the system is growing even more complicated. The provisions on damages in cases of impossibility of performance (§§ 280, 283 BGB) – in contrast to the provision on termination of the contract in cases of impossibility of performance (§ 326(5) BGB)–deal only with subsequent impossibility, whereas cases in which performance had already been impossible when the contract was concluded are governed by a separate provision – namely, § 311a(2) BGB. This separate provision has been justified primarily on the grounds that in the case of initial impossibility, no breach of duty (Pflichtverletzung) occurs, for according to § 275 BGB the debtor is released from his obligation to perform right from the formation of the contract (see Canaris (2001), 499, 506 et seq.). However, if one understands breach of duty (Pflichtverletzung) in the broad and simple sense of non-performance of the obligation, § 275 BGB does not constitute a hurdle to the assertion of such a breach in the case of initial impossibility (see Ernst, in Münchener Kommentar (2012) § 311a) no. 15 with references). The provision, then, bars only the remedy of specific performance, without totally removing the obligation’s effects and without influencing the creditor’s right to claim damages in particular. In other words, even though the debtor might be entitled to refuse performance under § 275 BGB, there is still an obligation that could be considered non-performed. d) Another remnant of the old Code’s orientation towards type of irregularity can be found in the reformed Code’s provisions on delay in payment. Delay in payment is treated distinctly from impossibility, defective performance, and other forms of breach of contract insofar as, according to §§ 280(2) and 286(1) BGB, damages for loss arising from delayed performance are, in principle, not recoverable unless the debtor has been warned by the creditor. In contrast to the PECL and the DCFR, German law thus sticks to the notice requirement (Mahnung, mise en demeure). It should be noted, however, that § 286(2)–(3) BGB provides for far-reaching exceptions to the requirement of a warning, the most important being a situation in which the parties have fixed a time for performance (dies interpellat pro homine). The list of exceptions contained in the Code was considerably enlarged in 2000, upon the implementation of the EC Directive on combating late payment (‘Gesetz zur Beschleunigung fälliger Zahlungen’ BGBl 2000 I, 330). As a consequence, in the vast majority of cases of late performance, the creditor may actually dispense with a warning and recover damages all the same. In other words, the differences between the prerequisites for a claim for ‘simple’ damages under § 280(1) and those for a claim for damages under §§ 280(2) and 286(1) BGB are less considerable than one might assume at first sight. But if so, one can ask whether it might not have been better to dispense with the warning requirement altogether in German law, thus simplifying its damages regime.

382

Chapter 8: Non-performance and Remedies in General e) Finally, it is worth mentioning one further remnant of the previous two-track system that can be found in today’s Civil Code: general rules governing impossibility and delayed performance stand aside from special provisions dealing with the defective performance of particular types of contracts. In principle, the reform of the BGB in 2002 put an end to the conceptualization of remedies governing the defective performance of sales and work contracts as separate from the general rules on non-performance. In contrast to the old BGB, the new §§ 437 and 634 BGB, as key provisions setting out available remedies in cases of defective performance of sales and work contracts, explicitly refer to the general rules on non-performance. Thus, there is no longer a separate regime for termination of the contract and for damages. Yet the list of remedies offered in §§ 437 and 634 BGB does not completely mirror the general rules on non-performance. The most significant discrepancy concerns the right to price reduction contained in §§ 437 no. 2, 441 BGB and §§ 634 no. 3, 638 BGB, which is lacking in the general rules on non-performance. Whereas Article 9:301 PECL provides for such a general remedy, German law does not. It therefore remains doubtful whether, for example, a person who undertakes to perform services in a service or employment contract (§ 611 BGB) but does not promise a certain outcome must face price reduction in the case of substandard performance (see for instance BGH NJW 1963, 1301; BGH NJW 1981, 1211; BGH NJW 2004, 2817; Müller-Glöge, in Münchener Kommentar (2012) § 611 no. 23). 2. Choice of remedies. The remedies available in cases of non-performance under the German Civil Code are roughly the same as those under the PECL and the DCFR, although their prerequisites and their effects may vary (for details see the discussion in Chapter 9 below). These remedies are the right to performance (§ 241(2) BGB), the right to withhold performance (§§ 320, 273 BGB), the right to terminate the contract (§§ 323, 324, 326(5) BGB), the right to a price reduction (§§ 441, 536, 638 BGB), and the right to damages (§§ 280 et seq. BGB). Whereas the BGB’s general rules on nonperformance do not contain a provision listing the available remedies, §§ 437 and 634 BGB enumerate the buyer’s and the client’s rights in cases of defective performance. 3. Excused non-performance. Similar to the PECL and the DCFR, the BGB curtails the creditor’s remedies in cases where non-performance is caused by circumstances that are not attributable to the debtor. As to damages, German law basically follows the fault principle, thereby limiting the availability of the recovery of damages (see § 280(1) BGB in conjunction with § 276 BGB). It should be noted, however, that it will generally be easier for the debtor to prove that he is not at fault under § 276 BGB than to meet the stringent prerequisites of an excuse due to an impediment under Article 8:108 PECL (see below comment on Article 8:108 PECL). Furthermore, specific performance is excluded under § 275(1)–(3) BGB in cases of impossibility and similar obstacles to performance. However, the release of the debtor rarely depends on whether he is responsible for the non-performance (for more details see Ernst, in Münchener Kommentar (2012) § 275 nos 72 et seq., 117 with references). 4. Non-performance caused by creditor. a) The German Civil Code does not provide for a general rule similar to Article 8:101(3) PECL or Article III.-3:101(3) DCFR

383

B. Gsell curtailing the creditor’s remedies insofar as he is to blame for the non-performance. However, the same principle is acknowledged under the BGB. German law mainly – though not only – deals with the situation of delay in acceptance (mora creditoris), which occurs when the creditor does not accept a proper tender of performance (see §§ 293 et seq. BGB). b) Thus, it is a common position that there is no right to withhold performance under § 320 BGB as long as the creditor is in default of acceptance (mora creditoris) (see Gsell, in Soergel (2005), § 320 no. 77). Furthermore, with mora creditoris the ‘risk of counter-performance’ (Preisgefahr or Gegenleistungsgefahr) is shifted to the creditor. Thus, according to § 326(2) 1 BGB, a creditor in delay of acceptance (mora creditoris) is not entitled to deny counter-performance when circumstances not attributable to the debtor supervene and render performance impossible under § 275 BGB. § 326(2) 1 BGB extends this rule to situations in which the creditor is solely or overwhelmingly responsible for circumstances releasing the debtor from his duty to perform under § 275 BGB. c) Similar rules can be found regarding the remedy of termination. According to § 323(6) BGB, the creditor is barred from termination if he is solely or overwhelmingly responsible for the circumstances that would entitle him to terminate the contract. The same is true if the circumstances not attributable to the debtor occur at a time at which the creditor is in delay of acceptance. According to §§ 441(1) 1 and 638(1) 1 BGB, the buyer or client may only resort to the remedy of price reduction ‘instead’ of terminating the contract; hence, price reduction is also excluded if the requirements of § 323(6) BGB are satisfied. d) With regard to damages, the legal situation is twofold and thereby similar to the PECL and the DCFR. First, the creditor’s responsibility might be considered contributory fault, thereby curtailing or even excluding his claim for damages under § 254 BGB. Second, the lack of proper cooperation may amount to a breach of duty under § 241(2) BGB and thus entitle the party who is in default of performance to recover damages under § 280(1) BGB, if only the other party is at fault (§ 276 BGB). In contrast to the old Code, the reformed BGB, under § 241(2) BGB, explicitly recognizes the existence of ancillary duties obliging each party to respect the rights and interests of the other party. Thus, there is increasing support for the view that each party has a duty similar to the one set out in Article 1:301 PECL–that is, a duty to cooperate in order to ensure that the whole contract is performed without irregularities and to thereby allow the other party to earn the promised counter-performance (see Gsell, in Soergel (2005), § 326 nos 47 et seq.). However, it should be noted that this view is not in accordance with the traditional understanding of mora creditoris, according to which, in principle, the creditor is under no obligation to accept performance and therefore is not liable in damages when delaying acceptance. Like the PECL and the DCFR, German law lacks precise rules on how to deal with cases of mixed responsibility–that is, where each party has her fair share of responsibility–making it impossible to consider the other party as solely or overwhelmingly responsible for the non-performance. The problem is discussed primarily with regard to cases of supervening impossibility of performance caused by both the debtor and the

384

Chapter 8: Non-performance and Remedies in General creditor. The outcome and the method of curtailing both parties’ rights were controversial under the old law and remain so under the reformed Code (see Gsell, in Soergel (2005), § 326 nos 84 et seq.).

Comparison and Evaluation There are two striking features of the PECL’s and DCFR’s systems of remedying non-performance. First, a unitary concept of breach of contract encompasses all types of irregularities of performance, whether or not they are excused, thereby allowing for a classification of the rules that focuses on the available remedies. Second, differences in prerequisites that make allowance for the particularities of a certain type of irregularity are minimized and forced to take a back seat. Other international instruments, such as the CISG and the UNIDROIT Principles, share this approach. Its advantages of considerable simplicity and clarity are obvious: problems of drawing the line between the scope of application of different sets of rules on the one hand and different types of irregularities on the other are reduced, and difficulties in ascertaining which type of irregularity actually occurred are less important for determining the applicable provisions. The 2002 reform of the Law of Obligations brought German law into considerable alignment with the PECL’s unitary concept of breach of contract. Nevertheless, the classification of different types of irregularities still plays an important role. Even though the BGB’s differentiation may more thoroughly reflect the particularities of each irregularity, it seems only partly justified by the substantial differences in the prerequisites and effects of the available remedies. Most notably, the benefit of a threefold legal answer to a creditor seeking the recovery of damages ‘in lieu of performance’ (Schadensersatz statt der Leistung) (§ 281 BGB dealing with delayed performance; § 283 BGB covering supervening impossibility; § 311a(2) BGB governing initial impossibility) is questionable, since the three provisions alike dispense with the requirement of an extra period for performance where the granting of such a period appears to be futile.

Principles of European Contract Law Article 8:102: Cumulation of Remedies Remedies which are not incompatible may be cumulated. In particular, a party is not deprived of its right to damages by exercising its right to any other remedy. 1. General. According to this provision, the remedies set out in Chapter 9 of the PECL are not mutually exclusive; they may be cumulated to the extent that they are not incompatible. Thus, as mentioned in the comments (Lando/Beale (2000), p. 362), it is possible first to withhold performance and then to terminate the contract, or to terminate the contract and to claim damages all the same. However, although Article 8:102 PECL explicitly points out that the remedy of damages is not excluded by the exercise of any other remedy, this does not affect incompatibility as a general limit to cumulation. Thus, the cumulation of damages with other remedies is limited by Article

385

B. Gsell 9:401 PECL, which bars the creditor from combining the right to price reduction with the recovery of damages for reduction in the value of the performance. As to the principle of free cumulation of compatible remedies, the PECL are in line with other international instruments (see Articles 45(2) and 61(2) CISG, and the comment on Article 7.1.1 PICC). 2. Incompatible remedies. In terms of defining ‘incompatibility,’ the comments (Lando/Beale (2000), p. 363) give some examples that can be subdivided into two categories. a) Logical inconsistency. The comments (Lando/Beale (2000), p. 363) consider specific performance and termination of the contract as incompatible remedies. This seems justified because the effects of both remedies are logically inconsistent with one another. It is impossible to continue the performance of the contract while stopping it at the same time. For the same reason, the comments (Lando/Beale (2000), p. 363) note that termination of the contract cannot be combined with acceptance of a non-conforming offer and the exercise of the right to reduce one’s own performance. b) Overcompensation. Furthermore, the comments (Lando/Beale (2000), p. 363) make reference to the abovementioned limits of a cumulation of price reduction and recovery of damages under Article 9:401 PECL. Even though, strictly speaking, the remedies in this case have no contradictory effects, the cumulation is nonetheless inadmissible insofar as it would result in a doubled compensation for the same loss, namely, a reduction in value of the defective performance. However, the problem of avoiding overcompensation need not necessarily be addressed with an eye towards whether a cumulation of remedies is possible. Another approach is to understand the limits to the recovery of damages set out in Article 9:401 PECL as a guideline for the measurement of damages. Viewed in this way, Article 9:401 PECL simply reflects the general measure of damages contained in Article 9:502 PECL, according to which the creditor is not entitled to more than full compensation of her loss. In other words, as the exercise of the right to price reduction diminishes the aggrieved party’s loss, the awardable amount of damages decreases correspondingly. 3. Change of remedy. The comments on Article 8:102 PECL (Lando/Beale (2000), p. 363) broadly discuss the issue of whether the creditor, after exercising one remedy, may change his mind and exercise another. It is worth noting that, in general, no problem arises when a party amends an earlier choice of remedy by exercising a further remedy that is compatible with the one originally chosen. Thus, for example, a claim for specific performance does not prevent the aggrieved party from later claiming damages for the loss resulting from the delayed performance. Whereas this situation might occur under the free choice of compatible remedies granted by Article 8:102 PECL, the provision does not identify the consequences of exercising a later remedy that is incompatible with the first one. The comments (Lando/Beale (2000), p. 363) hold that such a change of remedy is possible within the limits of the general principle of fair dealing as laid down in Article 1:201 PECL. Hence, the other party, by acting in reliance on the aggrieved party’s declaration of exercising a certain remedy, prevents the aggrieved party from switching to another, incompatible remedy. Yet it is not entirely clear whether the other party must actually have acted in reliance on the

386

Chapter 8: Non-performance and Remedies in General aggrieved party’s declaration of intention. There is some indication that the mere possibility of causing the former to act in reliance on that declaration could suffice to bar the latter from changing remedies: at least this is true during an additional period for performance fixed by the aggrieved party. Thus, without requiring any act in reliance on the notice fixing the additional period, Article 8:106(2) 1 PECL bars the aggrieved party from exercising incompatible remedies until the period has lapsed (see below comment on Article 8:106 PECL). Similarly, the comment underlines that the aggrieved party cannot switch from termination of the contract to claiming specific performance; by giving notice of termination, she may have caused the other party to act in reliance on the termination.

Draft Common Frame of Reference Article III. – 3:102: Cumulation of remedies Remedies which are not incompatible may be cumulated. In particular, a creditor is not deprived of the right to damages by resorting to any other remedy. Article III.-3:102 DCFR is a copy of Article 8:102 PECL, with some marginal differences in wording.

German Law § 325 BGB: Compensation and withdrawal The right to demand compensation in respect of a mutual contract is not excluded by withdrawal. 1. Cumulation of remedies. Regarding the cumulation of remedies, the revised German Civil Code takes a position similar to that of the PECL. This is true particularly with regard to the cumulation of termination of the contract and damages. Whereas under the old Code (cf. the former §§ 325, 326 BGB) the aggrieved party had to choose between terminating the contract or claiming damages for non-performance, § 325 BGB of the new Code explicitly states that a claim for damages is not excluded by termination of the contract. In other words, termination and damages are no longer considered mutually exclusive. This provision is extremely important for interpreting the Code’s provisions on damages, since past court practice found ways to mitigate the harsh consequences of the old Code’s mutual exclusivity of damages and termination. The most important ‘escape’ consisted of measuring damages in such a way (the so-called Differenzmethode; see with references Gsell, in Soergel (2005), § 325 BGB nos 1 et seq.) that allowed the aggrieved party to refuse her own counter-performance or even to have it restituted as a kind of minimum award of damages (Mindestschaden). The effects of the Differenzmethode were actually termination of the contract plus the compensation of further loss. This outcome of the Differenzmethode led Ulrich Huber, in his opinion on the reform of Germany’s law of obligations, to conclude that the exercise of the remedy of termination amounted to ‘legal malpractice,’ for it barred the aggrieved party from de facto cumulating damages and

387

B. Gsell termination by claiming damages according to the Differenzmethode (for a more detailed account see Huber (1981), p. 716. The new § 325 BGB considers termination and damages mutually compatible; thus, there is no longer a need for a second track of termination under the label of damages. If the aggrieved party wishes to be released from her own obligation of counter-performance, or to have the counter-performance restituted, she may terminate the contract. Even so, there is significant support for the view that the revised Code permits the aggrieved party to claim damages according to the Differenzmethode without terminating the contract (cf. Grüneberg, in Palandt (2013), § 281 no. 20). 2. Incompatible remedies. Although the BGB lacks a general rule on the cumulation of remedies, it is nevertheless acknowledged that remedies whose effects are inconsistent with one another cannot be cumulated. Some conflicts of remedies are explicitly dealt with in specific provisions. According to § 281(4) BGB, the claim of damages excludes the right to specific performance. According to §§ 441(1) 1 and 638(1) 1 BGB, the right to a price reduction can be exercised only ‘instead of’ (statt) the right of termination. By contrast, the remedies of price reduction and damages should be considered compatible under German law, since termination can be combined with a claim for damages and price reduction is subject to the same prerequisites as termination. However, exercising the remedy of price reduction entails the aggrieved party’s partial release from her obligation of counter-performance, thereby reducing the amount of loss that can be recovered in damages (see Ernst, in Münchener Kommentar (2012), § 325 no. 27). Thus, the cumulation of these two remedies does not result in overcompensation. As to the combination of termination and specific performance, the incompatibility stems from the fact that termination extinguishes both parties’ outstanding obligations, although this outcome is not explicitly stated in § 346 BGB. 3. Change of remedy. a) According to the prevailing court practice and academic view in Germany, the availability of a change of remedy (ius variandi) strongly depends on the nature of the originally chosen remedy (for a more detailed account see Gsell (2004), 643, 647 et seq.). Thus, remedies exercised by notice and having effect by this unilateral act alone (the so-called Gestaltungsrechte) are considered binding, since they are looked at as irreversibly affecting the parties’ mutual obligations. Under this doctrine of the Gestaltungsrechte, notice of termination of the contract has been considered irrevocable (cf. RGZ 85, 280, 285; BGH NJW 1982, 1279, 1280; BGH NJW 1984, 2937; BGH NJW 1985, 2697, 2698; BGH NJW 1995, 449, 450 for an illustration). This has been held true regardless of the other party’s reliance on the aggrieved party’s declaration. Because termination and damages were mutually exclusive remedies under the old Code, the aggrieved party was barred from shifting from termination to damages. However, the courts often helped by interpreting the aggrieved party’s declaration as not amounting to a notice of termination, even though the aggrieved party had explicitly used the term Rücktritt (cf. RG JW 1907, 386, 387; JW 1926, 2906 et seq.; BGH NJW 1979, 762; BGH NJW 1982, 1279). b) While the old Code essentially prohibited a shift from termination to damages for non-performance, the opposite was not true: the election of damages in principle was not regarded as definite (RGZ 85, 280, 283; RGZ 107, 345, 348), since the right to

388

Chapter 8: Non-performance and Remedies in General damages was not a Gestaltungsrecht and its exercise had no immediate impact on the parties’ obligations. Only when the court’s award of damages became final–when the debtor accepted the claim or actually paid it, or when the debtor acted in reliance on the aggrieved party’s declaration–was the aggrieved party barred from shifting to an incompatible remedy (see Huber (1999), Vol. 2, § 37 V 1 p. 217 with references). c) However, under the old Code, the strict irrevocability of the exercise of a Gestaltungsrecht was criticized, and limitations to its binding effects were suggested (cf. Leser (1975), passim; Lindacher (1980), 48 et seq.; Huber (1999), Vol. 2, § 37 V 1 pp. 219 et seq.). These suggestions closely resemble the PECL’s approach. Nevertheless, the traditional view appears to have survived the revision of the Code (cf. the criticism by Gsell (2004), 643, 647 et seq.). Thus, not only the exercise of the right to terminate the contract but also the claim of damages in lieu of performance (statt der Leistung) is held to be binding (cf. Ernst, in Münchener Kommentar (2012), § 325 no. 23 with references). This is because, according to § 281(4) BGB, the claim of damages instead of performance entails the extinction of the right to specific performance, and in this regard approaches a Gestaltungsrecht (Ernst, in Münchener Kommentar (2012), § 281 no. 106). Here, again, the binding effect of the claim of damages instead of performance is not considered to depend on the debtor’s reliance on the aggrieved party’s declaration. In terms of changing from a claim of specific performance to one of termination, the German Federal Court of Justice recently determined that taking legal action does not bar the aggrieved party from changing remedies during the lawsuit (see for instance BGH NJW 2006, 1198). Since the right to specific performance is not a Gestaltungsrecht, this decision is consistent with the Court’s previous ruling. d) It should be noted, however, that the consequences of the traditionally prevailing view are not entirely the same under the revised German Code. First, a change of remedy is no longer necessary when the creditor, after giving notice of termination, wishes to claim damages for non-performance (today: ‘in lieu of performance,’ or statt der Leistung) because under the revised Code, termination and damages can be cumulated (§ 325 BGB). Second, the situation has changed considerably with regard to remedies in cases of defective performance of a sales contract or a contract for work. Whereas under the old Code the remedy of termination (Rücktritt) was generally designed as a Gestaltungsrecht, the special regime governing defective performance followed a different concept. According to this regime, neither the exercise of the right to terminate in cases of defective performance (Wandelung) nor the exercise of right to price reduction (Minderung) had any immediate impact on the contract; rather, they depended on the consent of the other party (cf. former § 465 BGB for the sales contract and § 634(4) in conjunction with § 465 BGB for the contract for work). Consequently, the buyer (client) was allowed to switch to another remedy as long as the other party had not given the required consent (cf. RGZ 87, 237, 238 et seq.; BGHZ 29, 148, 151 et seq.; BGHZ 85, 367, 370; according to Huber, in Soergel (1991) § 462 no. 3 the right to a change of remedy was not controversial with regard to this situation). By contrast, under the revised Code, there is no longer a special regime for termination in cases of defective performance. In fact, both the right to termination and the right to price reduction have been uniformly designed as Gestaltungsrechte, the

389

B. Gsell exercise of which is independent of the other party’s consent. Thus, according to the traditional view, in cases of defective performance, the buyer (or client) is no longer allowed to switch from termination or price reduction to an incompatible remedy (cf. Faust, in Bamberger/Roth (2011), § 437 no. 171).

Comparison and Evaluation In terms of cumulation of remedies, German law is largely in line with the PECL. First, the creditor may not combine remedies that have inconsistent effects. Second, termination and damages are not considered to be incompatible remedies in this way. With regard to the issue of change of remedy, both sets of rules lack clear provisions. Given the great practical importance of this issue, the recourse to vague principles like that of fair dealing does not seem entirely satisfactory. This may lead to considerable legal uncertainty. Thus, the comments on Article 8:102 PECL (Lando/ Beale (2000), p. 363) leave doubts as to whether the other party must actually have acted in reliance on the aggrieved party’s declaration of intention, or whether it suffices that she could have acted in reliance on that declaration. Protecting the debtor’s potential–as opposed to actual–reliance may be considered overprotective. However, the burden of proof of no actual reliance on the declaration should be with the creditor. German law, compared to the PECL, seems even more questionable. Considering the unilateral exercise of the remedy, the key criterion for irrevocability is unsatisfactory for the simple reason that the legislator will rarely focus on the issue of change of remedy when deciding in favour of the unilateral mechanism of a Gestaltungsrecht. Thus, under the old Code, it was never very convincing that the aggrieved party was considered free to shift from termination to another remedy only in cases of defective performance, and not in other cases of non-performance. While the revision of the Code has abolished the separate system of termination in cases of defective performance of a sales or work contract by uniformly designing the remedy of termination (as well as the right to price reduction) as a Gestaltungsrecht, there is no evidence that the legislator thereby wanted to remove the creditor’s ius variandi in cases of defective performance. The example illustrates that the largely technical nature of the remedy may not necessarily reflect a substantial legislative assessment of the extent to which the other party should be protected against a change of remedy. It therefore seems preferable for German law to adopt an approach similar to that of the PECL (cf. Leser (1975), passim; Gsell, JZ 2004, 643, 647 et seq.).

Principles of European Contract Law Article 8:103: Fundamental Non-Performance A non-performance of an obligation is fundamental to the contract if: (a) strict compliance with the obligation is of the essence of the contract; or (b) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; or

390

Chapter 8: Non-performance and Remedies in General (c) the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance. 1. General. a) Under the PECL, the consequences that the non-performing party must face in cases of fundamental non-performance, as defined in Article 8:103 PECL, are in several regards more serious than those of simple non-performance. Namely, the aggrieved party may terminate the contract (Article 9:301(1), 9:302, 9:304 PECL) and thereby render futile the other party’s efforts to earn counter-performance. However, the idea of fundamental non-performance as a serious threshold for termination appears to be impaired by the fact that in cases of delayed performance, the PECL offer an alternative track towards termination. This option features less stringent prerequisites; according to Article 9:301(2) PECL, in cases of delay, the aggrieved party may also terminate the contract under Article 8:106(3). Thus, in cases of delayed performance, the simple expiration of an additional period of time for performance allows the aggrieved party to terminate the contract. Hence, the PECL’s system of termination can be considered twofold: in cases of delay of performance, the aggrieved party can resort to the Nachfrist (additional period) mechanism in order to open the way for termination, whereas in other situations of non-performance–namely, those of defective performance–the fundamental non-performance test necessarily must be met. On the other hand, at least formally, one can also bring the Nachfrist mechanism in cases of delay under the general concept of fundamental non-performance by considering the expiry of an additional period for performance as elevating the simple delay to a fundamental breach of contract. But still, there remains a substantial difference between delay and other forms of non-performance. Where a party has fixed an additional period for performance, only in cases of delay is there no room for doubts as to whether the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract. In other cases of non-performance, particularly those of defective performance, the expiry of the Nachfrist does not predetermine the fundamentality of the non-performance. b) Apart from termination of the contract, the fundamental non-performance concept is relevant with regard to the debtor’s right to cure a non-conforming tender. According to Article 8:104 PECL, the right to cure is excluded if the delay in performance would amount to a fundamental non-performance. Furthermore, where one party has reason to believe that there will be a fundamental non-performance by the other party, the former may demand adequate assurance of due performance and meanwhile withhold her own performance (Article 8:105 PECL). c) The PECL’s concept of a fundamental non-performance as a threshold to the exercise of remedies, the effects of which are particularly burdensome for the nonperforming party, closely corresponds to that of the CISG. According to Articles 49(1)(a), 51(2), 64(1)(a), 72(1), and 73(1) and (2) CISG, the right to declare the contract avoided requires a ‘fundamental breach of contract’ as defined in Article 25 CISG. By contrast, with regard to delayed performance, the CISG, again parallel to the PECL, provides for the Nachfrist mechanism as an alternative track entailing the aggrieved party’s right to terminate the contract (see Articles 49(1)(b), 64(1)(b) CISG).

391

B. Gsell A similar concept can be found in the UNIDROIT Principles (see Article 7.3.1 in conjunction with Article 7.1.5 PICC). Furthermore, the gravity of a non-performance plays a certain role under the European Consumer Sales Directive (1999/44/EC). However, since the Directive’s Article 3(6) excludes the right to rescission of the contract only if the lack of conformity is minor, the threshold for a termination of the contract is considerably lower than under the PECL. Moreover, Member States are not even required to incorporate this lower threshold into their national laws, since the Directive contains a minimum harmonization clause (Article 8) empowering Member States to adopt or maintain in force more stringent provisions in order to ensure a higher level of consumer protection. 2. Categories of fundamental non-performance. Article 8:103 PECL defines fundamental non-performance as encompassing three different categories. Whereas letter (b) is essentially a copy of the definition contained in Article 25 CISG, no (explicit) equivalent of letters (a) and (c) can be found in the Vienna Sales Convention. By contrast, Article 7.3.1 PICC reflects all factors contained in Article 8:103 PECL, plus some more – namely, the criterion of the non-performing party suffering disproportionate loss as a result of the preparation or performance if the contract is terminated (Article 7.3.1(2)(d) PICC). a) Letter (a), which corresponds with Article 7.3.1(2)(b) PICC, deals with situations in which the parties agree that strict compliance with the obligation is of the contract’s essence. The comment stresses that under this rule, it is not the actual gravity of the breach that matters but the parties’ agreement that the contractual obligation be strictly performed. In other words, it is up to the parties to determine which aspects of performance are of specific importance for one or both of them and to what extent strict compliance is required. However, one might question whether the rule fits adequately into the concept of fundamental non-performance, since it encompasses situations where any breach whatsoever, irrespective of its actual consequences, entitles the aggrieved party to terminate the contract, simply because the contract provides for it. Still, one should agree that the parties are basically free to stipulate a right to termination upon the occurrence of any irregularity (or even upon the occurrence of an event that does not amount to a non-performance at all). Yet the application of Article 8:103(a) PECL is not without difficulty. The comments (Lando/ Beale (2000), p. 364) emphasize that the duty of strict compliance need not be inferred from an express provision but may be derived from the language, nature, or surrounding circumstances of the contract, or from custom, usage, or between the parties. But since the actual gravity of the breach should not be taken into account, one wonders whether these criteria provide enough guidance for inferring a duty of strict performance from a contract lacking an explicit provision. It should be noted, therefore, that too generously assuming strict performance to be of the essence of a contract would impair the concept of fundamental non-performance as a real threshold for termination and other remedies of serious consequences for the debtor. Consequently, it is understandable that, by contrast, the concept of fundamental non-performance under the DCFR dispenses with a similar provision (for details see comment on Article III.-3:502 DCFR, 2., below).

392

Chapter 8: Non-performance and Remedies in General b) Under letter (b), which closely resembles Article 25 CISG, the consequences of the non-performance must be measured according to what the party was entitled to expect under the contract. In order to infer a fundamental non-performance under letter (b), three prerequisites have to be met. First, the non-performance deprives the aggrieved party of what it was entitled to expect under the contract. Second, the deprivation is substantial. Third, it cannot be shown that the other party did not foresee and could not reasonably have foreseen that result. While every non-performance, by definition, deprives the aggrieved party to a certain degree of what it was entitled to expect under the contract, the requirement that the deprivation be substantial constitutes the real threshold for fundamental non-performance. According to the comments (Lando/Beale (2000), p. 365), the key criterion for determining whether the substantiality requirement of (b) is met is the gravity of the consequences of non-performance. When, as a result of the non-performance, the aggrieved party is deprived of the benefit of the bargain and therefore loses his interest in the performance of the contract, this generally constitutes fundamental non-performance. By contrast, a non-performance is not fundamental when it entails only minor consequences for the aggrieved party and does not affect the root of the contract. It is worth noting, however, that the measure for determining whether grave consequences have occurred is not an entirely objective one. In fact, according to the clear wording of the rule, it is the contract that determines what expectancies the parties may have (see for a more detailed account with regard to Article 25 CISG Gsell, in Honsell (2010), nos 12 et seq.). Thus, even under (b), it is plausible that the parties agree in a very subjective manner on certain aspects of performance being of the contract’s essence, irrespective of the actual (objective) gravity of the possible consequences of non-performance. Viewed in this way, letter (b) becomes closer to letter (a). The interpretation of (b) as primarily resorting to the terms of the contract as a measure for determining the gravity of a non-performance is backed by the following qualification of the rule: consequences that the other party did not foresee and could not reasonably have foreseen are disregarded. This creates an incentive for each party to disclose to the other any special benefit expected from the performance of the contract, as well as any risk of non-performance resulting in a particular or particularly high loss for the disclosing party. The comments (Lando/ Beale (2000), p. 365) provide the example of central heating being installed in the client’s house. The heating’s control system should ensure a constant temperature of twenty degrees centigrade. Since the contractor is unaware that the client breeds rare species of plants in the house, which are extremely sensitive to changes in temperature, he could not reasonably have foreseen that these plants would die as a result of a defective heating pipe that caused the temperature fall by two degrees. The nonperformance, in this case, is not fundamental. By contrast, Comment C (Lando/Beale (2000), p. 365) gives another illustration, in which the contractor agrees to install a temperature control system in the client’s wine cellar; this control system is meant to ensure that the client’s fine wines are not adversely affected by substantial temperature fluctuation. In this situation, the contractor is aware of the likely consequences of a defective performance. c) Letter (c) treats intentional non-performance as fundamental nonperformance. This subjective criterion–namely, the non-performing party’s intention

393

B. Gsell of not (correctly) performing the contract–means that even a non-performance that objectively entails only minor consequences for the aggrieved party may amount to a fundamental non-performance. However, this intention elevates the non-performance to a fundamental non-performance only if it gives the aggrieved party reason to believe that she cannot rely on the other party’s future performance. According to Comment D (Lando/Beale (2000), p. 366), such a situation is possible only where, beyond the remedying of the non-performance itself, future performance is due. This does not seem entirely satisfactory. If the debtor, for example, explicitly and firmly refuses to render performance when performance is due, the aggrieved party generally has every reason to doubt the debtor’s remedying of the non-performance, irrespective of whether further instalments are to come.

Draft Common Frame of Reference Article III. – 3:502: Termination for fundamental non-performance (1) A creditor may terminate if the debtor’s non-performance of a contractual obligation is fundamental. (2) A non-performance of a contractual obligation is fundamental if: (a) it substantially deprives the creditor of what the creditor was entitled to expect under the contract, as applied to the whole or relevant part of the performance, unless at the time of conclusion of the contract the debtor did not foresee and could not reasonably be expected to have foreseen that result; or (b) it is intentional or reckless and gives the creditor reason to believe that the debtor’s future performance cannot be relied on. 1. Although Article III.-3:502 DCFR is clearly modelled on Article 8:103 PECL, there are some differences. First, Article III.-3:502 DCFR does not deal with fundamental non-performance in general, addressing it only as a prerequisite for termination of the contract. However, since, as shown above, the PECL’s concept of fundamental non-performance plays the most important role in determining the prerequisites for termination, the provisions still come close to each other. 2. Second, Article III.-3:502 DCFR does not contain a provision corresponding to Article 8:103(a) PECL. According to the comments on Article III.-3:502 DCFR (see von Bar/Clive (2009), Comments on Article III.-3:502, p. 853), the drafters of the DCFR do not acknowledge the rule laid down in Article 8:103(a) PECL as a general rule for contracts. They prefer not to leave it to the courts’ discretion to treat an obligation as of the essence of the contract even though non-performance had no serious consequences for the other party. This does not mean, however, that a party’s freedom to bargain for a right to termination on the occurrence of whatever irregularity the party considers serious enough will not be respected under the DCFR. As mentioned above (see comment on Article 8:103 PECL, 2.b)), the rule–similarly laid down in Article 25

394

Chapter 8: Non-performance and Remedies in General CISG, Article 8:103(b) PECL, and Article III.-3:502(2) (a) DCFR–refers to the contract as the measure for determining whether the consequences of non-performance are sufficiently grave to assume a fundamental non-performance. Thus, even though there is no explicit pendant to Article 8:103(a) PECL in Article III.-3:502(2) DCFR, the provision allows and even requires, by means of letter (a), taking into account the parties’ agreement on strict compliance with the obligation being of the contract’s essence. Apart from this, according to Article II-1:102 DCFR, the parties are free to derogate from the DCFR’s rules relating to contracts, except as otherwise provided. Thus, in general, the parties may contract around Article III.-3:502 DCFR by stipulating a lower threshold for termination of the contract. 3. Third, Article III.-3:502(2)(a) DCFR specifies what point in time is relevant for the foreseeability of the consequences of non-performance. Under Article 25 CISG, it is disputed whether the relevant point in time necessarily must be the time of the conclusion of the contract or whether information that the non-performing party acquires only later should also matter (cf. Gsell, in Honsell (2010) Article 25 nos 23 et seq. with references). If one understands the foreseeability criterion as a rule of contract interpretation that helps determine which benefits (including the avoidance of loss) a party bargained for and was therefore entitled to expect under the terms of the contract, it becomes obvious that, in principle, the time of conclusion of the contract is relevant and that subsequently acquired information may not elevate a nonperformance to a fundamental non-performance unless it resulted in a modification of the contract (for a more detailed account see Schroeter, in Schlechtriem/Schwenzer (2010), Article 25 CISG no. 15). Hence, it seems a helpful clarification when Article III.-3:502(2)(a) DCFR explicitly states that the foreseeability of the consequences of the non-performance refers to the time of the contract’s formation. However, there are situations in which the creditor is unable to disclose a particular risk of nonperformance at that time, for the simple reason that the relevant circumstances–which were unforeseeable–supervene only later on. Thus, for example, after concluding the contract, unexpected political turmoil might occur in the country and make it likely that the main transport route the creditor plans to use for transporting goods will soon be closed. He might then urge the debtor not to delay performance. With regard to such situations, it should be noted that the DCFR confers upon the parties the duty to act in accordance with good faith and fair dealing in performing an obligation (see Article III.-1:103(1) DCFR), as well as a general duty to cooperate in order to give full effect to the contract (see Article III.-1:104 DCFR; the same is true with regard to the PECL, see Articles 1:201, 1:202 PECL). Therefore, according to Articles III.-1:103 and III.-1:104 DCFR, a party is arguably entitled to expect the performing party to take supervening circumstances into account to the extent that good faith, fair dealing, and the general duty to cooperate require the latter to do so. At least in cases where the debtor would not face considerable extra burden in adapting his performance to the supervening circumstances, the debtor must be barred from later asserting that he could not have been reasonably expected to have foreseen the risk (see Gsell, in Honsell (2010) Article 25 nos 23 et seq. with regard to Article 25 CISG).

395

B. Gsell 4. Finally, Article III.-3:502(2)(b) DCFR identifies not just intentional but also reckless non-performance as fundamental non-performance if it gives the creditor reason to believe that the debtor’s future performance cannot be relied on. If one considers the recklessness of the debtor’s behaviour a typical reason for the creditor’s loss of reliance in future performance, the enlargement of the rule seems sound.

German Law § 281 BGB: Compensation instead of performance, because of non-performance or performance not in accordance with obligation (1) In so far as the debtor does not effect the performance which is due or does not effect it in accordance with the obligation, the creditor can, under the prerequisites of § 280 paragraph 1, demand compensation instead of performance if he has set a reasonable period for the debtor for the performance or subsequent fulfilment, but without result. If the debtor has effected a partial performance, the creditor can only demand compensation instead of the whole performance if he has no interest in the partial performance. If the debtor has not effected performance in accordance with the obligation, the creditor cannot demand compensation instead of the whole performance if the violation of duty is not substantial. (2) The setting of a period can be dispensed with if the debtor refuses performance seriously and finally, or if special circumstances are present which, on balancing the interests of both sides, justify the immediate making of a claim to compensation. (3)–(5) […] § 283 BGB: Compensation instead of performance on exclusion of duty to perform If the debtor does not need to perform according to § 275 paragraphs 1 to 3, the creditor can demand compensation instead of performance under the prerequisites of § 280 paragraph 1. § 281 paragraph 1 sentences 2 and 3 and paragraph 5 apply correspondingly. § 323 BGB: Withdrawal because performance not carried out or not carried out in accordance with contract (1) If the debtor in a mutual contract does not effect performance which is due, or does not effect it in accordance with the contract, the creditor can withdraw from the contract, if he has determined for the debtor an appropriate period for performance or subsequent fulfilment but without result. (2) The setting of a period can be dispensed with, if 1. the debtor refuses performance seriously and finally,

396

Chapter 8: Non-performance and Remedies in General 2. the debtor does not effect performance on a date determined in the contract or within a determined period and in the contract the creditor has made the continued existence of his interest in performance dependent on the punctuality of the performance or 3. special circumstances are present which justify immediate withdrawal, on balancing the interests of both parties. (3)–(4) […] (5) If the debtor has effected partial performance, the creditor can only withdraw from the whole contract if he has no interest in partial performance. If the debtor has not effected performance in accordance with the contract, the creditor cannot withdraw from the contract if the violation of duty is insignificant. § 326 BGB: Release from counter-performance and withdrawal in case of exclusion of duty to perform (1)–(4) […] (5) If the debtor does not need to perform according to § 275 paragraphs 1 to 3, the creditor can withdraw; on withdrawal § 323 applies correspondingly with the proviso that the setting of a period can be dispensed with. § 254 BGB: Contributory fault (1) If fault on the part of the victim has contributed to the origin of the harm, the duty to compensate as well as the extent of the compensation to be provided depends on the circumstances, and in particular on the extent to which the harm has been predominantly caused by the one or the other party. (2) This also applies if the victim’s fault is limited to the fact that he has omitted to draw the debtor’s attention to the risk of an unusually high level of harm of which the debtor neither knew nor ought to have known, or that he has omitted to avert the harm or to reduce it. The provisions of § 278 apply correspondingly. 1. General Nachfrist mechanism instead of general concept of fundamental nonperformance. German law does not, at least on its face, follow a general concept of fundamental non-performance as a threshold for the exercise of certain remedies, particularly the right to terminate the contract. In fact, the revised German Code features a unitary Nachfrist concept with regard to providing the creditor with a way to terminate (see § 323 BGB) and to claim damages in lieu of performance (statt der Leistung, see § 281 BGB). Thus, in contrast to the PECL and the DCFR, the expiry of an additional period for performance carries the same consequences regardless of whether there is delay of performance or non-conforming performance; the effects are basically the same in all cases of non-performance. Expiry of the Nachfrist gives rise to the right

397

B. Gsell to terminate the contract and/or to claim damages instead of performance. However, this unitary Nachfrist concept is subject to considerable exceptions, as will be shown forthwith. It is worth nothing that when comparing German law with the PECL (and the DCFR), the assessment can go in both directions. On the one hand, the German unitary Nachfrist system appears to establish, in some respects, a more stringent threshold for termination than that of fundamental non-performance under the PECL and the DCFR. On the other hand, the unitary Nachfrist mechanism might, in some respects, turn out to be more generous in allowing the creditor to terminate the contract. 2. German law is not more stringent in allowing the termination of the contract. At first sight, German law appears more stringent than both the PECL and the DCFR in terms of allowing a termination of the contract insofar as its lack of a general provision granting a right to termination in cases of fundamental non-performance. Thus, in principle, according to § 323(1) BGB, the creditor is always required to give the debtor ‘a second chance’ by fixing an additional period for performance. However, §§ 323(2) and 326(5) BGB provide far-reaching exceptions to the Nachfrist requirement that essentially cover all the situations dealt with in Article 8:103 PECL and Article III.-3:502 DCFR (for details see Dornis, comment on Article 9:301 PECL, GERMAN LAW, 3.). On the whole, then, one can say that whenever the creditor is allowed to immediately terminate the contract due to a fundamental non-performance under the PECL or the DCFR, he would also be entitled to do so under German law. 3. German law is more generous in allowing the termination of the contract with regard to non-conforming performance. When one asks the opposite question – whether German law is more generous in allowing for termination than either the PECL or the DCFR – the answer is yes. As mentioned above, and in contrast to the PECL and the DCFR, under § 323(1) BGB, the expiry of a Nachfrist entails a right to termination not only in cases of non-delivery but also in cases of non-conforming performance. Thus, with regard to non-conforming performance, it is easier for the creditor under German law to do away with the contract. This is true even though § 323(5) 2 BGB excludes the right to termination in cases of non-conforming performance where the violation of the duty is insignificant. Correspondingly, Article 3(6) of the European Consumer Sales Directive (1999/44/EC) excludes the consumer’s right to rescind the contract if the lack of conformity is minor. Yet the scope of § 323(5) 2 BGB is not limited to consumer sales contracts. According to the prevailing jurisprudence and academic views in Germany, the significance test in § 323(5) 2 BGB is not a stringent threshold; rather, it bars the creditor from termination only where defects are trifling and therefore do not really interfere with the creditor’s interest in correct performance (see Bundestag document No. 14/6040 p. 187; Grüneberg, in Palandt (2013), § 323 no. 32). The German Federal Court of Justice emphasizes the general priority of the creditor’s right to terminate under German law and the exceptional character of a finding of insignificance in the sense of § 323(5) 2 BGB. According to the Court, § 323(5) 2 BGB covers only those cases where the creditor’s interest in terminating the contract is

398

Chapter 8: Non-performance and Remedies in General minor and is outweighed by the interest of the debtor–for whom termination would be considerably burdensome–in maintaining the contract (cf. BGH NJW 2006, 1960, 1961). Hence, the creditor will generally have a much easier time meeting the significance requirement of § 323(5) 2 BGB than the fundamental non-performance prerequisite of the PECL and the DCFR. In summary, one can say that under German law it is the rule to consider a violation of duty significant, whereas under the PECL and the DCFR the fundamental non-performance criterion signifies a serious threshold barring the creditor from terminating in a considerable number of cases of nonconforming performance. In erecting a far less stringent hurdle for termination than that of fundamental non-performance, § 323(5) 2 BGB finds a counterpart not only in Article 3(6) of the European Consumer Sales Directive (1999/44/EC) but also in Article IV.-4:201 DCFR, which entitles the consumer to terminate ‘in the case of any lack of conformity, unless the lack of conformity is minor.’ With regard to consumer sales contracts, the provision actually replaces the fundamental non-performance criterion contained in Article III.-3:502 DCFR with the requirement that the non-performance not be minor, a threshold similar to that of § 323(5) second sentence BGB. 4. No foreseeability test to be met. German law does not contain any rule barring the creditor from terminating the contract where the debtor did not foresee and could not reasonably be expected to have foreseen the consequences of his non-performance. Thus, generally speaking, under German law the debtor must always consider the possibility of his non-performance causing harm serious enough to justify the creditor’s terminating the contract. However, according to § 254(2) BGB, the creditor’s claim in damages is mitigated by the extent to which he has omitted to draw the debtor’s attention to the risk of an unusually high level of harm about which the debtor neither knew nor ought to have known.

Comparison and Evaluation Comparing the PECL and DCFR on the one hand with German law on the other shows that even though German law lacks the principle of fundamental non-performance, the threshold for termination is generally the same in cases where performance has not been tendered. This is due to the fact that §§ 323(2) and 326(5) BGB largely dispense with the Nachfrist requirement. In contrast, German law is more generous than the PECL and the DCFR in allowing the creditor to terminate the contract in cases of non-conforming performance. The unitary Nachfrist prerequisite of the right to termination as laid down in § 323(1) BGB basically ignores the type of non-performance and usually requires simply that the creditor grant the debtor a second chance for proper performance. Its main advantage is obvious: a creditor who is uncertain whether a fundamental non-performance has occurred may fix an additional period for performance and thereby avoid any uncertainty with regard to his entitlement to termination. This may even help the debtor, who in some cases may be offered a second chance by the creditor in a situation where a court might otherwise not hesitate to assume a fundamental non-performance. In contrast, under the PECL and the DCFR, the parties

399

B. Gsell and the courts must determine whether a fundamental non-performance has occurred. This may be difficult, particularly in cases where there is a discrepancy between the minor objective consequences caused by the non-performance on the one hand and the parties’ subjective evaluation of the violated duty as fundamental on the other. When, in such a situation, the contract lacks an explicit term unequivocally declaring the violated duty to be fundamental, one needs to know to what extent the fundamental character of the non-performance is to be inferred from the circumstances. Yet with regard to this, neither Article 8:103(b) PECL nor Article III.-3:502(2)(a) DCFR offers clear guidance. This is due to the fact that both articles, though making reference to the gravity of the consequences of non-performance, measure these consequences with regard to what the aggrieved party was to expect under the contract. Stated in a positive way, one can say that Article 8:103(a)–(b) PECL and Article III.-3:502(2)(a) DCFR – as well as Article 25 CISG–feature a certain antagonism between, on the one hand, limiting particularly burdensome remedies to serious violations of the contract and, on the other hand, respecting the parties’ freedom to determine the importance of each contractual duty irrespective of the objective importance. However, the advantage of a uniform Nachfrist requirement in § 323(1) BGB contrasts with the disadvantage of a threshold for termination that is flexible only with regard to the creditor’s interest in dispensing with the Nachfrist (see § 323(2) BGB) but not with regard to the debtor’s interest in avoiding a particularly burdensome termination even after the expiry of a (first) additional period for performance. In fact, § 323(1) BGB basically prohibits the courts from considering either the particularities of certain types of contracts or those of certain kinds of non-performance. Thus, one might argue that the simple expiry of a Nachfrist is too low a hurdle for terminating a contract for work, as illustrated by the following hypothetical (for a more detailed account see Mehring (2009), 311 et seq.). A constructor undertakes to erect a large office building. After completion of the work, some defects become apparent that are not minor in the sense of § 323(5) second sentence BGB. The client fixes an additional period of time for performance. After expiry of the Nachfrist, it becomes evident that the constructor has failed to completely repair the defects. Let us assume that it is still possible to repair the defects within a reasonable time without causing considerable inconvenience to the creditor, and that the constructor is willing to do so. In cases of termination, German law basically leads to a mutual return of the performances already received (see § 346 BGB); thus, this type of situation will generally be particularly burdensome for the debtor, since he will not be able to sell the building or any of its parts in a profitable way. One therefore wonders whether termination is fair and reasonable where granting a ‘third chance’ to the debtor for performance would not cause considerable inconvenience to the creditor.

Principles of European Contract Law Article 8:104: Cure by Non-Performing Party A party whose tender of performance is not accepted by the other party because it does not conform to the contract may make a new and conforming tender where

400

Chapter 8: Non-performance and Remedies in General the time for performance has not yet arrived or the delay would not be such as to constitute a fundamental non-performance. 1. General. Even though the debtor has already made a non-conforming tender of performance, he may insist on offering proper performance under Article 8:104 PECL. The provision specifies two different situations. First, it deals with a non-accepted tender made before performance was due. Here, the debtor is always allowed timely to cure the non-conforming tender. Since the creditor is not entitled to a premature performance, such a timely cure will not put him at a disadvantage. Second, the provision addresses cases in which curing a non-conforming performance will be possible only by delaying performance. In these situations, the creditor is still allowed to cure the non-conforming performance except where the delay would amount to a fundamental non-performance. 2. Hierarchy between debtor’s right to cure and creditor’s remedies. There is an obvious potential conflict between the debtor’s interest in curing the lack of performance and the creditor’s interest in pursuing remedies for non-performance. Therefore, the hierarchy between the debtor’s right to cure and the creditor’s remedies is extremely important. Article 8:104 PECL raises a number of questions in this regard, notably the following. a) Cure and termination. Prima facie, the rule contained in Article 8:104 PECL seems to be in perfect harmony with Article 9:301(1) PECL, which states that a party may terminate the contract in cases of non-conforming performance only if the other party’s non-performance is fundamental. Hence, one might assume that the debtor’s right to cure under Article 8:104 PECL is subject to the creditor’s right to terminate the contract under Article 9:301 PECL. However, on a second glance, the hierarchy between the debtor’s right to cure and the creditor’s right to terminate under Article 9:301 PECL turns out to be less obvious. aa) Termination upon expiry of an additional period for performance. It is doubtable whether the debtor has a right to cure in cases where the creditor is entitled to terminate the contract under Article 8:106(3) PECL on the grounds that he had set an additional period for performance that elapsed before or due to rejection of the non-conforming tender. According to the wording of Article 8:104 PECL, one might still consider the debtor entitled to cure, since Article 9:301(2) PECL refers to the notice procedure in Article 8:106(3) PECL as an additional way (‘also’) towards termination. In other words, it is questionable whether the expiry of an additional period for performance alone constitutes a fundamental non-performance as required by Article 8:104 PECL. If one denies this assumption, then even after the expiry of the Nachfrist, the delay in curing will not necessarily be such as to constitute a fundamental non-performance, and therefore the debtor will still be allowed to cure. However, according to the comment on Article 8:104 PECL (Lando/Beale (2000), p. 368), there is no right to cure under Article 8:104 PECL when time ‘has become of the essence, e.g., by the giving and the expiry of a notice under Article 8:106 PECL’. Even though the comments (Lando/Beale (2000), p. 368) are not in perfect accordance with the wording of Article 8:104 PECL, this interpretation is sound; there is no reason why the (debtor’s) right to cure should be subject to the (creditor’s) right to terminate under

401

B. Gsell Article 9:301(1) PECL but not to the (creditor’s) right to terminate under Article 8:106(3) PECL in conjunction with Article 9:301(2) PECL. Hence, one should in fact assume that the right to cure is generally subject to the right to termination, irrespective of whether the right to termination arises from Article 9:301(1) PECL or from Article 8:106(3) PECL in conjunction with Article 9:301(2) PECL. bb) Termination due to fundamental irregularities other than a fundamental delay. Furthermore, the hierarchy between cure and termination is ambiguous due to the fact that Article 8:104 PECL, at least prima facie, does not generally exclude a right to cure where a fundamental non-performance has occurred. The provision, rather, restricts the exclusion of the debtor’s right to cure to situations where the delay in curing would be such as to constitute a fundamental non-performance. Thus, one can ask whether the debtor shall still be allowed to cure a non-conforming tender under Article 8:104 PECL where the prerequisites of the creditor’s right to terminate the contract under Article 9:301(1) PECL in conjunction with Article 8:103 PECL, under Article 9:304 PECL, or under Article 8:105 PECL are satisfied. This might be because, for example, the debtor has tried to hide the non-conformity of the tender or has firmly declared his unwillingness to effect proper performance, or because the creditor has other reasons to expect a fundamental non-performance and the debtor has not provided assurance within a reasonable time. Since the assumption of a fundamental non-performance or an anticipatory non-performance in such a situation is not based on the simple fact that the creditor has not yet got what he was entitled to expect under the contract, a right to cure seems inappropriate. However, the wording of Article 8:104 PECL is quite clear in focussing on the delay in curing as the only criterion restricting the debtor’s right to cure. b) Cure and price reduction. The right to cure is significantly restricted by the other party’s right to price reduction as provided for under Article 9:401 PECL. According to Article 9:401(1) PECL, the other party is free to accept the nonconforming tender–that is, to keep what has been offered–and reduce the price. If she does so, there will be no right to cure for the non-conforming party. 3. Acceptance of the non-conforming tender. Article 8:104 PECL requires a tender of performance that ‘is not accepted by the other party.’ Apparently, the provision does not grant a right to cure after acceptance of the non-conforming tender. Yet it is not obvious what ‘accept’ means in Article 8:104 PECL. Thus, the question arises as to whether there is a right to cure in cases where the non-conformity of the tendered performance is detected only after the creditor has received performance without protest. In such situations of a vice caché, is the creditor generally allowed to reject the debtor’s offer to cure on the grounds of having ‘accepted’ performance in the first place? Which point in time does Article 8:104 PECL refer to? Is it always the time of the non-conforming tender, or could it also be a later point in time if the non-conformity occurs later? If one considers Article 9:401 PECL, the answer must be the latter. Again: according to Article 9:401(1) PECL, the creditor is entitled to curtail the debtor’s right to cure by accepting the non-conforming tender and reducing the price. Since the comments on Article 9:401 PECL (Lando/Beale (2000), p. 430 Comment A) do not

402

Chapter 8: Non-performance and Remedies in General confine the right to price reduction to open defects, which are to be detected immediately, one must assume that the creditor’s decision to accept or reject the non-conforming tender can take place later. Therefore, a tender of performance may be considered ‘not accepted’ in the sense of Article 8:104 PECL even though the creditor did not protest when the tender was made. 4. Right to accept non-conforming tender? Under Article 8:104 PECL, the creditor’s acceptance of the non-conforming offer bars the debtor’s right to cure. Thus, the PECL allows the creditor, at least as a principle, to accept the non-conforming offer and thereby prevent the debtor from curing the non-conforming offer. However, it is worth asking whether restrictions to this principle should be acknowledged in cases where the non-conforming tender is of higher value than the promised performance. Let us assume, for example, that the buyer orders birdseed for a certain species A. Unfortunately, an error in labelling occurs in the seller’s factory, and so by mistake, the seller delivers birdseed that is more expensive but appropriate only for birds of species B. Upon discovering the error, the seller immediately informs the buyer and offers a prompt cure. However, since the buyer also has a lot of birds of species B, he wants to keep the non-conforming birdseed and refuses to grant the seller an opportunity to cure the lack of conformity. Article 8:104 PECL, however, does not offer a clear solution to this problem. 5. Right to reject non-conforming tender? Since Article 8:104 PECL deals with a tender of performance that ‘is not accepted by the other party,’ one must ask the question, under which conditions does the creditor actually have a right to reject a non-conforming tender? Apart from Article 7:103(1) PECL dealing with the right to decline a premature tender of performance, the PECL do not explicitly answer this question. Given that the remedies provided in Chapter 9 do not expressly encompass a right to reject a non-conforming tender, one can doubt the creditor’s right to generally do so. On the other hand, Article 8:104 PECL seems to presuppose the creditor’s right not to accept–that is, to reject–a non-conforming tender. If one acknowledges a general right to reject a non-conforming tender of performance under Article 8:104 PECL, one must then ask what the consequences of a proper rejection will be. In terms of the hierarchy between the (debtor’s) right to cure and the (creditor’s) right to terminate, one should probably treat the properly rejected tender like the situation of the debtor not having performed at all. As a consequence, after the proper rejection of a non-conforming offer, the debtor’s right to cure will be curtailed not only by the creditor’s right to terminate the contract under Article 9:301(1) PECL but also by the creditor’s setting of an additional period for performance and terminating the contract upon the expiry of such a period under Article 8:106(3) PECL.

Draft Common Frame of Reference Article III. – 3:201: Scope This Section applies where a debtor’s performance does not conform to the terms regulating the obligation.

403

B. Gsell Article III. – 3:202: Cure by debtor: general rules (1) The debtor may make a new and conforming tender if that can be done within the time allowed for performance. (2) If the debtor cannot make a new and conforming tender within the time allowed for performance but, promptly after being notified of the lack of conformity, offers to cure it within a reasonable time and at the debtor’s own expense, the creditor may not pursue any remedy for non-performance, other than withholding performance, before allowing the debtor a reasonable period in which to attempt to cure the nonconformity. (3) Paragraph (2) is subject to the provisions of the following Article. Article III. – 3:203: When creditor need not allow debtor an opportunity to cure The creditor need not, under paragraph (2) of the preceding Article, allow the debtor a period in which to attempt cure if: (a) failure to perform a contractual obligation within the time allowed for performance amounts to a fundamental non-performance; (b) the creditor has reason to believe that the debtor’s performance was made with knowledge of the non-conformity and was not in accordance with good faith and fair dealing; (c) the creditor has reason to believe that the debtor will be unable to effect the cure within a reasonable time and without significant inconvenience to the creditor or other prejudice to the creditor’s legitimate interests; or (d) cure would be inappropriate in the circumstances. Article III. – 3:204: Consequences of allowing debtor opportunity to cure (1) During the period allowed for cure the creditor may withhold performance of the creditor’s reciprocal obligations, but may not resort to any other remedy. (2) If the debtor fails to effect cure within the time allowed, the creditor may resort to any available remedy. (3) Notwithstanding cure, the creditor retains the right to damages for any loss caused by the debtor’s initial or subsequent non-performance or by the process of effecting cure. Article III. – 3:205 Return of replaced item (1) Where the debtor has, whether voluntarily or in compliance with an order under III. – 3:302 (Enforcement of non-monetary obligations), remedied a non-conforming performance by replacement, the debtor has a right and an obligation to take back the replaced item at the debtor’s expense.

404

Chapter 8: Non-performance and Remedies in General (2) The creditor is not liable to pay for any use made of the replaced item in the period prior to the replacement. 1. General. a) The DCFR follows a far broader approach regarding the right to cure and contains a more comprehensive regime than the PECL. Though both systems are similar at the core, they also show considerable differences. In both Article 8:104 PECL and Article III.-3:201 DCFR, the starting point is the situation of a non-conforming performance. However, the scope of application of Articles III.-3:201 et seq. DCFR is not confined to contractual obligations. Like Article 8:104 PECL, Article III.-3:202 DCFR differentiates between situations where a timely cure is possible (paragraph 1) and those where a cure will result in a delay of performance (paragraphs 2 and 3). With regard to the latter constellation, Article III.-3:202(2) DCFR contains two time limits: first, the debtor is required promptly to offer to cure the lack of conformity within a reasonable time, and, second, he must actually make the correct tender within a reasonable time, since the creditor is barred only from pursuing any remedy other than withholding performance for a reasonable period during which he must allow the debtor to attempt to cure. However, it is unclear whether ‘allowing’ requires an active declaration of consent made by the creditor or whether it simply refers to his willingness to accept a second conforming tender. What if, for example, the debtor announces by mail or e-mail that he will cure by a certain date, and the creditor simply waits for this date to arrive? According to the general principle of favouring the innocent creditor (see von Bar/Clive (2009), Comments on Article III.-3:201 DCFR, p. 812) that underlies the right to cure in the DCFR, the term ‘allowing’ should be understood as requiring an active reaction by the creditor only to the extent necessary for the debtor to know whether his second tender will be accepted. Thus, in this example, the creditor must actively answer the mail or e-mail only if the debtor could expect him to do so under the circumstances. This might be the case, for example, where the debtor depends on the creditor’s cooperation or has asked for confirmation. b) The rule contained in Article III.-3:202(2) DCFR is strongly qualified by the article that follows it. According to Article III.-3:203(a) DCFR, there is no room for a delayed cure where the delay amounts to a fundamental non-performance. This exception to the right to cure comes close to the one contained in Article 8:104 PECL. Yet Article III.-3:203(b)–(d) DCFR provides further qualifications of the rule and thereby offers more generous parameters for the creditor to deny cure than does Article 8:104 PECL. Letters (b) and (c) deal with the following specific situations: where the creditor has reason to believe that the debtor knowingly tendered a non-conforming performance and thereby acted against good faith and fair dealing (letter (b)); and where the creditor has reason to believe that the debtor will not be able to cure the lack of conformity within a reasonable period and without significant inconvenience or prejudice to the creditor (letter (c)). Finally, letter (d) contains a rather general provision denying the debtor a right to cure if it would otherwise be inappropriate under the circumstances. According to the comments on Article III.-3:203 DCFR (von Bar/Clive (2009), Comments on Article III.-3:203, pp. 818 et seq. in conjunction with

405

B. Gsell p. 812), this general exception to the right to cure is justified on the grounds that doubts as to whether to allow cure ought to be resolved in favour of the innocent creditor. 2. Hierarchy between debtor’s right to cure and creditor’s remedies. Even though the DCFR contains a far more detailed regulation of the debtor’s right to cure than the PECL, there is still considerable ambiguity concerning the hierarchy between debtor’s cure and creditor’s remedies. a) Cure and termination. aa) Termination upon expiry of an additional period for performance. Like the PECL, the DCFR raises the question of whether the creditor’s right to terminate upon the expiry of an additional period for performance is subject to the debtor’s right to cure, and vice versa (see comment on Article 8:104 PECL, 2a)aa), above). Article III.-3:203 DCFR, though containing qualifications to the debtor’s right to cure, does not expressly refer to Article III.-3:503 DCFR. According to Article III.-3:203(a) DCFR, the debtor is barred from cure only in cases where failure to perform within the time allowed for performance amounts to a fundamental nonperformance. Thus, in the same way as under the PECL, limits to the debtor’s right to cure depend on whether the lapse of an additional period for performance in itself is viewed as a fundamental non-performance. If one denies this assumption, the right to cure might persist even though the prerequisites of Article III.-3:503 DCFR are met, since an additional period for performance has lapsed due to the non-conformity of the offer or even before. Such an interpretation appears to be in line with the ‘starting position’ underlying the right to cure, according to which ‘the debtor who has tried to perform but has not done it well enough should not be in a worse position than one who had not performed at all’ (cf. von Bar/Clive (2009), Comment C on Article III.-3:502 DCFR, p. 856). If the debtor had not even attempted performance, he would have to face termination of the contract according to Article III.-3:503 DCFR. Hence, granting the debtor–who had tried but failed properly to perform–an opportunity to cure, even though the prerequisites to termination under Article III.-3:503 DCFR are satisfied, puts him in a better position than if he had not performed at all. Still, comment C on Article III.-3:502 DCFR (von Bar/Clive (2009), p. 856) does not offer sufficient help in interpreting the provision. On the one hand, it emphasizes that the creditor’s right to terminate is effectively subject to the debtor’s right to cure. On the other hand, it names termination for fundamental non-performance as an exception to this rule. bb) Termination due to irregularities other than a fundamental delay. Similar to the PECL, Article III.-3:202 and III.-3:203 DCFR raise some doubts concerning the extent to which a creditor’s right to termination for reasons other than a fundamental delay will curtail the debtor’s right to cure. Thus, it is questionable whether the creditor’s right to terminate under Article III.-3:502 DCFR for reasons other than delay of performance, under Article III.-3:504 DCFR for anticipated non-performance, or under Article III.-3:505 DCFR for inadequate assurance of performance is subject to the debtor’s right to cure under Article III.-3:202 DCFR. There are two reasons for these doubts. First, Article III.-3:203 DCFR deals with delayed cure only in terms of Article III.-3:202(2) DCFR (see Article III.-3:202(3) DCFR). Second, Article III.-3:203(a) DCFR refers only to a fundamental delay in performance. Even so, comment C on Article III.-3:502 DCFR (von Bar/Clive (2009), p. 856) emphasizes that:

406

Chapter 8: Non-performance and Remedies in General ‘there is no right to cure […] in cases that fall within paragraph (2) (b) of III. – 3:502 (Termination for fundamental non-performance), since in that case the creditor has the right to terminate immediately (cf. the parallel right to terminate immediately when fundamental non-performance is anticipated, see Article III.-3:504 (Termination for anticipated non-performance))’. In fact, since letters (b) to (d) of Article III.-3:203 DCFR contain further and rather general qualifications to the right to cure, one can probably consider the debtor barred all the same from curing the defective performance in situations of fundamental non-performance other than fundamental delay. This would be not under letter (a) of Article III.-3:203 DCFR but rather under letters (b) to (d). Letter (d) in particular, as a sweeping-up provision, can be interpreted as covering other forms of fundamental non-performance in the sense of Article III.-3:502 DCFR. Yet since Article III.-3:203 DCFR, according to Article III.-3:202(3) DCFR, is concerned with delayed cure only in terms of Article III.-3:202(2) DCFR, it is still uncertain whether the creditor’s right to termination is subject to the debtor’s right to cure in cases of anticipated nonperformance. Given the fact that the comments on Article III.-3:502 DCFR, as mentioned above, clearly deny the debtor’s right to cure the lack of conformity in such situations, one should consider extending letters (b) to (d) of Article III.-3:203 DCFR to cases of non-conforming tender made before performance was due. Thus, for example, when the debtor has intentionally hidden the non-conformity of his performance, there should be no room for cure even though the non-conforming offer was made before performance was due. cc) Determination of the gravity of non-performance subject to the effects of cure. Even if one assumes that letters (b) to (d) of Article III.-3:203 DCFR bar the debtor from cure in practically all situations of fundamental non-performance other than fundamental delay, there is still the following problem to resolve: with regard to Article 25 CISG, the prevailing academic view and jurisprudence hold that in cases of nonconforming performance, even though there might be a major defect, as a rule, there is no fundamental breach if repair or replacement is possible and is offered by the seller within a reasonable time and without causing considerable inconvenience to the buyer (see with references Müller-Chen, in Schlechtriem/Schwenzer (2010), Article 46 CISG no. 29; Gsell, in Honsell (2010), Article 25 no. 45). Given that the creditor will generally not suffer considerable detriment in terms of Article 25 CISG if cure is effected under the aforementioned conditions, such a restriction to the fundamental breach concept appears to be sound. Yet because Article 48(1)1 CISG grants the seller a right to cure ‘subject to Article 49’, such a narrow understanding of fundamental breach is problematic, since it actually results in determining the fundamental breach in Article 49(1)(a) CISG ‘subject’ to the effects of a cure allowed by Article 48 CISG. A similar question arises with regard to the DCFR: does considerable gravity of the lack of conformity of the debtor’s performance in itself justify the assumption of a fundamental non-performance within the meaning of Article III.-3:502 DCFR, or does the creditor’s offer to cure within a reasonable time hinder such an assumption? Like Article 25 CISG, the DCFR’s suggested qualification of the notion of fundamental non-performance makes perfect sense, because the gravity of the defect will be averted by cure. Since, in contrast to Article 48(1)1 CISG, Article III.-3:202 DCFR does not grant

407

B. Gsell cure ‘subject to Article III.-3:502 DCFR,’ it appears to be even more easily admissible under the DCFR than under the CISG to determine the prerequisites of a fundamental non-performance subject to the effects of cure. b) Cure and price reduction. In contrast to the PECL, under the DCFR the right to cure does not require a tender of performance that has not been accepted by the creditor. Therefore, under the DCFR one cannot assume that the debtor’s right to cure is subject to the creditor’s right to price reduction. Since Article III.-3:202(2) DCFR bars the creditor from pursuing any remedy for non-performance, other than withholding performance, he is also prevented from accepting the non-conforming performance and from resorting to a price reduction under Article III.-3:601 DCFR before allowing the debtor a reasonable period for curing. Furthermore, according to Article III.-3:204(1) DCFR, all remedies for nonperformance except withholding performance remain unavailable during the period allowed for cure. Thus, the remedy of damages also appears to be blocked. However, one can doubt whether this is appropriate with regard to damages compensating losses that have already been caused by the non-conforming tender and are no longer to be averted by the cure of a lack of conformity. Let us assume, for example, that the seller mistakenly delivers a defective machine that causes a loss of profit in the buyer’s factory because production stalls until the machine is repaired. Even though the seller offers to cure the defect within a reasonable period, the buyer himself repairs the machine without giving the seller the opportunity to do so. According to Article III.-3:202(2) DCFR, the creditor is barred from claiming damages not only for the cost of repair but also for the loss of profit, irrespective of the fact that the cure of the defect would have come too late to avert the loss of profit. Notably, Article III.-3:202(2) DCFR, in contrast to Article III.-3:204(3) DCFR (see 3.a), below), does not allow the creditor to claim damages for any (persistent) loss caused by the debtor’s initial nonperformance. However, the application of Article III.-3:204(3) DCFR should be extended to the situation just illustrated. 3. Consequences of allowing opportunity to cure. Article III.-3:204 and III.-3:205 DCFR deal with the consequences of allowing the debtor an opportunity to cure. a) Available remedies. aa) Paragraph 1 of Article III.-3:204 DCFR repeats the idea outlined in Article III.-3:202(2) DCFR (see 2.c), above) – namely, the debtor’s right to cure barring the creditor’s exercise of conflicting remedies. Paragraph 2 makes it unequivocally clear that after the lapse of a reasonable period for cure, the creditor is free again to resort to any available remedy. However, since the creditor, under Article III.-3:202(2) in conjunction with III.-3:204(1) DCFR, is barred from exercising remedies for non-performance only in order to allow the debtor a reasonable period for curing his non-conforming order, it should go without saying that the creditor will not have to wait beyond the lapse of the reasonable period. Therefore, one can consider paragraph 2 superfluous. bb) Paragraph 3 of Article III.-3:204 DCFR clarifies that, notwithstanding cure, the creditor retains the right to claim damages. However, it is worth nothing that a loss that the creditor suffered in the first place due to the non-conforming performance, but which was subsequently averted through the debtor’s cure, may not be compensated

408

Chapter 8: Non-performance and Remedies in General by the award of damages. Thus, for example, when the non-conforming offer causes the creditor to lose the profit of selling the good he expected to receive, but later his client, as a consequence of the cure effected by the debtor, makes up his mind and actually buys the now-conforming good, there is no loss left to be compensated. b) Return of replaced item. Finally, there is Article III.-3:205 DCFR, a provision that has not yet been part of the interim outline edition of the DCFR and is concerned with the consequences of cure made in the form of replacement of a defective item. aa) Paragraph 1 of the provision confers both a right and an obligation on the debtor to take back the replaced item. However, the provision apparently sidesteps the situation of the creditor being unable to return the received item or to return it in the same condition in which he had received it. Here, a question arises: under which conditions and to what extent is the creditor obliged to pay the value or to pay recompense for a reduction in the value of the received item? Article III.-3:205(1) DCFR leaves it open as to whether this problem must be resolved by applying the general provisions on damages on the grounds of non-performance of the creditor’s obligation to return the received item, or by correspondingly applying Article III.-3:513 DCFR, which deals with the payment of the value of a received benefit in the case of termination of the contract. bb) Paragraph 2 of Article III.-3:205 DCFR brings the DCFR in line with Article 3(3) and (4) of the Consumer Sales Directive (Directive 1999/44/EC). Article 3(3) Consumer Sales Directive states that repair and replacement must be ‘free of charge’ for the consumer. According to the European Court of Justice (ECJ) judgment in the Quelle case (cf. Quelle AG v. Bundesverband der Verbraucherzentralen und Verbraucherverbände, ECJ 17 April 2008, C-404/06) the ‘free of charge’ requirement is also meant to protect the consumer against having to pay compensation for the use of the defective good that has been replaced. However, since the scope of application of Article III.-3:205(2) DCFR is not confined to consumer contracts, one might ask whether such a general adoption of the ECJ’s view is justified. Yet since the creditor is entitled under the contract to expect timely performance, the use of the initially received (defective) item is covered by the contract, irrespective of whether the creditor acts as a consumer (see for details Gsell (2003), 1969 et seq.). Therefore, even in a B2B situation, the buyer should not have to pay compensation for the use of the defective good. It should be noted, however, that Article III.-3:205(2) DCFR is silent on whether the creditor should pay compensation for the longer life expectancy that the belatedly delivered conforming item may show compared to the (hypothetical) situation of an immediate delivery of a conforming item.

German Law § 281 BGB: Compensation instead of performance, because of non-performance or performance not in accordance with obligation

409

B. Gsell (1) In so far as the debtor does not effect the performance which is due or does not effect it in accordance with the obligation, the creditor can, under the prerequisites of § 280 paragraph 1, demand compensation instead of performance if he has set a reasonable period for the debtor for the performance or subsequent fulfilment, but without result. If the debtor has effected a partial performance, the creditor can only demand compensation instead of the whole performance if he has no interest in the partial performance. If the debtor has not effected performance in accordance with the obligation, the creditor cannot demand compensation instead of the whole performance if the violation of duty is not substantial. (2) The setting of a period can be dispensed with if the debtor refuses performance seriously and finally, or if special circumstances are present which, on balancing the interests of both sides, justify the immediate making of a claim to compensation. (3) If, because of the kind of violation of duty, the setting of a period does not come into consideration, then a warning will take its place. (4) The claim to performance is excluded as soon as the creditor has demanded compensation instead of performance. (5) If the creditor demands compensation instead of the whole performance, the debtor is entitled to demand back what has been performed in accordance with §§ 346 to 348. § 323 BGB: Withdrawal because performance not carried out or not carried out in accordance with contract (1) If the debtor in a mutual contract does not effect performance which is due, or does not effect it in accordance with the contract, the creditor can withdraw from the contract, if he has determined for the debtor an appropriate period for performance or subsequent fulfilment but without result. (2) The setting of a period can be dispensed with, if 1. the debtor refuses performance seriously and finally, 2. the debtor does not effect performance on a date determined in the contract or within a determined period and in the contract the creditor has made the continued existence of his interest in performance dependent on the punctuality of the performance or 3. special circumstances are present which justify immediate withdrawal, on balancing the interests of both parties. (3) If the setting of a period does not come into consideration because of the type of violation of duty, then a warning will take its place. (4) The creditor can withdraw even before performance becomes due, if it is obvious that the prerequisites for withdrawal will occur. (5) If the debtor has effected partial performance, the creditor can only withdraw from the whole contract if he has no interest in partial performance. If the debtor has not effected performance in accordance with the contract, the

410

Chapter 8: Non-performance and Remedies in General creditor cannot withdraw from the contract if the violation of duty is insignificant. (6) Withdrawal is excluded if the creditor is solely or overwhelmingly responsible for a circumstance that would entitle him to withdraw or if a circumstance for which the debtor is not responsible occurs at a time at which the creditor is in delay in acceptance. 1. General. German law does not contain any provisions expressly providing for a debtor’s right to cure. Yet the debtor all the same must be offered an opportunity to cure to the extent that the remedies for non-performance presuppose that the creditor has set an additional period for performance. Under the German Civil Code, all remedies allowing the creditor to refrain from receiving further (proper) performance – that is, the right to terminate the contract (§ 323(1) BGB), the right to claim damages in lieu of performance (Schadensersatz statt der Leistung, § 281(1) BGB), and even the right to price reduction (§§ 441, 638 BGB) – generally require the expiry of a Nachfrist (and this is not only in cases of delay but also in cases of non-conforming performance). Therefore, German law, like the DCFR, protects the debtor’s interest in curing – and protects it better than the PECL, which allow the creditor to bar the debtor from curing by simply accepting the non-conforming offer and seeking price reduction (see comment on Article 8:104 PECL, 2.b), above). However, in situations where the Nachfrist requirement is dispensable under §§ 323(2) and 281(2) BGB, the creditor may prevent the debtor from curing by the immediate exercise of the relevant remedy. Since the situations covered by §§ 323(2) and 281(2) BGB are essentially the same as fundamental non-performance under the PECL and the DCFR, one can say that, generally speaking, there is no right to cure under the BGB where a non-performance would have to be considered fundamental under PECL and DCFR. Nor is there a right to cure under German law in the case of anticipated non-performance, for § 323(4) BGB allows for immediate termination in this situation. 2. Hierarchy between debtor’s right to cure and creditor’s remedies. a) Since the right to cure under German law is designed as a mere reflex of the Nachfrist requirement in §§ 323(1) and 281(1) BGB, it is clear that in principle the right to cure is subject to the creditor’s rights to terminate the contract, to claim for damages in lieu of performance, and to seek price reduction. Unlike the PECL and the DCFR, the BGB clearly expresses this hierarchy – not only with regard to situations where cure would amount to a fundamental delay and where the Nachfrist requirement is therefore dispensable under § 323(2) no. 2 BGB but also with regard to other irregularities of performance justifying an immediate termination or claim of damages in lieu of performance under §§ 323(2) and (4) and 281(2) BGB. Furthermore, and again by way of contrast to the DCFR, it is also clear under the BGB that even in cases of major defects, the debtor in principle enjoys a right to cure, since under both provisions the Nachfrist requirement generally extends to the situation of non-conforming performance. b) Yet there is considerable controversy around what happens after the expiry of the Nachfrist. What if the debtor tenders proper performance after the Nachfrist has

411

B. Gsell lapsed but before the creditor has exercised his rights to termination, to price reduction, or to claim damages instead of performance? Since the obligation extinguishes only upon the exercise of these remedies (see §§ 281(4), 346(1) BGB), it is held that even after the expiry of the Nachfrist, the debtor may still successfully cure the lack of conformity when the creditor has not exercised one of the conflicting remedies (cf. Ernst, in Münchener Kommentar (2012) § 323 nos 169 et seq. with references). However, since the legislature’s decision of not automatically extinguishing the obligation upon expiry of the Nachfrist was meant to give the creditor more time to choose his remedy (see Bundestag document No. 14/6040, p. 185), it is more convincing to interpret German law as adhering to the principle that the debtor’s cure is subject to the creditor’s exercise of conflicting remedies. Thus, the debtor should not be allowed to surprise the creditor with curing the non-conforming performance after the Nachfrist has lapsed; rather, he should have to announce his willingness to cure and grant the creditor a short period in order to make up his mind whether to exercise conflicting remedies (see for a more detailed account Gsell (2006), pp. 299 et seq. with references). 3. Right to accept the non-conforming tender? Since under German law the right to cure amounts to no more than the creditor’s conflicting remedies being subject to a Nachfrist requirement, the question arises as to whether the creditor may bar the debtor from curing not by simply refraining from exercising any remedy but rather by accepting the defective good as proper performance. He particularly might want to do so in cases where the quality of the received goods exceeds what has been promised under the contract (see also comment on Article 8:104 PECL, 4., above). German academics are divided on this issue (cf. Musielak (2003), 89 et seq.; Lorenz, JuS (2003), 36 et seq.). Since the revised German Civil Code treats the delivery of a good different from the kind that has been promised not as a simple non-delivery but as nonconforming performance (see § 434(3) BGB), it is doubtable whether the debtor may claim return of the good on grounds of unjust enrichment and cure the lack of conformity. However, according to the prevailing academic view, the debtor is allowed to claim return of the good at least in cases of an extreme discrepancy in value between the promised good and the one actually delivered (see Faust, in Bamberger/Roth (2011) § 437 nos. 204 et seq. with references). 4. Right to reject non-conforming tender? Apart from § 266 BGB allowing the creditor to reject a partial performance, there is no rule in German law that generally empowers the creditor to reject a non-conforming tender. However, several remedies for nonperformance, particularly the right to replacement (§§ 439, 635 BGB) and the right to termination (§ 323 (1) BGB), aim at allowing the creditor to reject what he has been tendered. He therefore will be allowed to reject a non-conforming tender if the prerequisites of one of these remedies are met. In any case, under German law, in contrast to Article 8:106(3) PECL and Article III.-3:503 DCFR, the right to terminate the contract upon the expiry of an additional period for performance encompasses cases of non-conforming performance (§ 323(1) BGB); there is no need for the creditor to reject the tendered performance in order to open the way for terminating the contract.

412

Chapter 8: Non-performance and Remedies in General 5. Consequences of allowing opportunity to cure. In accordance with the right to cure being only a reflex of the prerequisites of the creditor’s remedies, in German law, the provisions on these remedies deal indirectly with the consequences of cure. Thus, in cases of replacement of a defective good, § 439(4) BGB obliges the buyer to re-transfer the received good in accordance with §§ 346–348 BGB. However, as a consequence of the ECJ’s Quelle judgment (Quelle AG v. Bundesverband der Verbraucherzentralen und Verbraucherverbände, ECJ 17 April 2008, C-404/06) the German legislature modified § 474(2) BGB. With regard to consumer sales contracts, the provision now expressly states that a buyer is not to pay compensation for the use of the defective good. Thus, German law has been brought in line with Article 3(3) and (4) of the Consumer Sales Directive (Directive 1999/44/EC), requiring repair and replacement to be ‘free of charge’ for the consumer.

Comparison and Evaluation Even though one can, with regard to the cure of a non-conforming performance, certainly differentiate between the debtor’s and the creditor’s perspectives, it cannot be denied that a double regulation–like that of the PECL and the DCFR–raises difficult questions around the hierarchy between the debtor’s right to cure and the creditor’s conflicting remedies. Neither the PECL nor the DCFR offer entirely satisfactory answers to these questions. This holds true particularly with regard to irregularities of performance other than delay of performance. By contrast, the German approach of designing the right to cure as a mere reflex of the Nachfrist prerequisite of certain remedies, at least in general, makes it more clear that cure is subject to the creditor’s exercise of a conflicting remedy. However, German law does not sufficiently regulate situations where the debtor offers a cure before the creditor has exercised a conflicting remedy.

Principles of European Contract Law Article 8:105: Assurance of Performance (1) A party which reasonably believes that there will be a fundamental nonperformance by the other party may demand adequate assurance of due performance and meanwhile may withhold performance of its own obligations so long as such reasonable belief continues. (2) Where this assurance is not provided within a reasonable time, the party demanding it may terminate the contract if it still reasonably believes that there will be a fundamental non-performance by the other party and gives notice of termination without delay. 1. General. When performance has not yet become due but it has already become clear that there will be a fundamental non-performance by the debtor, the creditor has a right

413

B. Gsell to withhold his own performance under Article 9:201(2) PECL and to immediately terminate the contract under Article 9:304 PECL for anticipatory non-performance. However, there might be situations where there is some evidence of a future irregularity of performance, making it likely that there will not be proper performance but failing to provide the certainty required by Article 9:304 PECL. Here, the creditor has a vital interest in establishing whether the contract will be performed and in withholding his own performance in the meantime. Article 8:105 PECL–which shows certain similarities to Article 71 CISG and § 2-609 UCC–deals with such situations of likely, though not certain, future non-performance. 2. Adequate assurance. Article 8:105 PECL first operates by allowing the creditor to demand adequate assurance of performance from the debtor if the former believes, on reasonable grounds, that there will be a fundamental non-performance by the latter. With regard to the prerequisites of such an adequate assurance, comment D on Article 8:105 PECL (Lando/Beale (2000), p. 371) makes reference to the surrounding circumstances, such as the standing and integrity of the debtor, her previous conduct in relation to the contract, and the nature of the event giving rise to the creditor’s believing that there will be non-performance. Accordingly, in some cases, the debtor’s declaration of intention to perform will suffice, whereas in other cases, evidence of the debtor’s ability to perform or a bank guarantee will be required. 3. Withholding performance. At the same time, the creditor may withhold his own performance until the debtor actually provides such assurance or until the situation no longer gives the creditor grounds to doubt the debtor’s ability and willingness properly to perform. In contrast to the general remedy of withholding performance as laid down in Article 9:201(1) PECL, Article 8:105 PECL is not confined to the withholding of a performance that is to occur simultaneously with or after the endangered performance. Thus, even a creditor who is to perform before the debtor’s performance is due may withhold performance under Article 8:105 PECL. The creditor might thereby avert the risk of losing the value of his own performance while receiving nothing in exchange, and meanwhile keep open the contract for performance. 4. Termination of the contract. However, if the debtor fails to provide the demanded assurance within a reasonable time, according to Article 8:105(2) PECL, the creditor may terminate the contract if he still has reason to believe that there will be a fundamental non-performance by the debtor. He must then give notice of termination to the debtor without delay. According to Comment C on Article 8:105 PECL (Lando/ Beale (2000), p. 371), the underlying idea is that the failure to provide the requested assurance is itself treated as fundamental non-performance. However, since, according to the unequivocal wording of Article 8:105(2) PECL, termination still depends on the creditor reasonably believing that there will be a fundamental non-performance by the debtor, this consideration is questionable. 5. Damages. Comment C on Article 8:105 PECL (Lando/Beale (2000), p. 371) emphasizes that the debtor’s failure to provide the demanded assurance also results in the creditor’s right to damages, unless the ‘deemed non-performance’ is excused under Article 8:108 PECL. However, it is still unclear under which conditions the debtor may

414

Chapter 8: Non-performance and Remedies in General escape liability in damages. In fact, neither the provision nor the comments clearly indicate whether the failure to provide assurance or the anticipated nonperformance–or both–must be excused under Article 8:108 PECL. 6. Relationship to other remedies for non-performance. In summary, one can argue that the creditor’s position under Article 8:105 PECL is better in two respects than under Article 9:201 or 9:304 PECL. First, unlike Article 9:201(2) and 9:304 PECL, Article 8:105 PECL does not require that future non-performance appear to be certain. Second, the right to withhold performance is not subject to the creditor having to perform simultaneously or after the debtor, as is the case under Article 9:201(1) PECL. However, since Article 8:105 PECL is confined to cases where the anticipated nonperformance is fundamental, a creditor may not resort to the provision where there is evidence of a future irregularity that simply stays below the threshold of a fundamental non-performance. With regard to the right to termination, this appears to be adequate since termination under the PECL generally requires fundamental non-performance or the anticipation of fundamental non-performance (see Article 9:301(1), 9:304 PECL). In contrast, the right to withhold performance generally does not presuppose the other party’s fundamental non-performance (see Article 9:201 PECL). Thus, one can ask whether the creditor’s interest in not having to bear the risk of unilateral performance should not also be protected in situations where the other party’s proper performance appears to be uncertain only to an extent that does not amount to a fundamental non-performance. If, for example, the buyer has agreed to pay the purchase price in advance but now has reason to believe that the goods to be delivered will be of a considerably lower quality than promised, one can consider it appropriate to give him a right to withhold at least part of the payment until the debtor provides adequate assurance.

Draft Common Frame of Reference Article III. – 3:401: Right to withhold performance of reciprocal obligation (1) A creditor who is to perform a reciprocal obligation at the same time as, or after, the debtor performs has a right to withhold performance of the reciprocal obligation until the debtor has tendered performance or has performed. (2) A creditor who is to perform a reciprocal obligation before the debtor performs and who reasonably believes that there will be non-performance by the debtor when the debtor’s performance becomes due may withhold performance of the reciprocal obligation for as long as the reasonable belief continues. However, the right to withhold performance is lost if the debtor gives an adequate assurance of due performance. (3) A creditor who withholds performance in the situation mentioned in paragraph (2) has a duty to give notice of that fact to the debtor as soon as is reasonably practicable and is liable for any loss caused to the debtor by a breach of that duty.

415

B. Gsell (4) The performance which may be withheld under this Article is the whole or part of the performance as may be reasonable in the circumstances. Article III. – 3:505: Termination for inadequate assurance of performance A creditor who reasonably believes that there will be a fundamental nonperformance of a contractual obligation by the debtor may terminate if the creditor demands an adequate assurance of due performance and no such assurance is provided within a reasonable time. 1. General. The DCFR’s rules on anticipated non-performance are similar to those contained in the PECL. Like the PECL, the DCFR deals not only with situations where future non-performance is clear but also with grounds for doubting proper performance which remain below this threshold. A creditor who has reason to believe that there will be non-performance by the debtor is allowed, first, to withhold his own performance until the debtor provides adequate assurance or the creditor otherwise loses his reasonable belief (Article III.-3:401(2) DCFR) and, second, to terminate the contract if the requested assurance has not been provided within a reasonable time (Article III.-3:505 DCFR). 2. Adequate assurance. Concerning the prerequisites of adequate assurance, Comment D on Article III.-3:505 DCFR (von Bar/Clive (2009), pp. 872 et seq.) is clearly modelled on Comment D on Article 8:105 PECL (Lando/Beale (2000), p. 371), presenting the same criteria and illustration. 3. Withholding performance. With different wording from Article 8:105(1) PECL, but virtually the same meaning, Article III.-3:401(2) DCFR deals explicitly with situations where the creditor is to perform first. As under the PECL (see Article 9:201(1) PECL), a creditor who is to perform simultaneously or even after the other party may resort to the general rule on withholding performance (see Article III.-3:401(1) DCFR), irrespective of whether he has reason to doubt the debtor’s willingness or ability to perform. However, unlike Article 8:105 PECL, Article III.-3:401(2) DCFR is confined to reciprocal obligations as defined in Article III.-1:102(4) DCFR and in the DCFR’s Definitions and its Annex. Thus, the expected non-performance of an obligation that is not dependent on performance of the creditor’s own obligation does not allow the creditor to withhold his own performance under Article III.-3:401 DCFR. A further difference between Article 8:105 PECL and Article III.-3:401(2) DCFR consists of the latter not requiring the expected non-performance to be fundamental. In this regard, the right to withhold performance for anticipated non-performance is more in line with the general rule on withholding performance under the DCFR than it is under the PECL (see comment on Article 8:105 PECL, 6., above.). Regarding the extent to which performance may be withheld, paragraph 4 of Article III.-3:401 DCFR contains a general rule that is apparently applicable to all situations dealt with by the provision. Accordingly, the creditor may withhold performance only to an extent reasonable under the circumstances. 4. Termination of the contract. Similar to Article 8:105(2) PECL, Article III.-3:505 DCFR entitles the creditor to terminate the contract if the expected non-performance is

416

Chapter 8: Non-performance and Remedies in General fundamental and the requested due assurance of performance is not provided within a reasonable time. Even though Article III.-3:505 DCFR does not expressly require the persistence of the creditor’s reasonable belief in the debtor’s non-performance, one can, as under Article 8:105(2) PECL, assume that the creditor shall not be allowed to terminate the contract if he, despite the debtor’s failure to provide assurance, ceases to have reason to doubt proper performance (cf. von Bar/Clive (2009), Comment C on Article III.-3:505 DCFR, p. 872, where it is explicitly required that the creditor still believes on reasonable grounds that performance will not be forthcoming). In general, however, the debtor’s failure to provide the requested assurance will strengthen rather than weaken the creditor’s reasonable belief in non-performance. 5. Damages. In accordance with Comment C on Article 8:105 PECL (Lando/Beale (2000), p. 371), Comment C on Article III.-3:505 DCFR (von Bar/Clive (2009), p. 872) underlines that ‘the debtor’s failure to give the assurance requested is itself treated as a non-performance of the obligation, giving the creditor the right to damages, where the deemed non-performance is not excused.’ Again, it is open whether either the failure to provide proper assurance or the future non-performance, or both defaults, must be excused in order to save the debtor from liability in damages. 6. Relationship to other remedies for non-performance. In contrast to the PECL (see Article 8:105(1) PECL on the one hand and Article 9:201(2) PECL on the other), the DCFR contains just a single provision on the creditor’s right to withhold performance in cases of the debtor’s anticipated non-performance. This is due to the fact that Article III.-3:401(2) DCFR–unlike Article 8:105(1) PECL–does not require the expected nonperformance to be fundamental. Hence, as mentioned above (see 3.), under the DCFR the remedy of withholding performance for anticipated non-performance is more in line with the general rule on withholding performance as laid down in Article III.-3:401(1) DCFR, for that general rule does not presuppose a fundamental nonperformance either. Similar to the PECL (see Article 8:105(2) PECL), the DCFR prohibits a creditor who has reason to believe that there will be fundamental nonperformance but who is uncertain whether the debtor will be able or willing to perform from immediately terminating the contract. By presupposing that the creditor unsuccessfully demands assurance of due performance, Article III.-3:505 DCFR compensates for the certainty of non-performance required in Article III.-3:504 DCFR (as well as in Article 9:304 PECL).

German Law § 321 BGB: Objection uncertainty (1) A person who is obliged to effect performance beforehand under a mutual contract can refuse the performance which is incumbent upon him if it is evident, after conclusion of the contract, that his claim to counter-performance is endangered by the lack of ability to perform on the part of the other party.

417

B. Gsell The right to refuse performance lapses when the counter-performance is brought about or security is provided for it. (2) The person obliged to effect performance beforehand can determine an appropriate period in which the other party must effect counter-performance simultaneously with performance or provide security, according to his choice. After expiry of the period without result, the person obliged to effect performance beforehand can withdraw from the contract. § 323 applies correspondingly. § 323 BGB: Withdrawal because performance not carried out or not carried out in accordance with contract (1)–(4) […] (5) […] If the debtor has not effected performance in accordance with the contract, the creditor cannot withdraw from the contract if the violation of duty is insignificant. (6) […] § 232 BGB: Types (1) A person who is required to provide security may do so: by the deposit of money or securities, by the pledge of claims that are registered in the Federal Debt Register [Bundesschuldbuch] or the Land Debt Register [Landesschuldbuch] of a Land, by the pledge of movable things, by the creation of ship mortgages on ships or ships under construction which are recorded in a German ship register or a ship construction register, by the creation of mortgages on land within the country, by the pledge of claims for which there is a mortgage on land within the country, or by the pledge of land charges or annuity land charges on land within the country. (2) If security cannot be provided in this manner, it is admissible to furnish a reasonable surety. 1. General. a) Like the PECL and the DCFR, the German Civil Code regulates the situation of anticipated non-performance. § 321 BGB used to have a rather limited scope; however, after the revision of the German Law of Obligations in 2002, it was broadened in three respects (see for a more detailed account Gsell, in Soergel (2005) § 321 nos. 3 et seq.) in order to bring the provision closer to Article 71(1) CISG (see Bundestag document No. 14/6040, p. 179). It was thus also brought more in line with Article 8:105 PECL, Article III.-3:401(2) DCFR, and Article III.-3:505 DCFR. First, § 321

418

Chapter 8: Non-performance and Remedies in General BGB is no longer confined to the danger of the debtor becoming insolvent. Like the PECL and the DCFR, § 321 BGB allows other obstacles that affect the debtor’s ability to perform–such as, for example, bans on exports or imports, wars, breakdown of suppliers, and illness (see Bundestag document No. 14/6040, p. 179)–to justify the withholding of the creditor’s own performance. Second, and again similar to (though not identical with) the PECL and the DCFR, the newly drafted § 321(2) BGB grants the creditor a right to terminate the contract where the debtor fails to perform or provide security. Third, and again resembling the PECL and the DCFR, though contrary to the original version of § 321 BGB, the new provision is no longer confined to subsequent obstacles; rather, it also covers situations where the debtor was unable to perform upon conclusion of the contract but where the creditor had not yet realized it. b) Although the revised § 321 BGB shares considerable similarities with Article 8:105 PECL, Article III.-3:401(2) DCFR, and Article III.-3:505 DCFR, some differences remain. Two of these are critical. First, § 321 BGB is concerned only with the debtor’s inability to perform. Thus, it does not cover situations where there is evidence for the debtor’s unwillingness to perform. Second, § 321 BGB is more stringent than the aforementioned articles insofar as it requires it to be evident that performance be endangered by the debtor’s lack of ability to perform. Thus, even though the creditor might reasonably believe in the debtor’s non-performance under the circumstances, the creditor will not be protected by § 321 BGB if the surrounding circumstances are misleading and it is later revealed that there was no real danger of non-performance. According to the legislative materials, the revised § 321 BGB will not even apply in situations where the creditor’s belief in non-performance is attributable to the debtor’s own behaviour (see Bundestag document No. 14/6040, p. 179). Hence, § 321 BGB still appears to be considerably more narrow than either the PECL’s or the DCFR’s rules on anticipated non-performance. However, jurisprudence under the old Code held that a creditor who reasonably expected non-performance was entitled–on the grounds of a corresponding application of the Nachfrist requirement in the old § 326 BGB in conjunction with § 242 BGB (performance in accordance with good faith)–to set a period for the debtor to declare his ability and willingness to perform. When the debtor failed to provide a satisfactory declaration, the creditor was considered able to terminate the contract (see for instance RGZ 93, 285, 286 et seq.; BGH NJW 1970, 1182; BGH MDR 1976, 393; BGH NJW 1977, 35; BGH NJW 1983, 989, 990; for more details see Gsell, in Soergel (2005), § 321 no. 30 with references). There is some support for the view that despite the revision of § 321 BGB, this jurisprudence will likely be upheld (see Gsell, in Soergel (2005), § 321 no. 30; Ernst, in Münchener Kommentar (2012), § 323 no. 135; but see Grüneberg, in Palandt (2013), § 323 no. 13), given that the legislature’s intention was to improve rather than deteriorate the creditor’s position. If this is the case, the creditor will be protected to a similar extent under German law as under the PECL and the DCFR. 2. Security or assurance. a) Under § 321(1) second sentence BGB, the creditor’s right to withhold performance lapses when the debtor either tenders performance or provides security for it. Accordingly, the creditor has no right to terminate the contract

419

B. Gsell under § 321(2) BGB if the debtor either tenders to perform his obligation simultaneously with the creditor’s counter-obligation or provides security within the period set by the creditor. Thus, the debtor has two ways to go ahead with the performance of the contract. b) Regarding the provision of security, the admissible forms are enumerated in § 232 BGB. Whereas the scope of the revised § 321 BGB goes beyond financial difficulties (see above, 1.), § 232 BGB aims solely at supplying the creditor with financial security. Accordingly, other forms of evidence that prove the debtor’s ability to perform will not qualify as security within the meaning of § 232 BGB. However, since § 321 BGB presupposes that the endangered performance is evident, one can assume that the creditor cannot resort to the provision if it becomes apparent that the debtor is able and willing (again) to properly perform (see Gsell, in Soergel (2005), § 321 nos. 43 and 52). Nevertheless, according to the abovementioned jurisprudence–which was developed alongside the old § 321 BGB (see above, 1.) and went beyond the scope of both the old and the newly drafted provision–the debtor is required to provide assurance of his ability and willingness to perform, the form of which depends on the circumstances. Thus, the debtor’s declaration of his ability and willingness to perform might be sufficient (see BGH MDR 1976, 393). 3. Withholding performance. a) Like Article III.-3:401(2) DCFR, § 321 BGB is expressly concerned with a party who performs first; a creditor who is to perform simultaneously with or after the other party may avail himself of the general rule on withholding performance (cf. § 320 BGB), which does not presuppose the debtor’s performance to be endangered. Furthermore, the scope of application of § 321 BGB is confined to obligations arising from a reciprocal contract that confers mutual obligations on the parties–such as a sales contract or a contract for work. Furthermore, and similar to Article III.-3:401(2) DCFR, the prevailing view on § 321 BGB holds that the provision covers reciprocal obligations only in the sense of performance of the obligation being dependent on the performance of the other party’s obligation, and vice versa (for criticism see Gsell, in Soergel (2005), § 321 no. 26). Accordingly, § 321 BGB does not apply to an obligation to which, according to the contract, no counterobligation can be attributed. Thus, for example, in German law the buyer’s obligation to take delivery, as a rule, is considered to have no counter-obligation (cf. Weidenkaff, in Palandt (2013), § 433 nos. 43 et seq.). Even though it has become apparent that the buyer may not be able to take delivery, the seller will generally not be entitled to refrain from tendering performance under § 321 BGB. b) Again, similar to Article III.-3:401(2) DCFR, as well as the general rule on withholding performance laid down in § 320 BGB, § 321 BGB does not require the expected non-performance to be fundamental. c) The provision lacks specific rules concerning the extent to which performance may be withheld. Therefore, the general rules as set out in § 320(2) BGB are applicable. Depending on the circumstances, and like under Article III.-3:401 DCFR, under § 321 BGB the creditor may be entitled to withhold only part of his own performance. 4. Termination of the contract. The right to terminate the contract under § 321(2) BGB, in contrast to Article 8:105 PECL and Article III.-3:505 DCFR, does not presuppose

420

Chapter 8: Non-performance and Remedies in General that the expected non-performance is fundamental. However, according to § 321(2), third sentence BGB, § 323 BGB is to be applied correspondingly. Therefore, the creditor will be confined to terminating only a portion of the contract if only part of the performance appears to be endangered, unless he has no interest in partial performance (see § 323(5), second sentence BGB). Furthermore, he will not have a right to termination at all if the expected non-conforming performance is supposed to be insignificant (see § 323(5), second sentence BGB). 5. Damages. a) According to the prevailing view, § 321 BGB does not confer an obligation on the debtor to provide security or offer performance within the period set by the creditor (see Gsell, in Soergel (2005), § 321 nos. 56 et seq. with references). The underlying idea is that the mere danger of the debtor’s non-performance may not change the order of performances agreed to by the parties. Otherwise, the debtor’s legitimate interest in first receiving counter-performance and perhaps in even making use of the received counter-performance in order to enable himself to effect performance would be disregarded (see Bundestag document No. 14/6040, p. 180). Thus, if the contract unconditionally states that performance becomes due only after the debtor has received counter-performance and the creditor is therefore under an obligation to perform in advance (so-called beständige Vorleistungspflicht), neither the debtor’s not providing the requested security nor his not tendering performance will amount to a non-performance. Therefore, the creditor will not be entitled to claim damages. b) However, the situation is different with regard to cases where, according to the abovementioned jurisprudence (see above, 3.), the creditor is allowed to set a reasonable period for the debtor to declare his ability and willingness to perform or otherwise provide assurance of his future performance. According to this jurisprudence, the debtor’s default in clarifying the situation amounts to a positive breach of contract (positive Vertragsverletzung) or positive malperformance (positive Forderungsverletzung), therefore entitling the creditor to claim damages from the debtor. Since the requested declaration or assurance does not affect the debtor’s right to receive performance beforehand, one can easily follow this jurisprudence (see also Gsell, in Soergel (2005), § 321 no. 30). Yet under the revised Code, one would–without much difference in outcome–assume a breach of a duty in the sense of § 241(2) BGB, resulting in a creditor’s right to damages under § 280(1) BGB. 6. Relationship to other remedies for non-performance. Similar to the PECL (see Article 9:304 PECL) and the DCFR (see Article III.-3:504 DCFR), German law, in addition to § 321 BGB, contains a further provision granting the creditor a right to terminate the contract before performance is due; this provision is § 323(4) BGB. As with Article 9:304 PECL and Article III.-3:504 DCFR, § 323(4) BGB is more stringent than § 321 BGB in that it requires it to be evident that there will be a non-performance that would justify termination of the contract if the creditor waited until performance became due. Thus, the creditor is barred from immediate termination of the contract if his grounds for doubting the debtor’s ability to perform are too weak to make future non-performance evident. However, it should be noted that § 321 BGB, even in conjunction with the jurisprudence that has been developed alongside the provision and which allows the creditor to demand clarification from the debtor (see above, 3.),

421

B. Gsell does not cover all situations where a creditor is prevented from resorting to § 323(4) BGB because of the stringent threshold of future non-performance required to be evident. In fact, while both §§ 321 and 323(4) BGB are confined to reciprocal contracts, it is only with regard to § 321 BGB that the prevailing view requires reciprocal obligations (see above, 3.). Similarly, the aforementioned jurisprudence is concerned only with reciprocal obligations. Thus, where a creditor has reason to believe that there will be non-performance of an obligation to which no counter-obligation can be attributed, he does not, under either § 321 BGB or existing jurisprudence, enjoy the opportunity to clarify the situation or open the way to termination by setting a period for the debtor to provide security, tender performance, or provide assurance of due performance.

Comparison and Evaluation Compared to the PECL and the DCFR, German law is more complicated and ambiguous insofar as, after the revision of § 321 BGB, it is unclear to what extent the jurisprudence developed alongside the Code and according to which the creditor is allowed to demand clarification of the debtor’s ability and willingness to perform will be upheld. Apart from this, it is questionable whether § 321 BGB is appropriate in its allowing the debtor to clarify the situation by tendering performance, notwithstanding the fact that performance is not yet due. However, even in situations where future performance appears to be endangered, the creditor might all the same be unprepared to receive performance before it is due. Finally, it does not seem justified that German law, according to the prevailing view, confines the right to withhold performance or terminate the contract for danger of non-performance to reciprocal obligations, whereas the right to termination for anticipated non-performance as laid down in § 323(4) BGB covers all obligations arising from a reciprocal contract, irrespective of whether counter-obligations can be attributed. Regarding the right to withhold performance, Article III.-3:401(2) DCFR and § 321 BGB are more satisfactory than Article 8:105 PECL because they do not require the future non-performance to be fundamental; therefore, they are more in line with the general rule on withholding performance as laid down in all three sets of rules.

Principles of European Contract Law Article 8:106: Notice Fixing Additional Period for Performance (1) In any case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance. (2) During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages, but it may not resort to any other remedy. If it receives notice from the other party that the latter will

422

Chapter 8: Non-performance and Remedies in General not perform within that period, or if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under chapter 9. (3) If in a case of delay in performance which is not fundamental the aggrieved party has given a notice fixing an additional period of time of reasonable length, it may terminate the contract at the end of the period of notice. The aggrieved party may in its notice provide that if the other party does not perform within the period fixed by the notice the contract shall terminate automatically. If the period stated is too short, the aggrieved party may terminate, or, as the case may be, the contract shall terminate automatically, only after a reasonable period from the time of the notice. 1. General. a) The creditor is generally entitled to allow an additional period for performance without forfeiting his rights to damages or to withhold performance of his own reciprocal obligations. However, according to Article 8:106(2) PECL, the creditor may not, during the additional period, change his mind and resort to conflicting remedies, particularly termination. This would amount to a venire contra factum proprium. Only if the debtor notifies the creditor of his intention to not perform within that period may the creditor, even though the additional period has yet to elapse, resort to other remedies available under Chapter 9, particularly the right to terminate the contract. The same holds true upon the expiry of the additional period of time. Thus, the creditor may not lose his right to specific performance by vainly granting the debtor a second chance for performance. b) If at the time of fixing the additional period the creditor is not able to terminate the contract under Chapter 9 because, so far, the non-performance has not amounted to a fundamental non-performance, he will acquire a right to termination under Article 8:106(3) PECL. This provision allows for termination when due performance has not been made upon expiry of the additional period. In other words, by fixing an additional period for performance, the creditor may open the way to termination of the contract. However, this possibility is restricted to cases of delayed performance; in cases of defective performance, the right to termination still depends on a fundamental breach of contract even after the additional period for performance has ended. In the notice fixing an additional period for performance, the creditor may provide for automatic termination of the contract upon expiry of the period. If the creditor states an unreasonably short period, he may terminate the contract–or the contract may terminate automatically–only after a reasonable period of time following the notice. 2. Granting the debtor a second chance in cases of delay of performance and thus opening the way to termination of the contract. a) In cases of delayed performance, the additional period fixed by way of notice must be sufficiently clear and definite in order to lead to a right to termination under Article 8:106(3) PECL. According to Comment D on Article 8:106 PECL (Lando/Beale (2000), p. 375), a determinate period of time must be set – a request for performance ‘as soon as possible’ will not suffice, as such a notice might give the defaulting party the impression that she is free to decide when to perform. For the same reason, overly polite and therefore ambiguous terms

423

B. Gsell like ‘we hope very much that performance can be made by July 1’ should be avoided (see Lando/Beale (2000), p. 375 Comment D). Furthermore, Article 8:106(3) PECL requires a period of reasonable length. Comment E on Article 8:106 PECL (Lando/Beale (2000), pp. 375 et seq.) recommends taking the following criteria into account. First, the length of the original period should be considered to the extent that a short original period might justify a similarly short additional period. Furthermore, the aggrieved party’s need for quick performance may, if apparent to the defaulting party, give reason for a short additional period. Besides the nature of the goods, the delivery of services or rights may come into play, making performance simple or complicated. Finally, the nature of the event causing the delay must be taken into account. Thus, a shorter period might be justified where non-performance is the fault of the debtor, whereas it might not be justified in cases of force majeure delaying performance. Nevertheless, if the period set by the creditor is too short, the notice will not be without effect; rather, it will still set off an additional period of reasonable length for performance. Thus, even if the creditor fails to grant the debtor sufficient extra time for performance, the creditor will still be entitled to terminate the contract upon expiry of a reasonable period of time; or, in cases of the announcement of automatic termination, the contract will terminate automatically upon the lapse of a reasonable period of time. b) Comment B on Article 8:106 PECL (Lando/Beale (2000), p. 374) underlines that in cases where one party refuses to accept or allow the other party’s performance, the party who is to perform a service may also use the notice procedure. This appears to be in line with the PECL’s unitary concept of breach of contract, including the violation of accessory duties (see comment on Article 8:101 PECL, 2., above). According to Comment B on Article 8:106 PECL (Lando/Beale (2000), p. 374), the Nachfrist mechanism applies even if the non-performance is excused because of a temporary impediment under Article 8:108(2) PECL. This makes sense insofar as Article 8:106(3) PECL, also in this situation, provides the creditor with a viable way to terminate the contract. However, where the impediment, though temporary, will obviously not be overcome within a reasonable period, this will usually amount to a fundamental non-performance, and therefore the creditor will not be required to fix an additional period in order to terminate the contract. c) Since according to Article 8:106(3) PECL, the right to termination after the lapse of an additional period for performance is confined to cases of delayed performance, the question arises as to whether the creditor may reject a non-conforming offer of performance, thereby opening the way to the application of Article 8:106(3) PECL. However, the PECL does not deal with this problem expressly. On the one hand, Chapter 9 does not explicitly grant a right to reject a non-conforming tender. On the other hand, the creditor’s right to refuse a non-conforming tender appears to be presupposed in Article 8:104 PECL (see comment on Article 8:104 PECL, 5., above). 3. Granting the debtor a second chance in other situations. a) Since Article 8:106(3) PECL encompasses only delayed performance, the setting of an additional period will not lead to a right to termination under Article 8:106(3) in cases where defective performance does not amount to a fundamental non-performance. Even so, the

424

Chapter 8: Non-performance and Remedies in General creditor may, by way of notice, show his willingness to accept proper performance and thus push the debtor to cure the non-conforming offer. Since defective performance is not covered by Article 8:106(3) PECL, in this case, the creditor may choose a period as long or short as he considers appropriate (see Lando/Beale (2000), p. 375, Comment D). However, Article 8:106(2) PECL will still apply. Therefore, the creditor should all the same set a sufficiently unambiguous period in order to know exactly how long he will be barred from resorting to remedies other than withholding performance and claiming damages. b) On the other hand, the setting of an additional period may also make sense where the non-performance is already fundamental and the aggrieved party can immediately terminate the contract without giving the debtor a second chance. First, as Comment B on Article 8:106 PECL (Lando/Beale (2000), p. 374) stresses, the creditor might still be willing to accept a proper performance provided it will be rendered within a reasonable period of time. Second, it might be uncertain to the creditor whether the threshold of a right to fundamental non-performance has already been satisfied by the mere delay in performance. By granting the debtor an additional period of time for performance, the creditor can overcome this legal uncertainty and, after the lapse of the period, terminate the contract under Article 8:106(3) PECL (p. 374). 4. Unilateral termination of contract. a) Under Article 8:106(3) PECL, termination of the contract is effected unilaterally by declaration of the aggrieved party and without judicial intervention. However, the aggrieved party may even provide for automatic termination upon the lapse of an additional period for performance by announcing the automatic termination in the notice fixing the additional period. b) Given the fact that upon expiry of the additional period for performance, the aggrieved party may terminate the contract or the contract will terminate automatically, the question must be asked, what happens if the debtor offers performance only after the Nachfrist has lapsed? According to Comment F on Article 8:106 PECL (Lando/Beale (2000), p. 376), the principle of good faith as laid down in Article 1:201 PECL requires the aggrieved party to react in the two following situations. First, the aggrieved party must inform the debtor of her unwillingness to accept performance if she knows about the debtor’s persistent attempts to render performance. Second, if the defaulting party asks the creditor whether she will still accept performance, the latter must answer within a reasonable time. However, comment F on Article 8:106 PECL leaves open the consequences of the creditor not acting in good faith. Given the fact that the unitary concept of non-performance underlying the PECL embraces any kind of breach of contract, including the violation of an accessory duty (see comment on Article 8:101 PECL, 2., above), one must suppose that the aggrieved party’s failure to inform the debtor of her unwillingness to accept performance in the two aforementioned situations will result in the debtor’s right to recover damages under Article 9:501 PECL. In contrast, there is little basis in the PECL for the assumption that a creditor who failed to inform the debtor about her unwillingness to accept a delayed performance must accept the debtor’s delayed offer.

425

B. Gsell Draft Common Frame of Reference Article III. – 3:103: Notice fixing additional period for performance (1) In any case of non-performance of an obligation the creditor may by notice to the debtor allow an additional period of time for performance. (2) During the additional period the creditor may withhold performance of the creditor’s reciprocal obligations and may claim damages, but may not resort to any other remedy. (3) If the creditor receives notice from the debtor that the debtor will not perform within that period, or if upon expiry of that period due performance has not been made, the creditor may resort to any available remedy. Article III. – 3:503: Termination after notice fixing additional time for performance (1) A creditor may terminate in a case of delay in performance of a contractual obligation which is not in itself fundamental if the creditor gives a notice fixing an additional period of time of reasonable length for performance and the debtor does not perform within that period. (2) If the period fixed is unreasonably short, the creditor may terminate only after a reasonable period from the time of the notice. Article III. – 3:507: Notice of termination (1) A right to terminate under this Section is exercised by notice to the debtor. (2) Where a notice under III. – 3:503 (Termination after notice fixing additional time for performance) provides for automatic termination if the debtor does not perform within the period fixed by the notice, termination takes effect after that period or a reasonable length of time from the giving of notice (whichever is longer) without further notice. Article III.-3:103 DCFR is clearly modelled on Article 8:106(1)–(2) PECL, with only minor differences in wording. Similarly, Article III.-3:503 DCFR, read together with Article III.-3:507(2) DCFR, is a rough copy of Article 8:106(3) PECL.

German Law § 323 BGB: Withdrawal because performance not carried out or not carried out in accordance with contract (1) If the debtor in a mutual contract does not effect performance which is due, or does not effect it in accordance with the contract, the creditor can withdraw from the contract, if he has determined for the debtor an appropriate period for performance or subsequent fulfilment but without result.

426

Chapter 8: Non-performance and Remedies in General (2) The setting of a period can be dispensed with, if 1. the debtor refuses performance seriously and finally, 2. the debtor does not effect performance on a date determined in the contract or within a determined period and in the contract the creditor has made the continued existence of his interest in performance dependent on the punctuality of the performance or 3. special circumstances are present which justify immediate withdrawal, on balancing the interests of both parties. (3) If the setting of a period does not come into consideration because of the type of violation of duty, then a warning will take its place. (4) The creditor can withdraw even before performance becomes due, if it is obvious that the prerequisites for withdrawal will occur. (5) If the debtor has effected partial performance, the creditor can only withdraw from the whole contract if he has no interest in partial performance. If the debtor has not effected performance in accordance with the contract, the creditor cannot withdraw from the contract if the violation of duty is insignificant. (6) Withdrawal is excluded if the creditor is solely or overwhelmingly responsible for a circumstance that would entitle him to withdraw or if a circumstance for which the debtor is not responsible occurs at a time at which the creditor is in delay in acceptance. 1. General. a) German law lacks a specific provision allowing the creditor to grant the debtor a second chance for performance. However, it goes without saying that, as a rule, the creditor may do so under German law. Also, the main provisions dealing with the creditor’s shifting from specific performance to termination and damages–that is, §§ 323 and 281 BGB–presuppose the creditor’s being allowed to grant the debtor an extra period for performance. This is evident in §§ 323(1) and 281(1) BGB, which require the fixing of such an extra period for performance as a prerequisite of termination and the recovery of damages in lieu of performance (statt der Leistung). As under the PECL and the DCFR–and contrary to the old German Civil Code (cf. § 326 BGB, old version) – the creditor may claim specific performance even after the lapse of the additional period for performance. Actually, he loses the right to specific performance only by declaring the contract terminated (cf. § 346 BGB) or claiming damages in lieu of performance (statt der Leistung, cf. § 281(4)). However, with an ‘automatic’ outcome similar to that of Article 8:106(3), second sentence PECL and Article III.-3:507(2) DCFR, German law allows the creditor to declare, in his notice fixing an additional period for performance, termination of the contract upon the expiry of the Nachfrist (see Ernst, in Münchener Kommentar (2012), § 281 no. 96; § 323 no. 148). Thus, upon the lapse of the additional period for performance, no further notice is necessary in order to terminate the contract. Under German law, as under the PECL and the DCFR, a creditor who, despite being entitled to an immediate termination or recovery of damages in lieu of performance (statt der Leistung), decides to grant the

427

B. Gsell debtor a second chance may not suddenly change his mind; consequently, he will generally be barred from resorting to incompatible remedies until the additional period has elapsed or the debtor declares that he will not perform (RGZ 89, 123, 124; for more details see Gsell, in Soergel (2005), § 323 BGB no. 58 et 95 with references). However, where it is evident that the debtor will be unable to perform within the additional period due to an impediment, making performance impossible, the creditor may terminate the contract and claim damages in lieu of performance (statt der Leistung), irrespective of whether the additional period has ended (cf. Ernst, in Münchener Kommentar (2012), § 281 no. 43; § 323 no. 81). b) With regard to the prerequisites for terminating a contract, German law tends to avoid differentiating between delayed performance and defective performance. Instead, it follows the unitary principle of a right to terminate when performance has not been rendered within an additional period for performance fixed by the creditor (cf. § 323 BGB). This holds true despite the fact that cases of defective performance – unlike delayed performance – exclude termination if the non-performance is insignificant (cf. § 323(5), second sentence BGB), barring the creditor from opening his way to termination by using the Nachfrist mechanism (see comment on to Article 8:106 PECL, 3., above). However, it should be noted that the threshold for a significant defect under § 323(5), second sentence BGB is considerably lower than that for a fundamental non-performance under the PECL and the DCFR. Thus, in most cases of defective performance, § 323(5), second sentence BGB will not prevent the creditor from terminating the contract after the lapse of an additional period for performance. In fact, the German Federal Court of Justice found a significant violation of duty (Pflichtverletzung) in the following situations: the car offered by the seller was actually black instead of the blue metallic originally promised (see NJW-RR 2010, 1289); humidity continued to seep into the purchased SUV after two repair shops tried to fix the defect (see BGH NJW 2009, 508); the seller fraudulently concealed the defect of the sold good (BGH NJW 2006, 1960, 1961). In contrast, the Court considered the violation of duty insignificant where the costs of repair amounted to only 1% of the purchase price (see BGH NJW 2005, 3490, 3493, confirmed by BGH NJW 2008, 1518, 1519 and BGH NJW 2011, 2872) and where the actual fuel consumption of a newly purchased car exceeded the mileage indicated by the manufacturer by less than 10% (BGH NJW 2007, 2111, 2112 confirming BGH NJW 1997, 2590 (with regard to § 459(1) second sentence of the unrevised BGB)). 2. Granting the debtor a second chance and thus opening the way to termination. a) Like the PECL and the DCFR, §§ 323(1) and 281(1) BGB require that the creditor fix a sufficiently determinate period for performance in order to meet the prerequisites for a right to terminate the contract and claim damages in lieu of performance. Again, as with the PECL and the DCFR, neither ambiguous terms nor too-polite language should be used (cf. Gsell, in Soergel (2005), § 323 BGB nos. 72 and 78 with references; but see also BGH NJW 2009, 315: a request for ‘immediate’ or ‘prompt’ performance might be sufficient). b) Without differing substantially from the PECL and the DCFR, German law requires that the additional period fixed by the creditor be of reasonable length. The

428

Chapter 8: Non-performance and Remedies in General reasonableness test follows a concrete approach, taking into consideration the contract’s specific circumstances. Other criteria, such as the creditor’s need for quick performance (cf. OLG Köln NJW-RR 1993, 949), the nature of the performance still due (see RG Recht 1919, no. 1062), and the length of the delay (see BGH NJW 1982, 1279, 1280) should be taken into account. Again in line with the PECL and the DCFR, German law allows the creditor, in cases where the additional period granted by him is too short, to nevertheless terminate the contract after a reasonable period of time has elapsed (see BGH NJW 1985, 2640). c) In contrast to the old Civil Code (cf. § 326 BGB, old version) and again in line with the PECL and the DCFR, under § 323 BGB, according to the prevailing view, even the violation of an accessory duty is covered by § 323(1) BGB and may thereby justify the termination of a reciprocal contract after the lapse of an additional period for performance has been set by the creditor (cf. Grüneberg, in Palandt (2013), § 323 no. 10; Gsell, in Soergel (2005), § 323 BGB nos. 23 et seq.). With regard to temporary impediments, the prevailing view in Germany holds that there is no room for a direct application of § 323(1) BGB, since the provision presupposes that the creditor is entitled to claim performance, whereas, according to § 275(1) BGB, the duty to perform is suspended as long as the debtor is hindered by an impediment. Nevertheless, there is great support for an analogous application of § 323(1) BGB in such situations (see Ernst, in Münchener Kommentar (2012), § 323 no. 145 with references). d) Under German law, the creditor is generally entitled to reject a non-conforming offer (cf. Ernst (1997), 896, 897 with regard to sales contracts). However, since the right to termination as laid down in § 323(1) BGB extends to cases of defective performance, the creditor may resort to the Nachfrist mechanism without rejecting the defective goods. 3. Granting the debtor a second chance in other situations. For the same reasons as under the PECL and the DCFR, under German law it sometimes makes sense to set an additional period for performance even though the creditor either will not be allowed to terminate the contract after the period has lapsed (see comment on Article 8:106 PECL, 3.a), above) or is not required to give the debtor a second chance and can in fact immediately terminate the contract (see comment on Article 8:106 PECL, 3.b), above). However, since, unlike the PECL and the DCFR and as mentioned above (see 1.b)), the Nachfrist mechanism of § 323(1) BGB is not confined to delayed performance, the former of the two aforementioned situations will happen only under exceptional circumstances. 4. Unilateral termination of the contract. a) Whereas § 326(1) BGB, at least generally speaking, provides for automatic termination of the contract in cases of impossibility of performance, § 323 BGB requires that termination be effected by way of notice to the other party, similar to the PECL and the DCFR. As mentioned above (see 1.a)), and again in line with the PECL and the DCFR, the creditor is not necessarily required to declare termination of the contract only after the additional period granted to the debtor has elapsed; rather, the creditor may add the declaration of termination (upon expiry of the Nachfrist) to his first notice, in which he sets the additional period for performance.

429

B. Gsell b) With regard to the time after the lapse of the Nachfrist, there is much controversy in Germany as to whether the creditor, as long as he has not yet declared the contract terminated, must still accept the debtor’s delayed offer of performance. Since according to § 346 BGB the debtor’s duty to perform ends only upon termination of the contract, one might actually consider the contract to still be in effect. However, in 2002, the German legislature deliberately did away with the automatic termination of the contract upon expiry of the Nachfrist (cf. § 326 BGB old version), in order to prevent the creditor from deciding in favour of or against terminating the contract at the early stage of the setting of the Nachfrist (see Bundestag document No. 14/6040, p. 185). Therefore, the creditor’s free choice of remedies should prevail over the debtor’s interest in tendering performance after expiry of the Nachfrist (see comment on Article 8:106 PECL, German Law, 2., above). However, where, after the Nachfrist has elapsed, the debtor announces performance to the creditor and the creditor fails to declare termination within a reasonable period of time, the creditor should be entitled to termination only upon the expiry of a further period for performance – that is, after having granted the debtor a third chance (see for a more detailed account Gsell (2006), pp. 299 et seq.).

Comparison and Evaluation With regard to the creditor’s right to grant the debtor an additional period of time for performance, there is not much difference between the PECL, the DCFR, and German law. Under none of these sets of rules can the creditor forfeit his right to performance and damages by allowing the debtor a second chance for performance. The same holds for the creditor being unable to suddenly change his mind before the end of the additional period of time, for such behaviour would amount to a venire contra factum proprium. The three sets of rules allow the creditor to open the door to termination by way of a Nachfrist mechanism. All three require a sufficiently clear and determinate Nachfrist of reasonable length and, generally speaking, provide for an automatic running of a reasonable period where the one granted by the creditor turns out to be too short. However, the PECL and the DCFR allow the Nachfrist mechanism to be used as a way to terminate the contract only if there is a delay in performance, whereas German law extends it to other forms of non-performance, particularly defective performance, excluding it only in cases of an insignificant violation of a duty (§ 323(5), second sentence BGB). While German law thus, even in cases of defective performance, provides the creditor with a clear and practical track towards termination of the contract, sparing him the assessment of whether there is a fundamental nonperformance, it might overprotect him in certain situations. Concerning contracts for work, for example, one might consider it inappropriate that the creditor is entitled to terminate the contract due to a defect that is neither seen as minor in the sense of § 323(5), second sentence BGB nor a fundamental non-performance under the PECL or the DCFR. Where, for example, the contractor has undertaken to erect a new house and fails to cure a major but reparable defect in the heating system on time, he will

430

Chapter 8: Non-performance and Remedies in General apparently suffer considerable loss if he has to remove the building as a consequence of termination of the contract (see for more details Mehring (2009), 310 et seq.). However, with regard to consumer sales contracts, the differences between German law and the DCFR actually turn out to be smaller than one might have first assumed. Since Article IV.-4:201 DCFR entitles the consumer to terminate the contract ‘in the case of any lack of conformity, unless the lack of conformity is minor,’ the fundamental non-performance criterion contained in Article III.-3:502 DCFR is actually replaced with the requirement that the non-performance not be minor, a threshold similar to that of § 323(5), second sentence BGB. Finally, it should be noted that all three sets of rules lack clear statements regarding cases where the debtor offers performance after the end of the additional period for performance. Thus, it is unclear under which circumstances the aggrieved party should let the other party know whether performance will still be accepted, and what consequences a violation of such an accessory duty will entail.

Principles of European Contract Law Article 8:107: Performance Entrusted to Another A party which entrusts performance of the contract to another person remains responsible for performance. 1. General. a) Modern division of labour arguably results in most contracts being performed not by the debtor himself but by third persons acting on his behalf. With regard to this phenomenon, Article 8:107 PECL states a fairly simple rule: if the debtor entrusts performance to another person, he does so at his own risk. In other words, the other person’s lack of proper performance will be attributed to the debtor just as if he had acted himself. b) However, with regard to the similar question as to whether a third person’s actual or constructive knowledge may be imputed to the debtor, the PECL contain a specific provision: Article 1:305 PECL. 2. Internal relationship between the debtor and the third person irrelevant. According to Comment B on Article 8:107 PECL (Lando/Beale (2000), p. 378), the internal relationship between the third party and the debtor is of no relevance. Thus, Article 8:107 PECL is to be applied irrespective of whether the third person acts as an independent subcontractor or as an employee or agent subject to the debtor’s instructions. 3. A third person to whom performance has been entrusted by the debtor. Although the rule contained in Article 8:107 PECL appears simple at first glance, there is more behind it than one might expect. That is because the provision does not extend to all third persons affecting performance but rather presupposes that the debtor has entrusted performance to someone else. Hence, the problem consists of determining whether a third person on whose behaviour proper performance actually depends is to be considered a person entrusted with performance under Article 8:107 PECL. For example, with regard to a sales contract between two merchants or between a

431

B. Gsell merchant and a consumer, it is questionable whether the manufacturer of the goods is to be looked at as a person to whom the merchant has entrusted performance, even though it is obvious that the defective manufacture of goods will in the end lead to the merchant’s defective performance. Since under a sales contract, unlike a contract for work, the seller is not obligated to manufacture the sold goods, the manufacturing might not be considered to form part of the performance of the sales contract (see also comment on Article 8:108 PECL, 2., below).

Draft Common Frame of Reference Article III. – 2:106: Performance entrusted to another A debtor who entrusts performance of an obligation to another person remains responsible for performance. This provision is clearly modelled on Article 8:107 PECL and contains the same principle. Yet since the approach of Book III of the DCFR is broader than that of the PECL (see comment on Article III.-3:101 DCFR, above), Article III.-2:106 DCFR is not confined to contractual obligations. Thus, if the debtor of a non-contractual obligation, which falls within the scope of Book III DCFR, entrusts performance to another person, he nevertheless remains responsible for that performance. Importantly, the provision requires an obligation emerging from a pre-existing relationship (see Article III.-1:102 (1) DCFR). Therefore, namely the causation of legally relevant damage under Book VI lies beyond its scope. However, Article VI.-3:201(1) DCFR follows a similar concept in that it establishes liability for damages caused by employees and similarly engaged auxiliary persons in the course of their employment or engagement. The liability is strict insofar as it arises only when the auxiliary person is accountable for the damage, the principal being prevented from exculpating himself by way of proving that he carefully selected the auxiliary person (see von Bar/Clive (2009), Comment B on Article VI.-3:201(1) DCFR, pp. 3455 et seq.). Like the PECL, the DCFR uses a separate provision – Article II.-1:105 DCFR–to deal with the imputation of a third party’s knowledge to the debtor.

German Law § 278 BGB: Responsibility of debtor for third parties The debtor has to answer for fault on the part of his statutory representative and of the persons whom he uses for the fulfilment of his obligations to the same extent as for his own fault. The provisions of § 276 paragraph 3 do not apply. 1. General. a) § 278, first sentence BGB contains the same rule as Article 8:107 PECL and Article III.-2:106 DCFR: a debtor who avails himself of the benefits of the division of labour must bear the corresponding risks (see Motive zum Entwurf eines Bürgerlichen Gesetzbuchs für das Deutsche Reich, II, p. 30; for more details see Grundmann, in Münchener Kommentar (2012), § 278 no. 3 with references). Because contractual

432

Chapter 8: Non-performance and Remedies in General and non-contractual liability under German law follows a fault-based approach (cf. § 276 BGB), § 278, first sentence BGB focuses on the imputation of the third person’s fault to the debtor. However, it goes without saying that where, as an exception, the debtor’s liability does not require fault, he still remains responsible for the nonperformance of an auxiliary person to whom he has entrusted performance (see Löwisch/Caspers, in Staudinger (2009), § 278 no. 58). German law, like the PECL and the DCFR, uses separate provisions – namely, § 166 BGB–to deal with the imputation of a third person’s knowledge to the debtor. b) Similar to Article III.-2:106 DCFR and contrary to Article 8:107 PECL, the scope of § 278, first sentence BGB extends to non-contractual obligations in addition to contractual ones. However, like Article III.-2:106 DCFR, § 278 BGB still presupposes an obligation in the sense of a legal relationship between two determinate parties, the debtor and the creditor. By way of contrast, the provision is inapplicable as long as the general duties violated do not emerge from a pre-existing legal relationship between the persons involved (see BGHZ 1, 248, 249; BGHZ 3, 46, 49; see also Grundmann, in Münchener Kommentar (2012), § 278 no. 15 with references). Thus, particularly in the field of torts law, the more generous rule as laid down in § 831 BGB applies. § 831 BGB, unlike Article VI.-3:201(1) DCFR, allows the principal to exonerate himself for a vicarious agent’s unlawful behaviour. He can do this by establishing evidence that he carefully selected the vicarious agent. Due to this two-track system allowing the principal’s exoneration from vicarious liability under § 831 BGB but not under § 278 BGB, German jurisprudence has, for a long time, shown a certain tendency to follow a rather broad understanding of contractual and quasi-contractual relationships, through which the courts have opened the way for the application of § 278 BGB but not the more generous § 831 BGB (cf. von Caemmerer (1960), pp. 49 et seq.). 2. Internal relationship between the debtor and the third person irrelevant. Parallel to the PECL and the DCFR, § 278 BGB considers the internal relationship between the debtor and the third person to be irrelevant as long as the third person is acting due to the debtor’s decision to leave performance partly or totally to this person. Even if the third person runs an independent business, § 278 BGB may apply (cf. BGH NJW 1979, 197; BGH NJW 1988, 1907, 1908; for more details see Grundmann, in Münchener Kommentar (2012), § 278 no. 44 with references). 3. A third person to whom performance has been entrusted by the debtor. German law also converges with the PECL and the DCFR insofar as § 278 BGB does not cover all situations where proper performance depends on a third person’s behaviour. Like Article 8:107 PECL and Article III.-2:106 DCFR, § 278 BGB requires that the debtor ask a third person to perform or help him perform the contract. Thus, similar to the difficulties faced under the PECL and the DCFR, § 278 BGB raises the question of how to determine whether the debtor has entrusted performance to a third person. In terms of sales contracts, the prevailing view holds that the manufacturer is not a person to whom performance has been entrusted by the debtor, and therefore is not an auxiliary person in the sense of § 278 BGB (see BGH VersR 1956, 259, 260; BGH VersR 1962, 480, 481; BGH NJW 1968, 2238, 2239; but see also Grundmann, in Münchener Kommentar (2012), § 278 no. 31 with further references).

433

B. Gsell Comparison and Evaluation The three sets of rules follow the same widely acknowledged idea of the debtor maintaining responsibility for performance if he avails himself of the benefits of the division of labour. Whereas the PECL cover only contractual obligations, the DCFR and German law extend to non-contractual obligations where duties emerge from a pre-existing legal relationship. In contrast, with regard to torts, both the DCFR and German law contain separate provisions. However, while the underlying concept of strict liability for damages caused by employees and other auxiliary persons laid down in Article VI.-3:201(1) DCFR is essentially the same as that of Article III.-2:106 DCFR, § 831 BGB allows the principal to exculpate himself from liability for auxiliary persons, thus shifting part of the risk to the person suffering the damage. This does not seem very convincing. Not surprisingly, German tort law’s generosity towards the principal has provoked German courts to ‘escape’ more and more from tort law by gradually developing a rather broad concept of contractual and quasi-contractual relationships. Hence, the DCFR seems more in line with today’s ubiquitous practice of the division of labour.

Principles of European Contract Law Article 8:108: Excuse Due to an Impediment (1) A party’s non-performance is excused if it proves that it is due to an impediment beyond its control and that it could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences. (2) Where the impediment is only temporary the excuse provided by this Article has effect for the period during which the impediment exists. However, if the delay amounts to a fundamental non-performance, the creditor may treat it as such. (3) The non-performing party must ensure that notice of the impediment and of its effect on its ability to perform is received by the other party within a reasonable time after the non-performing party knew or ought to have known of these circumstances. The other party is entitled to damages for any loss resulting from the non-receipt of such notice. 1. General. a) Article 8:108 PECL deals with excused non-performance where certain obstacles prevent a party from (properly) performing an obligation. The effects of the excuse are set out in Article 8:101(2) PECL: the aggrieved party, while barred from claiming performance or damages, may resort to remaining remedies, such as the right to withhold performance (Article 9:201 PECL), the right to price reduction (Article 9:401 PECL), and the right to terminate the contract (Article 9:301 PECL) (see comment on Article 8:101 PECL, 4., above).

434

Chapter 8: Non-performance and Remedies in General b) Whereas Article 8:108 PECL covers all contractual obligations, including obligations to pay money (see Lando/Beale (2000), p. 379 Comment A), its scope is still limited in several ways. First, and in contrast to Article 79 CISG (see Schlechtriem/ Schwenzer (2010), Article 79 CISG no. 4), the provision concerns only downright impossibility of performance–that is, the debtor’s being prevented from (properly) performing–whereas obstacles that make performance excessively onerous are covered by a separate provision, Article 6:111 PECL (see Lando/Beale (2000), p. 379 Comment A). A similar distinction can be found in the UNIDROIT Principles, where, on the one hand, Article 7.1.7 PICC deals with force majeure and, on the other hand, Articles 6.2.1–6.2.3 PICC deal with hardship. However, according to Comment 6 on Article 6.2.1 PICC, both categories overlap. Second, and again in contrast to Article 79 CISG (see Schlechtriem/Schwenzer (2010), Article 79 CISG no. 12), Article 8:108 PECL does not extend to impediments that already existed when the contract was concluded. The PECL treat such initial impediments under the heading ‘mistake’ (see Article 4:103 PECL; see also Lando/Beale (2000), p. 379 Comment B). Third, even though Article 8:108 PECL is not confined to particular reasons for an impossibility of performance but rather encompasses all types of events–such as natural occurrences, impediments caused by an exercise of the sovereign or governmental power, and acts of third parties (see Lando/Beale (2000), p. 379 Comment B) – the provision does not provide an excuse for all obstacles preventing a party from performance. In fact, roughly speaking, it covers only force majeure. Thus, the provision is not concerned with cases where non-performance is unexcused but all the same the debtor cannot render (proper) performance. Yet this problem of the general limits to specific performance is dealt with in Article 9:102(2)(a) PECL. c) Paragraph 2 of Article 8:108 PECL extends the excuse as set out in paragraph 1 to temporary impediments, whereas Article 8:108(3) PECL requires the non-performing party to timely and properly inform the other party about the impediment and its effects on the non-performing party’s ability to perform. d) Like most of the PECL’s rules, Article 8:108 PECL is not mandatory. Rather, it allows the parties to allocate the risk of supervening impossibility in a different way (see Lando/Beale (2000), p. 379 Comment A). 2. Impediments excusing party. Under Article 8:108 PECL, the non-performing party is excused only by impediments that are traditionally classified as force majeure (see Lando/Beale (2000), p. 379 Comment C). a) First, the obstacle must be beyond the control of the debtor in the sense that it does not result from his sphere of activity. Thus, for example, a breakdown of the debtor’s machines or a strike carried out by his employees are considered internal, even though he can neither foresee nor prevent them (see Lando/Beale (2000), p. 380 Comment C). While the PECL lack an explicit provision corresponding to Article 79(2) CISG, it should be noted that third persons to whom the debtor entrusts performance – for example, subcontractors–nevertheless form part of the debtor’s sphere of control. Only where the impediment is also beyond the control of the third person may it be classified as external. Like Article 79 CISG, the wording of Article 8:108(1) PECL does not specify under which conditions the debtor is responsible for the activities of third

435

B. Gsell persons who have an impact on proper performance but are not involved in the contract’s performance in a strict sense. Comment C on Article 8:108 PECL (Lando/ Beale (2000), p. 380) offers some guidance by providing the following example of an external cause of non-performance: a chinaware manufacturer is forced to interrupt his production due to a shortage of gas caused by an unexpected strike by the national gas company. It is unclear to what extent this example can be generalized to other third persons. The problem is of considerable practical relevance with respect to sales contracts in particular, since the seller is often not the manufacturer. The prevailing view on Article 79 CISG holds that the seller, even though a mere intermediary, in principle bears the procurement risk–including the risk of defectively manufactured goods – and is therefore not considered exempt if his supplier lets him down or if any defects in construction, manufacturing, or instruction become apparent (see BGH CISG-online 396 = BGHZ 141, 129, 134 (Rebwachs), see also Schlechtriem/Schwenzer (2010), Article 79 CISG nos. 26 et seq. with references). b) Second, the debtor must be prevented by an obstacle that he could not have taken into account upon conclusion of the contract. According to Comment C on Article 8:108 PECL (Lando/Beale (2000), p. 380), two situations can be distinguished: the debtor either might have assumed the risk or might be at fault in not having foreseen it at the time of the conclusion of the contract. In determining foreseeability, the perspective of a normal person placed in the same situation is to be considered (see Lando/Beale (2000), p. 381 Comment C). Besides, the test of reasonable foreseeability does not refer to the event as such but extends to the time of its occurrence. Thus, a natural occurrence that regularly happens during a certain period of the year might excuse the debtor if it takes place on an unusual date. With regard to whether the knowledge of third persons may be imputed to the debtor, Article 1:305 PECL applies. c) Finally, the debtor is excused only if he proves that he could have neither avoided nor overcome the impediment or its consequences. It is obvious, though, that it is the level of the debtor’s precautions that often determines whether he will avoid a certain risk. Thus, Comment C on Article 8:108 PECL (Lando/Beale (2000), p. 381) has good reason to underline that the insurmountability requirement must not be understood in an absolute sense and that the debtor therefore is not expected to take precautions that are illegal or out of proportion to the risk. d) Even though an event might be classified as force majeure, the debtor is not excused if he delayed performance and if the event would not have affected him in case of a timely tender of performance (see Lando/Beale (2000), p. 380 Comment C). 3. Effects. a) With regard to the creditor being barred from claiming damages if the non-performance is excused (see Article 8:101(2) PECL and above, 1.a)), Comment D on Article 8:108 PECL (Lando/Beale (2000), p. 381) emphasizes that liquidated damages and penalties are also excluded, unless the parties have agreed otherwise. b) With regard to the creditor’s right to termination, the general rules apply. On the one hand, a total and permanent impossibility of performance usually amounts to

436

Chapter 8: Non-performance and Remedies in General fundamental non-performance (see with respect to Article 25 CISG, Gsell, in Honsell (2010), Article 25 no. 29 with references) whereas, on the other hand, a termination by notice does not make much sense in such a situation, since the contract can no longer be performed. That is why Article 9:303(4) PECL provides for automatic termination of the contract. However, where an impediment affects only part of the debtor’s obligations or affects them only partially, the contract might well be upheld. Therefore Article 9:303(4) PECL does not apply and no automatic termination will take place. Yet if the partial non-performance caused by the impediment is fundamental to the contract as a whole, the creditor may all the same terminate the contract under Article 9:301 PECL by way of unilateral declaration. According to Article 9:302, second sentence PECL, the same holds true in cases of divisible contracts that are to be performed in a series of performances, to each of which is attributed a respective counter-performance. If the partial non-performance does not amount to a fundamental non-performance of the entire contract, the creditor may still claim a price reduction under Article 9:401 PECL or may, in cases of a divisible contract to be performed in segments, partly terminate the contract under Article 9:302, first sentence PECL. Finally, one can ask whether, in cases of a partial delay in performance, the creditor may fix an additional period for performance and terminate the whole contract upon expiry of the Nachfrist under Article 8:106(3) PECL, even though there is no fundamental non-performance of the whole contract. The wording of Article 8:106(3) PECL leaves it unclear as to whether the provision extends to partial delays. With respect to divisible contracts, the rationale of Article 9:302 PECL supports only a partial termination unless there is a fundamental non-performance of the contract as a whole. Therefore, the expiry of an additional period for partial performance should be regarded as allowing a termination only of the relevant part of the contract. However, with regard to indivisible contracts, one might consider Article 8:106(3) PECL applicable to the whole contract. Yet in cases of only minor (partial) delays in performance, the creditor might still be barred from terminating the contract under Article 8:106(3) PECL, since a termination might violate his duty to act in accordance with good faith and fair dealing as set out in Article 1:201 PECL. c) Where there is a temporary impediment, the debtor will be only temporarily excused under Article 8:108(2) PECL. It should go without saying that the period of excused performance will last as long as the obstacle prevents the debtor from performing, even where the circumstances causing the obstacle might not last anymore (see Lando/Beale (2000), p. 382 Comment E). However, the parties usually agree on the contract being performed within a fairly strict time frame. Thus, whereas the length of period within which the creditor will still be interested in performance may vary considerably from contract to contract, virtually every creditor will sooner or later lose interest in receiving performance. One can say that, in a certain way, time is always of the essence of the contract. Article 8:108(2), second sentence PECL takes this into account and allows the aggrieved party to treat a delay as a fundamental nonperformance where the delay itself is fundamental. If, under the given circumstances, it is doubtable whether the delay amounts to a fundamental non-performance, the creditor may fix an additional period for performance under Article 8:106(3) PECL and

437

B. Gsell thus open his way to terminating the contract (see Lando/Beale (2000), p. 383 Comment E). 4. Notice. a) When notice is due under Article 8:108(3) PECL, the provision does not make reference to the date on which performance is to be made but requires a notice within a reasonable time after the debtor has gotten knowledge of the impediment or ought to have known about it. This is sound, since a notice at the earliest possible stage might help the creditor minimize or avoid possible loss resulting from the nonperformance. Furthermore, where, due to the impediment, the creditor is entitled to terminate the contract, the notice will enable him to exercise this right (see Lando/ Beale (2000), p. 383 Comment F). Whether the time within which notice has been received is reasonable depends on the particular circumstances. According to Comment F on Article 8:108 PECL (Lando/Beale (2000), p. 383), where the consequences of the impediment are not known to the debtor in the first place, circumstances may even require a first notice to be served, which is to be immediately followed by a second, more detailed one. Article 8:108(3) PECL calls for the notice to be received by the creditor within a reasonable time. Thus, it is made clear that the risk of loss or delay of the properly dispatched notice lies with the debtor. b) In cases where there is a failure to give notice of the impediment, the aggrieved party is entitled to recover damages. However, under Article 8:108(3) PECL, the creditor may not claim compensation for the whole damage resulting from nonperformance; rather, he may claim it only for the loss suffered as a consequence of the lack of a proper notice.

Draft Common Frame of Reference Article III. – 3:104: Excuse due to an impediment (1) A debtor’s non-performance of an obligation is excused if it is due to an impediment beyond the debtor’s control and if the debtor could not reasonably be expected to have avoided or overcome the impediment or its consequences. (2) Where the obligation arose out of a contract or other juridical act, nonperformance is not excused if the debtor could reasonably be expected to have taken the impediment into account at the time when the obligation was incurred. (3) Where the excusing impediment is only temporary the excuse has effect for the period during which the impediment exists. However, if the delay amounts to a fundamental non-performance, the creditor may treat it as such. (4) Where the excusing impediment is permanent the obligation is extinguished. Any reciprocal obligation is also extinguished. In the case of contractual obligations any restitutionary effects of extinction are regulated by the rules in Chapter 3, Section 5, Sub-section 4 (Restitution) with appropriate adaptations. (5) The debtor must ensure that notice of the impediment and of its effect on the ability to perform reaches the creditor within a reasonable time after the

438

Chapter 8: Non-performance and Remedies in General debtor knew or could reasonably be expected to have known of these circumstances. The creditor is entitled to damages for any loss resulting from the non-receipt of such notice. Article III.-3:104 DCFR is clearly modelled on Article 8:108 PECL. The first two paragraphs of Article III.-3:104 DCFR resemble Article 8:108(1) PECL, with slight differences in wording. These are due to the broader scope of Article III.-3:104 DCFR, which, in contrast to Article 8:108 PECL, is not confined to contracts but extends to non-contractual obligations as well (cf. Article III.-1:101 DCFR). Paragraphs 3 and 5 of Article III.-3:104 DCFR are equivalents of paragraphs 3 and 4 of Article 8:108 PECL, with almost identical wording and no difference in substance. Furthermore, Article III.-3:104(4) DCFR provides for an automatic extinction of the obligation and the respective reciprocal obligation in cases of permanent impediments, and is thus similar to Article 9:303(4) PECL. However, in contrast to the latter provision, Article III.-3:104(4) DCFR does not presuppose a total non-performance. Therefore, its application will not necessarily terminate the entire contract; instead, it may be confined to a part of the contract where the debtor’s obligations are only partly affected by a permanent impediment. Finally, concerning the effects of the excuse, Article III.-3:101(2) DCFR contains the same rule laid down in Article 8:101(2) PECL: the creditor may not claim performance or damages where he stays free to resort to the remaining remedies. Given that the DCFR is well in line with the PECL regarding the prerequisites and effects of the debtor’s excuse for non-performance, it is not surprising that the same uncertainties in the interpretation of the rule arise. Thus, under Article III.-3:104 DCFR, like Article 9:303 PECL, it is unclear under which conditions the debtor is responsible for third persons on whose activities proper performance depends–particularly to what extent he bears the procurement risk and the risk of manufacturing defects.

German Law § 276 BGB: Responsibility of debtor (1) The debtor is responsible for intention and negligence if no stricter or more lenient liability is either determined or to be deduced from the other content of the obligation relationship, in particular from the adoption of a guarantee or a risk of production. The provisions of §§ 827 and 828 apply correspondingly. (2) A person acts negligently if he does not have regard to the care necessary in human affairs. (3) The debtor cannot be released in advance from liability for intention. 1. General. a) Similar to the PECL and the DCFR, German law prohibits a creditor from claiming specific performance or damages where the debtor is prevented from performance by a supervening impediment for which he is not responsible. However, in terms of the measure of responsibility, German law does not follow the force majeure approach. It uses a different principle: the fault principle. According to § 276 BGB, the

439

B. Gsell debtor is responsible for intention and negligence unless a stricter or more lenient liability is either determined or to be deduced from the content of the obligation. This might be the case due to a different allocation of risk on which the parties have expressly or tacitly agreed. Where such an exception to the fault principle has been acknowledged, and the debtor is therefore considered to have assumed strict responsibility for non-performance, German law might produce the same basic results as the force majeure approach of the PECL and the DCFR (see with respect to the procurement risk 2. below). But even within the scope of the fault principle laid down in § 276 BGB, results will not necessarily vary from the outcome of a force majeure test. This is mostly due to a rather objective understanding of negligence in German law. Thus, § 276(2) BGB makes reference to a standard of care called for by the legal transaction while essentially ignoring the debtor’s individual weakness (see Grundmann, in Münchener Kommentar (2012), § 276 nos 55 et seq. with references). Furthermore, the criteria for determining whether the debtor has met the required standard of care are similar to the prerequisites of traditional force majeure. Accordingly, negligence presupposes the foreseeability of the impediment (see Grundmann, in Münchener Kommentar (2012), § 276 nos 68 et seq. with references). And whether the debtor is considered negligent in order to avoid or overcome a certain risk of non-performance depends on whether he can control the risk and, if so, which precautions appear adequate under the given circumstances (see Grundmann, in Münchener Kommentar (2012), § 276 nos. 77 et seq. with references). Therefore, just as under the PECL and the DCFR (see comment on Article 8:108 PECL, 2.c), above), the debtor is required to take precautions proportionate to the risk. However, unlike the PECL and the DCFR (see Comment on Article 8:108 PECL, 2.a)), § 276 BGB does not hold the debtor responsible for an unforeseeable and unpreventable breakdown of his machines unless he has assumed such a risk by way of agreement between the parties to the contract. b) As shown above, Article 8:108 PECL and Article III.-3:104 DCFR do not–or at least do so only partly–state the effects of excused non-performance. This is even more true with respect to § 276 BGB, whose scope, unlike Article 8:108 PECL and Article III.-3:104 DCFR, is fairly broad and not limited to impossibility of performance or force majeure. In fact, § 276 BGB is, in a rather general way, concerned with establishing the fault principle as a measure of responsibility and the prerequisites of fault. The question whether, in cases of an impediment to performance, a remedy for nonperformance presupposes the debtor’s responsibility is dealt with in the context of the rules governing impossibility and the relevant remedies. According to § 275(1) BGB, the debtor is exempted from specific performance whenever there is any impossibility of performance. While such an exemption, similar to Article 9:102(2)a) PECL and Article III.-3:302(3)a) DCFR, takes place regardless of whether the impediment is the fault of the debtor (see Ernst, in Münchener Kommentar (2012), § 275 no. 8), the provisions governing the right to damages – that is, §§ 280(1) and (3), 283, and 311a(2) BGB–all require the debtor’s responsibility (Zuvertretenhaben) and thus refer to § 276 BGB. Furthermore, the German Civil Code is in line with the PECL insofar as termination of the contract does not depend on the debtor’s responsibility (see § 326(1) and (5) in conjunction with § 323 BGB).

440

Chapter 8: Non-performance and Remedies in General 2. Responsibility for third persons. a) With regard to auxiliary persons, such as employees or other persons, § 278 BGB holds the debtor responsible for their activities just as if he had acted himself (for further details, see comment on Article 8:107 PECL, German law, above). b) Like the PECL and the DCFR, German law also faces the problem of under which conditions the debtor is responsible for third persons’ activities that are not involved in performance in a strict sense but nevertheless influence proper performance. While it follows from the fault principle laid down in § 276 BGB that the debtor is not responsible for these persons’ impact on performance unless he himself is at fault, exceptions to this rule are recognized. Thus, with regard to the sale of generic goods in particular, the prevailing view holds that a different allocation of risks takes place since the seller, by way of selling generic goods, assumes the procurement risk in principle (see Grundmann, in Münchener Kommentar (2012), § 276 nos. 177 et seq. with references, see also in detail Gsell (1998), passim with references). Thus, like the PECL and the DCFR–if one interprets these provisions in accordance with Article 79 CISG (see comment on Article 8:108 PECL, 2.a), above) – the seller’s non-performance is not excused when his own supplier has let him down. However, whereas the prevailing view on Article 79 CISG denies an excuse where a seller who is not the manufacturer has sold goods affected by a manufacturing defect (see comment on Article 8:108 PECL, 2.a), above), the situation under German law is different. Where the seller acts as a mere intermediary and is not supposed to check the quality of the goods, he is not considered liable for manufacturing defects (see Canaris (2005a), pp. 179, 230 et seq. with references; see also above comment on Article 8:107 PECL, GERMAN LAW, 3.). 3. Delayed performance. If an impediment affects the debtor’s ability to perform only due to his delay in performance, German law, like the PECL and the DCFR, bars the debtor from invoking force majeure (cf. § 287 BGB). 4. Effects. a) In cases of impossibility of performance, German law, like Article 9:303(4) PECL and Article III.-3:104(4) DCFR, provides for an automatic termination of the obligation reciprocal to the one affected by the impediment (§ 326(1), first sentence BGB). Even though this means that the creditor does not need to give notice of termination to the debtor, he still might do so and thus terminate the contract by unilateral declaration (see § 326(5) BGB in conjunction with § 323(1) BGB). Regarding the problem of an impediment causing an only partial impossibility of performance (and therefore resulting in an only partial exemption of the debtor under § 275(1) BGB), a solution is provided by § 326(1), first sentence BGB in conjunction with § 441(3) BGB: the reciprocal obligation will be reduced proportionately by virtue of law. However, in this situation the debtor might still be entitled to terminate the entire contract by unilateral declaration if a partial performance is of no interest to him (see § 326(5) BGB in conjunction with § 323(5), first sentence BGB, the loss-of-interest requirement coming close to the fundamental non-performance test, as called for in Article 9:301 and Article 9:302, second sentence PECL as well as in Article III.-3:502 and Article III.-3:506(2)(b) DCFR). Since this loss-of-interest requirement is laid down in the very provision that governs the Nachfrist regime–that is, § 323 BGB – it is

441

B. Gsell unequivocally clear in German law that the creditor may not bypass it and open his way to a termination of the contract by simply fixing an additional period for partial performance. b) Since § 276 BGB provides for a general measure of the debtor’s responsibility (see 1., above), the provision also applies to the debtor’s responsibility in cases of temporary impediments. However, just as in the case of permanent impediments, it is not § 276 BGB but the provisions governing temporary impediments and the relevant remedies that answer the question of whether a remedy in cases of temporary impediments presupposes responsibility under § 276 BGB. The legal situation regarding temporary impediments is less clear than that concerning permanent impediments. Even though the German legislature, in 2002, refrained from explicitly extending § 275(1) BGB to temporary impediments (see Bundestag document No. 14/6857, pp. 11 et seq.; Bundestag document No. 14/7052, pp. 271 et seq.; for more details see Ernst, in Münchener Kommentar (2012), § 275 no. 132 with references), the prevailing view supports a temporary exemption of the debtor under this provision. Thus, comparably to Article 9:102(2)(a) PECL and Article III.-3:302(3)(a) DCFR – both of which extend to temporary impossibility (see Lando/Beale (2000), p. 396 Comment E and von Bar/Clive (2009), Comment E on Article III.-3:302(3) DCFR, p. 830) – the creditor is barred from claiming specific performance, regardless of whether the debtor is responsible for the temporary impediment. Furthermore, German law is in line with the PECL and the DCFR insofar as the creditor’s right to terminate due to a temporary impediment does not presuppose either force majeure or the debtor’s not being at fault. However, it is uncertain, under German law, which provisions apply with respect to the creditor’s right to termination in this situation. The prevailing view supports a respective application of § 323 BGB that governs delay in performance (see Ernst, in Münchener Kommentar (2012), § 275 nos. 144 et seq. with references). Thus, § 323(1) BGB, like Article 8:106(3) PECL and Article III.-3:103(3) in conjunction with Article III.-3:503 DCFR, allows the creditor to open his way towards termination of the contract by granting an additional period for performance. Furthermore, according to § 323(2) BGB, he may dispense with the Nachfrist requirement and terminate the contract immediately where time is of the contract’s essence or where other specific circumstances call for an immediate termination. Again, this outcome comes close to the results achieved under the PECL and the DCFR (see Article 8:108(2), second sentence PECL and Article III.-3:104(3), second sentence DCFR). On the other hand, the PECL, the DCFR, and German law also deal similarly with temporary impediments insofar as the creditor may not claim damages if the debtor is excused under Article 8:108 PECL or Article III.-3:104 DCFR or, accordingly, not responsible for nonperformance under § 276 BGB. In fact, while there is controversy over the exact legal basis of a damage claim in cases of temporary impossibility, under German law, § 276 BGB leaves no doubt about liability in damages calling for responsibility (see Ernst, in Münchener Kommentar (2012), § 275 nos. 135 et seq., 146 with references). 5. Notice. The German Civil Code lacks an explicit provision requiring the debtor to give timely notice of an impediment. Nevertheless, under German law the debtor might be under a duty to inform the creditor of the impediment and its impact on his ability

442

Chapter 8: Non-performance and Remedies in General to (properly) perform the contract if, under the circumstances, such a notice might help to prevent the creditor from suffering loss. In fact, a general concept of ancillary duties not unlike the general duties laid down in Article 1:201 and 1:202 PECL, as well as in Article III.-1:103 and III.-1:104 DCFR, was codified in 2002 (see § 241(2) BGB and comment on Article 8:101 PECL, GERMAN LAW, 4.d), above) during the reform of Germany’s Law of Obligations. Accordingly, each party must be considerate of the other’s rights and interests (for more details see Gsell, in Soergel (2005), § 326 nos 47 et seq.). However, in contrast to Article 8:108(3) PECL and Article III.-3:104(5) DCFR, a violation of an ancillary duty under § 241(2) BGB in conjunction with § 280(1) BGB entails liability in damages only if the party is at fault; as a result, a debtor who is to give notice of the impediment does not bear the risk of the notice failing to reach the creditor due to force majeure.

Comparison and Evaluation The PECL and the DCFR stand in contrast to German law insofar as § 276 BGB, even though dealing with the prerequisites of the debtor’s responsibility, does not name the remedies that presuppose such a responsibility. However, substantively speaking, the PECL and the DCFR are less divergent from German law than one might assume at first glance. All three sets of rules are in accordance with regard to the creditor’s being barred from specific performance irrespective of the impossibility being caused by force majeure or by the debtor. Furthermore, under all three regimes, the debtor’s being excused does not curtail the creditor’s right to terminate the contract. And on the flip side, the creditor is barred from claiming damages only where the debtor is excused or – under German law–not responsible. However, while the PECL and the DCFR excuse the debtor’s non-performance only in cases of force majeure, German law follows the fault approach. Nevertheless, the results are often the same. Thus, under German law the debtor will be considered at fault if he does not take adequate precautions in order to avoid or overcome a foreseeable risk of non-performance. Furthermore, considerable exceptions to the fault principle have been acknowledged. Thus, particularly with regard to the sale of generic goods, it is widely accepted that the seller bears the procurement risk. Sometimes, however, the fault principle produces an outcome different from the one that might be achieved under the PECL or the DCFR. In Germany, the prevailing view holds that the seller who is not the manufacturer does not bear the risk of defective manufacturing.

Principles of European Contract Law Article 8:109: Clause Excluding or Restricting Remedies Remedies for non-performance may be excluded or restricted unless it would be contrary to good faith and fair dealing to invoke the exclusion or restriction. 1. General. As a principle, the PECL respect the parties’ freedom to determine the content of the contract and the consequences of a breach of contract. Therefore, clauses

443

B. Gsell excluding or restricting a party’s liability for non-performance are given basically full effect under the PECL. However, as Comment A on Article 8:109 PECL stresses (Lando/Beale (2000), p. 385), there must be certain limits to the freedom of contracting out of non-performance, since an exclusion clause could, in extreme cases, allow a debtor to undertake to perform while simultaneously excluding all sanctions for failure to perform. Thus, Article 8:109 PECL provides for the inapplicability of limitation and exclusion clauses when, under the given circumstances, it is contrary to good faith and fair dealing to rely on such clauses. It should go without saying that there is no way of contracting out of Article 8:109 PECL (see Lando/Beale (2000), p. 388 Comment D): invoking a clause that discards the PECL’s control of unfair contract terms is in itself contrary to good faith and fair dealing. According to Article 1:201(2) PECL, the general duty of good faith and fair dealing as laid down in Article 1:201(1) PECL may not be excluded or limited by the parties. 2. Scope of application. a) Most exclusion or limitation clauses deal with the restriction of liability for damages. The scope of Article 8:109 PECL goes beyond this by encompassing all types of clauses curtailing the aggrieved party’s remedies in case of non-performance. Moreover, it makes no difference between clauses limiting liability on the one hand and clauses excluding a party’s right to resort to a remedy for non-performance on the other hand. b) However, whereas Article 9:509(2) PECL allows the reduction of liquidated damages where they are grossly excessive compared with the actual loss suffered by the aggrieved party, Article 8:109 PECL does not deal with clauses increasing liability for non-performance and thus operates only in favour of the aggrieved party. c) In contrast to Article 4:110 PECL, which is concerned with unfair contract clauses that have not been individually negotiated, Article 8:109 PECL is not confined to such standard terms; it extends to individually negotiated clauses. Yet at the same time, the scope of Article 8:109 PECL is narrower than that of Article 4:110 PECL, since it covers only those clauses that limit or exclude sanctions for non-performance, whereas Article 4:110 PECL deals with unfair standard terms in a rather general way. Regarding the exclusion or reduction of remedies for mistakes and incorrect information, there is also a special provision, Article 4:118 PECL, that, like Article 8:109 PECL, encompasses individually negotiated terms. 3. Good faith and fair dealing standard. a) Not surprisingly, the good faith and fair dealing test imposed by Article 8:109 PECL is considered less severe than that of Article 4:110 PECL. A limitation of liability clause that would be invalid under Article 4:110 PECL might still be seen as fair and in line with good faith if individually negotiated (see Lando/Beale (2000), p. 387 Comment C Illustration 5). b) comments C and D on Article 8:109 PECL (Lando/Beale (2000), pp. 386 et seq.) provide further clarification on the circumstances that lead to a violation of the good faith and fair dealing standard as laid down in Article 8:109 PECL: as a rule, an intentional or at least knowingly committed non-performance is considered contrary to good faith and fair dealing, even though the exemption clause has been individually negotiated. Comment C on Article 8:109 PECL (Lando/Beale (2000), p. 386) gives the illustration of a security firm that has agreed to send its men once an hour to check on

444

Chapter 8: Non-performance and Remedies in General a customer’s premises, but then deliberately sends them only every three hours. In this situation, the security firm may not invoke a limitation-of-responsibility clause. Under Article 1:301(3) PECL, an intentional act includes an act performed recklessly. Thus, according to Comment C on Article 8:109 PECL (Lando/Beale (2000), p. 387), an act done recklessly is to be interpreted as an intentional act under Article 8:109 PECL as well. c) However, where the parties wished that the party who benefits from the limitation of liability clause should have the choice to either breach the contract in a certain way and rely on its limited liability or to stick to proper performance, the intention criterion does not work (see Lando/Beale (2000), p. 387 Comment C Illustration 4). Thus, depending on what the parties had in mind when agreeing to limiting damages for a certain breach of contract, even an intentional non-performance might be in line with good faith and fair dealing. d) Even when there has been negotiation on a clause, causing it to fall outside Article 4:110 PECL, one party might still lack sufficient bargaining power and thus fail to achieve a fair contract. Under such circumstances, even the invoking of an individually negotiated clause might be considered unfair under Article 8:109 PECL (see Lando/Beale (2000), pp. 387 et seq. Comment D Illustration 6). 4. Consequences. Article 8:109 PECL prevents the advantaged party from invoking the unfair contract clause. The question remains, though, whether the clause is to be treated as null, void, or unenforceable (see Lando/Beale (2000), p. 388 Comment D). According to Comment D on Article 8:109 PECL (Lando/Beale (2000), p. 388), the provision does not give the court discretion to reduce an excessive liability limitation clause to an admissible amount.

Draft Common Frame of Reference Article III. – 3:105: Term excluding or restricting remedies (1) A term of a contract or other juridical act which purports to exclude or restrict liability to pay damages for personal injury (including fatal injury) caused intentionally or by gross negligence is void. (2) A term excluding or restricting a remedy for non-performance of an obligation, even if valid and otherwise effective, having regard in particular to the rules on unfair contract terms in Book II, Chapter 9, Section 4, may nevertheless not be invoked if it would be contrary to good faith and fair dealing to do so. 1. General. a) Article III.-3:105(2) DCFR is a close copy of Article 8:109 PECL. Thus, the comments on both provisions are more or less identical, and even the same illustrations are used (see Von Bar/Clive (2009), Comments on Article III.-3:105(2) DCFR, pp. 793 et seq.; Lando/Beale (2000), pp. 385 et seq.). Article III.-3:105(2) DCFR is complemented by separate provisions granting a more far-reaching and – in terms of the good faith and fair dealing standard – a more severe protection against unfair

445

B. Gsell contract terms. These provisions are found in Book II, Chapter 9, Section 4, which is concerned mainly with standard terms. Thus, according to Article II.-9:410 (1)(b) DCFR, a term supplied by the business in a consumer contract is presumed to be unfair if it inappropriately excludes or limits the consumer’s remedies for nonperformance. b) In contrast to the PECL, the DCFR provides for a further mandatory protection of the consumer-buyer. Thus, under Article IV.A.-4:101 DCFR, which deals with consumer contracts for sale, the consumer’s remedies for non-conformity may not be waived or restricted in advance – not even by way of individually negotiated terms. c) While Article 8:109 PECL leaves it open whether a contract clause, which may not be relied on under this provision, is to be treated as null, void, or unenforceable (see comment on Article 8:109 PECL, 4., above), Article III.-3:105(2) DCFR does not really address the validity of contract clauses. It operates only by preventing the party from invoking a valid and otherwise effective clause where, under the given circumstances, this would be against good faith and fair dealing. 2. Excluding or restricting liability for damages for personal injury. a) There is no direct equivalent to Article III.-3:105(1) DCFR in the PECL. According to this provision, a party may not validly exclude or restrict liability for intentionally or grossly negligently caused personal injury. The underlying idea is that, on the one hand, the potential victim of personal injury would hardly ever wittingly agree to restrict available remedies, let alone exclude them altogether, while, on the other hand, there is no legitimate interest in such a limitation-of-responsibility clause (see Comment A on Article III.-3:105 DCFR, p. 793). The protection provided by Article III.-3:105(1) DCFR is complemented by Article II.-9:410(1)(a) DCFR, according to which a term supplied by the business in a consumer contract is presumed to be unfair if it limits the business’s liability for death or personal injury caused to a consumer through an act or omission of that business. Article II.-9:410(1)(a) DCFR, in contrast to Article III.-3:105(1) DCFR, is not confined to personal injury caused intentionally or by gross negligence. b) Article III.-3:105(1) DCFR does not in itself stipulate the prerequisites for liability but is concerned only with limitation and exclusion clauses. In contrast to Article 1:301(3) PECL, the DCFR does not contain a general definition of ‘intentional act.’ However, intention as a prerequisite of accountability for damages is specified in Article VI.-3:101 DCFR. Yet unlike Article 1:301(3) PECL, the provision does not deal with reckless acts. With regard to gross negligence, the DCFR does provide a general definition, according to which there is ‘gross negligence’ if a person is guilty of a profound failure to take such care as is self-evidently required under the circumstances (see Annex to the DCFR).

German Law § 138 BGB: Immoral legal transaction; extortion (1) A legal transaction which violates good morals is void. (2) […]

446

Chapter 8: Non-performance and Remedies in General § 242 BGB: Performance in accordance with good faith A creditor is obliged to effect performance in the manner required by good faith, having regard to custom (Verkehrssitte). § 276 BGB: Responsibility of debtor (1)–(2) […] (3) The debtor cannot be released in advance from liability for intention. 1. General. a) In order to paint a realistic picture of the limits to the freedom of contract under German law, one must point out the key role of standard terms: in Germany, restrictions on the use of contract clauses that were intended for several uses and had not been individually negotiated by the parties were originally developed by the courts, which took recourse to the aforementioned general provisions of § 138 BGB on immoral legal transactions (see RGZ 20, 115; RGZ 62, 264) and § 242 BGB on performance in accordance with good faith (see BGHZ 20, 164, 167 et seq. = NJW 1956, 908; BGHZ 60, 243 with references). In 1976, the German legislature enacted a specific law whose scope was not limited to consumer contracts but extended to contracts between businesses, see Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen – AGB-Gesetz, Federal Law Gazette 1976 I, 3317). In 2002, the provisions of this separate act on the control of standard terms–which served as role model for the European Directive 93/13/EEC on unfair terms in consumer contracts (see Official Journal L 095, 21/04/1993 pp. 29 et seq.) – were, without many modifications, integrated into the German Civil Code (see now §§ 305 et seq. BGB). Even though one can conclude that control of standard terms is less severe for B2B contracts than for consumer contracts, it nevertheless often happens that a standard term contained in a B2B contract is considered unfair in the same way as it would be in a B2C contract. This is mostly due to the fact that in German law one of the key criteria for determining whether a contract clause passes the control consists of assessing the extent to which the parties deviate from otherwise effective legal default rules, see § 307(2) no. 1 BGB. Wherever the default rules are the same for businesses and consumers, the same basic measure will be used. Thus, according to § 309 no. 7(b) BGB, liability towards consumers for gross negligence may not be excluded by way of standard terms. With regard to businesses, the courts have achieved similar results by resorting to the aforementioned general measure of control as laid down in § 307 BGB (cf. BGH NJW 2007, 3774, 3775; BGH NJW-RR 1989, 953, 955 et seq.; BGH NJW 1988, 1785, 1786; see for more details Wurmnest, in Münchener Kommentar (2012), § 309 no. 7 BGB no. 36). b) In principle, individually negotiated terms, particularly liability limitation and exclusion clauses, are considered valid and effective under German law. However, with regard to consumer sales contracts, German law mirrors Directive 1999/44/EC and, therefore, like the DCFR, provides for a partly mandatory protection of the consumer. Thus, according to § 475(1) and (3) BGB, a restriction or limitation of the consumer’s remedies in cases of defective performance cannot be validly agreed upon

447

B. Gsell in advance. However, according to § 475(3) BGB, the mandatory nature of the consumer’s remedies does not extend to the recovery of damages, an exception due to the fact that damages are beyond the scope of Directive 1999/44/EC. c) Apart from such specific consumer law, § 276(3) BGB prevents the parties from excluding or limiting in advance the debtor’s liability for intentional acts. Article 8:109 PECL and Article III.-3:105(2) DCFR, in principle, consider an intentional breach contrary to good faith and fair dealing (see comment on Article 8:109 PECL, 3.b) and comment on Article III.-3:105 DCFR 1.a), both above). § 276(3) BGB operates in largely the same way. However, § 276(3) BGB is inapplicable with regard to intentional acts not of the debtor himself but of auxiliary persons to whom the debtor has entrusted performance (see § 278, second sentence BGB). Still, in standard terms, liability towards a consumer for an intentional or grossly negligent act of an auxiliary person may not be limited or excluded (see § 309 no. 7(b) BGB). It is unclear whether the same holds true in contracts between businesses. The German Federal Court of Justice tends to ban the exclusion of vicarious liability for intentional acts and gross negligence in business contracts only where the respective clauses extend to fundamental breaches of contract (see on the one hand BGH NJW 1985, 2258, 2261; BGH NJW 1984, 1350, 1351 and on the other BGH NJW 1988, 1785, 1788, for details see Wurmnest, in Münchener Kommentar (2012), § 309 no. 7 BGB no. 36 with references). d) Finally, German law contains two rather general provisions empowering the courts to refuse the enforcement of contract terms that excessively exclude or restrict a party’s liability for non-performance, even though such terms might have been individually negotiated: § 138 BGB on immoral legal transactions and § 242 BGB on performance in accordance with good faith. However, since German law gives, in principle, full respect to individually negotiated limitation-of-responsibility clauses, these two provisions may operate only in exceptional circumstances. This is so because, on the one hand, the most important form of excessive limitation of liability is already dealt with in § 276(3) BGB while, on the other, there is a rather far-reaching control of standard terms that covers not only consumer contracts but also contracts between businesses (see a), above). In summary, one must conclude that not much room remains for curtailing limitation of liability clauses by way of §§ 138 and 242 BGB. 2. Excluding or restricting liability for damages for personal injury. German law lacks a provision like Article III.-3:105(1) DCFR banning the limitation or exclusion of liability for personal injury, even with respect to clauses that have been individually negotiated. However, with respect to intentional acts, § 276(3) BGB applies. Regarding standard terms, § 309 no. 7(a) BGB is similar to Article II.-9:410(1)a) DCFR in its protection of the consumer, going beyond Article III.-3:105(1) DCFR by not confining the scope to personal injury caused by gross negligence or intentional acts. Still, according to the wording of § 309 no. 7(a) BGB, the parties are precluded from validly agreeing on a restriction or exclusion of liability only for personal injury based on fault. Yet according to no. 1(a) of the Annex of Directive 93/13/EEC on unfair terms in consumer contracts (cf. Official Journal L 095, 21/04/1993 pp. 29 et seq.) terms excluding or limiting legal liability for personal injury may be regarded as unfair, irrespective of whether liability is fault based. Given the fact that Germany is bound by

448

Chapter 8: Non-performance and Remedies in General Directive 93/13/EEC, the prevailing academic view holds that the rule laid down in § 309 no. 7a) BGB should be extended by way of application of § 307 BGB to clauses restricting or limiting no-fault liability for personal injury (cf. Wurmnest, in Münchener Kommentar (2012), § 309 no. 7 BGB no. 19 with references).

Comparison and Evaluation Generally speaking, all three legal regimes respect the parties’ freedom to restrict or exclude liability for non-performance. In addition, all three are convergent in that they preclude the parties from excessively using this freedom. Furthermore, the PECL, the DCFR, and German law similarly favour a stricter control of standard terms than of individually negotiated clauses. However, the latter may still be considered unfair under all three regimes. Thus, as a rule, liability for intentional acts may not validly be restricted, let alone excluded – not even by way of individually negotiated contract clauses. With respect to liability for damages for personal injury, the DCFR appears to be a little stricter than the PECL and German law in that, even in individually negotiated terms, it prevents the parties from excluding or restricting liability for damages for personal injury caused by gross negligence. Given the high value of a person’s physical integrity, as well as the practical difficulties of proving an intentional act, the DCFR’s severity seems sound.

449

CHAPTER 9

Particular Remedies for Non-performance T.W. Dornis

SECTION 1: RIGHT TO PERFORMANCE Principles of European Contract Law Article 9:101: Monetary Obligations (1) The creditor is entitled to recover money which is due. (2) Where the creditor has not yet performed its obligation and it is clear that the debtor will be unwilling to receive performance, the creditor may nonetheless proceed with its performance and may recover any sum due under the contract unless: (a) it could have made a reasonable substitute transaction without significant effort or expense; or (b) performance would be unreasonable in the circumstances. 1. General. The provision contains the fundamental principle of contract law (pacta sunt servanda). The creditor must offer performance himself before he can demand to receive the debtor’s counter-performance in exchange. The provision is part of the substantive law regime; procedural enforcement mechanisms are an issue of national law. According to the comments, a ‘monetary obligation’ under Article 9:101 is any obligation to make a payment of money. It comprises primary and secondary obligations, most notably obligations for payment of interest or damages. Every monetary obligation must be due before it can be recovered; in common law terminology, the creditor must have ‘earned’ the obligation by his own performance (Lando/Beale (2000), p. 391).

451

T.W. Dornis 2. Exceptions. Paragraph (2) identifies two exceptional constellations where the principle of pacta sunt servanda does not apply. These exceptions are not universal among contract law regimes around the world; indeed, the rule is unknown to German law. Both are founded on the argument that performance should not be forced on a debtor if he no longer wants it. Under sub-paragraph (a), there is no performance and recovery if the creditor can make a cover transaction on reasonable terms and if this transaction does not cause substantial effort or expense. As the PECL commentary explains, there may also be a commercial usage requiring that a cover transaction be concluded. Sub-paragraph (b) is founded on an arguably vague concept: unreasonableness of performance is what determines whether an existing contract should be neglected. The PECL commentary uses the debtor’s refusal of acceptance prior to the creditor’s commencement of performance as an example. 3. Legal consequences. Under the exceptional constellations of paragraph (2), a creditor may no longer demand the price for his performance. There is no enforcement against the debtor. Nevertheless, the creditor can claim damages for the debtor’s non-performance (see Article 9:103; below comment 1).

Draft Common Frame of Reference Article III. – 3:301: Enforcement of monetary obligations (1) The creditor is entitled to recover money payment of which is due. (2) Where the creditor has not yet performed the reciprocal obligation for which payment will be due and it is clear that the debtor in the monetary obligation will be unwilling to receive performance, the creditor may nonetheless proceed with performance and may recover payment unless: (a) the creditor could have made a reasonable substitute transaction without significant effort or expense; or (b) performance would be unreasonable in the circumstances. 1. General. Apart from minor textual corrections and clarifications, the DCFR provision on monetary obligations and enforcement corresponds to that of the PECL. The DCFR is more consistent, for it generally shifts to the terminology of ‘creditor/debtor’ and more precisely distinguishes ‘obligation’ and ‘contract’ (see also van Kogelenberg (2009), p. 613). Yet, there is a difference in scope that may be determinative in certain constellations. The scope of Book III of the DCFR exceeds the PECL. It concerns not only contractual obligations but also, as the DCFR commentary states, ‘what might be called traditional obligations of a patrimonial law nature in the field of private law, and corresponding rights’ (id., p. 669). These obligations may arise from unilateral promises, pre-contractual negotiations, liability for damages, unjustified enrichment, or the benevolent intervention in another’s affairs (see Article III.-1:101 and 1:102(1) and (5)). Article III.-3: 301 DCFR does not provide otherwise (see Article III.-1:101); it therefore extends to contractual and non-contractual obligations alike.

452

Chapter 9: Particular Remedies for Non-performance 2. ‘Reciprocity.’ The issue of reciprocity may be problematic. As Article III.-1:102(4) DCFR provides, an obligation may be ‘reciprocal’ in relation to another obligation that falls outside a contractual relationship. It may be in a relation of reciprocity if performance of the obligation is due in exchange for performance of the other obligation (paragraph (4)(a)), if it is an obligation to facilitate or accept performance of the other obligation (paragraph (4)(b)), or if it is so clearly connected to the other obligation or its subject matter that performance of the one can reasonably be regarded as dependent on performance of the other (paragraph (4)(c)). In the context of contractual obligations, the concept of reciprocal obligations is important primarily with regard to the remedy of termination for fundamental non-performance (see below Articles III.-3:502 et seq. DCFR). Yet, as the DCFR commentary makes clear, the issue is not one of the contractual agreements (id., p. 673). First, in contracts, not all of the parties’ principally opposing obligations are also ‘reciprocal’. There may be separate packages or parts of the contract that coexist without the corresponding obligations being reciprocally interconnected. Second, obligations arising from different contracts or under a non-contractual relationship may also be ‘reciprocal’ under Article III.-1:102; the most prominent example is two parties’ obligations to reverse unjustified enrichment stemming from a void contract (id., p. 673).

German Law § 241 BGB: Duties arising out of the obligation (1) By virtue of the obligation the obligee is entitled to demand performance from the obligor. Performance may also consist in refraining from doing something. (2) […]

1. General. The binding force of contractual agreements and the corresponding right to performance is stronger under the German BGB than under the PECL and the DCFR. German doctrine follows the general continental European approach of a strict principle of pacta sunt servanda. Even if a substitute transaction may easily be made, the creditor can insist on mutual performance. 2. Mora creditoris: default of acceptance and refusal. Under German law, the contractual relationship and the parties’ obligations usually survive the debtor’s unwillingness, his communication of unwillingness, and his default of acceptance. Generally, the debtor is not obligated to accept performance. Few exceptions exist – among them are sales contracts where the buyer is actually obliged to accept the goods (see § 433(2) BGB). Apart from these exceptions, however, the creditor cannot sue for acceptance. Notwithstanding this non-enforceability, a refusal to accept or a default in cases where the creditor cannot complete performance without the debtor’s cooperation or concurrence (e.g., acceptance of goods) will ensue in a modification of the contractual relationship – inter alia, the creditor will be isolated from liability for negligence and the risk of loss will shift to the debtor (see §§ 293 et seq. BGB; see below

453

T.W. Dornis 3.). This is the situation of mora creditoris (Gläubiger-/Annahmeverzug): if the time of performance has arrived and the debtor is able to perform (see §§ 271, 297, 299 BGB), he may tender performance to the other side. In principle, actual tender is required, but a merely verbal offer to perform may suffice if the creditor has already refused acceptance in advance; if he has announced that he will not perform in exchange; or if the creditor’s cooperation, which is required for the debtor’s performance to be efficient, is not concurrently offered (see §§ 294, 295 BGB; see also § 296 for cases where the creditor’s tender is fully dispensable; for anticipatory breach see below §§ 323, 324 BGB comment 1). 3. Legal consequences. Mora creditoris will not discharge the creditor from his own obligation to perform, but he will be isolated from liability for negligence if his performance becomes impossible during the time of the debtor’s mora creditoris (§ 300(1) BGB; for the restitution of benefits and expenditures see §§ 302, 304 BGB). Under a sales contract, the creditor is entitled to abandon possession in real property or in a vessel that has been sold but not accepted. As to movable property, he may proceed in accordance with §§ 372 et seq. BGB (bailment and public auction). Under §§ 300(2), 326(2), and 323(6) BGB, the creditor will be discharged from his own duty to perform in cases where impossibility occurs during the debtor’s mora creditoris. Notwithstanding, the latter still remains obliged to deliver his counter-performance (payment), even without receiving something in return (for a detailed illustration see Medicus/Lorenz (2010), nos. 522 et seq.).

Comparison and Evaluation 1. Common law foundations. German law, like the CISG (Article 62), generally does not restrict the creditor’s (seller’s) right to demand payment (but cf. Article 28 CISG for limitations). Quite differently, both the PECL and the DCFR adopt the common law’s more hesitant approach to specific performance (for the doctrinal common law/civil law dichotomy and the PECL/DCFR reconciliation in general see below Article 9:102 PECL (COMPARISON AND EVALUATION)). Nonetheless, the PECL and the DCFR have laid out limitations on the debtor’s release from performance. This, however, also reflects a common law basis: in English law, for instance, the exchange of performances can be enforced by the creditor if he shows a legitimate interest in doing so (see, e.g., White and Carter (Councils) Ltd. v. McGregor [1962] A.C. 413, 431 (Lord Reid); see also McKendrick, in Chitty (2008), no. 24-010). A comparable option for enforcement under the PECL and the DCFR may be found in the factors of effort and expense in sub-paragraph (a), as well as in the reasonability test of sub-paragraph (b). The creditor will have a legitimate interest in proceeding with performance and recovering counter-performance if a substitute transaction would be unreasonably expensive, burdensome, or otherwise inadequate. 2. Doctrinal divergence. An evident difference between the two regimes–the civil law and the PECL/DCFR common law paradigm – exists where the creditor cannot render his performance without the debtor’s cooperation. The remedy under common law is

454

Chapter 9: Particular Remedies for Non-performance damages. There is no enforcement of primary monetary obligations (see, e.g., McKendrick, in Chitty (2008), no. 24-010). Likewise, the PECL and the DCFR will release the debtor. As the commentaries demonstrate in the case of a contract on the lease of advertising space, the lessee’s refusal to perform, and a subsequent cancellation, the lessor’s performance would be unreasonable, and no further exchange may be advanced. The creditor can no longer demand money owed under the contract; rather, he can only claim damages. In such a case, the German BGB is different: a lack of cooperation and an impossibility to complete the contractual exchange on a voluntary basis will not release the unwilling debtor. The creditor may have the rights to terminate and to demand damages (see the comparison below on Article 9:301 and German law), but he may still choose to continue with the contractual programme of exchanging the parties’ performances.

Principles of European Contract Law Article 9:102: Non-monetary Obligations (1) The aggrieved party is entitled to specific performance of an obligation other than one to pay money, including the remedying of a defective performance. (2) Specific performance cannot, however, be obtained where: (a) performance would be unlawful or impossible; or (b) performance would cause the debtor unreasonable effort or expense; or (c) the performance consists in the provision of services or work of a personal character or depends upon a personal relationship, or (d) the aggrieved party may reasonably obtain performance from another source. (3) The aggrieved party will lose the right to specific performance if it fails to seek it within a reasonable time after it has or ought to have become aware of the non-performance. 1. General. The creditor is generally entitled to specific performance of an obligation other than one to pay money; that is, Article 9:102 PECL covers all obligations not covered by Article 9:101 PECL. The most common examples are obligations to act or not to act, to make a declaration, to deliver goods, and to transfer property. Specific performance under the PECL means the substantive right to demand performance under the terms and conditions of the contract. Yet, it also includes the remedy of enforcing the substantive right by procedural means. 2. Scope of application. According to the PECL commentary, the right to demand performance applies to three situations. The most obvious constellation is a complete default of performance. In addition, performance may be requested in constellations where tender of a non-conforming performance has been made but has been duly rejected. Finally, an aggrieved party may insist on fully conforming performance if the other party’s initial attempts to perform did not conform to the contractual agreement.

455

T.W. Dornis Conformity may then be achieved by, for example, further delivery, replacement, or repair. 3. Exceptions. As the PECL commentary explains, the PECL rules are the result of a compromise between conflicting concepts of ‘specific performance’ under civil law and common law doctrines (Lando/Beale (2000), p. 395). While the general rule in paragraph (1)–that is, that specific performance is part of the legal obligation–corresponds to the civil law understanding, the exceptions in paragraphs (2) and (3) comply with the common law concept of specific performance being a remedy. The doctrinal structure of specific performance under the PECL, however, differs from the common law insofar as it is not within the court’s discretion to balance the parties’ equities. Unless an exceptional situation under paragraphs (2) and (3) exists, the court must grant the remedy. a) Impossibility and illegality. Prima facie, constellations of impossibility and illegality seem to be evident and straightforward situations where specific performance will be excluded. This is further suggested by the commentary’s scant illustration on the issue. Yet, the concept of impossibility is complex, particularly if viewed against the backdrop of most national laws’ detailed and sophisticated frameworks and schemes on variations of impossibility (e.g., moral, normative, economic impossibility; see below § 275 BGB comment 2). Hence, the exception is loaded with potential controversy. As to ‘temporary’ impossibility, the commentary explains that it will prevent specific performance and its enforcement for the time during which the impossibility endures. Here as well, the interpretation may be less than clear, depending on the circumstances, since the concept is already contested in national systems (for German law see, e.g., Ernst, in Münchener Kommentar (2007), § 275 nos 132 et seq.). Finally, as to ‘illegality’ of the performance, one might doubt the validity of the contract before addressing the issue of performance. The PECL commentary is unclear in this regard. At least concerning the outcome, however, it is obvious that performance will be excluded. b) Unreasonable effort or expense. Under the PECL, the question of unreasonable effort or expense concerns only the non-performing party. It does not raise the question of whether the transaction is generally reasonable, nor does it require a comparison or balancing of conflicting interests on both sides. There is no precise guideline for determining the level of unreasonability required to exclude specific performance. The only signpost is the general requirement of good faith and fair dealing under Article 1:201 PECL. The example in the PECL commentary concerns an extreme case and therefore is not very helpful for extracting a general rule: a sold yacht sinks, and raising it would cost forty times its actual value. The question will be much more difficult to answer if costs are less extraordinary. Evidently, therefore, the concept of unreasonable effort or expense is hardly helpful without further specification. Finally, questions of contract frustration due to a change in circumstances will be dealt with not as an issue of ‘unreasonableness’ but rather under Article 6:111 PECL (see above Unberath on Article 6:111 PECL comment 2). In this regard, however, the exact delimitation is also unclear.

456

Chapter 9: Particular Remedies for Non-performance c) Provision of services, work of a personal character, and personal relationship. The prohibition against specific performance for services or work of a personal character reflects the traditional hesitation of common law jurisdictions towards enforcement in natura. Not only, as is often argued, will performance of these obligations severely invade the party’s personal freedom but it may also be highly inefficient in terms of enforcement. Furthermore, the court will not have many options for guaranteeing proper enforcement, nor will it be easy to assess the conformity of the forced services and work. As the PECL commentary explains, services are of a ‘personal character’ only if they require a certain degree of sophistication and individuality (Lando/Beale (2000), p. 397). Most notably, artistic, scientific, and non-delegatable services qualify for the provision. Similarly, the nature of the personal relationship between the parties must be identified. If, for instance, a partnership agreement is to be enforced, it must be determined whether the parties will play an active role within the partnership or not. Enforcement should not be too problematic in the latter case for want of a ‘personal’ relationship. Finally, it is important to remember that the prohibition must not be circumvented by an extensive use of prohibitive orders. As the PECL commentary explains, for example, the rendering of services to a competitor of the party’s former client may not be enjoined by an overly comprehensive non-competition clause in the parties’ agreement. A party cannot be prohibited from working for anybody else, since this would ultimately lead to an indirect enforcement of the party’s obligation under the initial agreement. d) Cover transaction. The provision mirrors Article 9:101(2)(a) PECL by not allowing for specific performance if a cover transaction can be made with reasonable effort. From a practical perspective, termination of the contract and damages will usually be the faster and less costly option compared to specific enforcement. Correspondingly, the aggrieved party is referred to a cover transaction and the liquidation of damages in cases where the cover transaction will make up for the contractual equity. With regard to its practical application, however, the rule is significantly limited: if the non-performing party is not in a position to pay damages for the difference, a cover transaction may not be deemed ‘reasonable.’ It is again the vagueness of the reasonability concept that may create problems in practice. In addition, the provision has been criticized for unduly intermingling civil law and common law concepts of performance, thereby inadequately allowing for a premature release of the debtor from his obligation to perform in natura. As has been contended, it may be difficult to determine the reasonability of alternative performance in practice. Thus, in order to avoid lengthy proceedings, creditors may elect to sue for damages rather than to enforce performance (see, e.g., van Kogelenberg (2009), pp. 610–611). The problem, however, is not as severe as it seems. Of course, each additional option for escape from performance will create a corresponding risk for the creditor during litigation of the case. Yet, this effect is not unintended: after all, creating an incentive for the parties to evaluate their prospects of successful litigation prior to the lawsuit enhances efficiency. Open-and-shut constellations will rarely need litigation. The parties will tend to settle beforehand. Otherwise, litigation will be of minimal risk (e.g., if unique goods have been sold). Less evident constellations will have to be provided for in the parties’ agreement, generally by an adaption of the price (i.e., if it is evident that a debtor may

457

T.W. Dornis more easily delay or evade specific performance, the creditor may factor in the additional costs). And finally, if the contract does not provide for a solution, the creditor’s conundrum in cases where the outcome is unpredictable is relieved by the fact that the burden of proof has shifted. As the PECL commentary suggests, the creditor’s choice of performance should create a rebuttable presumption that an alternative transaction would not be reasonable. It is then up to the non-performing party to prove that a reasonable cover transaction could have been made (Lando/Beale (2000), p. 398). It does not suffice, however, to have the non-performing party prove options for an alternative transaction only. The party must also establish that the alternative is reasonable in terms of cost and effort. Transferring the rules developed in English case law on the issue of specific performance is not adequate. In a sale of goods case (as for the equitable remedy of specific performance in general), English courts have much wider discretion in ordering or rejecting specific performance (see, e.g., Treitel (1976), pp. 17 et seq.; Beale, in Chitty et al. (2008), nos. 43–470 et seq., 43–473; see also § 52(1) Sale of Goods Act (where the court may direct performance ‘if it thinks fit’)). e) Reasonable time for request. Paragraph (3) requires the request for specific performance to be made within a reasonable time. While the provision does not preclude the aggrieved party’s choice of an alternative remedy, it protects the nonperforming party from detriments that may result from a delayed request. In essence, the rule is a tribute to equity doctrine: if the claimant hesitates without due cause, he will forfeit the remedy. The length of a ‘reasonable’ time period may vary according to the circumstances of the specific case. Again, the PECL commentary explains that the non-performing party should have to prove unreasonable delay (for a corresponding rule on termination see Article 9:303(2) PECL, below comment 2). Draft Common Frame of Reference Article III. – 3:302: Enforcement of non-monetary obligations (1) The creditor is entitled to enforce specific performance of an obligation other than one to pay money. (2) Specific performance includes the remedying free of charge of a performance which is not in conformity with the terms regulating the obligation. (3) Specific performance cannot, however, be enforced where: (a) performance would be unlawful or impossible; (b) performance would be unreasonably burdensome or expensive; or (c) performance would be of such a personal character that it would be unreasonable to enforce it. (4) The creditor loses the right to enforce specific performance if performance is not requested within a reasonable time after the creditor has become, or could reasonably be expected to have become, aware of the non-performance. (5) The creditor cannot recover damages for loss or a stipulated payment for non-performance to the extent that the creditor has increased the loss or the amount of the payment by insisting unreasonably on specific performance in

458

Chapter 9: Particular Remedies for Non-performance circumstances where the creditor could have made a reasonable substitute transaction without significant effort or expense. 1. General. With regard to specific performance of non-monetary obligations, the DCFR is textually more consistent than the PECL. It is also broader in scope, covering both contractual and non-contractual obligations (see Article III.-1:101 and 1:102 DCFR). Beyond terminology and scope, however, the drafters have not substantially changed the provision. 2. Modifications and details. a) Non-conformity. Different from the unspecific language of Article 9:102 PECL, paragraph (2) explicitly clarifies that cases of nonconformity also fall within the category of constellations where specific performance is possible. Under the PECL, this interpretation has only been illustrated in the commentary (Lando/Beale (2000), p. 395). b) Cover transaction. The DCFR lacks a provision comparable to a Article 9:102(2)(d) PECL, which excludes specific performance whenever the aggrieved party can ‘reasonably obtain performance from another source.’ This has been interpreted as a reflection of the drafters’ desire to shift the frame more towards the civil law paradigm and away from the common law conception (see, e.g., Leible (2008), pp. 100–101; van Kogelenberg (2009), pp. 613 and 615; but cf. also Huber (2008), p. 716). Upon closer scrutiny, however, it is questionable whether this textual reduction will effectuate a real change in doctrine and outcome. Evidently, Article III.-3:302(5) DCFR has been newly introduced and concerns constellations covered by Article 9:102(2)(d) PECL. The new provision seems to intend to limit potential abuse of an apparently extended ‘entitlement’ to specific performance under the DCFR. Damages cannot be recovered for actual losses where the creditor has increased the loss by unreasonably insisting on specific performance in circumstances where he could have made a reasonable substitute transaction that would not have caused significant effort or expense. Notwithstanding this formal castling, the PECL exception for cases where an alternative source for performance exists has not been abandoned or abolished in substance. Upon second look, the rule can still be found in the DCFR. As the commentary explains, under Article III.-3:302(3)(b) DCFR, performance may be ‘unreasonably burdensome or expensive’ for the debtor if the creditor could ‘easily obtain performance from another source and claim the cost of doing so from the debtor’ (von Bar/Clive (2009), p. 831 (Illustration 4)). In this regard, alteration of the text of Article 9:102(2)(b) PECL in its DCFR counterpart (Article III.-3:302(3)(b) DCFR) will absorb effects from non-implementation of the explicit escape for cover transactions. The new formulation in Article III.-3:302(3)(b) DCFR no longer limits the analysis of burdens and expenses to the debtor. It is therefore a balancing of both the creditor’s and the debtor’s concerns that will determine whether performance would be unreasonable. Hence, by and large, the DCFR has been modified only superficially – and at best, marginally – towards a more civil law-based concept of specific performance; the new structure actually appears to be more of a fine-tuning within the pre-existing hybrid structure of the PECL (see also generally below COMPARISON AND EVALUATION).

459

T.W. Dornis c) Performance of a ‘personal character.’ As to performance of obligations under service or work contracts, the DCFR has modified the language of the PECL. According to Article III.-3:302(3)(c) DCFR, specific performance is excluded if performance would be of ‘such a personal character’ that it would be unreasonable to enforce it. The commentary explains that considerations not only of practicality but also – mainly, in fact – of giving regard to ‘respect for the debtor’s human rights’ are what lead to unenforceability (von Bar/Clive (2009), Comments on Article III.- 3:302, p. 832). This appears unconvincing. Most fundamentally, issues of human rights violations may also be resolved in terms of contract validity. The DCFR commentary’s example of an obligation to take part in a medical experiment involving surgical procedures on the debtor illustrates this point (see id.). The issue may primarily be contract validity, not whether the obligation should be enforceable as such (see Article II.-7:301 DCFR – Contracts infringing fundamental principles): if human rights are affected, it is likely that the contract will be contrary to, e.g., the ECHR or other fundamental principles). For further problems of non-enforcement, see below.

German Law § 275 BGB: Exclusion of the obligation to perform (1) A claim for performance cannot be made in so far as it is impossible for the obligor or for anyone else to perform. (2) The obligor may refuse to perform in so far as performance requires expenditure which, having regard to the subject matter of the obligation and the principle of good faith, is manifestly disproportionate to the obligee’s interest in performance. When determining what may reasonably be required of the obligor, regard must also be had to whether he is responsible for the impediment. (3) Moreover, the obligor may refuse to perform if he is to effect the performance in person and, after weighing up the obligee’s interest in performance and the impediment to performance, performance cannot be reasonably required of the obligor. (4) The obligee’s rights are determined by §§ 280, 283 to 285, 311a and 326. § 313 BGB: Interference with the basis of the contract (1) If circumstances upon which a contract was based have materially changed after conclusion of the contract and if the parties would not have concluded the contract or would have done so upon different terms if they had foreseen that change, adaptation of the contract may be claimed in so far as, having regard to all the circumstances of the specific case, in particular the contractual or statutory allocation of risk, it cannot reasonably be expected that a party should continue to be bound by the contract in its unaltered form.

460

Chapter 9: Particular Remedies for Non-performance (2) If material assumptions that have become the basis of the contract subsequently turn out to be incorrect, they are treated in the same way as a change in circumstances. (3) If adaptation of the contract is not possible or cannot reasonably be imposed on one party, the disadvantaged party may terminate the contract. In the case of a contract for the performance of a recurring obligation, the right to terminate is replaced by the right to terminate on notice. 1. General. Under the BGB, it is conclusion of the contract that provides a right to performance. The language of § 241 BGB reflects this foundational concept only partially. The commonly acknowledged implication, however, is that the parties are entitled to demand performance of their respective obligations in specie (Zimmermann (1996), p. 776; Zweigert/Kötz (1996), p. 469). Actionability is inherent to an obligation and will self-understandingly be included without an explicit statutory mention. Besides, for performance to be effectuated, generally there is no further requirement to be claimed. The right to performance, therefore, is a primary obligation, not a remedy (Stürner (2011), p. 169). In addition, German law separates different kinds of obligations stemming from a contractual agreement. As to the interest in performance, there may be an obligation not only to perform per se but also to take care of, to protect, and to maintain the other party’s entitlements and assets (Fürsorge-, Obhuts- und Rücksichtnahmepflichten). The latter category of obligations is not immediately related to performance (Medicus/Lorenz (2010), nos 347 et seq.; see more extensively below Articles 9:501 et seq. PECL (COMPARISON AND EVALUATION)); nevertheless, performance may be required and sued for. For cases of liability for pre-contractual misrepresentation and culpa in contrahendo, see § 311(2) and § 241(2) BGB (see also Article 2:301 and 2:302 PECL and above). 2. Exceptions. The legal right and its inherently unlimited enforcement finds two limitations. A debtor will be relieved from a duty to perform by impossibility or other impediments under § 275 BGB (Unmöglichkeit) or by frustration of the contract according to § 313 BGB (Störung der Geschäftsgrundlage). a) Impossibility and other impediments. aa) § 275(1) BGB covers instances of total or partial impossibility to perform, regardless of whether impossibility occurred prior to or after the contract’s conclusion. It also covers both actual impossibility and impossibility of performance for legal reasons (e.g., if the promised result cannot be achieved or established under the legal regime). This constellation has always been universally acknowledged (see, e.g., RGZ 107, 15, 17; generally Zimmermann (2002a), pp. 10–11). Only a few exceptions to the non-performing party’s principal discharge upon occurrence of impossibility have ever been found. One example dates back to times when tangible property was less fleeting than money value. Under circumstances of inflation, compensatory restitution was sometimes interpreted to comprise the transfer of an equivalent tangible object and not the payment of mere monetary damages (see, e.g., AG Hamburg Südd. JZ 1946, 180–181 (decision of 6 March 1946; lost wristwatch and obligation to provide substitute); see also OLG Hamm MDR 1947, 100–101). Impossibility of performance must be definite. If it is of only temporary

461

T.W. Dornis character, specific performance is not excluded. The aggrieved party may not have a right to enforce during the time of hindrance; the obligation, however, may become enforceable again upon elimination of the problem (Medicus (2005), 347, 349). Yet, if time is of the essence, even a temporary impossibility may lead to non-enforceability (absolutes Fixgeschäft). The standard textbook example is a singer’s performance at a birthday party. Absent an essentiality of time, however, the mere relevance of a specific time for performance will not preclude the aggrieved party’s rights. Even after the time for performance has lapsed, the aggrieved party may still be interested in performance (e.g., travellers may still be interested in a flight even after the time of initial booking (relatives Fixgeschäft); see, e.g., BGH NJW 2009, 2744). bb) The reformed 2002 BGB contains further instances of discharge in § 275(2) and (3) BGB; many of these instances had already been acknowledged before the reform. Paragraph (2) concerns cases of ‘practical’ or ‘factual’ impossibility (in contrast to actual impossibility under paragraph (1); see Bundestags-Drucksache 14/6040, p. 130). It covers situations of a disproportionality of conflicting interests requiring a balancing of different factors. The disproportionality must be found only between the non-performing party’s effort to perform and the aggrieved party’s benefit expected from such performance (see, e.g., BGH NJW 2005, 3284). The threshold for finding impossibility under paragraph (2) is high, though: it applies only upon a finding of gross disproportionality. Evidently, the balancing is not just a simple comparison of the costs and benefits for the non-performing party. In other words, even if the nonperforming party has to exert an extraordinarily high effort, it may not be discharged as long as the other side’s benefit has grown accordingly. A typical example in this case is the unpredictable rise of the product price under a sales contract: even if the non-performing party’s internal calculation may be distorted due to rising prices, the other side’s contractual benefit will enlarge correspondingly. In sum, then, the proportions have not changed (instructively Zimmermann (2002a), pp. 12–13). There is also no escape from the contract on the basis of a possibly more lucrative alternative or cover transaction for the non-performing party. No theory of efficient breach exists under § 275(2) (Stürner (2011), p. 172; see also Huber (2008), p. 724 (as to a different concept under the DCFR)). As a practical example, the debate over instances of so-called subjective impossibility is revealing. Interpretations differ in cases where a third person has acquired priority concerning the subject matter of the contract. The most often enunciated hornbook example is the sale of goods owned by a third person. If the seller has no title in the goods, he may not be able to perform immediately. Yet, performance cannot be deemed impossible under § 275(1) BGB (Zimmermann (2002a), pp. 14–15). Scholarly opinions differ as to whether the seller should be required to undertake further efforts in order to (re)acquire title and then transfer the goods to the buyer. The application of § 275(2) BGB in these cases is a question of balancing under the specific circumstances (see, e.g., Medicus/Lorenz (2010), no. 417 (§ 275(2) BGB requiring ‘extreme expenses’); see also BGHZ 141, 179, 181). Quite differently, both the PECL (Lando/Beale (2000), p. 396) and the DCFR commentary (von Bar/Clive (2009), Comment on Article III.-3:302, p. 830) suggest, without further elaboration, that specific performance should not be available where a third party has acquired priority over the creditor regarding the contractual subject matter.

462

Chapter 9: Particular Remedies for Non-performance cc) Besides, another escape for obligations to be performed in person exists under § 275(3) BGB. A prominent example is the opera singer who refuses to perform the day her child becomes sick (see Bundestags-Drucksache 14/6040, p. 130). As with paragraph (2), the decision-maker will have to balance the conflicting interests. Such a balance, however, is hardly feasible with ultimate precision. Different from the (almost purely) economic rationale in § 275(2) BGB, paragraph (3) requires giving utmost regard to the non-performing party’s personal interests. Hence, it is the creditor’s interest in actual performance that must be compared with the debtor’s individual concerns that make performance personally unreasonable. In practice, instances of unreasonability usually concern service and work contracts (see, e.g., BAG NJW 1983, 2784). b) Frustration of contract. Finally, German law has codified a principle of frustration of contract in § 313 BGB. If the circumstances since the contract’s conclusion have changed, and if a party can no longer be reasonably expected to perform his obligations under the terms of the contract due to this change of circumstances, the provision establishes an option for release of the parties (Störung der Geschäftsgrundlage). Most illustratively, such a constellation may be found in the example of the sales contract where prices have risen exorbitantly after the time of the contract’s conclusion (see above 2 a)bb)). Also, the delimitation of § 275 and § 313 BGB is not always clear. ‘Moral’ impossibility or impossibility for personal/individual reasons under § 275(3) BGB is closely related to situations of frustration under § 313 BGB (see also critically Zimmermann (2002a), pp. 16–17; extensively Ernst, in Münchener Kommentar (2007), § 275 nos 19 et seq.). Correspondingly, the PECL provide different categories for handling these constellations. Special rules on the change of circumstances can be found in Article 6:111 PECL. Besides, the Principles exclude the right to specific performance per se where it would consist of services or work of a personal character (Article 9:102(2)(c) PECL). 3. Legal consequences. The primary obligation will be excluded automatically (ipso iure) upon occurrence of the fact constituting impossibility under § 275(1) BGB. Under paragraphs (2) and (3), however, the primary obligation will be extinguished only upon the non-performing party’s giving notice to the other side (ope exceptionis). The reason is that as long as the hindrance may still be overcome, it is up to the obligated party to decide which way to go (Medicus/Lorenz (2010), no. 427). Besides, § 275(4) BGB clarifies that the provision concerns only the primary obligation; with regard to remaining or ensuing secondary obligations, § 275(4) BGB refers to the provisions on remedies, particularly damages (see above). § 313 BGB, by contrast, will not grant a claim for damages. Either the contract will be adapted to the changed conditions or, if modification is unfeasible, a right to terminate will exist. Here, again, a deviation from the common law principle of contract frustration surfaces: common law doctrine allows only for termination of the contract; the judge has no discretion to adapt the contractual relations to the changed conditions (for the comparison see Stürner (2011), p. 179).

463

T.W. Dornis Comparison and Evaluation While specific performance in civil law is the foundational element of any obligation, it is the exception rather than the rule in common law. The PECL and the DCFR reflect and illustrate this fundamental doctrinal–albeit practically no longer very significant –dichotomy among the European (and the world’s) legal families. Both regimes have managed to implement a workable reconciliation of divergent doctrinal concepts. Remaining differences, most notably on the level of procedural enforcement structure and sanctions, will not be overly determinative in practice. Among the substantive differences that still exist and that are also reflected in the PECL and the DCFR, treatment of the buyer’s rights in cases of non-conformity are most relevant practically speaking. 1. Doctrinal reconciliation. German civil law conceives of specific performance as an inherent element of the creditor’s contractual right and the debtor’s corresponding obligation. Performance is not only a remedy but a primary contractual right. Common law, by contrast, categorizes performance as a remedy issued by a court upon the creditor’s request. In principle, common law courts are hesitant to order specific performance. The creditor will usually be referred to claim damages instead. In essence, the difference can be found in a divergent understanding of the pacta sunt servanda principle. The civil law rights-based approach typically binds the parties to their agreements. In common law, by contrast, a contractual agreement is less invasive on individual freedom: ‘The only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass’ (Holmes (1881), p. 301). Reconciling both worlds under one doctrinal foundation is difficult. The PECL and the DCFR have managed such a combination under a hybrid construct. Both regimes acknowledge the civil law principle of performance in natura (Naturalerfüllung; see Zimmermann (2002a), p. 10 (on the PECL)). Yet, they also characterize specific performance as a remedy corresponding to common law principles. In other words, the creditor’s right does not flow from the parties’ agreement alone but rather requires certain specific pre-conditions to be found (critically as to the combination see Weller (2008), pp. 764 et seq.). Remarkably, in this regard, the PECL and the DCFR go beyond the CISG. Different from its predecessor, the ULIS (Article 25), the CISG establishes, albeit in the form of a remedy, an almost comprehensive primary obligation of performance (see Articles 46 and 62). While the ULIS still allowed for the seller to be released if an alternative transaction was practically feasible, the CISG allows for the buyer to sue for performance. Likewise, the seller can sue for payment and acceptance of the goods. It is only for the consequences that municipal law applies (Article 28). Common law and civil law judges may therefore still adjudicate differently on the basis of a claim for performance. In this regard, both the PECL and the DCFR have consequently harmonized adjudication on issues of specific performance. In addition, uniformity is fostered by another difference from traditional common law adjudication: neither the PECL nor the DCFR gives the court discretion in granting an order of performance. Their constellations of exclusion are exhaustively defined, and both regimes’ rules are binding. In terms of the practical

464

Chapter 9: Particular Remedies for Non-performance outcome, this approach will guarantee uniform adjudication regardless of the individual decision-maker’s legal culture. 2. The case of non-conforming goods: a non-common paradigm of ‘reasonability.’ Cases of non-conforming goods are extensively debated under all regimes. The situation has become particularly disparate in the wake of current ECJ case law. Most notably, the criterion of reasonability may no longer be handled homogeneously. a) The dual threshold under CISG: fundamentality and reasonability. The CISG contains a right to performance in natura (Articles 41, 46). Yet, the delivery of substitute goods as a variant of curing non-conforming performance is limited to constellations of fundamental breach (Article 46(2)). This restriction reflects the CISG’s tendency to avoid termination of the contract (see also Article 49(1)). Since replacement of goods is similar to and often even more invasive than termination as far as costs are concerned, the CISG drafters decided in favour of efficiency. Cure by repair is the fall-back option. It is, however, limited by a standard of reasonability and with regard to all the circumstances under Article 46(3) CISG. b) German and EU law: the conundrum of relative and absolute disproportionality. Like the CISG, German law under the Sale of Consumer Goods Directive (1999/ 44/EC) has established that the issue of remedies (i.e., whether the seller must replace or repair) is for the buyer to decide. German law and the Directive have not established a threshold of fundamentality for the claim of replacement. A standard of reasonability determines whether the buyer can demand replacement or repair. Under previous interpretations of § 439(3) BGB, it also seemed to be a question of proportionality (or reasonability) of efforts and expenses whether the seller would be entitled to reject conforming cure altogether. In these cases, the buyer could resort only to termination of the contract or a price reduction. The ultimate threshold for a finding of unreasonability of efforts and costs (i.e., unreasonability that would allow the buyer to reject cure altogether) used to be a comparison of benefits on the side of the buyer with costs on the side of the seller (see, e.g., Lorenz (2009), pp. 1636–1637). A seller would then, for example, be able to reject curing performance per se under the standard of § 323(5) 2 BGB whenever the non-conformity was minor or insignificant (id., p. 1637). This interpretation has become obsolete in light of the ECJ’s decision of 16 June 2011 (C-65/09, C-87/09; Gebr. Weber/Jürgen Wittmer; Ingrid Putz/Medianess Electronics GmbH). As the ECJ declared, the Directive is intended to give the seller a right to refuse repair or replacement of the defective goods only if this is impossible or relatively disproportionate. If, however, only one of the two options is available, the seller may not refuse the only remaining option that would allow him to establish conformity (id., no. 71). In addition to jettisoning a right to refuse repair and replacement for absolute disproportionality, the Court explained that it may be possible to limit the consumer’s right to reimbursement of the costs of removing the defective goods and installing the replacement goods (id., no. 74). None of these tenets has led to an instant clarification of the issue. Yet, the BGH has made clear that, at least with respect to b2c contracts, no absolute right to refuse curing performance exists (BGH NJW 2012, 1073, 1077 et seq.; BGH NJW 2013, 220 et seq.).

465

T.W. Dornis c) The buyer’s maze: PECL and DCFR. The situation is equally complicated under the PECL and the DCFR, where the intricacies of specific performance doctrine must be considered as well. Generally, a buyer may insist on cure of defects if the delivery does not conform to the terms of the contract. The right to demand cure covers replacement and repair. Apparently, however, unlike the CISG, German, and European law, it is not the buyer who chooses among the remedies but the seller (see Article 7:105 PECL and Article III.-2:105(1) DCFR). Furthermore, the right to demand conforming performance is subject to exceptions under Article 9:102(2) and (3) PECL and Article III.-3:302(3) and (4) DCFR. As to the right to demand replacement, if non-conformity is not fundamental, the buyer will be in a conundrum: he will not be able to terminate the contract, not even by setting an additional period for performance (see below Article III – 3:502 comment 3; for the different treatment of consumer sales contracts see Article IV.A.-4:201 DCFR and below comment 3 c)). In addition, his claim may fail due to the seller’s argument that replacement was unreasonable in terms of efforts and expenses (see also Huber (2008), pp. 719–720). The seller, by contrast, has a right to cure by either repair or replacement. This right may even prevail over the buyer’s remedies in many constellations (for the hierarchy between the right to cure and the buyer’s remedies see below Article 9:301 and 9:401 PECL). By and large, therefore, the buyer’s position appears to be significantly unprotected under the PECL and the DCFR. 3. Practical application: procedural rules and enforcement. As it appears, the civil law/common law dichotomy regarding the issue of specific performance has vanished over time. Practical and procedural accommodations in civil law and common law systems have reduced former differences in outcome. In this regard, the PECL and the DCFR limitations on specific performance reflect a consensus on the actual enforcement of non-monetary obligations (for the trend of approximation see, e.g., Treitel (1976), pp. 6 et seq.; Zweigert/Kötz (1996), p. 482). Against this backdrop, the PECL and the DCFR have implemented a modern and convincing reconciliation of different doctrinal paradigms. Nevertheless, certain details may still provoke debate. a) The bone of contention: service and work contracts. In common law practice, adjudication in cases of specific performance under service or work contracts is usually an issue of enforcement efficiency. In other words, specific performance may not be granted in cases where it might become difficult to efficiently enforce the verdict or administer and supervise its enforcement (see generally Farnsworth (2004), § 12.4; most instructively (on US law, yet generally applicable): Walgreen Co. v. Sara Creek Property Co., B.V., 966 F.2d 273, 275 et seq. (7th Cir. 1992) (Posner, J.)). As the DCFR commentary adds in accordance with traditional common law doctrine, protection of the debtor’s human rights may also require limitations on specific performance if obligations have a personal character (von Bar/Clive (2009), Comment G on Article III.- 3:302 p. 832; see already Holmes (1881), p. 300 (theory needs to be freed from the idea that ‘contract is a qualified subjection of one will to another, a kind of limited slavery’)). In essence, however, non-enforceability is usually found as a result of impending problems of efficient adjudication. In many cases, requiring an unwilling debtor to perform will not result in a conforming performance; neither will it be efficient to administer by courts or other enforcement authorities (see Walgreen, at

466

Chapter 9: Particular Remedies for Non-performance 278–279). Revealingly, the example given for exceptions under Article III.-3:302(3)(c) DCFR in the DCFR commentary concerns a question not of human rights or dignity but of enforcement efficiency: if a painter has almost finished a portrait ‘apart from some routine background work,’ evidently ‘completion and signature’ may not only significantly enhance the portrait’s value but be also easy (i.e., efficient) to enforce (see von Bar/Clive (2009), Comment G on Article III.-3:302, p. 833). The counter-example of a ‘ghastly portrait’ – that is, one where more than mere finishing work must be done by the artist (and thus enforced) – will not necessarily differ significantly from the example in terms of human rights affection. After all, in both cases, the painter’s personal liberties will be curtailed by the exercise of force in order to make him complete the work. The difference lies in enforcement efficiency. b) The blind eye of PECL/DCFR: no rules on procedure. Both the concern for enforcement efficiency and human rights protection are closely correlated with another point of criticism. As has been argued, neither the PECL nor the DCFR provides for procedural rules. Thus, neither establishes a consistent enforcement system (van Kogelenberg (2009), pp. 608, 617; see also generally Ernst (2008), p. 273). Without a concurrent amendment to procedural law, as it might appear, unintended inconsistencies could evolve. Yet, the problem may not be as drastic in practice. The PECL and the DCFR have implemented the system of common law exceptions to specific performance. Under this system, the individual decision-maker’s discretion may be limited. Yet, specific performance will still typically fail in constellations that have already been acknowledged as non-enforceable under traditional common law doctrine. Furthermore, if one takes into account the common law courts’ discretion in finding of contempt of court in cases of non-compliance with an order of specific performance, it is even less likely that imposition of the PECL/DCFR hybrid rules on specific performance could distort the coherence of substantive and procedural law. This also is true for German law. There, the problem is resolved at a later stage: under § 888(1) and (3) German Code of Civil Procedure (ZPO), the enforcement of court orders on, for example, service contracts is limited. A creditor may switch to damages under § 893 ZPO if specific performance cannot be granted under §§ 887 et seq. ZPO. Here as well, there is no risk of overextensive enforcement in natura. To the contrary, more detailed and sophisticated procedural enforcement rules at the national level will be unaffected by the PECL/DCFR rules on substantive law. This also holds true for issues of human rights protection, which may be resolved at either the level of contract validity (see above Article III.-3:302 DCFR comment 2.c)) or the procedural level (see also BGH NJW 2008, 2919, 2920).

Principles of European Contract Law Article 9:103: Damages Not Precluded The fact that a right to performance is excluded under this Section does not preclude a claim for damages.

467

T.W. Dornis 1. General. If a party is relieved of an obligation to perform under Article 9:101(2), 9:102(2), and 9:102(3) PECL, it may still be liable for damages unless its nonperformance is excused under Article 8:108 PECL. 2. Exclusion of specific performance and contract termination. With regard to the effects of performance exclusion on the contract’s validity, several critical issues exist. While some constellations of impossibility or illegality appear to terminate the contractual relationship automatically, others will have additional pre-requisites. a) There is no general provision on the question whether the contract should be deemed terminated when performance is excluded. The only constellation that has been explicitly provided for is an excuse under Article 8:108 PECL. If the impediment is total and permanent, the contract will be terminated without further requirements (see Article 9:303(4) PECL). b) As the PECL commentary further suggests, termination may also ensue if the aggrieved party is required to conclude and has actually concluded a cover transaction according to Article 9:101(2)(a) and 9:102(2)(d) PECL (Lando/Beale (2000), p. 403). This, however, should not be determinative per se. The non-performing party may still tender after the aggrieved party has executed the cover transaction. Contract termination need not be assumed in order to protect the aggrieved party, who might still be interested in the tender. An unsolicited tender, however, may be contrary to good faith and fair dealing (Article 1:201(1) PECL). c) In cases of initial impossibility, Article 4:102 PECL provides for the contract’s being principally valid. Different from former German law (§ 306 BGB (pre-2002 version)) and in accordance with current German law (§ 311a(1) BGB (post-2002 version)), the contract is not invalid merely because performance was impossible at the time it was concluded (see above § 311a (1) BGB comment 1 under Article 4:102 PECL). Nevertheless, the PECL provide for the parties to avoid the contract under certain circumstances. Evidently, specific performance will be excluded. Yet, if one party is deemed to have taken the risk knowingly or if it could have known better, it will still be bound (see Article 4:103 PECL). As the commentary further suggests, if a seller should have known about the initial impossibility, he will have to bear the risk and be liable. Liability for damages will be governed by Article 4:117 PECL.

Draft Common Frame of Reference Article III. – 3:303: Damages not precluded The fact that a right to enforce specific performance is excluded under the preceding Article does not preclude a claim for damages. The DCFR rule mirrors the corresponding provision under the PECL. In addition to the PECL commentary, the DCFR commentary explains that, under certain conditions, it might be possible to imply an agreement between the parties to terminate the contract which per se is not invalid merely for reasons of initial impossibility or other impediments to performance (Article II.-7:102 DCFR). This should, for instance, be

468

Chapter 9: Particular Remedies for Non-performance considered whenever a creditor has accepted that performance would be unreasonably burdensome for the debtor, and he therefore obtains performance from a third party (van Bar/Clive (2009), Comment B on Article III.-3:303, p. 842).

German Law § 283 BGB: Compensation in lieu of performance where there is no duty to perform If, by virtue of § 275(1) to (3), the obligor does not have to perform, the obligee may demand compensation in lieu of performance. § 281(1), second and third sentence, and (5) apply mutatis mutandis. § 311a BGB: Impediment to performance at the time of the conclusion of the contract (1) The fact that by virtue of § 275(1) to (3) the obligor does not need to perform and the impediment to performance already exists upon conclusion of the contract does not prevent the contract from being valid. (2) The obligee may, at his option, demand compensation in lieu of performance or reimbursement of expenditures to the extent provided for in § 284. This does not apply if, at the time of the conclusion of the contract, the obligor had no knowledge of the impediment to performance and was not responsible for his lack of knowledge. § 281(1), second and third sentence, and (5) apply mutatis mutandis. 1. General. Under German law, as under the PECL and the DCFR, mere exclusion of performance will not terminate the contract. Besides, as a rule, unless nonperformance is excused, the debtor will generally be liable for damages. A distinction has to be made according to the time at which impossibility or an impediment to performance occurs. If the impediment occurred prior to the contract’s conclusion, the non-performing party will be liable for damages (§ 280(1) BGB) in lieu of performance or reimbursement for wasted expenditures (§ 284 BGB) unless it can prove that it had no knowledge of the impediment and that it was not responsible for this lack of knowledge (§ 311a(2) BGB). If, however, the impediment came into existence after the contract’s conclusion, the non-performing party must prove that it was not responsible for the instance causing the impediment (§§ 283, 280(1) 2 BGB). For the difference between damages in lieu of performance and damages in addition to performance, see below §§ 280 et seq. comment 1 under Article 9:501. 2. Distinction: initial and subsequent impossibility. Unlike under pre-2002 law, contract validity will not be affected by an initial impossibility of performance. Nevertheless, German law still distinguishes between initial impossibility and impossibility occurring after the contract’s conclusion. The doctrinal basis is that there is a different point of reference for the non-performing party’s fault. In cases of impossibility after contract conclusion (§ 283 BGB), it is the causation of the impediment that

469

T.W. Dornis will trigger the non-performing party’s liability. In cases of initial impossibility (§ 311a BGB), it is the lack of knowledge about the non-performer’s incapacity to perform at the time of contract conclusion. As the Bundesgerichtshof has stated, the rule of thumb is that prior to contract conclusion, the party must be informed about its capacities to perform, and that after contract conclusion, it must maintain these capacities (BGH NJW 2007, 3777; see also Canaris (2001), p. 507). Doctrinally, the case of initial impossibility resembles a constellation of culpa in contrahendo (Canaris, id.). 3. Measure of damages: expectation interest. Notwithstanding the different perspectives concerning the non-performer’s fault, with regard to the consequences, both initial and subsequent impossibility and impediments provide for compensation of the aggrieved party’s so-called expectation interest as damages (Erfüllungsinteresse; see Canaris (2005b), pp. 11, 12). Doctrinally, cases of initial impossibility are being characterised as the non-performer’s breach of a promise to perform (Canaris, id.; Zimmermann (2002a), p. 30). Absent cases of public policy violation, a contract concerning an initially impossible performance will be valid. Only in extremely limited circumstances will damages be reduced to the aggrieved party’s so-called reliance interest (negatives Interesse; see, e.g., Grüneberg, in Palandt (2012), § 311a nos. 5 and 7 (absurd cases like, e.g., promise to construct a perpetuum mobile)). Although suggested during the 2002 reform, German case law and commentary have not come to acknowledge a concept of minimum liability (for the negative interest) by analogy to § 122 BGB in cases where the non-performer is not at fault as to his incapacity (for the suggestion see Canaris, id.).

Comparison and Evaluation Under all regimes, exclusion of performance generally does not affect contract validity. All three regimes hold a contract concerning an initially impossible performance valid (Article 4:102 PECL, Article II.-7:102 DCFR, and § 311a BGB). As to the scope of damages, however, the regimes may differ. Under the PECL and the DCFR, the aggrieved party may have an option to avoid the contract (Article 4:103 PECL and Article II.-7:201 DCFR). The scope of admissible damages is governed by Article 4:106 and 4:117 PECL, as well as Article II.-7:204 and 7:214 DCFR. The remedy of damages in cases of initial impossibility, however, does not always aim to put the aggrieved party into the position in which it would be in the case of conforming performance. Usually, the aggrieved party can request only to be put back into the position in which it would have been had it not entered into the defective contract (Lando/Beale (2000), pp. 281–282; von Bar/Clive (2009), Comments on Article II. 7:204 and II.-7:214, pp. 489, 529–530). Besides, in cases of a shared mistake, even though both sides may avoid the contract, the losses will be divided between the parties without further compensation. The PECL and the DCFR commentaries illustrate this constellation through the example of a holiday cottage destroyed the night before conclusion of the lease contract (Lando/Beale (2009), p. 233; von Bar/Clive (2009), Illustration 5 on Article II.-7:201, p. 461). It is therefore only negative interest or no damages at all that may be recovered in cases of initial impossibility. Quite differently, under § 311a(2)

470

Chapter 9: Particular Remedies for Non-performance BGB, a claim for compensation of expectation interest–that is, damages in lieu of performance–will accrue. There is no limitation to or alternative option to reimbursement for reliance loss or the negative interest (critically Canaris (2001), p. 508; Canaris (2005b), pp. 11 et seq.; as to the UNIDROIT Principles see also, e.g., Huber (1999), pp. 539–540).

SECTION 2: WITHHOLDING PERFORMANCE Principles of European Contract Law Article 9:201: Right to Withhold Performance (1) A party which is to perform simultaneously with or after the other party may withhold performance until the other has tendered performance or has performed. The first party may withhold the whole of its performance or a part of it as may be reasonable in the circumstances. (2) A party may similarly withhold performance for as long as it is clear that there will be a non-performance by the other party when the other party’s performance becomes due. 1. General. Article 9:201 generally protects the withholding party from advance performance without security. This serves to reduce the risk of default. In addition, the provision upholds the initially established incentive to perform: each side will receive only upon its own performance (do ut des; see also Article 7:104 PECL). The most prominent example is that of a sales contract where the parties simultaneously exchange title in the goods and possession of the goods with the payment of the price. Clearly, however, in many cases a simultaneous exchange of performance is impracticable. In practice, innumerable variations of advance performance exist. The order of performance may then be determined by a previous practice between the parties, a general usage (Article 1:105 PECL), or the implied terms of the contract according to Article 6:102 PECL (see above Chapter 6). 2. Withholding performance of a reciprocal obligation. a) ‘Reciprocity’ unclear. As the comments make clear, the PECL do not provide for a right to withhold performance concerning non-performance of obligations stemming from separate contracts (for German law see below § 320 comment 1). Furthermore, since the PECL are limited to contractual obligations only (see Article 1:101(1) PECL and Lando/Beale (2000), Introduction xxv), non-contractual obligations do not qualify for an application of the provision. Thus, both the non-performed obligation and the withheld obligation must be part of one and the same contractual instrument. Yet, this explanation alone does not fully clarify the issue. What also must be resolved is whether the obligations at issue are part of the contract’s ‘synallagmatic,’ or ‘reciprocal,’ exchange structure. The PECL commentary is not very clear on this point. It is not evident whether all obligations under a contract will qualify as synallagmatic under paragraph (1). This is a problem of differentiating primary and secondary obligations. One example under

471

T.W. Dornis German law is acceptance of the goods in a sales contract: generally, acceptance is a secondary obligation of the buyer. There may, however, be cases where the seller has a specific interest in the buyer’s timely acceptance, and where the parties have thus agreed on acceptance being one of the buyer’s primary duties (see, e.g., Medicus/ Lorenz (2010), nos. 118 et seq.). While primary obligations are usually mutually interconnected, secondary obligations will generally not be included in the contractual programme of reciprocal exchange (see, e.g., RGZ 101, 431; BGH NJW 1953, 1347). For the PECL, this means that in order to duly characterize an obligation as synallagmatic under the provision, one must determine what the parties have agreed upon concerning the specific obligation at issue. In this regard, the parties’ previous practice, a general usage (Article 1:105 PECL), or the implied terms of the contract (Article 6:102 PECL, see above Chapter 6) can help determine the status of an obligation. b) Limitations: fairness and reasonability. Most fundamentally, the right to withhold performance is limited by the general prohibition on remedies in Article 8:101(3) PECL. A party that has caused the other’s non-performance may not resort to the right to withhold its own performance. Besides, as the comments explain, a party’s non-performance need not be fundamental in order to entitle the other party to withhold the whole of its performance. Under the paradigm of ‘reasonableness,’ the non-performing party may thus be forced to deliver its full performance even in cases of minor non-performance. The threshold for unreasonability is high: the withheld performance must not be ‘wholly disproportionate’ (in relation to the defect in or lack of the other party’s performance), and the withholding party must act in good faith. This differs from the common law approach, in which the withholding of performance can be founded only on the other side’s ‘fundamental’ non-performance. Regarding the practical application, however, the PECL’s reference to what ‘may be reasonable in the circumstances’ is hardly helpful in providing a workable guideline. 3. Anticipatory non-performance. If one party has to perform first, paragraph (2) allows for a suspension of performance in cases of so-called anticipatory nonperformance. a) Fundamentality. The only requirement is that it must be clear that there will be a non-performance by the other party at the time performance becomes due. As the PECL commentary states, the anticipatory non-performance should also be ‘fundamental’ (Lando/Beale (2000), p. 406). This, however, is not the only possible interpretation. The text in paragraph (2) does not establish an explicit pre-requisite of fundamentality. By contrast, since paragraph (2) ‘similarly’ allows for withholding performance, the question of whether the non-performance must be fundamental is debatable, at least regarding constellations permitting a partial withholding. b) Options to proceed. The aggrieved party generally has three options for proceeding in a situation of anticipatory non-performance. First, it may demand an assurance of performance under Article 8:105 PECL. If this assurance is not provided within a reasonable period, the demanding party may terminate the contract (see Article 8:105(2) PECL; see also instructively above Gsell). Second, the party anticipating non-performance of the other side may terminate the contract under Article 9:304

472

Chapter 9: Particular Remedies for Non-performance PECL. And finally, it may decide to continue the contract while simply withholding its own performance.

Draft Common Frame of Reference Article III. – 3:401: Right to withhold performance of reciprocal obligation (1) A creditor who is to perform a reciprocal obligation at the same time as, or after, the debtor performs has a right to withhold performance of the reciprocal obligation until the debtor has tendered performance or has performed. (2) A creditor who is to perform a reciprocal obligation before the debtor performs and who reasonably believes that there will be non-performance by the debtor when the debtor’s performance becomes due may withhold performance of the reciprocal obligation for as long as the reasonable belief continues. However, the right to withhold performance is lost if the debtor gives an adequate assurance of due performance. (3) A creditor who withholds performance in the situation mentioned in paragraph (2) has a duty to give notice of that fact to the debtor as soon as is reasonably practicable and is liable for any loss caused to the debtor by a breach of that duty. (4) The performance which may be withheld under this Article is the whole or part of the performance as may be reasonable in the circumstances. 1. General. The DCFR largely mirrors the PECL rule on the right to withhold performance. Apart from some minor alterations, it has implemented the general principle of do ut des. The DCFR’s scope of application is different, though. It covers not only contractual obligations but obligations in general, ‘whether they are contractual or not.’ This may include obligations arising from unilateral promises, precontractual negotiations, non-contractual liability, unjustified enrichment, or the benevolent intervention in another’s affairs (see Article III.-1:101 DCFR). 2. Clarification and modification. a) ‘Reciprocity’ defined. Unlike the PECL, the DCFR (under Article III.-1:102(4) DCFR) explicitly defines the concept of ‘reciprocal obligation.’ According to the definition, an obligation is reciprocal if (a) performance of the obligation is due in exchange for performance of the other obligation; (b) it is an obligation to facilitate or accept performance of the other obligation; or (c) it is so clearly connected to the other obligation or its subject matter that performance of the one can reasonably be regarded as dependent on performance of the other. b) No fundamentality required. None of the two options to withhold performance in Article III.-3:401(1) and (2) DCFR requires the other side’s non-performance to be fundamental (see paragraph (4)). In this regard, the DCFR has clarified (and arguably modified) the rule under the PECL (see above Article 9:201 PECL comment 2). 3. Duty to inform and bar to remedies. Another difference between the PECL and the DCFR is the latter’s newly introduced duty of the withholding party to give notice of

473

T.W. Dornis withholding to the debtor (Article III.-3:401(3) DCFR). This notice is not a pre-requisite for the right to withhold but rather a separate and concurrent duty. However, it may result in the withholding party’s liability for loss caused to the debtor due to non-information about the withholding. Finally, the DCFR has established a general bar to exercising remedies during the time a debtor has a right to cure. This bar does not, however, preclude the creditor’s right to withhold his own performance on a reciprocal obligation (Article III.-3:204 DCFR).

German Law § 273 BGB: Right of retention (1) If the obligor has a claim that is due against the obligee under the same legal relationship as that on which the obligation is based, he may, unless the obligation leads to a different conclusion, refuse the performance owed by him, until the performance owed to him is rendered (right of retention). (2) A person who is obliged to return an object has the same right, if he is entitled to a claim that is due on account of outlays for the object or on account of damage caused to him by the object, unless he obtained the object by means of an intentionally committed tort. (3) The obligee may avert the exercise of the right of retention by providing security. The providing of security by guarantors is excluded. § 274 BGB: Effects of the right of retention (1) In comparison to a legal action by the obligee, assertion of the right of retention only has the effect that the obligor is to be ordered to render performance in return for receiving the performance owed to him (concurrent performance). (2) On the basis of such an order the obligee may pursue his claim by way of execution, without effecting the performance he owes, if the obligor is in default of acceptance. § 320 BGB: Defence of failure to perform the contract (1) Unless the contract requires him to perform first, a person bound by a synallagmatic contract may refuse to perform his part until the other party effects counter-performance. If performance is to be made to several persons, the part due to one of them can be refused until the entire counter-performance has been effected. The rule in § 273(3) does not apply. (2) If one party has partially performed, counter-performance may not be refused if, under the circumstances, in particular on account of the relative insignificance of the part not performed, the refusal would constitute bad faith.

474

Chapter 9: Particular Remedies for Non-performance § 321 BGB: Defence of insecurity (1) A person bound by a synallagmatic contract to perform first may refuse to perform his part if after conclusion of the contract it becomes apparent that his claim for counter-performance is endangered by the other party’s lack of ability to perform. The right to refuse to perform ceases if counter-performance is effected or security provided for it. (2) The person required to perform first may specify a reasonable period within which the other party must, at his option, effect counter-performance or provide security concurrently with performance. If the period expires to no avail the person required to perform first may terminate the contract. § 323 applies mutatis mutandis. 1. General. German law goes beyond the PECL – albeit not the DCFR–concerning the right to withhold performance in constellations other than contractual synallagmatic, or reciprocal, obligations (see below for an evaluation). a) General rule: correlated obligations. §§ 273 and 274 BGB allow for withholding performance on obligations that stem from different contractual or non-contractual foundations. A debtor may refuse to perform on an obligation if he has himself an outstanding obligation against his creditor. Withholding of performance under this more general rule, however, is possible only on obligations that (as the statutory text provides) stem from the same legal relation (‘aus demselben rechtlichen Verhältnis’, see § 273(1) 1 BGB). Actual practice has diverged from the literal interpretation of the statutory provision: it suffices that both obligations are founded on uniform and interconnected factual relations (see, e.g., BGHZ 92, 194, 196; BGHZ 115, 99, 103 (‘innerlich zusammenhängendes einheitliches Lebensverhältnis’)). In other words, in practice, both obligations – even though not stemming from the same agreement or non-contractual foundation – must share a common factual and economic interrelation insofar as it would be contrary to good faith and fair dealing if one of them could be enforced without a concurrent or simultaneous enforcement of the other (BGHZ 47, 167; BGHZ 64, 125). Numerous constellations have been categorized. One example is obligations stemming from different serial contracts within the same parties’ continuous business relationship. Notwithstanding this extensive scope of the general right to withhold performance, its exertion may be limited by law, by the specificities of the contract, or, most generally, by the principle of good faith and fair dealing (see extensively Krüger, in Münchener Kommentar (2007), § 273 nos. 14 et seq., 42 et seq.). b) Special rule: synallagmatic obligations. In addition to the general right to withhold performance under §§ 273 and 274 BGB, a special provision for reciprocal contractual obligations (functional synallagma under German doctrine) exists in § 320 BGB. The relevant obligations need to stem from the same contractual agreement between the parties. It must be primary and essential duties of performance–and not merely secondary obligations – that are accepted in a direct and immediate exchange for the other side’s corresponding promise to perform (for secondary duties see above). This special right to withhold performance cannot be avoided by the mere granting of

475

T.W. Dornis security (see § 320(1) 3 BGB and above); this is different under § 273(3) BGB. Under the parties’ contractual agreement, each side is entitled to actual performance, and not just a security equivalent. A special variant of the right to withhold performance for construction contracts can be found in § 641(3) BGB. In addition, under the German Commercial Code (HGB), special rules for contracts between merchants exist (§§ 1 et seq., §§ 369 et seq. HGB). 2. Anticipatory non-performance. A party required to perform first will be entitled to refuse performance if, after conclusion of the contract, it has become evident that the other side will not be able to perform when its obligation becomes due. It does not matter whether the reasons for the anticipatory non-performance existed prior to the contract’s conclusion, as long as it was not possible to foresee or predict these reasons (see, e.g., BGH NJW 2010, 1272, 1273; Gsell, in Soergel (2005), § 321 no. 45). Temporary hindrance of performance in the future may generally suffice. Anticipatory non-performance need not be due only to a deterioration of the other side’s financial circumstances; rather, all instances that can lead to non-performance will qualify for an application of the provision (e.g., political developments, such as a strike or a war, or natural catastrophes). § 321 will not apply, however, if sufficient security has been provided (RGZ 53, 246). Primarily, § 321(1) provides a right to withhold performance. In addition, § 321(2) offers an option to terminate the contract. If the other party neither performs simultaneously nor provides sufficient security, the first party may terminate the contract under § 323 BGB.

Comparison and Evaluation 1. The common law/civil law dichotomy. The right to withhold performance is another example of the dichotomy running through the PECL/DCFR and German civil law. The right as such is widely acknowledged in most jurisdictions, regardless of whether they are common law or civil law. Although the CISG may not explicitly provide for a rule on withholding performance, the concept is generally acknowledged to exist in Articles 58, 71, 85, and 86 (see extensively Magnus, in Staudinger (2013) Article 58 nos. 22–23). Under common law doctrine, a right to withhold performance generally requires that the other party’s non-performance would deprive the withholding party of the substance of what was contracted for. Thus, withholding performance must overcome almost the same threshold as termination of the contract. The right to withhold performance under the PECL and the DCFR, by contrast, is principally limited by a concept of reasonableness only. A party may withhold all or part of its performance as long ‘as [it] may be reasonable in the circumstances.’ Both regime’s commentaries fail to provide much guidance apart from the explanation that a ‘fundamental’ non-performance is not a pre-requisite for withholding performance. Thus, even in cases of minor non-performance, withholding may be reasonable if the amount withheld is ‘not wholly disproportionate’ and the withholding party acts in good faith (Lando/Beale (2000), p. 405; for the ambiguity as to anticipatory nonperformance see above). German law largely follows the same approach. The threshold

476

Chapter 9: Particular Remedies for Non-performance for finding unreasonability under § 320(2) BGB, however, is high: counterperformance may not be refused in full if, under the circumstances, the refusal would constitute bad faith, particularly on account of the relative insignificance of the other party’s non-performance. Decision-makers have a high degree of discretion (see, e.g., BGH NJW 1997, 938, 939); only for construction contracts is a more specific threshold given in § 641(3) BGB for the employer’s right to withhold payment (the right is limited to twice the amount necessary to cure defects). The fact that the right to withholding performance under § 320 BGB is limited by a more lenient standard reflects the provision’s foundation on the civil law conception of specific performance. It is not intended only to guarantee security. A similar inference may be drawn from § 320(1) 2 BGB (Medicus/Lorenz (2010), no. 255). 2. Scope of withholding. While the scope of the right under German law unquestionably exceeds the PECL’s strict focus on ‘contracts,’ it largely complies with the DCFR. The paradigm of uniform and interconnected factual relations widely corresponds to the definition of ‘reciprocal’ in Article III.-1:102(4)(c) DCFR. German law, however, ultimately creates more specific limitations on the right to withhold. These restrictions have been established, for example, by reference to the specificities of the parties’ contract, or generally by the principle of good faith and fair dealing (see above). In this regard, the structural overextensiveness of § 273 BGB is restricted. An oft-enunciated and practically relevant example is the case where the parties have contractually excluded a settling of accounts (§ 387 BGB): when settling is not possible, there is no right to withhold performance (BGH NJW 1984, 128, 129). Similarly, withholding performance may be excluded if it could severely restrain the creditor – for example, withholding a passport or commercial documents, or the return or refund of security after the secured obligation has been fulfilled (BGH NJW 1968, 2139, 2140 (refund of security); for further examples see Krüger, in Münchener Kommentar (2007), § 273 nos. 48 et seq.). Under the DCFR, a similar restriction would have to be founded on the general principle of good faith and fair dealing (Article III.-1:103 DCFR). 3. Anticipatory non-performance: foreseeability. On the question of anticipatory non-performance, the PECL and the DCFR are less specific than, for example, Article 71 CISG or § 321 BGB. Both the CISG and the German BGB are sufficiently precise: while the party’s right to withhold performance is not affected where the impediment to the other side’s future performance existed prior to or at the time of contract conclusion, neither under Article 71 CISG nor under § 321 BGB must non-performance have been apparent or foreseeable prior to the conclusion of the contract (Magnus, in Staudinger (2013), Article 71 CISG no. 28; Gsell, in Soergel (2005), § 321 no. 45; BGH NJW 2010, 1272; the pre-2002 German law was different insofar as it was determinative that the circumstances had occurred after contract conclusion). By contrast, prima facie, the PECL and the DCFR allow for an application of Article 9:201(2) PECL and Article III.-3:401(2) DCFR, respectively, even in cases where the non-performance was apparent or could have been foreseen prior to contract conclusion. To correct this imprecision, one must restrict interpretation of the provisions by finding that the party who knew or could have known about future non-performance has assumed the risk and can thus no longer resort to a right to withhold performance. This may be inferred

477

T.W. Dornis from Articles 1:201 and (by analogy) 4:103(2) PECL, and Articles III.-1:103 and (also by analogy) II.-7:201(2) DCFR.

SECTION 3: TERMINATION OF THE CONTRACT Principles of European Contract Law 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). 1. General. The right to terminate the contract under the PECL follows a double-track. A creditor is entitled to terminate the contract if non-performance is fundamental. In addition, in cases where delayed performance is not in itself a fundamental nonperformance, the aggrieved party may fix an additional period of time for performance. If the other side does not perform within this period, the aggrieved party may terminate the contract (see above Article 8:106(3) PECL). 2. (Non-)Fundamental non-performance. In general, contract termination has two pre-requisites. First, one side’s non-performance must be fundamental (for the concept of fundamentality, see above Gsell on Article 8:103). The second pre-condition is a notice to the defaulting party (see Article 9:303 PECL and below). Notably, the contract may be terminated regardless of whether the non-performance can be excused. If no fundamental non-performance can be found, the aggrieved party may terminate the contract under Article 8:106(3) PECL (see instructively above Gsell). This option, however, is applicable only in cases of non-fundamental non-performance. In addition, Article 8:106(3) PECL does not apply in cases of non-conformity. This result may be inferred from the text of the norm (‘in a case of delay’). In addition, the PECL commentary (Lando/Beale (2000), pp. 374–375) clarifies the point. The notice procedure will thus be ineffective in cases of non-conformity that does not qualify as fundamental non-performance (e.g., if defective goods have been delivered). The aggrieved party will be unable to extend the scope of available remedies by setting an additional period for performance. Nevertheless, the setting of an additional time period may still be useful in practice (i.e., by giving the debtor a ‘final chance’). Under the provision, the aggrieved party must give notice fixing an additional period of reasonable length. When this period has lapsed, the party may terminate the contract. For more details see above Gsell; see also below Article III.-3:502 DCFR comment 3.b)). 3. Limitations. a) Contribution by aggrieved party. As the comments explain, if non-performance is due at least in part to the aggrieved party’s own conduct, it might not be possible to characterize the non-performance as fundamental. In these cases, the right to terminate may be excluded. In addition, a court might have to decide on the

478

Chapter 9: Particular Remedies for Non-performance issue of damages for the non-performing party if the aggrieved party has itself not fully performed (see Lando/Beale (2000), p. 410). More generally, any degree of causation or contribution to one party’s non-performance by the other party may prevent it from fully resorting to the remedies in Chapter 9 of the PECL (see Article 8:101(3) PECL; Lando/Beale (2000), p. 361 and above). Strictly speaking, however, in these cases one should not inquire whether non-performance is ‘fundamental.’ Contribution by the aggrieved party limits recourse to the full range of remedies that would in principle be available without a detrimental interference. The issue, therefore, is a practical balancing of equities and a fine-tuning of the remaining remedies (for both parties) on a sliding scale depending on the extent and intensity of both parties’ input (for a detailed critique see above Gsell on Article 8:101(3)). b) Hierarchy: right to cure and termination. As to the interrelation between a debtor’s right to cure in cases of non-conformity and the creditor’s remedies, most notably the right to terminate the contract, various constellations exist. As a general rule, one can assume that the right to terminate under Article 9:301(1) and (2) PECL will usually prevail over the debtor’s right to cure under Article 8:104 PECL (for a detailed illustration and further constellations of conflict between the right to cure and the other side’s remedies see above Gsell on Article 8:104 PECL comment 2.a)).

Draft Common Frame of Reference Article III. – 3:502: Termination for fundamental non-performance (1) A creditor may terminate if the debtor’s non-performance of a contractual obligation is fundamental. (2) A non-performance of a contractual obligation is fundamental if: (a) it substantially deprives the creditor of what the creditor was entitled to expect under the contract, as applied to the whole or relevant part of the performance, unless at the time of conclusion of the contract the debtor did not foresee and could not reasonably be expected to have foreseen that result; or (b) it is intentional or reckless and gives the creditor reason to believe that the debtor’s future performance cannot be relied on. Article III. – 3:503: Termination after notice fixing additional time for performance (1) A creditor may terminate in a case of delay in performance of a contractual obligation which is not in itself fundamental if the creditor gives a notice fixing an additional period of time of reasonable length for performance and the debtor does not perform within that period. (2) If the period fixed is unreasonably short, the creditor may terminate only after a reasonable period from the time of the notice.

479

T.W. Dornis Article IV. A. – 4:201: Termination by consumer for lack of conformity In a consumer contract for sale, the buyer may terminate the contractual relationship for non-performance under Book III, Chapter 3, Section 5 (Termination) in the case of any lack of conformity, unless the lack of conformity is minor. 1. General. The section on termination applies only to contractual obligations and relationships (Article III.-3:501(1) DCFR). In addition, it does not concern express agreements on the right to terminate, which are governed by Article III.-1:109 DCFR. The terminology is more precise than under the PECL, where it is a ‘termination of the contract’ that has been established. As the DCFR commentary clarifies, it is not the contract as such that is being terminated–it is the ‘contractual relationship’ between the parties, or the particular rights and obligations arising from it (see also von Bar/Clive (2009), Intr. 52). No need for litigation exists if the contract is to be terminated. Termination can be effected by a creditor’s acts only. Depending on the circumstances, a contractual relationship may be terminated in part or as a whole. In the former case, the remainder of the contractual relationship continues to exist with a limited scope and content. Prominent examples are the survival of arbitration clauses or stipulated damages clauses. Two principal grounds for termination exist under the DCFR: the most basic ground lies in a party’s fundamental non-performance (Article III.-3:502 DCFR). In addition, there are several categories equivalent to fundamental non-performance: lapse of additional time for performance, anticipated nonperformance, and inadequate assurance of performance (Article III.-3:503, 3:504, and 3:505 DCFR). 2. Hierarchy: right to cure and termination. Even though the DCFR has established a more detailed and technically advanced regulation of the right to cure than the PECL, the relationship between the right to cure and the creditor’s remedies is still complex (see Article III.-3:202, 3:203, and 3:204 DCFR). In principle, the right to terminate is subject to the right to cure. But there is no right to cure in cases where, for example, a fundamental non-performance has been found on the basis of the debtor’s destruction of trust under Article III.-3:502(2)(b) DCFR (see von Bar/Clive (2009), Comments on Article III.-3:502, p. 856). One may question, however, whether the DCFR commentary provides a convincing explanation on the issue. For an extensive analysis, see above Gsell on Article 8:104 PECL/DCFR comment 2.a). 3. Concepts of non-performance: fundamentality, delay, and non-conformity. Like the PECL, the DCFR has implemented a concept of fundamental non-performance as a principal pre-condition for contract termination. As von Bar/Clive (2009) explain, a unitary concept of non-performance has been established (p. 672; see Article III.-1:102(3) DCFR). Accordingly, non-performance is not limited to total or partial failure to perform, or to performance that is delayed or premature. It may also comprise defective and non-conforming performance. Notwithstanding a push towards unification, different categories of non-performance still exist as far as the remedies are concerned. Furthermore, the DCFR has modified the categories of fundamental nonperformance.

480

Chapter 9: Particular Remedies for Non-performance a) Marginal modifications of ‘fundamentality.’ On its face, the concept of fundamentality appears more limited under the DCFR than under the PECL: Article III.-3:502(2) DCFR omits the rule of Article 8:103(a) PECL. A finding of fundamental non-performance is thus not possible under the DCFR by mere reference to an interpretation of the parties’ agreement and the construction that ‘strict compliance with the obligation is of the essence of the contract.’ As the DCFR commentary explains, the parties, rather, will have to explicitly provide for such an understanding in their agreement. In addition, trade usage to that effect may lead to the contract’s termination (von Bar/Clive (2009), Comments on Article III - 3:502, p. 853). Whether this mere textual change will alter the substantive scope of fundamentality under the provision, however, is questionable. In essence, Article III.-3:502(2)(a) DCFR may comprise most of the strict-compliance cases that are covered by the PECL (see also above Gsell on Article 8:103 PECL comment 2.b)). b) Heterogeneity of remedies. With regard to the divergent remedial categorization of different cases of non-performance, the DCFR (as the PECL) is essentially far less homogeneous than the officially expressed ambition to establish a unitary concept of non-performance implies. In principle, the concept of non-performance comprises all kinds of failures to perform. It should, therefore, cover not only premature or delayed performance and default in general but also cases of defective performance and, hence, non-conformity (see Article III.-1:102(3); von Bar/Clive (2009), Comments on Article III.–1:102, p. 672). Regarding the grounds for termination of the contract, however, the unity is once again broken up. Under Article III.-3:502 DCFR, a creditor may terminate if ‘the debtor’s non-performance of a contractual obligation is fundamental’; this comprises both non-conformity and delay. As long as the nonperformance is fundamental, no distinction exists between the treatment of different deficits. This is different, however, under Article III.-3:503 DCFR (which corresponds to Article 8:106(3) PECL). The provision speaks of a ‘delay in performance.’ This excludes cases of non-conformity (and will very likely also exclude delivery of an aliud (for the corresponding treatment under Article 35 CISG see, e.g., BGHZ 132, 290, 296–297; Magnus, in Staudinger (2013), Article 35 CISG no. 9). While prima facie this understanding need not necessarily be authoritative against the backdrop of the drafters’ ambition to establish a unitary concept of non-performance, the plain text of the provision suggests a strict interpretation. Already, the PECL commentary has excluded the Nachfrist mechanism for cases of non-conformity (Lando/Beale (2000), pp. 374–375). The existence of a special rule on consumer sales contracts in Article IV.A.-4:201 DCFR also implies that defective performance has been excluded from the general rule in Article III.-3:503 DCFR (cf. Dauner-Lieb/Quecke (2008), p. 155; with general doubts Faust (2009), p. 24; see also below c)). Thus, for non-conformity cases, the non-consumer’s/creditor’s remedies are specific performance, withholding own performance, and damages only. Termination of the contract is not possible for cases beyond the scope of fundamental defects. This rule corresponds to the system of remedies under the CISG. According to Article 49(1) CISG, avoidance of the contract requires either a ‘fundamental breach’ or ‘non-delivery’ along with the expiry of an additional period. Delivery of defective goods below the threshold of fundamental breach

481

T.W. Dornis will not allow for avoidance under the CISG (for dominant opinion on the issue see, e.g., Magnus, in Staudinger (2013), Article 49 no. 21). c) Consumer sales contracts and non-conformity. As just mentioned, Article IV.A.-4:201 DCFR allows the consumer/buyer to terminate the contract for nonperformance in cases of non-conformity. The provision does not require the consumer/ buyer to set an additional time period for curing the defects. He can immediately terminate the contract upon occurrence of non-conformity. The DCFR commentary explains this as a ‘very considerable relaxation’ of the general rules on termination in favour of the consumer (von Bar/Clive (2009), Comment B on Article IV.A.–4:201, p. 1341). A defect need not be fundamental to allow for termination of the contract. The provision’s potential overreach has two restrictions, though. First, termination will be excluded if the non-conformity is merely minor. The seller bears the burden of proof in this regard. Second, a consumer/buyer will not be able to terminate the contract immediately, due to the hierarchy between the seller’s right to cure and the buyer’s right to terminate (for the hierarchy see above comment 2). The seller will have a prevailing right to cure the defect under Articles III.-3:202 et seq. DCFR.

German Law § 323 BGB: Termination for non-performance or for performance not in accordance with the contract (1) If under a synallagmatic contract the obligor fails to effect performance when due or to perform in accordance with the contract, the obligee may terminate the contract, if he has fixed, to no avail, an additional period of time for performance. (2) A period of time does not have to be fixed if 1. the obligor seriously and definitely refuses to perform, 2. the obligor fails to perform by a date specified in the contract or within a specified period and, in the contract, the obligee has linked the continuation of his interest in performance to the punctuality of that performance, or 3. special circumstances exist which, after each party’s interests have been weighed, justify immediate termination. (4) The obligee may terminate the contract before performance becomes due if it is obvious that the preconditions for termination will be satisfied. (5) If the obligor has performed in part, the obligee may terminate the entire contract only if he has no interest in partial performance. If the obligor has failed to perform in accordance with the contract, the obligee may not terminate the contract if there has been no more than an immaterial breach of duty. (6) Termination is excluded if the obligee is solely or overwhelmingly responsible for the circumstance which would entitle him to terminate the contract or if a circumstance for which the obligor is not responsible materialises at a time when the obligee is in default through non-acceptance.

482

Chapter 9: Particular Remedies for Non-performance § 324 BGB: Termination for breach of a duty under § 241 (2) If the obligor breaches some other duty under § 241 (2) under a synallagmatic contract, the obligee may terminate the contract if he can no longer reasonably be expected to abide by the contract. § 325 BGB: Compensation and termination The right to claim compensation in the case of a synallagmatic contract is not precluded by termination. § 326 BGB: Release from counter-performance, and termination where there is no duty to perform (1) If, by virtue of § 275(1) to (3), the obligor is released from his obligation to perform, the claim for counter-performance lapses; in the case of part performance § 441(3) applies mutatis mutandis. Sentence 1 does not apply if the obligor under § 275(1) to (3) does not have to effect supplementary performance in the event of a failure to perform in accordance with the contract. (2) If the obligee is solely or overwhelmingly responsible for the circumstance releasing the obligor from the need to perform pursuant to § 275(1) to (3), or if the obligor is not responsible for that circumstance and this occurs at a time when the obligee is in default through non-acceptance, the obligor retains his claim for counter-performance. He must, however, allow a deduction for whatever he saves as a result of release from performance, he acquires through the utilisation of his labour elsewhere, or he maliciously fails to acquire. (3)–(4) […] (5) If, by virtue of § 275(1) to (3), the obligor does not have to perform, the obligee may terminate; § 323 applies mutatis mutandis to the termination, except that it is not necessary to fix a period of time. 1. General. Unlike the common law, the CISG, and the PECL/DCFR, German law does not enshrine a paradigm of ‘fundamental non-performance’ or ‘fundamental breach.’ The old BGB did not acknowledge a unitary concept of non-performance. Correspondingly, it provided for a number of different remedies for divergent variants of non-performance. This diversity was significantly reduced in 2002 (see extensively Zimmermann (2002a), pp. 6 et seq.). Today, German law in principle no longer differentiates between delayed and defective performance, but follows a uniform concept of termination (and damages) when complete and conforming performance has not been rendered within an additional period for performance fixed by the creditor (Nachfrist mechanism). Nevertheless, the basic distinctions between the old categories–for example, non-conformity and delay of performance–still underlie the structures of German law (see generally Canaris (2001), p. 512; see also above Gsell on Article 8:103 PECL).

483

T.W. Dornis 2. Structure: Nachfrist mechanism and its exceptions. No doctrine exists in German law that formally corresponds to the concept of fundamental non-performance. In its stead, the expiry of an additional period for performance may lead to contract termination and open the door to bringing a claim for damages (in lieu of performance; see §§ 323, 281 BGB). However, a number of exceptions exist that allow for a disposal of the Nachfrist requirement. Most notably, impossibility or other impediments to performance under § 275 BGB will establish a right to terminate the contract under § 326(5) BGB. In these cases, there is no need to fix an additional period for performance. If performance is not impossible, and no other significant impediment exists, yet performance is nonetheless delayed or defective, the aggrieved party may proceed under § 323 BGB. In these cases, a key distinction must be made according to the character and quality of the obligation at issue. If performance on a primary or secondary obligation to perform (Hauptleistungspflicht or Nebenleistungspflicht) is delayed or deficient, § 323 BGB applies. The distinction between ‘primary’ and ‘secondary’ continues to exist for terminological reasons and will be determined according to whether the obligation to perform is reciprocally correlated to a counterobligation of the other party. In contrast to pre-2002 law, the new § 323 BGB no longer requires that such a reciprocal (or synallagmatic) relation exist in order to be applicable (but cf. still differently with remarkable arguments Ernst, in Münchener Kommentar (2007), § 323 nos. 10 et seq.). With regard to the category of subsidiary or ancillary duties that are not immediately intended to achieve a specific result through performance (Nebenpflichten, see § 241(2) BGB), contract termination is provided for under § 324. Finally, if a continuous contractual relationship exists (e.g., lease, loan, or service contracts), § 314 BGB is the lex specialis giving the parties a right to terminate the contract under extraordinary circumstances without complete and comprehensive restitution (for special rules on consumer loans see §§ 498, 508(2) BGB). 3. Prerequisites of § 323 BGB. Termination of a contract under § 323 has two basic pre-requisites. First, performance must be due. Second, notice fixing an additional period for performance must be given to the other side (Nachfrist mechanism). An exception to the first requirement can be found in § 323(4) BGB, which provides for termination in cases of anticipatory non-performance. If it is evident that the preconditions for termination will exist, the creditor may declare the contract terminated prior to the obligation’s due date. As to the requirement of setting an additional period of time to perform, three principal exceptions can be found in § 323(2) BGB. First, a constellation similar to cases of anticipatory non-performance, albeit at a time when performance is already due, will be found under § 323(2) no. 1 BGB if the debtor seriously and definitely refuses to perform (see also §§ 281(2), 286(2) no. 3 BGB; for anticipatory non-performance under § 323(4) BGB (prior to the due date) see below Article 9:304 PECL/GERMAN LAW comment 1.). This provision partly covers the situation dealt with under Article 8:103(c) PECL and Article III.-3:502(2)(b) DCFR. Second, if time is of the essence for performance, § 323(2) no. 2 BGB allows one to forego the Nachfrist requirement (relatives Fixgeschäft). Evidently, the provision resembles Article 8:103(a) and (b) PECL, as well as Article III.-3:502(2)(a) DCFR. A special provision exists in § 376 German Commercial Code (HGB) for merchants’ sales

484

Chapter 9: Particular Remedies for Non-performance contracts. Finally, § 323(2) no. 3 BGB refers to ‘special circumstances’ that require an immediate termination without the prior setting of an additional period for performance (see also § 286(2) no. 4 BGB). One example is the seller’s fraudulently non-informing the buyer about defects of the goods. The special circumstance in this the case is the loss of trust (see also BGH NJW 2007, 835; BGH NJW 2010, 2503). In addition, no. 3 is relevant in cases of consumer sales (§§ 474 et seq.): Article 3(5) Directive 1999/44/EC does not require the setting of an additional period for either termination or reduction of the price. Construction of § 323 BGB in conformity with the Directive will thus have to give regard to the lower threshold on the level of European law under no. 3 (see extensively Unberath (2005), 28 et seq.; Medicus/Lorenz (2010), no. 482). 4. Exclusion of right to terminate. The right to terminate the contract in cases of delayed performance may be excluded under several constellations. a) If the contractual performance at issue is divisible, and the debtor has performed only part of his obligation, the aggrieved party is free to declare the remainder of the contract terminated (if the pre-requisites for termination exist insofar). It may terminate the contract as a whole only if interest in the remainder of the other side’s performance has vanished due to the delay in performance (§ 323(5) BGB). b) In addition, non-conforming performance by the seller in a sales transaction may lead to contract termination. In these cases, however, § 323(5) 2 BGB excludes termination whenever the defect is negligible or insignificant. Application of this rule has also been considered in the reverse constellation: even though, if performance is indivisible, no need to prove a discontinued interest exists, it has been suggested that a seller may not be allowed to terminate the contract in cases where only a small fraction of the sales price is still outstanding. § 323(5) 2 BGB should then apply analogously (see Canaris (2009), pp. 17, 36–37; for the contrary position see Medicus/ Lorenz (2010), no. 484). In practice, courts have found an only insignificant defect and non-conformity, for instance, if the fuel consumption of a new car exceeded the information given by the manufacturer by less than 10% (BGH NJW 2007, 2111, 2112), and in cases where the costs of repair amounted to no more than 1% of the purchase price (see, e.g., BGH NJW 2005, 3490, 3493; BGH NJW 2008, 1518, 1519). c) Finally, termination is excluded under § 323(6) BGB if it was the creditor himself who contributed to the situation of non-performance and if his contribution is predominantly or fully responsible for the default. This includes situations where the non-performing party has tendered performance without the creditor’s due cooperation, thereby placing the creditor in mora creditoris. If afterwards the tendering party, without fault, is unable to perform, the creditor may not escape the contract and his liability by mere termination. 5. Legal consequences. The right to terminate comes into existence either upon expiry of the additional period set for performance, or at the time a constellation under § 323(2) BGB has occurred. Contract termination, however, cannot become effective before the aggrieved party has given notice to the non-performing party or has requested damages (see § 281(4) BGB). It follows that an aggrieved party may (upon expiry of the additional time period or in cases of § 323(2) BGB) also continue to

485

T.W. Dornis demand performance. In that case, the right to terminate the contract will generally coexist with the right to demand performance under the contract (elektive Konkurrenz). The aggrieved party remains free to terminate the contract at any time, even after it has made another demand to perform (see BGH NJW 2006, 1198; the situation is, however, governed by § 242 BGB; see, e.g., Jacobs (2008), pp. 153–154). This situation places the non-performing party into a state of uncertainty: the party may continue to perform in order to prevent further liability for late performance, yet this may collide with a delayed declaration of termination, invalidating further efforts at performance. As a pragmatic escape, the non-performing party must tender performance. This will result either in acceptance and a corresponding extinction of the obligation or in a rejection of the tender, which leads to an extinction of the creditor’s right to terminate (see Jacobs (2008), 141 and 146 et seq.). As a result of the contract’s termination, both side’s obligations will be extinguished, and previously exchanged performances must be restituted (§§ 346 BGB et seq.). Damages can be combined with contract termination (see §§ 325, 280, 281 BGB; see generally below).

Comparison and Evaluation 1. Conceptual differences. The PECL and the DCFR rules on contract termination illustrate a reconciliation of divergent principles. They accommodate the common law concept of fundamentality of non-performance (or breach) and the German technique of setting an additional period in order to compel performance or terminate the contract (Nachfrist mechanism). Similar accommodations and hybrid structures can be found in all major contract law regimes, most notably the CISG (e.g., Articles 49, 51, 64, 72, and 73) and the UNIDROIT Principles (Articles 7.1.5 and 7.3.1). German law, at least formally, contrasts significantly: it lacks a pre-requisite of fundamentality of nonperformance with regard to contract termination. The Sale of Consumer Goods Directive (1999/44/EC) goes even further by also not requiring an additional time period to be set (Article 3). 2. Practical convergence. Notwithstanding this evident doctrinal and structural divergence, the differences are hardly significant in practice. a) Non-performance typology: a paradigm of homogeneity. Most evidently, cases of intentional non-performance constitute fundamental non-performance (see Article 8:103(c) PECL, Article III.-3:502(2)(b) DCFR). Correspondingly, under § 323(2) no. 3 BGB, intentional non-performance renders the Nachfrist unnecessary (see, e.g., BGH NJW-RR 2008, 1052; BAG NZA 2010, 1348). It is trust distortion that suffices to qualify instances of even minor non-performance as fundamental. However, further constellations exist where fundamentality and a right to immediate termination under the Nachfrist mechanism will correspond under an objective standard. In particular, § 326(5) BGB prescribes an immediate right to terminate in cases of impossibility or other impediments under § 275 BGB. These constellations usually qualify as fundamental non-performance. In situations where the setting of an additional time period is not required, § 323(2) BGB mirrors many categories under the PECL and the DCFR. The

486

Chapter 9: Particular Remedies for Non-performance provision’s no. 1 establishes a right to terminate without Nachfrist for the debtor’s communication of unwillingness to perform. This resembles Article 9:304 PECL and Article III.-3:504 DCFR (see below). Under § 323(2) no. 2 BGB, the parties’ contractual agreement establishes conditions of a so-called relatives Fixgeschäft, which provides for an immediate right to terminate in cases of delay. Hence, in cases where a party has been ‘substantially deprive[d] […] of what [he] was entitled to expect under the contract’ (Article 8:103(b) PECL and Article III.-3:502(2)(a) DCFR), the contract can be terminated without further pre-conditions (for the absolutes Fixgeschäft where delay will result in impossibility see above Article 9:102 PECL/§ 275 BGB comment 2.a)). Finally, § 323(2) no. 3 BGB comprises cases that are characteristic of the concept of fundamental non-performance. As mentioned above, one example is trust deterioration (see above German Law comment 3). Another example is just-in-time contracts, where delayed performance gives a right to immediately terminate the contract (at least in part) for the ‘special circumstances’ or the ‘substantial deprivation’ of the creditor (see Bundestags-Drucksache 14/6040, p. 140). Many of the categories in no. 3 may be reflected in Article III.-3:502(2)(b) DCFR (see, e.g., BGH NJW 2009, 2600; BGH NJW 2011, 2871). By and large, therefore, German law covers most instances of fundamental non-performance within the domain of constellations where a Nachfrist requirement does not exist. b) Conceptual disparity: non-conformity cases. Since, in principle, neither the PECL nor the DCFR allows for contract termination under a Nachfrist mechanism in cases of non-conformity – that is, the deficient performance by, for example, delivery of defective goods – German law arguably goes beyond both regimes as far as contract termination is concerned. § 323(1) BGB generally covers all cases of non-performance, including delayed and non-conforming performance. The only limitation to termination for non-conformity is found in § 323(5) 2 BGB (see also Article 3(6) Directive 1999/44/EC). A finding of insignificance (or unreasonableness) requires a comprehensive balancing of both parties’ interests (BGH NJW-RR 2010, 1291). In practice, the threshold for finding non-conformity insignificant is high. Vice versa, there is no serious obstacle to termination, even in cases of small or minor defects. The rule applies analogously in cases of complete non-performance of an obligation that is deemed insignificant (see, e.g., Grüneberg, in Palandt (2012), § 323 no. 32). Comparing the thresholds for termination under German and European law with those under the PECL/DCFR illustrates that the BGB contains hardly any restrictions on whether non-conformity could be deemed an instance of non-performance and ground for contract termination. Moreover, the threshold for significance (or reasonability) is practically almost non-existent. Quite differently, the PECL and the DCFR have established an eye-of-the-needle criterion of fundamentality that will not be overcome by many cases of non-conformity in practice. An exception exists, however, under the DCFR’s provision on consumer sales contracts. In this regard, the systems converge: the consumer/buyer may still be restricted in exercising his right to terminate by the seller’s right to cure (see above DCFR comment 2). Nevertheless, many constellations of non-conformity in consumer sales contracts may again be subject to the limitations on the right to cure under Article III.-3:203 DCFR.

487

T.W. Dornis 3. Economic reason and practical aspects. a) Right to withhold and to terminate. Prima facie, one more thing appears to be inconsistent upon a comparison of the systems. With regard to the right to terminate and the right to withhold performance, the PECL and the DCFR establish different standards of limitation. A right to terminate the contract will generally require an incident of fundamental non-performance. Anything below this threshold (except for consumer sales contracts) fails to qualify for termination (Articles 9:301 PECL and III.-3:502(1) DCFR). The right to withhold performance in cases of delayed counter-performance, however, is limited by a standard of reasonability only (Articles 9:201(1) PECL and III.-3:401(4) DCFR). German law, by contrast, does not enshrine a similar dichotomy. It allows for contract termination in cases of even minor and less significant non-conformity or nonperformance. Under § 320(2) BGB withholding performance is generally subjected to a standard of reasonableness. Upon closer scrutiny, it is evident that the PECL and the DCFR have established an economically sound system of remedies: contract termination is often costly (due to winding-up). It thus makes sense to raise the level for a reversal of the contract. This is different for the mere withholding of one side’s performance, which will not immediately create significant costs. The effect of withholding may be duly characterized as an incentive mechanism for the contractual exchange. In this regard, the lower threshold is adequate. b) Nachfrist, fundamentality, and foreseeability. There is another relevant point for the economic efficiency of remedies under the different regimes. The German Nachfrist requirement helps avoid insecurity. The situation is less predictable in systems where a paradigm of fundamentality governs (see above Gsell on Article 8:103 PECL (COMPARISON AND EVALUATION)). Upon first look, therefore, it might be doubted whether the fundamentality concept could ever provide an efficient solution for non-performance cases. This, however, is not a necessary conclusion. In combination with the foreseeability requirement in Article 8:103(b) PECL and Article III.-3:502(2)(a) DCFR, the concept of fundamentality may ultimately prove to be even more efficient: if fundamentality is found only when a deprivation of the aggrieved party is at least reasonably foreseeable, both sides to an agreement will have incentives to disclose all relevant information. The close interrelationship between fundamentality and foreseeability may thus foster clarity and transparency and, ultimately, reduce costs due to the parties’ more careful drafting of their agreements (see generally to the informationforcing effect of the foreseeability rule Cooter/Ulen (2000), p. 247). c) Right to cure. Finally, regarding the right to cure, another debate surfaces upon comparing the regimes. The non-performing party has a right to cure under all systems. Even under the DCFR’s rules on consumer sales contracts, the seller is usually allowed to cure before the consumer/buyer may terminate or reduce the price. The evaluation of the right to cure and its counterpart of immediate termination (or price reduction) are generally contested with regard to the respective economic benefits or detriments. Some voices contend that a right to immediate termination (or reduction), most notably in consumer sales contracts, will be welfare enhancing since it provides an incentive to raise quality levels (see, e.g., Dauner-Lieb/Quecke (2008), p. 148). The counter-position predicts that excluding the right to cure will ultimately raise prices (see, e.g., Wilhelm (2011), p. 229; see also generally as to the premium that will have

488

Chapter 9: Particular Remedies for Non-performance to be paid by the consumer for higher protection levels: Huber (2008), p. 712). In this regard, it may be most important to recognize that termination as such is usually more costly than alternative remedies, such as, for example, price reduction. Besides, particularly in B2C constellations, the seller may also often be the cheapest cost avoider. Hence, over-restricting the right to cure will tend to be inefficient.

Principles of European Contract Law 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 nonperformance, 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. 1. General. The provision states that the termination of a contract to be performed in parts is generally limited to the extent of non-performance. Thus, it is not a termination of the contract per se but an annulment of a distinguishable part of the overall performance programme. Only where a distinct and separate partial non-performance amounts to fundamental non-performance of the contract as a whole will complete termination be allowed (see then Article 9:305 PECL, below). 2. Divisibility of performance and counter-performance. a) ‘Separate parts’. The language of Article 9:302 PECL is clear: partial termination is at issue only if the contract is to be performed ‘in separate parts.’ This always requires divisibility of both performance and counter-performance (for the DCFR see below comment 2). Prima facie, the provision covers only contracts to be performed in a series of separate units. The most prominent example, as illustrated in the comments, is service contracts with a series of distinct performance units, each having a separately calculated price–for example, a cleaning contract providing for the weekly cleaning of office space for a price calculated in weekly instalments (Lando/Beale (2000), pp. 411–412). In these cases, the contract is divided into separate and corresponding parts of performance and counter-performance. It is questionable whether the provision also applies to contracts where performance and counter-performance are not correspondingly divisible into sub-parts. A simple case illustrates the point: 100 boxes of wine have been ordered, but only 95 have been delivered. The seller has not completed performance during the additional period fixed by the creditor. Two questions arise. Is the buyer entitled to terminate the contract with regard to the lacking boxes? Is he entitled to terminate the contract as a whole? As the PECL commentary (Lando/Beale (2000), p. 412, Comment C.) makes clear regarding service contracts, if the payment can be apportioned accordingly, Article 9:302 PECL can be applied in order to allow for a partial termination. The same rule should apply to sales contracts and other kinds of agreements.

489

T.W. Dornis b) Universal standard: fundamentality. As to the termination of a part of the contract or of the contract as a whole, the question will always be whether the non-performance is fundamental for the part or for the contract as a whole. The answer depends on the parties’ agreement and the circumstances. In the above example, termination in full may not be indicated unless complete delivery was of the essence of the contract, or the case falls within one of the other categories of fundamental non-performance under Article 8:103 PECL.

Draft Common Frame of Reference Article III. – 3:506: Scope of right to terminate (1) Where the debtor’s obligations under the contract are not divisible the creditor may only terminate the contractual relationship as a whole. (2) Where the debtor’s obligations under the contract are to be performed in separate parts or are otherwise divisible, then: (a) if there is a ground for termination under this Section of a part to which a counterperformance can be apportioned, the creditor may terminate the contractual relationship so far as it relates to that part; (b) the creditor may terminate the contractual relationship as a whole only if the creditor cannot reasonably be expected to accept performance of the other parts or there is a ground for termination in relation to the contractual relationship as a whole. 1. General. The DCFR provision on partial contract termination largely corresponds to the PECL rule. Minor amendments provide clarification and predictability. The exclusion of partial contract termination where the debtor’s obligation is indivisible (Article III.-3:506(1) DCFR) is implicit in the PECL’s clear language that partial termination is available only if the contract ‘is to be performed in separate parts’ (Article 9:302 PECL). The exclusion of partial contract termination also concerns cases of non-conforming performance. Hence, delivery of defective goods under a sales contract will not allow for contract termination in part. The issue will rather be whether non-conformity constitutes a fundamental non-performance (see Article IV.A.-2:301 DCFR and Faust (2009), pp. 27–28). 2. Categories of partial non-performance. a) Divisibility. As the DCFR commentary makes clear, two sub-categories of partial (non-)performance exist. In this regard, the DCFR provides textual clarification, but no substantial modification, of the PECL. Divisibility of performance (as a pre-requisite for partial termination) may comprise contractual agreements with serial performance and correspondingly divisible counterperformance. In these cases, the parties’ obligations concern subject matter that may be divided into different segments, regardless of the time of performance set for each segment (e.g., different objects sold under a single contract). In addition, it may cover contracts with a continuous performance structure (e.g., service contracts). In these

490

Chapter 9: Particular Remedies for Non-performance cases, even though the complete performance may not be divisible per se, it can still be segmented with regard to the time during which each segment is to be performed (see also Leible (2008), p. 105). An obligation to pay is generally considered ‘divisible’ under the provision as long as it can be properly apportioned to the corresponding part of counter-performance. This, in turn, also depends on the feasibility of reliably computing the value of the segments of partial performance and non-performance. In essence, the DCFR reflects the PECL requirement that the contract as such must be divisible. Even though the wording of Article III.-3:506 DCFR might imply that it is the debtor’s obligation that should be determinative, it actually is both parties’ obligations: only if performance and counter-performance can be apportioned accordingly will a partial termination be at issue (see Article III.-3:506(2)(a) DCFR (‘part to which a counter-performance can be apportioned’); see also Faust (2009), p. 27). b) Two-step analysis. In cases of partial non-performance, the analysis for termination comprises two steps. First, it must be determined whether the partial non-performance is fundamental with regard to the relevant part (or parts) of the whole performance. The contract may then be terminated under paragraph (2)(a). Evidently, regarding the relevant part at issue, if non-performance does not qualify as fundamental per se, termination of the corresponding part can still be achieved by Article III.-3:503 DCFR. Second, concerning the contract as a whole, two categories of relevant non-performance must be distinguished: on the one hand, if non-performance regarding the relevant part also constitutes a fundamental non-performance of the contract as a whole, the contract can be terminated in full under paragraph (2)(b), second alternative (see also Faust (2009), p. 27). On the other hand, even if partial non-performance does not amount to a deficiency of the whole contract, there may still be a right to terminate in full under paragraph (2)(b), first variant. This, however, requires that the creditor ‘cannot reasonably be expected to accept performance of the other parts’ (for the question of what reference point should be chosen see below COMPARISON AND EVALUATION comment 2).

German Law § 266 BGB: Part performance The obligor is not entitled to render part performance. § 323 BGB: Termination for non-performance or for performance not in accordance with the contract (1)–(4) […] (5) If the obligor has performed in part, the obligee may terminate the entire contract only if he has no interest in partial performance. If the obligor has failed to perform in accordance with the contract, the obligee may not terminate the contract if there has been no more than an immaterial breach of duty.

491

T.W. Dornis 1. General. Under German law, the concepts of partial performance and contract termination are difficult to reconcile. Most generally, the category of partial performance (Teilleistung, § 266 BGB) comprises both quantitative and qualitative deficits of performance. Partial performance will be found if the debtor offers to render a smaller amount of goods, fewer service hours, or different objects than he is obliged to deliver under the contract. In addition, partial performance may also lie in non-conformity, most notably if the delivered goods under a sales contract are in a defective, albeit curable, condition (see, e.g., Krüger, in Münchener Kommentar (2007), § 266 no. 3; Medicus/Lorenz (2010), no. 158). No partial performance, however, will be found in cases of partial impossibility under § 275(1) BGB–for example, if a defect in the contract’s subject matter cannot be cured (S. Lorenz (2003b), 3098). Regarding the termination of the contract, however, quantitative and qualitative deficits of the performance must be distinguished. § 323(5)1 BGB applies to cases of malperformance only with regard to quantity. It does not cover situations of qualitatively defective or non-conforming performance (arg. e § 323(5)2 BGB; Ernst, in Münchener Kommentar (2007), § 323 nos 197–198; but cf. id. no. 256 for cases where both provisions apply because the quantitatively deficient performance (i.e., the separable part of the whole) is also qualitatively non-conforming). 2. Constellations of (partial) non-performance Accordingly, several constellations of partial non-performance have to be distinguished. Under § 266 BGB, generally the aggrieved party may reject a partial performance, whether quantitative or qualitative. After rejection, the case is one of complete non-performance, and the contract may be terminated as a whole under § 323 BGB (Ernst, in Münchener Kommentar (2007), § 323 no. 200). Partial termination is excluded if the debtor’s or the creditor’s performance is indivisible, whether actually, legally, or under the parties’ agreement (BGH NJW 1990, 3011 (sale of computer hardware and tailor-made software); fundamentally Gsell, in Soergel (2005), § 323 nos 172 et seq.). Also, if counter-performance is indivisible, termination of the contract as a whole is the only option (BGH NJW 2010, 146; Ernst, in Münchener Kommentar (2007), § 323 no. 202). Hence, in cases of indivisibility, the contract can be terminated only in its entirety. If the performance can be divided and partial quantitative performance has been accepted, § 323(5) 1 BGB applies. It then must be determined whether the creditor has an interest in the partial performance that has already been rendered. If such an interest exists, the creditor will still have to render his own counter-performance, albeit proportionately reduced (BGHZ 36, 318). Termination will concern only the outstanding non-performed part of the debtor’s obligation. The full contract, however, may be terminated if the creditor has no (more) interest in the partial performance that has already been rendered (see, e.g., BGH NJW 1990, 2550). Acceptance of partial performance per se will not exclude the right to terminate the contract as a whole. Yet, the creditor must have reserved his right to fully terminate the contract at the time when he accepted an only partial performance (Ernst, in Münchener Kommentar (2007), § 323 no. 206). 3. Legal consequences. Even though the pre-requisites of § 323(5) 1 BGB might be fulfilled, the creditor is normally not obliged to terminate the contract as a whole. He may choose between partial and complete termination. Once he decides, however, the

492

Chapter 9: Particular Remedies for Non-performance result is binding (Ernst, in Münchener Kommentar (2007), § 323 no. 210). In cases of partial termination, he still must counter-perform in part. The scope of his counterperformance will be calculated in accordance with the technique provided for in § 441(3) BGB. In other words, it will be proportionately reduced (see, e.g., Gaier (2001), 336 et seq.).

Comparison and Evaluation 1. Right to reject partial performance. Neither the PECL nor the DCFR expressly provide for a right to reject an only partial tender of performance. Of course, the rejection of partial performance can be explicitly excluded by the parties’ agreement. Without an agreement, rejection is generally possible for non-conforming performance (see Article 8:104 PECL, Article III.-3:202 and 3:203 DCFR). Also, with regard to the debtor’s early performance, a right of rejection exists. This right, however, arises only if the creditor would suffer a detriment from early acceptance or if he has a legitimate interest in not accepting prior to the due date. If no such detriment or interest exists, early performance is allowed (Article 7:103(1) PECL and Articles III.-2:103(1), IV.A.3:105(1) DCFR). Against this backdrop, it would appear inadequate not to allow for rejection in cases of partial performance as well. Nevertheless, the right should be limited by good faith and fair dealing (Article 1:201 PECL, Article III.-1:103(1) DCFR). Accepting partial performance may fall in particular under the creditor’s obligation to cooperate, for example, if performance cannot be delivered immediately but has to be tendered in separate segments (Article 1:202 PECL, Article III.-1:104 DCFR). Under this perspective, differences between PECL, DCFR, and German law are minimal. Even though German law generally enables the creditor to reject acceptance unrestrictedly for all cases of partial performance, his right has also been limited in practice by a standard of good faith and fair dealing. Rejection of acceptance must not be unreasonable (§ 242 BGB; see, e.g., BGH VersR 1954, 298; OLG Bremen NJW-RR 1990, pp. 6–7). 2. Reference point for the creditor’s interest. In cases of partial performance where the creditor may elect to terminate the contract as a whole, German law and the PECL/DCFR appear to differ significantly. § 323(5) 1 BGB requires that the creditor has no ‘interest’ in partial performance. This interest refers to the part of performance that he has already received (see fundamentally Gsell, in Soergel (2005), § 323 no. 187). In addition, the interest needs specification: it does not suffice that the creditor has any kind of residual interest in the part of performance already received. His interest must be a contractual interest–that is, partial performance must comply with what the parties have agreed to under the contract. Termination of the whole relationship will be excluded only where partial performance helps, at least in part, effectuate the creditor’s genuine interest that was to be fulfilled by the contract. In this regard, it is the initial and genuine interest of the creditor in contract fulfilment that provides the standard for testing whether the residual interest may be sufficient for excluding termination of the whole contract (see instructively Ernst, in Münchener Kommentar (2007), § 323 no. 203; see also, e.g., BGH NJW 1990, 2549; BGH NJW 1990, 3011). Under Article

493

T.W. Dornis 9:302 PECL, termination of the contract as a whole requires non-performance to be fundamental ‘to the contract as a whole.’ While German law looks at the creditor’s interest in the part that has already been delivered, the PECL provide for an overall perspective of fundamentality. The PECL standard is far from precise. Yet, it may widely correspond to the German rule in terms of its practical results. After all, it is the parties’ agreement and the creditor’s contractual interest that will be determinative for a finding of fundamental non-performance (see Article 8:103 PECL). Quite problematically, however, the DCFR may fail to provide any determinative rule at all. Article III.-3:506(2)(b) DCFR allows for termination of the full contract ‘only if the creditor cannot reasonably be expected to accept performance of the other parts’ (or if a different ground for termination, e.g., anticipated non-performance, exists). This text is ambiguous concerning the reference of the creditor’s interest. While the ‘other parts’ could be understood as the outstanding remainder of performance (see, e.g., Leible (2008), p. 105), the DCFR commentary’s illustration seems to take the opposite position insofar as it suggests giving regard to whether the creditor is interested in the part of performance that has already been (or will be) received by the creditor (von Bar/Clive (2009), Comments on Article III.-3:506 p. 876). In essence, therefore, the PECL and German law will practically accord. The DCFR, however, will be difficult to apply due to the imprecision of its text.

Principles of European Contract Law Article 9:303: Notice of Termination (1) A party’s right to terminate the contract is to be exercised by notice to the other party. (2) The aggrieved party loses its right to terminate the contract unless it gives notice within a reasonable time after it has or ought to have become aware of the non-performance. (3) (a) When performance has not been tendered by the time it was due, the aggrieved party need not give notice of termination before a tender has been made. If a tender is later made it loses its right to terminate if it does not give such notice within a reasonable time after it has or ought to have become aware of the tender. (b) If, however, the aggrieved party knows or has reason to know that the other party still intends to tender within a reasonable time, and the aggrieved party unreasonably fails to notify the other party that it will not accept performance, it loses its right to terminate if the other party in fact tenders within a reasonable time. (4) If a party is excused under Article 8:108 through an impediment which is total and permanent, the contract is terminated automatically and without notice at the time the impediment arises.

494

Chapter 9: Particular Remedies for Non-performance 1. General. Termination is generally effectuated by notice to the other party. This notice may be given by express or conclusive declaration of termination. The notice requirement and the requirement of timeliness stem from a balancing of interests: the inconvenience caused to the creditor in giving notice is usually far smaller than the loss potentially caused to the debtor resulting from a failed attempt to perform in situations where the contract will ultimately be terminated. The creditor will have to check for defects and will need some time to decide how to proceed. In the meantime, however, the defaulting debtor may arrange for further performance, requiring preparations for cure, substitute production, or delivery. These efforts may result in a misallocation of resources (i.e., inefficiency) if the contract is ultimately terminated. In essence, it is a question of economic balancing. The notion of ‘reasonable time’ (paragraphs (2) and (3)(a)) must consider the specific circumstances of both parties and of the contract. If there is no need to prevent the defaulting party from further attempts to perform, no notice within a reasonable time is required. This applies particularly in cases of anticipatory non-performance (Article 9:304 PECL; below comment 1). 2. Two constellations: performance is late/defective or overdue. As to the creditor’s options for proceeding, it must be determined whether performance has already been tendered, either late or non-conforming, or is still due. In the former case, paragraph (2) gives the creditor the option of verifying what has actually been rendered and deciding whether it is still lucrative or otherwise advisable to continue with the contract. His right to terminate may be forfeited if it is not exercised in due course–that is, if the creditor unreasonably lingers. If performance is due but has not been made, the creditor has several options available. If he knows nothing about the debtor’s intentions to perform (or not to perform) but is still interested in performance, he must claim specific performance. In addition, he has to comply with the reasonability requirement under Article 9:102(3) PECL (see above). In practice, however, the creditor will not be under too much time pressure: he may still wait according to Article 9:303(3)(a) PECL. Even though the debtor may try to claim that the creditor unreasonably delayed the demand for specific performance under Article 9:102(3) PECL, the creditor can refer to the fact that he did not need to terminate before performance and that he was honestly hoping for the debtor to come along. Finally, if the debtor still intends to perform and if the creditor knows or has reason to know of the debtor’s intentions, he is required to notify the debtor if he no longer wants performance. Otherwise, the debtor may still fulfil his obligation by performing within a reasonable period. This rule reflects the economic rationale of the notification requirement. Even though the multiple uses of ‘reasonable’ do not offer much clarity, the rule may be workable if one considers its economic foundation. As to the debtor’s intention to tender ‘within a reasonable time’ (see Article 9:303(3)(b) PECL), it is the contractual agreement that determines when a tender would actually no longer be admissible. As to the creditor’s ‘unreasonable’ failure to notify the debtor, the decision-maker will have to focus on the specific circumstances of the creditor: notification will usually not require any additional time for consideration; there is neither a defective tender to be tested, nor will the creditor need much time to make up his mind (he has actually already decided

495

T.W. Dornis against contract continuation). In essence, therefore, ‘reasonable’ here means immediately. Finally, the debtor’s grace period for tender ‘within a reasonable time’ will again be a question of the parties’ individual circumstances in the specific case. 3. Exceptions to notice requirement. The PECL commentary identifies two exceptions to the notice requirement. First, in cases of non-fundamental delayed nonperformance, if the creditor has set an additional period for performance and has also provided for automatic termination at the end of this period, there is no need to give notice of termination (Article 8:106(3) PECL). In addition, paragraph (4) refers to Article 8:108 PECL and the automatic termination of the contract in cases of a total and permanent impediment. Whether the constellation should be limited to cases where non-performance is excused, however, is questionable (as to the parallel provision in Article III.-3:104(4) DCFR see also Leible (2008), pp. 105–106; Faust (2009), p. 29). 4. Revocability. As to the options to revoke a notice of termination, the PECL commentary gives a general undetailed explanation: while amending remedies may be possible as long as they are compatible, a change of incompatible remedies is more complicated. For example, if the creditor amends his demand for specific performance with a claim for damages for the delay, no problem will arise. This is different, however, if a choice of remedies has created definite facts. Terminating the contract might therefore bar the creditor from later returning to a claim for specific performance. Yet, the commentary also suggests that the general principle of good faith and fair dealing should govern (Lando/Beale (2000), p. 363; see also above Gsell on Article 8:102 PECL comment 3). In this regard, one could argue that it is not only an issue whether the choice of remedies has been definite, but that it will also be possible to switch as long as the other side has not adapted to the choice. In other words, a creditor may switch from specific performance to termination, and vice versa, as long as his communication to the non-performing debtor has not caused the latter to act in reliance on the communication.

Draft Common Frame of Reference Article III. – 3:507: Notice of termination (1) A right to terminate under this Section is exercised by notice to the debtor. (2) Where a notice under III. – 3:503 (Termination after notice fixing additional time for performance) provides for automatic termination if the debtor does not perform within the period fixed by the notice, termination takes effect after that period or a reasonable length of time from the giving of notice (whichever is longer) without further notice. Article III. – 3:508: Loss of right to terminate (1) If performance has been tendered late or a tendered performance otherwise does not conform to the contract the creditor loses the right to terminate under this Section unless notice of termination is given within a reasonable time.

496

Chapter 9: Particular Remedies for Non-performance (2) Where the creditor has given the debtor a period of time to cure the nonperformance under III. – 3:202 (Cure by debtor: general rules) the time mentioned in paragraph (1) begins to run from the expiry of that period. In other cases that time begins to run from the time when the creditor has become, or could reasonably be expected to have become, aware of the tender or the non-conformity. (3) A creditor loses a right to terminate by notice under III. – 3:503 (Termination after notice fixing additional time for performance), III. – 3:504 (Termination for anticipated non-performance) or III. – 3:505 (Termination for inadequate assurance of performance) unless the creditor gives notice of termination within a reasonable time after the right has arisen. Article III. – 3:104: Excuse due to an impediment (1)–(3) […] (4) Where the excusing impediment is permanent the obligation is extinguished. Any reciprocal obligation is also extinguished. In the case of contractual obligations any restitutionary effects of extinction are regulated by the rules in Chapter 3, Section 5, Sub-section 4 (Restitution) with appropriate adaptations. (5) […] The DCFR provisions on notice of contract termination largely resemble the PECL rules. If the creditor has given the debtor time to cure the non-performance under Article III.-3:202, the ‘reasonable time period’ under Article III.-3:508(1) DCFR begins to run from the expiry of the period given for cure (Article III.-3:508(2) DCFR). In other cases of an additional period for performance, cases of anticipated non-performance, and cases where the debtor has failed to give adequate assurance of performance (Article III.-3:503, 3:504, and 3:505 DCFR), the creditor will lose the right to terminate unless notice is given within a reasonable time after the right has arisen. As the DCFR commentary makes clear, mere inability to return a tangible benefit received from the other side does not preclude a party from terminating the contract (von Bar/Clive (2009), Comment D on Article III.-3:508, p. 883). As with the PECL, it is uncertain whether the extinction of reciprocal obligations is dependent on the party’s being excused where a permanent impediment exists (see Article III.-3:104(4) DCFR; for the critique see above).

German Law § 314 BGB: Termination, for good cause, of contracts for the performance of a recurring obligation (1)–(2) […]

497

T.W. Dornis (3) The person entitled may terminate only if he gives notice of termination within a reasonable period after becoming aware of the cause for termination. […] § 325 BGB: Compensation and termination The right to claim compensation in the case of a synallagmatic contract is not precluded by termination. § 349 BGB: Declaration of withdrawal Withdrawal takes place by a declaration as against the other party. § 350 BGB: Expiry of the right of termination after a period of time has been set If a period has not been agreed for exercise of a contractual right of termination, the other party may fix a reasonable period within which the party entitled to terminate must exercise that right. If termination is not declared before the end of that period, the right of termination expires. § 351 BGB: Indivisibility of the right of termination If one or the other party to the contract consists of more than one person, the right to termination can be exercised only by all and against all persons. If the right to termination expires for one of the persons entitled, it also expires for the others. 1. General. After the 2002 reform, termination became the central technique for ending and winding up contractual relations. A wide array of legal rights to terminate the contract exist (see, e.g., §§ 313(3), 314(3), 321(2), and §§ 323, 324, 326(5), 437, 438(4) 3, 634, 634a(4) 3 BGB). Exercising the right to terminate requires that the terminating party give notice to the other side (§ 349 BGB). Notice of termination is a declaration of will (§ 130(1) BGB). Accordingly, the general rules on the declaration of a party’s will apply (§§ 116 et seq. BGB). 2. Revocability. After receipt, the notice of termination is generally irrevocable (§ 130(1) 2 BGB). Under pre-2002 German law, however, a declaration of termination could be revoked even after receipt of the notice if the debtor was unable to restitute property previously received from the creditor. The hornbook example was destruction of a sold object by force majeure and the seller’s subsequent termination, declared as a reaction to the buyer’s non-payment and without knowing about the object’s destruction. The seller was then allowed to revoke his termination and to avoid having to pay back the price without a concurrent claim for restitution of the object or its value (see Kaiser, in Staudinger (2012), § 349 nos. 27 et seq.). Under reformed law, this problem has been eliminated, since a claim for value restitution has been introduced (see § 346(2) no. 3 BGB; for an exception, however, see § 346(3) no. 2 BGB).

498

Chapter 9: Particular Remedies for Non-performance Exceptions to the principle that a choice of remedies (either termination or damages) will be binding are being debated. Yet, details are contested, and it appears that dominant opinion still adheres to a concept of principal irrevocability (see extensively Gaier, in Münchener Kommentar (2007), § 349 nos. 3–4). It is doubtable, however, why the aggrieved party should not be allowed to change its remedies–most notably, switch from termination to damages or vice versa–as long as the other side has not acted in reliance on the aggrieved party’s choice (see instructively above Gsell on Article 8:102 PECL/§ 325 BGB comment 3; and also Gsell (2004), 647 et seq.). 3. Time limitations. The right to terminate can typically be exercised without restriction as to time. The issue, then, is how to avoid undue disadvantage to the non-performing party by the aggrieved party’s potentially improper delay in declaring the contract terminated. The aggrieved party may be seduced to speculate whether continuance of the contract or termination is more beneficial. For the non-performing party, a double bind arises: it will need to prepare for termination and still have to face the aggrieved party choosing performance. Theory and practice have developed some escapes. Yet, the picture is not completely clear. Evidently, a waiver of the right to terminate may be found if the aggrieved party, being aware of its right, either performs itself or accepts the other side’s performance without reference to the termination (see, e.g., BGH BB 1969, 383). A mere delay in declaring will usually not suffice for a waiver; this depends on the circumstances, particularly whether the other side could reasonably assume that the right would no longer be exercised (see, e.g., BGH NJW 2002, 670). Besides, under the statutory language, only a contractual right to terminate allows the non-performing party to set a time period within which the aggrieved party can exercise the right to terminate (§ 350 BGB). This has been criticized. After all, in cases where a legal right to terminate exists, the aggrieved party may also effectively acquire a right to speculate at the non-performing party’s expense by waiting for the ‘right’ time to terminate the contract. Whether this imbalance should be justified by the fact that the other side has failed to perform properly is questionable. As an escape for the non-performer, the analogous application of § 350 BGB has been suggested (Gaier, in Münchener Kommentar (2007), § 350 no. 2). Similar effects could be achieved by analogous application of § 264(2) BGB (M. Schwab (2003), 136). Evidently, the question of when to exercise the right to terminate is an issue of good faith and fair dealing. The most convincing suggestion, therefore, is an analogous application of § 314(3) BGB, requiring termination within an equitable or adequate period after the ground for termination has become known (Ernst, in Münchener Kommentar (2007), § 323 no. 150). Under the PECL and the DCFR, the resolution is almost identical to this last suggestion: speculation at the non-performing party’s expense is limited by the requirement that a right to terminate must be exercised within a reasonable time (Article 9:303(2) PECL, Article III.-3:508(3) DCFR). 4. Legal consequences. Contractual relations end upon receipt of a notice of termination. Doctrinally, the contract will be transformed into a so-called restitutionary relationship (Rückgewährschuldverhältnis; see §§ 346 et seq. BGB and below). The only exception is § 352 BGB, in cases where the creditor has terminated for nonperformance and the debtor, immediately upon notice, declares a settling of the parties’

499

T.W. Dornis accounts (see §§ 387 BGB). Any pre-existing remedies – in particular, claims for damages for prior malperformance – will not be affected by the termination (BGH NJW 2008, 911; see also § 325 BGB).

Comparison and Evaluation The three regimes appear to have different concepts concerning the time limit for exercising the right and the revocability of a declaration to terminate. In substance, these differences become smaller by sensible recourse to the principle of good faith and fair dealing. Regarding the requirement of exercising the right to terminate within a ‘reasonable’ time, the PECL and the DCFR differ from German statutory law insofar as the latter is silent on the issue. Yet, theory and practice in Germany also deal with constellations of a delayed declaration under the principle of good faith and fair dealing (§ 242 BGB). At first sight, the time frame available to the aggrieved party may appear to be wider. Correspondingly, the threshold for loss of the right to terminate is higher. Yet, the analogous application of § 314(3) BGB achieves an identical outcome. And even under alternative options for resolving the conundrum of the non-performing party, it is universally acknowledged that good faith and fair dealing require a limitation of the time available for declaration. Hence, a reasonable time limitation exists. Quite differently, the issue of revocation of the termination notice has not been dealt with explicitly under the PECL and the DCFR. It is, however, a debated issue under German law. Most sensibly, cases where the aggrieved party has an interest in altering its initial, disadvantageous choice of termination over continuance (or vice versa) will usually have to be resolved by reference to good faith and fair dealing (see above Gsell on Article 8:102 PECL (COMPARISON AND EVALUATION)).

Principles of European Contract Law Article 9:304: Anticipatory Non-Performance Where prior to the time for performance by a party it is clear that there will be a fundamental non-performance by it the other party may terminate the contract. 1. General. If it becomes clear before performance is due that the debtor will default in a way that amounts to fundamental non-performance, the creditor may terminate the contract immediately. It would be inefficient to make a creditor wait until performance is due before allowing him to exercise his right to terminate the contract. The doctrine of ‘anticipatory non-performance’ (according to the PECL’s terminology) equates foreseeable with actual non-performance. In terms of the pre-requisites for an ‘anticipatory’ non-performance, the provision does not expressly distinguish between cases where the debtor refuses to perform (unwillingness) and those where default is due to objective circumstances alone (inability).

500

Chapter 9: Particular Remedies for Non-performance 2. ‘Manifest fundamentality.’ As with actual non-performance, anticipated nonperformance entitles the creditor to terminate the contract only in cases where the expected default would be fundamental (see Article 8:103 PECL). In addition, the doctrine requires clarity that the debtor is unwilling or unable to perform on the due date. If it is uncertain, the creditor must demand assurance of performance under Article 8:105 PECL (for the correlation see above Gsell on Article 8:105 PECL). 3. Declaration and legal consequences. A constellation of anticipatory nonperformance does not require the creditor to give notice of termination within the time limits of Article 9:303 PECL. If the debtor has expressed an unwillingness or inability to perform, he need not be protected against a waste of resources by early notification. Nevertheless, termination can be declared only as long as the necessary degree of conviction that there will be non-performance in the future persists. The right to terminate may get lost if the debtor regains his ability to perform before his obligation has become due. Similarly, where the debtor originally refused to abide by the contract, he may return to honour the parties’ agreement before his performance is due. If the creditor has not terminated the contract in the meantime, he may resort only to demanding assurance of due performance (Article 8:105 PECL). The right to terminate will no longer exist. Once validly declared, termination of the contract for anticipatory non-performance provides the creditor with the same rights as a termination for actual non-performance.

Draft Common Frame of Reference Article III. – 3:504: Termination for anticipated non-performance A creditor may terminate before performance of a contractual obligation is due if the debtor has declared that there will be a non-performance of the obligation, or it is otherwise clear that there will be such a non-performance, and if the non-performance would have been fundamental. Article III. – 3:505: Termination for inadequate assurance of performance A creditor who reasonably believes that there will be a fundamental nonperformance of a contractual obligation by the debtor may terminate if the creditor demands an adequate assurance of due performance and no such assurance is provided within a reasonable time. The DCFR resembles the PECL rule, albeit with a terminological clarification. Unlike the PECL’s use of the term ‘anticipatory’ non-performance, the DCFR uses the term ‘anticipated’ non-performance. This term appears to be more accurate, since it is the creditor’s perception and conclusion of a future non-performance that provides the right to terminate the contract prior to the performance due date.

501

T.W. Dornis German Law § 323 BGB: Termination for non-performance or for performance not in accordance with the contract (1)–(3) […] (4) The obligee may terminate the contract before performance becomes due if it is obvious that the preconditions for termination will be satisfied. (5)–(6) […] § 324 BGB: Termination for breach of a duty under § 241 (2) If the obligor breaches some other duty under § 241 (2) under a synallagmatic contract, the obligee may terminate the contract if he can no longer reasonably be expected to abide by the contract. 1. General. The provision of § 323(4) BGB was introduced by the 2002 reform. It covers all cases of anticipated non-performance, most notably delay and non-conformity. With regard to the additional pre-requisites for contract termination under § 323(4) BGB, there are two principal constellations. The first constellation involves cases where the debtor refuses to perform–in other words, where the debtor, prior to the due date, communicates his unwillingness to perform at the time when performance will become due. These instances of non-performance are due to subjective factors and thus must be distinguished from constellations where objective factors alone constitute the pre-requisites for a right to termination. Doctrinally, the debtor’s communication of an unwillingness to perform in the future can be characterized as an effective and current breach of the contract. The second constellation involves situations of mere incapacity (or other impediments) occurring in the future, quite differently referring to the impending violation of contractual duties only. It thereby, strictly speaking, establishes a new category of non-performance (Ernst, in Münchener Kommentar (2007), § 323 no. 132). 2. Overlap. a) The rule on termination for anticipated non-performance overlaps with other provisions on contract termination and remedies. Particularly in cases where the debtor refuses to perform, § 324 BGB also may allow for contract termination in certain constellations. In practice, both provisions will usually concurrently apply (see, e.g., Ernst, in Münchener Kommentar (2007), § 323 no. 132). Both § 323(4) BGB and § 324 BGB generally concern cases where the debtor would be able to perform in principle, but nonetheless refuses to fulfil an obligation. In addition, if performance is at risk for actual impossibility or the fact that the debtor will have to exert a disproportionately large effort, §§ 326(1), (5), 275 BGB will provide for a right to terminate beyond the category of ‘anticipatory breach.’ Hence, § 323(4) BGB will primarily cover cases of impossibility occurring in the future and cases of future non-performance on monetary obligations. For the latter category, however, one may also resort to § 311a(2) BGB (at

502

Chapter 9: Particular Remedies for Non-performance least if the impediment already existed at the time of contract conclusion; see Ernst, in Münchener Kommentar (2007), § 323 nos 131 and 134). b) Finally, the right to withhold performance under § 321(1) BGB may overlap with § 323(4) BGB in certain cases. Yet, § 321(1) BGB requires only that the risk of future non-performance be visible or observable (erkennbar). § 323(4) BGB, by contrast, demands that the future non-performance be evident (offensichtlich). While the latter standard may not require conviction beyond a reasonable doubt, it virtually requires a finding of facts that allows a well-founded conclusion of future nonperformance (see instructively Ernst, in Münchener Kommentar (2007), § 323 no. 134). The threshold is therefore much higher under § 323(4) BGB. This duly reflects the provisions’ differing effects: § 321(1) BGB allows only the withholding of performance, while § 323(4) BGB may result in contract termination. For further comparison, see above Gsell on Article 8:105 PECL. 3. Analogy to Article 72(2) CISG? In cases where a debtor has not rejected performance but where the creditor fears that the debtor will fail to perform in the future, Article 72(2) CISG provides for a requirement of ‘pre-termination communication.’ If the creditor intends to terminate, he must give ‘reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.’ Similarly, practice under pre-2002 German law had acknowledged a mechanism of pretermination communication among the parties. If the debtor failed to convince the anxious creditor within a certain time period (set by the creditor) that performance would be duly delivered, the latter could terminate (see, e.g., RG Recht 1912 Nr. 3181). Similarly, under the reformed BGB, albeit without a literal foundation in the Code, in cases of doubt (i.e., where the creditor is not convinced that non-performance will ensue in the future), the debtor may be required to respond to the creditor’s request. He may also need to explain his future situation and, where appropriate, provide security or assurance (Gsell, in Soergel (2005), § 323 no. 139). 4. Legal consequences. If the pre-requisites for termination under § 323(4) BGB are met, a right (no duty) to terminate prior to the contractual due date exists. There is no need to set an additional period for performance. The creditor may also continue with the contract and demand specific performance. As to damages, there are no differences from other cases of termination. Yet, damages for a delay in payment will accrue only from, and not before, the due date set in the parties’ contractual agreement (BGH NJW-RR 2008, 210).

Comparison and Evaluation 1. Rights to terminate and to withhold. Concerning the scope of the right to terminate and the right to withhold performance, the regimes of the PECL, the DCFR, and German law differ at least formally. For the PECL and the DCFR, the right to terminate requires non-performance to be fundamental (Article 9:304 PECL and Article III.-3:504 DCFR).

503

T.W. Dornis Withholding of performance, by contrast, is also possible in cases of nonfundamentality (Article 9:201 PECL, Article III.-3:401 DCFR). The standard of conviction differs between the categories: for termination, the PECL and the DCFR require that it be ‘clear’ that there will be a future non-performance. Withholding performance, however, requires only that the creditor ‘reasonably believes’ that there will be non-performance. Also, a reasonable belief in fundamental non-performance will suffice for giving the creditor a right to demand assurance under Article 8:105 PECL and Article III.-3:505 DCFR. German law does not acknowledge a concept of fundamentality (see above). In addition, the standards of conviction and factual foundation required for a finding of anticipated non-performance and for a right to withhold performance differ. For contract termination under § 323(4) BGB, the risk of nonperformance must be evident, which requires a maximum level of factual corroboration. For the right to withhold performance, by contrast, the risk needs only to be observable (§ 321(1) BGB). In this regard, the level of certainty must be higher than under the PECL and the DCFR (see extensively above Gsell on Article 8:105 PECL). An extension of pre-termination communication, however, will approximate the practical results (see below 2.). Under German law, §§ 320 and 321 BGB appear to have a reciprocity requirement. In this regard, paradoxically, contract termination under § 323(4) BGB (where no reciprocity is required) is possible for secondary obligations to perform, while the less invasive options of withholding performance or demanding assurance are excluded (for a critique see Gsell, in Soergel (2005), § 321 no. 26 and § 320 nos 12 et seq.; see also above Gsell on Article 8:105 PECL/GERMAN LAW comment 3., comment 6., and COMPARISON AND EVALUATION). 2. Pre-termination communication. As mentioned above, there is another difference concerning the parties’ pre-termination communication under the PECL, the DCFR, and German law. Both the PECL (Article 8:105) and the DCFR (Article III.-3:401(2) and Article III.-3:505) provide for the creditor’s right to demand ‘adequate assurance’ if he ‘reasonably believes’ that there will be a (fundamental) non-performance by the other party. Quite differently, German law appears to be tacit with regard to similar constellations of reasonable doubts that do not establish the necessary level of certainty for the debtor’s potential failure under § 321 BGB. Yet, a mechanism of pre-termination communication between the parties may be inferred from the former practice under the unrevised Code and a comparable rule in Article 72(2) CISG. Hence, the problem of an ‘uncommunicative’ right to terminate (Ernst, in Münchener Kommentar (2007), § 323 no. 135) may be resolved by a structured resolution under the principle of good faith and fair dealing.

Principles of European Contract Law 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

504

Chapter 9: Particular Remedies for Non-performance 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. 1. General. The effects of contract termination under the PECL are governed by Articles 9:305 et seq. Most fundamentally, termination releases both parties from their future obligations to perform. If there has been an exchange of performances or performance by one party only, the performing party may wish to recover property, money, or the value of its performance from the other side. In addition, a party may want to dispose of what it has received in the course of a prior performance. In this regard, termination offers a way to undo the contractual relations and the parties’ prior performances. Yet, termination does not generally have a retroactive effect. As paragraph (2) clarifies, in particular, it will not affect contract provisions on dispute settlement or other provisions intended for operation after contract termination (e.g., confidentiality agreements). 2. Return of performances received. In principle, termination does not lead to (mutual) return of the parties’ performances or a corresponding restitution. In many cases, particularly those where contracts are to be performed over a period of time, the date of termination is a demarcation line–previous performances will be left untouched, and only future obligations are being affected. A more extensive unwinding of the contract, however, which includes previous performances, can be found under Article 9:306, 9:307, and 9:308 PECL.

Draft Common Frame of Reference Article III. – 3:509: Effect on obligations under the contract (1) On termination under this Section, the outstanding obligations or relevant part of the outstanding obligations of the parties under the contract come to an end. (2) Termination does not, however, affect any provision of the contract for the settlement of disputes or other provision which is to operate even after termination. (3) A creditor who terminates under this Section retains existing rights to damages or a stipulated payment for non-performance and in addition has the same right to damages or a stipulated payment for non-performance as the creditor would have had if there had been non-performance of the now extinguished obligations of the debtor. In relation to such extinguished obligations the creditor is not regarded as having caused or contributed to the loss merely by exercising the right to terminate.

505

T.W. Dornis Article III. – 3:511: When restitution not required (1) There is no obligation to make restitution under this Sub-section to the extent that conforming performance by one party has been met by conforming performance by the other. (2) The terminating party may elect to treat performance as non-conforming if what was received by that party is of no, or fundamentally reduced, value to that party because of the other party’s non-performance. (3) Restitution under this Sub-section is not required where the contract was gratuitous. 1. General. Similar to the PECL, the general rule under the DCFR is that termination usually concerns only unperformed obligations. As Article III.-3:509(1) DCFR clarifies, only ‘outstanding obligations’–that is, obligations that have not been performed in full (including non-conforming performance)–will come to an end. This is the rule of ‘prospective effects’: termination does not retrospectively affect the contractual relationship or the parties’ mutual obligations as far as these obligations have already been performed. Terminologically more precise than the PECL, Article III.-3:509(1) DCFR provides that outstanding obligations ‘come to an end.’ Article III.-3:311(1) DCFR complements this rule by excluding restitution for conforming performance by one party that ‘has been met with conforming performance by the other.’ There is no unwinding of the contract in situations of equivalence. Most commonly, this is the case for instalment contracts. 2. Exception: ‘prospective effect based on a retrospective investigation.’ Notwithstanding this general foundation on prospectivity, the contract may be partially unwound again by the return of property and/or money. This rule of ‘prospective effect based on a retrospective investigation’ has inter alia been expressed in Article III.-3:511(2) DCFR. If the performance received by one party is of no (or little) value, restitution may be initiated for both sides. The rule will not apply, however, under Article III.-3:511(3) DCFR; for gratuitous contracts, there is no comparison of values. 3. Special rules on damages. According to Article III.-3:509(3) DCFR, termination will not extinguish existing claims for damages that the aggrieved (terminating) party would have been entitled to as a consequence of the other side’s non-performance. This means that, as far as damages are concerned, non-performance that was responsible for the termination will be treated as if it was not followed by a termination. Hence, the other side cannot argue that, without the termination, no damages would have accrued–that is, that the party would have duly performed had the contract not been hastily terminated. Sentence 2 in paragraph (3) further clarifies that termination by the creditor will not be seen as contributing to the debtor’s non-performance (see Article III.-3:101(3) and III.-3:704 DCFR).

506

Chapter 9: Particular Remedies for Non-performance German Law § 346 BGB: Effects of termination (1) If one party to a contract has reserved a right to terminate the contract or if he has a statutory right of termination, then, if termination occurs, any performance received is to be returned, as are benefits derived from such performance. (2) The obligor must pay compensation for value rather than effect a return, where 1. the return or surrender is excluded because of the nature of what has been acquired, 2. he has consumed, transferred, encumbered, processed or transformed the object received, 3. the object received has deteriorated or has been destroyed; any deterioration resulting from the proper use of the object for its intended purpose is, however, disregarded. If the contract specifies a counterperformance, such counterperformance is to be taken as a basis for calculation of the compensation for value. (3) There is no duty to pay compensation for value 1. if the defect which gives the right to termination became apparent only during the processing or transformation of the item, 2. in so far as the obligee is responsible for the deterioration or destruction or the damage would also have occurred in his hands, 3. if, in the case of a statutory right of termination, the deterioration or destruction has occurred in the hands of the person entitled even though he has taken the care which he usually takes in his own affairs. Any remaining enrichment must be given up. (4) The obligee may demand compensation, in accordance with §§ 280 to 283, for infringement of a duty under subsection (1) above. § 348 BGB: Concurrent performance The obligations of the parties arising out of termination are to be performed concurrently. The provisions of §§ 320 and 322 apply mutatis mutandis. Under German law, declaration and notice of contract termination will extinguish the parties’ contractual relationship and their obligations to perform (for an exception see § 352 BGB). Formally, extinction does not appear to be retroactive. Claims for damages for a party’s prior violation of contractual duties will continue to exist (§ 325 BGB; for the correlation see Gsell (2004), 643). Doctrinally, the contract will not be deemed removed or dissolved by the termination. The parties’ performances, if already delivered, will thus not be found to have been made without legal ground. Instead, the parties’ initial contractual agreement is deemed to have been transformed by the termination into a so-called restitutionary or contractual winding-up relationship (Rückgewährschuldverhältnis, see BGH NJW 2008, 911; Zimmermann (2002a), p. 39).

507

T.W. Dornis Hence, if (partial) performance was made by one or both sides prior to termination, the declaration of termination will create new primary obligations between the parties. The execution of this restitutionary relationship, though, particularly of its newly created obligations, may have a retroactive effect: each side must re-transfer the performance received and the benefits taken to the other party. If such a re-transfer is impossible, compensation for the value must be provided (BGH NJW 2008, 2028, 2030; BGH NJW 2009, 63, 64). A party’s obligation to provide compensation may be discharged under § 346(3) BGB in certain circumstances (see below Articles 9:307 et seq./German Law comment 2). In restitutionary relationships, the parties’ obligations to perform are reciprocal (§ 348 BGB).

Comparison and Evaluation 1. Doctrinal divergence. The PECL/DCFR provisions on termination and the corresponding German rules differ with regard to their doctrinal foundations. Both the PECL and the DCFR are founded largely on the idea of prospective effects. This means that a contract that has been terminated will not be treated as if it had been retrospectively cancelled. This appears to differ under German doctrine, where the parties’ agreement is deemed to be transformed into a restitutionary relationship substituting the former contract. Execution of the obligations springing from this newly created relationship will generally reverse a prior exchange of performances. Again, however, the divergence may not prove very significant in practice. 2. Technical convergence. Neither the PECL/DCFR nor German law requires that a court effectuate the termination. The parties have the power to end the agreement by a mere declaration of their will. In addition, fault on the side of the non-performing party is not a pre-requisite for a valid termination. As to the legal consequences, a declaration of termination will bring the parties’ contractual exchange to a halt and, correspondingly, dispose of the parties’ outstanding parts of their future obligations. The parties’ relationship will not treated as if it had never been made. Most notably, this is reflected in the fact that all regimes allow for a survival of claims for damages and contract clauses, such as dispute settlement or stipulated damage provisions. Similarly, the regimes’ approaches to long-term relationships and instalment contracts are largely identical: like the PECL and the DCFR, German law allows for these contracts to be terminated in terms of future obligations only. Termination operates only ex nunc (§ 314 BGB; BGH NJW 1981, 679, 680; see also generally Zimmermann (2002a), p. 42).

Principles of European Contract Law 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.

508

Chapter 9: Particular Remedies for Non-performance The terminating party may not be forced to keep property received from the other party that, as a consequence of the other party’s non-performance, is of no or reduced value for the first party. A typical constellation is a contract for the delivery of several components, such as a computer system, where the debtor tenders only the first component–a piece that is useless without the other parts. If the outstanding performance cannot be separated under the contract and if the parts cannot be used separately (e.g., in the case of tailor-made computer hard-/software), the aggrieved party need not keep the partial performance. It could instead claim damages (Article 9:502 PECL) or reduce the price (Article 9:401 PECL). Yet, damages or price reduction are often not reasonable options, particularly if the property received by the aggrieved party cannot be used or made usable for the contractual purpose since there is no marketplace where the missing part of the debtor’s performance can be acquired separately. In the above example, the problem is that hardware and software are usually sold in packages; single components cannot be bought separately without extra charges. In such cases, exercising a right to reject the property received is the cheapest option for the aggrieved party. Returning property received prior to the termination is also an obligation of the recipient (see below Article 9:308 PECL; for the obligation to accept return of property see below COMPARISON AND EVALUATION).

Draft Common Frame of Reference Article III. – 3:511: When restitution not required (1) […] (2) The terminating party may elect to treat performance as non-conforming if what was received by that party is of no, or fundamentally reduced, value to that party because of the other party’s non-performance. (3) […] Article III.-3:510 DCFR generally provides for restitution of benefits, most notably the re-transfer of property, in cases where fairness requires ensuring that the parties will not end up unjustly enriched or correspondingly aggrieved. Often, re-transfer is primarily in the interest of the party that initially transferred the property. Article III.-3:511 DCFR limits this principle. Paragraph (2) provides that whenever the property already received is of no value to the recipient because of the contract’s termination, performance may be treated as non-conforming. Returning the received property is an obligation (see below Article III.-3:510 DCFR; for the obligation to accept return of property see below COMPARISON AND EVALUATION).

German Law The question whether under § 346 BGB, in addition to a duty to restitute property received under the terminated contract, there exists a concurrent right to demand

509

T.W. Dornis re-transfer under § 346 BGB is hotly debated. Evidently, the parties are generally obliged only to restitution. Most notably, this includes re-transferring property received from the other side (§ 346(1) BGB). It is unclear, however, whether this duty to return property is accompanied by a corresponding obligation of the other side to take the property back. Particularly for constellations of terminated sales contracts, it has been suggested that the seller could be obliged to take back his goods in analogy to § 433(2) BGB (see, e.g., Faust, in Bamberger/Roth (2007), § 437 no. 45). The contrary position, however, which seems to be the dominant opinion, rejects a duty to take back property after contract termination (see, e.g., Gaier, in Münchener Kommentar (2007), § 346 no. 16). Only under specific circumstances does it allow for such an obligation to come into existence – in other words, the recipient of the property must bring forward a specific interest in getting rid of the property (see, e.g., BGHZ 87, 104, 109–110; BGH NJW-RR 1989, 650–651). Taking back property after termination will thus not be a duty; if the debtor refuses to take his property back, the rules on mora creditoris apply (Gläubigerverzug, §§ 293 et seq. BGB). Only upon finding a special interest on the side of the creditor will taking back the property be subject to an obligation under the restitutionary relationship (§ 241(2) BGB; see Gaier, in Münchener Kommentar (2007), § 346 no. 16).

Comparison and Evaluation The PECL and the DCFR provide for a general right to reject property previously received in cases where its value under the contract has been fundamentally reduced by the other party’s non-performance. In addition, the other party has a concurrent right to recover property under Article 9:308 PECL and Article III.-3:510(3) DCFR (see also below). If the other side refuses to take back property previously transferred, the rules on mora creditoris provide for relief (Article 7:110 PECL, Article III.-2:111 DCFR). In addition, the creditor can demand performance on an obligation to take back the property. As opposed to the rules on the debtor’s cure of non-conformity (see, e.g., Article III.-3:205(1) DCFR), no explicit obligation to take back the property has been established. Yet, the obligation ensues from general principles. Refusal is a nonperformance of the duty to cooperate (see Articles 7:110, 1:202, and 1:301(4) PECL, Articles III.-2:111, 1:104, and 3:101 DCFR). The debtor’s refusal to take back the property may also result in a claim for damages. Nevertheless, the duty to cooperate is imposed only where there is an interest on the other side. A failure to accept the tender of property or to take back property on demand will not necessarily be a nonperformance if the creditor has no specific interest or if it cannot reasonably be expected (Lando/Beale (2000), p. 120; von Bar/Clive (2009), Comments on Article III.1.104, p. 687). German law has established a corresponding and, in practical terms, almost identical solution. In general, the rules on mora creditoris apply (§§ 293 et seq. BGB). In addition, a right to demand taking back the property may exist. It requires that the creditor/recipient demonstrate a special interest in getting rid of the property.

510

Chapter 9: Particular Remedies for Non-performance Principles of European Contract Law 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. 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. 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 counterperformance may recover a reasonable amount for the value of the performance to the other party. 1. General. The PECL follow the rule of prospective effects (above Article 9:305 PECL/Article III.-3:509 DCFR comment 1.). Termination of the contract generally has no retroactive effect. Restitution among the parties will therefore not be founded on an idea of winding up the contract. It is the imbalance of the parties’ performances at the point of termination that is taken as justification of restitution. Article 9:307, 9:308, and 9:309 PECL must be read in context: they formulate a general principle of restitution in cases where the performing party has not received an adequate counter-performance. The party can then recover money, property, or the value of its non-returnable performances. Evidently, this limitation to restitution may not be fully compliant with a creditor’s option to terminate the contract as a whole (see above Article 9:302 PECL): if the effects of termination are limited to a part of the contract–that is, the obligations still to be performed–even a creditor’s full-fledged right to terminate the contract as a whole will, practically speaking, result only in a partial termination. 2. Recovery of money paid. Recovery of money under Article 9:307 PECL is one instance where the PECL provide a restitutionary remedy after termination and, strictly speaking, an exception to the rule of prospectivity. If the creditor has paid for a performance he did not receive, he can demand retroactive restitution. Since payment of money for a divisible counter-performance can be easily apportioned, a claim for repayment will always cover the corresponding amount for the counter-performance that was not delivered. The most common examples are continuous work or service contracts and contracts where performance is due in separate instalments. In addition to damages, the party terminating the contract and claiming restitution for money may also claim interest (Article 9:508 PECL). 3. Recovery of property. If performance was to deliver and transfer property, termination will entitle the transferor to recover his former property if he has not

511

T.W. Dornis received an equivalent counter-performance (usually in the form of payment). With regard to repayment of money, after contract termination, re-transfer of property may result in a curtailing of termination rights if recovery will be executed only in parts (see above 1.). a) No third-party effects. As the commentary explains, Article 9:308 PECL concerns only the contractual relationship and the parties to the contract. Third-party rights to resist restitution to the initial owner of the property are not governed or provided for under the PECL. Such rights are an issue for the applicable national regime. b) Negotiable instruments, securities, and shares. Regularly, the sale or assignment of shares, securities, and other transferable rights will be accompanied by a transfer of certificates or other instruments giving evidence of the right. These instruments are usually embodied in paper. Since in these cases, property or title in the document accompanies the subject matter of the contract, termination of the contract and an ensuing obligation to re-transfer the actual subject matter will also comprise a duty to re-transfer the document (property). Again, the applicable national regime will have to provide for the details. c) Intellectual and industrial property. If the subject matter of the contract concerns the transfer of intellectual or industrial property rights, termination may require a re-transfer under certain circumstances. This depends on the subject matter and whether the right was transferred in direct connection with a piece of tangible property. For patents, trademarks, and related rights, the transfer of tangible objects will usually entail only authorization to make use of the IP right regarding the tangibles sold. Termination will end the right to use and will require re-transfer of property in the tangibles. If a registered right as such (e.g., patents, trademarks) has been transferred (in full or in part), termination and re-transfer of title in the industrial or intellectual property right may require a formal filing of the change with the registering authority in order to achieve full validity or to avoid procedural disadvantages (see, e.g., Articles 17 et seq. Regulation (EC) No 207/2009 (concerning community trademarks)). Copyrights, by contrast, may not be transferable at all (or only in part; see § 29 German Copyright Act). Depending on the applicable national regime, contract termination will then simply cancel the license that has been granted. No further activity is required. d) Bad bargain. Even if the parties’ agreement was imbalanced in terms of the values of performance and counter-performance (i.e., a bad bargain), a claim for restitution of property will not fail. Hence, even if the property is more valuable than the price agreed upon, the seller is entitled to claim it back in full after he has terminated for non-payment. 4. Recovery for performance that cannot be returned. a) Non-returnability. A claim for re-transfer of property in goods or tangibles does not exist if re-transferring is impossible or too burdensome (as in, e.g., cases of work performances). The performing party may then still have a claim for payment and perhaps even for damages. Yet, payment may not be due and may not even become due in the future. In addition, a claim for damages will usually not accrue on the side of the non-performer, and it may fail if the non-performing party is excused (see Article 8:108 PECL). For these

512

Chapter 9: Particular Remedies for Non-performance constellations, Article 9:309 PECL provides for restitution of the value that was transferred prior to the contract’s termination. b) Calculation. The PECL are not determinatively clear on the point of how to calculate the amount of restitution. As the illustrations in the commentary imply, the performing party should receive only what the other party has actually obtained. The focus is on the receiving party only. If the non-returnable performance is useless and of no value to this party, even though it may actually be useful or valuable to a third party (or the other party), there will be no restitution. Additionally, recovery must never exceed a corresponding proportion of what was contractually agreed upon as remuneration. In this regard, a potential recovery will be even further limited: it must not exceed the other side’s actual enrichment or ‘net benefit.’ Illustration 1 (Lando/Beale (2000), p. 425) explains this lucidly: a party has delivered only two thirds of its contractual performance. The outstanding third was contracted for separately with a third party. The non-performing party will then recover only the difference between its initially contracted price and the other side’s expenses (i.e., the third party’s price for the outstanding rest and the other side’s expenses for finding and organizing an alternative contract). Under this technique, the ‘reasonable amount’ of recovery may quickly come close to zero, depending on how much of the contract’s performance was delivered before termination became effective.

Draft Common Frame of Reference Article III. – 3:510: Restitution of benefits received by performance (1) On termination under this Section a party (the recipient) who has received any benefit by the other’s performance of obligations under the terminated contractual relationship or terminated part of the contractual relationship is obliged to return it. Where both parties have obligations to return, the obligations are reciprocal. (2) If the performance was a payment of money, the amount received is to be repaid. (3) To the extent that the benefit (not being money) is transferable, it is to be returned by transferring it. However, if a transfer would cause unreasonable effort or expense, the benefit may be returned by paying its value. (4) To the extent that the benefit is not transferable it is to be returned by paying its value in accordance with III. – 3:512 (Payment of value of benefit). (5) The obligation to return a benefit extends to any natural or legal fruits received from the benefit. Article III. – 3:512: Payment of value of benefit (1) The recipient is obliged to:

513

T.W. Dornis (a) pay the value (at the time of performance) of a benefit which is not transferable or which ceases to be transferable before the time when it is to be returned; and (b) pay recompense for any reduction in the value of a returnable benefit as a result of a change in the condition of the benefit between the time of receipt and the time when it is to be returned. (2) Where there was an agreed price the value of the benefit is that proportion of the price which the value of the actual performance bears to the value of the promised performance. Where no price was agreed the value of the benefit is the sum of money which a willing and capable provider and a willing and capable recipient, knowing of any non-conformity, would lawfully have agreed. (3) The recipient’s liability to pay the value of a benefit is reduced to the extent that as a result of a non-performance of an obligation owed by the other party to the recipient: (a) the benefit cannot be returned in essentially the same condition as when it was received; or (b) the recipient is compelled without compensation either to dispose of it or to sustain a disadvantage in order to preserve it. (4) The recipient’s liability to pay the value of a benefit is likewise reduced to the extent that it cannot be returned in the same condition as when it was received as a result of conduct of the recipient in the reasonable, but mistaken, belief that there was no non-conformity. Article III. – 3:513: Use and improvements (1) The recipient is obliged to pay a reasonable amount for any use which the recipient makes of the benefit except in so far as the recipient is liable under III. – 3:512 (Payment of value of benefit) paragraph (1) in respect of that use. (2) A recipient who has improved a benefit which the recipient is obliged under this Section to return has a right to payment of the value of improvements if the other party can readily obtain that value by dealing with the benefit unless: (a) the improvement was a non-performance of an obligation owed by the recipient to the other party; or (b) the recipient made the improvement when the recipient knew or could reasonably be expected to know that the benefit would have to be returned. Article III. – 3:514: Liabilities arising after time when return due (1) The recipient is obliged to: (a) pay the value (at the time of performance) of a benefit which ceases to be transferable after the time when its return was due; and

514

Chapter 9: Particular Remedies for Non-performance (b) pay recompense for any reduction in the value of a returnable benefit as a result of a change in the condition of the benefit after the time when its return was due. (2) If the benefit is disposed of after the time when return was due, the value to be paid is the value of any proceeds, if this is greater. (3) Other liabilities arising from non-performance of an obligation to return a benefit are unaffected. 1. General. Like the PECL, the DCFR establishes the right to demand return of any benefit that, if unreturned, would result in an unjust enrichment. After contract termination, the recipient party is therefore obliged to restore benefits received by the other side’s performance. These benefits can be money, property, and non-monetary transferable tangibles. They can also be the value of benefits if they are nontransferable. As the DCFR commentary explains, this rule is not meant to be understood as a fictitious dissolution of the contract; the contract is not to be regarded as if it never existed, and the rule of prospective effects is still to govern. Yet, the rules of restitution under Article III.-3:510 DCFR are doctrinally understood to impose new obligations on the parties in order to avoid unfairness (see von Bar/Clive (2009), Comment A on III.-3:510, p. 893). 2. Recovery of money paid. The rules on the recovery of money in Article III.-3:510(2) DCFR correspond to those of the PECL. A claim for interest can be found in Article III.-3:708 DCFR. 3. Recovery of property. Generally, the rules on re-transfer of property correspond to the PECL-regime. Article III.-3:510(3), last sentence DCFR clarifies that if re-transfer would be unreasonable in terms of effort and expense, the benefit may be returned by reimbursing its value. 4. Recovery for benefits that cannot be returned. If a benefit that has been transferred prior to contract termination cannot be returned by actual re-transfer, an obligation to pay its value exists under Article III.-3:510(4) and 3:512 DCFR. a) General rule: payment of value of performance benefits. Article III.-3:512(1) DCFR distinguishes between returnable and non-returnable benefits. The recipient is obliged to pay the value of a benefit that is non-returnable per se or that becomes non-returnable before the restitutionary obligation becomes due (sub-paragraph (a)). If the benefit can be returned, the recipient must compensate the other party for any reduction in its value that occurs between the time of receipt and the time of return (sub-paragraph (b)). As to the manner in which the value is calculated, paragraph (2) provides for a rule of proportionality: the value of the promised performance will be compared to the actual performance’s value. The benefit’s value, then, is a corresponding proportion or percentage of the agreed price. If no price has been agreed upon, the DCFR refers to a ‘willing and capable provider and a willing and capable recipient’–the value is deemed the price that they would have agreed upon as compensation had they known about the non-conformity (i.e., the actual performance’s deficits). In this regard, the second sentence of paragraph (2) simulates two fictitious parties’

515

T.W. Dornis hypothetical agreement on a price that should reasonably be paid for the actually non-conforming performance. Paragraph (3) reduces, and in some cases eliminates, the obligation to recompense for the value of a benefit where the recipient’s inability to reimburse the value is due to the other side’s non-performance of a contractual obligation. The other side’s non-performance must be the reason that the benefit cannot be returned in ‘essentially the same condition as when it was received’ (sub-paragraph (a)), or else the recipient must be ‘compelled without compensation either to dispose of it or to sustain a disadvantage in order to preserve it’ (subparagraph (b)). b) Payment for use of the benefit. In addition to restitution of performances and their values that have been received, Article III.-3:513(1) DCFR provides for restitution of additional benefits that the parties draw while making use of the other side’s performance. The recipient of a returnable benefit must pay a reasonable amount for any use made of the benefit. To prevent double restitution, however, the obligation excludes compensation for value reduction that occurs due to the recipient’s use between performance and termination; reimbursement for this reduction in value (i.e., the using party’s benefit) is already covered under Article 3:512(1) DCFR. Remarkably, Article III.-3:512(4) DCFR excludes the recipient’s liability to pay the value of a benefit if the use was made under the reasonable (albeit mistaken) belief that there was no need to terminate (i.e., no non-conformity). The DCFR commentary illustrates this with the example of a non-conforming kitchen stove. The buyer’s use of the stove deteriorates the stove, leading to a reduction in its value. Since the use occurred under the buyer’s legitimate assumption that the stove was not defective, no recompense can be required under Article III.-3:512(1) and (4) DCFR. Yet, under Article III.-3:513(1) DCFR, at least a part of the benefit gained by making use of the stove (i.e., a ‘reasonable amount’) must be restored. If the functionality (and use) of the stove was limited due to non-conformity, restitution will be ‘reasonably’ (i.e., proportionately) reduced (see von Bar/Clive (2009), Comments on Article III.-3:513, p. 905). 5. Improvements. If a recipient has improved the benefit that he must return, he may still claim payment of the value of the improvement under Article III.-3:513(2) DCFR. As a pre-condition, however, the other party must be able to ‘readily obtain’ the improvement’s value by ‘dealing with the benefit.’ This rule, too, is intended to prevent unjust enrichment in cases of termination. Since the recipient is the one who decided to improve the benefit, he must also bear the risk that the other side cannot obtain its value. In addition, no improvement value is payable if the improvement per se was the non-performance of the improver (paragraph (2)(a)), or if the recipient/improver knew or could reasonably be expected to know that he would have to return the benefit (paragraph (2)(b)). As to the latter limitation, at least a modification is indicated. The principle of good faith will hardly justify limiting restitution (but cf. von Bar/Clive (2009), Comments on Article III.-3:513, p. 906). The improvement must not be improper or unjustified only because it could have been expected that the contract might be terminated. Allowing the other party to argue that it could not ‘readily obtain’ the value is already sufficient to prevent abusive investments. There is no additional

516

Chapter 9: Particular Remedies for Non-performance need to exclude restitution if it is up to the owner to decide whether he can make use of an improvement. 6. Natural and legal fruits. Finally, under Article III.-3:510(5) DCFR, restitution of any benefit will comprise natural or legal fruits that have sprung from the benefit on the side of the other party. As the DCFR commentary illustrates, the provision concerns cases where proceeds from property or money (e.g., lambs, calves, rents, and dividends) have been achieved and collected. 7. Liability for non-performance on restitutionary obligations. If transfer of a benefit from performance becomes impossible prior to the contract’s termination, Article III.-3:512 DCFR applies. By contrast, Article III.-3:514 DCFR applies to the parties’ obligations only after termination of the contract. As to substitution of the benefit/ value reimbursement under paragraph (2), the proceeds will have to be disgorged. Compensation will be reduced, however, by an already received partial payment of the agreed upon price.

German Law § 346 BGB: Effects of termination (1) If one party to a contract has reserved a right to terminate the contract or if he has a statutory right of termination, then, if termination occurs, any performance received is to be returned, as are benefits derived from such performance. (2) The obligor must pay compensation for value rather than effect a return, where 1. the return or surrender is excluded because of the nature of what has been acquired, 2. he has consumed, transferred, encumbered, processed or transformed the object received, 3. the object received has deteriorated or has been destroyed; any deterioration resulting from the proper use of the object for its intended purpose is, however, disregarded. If the contract specifies a counterperformance, such counter-performance is to be taken as a basis for calculation of the compensation for value. (3) There is no duty to pay compensation for value 1. if the defect which gives the right to termination became apparent only during the processing or transformation of the item, 2. in so far as the obligee is responsible for the deterioration or destruction or the damage would also have occurred in his hands, 3. if, in the case of a statutory right of termination, the deterioration or destruction has occurred in the hands of the person entitled even though he has taken the care which he usually takes in his own affairs. Any remaining enrichment must be given up.

517

T.W. Dornis (4) The obligee may demand compensation, in accordance with §§ 280 to 283, for infringement of a duty under subsection (1) above. § 347 BGB: Benefits and expenditure after termination (1) If, contrary to the rules of proper management, the obligor has failed to derive benefits even though it would have been possible to do so, he must compensate the obligee for their value. In the case of termination based on a statutory right, the person entitled must display with regard to the benefits only the standard of care which he usually takes in his own affairs. (2) If the obligor returns the object, compensates the obligee for value, or if his duty to compensate for value is excluded pursuant to § 346 (3), Nos. 1 or 2, he must be reimbursed for necessary expenditure. Other expenditure is to be reimbursed in as much as the obligee is enriched by it. 1. General. Under § 346 BGB, restitution of received performances or benefits is a result of the contract’s transformation into a restitutionary relationship (see above Article 9:303/GERMAN LAW comment 4). German law also rejects the idea of complete contract dissolution. Nevertheless, the primary obligations stemming from the parties’ agreement will be extinguished (BGH NJW 2002, 1872; Gaier, in Münchener Kommentar (2007), § 346 no. 15). If the parties have (or one party has) already performed fully or in part prior to termination, the transformation of the contract will create new primary obligations (or a single obligation) to restitute. These obligations are to be fulfilled largely in natura (§ 346(1) BGB; see also Gaier, in Münchener Kommentar (2007), § 346 no. 17). Unless the contract has been terminated in part only, recompensation under the newly created restitutionary relationship between the parties will in principle lead to a full reversal of the exchange of performances. 2. Recovery for performance that cannot be returned. If one party’s or both parties’ performances cannot be returned, each benefit’s value must be restituted (§ 346(2) BGB). a) Exceptional cases of non-transferability. § 346(2) nos 1, 2, and 3 BGB provides for the transformation of the duty to restitute in natura into a duty to recompense the value of performances and benefits that have been received. Under no. 2, re-transfer of the benefit received is impossible as a result of the performance having been consumed, sold or transferred, encumbered, converted, or transformed. Under no. 3, deterioration or destruction of the benefit performed will extinguish the obligation to re-transfer in natura. Ordinary use of the performance and a concomitant deterioration of its value, however, will not qualify. As far as § 346(2) nos. 2 and 3 BGB concerns cases of impossibility, the other party may use § 285 BGB to claim transfer of the replacement or of the claim for replacement that has been received (Gaier, in Münchener Kommentar (2007), § 346 no. 47). This may comprise compensatory payments by a tortfeasor, as well as proceeds from a sale of the benefit (BGH NJW 1983, 929, 930).

518

Chapter 9: Particular Remedies for Non-performance b) Evaluation and computation. Evaluation and computation are governed by § 346(2) 2 BGB: the initially agreed upon counter-performance shall provide the foundation for calculating the benefit’s value. If performance was non-conforming, the value of the counter-performance must be reduced accordingly (in analogy to §§ 441(3), 638(3) BGB; see also BGH NJW 2011, 3085, 3086). If the parties have not agreed on an exact price, the value must be calculated according to the market price (Bundestags-Drucksache, 14/6040, p. 196; Gaier, in Münchener Kommentar (2007), § 346 no. 21). c) Exclusion of value restitution. § 346(3) BGB provides for limitations on the principle of value restitution. Yet, even though complete restitution of the received benefits’ value may be excluded under § 346(3) 1 BGB, a remaining enrichment must always be disgorged (§ 346(3) 2 BGB). Under § 346(3) no. 1 BGB, the non-conformity that leads to contract termination must not become apparent or visible before the time when performance is being converted, transformed, or consumed (for the last constellation see most illustratively AG Burgwedel NJW 1986, 2647 (snail in green-leaf salad)). No. 2 concerns cases where deterioration or impossibility are caused by the creditor of the restitutionary obligation or where deterioration or impossibility would have also occurred had the benefit already been restituted (see, e.g., BGH NJW 1997, 3164). Finally, if termination has been declared on the basis of a statutory (not a contractual) right to terminate the contract, and if it is the declarant who is unable to re-transfer the benefit, there is no duty to restitute the value of a benefit provided by the other side’s performance, as long as the declarant has observed the same care that he usually applies in his own affairs. Details are contested on many issues (see extensively Gaier, in Münchener Kommentar (2007), § 346 nos. 48 et seq.). 4. Use and fruits. As a general rule, each side must hand over the actual benefits and fruits gained from the other side’s performance between the time of receipt and the time of return (§ 346(1) BGB; see also §§ 99, 100 BGB for use benefits and natural/legal fruits). In addition, § 347(1) 1 BGB provides that if the recipient has not, contrary to the rules and usages of a proper business, obtained a benefit despite its being possible, he must compensate the other party for the foregone value. If restitution under this norm, however, is due to a statutory right to terminate, the terminating party will be held responsible only for the benefits he would have drawn under the standard of care that he usually uses in his own affairs (§ 347(1) 2 BGB). 5. Improvements. a) Distinction: necessary and other expenditures. Regarding reimbursement for improvements, it is necessary to distinguish between necessary and other expenses or expenditures. Necessary expenditures comprise only those improvements required to uphold the functionality of an object or to maintain the ongoing cultivation of a business or other concern (see, e.g., BGHZ 131, 220, 222–223). Other expenditures, by contrast, are not fundamental and necessary for the day-to-day maintenance of a thing or business. More generally, this category comprises all voluntary investments in a thing or business. b) Different standards of reimbursement. The recipient is entitled to reimbursement of necessary expenditures for the improvement of a benefit (property) that he must return under § 347(2) 1 BGB. This also applies if his duty to return or to

519

T.W. Dornis recompense the value of the benefit is excluded under § 346(3) no. 1 or 2 BGB. However, expenses for improving the benefit (property) will not be compensated if they have already been regarded as reducing the duty to recompense use benefits or value under § 346(1) or § 346(3) 2 BGB (Gaier, in Münchener Kommentar (2007), § 347 nos 15–16). In cases under § 346(3) no. 3 BGB, as a specific rule of good faith and fair dealing, there is no right to compensation for expenses on improvements (but cf. critically Derleder (2005), p. 2484). Different from necessary expenditures, other expenses or expenditures will be reimbursed under § 346(2) 2 BGB only if the other party stands to be enriched by the improvements. 6. Non-performance of restitutionary obligations. The parties’ obligations to restitute under § 346 BGB are subject to the general rules of §§ 280–283 BGB (§ 346(4) BGB). Non-performance of an obligation to restitute will therefore provide a claim for damages. It is debated whether § 346(4) BGB applies only after termination has been declared, or whether a claim for damages may also arise from conduct prior to the declaration of termination. An example of this dilemma arises in the case where a buyer destroys or damages property that, as he knows or should know, may have to be re-transferred to the seller shortly, since the sales contract is terminable. Most theoretical analyses tend to support the application of § 346(4) BGB to conduct both prior to and after the time of actual termination. The only pre-condition that must be fulfilled in order to find fault on the side of the relevant party is that the party actually knew or could have been expected to know that a reason to terminate the contract existed. Prior to the time when knowledge can be expected, no intentional or negligent non-performance can be found (for the debate see Gaier, in Münchener Kommentar (2007), § 346 nos 59 et seq.). In essence, the rules on non-performance under German law appear less stringent: unlike the PECL and the DCFR, German law applies the fault principle (see also Leible (2008), p. 107).

Comparison and Evaluation 1. General. The conception of a partial extinction of contractual obligations under the PECL and the DCFR implies, for many constellations, that obligations may be upheld insofar as a corresponding segment of counter-performance can be found. This technique will in many cases dilute the theoretical distinction between termination in part and termination of the contract as a whole (see above Article 9:302). In this regard, German law at least principally provides for a more consistent system of termination and restitution. Yet, this is not the only divergence: in addition, the regimes will differ with regard to the computation of amounts to be recovered and with regard to the rules on recovery of use benefits, fruits, and improvements. 2. Recovery of performance that cannot be returned: proportionality required. The PECL do not provide an explicit guideline for the calculation, while the DCFR and German law do. Both Article III.-3:512(2) DCFR and § 346(2) 2 BGB contain a rule for processing the value, which largely upholds the parties’ agreement on the value proportions of performance and counter-performance. Both regimes allow for giving

520

Chapter 9: Particular Remedies for Non-performance regard to a reduced value of the counter-performance (above). In addition, under both the DCFR and German law, the market price or a hypothetical agreement between reasonable parties (as a proxy for the market price) provides the fall-back option for computation in the absence of an initial agreement on the counter-performance’s value. The PECL, by contrast, refer to recovery of a ‘reasonable amount for the value of the performance to the other party.’ There is no rule of proportionality. As a closer look reveals, the PECL do not offer a very workable standard. The PECL commentary’s illustration 1 on the issue has been mentioned already (see above PECL comment 4. b)): the builder of a garage, having finished two-thirds of his work before becoming insolvent, should be entitled to recover only a ‘net benefit’ from the employer. This ‘net benefit’ is calculated on the basis of what the employer has to pay for substitute performance by a different builder (for the outstanding third) and the additional costs (‘inconvenience’) of changing the contractual partner (Lando/Beale (2000), p. 425). An alteration of the facts demonstrates the problem: the garage builder stops after the first third of his performance, for which (as a whole) the parties have agreed to pay EUR 3,000. The second contractor demands EUR 1,800 for completing the rest (i.e., the outstanding two-thirds). The employer will have an additional ‘inconvenience’ of EUR 100. His ‘net benefit’ will then be EUR 1,100. Yet, this will hardly be the amount to be disgorged as a ‘reasonable sum.’ Evidently, a proportionality rule will have to provide the guideline for reasonability (leading to a recompensation of EUR 1,000; see also Lando/Beale (2000), p. 426 (Illustration 4)). 3. Use benefits, fruits, and improvements. The regimes’ rules on reimbursement for use, fruits, and improvements differ in significant ways. The PECL do not provide for reimbursement of benefits/values from the use made of a performance, nor do they have a norm on improvements. It is difficult to construe a rule on the basis of the Principles’ text alone. Article 1:201 PECL might be interpreted to refer to Article 1:301(4) PECL and the remedies for non-performance on a duty to cooperate. Yet, this hardly seems to be a solid foundation, let alone a practically workable guideline. a) Use and fruits. The PECL do not provide for reimbursement of use benefits. The DCFR does, but only for the value of use that has actually been made (Article III.-3:513(1) DCFR). This is, again, different under German law, where the recipient may even be obliged to reimburse potential benefits he neglected to realize while in possession of the performance/property (§ 347(1) BGB). This rule is not necessarily superior. Establishing a requirement of ‘proper use’ will principally help to prevent a waste of resources (or the loss of potential resources); but it also limits the parties’ disposition. Since the DCFR aims to foster welfare through optimum market efficiency (see, e.g., principles nos. 54 et seq.; also von Bar/Clive (2009), Comments on Article III.-3:513, p. 906), too deep an intervention into party autonomy is not indicated. b) Improvements. The PECL and the DCFR also differ with regard to improvements. While the PECL are silent on this point, the DCFR provides for a rule. Article III.-3:513(2) does not, however, make distinctions regarding the character of the improvements. The only requisite pointing towards a qualitative limitation is that ‘the other party can readily obtain that value by dealing with the benefit.’ In this regard, there is no restitution, even for necessary investments, unless the other party can make

521

T.W. Dornis use of the improvement. This is a subjective standard of actual enrichment on the side of the other party. Only if the other side can, as the DCFR commentary states, ‘translate’ the improvement ‘into realised value’ (von Bar/Clive (2009), Comments on Article III.-3:513, p. 906) will a right to compensation exist. Even though the DCFR does not distinguish between necessary and other improvements, value ‘realisation’ in this sense usually has to be found for necessary improvements. Without most of these, the property or other asset may no longer be functional and usable. As to unnecessary improvements, the DCFR’s rule refers to the restitution of existing enrichment, which ultimately requires giving regard to the other party’s interests and specific circumstances. In this sense, the practical outcome under German law will correspond in most cases. Necessary improvements will regularly be reimbursed without testing for enrichment. For unnecessary improvements, it has been acknowledged that improvements that increase the value of an object may not be reimbursed if the owner cannot make use of it (so-called aufgedrängte Bereicherung; see, e.g., Kaiser, in Staudinger (2012), § 346 no. 49).

SECTION 4: PRICE REDUCTION Principles of European Contract Law Article 9:401: Right to Reduce Price (1) A party which accepts a tender of performance not conforming to the contract may reduce the price. This reduction shall be proportionate to the decrease in the value of the performance at the time this was tendered compared to the value which a conforming tender would have had at that time. (2) A party which is entitled to reduce the price under the preceding paragraph and which has already paid a sum exceeding the reduced price may recover the excess from the other party. (3) A party which reduces the price cannot also recover damages for reduction in the value of the performance but remains entitled to damages for any further loss it has suffered so far as these are recoverable under Section 5 of this Chapter. 1. General. There is a general right to price reduction remedying a tender of performance that does not conform to the contract but is accepted by the creditor (actio quanti minoris). It applies even if the non-performance is excused (see Article 8:101(2) PECL), and regardless of whether the performance at issue is deficient or nonconforming regarding time, quantity, or quality. Price reduction is thus also possible in cases of delayed delivery. In this regard, the PECL rule differs from the CISG, where reduction is allowed only for non-conformity (Article 50). 2. Prerequisites and technique. a) Acceptance Article 9:401 PECL requires that the creditor has actually accepted performance. Otherwise, he will have to claim either

522

Chapter 9: Particular Remedies for Non-performance restitution (Article 9:307 PECL) or damages (Section 5, see below). Acceptance, however, may not necessarily require having or taking possession of the tendered performance. For instance, it suffices that the creditor communicates his acceptance to the debtor after learning about the non-conformity and while the defective goods are still on their way (for the problem of possession/acceptance see also above Gsell on Article 8:104 comment 3.; for the computation see below c)). b) Declaration. The exact technique for reducing the price is not specified under the PECL. The issue is whether reduction will be effected ipso iure or by declaration and notice vis-à-vis the non-performing party. The latter option is the so-called Gestaltungsrecht that has been established as technique for price reduction under German law (see, e.g., § 441 BGB). Under the concept of ‘reduction by declaration,’ the right may apparently be exercised without a time limit. This is deemed inadequate (see, e.g., Zimmermann (2005b), p. 272). There are arguments for both solutions under the PECL. In contrast to Article 9:303 PECL, the rule on price reduction does not explicitly provide for a declaration. The text is ambiguous, and even an interpretation in context is hardly determinative. While Article 9:401(1) PECL (‘may reduce the price’) could be understood to refer to a declaration, paragraph (2) (‘is entitled to’) could, to the contrary, imply that reduction be automatic. Under the CISG, a similar formulation (‘may reduce the price’) has almost universally been acknowledged to require declaration (see, e.g., Müller-Chen, in Schlechtriem/Schwenzer (2008), Article 50 no. 4). It is hard to infer a clear intention of the Principles’ drafters. The difference may be simple inadvertence (but cf. differently Dauner-Lieb/Quecke (2009), pp. 156–157). In any event, an analogy is hard to justify. The debate on the problem has evolved mainly on the basis of the DCFR (Article III.-3:601). There as well, so the argument goes, a right to reduction might exist without time limitation, since neither Article III.-3:508(3) nor III.-7:101 DCFR applies to the right to price reduction by declaration (Faust (2009), pp. 20–21). This argument can also be made for the PECL, where only the right to termination must be exercised by notice within a reasonable period, and where prescription concerns rights to performance of an obligation but not the option to create a right by declaration (see Articles 9:303(2) and 14:101 PECL; the latter point has been resolved differently under Article 10.1(1) UNIDROIT Principles; see Dauner-Lieb/ Quecke (2008), p. 156). Besides, alternative limitations are scarce. Under the DCFR, the right to declare reduction for non-conformity is limited to two years for B2B sales contracts by Article IV.A.-4:302(2) DCFR. No comparable provision exists under the PECL. And even though, for both the PECL and the DCFR, general limitations under the concept of good faith and fair dealing apply, this hardly provides a practically workable guideline. Thus, there appears to be agreement that an unlimited right to declare price reduction should be avoided as inequitable and that, hence, an ipso iure reduction should be the rule of choice (see, e.g., Faust (2009), pp. 20–21, id.; Dauner-Lieb/Quecke (2008), pp. 156–157; implicitly also Zimmermann (2005b), p. 272 n. 59). Yet, this must not be the last word. In fact, the practical consequences may be less drastic than they appear. Even under a reduction-by-declaration rule, the aggrieved party will hardly attain a position where its right can be exercised unreasonably. Two constellations must be distinguished: allowing the aggrieved party a right to reduce the price vis-à-vis the other side’s claim for payment (i.e., to refuse excess

523

T.W. Dornis payment) will not necessarily require a timely limitation (for the CISG see Schnyder/ Straub, in Honsell (2010), Article 50 no. 28). This is the constellation provided for under Article 9:401(1) PECL: the claim for price payment carries the ‘defect’ that it may be reduced upon declaration of the other side. There is no need to limit this burden for reasons of justice or efficiency. As long as payment of the price can be sued for within the period of prescription, the other side will be entitled to declare reduction (see also § 215 BGB for a comparable rule on prescription and for the PECL Lando/et al. (2003), pp. 158, 160 (Notes)). The constellation under Article 9:401(2) PECL is more complicated. Yet, as the text suggests, the claim for recovery may come into existence upon occurrence of the facts allowing for a reduction. There is no need for a declaration (‘entitled to reduce’) in order to give rise to a claim for recovery (‘may recover the excess’). Under this perspective, the claim for recovery will be subject to the general rules of prescription. c) Computation. The price will be reduced in proportion to the reduction in the value of the promised performance. The relevant point in time for evaluating performance is the time of tender, not the time of contract conclusion. This is different under German law (see § 441(3) BGB). In addition to obtaining a reduction in the obligation to pay the price, the creditor may obtain a reduction by restitutionary recovery (Article 9:401(2) PECL). 3. Limitations. a) No cumulation. The creditor cannot claim both reduction of the price and damages for reduction of the value. Both remedies concern the same loss. Thus, reduction and damages are principally incompatible; cumulation under Article 8:102 PECL is not possible. Yet, it is possible as far as different kinds of damage are claimed: all losses other than the diminution of value may be combined with a remedy for price reduction. One example is the loss incurred by a non-conforming performance in a construction contract for the building of a house and the costs of renting an alternative accommodation for the time necessary to cure the deficits. While the qualitative non-performance leads to a reduction of the price, costs incurred due to the delay can be recovered under § 5. b) Right to cure and price reduction. Under the PECL, the creditor can bar the other side’s attempt to cure by accepting a deficient performance; the right to cure is subject to the creditor’s right to price reduction (see also above Gsell on Article 8:104 comment 2.b)).

Draft Common Frame of Reference Article III. – 3:601: Right to reduce price (1) A creditor who accepts a performance not conforming to the terms regulating the obligation may reduce the price. The reduction is to be proportionate to the decrease in the value of what was received by virtue of the performance at the time it was made compared to the value of what would have been received by virtue of a conforming performance.

524

Chapter 9: Particular Remedies for Non-performance (2) A creditor who is entitled to reduce the price under the preceding paragraph and who has already paid a sum exceeding the reduced price may recover the excess from the debtor. (3) A creditor who reduces the price cannot also recover damages for the loss thereby compensated but remains entitled to damages for any further loss suffered. (4) This Article applies with appropriate adaptations to a reciprocal obligation of the creditor other than an obligation to pay a price. 1. General. The DCFR rule on price reduction largely corresponds to the PECL structures. As to alternative remedies to price reduction, the creditor can seek either a restitutionary claim under Article III.-3:510 DCFR or damages under § 7. Yet, as with the PECL, reduction may be of particular relevance in many practical constellations, since it does not require termination of the contract and also remains unaffected by an excuse of non-performance (see Article III.-3:101(2) DCFR). Like the PECL, paragraph (4) provides for an application ‘with appropriate adaptions’ to reciprocal obligations other than payment of a price. 2. Prerequisites and technique. With regard to acceptance of performance and computation, the DCFR resembles the PECL. For the debate on the technique of price reduction, particularly whether a notice or declaration to the non-performing party is required, see above Article 9:401 comment 2. The outcome is the same under both the DCFR and the PECL. The DCFR, however, additionally provides for a special rule of notification in B2B contracts (Article IV.A.-4:302; see also above Article 9:401 comment 2). 3. Limitations: right to cure and price reduction. Under the DCFR, the hierarchy between the debtor’s right to cure a non-conforming tender and the creditor’s right to a price reduction is not as clear as under the PECL. Article 8:104 PECL provides that the right to cure exists only upon the creditor’s non-acceptance of the debtor’s tender. There is no conflict with the right to price reduction, since such a right can be exercised only after acceptance by the creditor. Quite differently, Article III.-3:202(1) and (2) DCFR states that a new and conforming tender may be made to cure non-conformity if it can be done within the time allowed for performance or, if not within this period, within a reasonable time and promptly after notification of the lack of conformity. It further provides that within the time allowed for an attempt to cure, the creditor may not pursue any remedy for non-performance other than withholding performance (see also Article III.-3:204 DCFR). Since the DCFR does not distinguish between situations where performance has been accepted and those where it has been rejected, any offer by the debtor to cure will arguably bar the remedy of price reduction for the time of the attempt. Even if the creditor has accepted a non-conforming performance, the right to price reduction will be restrained. Given the DCFR’s aim to uphold contractual relations where possible and appropriate – and to bring its rules in accordance with the Directive 1999/44/EC (Article 3) – the DCFR should be understood to extend the right to cure (see generally von Bar/Clive (2009), Comments on Article III.-3:201,

525

T.W. Dornis pp. 812–813; and above Gsell on Article 8:104, DCFR-part comment 2.b; for the correlation to Article III.-3:103 DCFR and the provisions on cure under a sales contract (Article IV.A.-2:203 DCFR) see Faust (2009), p. 32). The debtor’s right to cure therefore prevails over the creditor’s option to reduce the price. The latter’s right will be barred until cure has failed.

German Law 1. General. There is no general remedy of price reduction under the BGB if the tender of performance does not conform to the contract. However, with regard to the most important types of contracts, particularly sales and work contracts, special provisions allow for a reduction of the price. The pre-requisites for the right to price reduction are basically the same as for the right to terminate the contract (see §§ 441(1), (3), 638(1), (3), and § 323 BGB; also Article 3(5) Directive 1999/44/EC; generally in comparison to the DCFR see Leible (2008), p. 108). Regarding price reduction under § 441(3) and § 638(3) BGB, it is important to note that the relevant point in time for a comparison between the actual and the hypothetical values, unlike under Article 9:401 PECL, is the time of the contract’s conclusion, not of the tender or delivery (see also III.-3:601(1) DCFR). 2. Limitations. In contrast to the PECL, the debtor generally must be given a second chance to cure the non-conforming performance. The creditor is not entitled to reduce the price immediately; rather, he may do so only where an additional period for performance (fixed by the creditor) has lapsed without the debtor curing the nonconforming tender. Yet, the right to cure is still only a reflex stemming from the Nachfrist mechanism in §§ 323, 281 BGB (see instructively above Gsell on German law to Article 8:104). It is therefore generally subject to the aggrieved party’s remedies. Most notably, if the Nachfrist requirement is dispensable (see, e.g., § 323(2) BGB), an immediate price reduction is possible.

Comparison and Evaluation In contrast to the PECL, the DCFR and German (as well as EU) law have extended the scope of the debtor’s right to cure. Since price reduction factually results in a partial contract termination for many cases (e.g., short tender under a sales contract), restricting its scope of application generally avoids an over-hasty contract dissolution for reasons that are external to the parties’ agreement. Acceptance and price reduction may be economically beneficial for the aggrieved party. This is the case, for instance, for a buyer if the product’s market price falls after contract conclusion, and the actual tender quantitatively stays behind what the parties have agreed upon. Nonetheless, a party should not get the opportunity to dissolve contractual relations simply upon a change of (extra-contractual) circumstances. In this regard, limiting the right to reduce the price (different from the PECL) avoids the parties’ speculation on a change of market parameters.

526

Chapter 9: Particular Remedies for Non-performance SECTION 5: DAMAGES AND INTEREST Principles of European Contract Law Article 9:501: Right to Damages (1) The aggrieved party is entitled to damages for loss caused by the other party’s non-performance which is not excused under Article 8:108. (2) The loss for which damages are recoverable includes: (a) non-pecuniary loss; and (b) future loss which is reasonably likely to occur. Article 9:502: General Measure of Damages The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed. Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived. Article 9:503: Foreseeability The non-performing party is liable only for loss which it foresaw or could reasonably have foreseen at the time of conclusion of the contract as a likely result of its non-performance, unless the non-performance was intentional or grossly negligent. 1. General. The PECL system of damages provides for recovery of losses from an unjustified failure to perform. It is irrelevant whether the non-performing party has been enriched as a result of its default in performance. The only relevant factor is the aggrieved party’s loss. The aggrieved party must have suffered an actual loss, or it must expect to incur a loss in the future. The PECL does not provide for either (nominal) damages without loss or claims for punitive damages. The provision covers all kinds of failure to perform (see Article 1:301(4) PECL). 2. Interest protected, types of damages, and computation of compensation. a) Expectation, reliance, and consequential losses. Article 9:502 PECL provides that the aggrieved party must be put as nearly as possible into the position in which it would have been if the contract had been duly performed. aa) This covers the loss suffered as a result of non-performance and the gain that would have been made had the contract been duly performed. These two categories of interest (damnum emergens and lucrum cessans) form the so-called expectation interest (Erfüllungsinteresse or positives Interesse). Damages here are meant to place the aggrieved party into the position that it may justifiably have expected to be in under the circumstances of the other side’s hypothetically proper performance.

527

T.W. Dornis bb) This must be distinguished from the so-called negative interest, or reliance interest (Vertrauensinteresse), which establishes only the situation that would have existed had the contract not been concluded. Also, it must be distinguished from restitution under Articles 9:305 et seq. PECL. cc) In addition to the loss suffered from non-performance, the aggrieved party is entitled to so-called consequential damages. The concept of consequential damages is different from expectation damages. The latter can be directly attributed to the non-performance and are designed to compensate for the lost performance that has been promised. An award of expected damages, however, will not go beyond what the contract would have provided. It is the equivalent for the promised but lost performance. If non-performance has, by contrast, more wide-reaching consequences and has caused further losses through other transactions that were dependent on or correlated with the contract, an award of damages must also comprise compensation for the respective losses under the category of consequential damages. The example in the PECL commentary illustrates the difference lucidly: if the sold washing machine not only has its value reduced due to a defect but also ruins the buyer’s clothes while in operation, the loss in value is the expected damage, while the ruined clothes are consequential damage (Lando/Beale (2000), p. 439). Finally, also within the category of compensable damages is the interest on the amount of expected or consequential damages. This interest is calculated starting from the date when the loss was incurred. Payment of interest compensates the creditor for the loss of the benefit of investing the money during the period between non-performance (after performance had become due) and actual payment. b) Types of damages protected. The damages that can be recovered include actual pecuniary losses and non-pecuniary losses. Under the latter category, damages may comprise pain and suffering, inconvenience, and mental distress that have resulted or will result from non-performance. The example given in the PECL commentary is a package holiday contract with default of the tour operator. The traveller may recover damages for the inconvenience and loss of enjoyment (Lando/Beale (2000), p. 436). In addition, the recoverable loss includes future loss, which is expected to occur only after the remedy has been decided. The court will then have to determine the likelihood of a loss occurring in the future and the loss’s amount. c) Computation. The aggrieved party is usually entitled to compensation for the amount that was lost due to the other party’s non-performance. This is equivalent to the value of its contractual expectation. Not only does this expectation cover the aggrieved party’s expenditures following from the non-performance and any lost gains–it also requires considering a potential reduction of the loss that may have resulted from non-performance. Thus, any compensating gains by the aggrieved party that are due to the non-performance must be discounted from the amount of damages (compensatio lucri cum damno). This also covers saved expenses. As the PECL commentary illustrates, compensating gains and saved expenses often occur as the result of a cover transaction. A common problem in this regard is the issue of whether the compensating gain was a direct result of the cover transaction (and of the non-performance), or whether it was due to an independent transaction, in which case it will not have to be discounted. Hence, when a unique item or object has been sold

528

Chapter 9: Particular Remedies for Non-performance and, upon the buyer’s non-performance, the seller sells the object to a third party (fora higher price), the gain due to the better bargain in the second transaction must be discounted from the damages. This may be different when commodities or easily reproducible products, as well as products that the seller has in stock, are sold: if the seller manages to sell the product(s) to a third party shortly after the first buyer has defaulted, the issue will be whether the second sale was a substitute for the first contract. In order to show that the second sale was not a substitute, common law courts often request that the seller make a case for a ‘lost volume’ situation. Damages are due whenever the seller can demonstrate that he would have sold to both the defaulting party and the second buyer (for which he must show that he had the capacity – i.e., that he had a sufficient number of products on stock; that a second sale would have been profitable; and that the second sale would have been executed even if the first party had not defaulted). This usually requires a situation where the supply exceeds the demand (for the same rationale under the U.C.C. see, e.g., Islamic Republic of Iran v. Boeing Co., 771 F.2d 1279, 1290 (9th Cir. 1985) (U.C.C. § 2.708(2); see also § 350 Restatement (Second) of Contracts and Comments)). In this regard, the PECL establish a different burden of proof, however: it is the non-performing party that must show that the actual transaction was a substitute transaction (see Lando/Beale (2000), pp. 439–440). It is questionable whether this makes sense in practice since the non-performer will hardly ever have sufficient information on the other side’s capacity. 3. Causation. The aggrieved party can recover damages only for loss that is due to non-performance. The other party’s non-performance must be the causal factor for the occurrence and existence of the aggrieved party’s loss (conditio sine qua non). The pre-requisite of causation will be amiss where an intervening event was independently responsible for the loss. The critical question will be whether and to what extent the additional event would have had an impact on the contractual performance and the loss if the other party’s failure to perform had not occurred. The PECL commentary gives three examples as an illustration. First, if the seller of machinery does not deliver in time, he will be liable for all damages that accrue as a result of the delay in performance, particularly a decrease in the buyer’s production due to the lack of machinery. If the buyer’s operations subsequently come to an end for a different reason (e.g., a fire destroys the factory), damages are due to non-performance only until the time when the fire stopped production. The burning down of the factory is an independent event that breaks the chain of causation for the delayed performance. Responding to the aforementioned question, the fire destroyed the buyer’s capacity to produce independently. The outcome will be different, however, if the new machinery has a special fire-prevention mechanism, if the fire was caused by the old machinery and was due to its lack of a fire-prevention mechanism, and if the old machinery was supposed to be substituted by the seller’s new products for this reason. In this case, the fire is not an independent event that could intermit causation of the seller’s nonperformance for losses accrued prior to and after the fire. 4. Foreseeability. Article 9:503 PECL limits the non-performing party’s liability for damages that it foresaw or could reasonably have foreseen at the time of the contract’s conclusion. In addition, these damages have to be a likely result of the party’s

529

T.W. Dornis non-performance. In cases of intentional or grossly negligent non-performance, there is no limitation regarding the foreseeability of damages and the likelihood of their occurrence. Generally, foreseeability will hardly be an issue as far as direct or expectation damages are concerned. A party entering a contract is supposed to understand that its own non-performance will extinguish the other party’s possibilities for realizing the value of its promised performance. In particular, this includes potential profits that could be made by, for example, resale or other transactions. Hence, lost profits or the costs of a substitute transaction will usually be covered by the scope of foreseeability and likelihood (for the similar rationale under Article 74 CISG see Schlechtriem/Schwenzer (2008), Article 74 nos. 51 et seq.; for lost profits of a merchant under Article 74 CISG see, e.g., Delchi Carrier SpA v. Rotorex Corp. (2nd Cir., 6 December 1995), CISG-Online no. 140). In this regard, however, the PECL commentary’s illustration 1 is questionable: of course, the private sale of stamps to a dealer may not always suggest that the latter will resell the stamps at a significant profit. Yet, nothing compels one to assume that the resale of ‘stamps as a collection’ was unforeseeable (but cf. Lando/Beale (2000), p. 441). The situation may be different for so-called consequential damages. Per se, consequential damages are less predictable since their potential realization will usually lie beyond the scope of the immediate transaction. Unless the non-performing party has concrete reasons to expect additional transactions or endeavours, no liability will ensue for consequential losses. As an example, one might consider the case of some broken tiles on a roof. If the owner of the house contracts a roofer to repair the problem, it is clearly foreseeable to the latter that upon non-performance, the owner will find a substitute roofer. Hence, a difference in the price, if the second roofer is more expensive, must be borne by the non-performing party. In addition, it may be foreseeable that further damage to the house and the interior could develop as a result of the leaking roof; albeit consequential, this damage would have to be compensated. The situation would be different, however, if the water were to damage a unique and expensive piece of antique furniture that the owner stores directly below the roof. This situation could hardly have been reasonably foreseen by the roofer. 5. Degree of fault required. If a party has promised to produce or achieve a specific result, damages may be due upon failure to establish the result. There is no personal fault required on the side of the non-performing party. Yet, a claim for damages will not accrue if non-performance is excused under Article 8:108 PECL. Work contracts offer a typical example of agreements concerning such a result. If a party has agreed (i.e., promises) to perform by producing a specific result – which will usually be the case if no clause has been included specifying the required degree of care – its nonperformance will be equivalent to the committing of a fault. Quite differently, however, if the non-performing party has contracted to use reasonable care and skill when performing, a failure to comply will make it liable only if fault can be established. Most commonly, in service contracts, the service provider will be liable only for fault and not for a general failure to establish a specific success (e.g., a physician’s treatment of a patient).

530

Chapter 9: Particular Remedies for Non-performance Draft Common Frame of Reference Article III. – 3:701: Right to damages (1) The creditor is entitled to damages for loss caused by the debtor’s nonperformance of an obligation, unless the non-performance is excused. (2) The loss for which damages are recoverable includes future loss which is reasonably likely to occur. (3) ‘Loss’ includes economic and non-economic loss. ‘Economic loss’ includes loss of income or profit, burdens incurred and a reduction in the value of property. ‘Non-economic loss’ includes pain and suffering and impairment of the quality of life. Article III. – 3:702: General measure of damages The general measure of damages for loss caused by non-performance of an obligation is such sum as will put the creditor as nearly as possible into the position in which the creditor would have been if the obligation had been duly performed. Such damages cover loss which the creditor has suffered and gain of which the creditor has been deprived. Article III. – 3:703: Foreseeability The debtor in an obligation which arises from a contract or other juridical act is liable only for loss which the debtor foresaw or could reasonably be expected to have foreseen at the time when the obligation was incurred as a likely result of the non-performance, unless the non-performance was intentional, reckless or grossly negligent. 1. General. The DCFR system of damages is founded on the PECL conception of the non-performance of contractual obligations. Article III.-3:701 DCFR covers damages for non-performance of contractual obligations. It does not apply to damages that are recoverable under Book VI DCFR (Non-contractual liability arising out of damage caused to another). In addition, Article III.-3:702 DCFR is strictly limited to a measuring of damages for loss caused by the non-performance of an obligation. It does not apply to loss caused by other conduct. In many cases, the compensation will depend on the specific provision creating the duty to obey with (see, e.g., Article II.-7.204 and 7:214 DCFR). Also, the foreseeability requirement under Article III.-3:703 DCFR does not apply to obligations arising by operation of law (e.g., non-contractual liability). 2. Non-economic loss. As to the categories of loss that are recoverable, Article III.-3:701(3) DCFR clarifies and extends the PECL system. The provision defines ‘economic loss’ as including loss of income or profit, burdens incurred, and a reduction in the value of property.

531

T.W. Dornis a) ECJ 2002 Leitner. The category of ‘non-economic’ loss (i.e., ‘non-pecuniary loss’ under the PECL) includes pain and suffering and an impairment of the quality of life resulting from a failure to perform. Concerning the recovery of non-economic loss, the provision is deemed to follow ECJ, Case C-168/00 (12 March 2002), ECR 2002, I-2631 (Simone Leitner v. TUI Deutschland GmbH & Co. KG) (claim for non-pecuniary loss under the Package Travel Directive); see also ECJ, Case C-14/83 (10 April 1984), ECR 1984, 1891 no. 28 (Sabine von Colson and Elisabeth Kamann v. Land NordrheinWestfalen) (anti-discrimination cases); for the acquis communautaire, the Acquis Principles, and the DCFR see also Magnus (2008), pp. 205 et seq., 220 et seq. b) Risk of unboundedness. The statutory inclusion of different heads of damage has been criticized as inviting overextension. Since the category of non-economic loss has been added without limitation, it may suggest that any and all losses will be included, regardless of their specific quality and quantity (see, e.g., Eidenmüller et al. (2008), p. 681; Huber (2008), p. 730). 3. Limitation: non-conformity in non-business sales contracts. For non-business sellers, Article IV.A.-4:202(1) DCFR establishes a restriction on the principle of guarantee liability. The amount of damages for non-conforming performance under a non-business sales contract will be capped and cannot exceed the contract price. The definition of a non-business seller corresponds to the definition of a consumer (von Bar/Clive (2009), Comment B on Article IV.A.-4:202, p. 1346). The buyer’s status is irrelevant. The provision will therefore also cover sales by non-business sellers to businesses. The exception will not apply if the seller knew or could reasonably be expected to have known about the lack of conformity and if he did not disclose the deficit to the buyer (paragraph (2)).

German Law § 249 BGB:Type and scope of compensation (1) A person who is under a duty to provide compensation has to restore the state of affairs which would exist if the circumstance giving rise to the duty to compensate had not arisen. […] § 251 BGB: Compensation in money without setting of time limit (1) In so far as restoration in kind is not possible or is not sufficient for indemnifying the creditor, the person obliged to compensate must indemnify the creditor in money. […]

532

Chapter 9: Particular Remedies for Non-performance § 252 BGB: Lost profit The harm for which compensation is to be made also includes lost profit. Profit is deemed to be lost if it could be expected with probability in the usual course of things or the special circumstances, in particular the arrangements and provision which have been made. § 253 BGB: Non-material harm (1) In the case of harm which is not financial harm, compensation in money can only be demanded in the cases determined by statute law. (2) If compensation is to be provided because of injury to the body, health, freedom or sexual self-determination, fair compensation in money can also be demanded for harm which is not financial harm. § 254 BGB: Contributory fault (1) If fault on the part of the victim has contributed to the origin of the harm, the duty to compensate as well as the extent of the compensation to be provided depends on the circumstances, and in particular on the extent to which the harm has been predominantly caused by the one or the other party. (2) This also applies if the victim’s fault is limited to the fact that he has omitted to draw the debtor’s attention to the risk of an unusually high level of harm of which the debtor neither knew nor ought to have known, or that he has omitted to avert the harm or to reduce it. The provisions of § 278 apply correspondingly. § 255 BGB: Assignment of claims to compensation A person who must pay damages for the loss of a thing or a right is only obliged to compensate in return for the assignment of the claims which the person entitled to damages holds against third parties on the basis of ownership of the thing or on the basis of the right. § 280 BGB: Compensation for violation of duty (1) If the debtor violates a duty arising from an obligation relationship, the creditor can demand compensation for the harm arising from this. This does not apply if the debtor is not responsible for the violation of duty. (2) The creditor can only demand compensation for delay in performance under the additional prerequisite of § 286. (3) The creditor can only demand compensation instead of performance under the additional prerequisites of § 281, § 282 or § 283. § 281 BGB: Compensation instead of performance, because of non-performance or performance not in accordance with obligation (1)–(3) […]

533

T.W. Dornis (4) The claim to performance is excluded as soon as the creditor has demanded compensation instead of performance. (5) […] § 283 BGB: Compensation in lieu of performance where there is no duty to perform If, by virtue of § 275 (1) to (3), the obligor does not have to perform, the obligee may demand compensation in lieu of performance. § 281 (1), second and third sentence, and (5) apply mutatis mutandis. § 284 BGB: Reimbursement for wasted expenditure Instead of demanding compensation in lieu of performance, the obligee may demand reimbursement of the expenditure which he has incurred in reasonable reliance on the receipt of performance, save where the purpose of that expenditure would not have been achieved even if the obligor had not breached his duty. § 285 BGB: Surrender of substitute (1) If, as a result of a circumstance under which § 275(1) to (3) relieves the obligor of the obligation to perform, the obligor obtains a substitute or a substitute claim for the object owed, the obligee may demand surrender of what has been received as substitute or an assignment of the substitute claim. (2) If the obligee may demand compensation in lieu of performance, then, if he uses the right laid down in subsection (1) above, the compensation is reduced by the value of the substitute or substitute claim he has obtained. § 286 BGB: Delay by debtor (1) If the debtor does not perform in response to the creditor’s warning which takes place after performance has become due, then he will be in delay as a result of the warning. The raising of a claim to performance as well as the submission of a warning order in warning proceedings are equivalent to a warning. (2) A warning is not needed if 1. a time is determined for the performance according to the calendar, 2. an event must precede the performance and an appropriate time is determined for the performance in such a way that it can be reckoned from the event onwards according to the calendar, 3. the debtor refuses performance seriously and finally, 4. the immediate commencement of delay is justified on special grounds on balancing the interests of both sides. (3) The debtor in respect of a demand for payment will be in delay at the latest if he does not perform within 30 days after the due date and an account or an equivalent payment statement is received; this only applies as against a debtor

534

Chapter 9: Particular Remedies for Non-performance who is a consumer if his attention has been particularly drawn to these results in the account or payment statement. If the point in time of the arrival of the account or payment statement is uncertain, the debtor who is not a consumer is in delay at the latest 30 days after the due date and receipt of the counter performance. (4) The debtor is not in delay as long as performance fails to occur as a result of a circumstance for which he is not responsible. 1. General. Under German law, § 280(1) BGB establishes the principle that liability for damages ensuing from contractual obligations requires both non-performance and individual fault. This is a fundamental divergence from the PECL and the DCFR systems, where fault as such is not a principal requirement for damages. Additional pre-requisites for liability under German law can be found in § 280(2) and (3) BGB. This establishes a systematic distinction between different categories: damages in addition to performance (§ 280(1) BGB), damages for delayed performance (§§ 280(2), 286 BGB), and damages in lieu of performance (§§ 280(3), 281 et seq. BGB). The provision on initial impossibility under § 311a(2) BGB is the lex specialis to and complements §§ 280 and 283 BGB. Liability there is also founded on the defaulting party’s non-performance and its fault. Yet, it modifies the reference point for establishing the latter: excusing the defaulting party requires showing that the party made its promise without knowledge of the impediment and that this ignorance was not negligible (see instructively Ernst, in Münchener Kommentar (2007), § 311a nos. 4, 19, 99, and 42 et seq.). Finally, further pre-requisites, most notably the computation of damages, will be governed by §§ 249 et seq. BGB. 2. Interest protected, types of damages, and computation. a) Negative and positive interest. With regard to liability for damages ensuing from non-performance within a contractual relationship, German law distinguishes between the aggrieved party’s damage resulting from reliance on the contract, also called negative interest (Vertrauensschaden), and an interest in being compensated for damages resulting from non-performance – that is, the making up for the aggrieved party’s loss of so-called positive or expectation interest (Nichterfüllungsschaden). aa) The category of compensation for negative interest comprises cases of culpa in contrahendo, liability for avoiding a contract, and liability where an agent acted without authority (§§ 122(1), 179(2) BGB). bb) Regarding compensation for a party’s positive interest, § 280 BGB distinguishes among several categories. Most fundamentally, the core provision in § 280(1) BGB concerns damages for non-performance of an obligation in general. If a debtor fails to perform, the creditor is entitled to claim compensation for any loss resulting from the failure to comply with the contractual duty (for the additional pre-requisite of fault see below COMPARISON AND EVALUATION comment 3). In addition, under § 280(3) BGB, the creditor may claim damages in lieu of performance (statt der Leistung) under the additional requirements of §§ 281, 282, and 283 BGB. Within this category, one can find cases of impossibility of performance (§§ 275, 283 BGB), delay of performance where the creditor has unsuccessfully fixed an additional period (§§ 280, 281 BGB),

535

T.W. Dornis and non-performance of ancillary obligations (§§ 241(2), 280(3), 282 BGB). Under unreformed law, the category had been developed through case law and practical commentary into the so-called concept of positive malperformance (positive Forderungsverletzung). For the general distinction between obligations to perform and other duties, see Article 9:301/GERMAN LAW comment 2. cc) Different from damages in lieu of performance, a creditor may also require damages for delay of performance under the pre-conditions set by §§ 280(2), 286 BGB. A demand for damages under the rules on mora debitoris will leave the debtor’s primary duties to render performance unaffected. Damages for delayed performance comprise loss that has accrued due to late performance – in other words, lost gains, additional expenses due to the delay, and potential decreases in value of the subject matter of the performance that may result from the delay (see, e.g., Ernst, in Münchener Kommentar (2007), § 286 nos. 123 et seq.). b) Types of damages. aa) Primarily, the law provides for reparation of economic or pecuniary losses. Like the pre-2002 Code, § 253(1) BGB still upholds the principle that non-economic losses will not be compensated unless the law expressly so provides. However, § 253(2) BGB allows damages to be claimed for non-economic losses that ensue from a violation or invasion of certain immaterial goods. In addition, § 651f(2) BGB provides for compensation for non-performance under a travel contract if the trip has been confounded or substantially impaired, and the traveller’s time for the holiday trip has been spent uselessly. The provision may be seen as a further exception to § 253(1) BGB. bb) Compensation for lost (or frustrated) investment in connection with a contract used to be difficult to attain under the pre-2002 BGB. An actual example case for the category of ‘frustrated expenses’ was the acquisition of premises and the buyer’s investment in new equipment for a night club. Operation of the night club was later disallowed by the authorities. Compensation for the ultimately useless expenses failed because the buyer could not prove that the investment would have been profitable (BGHZ 114, 193; see also BGHZ 99, 182). The 2002 reform introduced a new § 284 BGB, which now allows the creditor to claim compensation for frustrated expenses and investment in lieu of damages for non-performance. Doctrinally, § 284 BGB has been qualified as a provision on damages (see Medicus/Lorenz (2010), no. 455a; see also Bundestags-Drucksache 14/6040, pp. 143 et seq.). Frustrated expenses that can be recovered include, inter alia, investment on the subject matter of the contract and the costs of contracting or financing. The amount of damages that can be recovered must be limited to reasonable expenses. In other words, the creditor cannot demand compensation for excessive expenses (§ 254 BGB applies; see below Article 9:504/German Law comment 1). Expenses can be demanded only as an alternative to damages in lieu of performance under § 281 BGB. Yet, it will not conflict with a claim for damages under § 280 BGB where these damages concern a different interest. Furthermore, a party’s right to terminate the contract will not be affected by the demand for compensation under § 284 BGB (§ 325 BGB). Neither the PECL nor the DCFR contains a comparable rule. It may be possible, however, to achieve similar result under the general rules on ‘damages’ (e.g., Article 9:502 PECL; see also Zimmermann (2002a), p. 29).

536

Chapter 9: Particular Remedies for Non-performance c) Computation. aa) Under § 249(1) BGB, the aggrieved party is entitled to compensation of all damages that have accrued as a result of the instance causing the damage. The provision reflects the fundamental principle of damage calculus: the decision-maker has to compare the aggrieved party’s actual position with the hypothetical position it would be in had the instance causing the damage not occurred. The difference in value or legally protected goods constitutes the damage that must be reimbursed (Differenzhypothese). bb) Damages for non-performance usually require proof of the benefit and the value of the benefit that would have resulted from proper performance. Since contractual consolidation into a predetermined sum of stipulated damages is strictly limited (see § 309 no. 5 BGB and below Article 9:509 PECL/German Law), computation and proof are difficult in practice. In this regard, § 252, second sentence BGB alleviates the aggrieved party’s burden of proof for lost gains (lucrum cessans). It suffices to prove a probability that a certain gain would have accrued. cc) Sometimes, an event causing damage to a party will detrimentally affect that party’s goods, property, and other assets. Other times, it may effectuate a beneficial change in value. In these cases, the question arises whether the benefits should be discounted from the amount of damages (Vorteilsausgleichung). Case law has established a principle of moderate deduction: directly ensuing benefits will be considered only if doing so is reasonable, will not contradict the purpose of the legal norm establishing liability, and does not lead to an inequitable discharge for the debtor (see, e.g., BGH NJW 1997, 2378; BGH NJW 2004, 3557). A common hornbook example is where the creditor receives compensation for damages to an already used object by delivery or construction of a new object. It may be argued that he then needs to recompense the excess value transferred in order to avoid overcompensation (‘Ersatz neu für alt’; see, e.g., BGH NJW 1996, 584, 585–586). A statutory foundation of the concept can be found in § 255 BGB. 3. Causation, no ‘foreseeability.’ As under the PECL and the DCFR, German law requires that all losses be causally connected to the event giving rise to liability (conditio sine qua non). Several limitations to the relevance of causal events exist. a) Hypothetical and alternative causation. The issue of so-called hypothetical causation arises in cases where a certain loss on the side of the aggrieved party would have occurred even without the other side’s conduct (or omission) due to a different and independent event (Reserveursache). One example is the fire in a buyer’s factory that would have eliminated his production capacities regardless of the seller’s delayed delivery (see above Articles 9:501 et seq. PECL comment 3). Treatment of these alternative causal factors is not uniform. Causation of non-performance will not, for instance, be deemed affected by an alternative event if this event would have established a restitutionary claim for the aggrieved party against a third party (e.g., claims against an insurance company). Otherwise, the aggrieved party would be left without any compensation for the actual damage: the third party will not be liable for want of an actual damage-causing event; the other side’s liability would be discharged by reference to the third-party event (see, e.g., BGH NJW 1967, 551). Quite differently,

537

T.W. Dornis however, it will lead to a reduction (or complete exclusion) of the claim for compensation if the asset or value affected by the other party’s conduct or omission was already defective and therefore had a lower actual value (Anlagenfälle). In the factory fire example, if the non-performing seller is held liable for the destroyed building as well (under a theory of consequential damages), any pre-existing defects of the building must be considered in the calculation of actual damages (see, e.g., BGH NJW-RR 1995, 937; RGZ 148, 48). b) Adequate causation (Adäquanztheorie). Many events or occurrences may be causal for the losses that have occurred. Yet, they may still be too far removed from the actual loss to be used as a foundation for a claim for damages. Therefore, German doctrine uses a specific paradigm of probability to restrict pure causation and its relevance for liability. The so-called theory of adequate causation requires that the causal event was generally – not just under uniquely special, unlikely, or unexpected circumstances–suited to cause the loss at issue (BGHZ 3, 261, 267; BGHZ 137, 11, 19). With regard to the perspective that should be adopted in order to evaluate probability, the ‘optimal observer’ in the position of the acting (or non-acting) party causing the damage is to set the standard (see also Medicus/Lorenz (2010), no. 638). In cases of intentional non-performance, all regimes seem to agree that neither foreseeability nor minimum probability of losses are required to hold the non-performing party liable. This rule has been explicitly implemented in the PECL/DCFR. In Germany, case law and theory (albeit not uncontestedly) have decided similarly (see, e.g., BGH NJW 1981, 983; BGH NJW 1992, 1381, 1382; but cf. also critically with remarkable arguments Oetker, in Münchener Kommentar (2007), § 249 no. 108). c) Normative protection (Schutzbereich der Norm). In addition to limitations under the paradigm of adequate causation, which looks at the probability that an event caused a specific loss, there is another doctrinal limitation. Under the so-called theory of normative protection, the specific scope of protection of the legal norm establishing an obligation will determine whether a certain loss falls within the category of compensable damages. If the protective purpose of the norm at issue does not cover the loss, it will not be within the category. One example is the mandate of an attorney: the contractual relationship will concern counselling on business and financial issues; damages ensuing from malpractice will thus be generally covered. Yet, liability under the mandate contract will not include damages that have ensued from a physical shock due to the attorney’s malpractice (BGH NJW 2009, 3025 (pain and suffering denied)). 4. Requirement of fault for non-performance. Under reformed contract law, the concept of ‘breach of a contractual duty,’ or the violation or non-performance of an obligation (Pflichtverletzung), is the foundation for all individual liability (Vertretenmüssen). The reform intended to harmonize the concept of non-performance and to abolish the former system’s different categories of non-performance and correspondingly divergent remedies. As under pre-2002 law, however, the concept of fault (Verschulden) is also crucial under the new Code. Yet, it is important to distinguish the concepts of fault and liability. Liability may exist without fault. It always requires non-performance, but not necessarily the debtor’s fault in non-performing (see extensively Zimmermann (2002a), pp. 17 et seq.)

538

Chapter 9: Particular Remedies for Non-performance a) Liability and fault distinguished. As § 276(1) BGB clarifies, liability and fault are separate categories. The provision distinguishes between negligent and intentional misconduct/non-performance. A debtor may be liable without fault, for simple negligence, or for qualified fault (e.g., intentional/reckless misconduct; see extensively Grundmann, in Münchener Kommentar (2007), § 276 nos. 10 et seq.). Concerning damages, unless statutory law or the parties’ agreement provides differently, §§ 280 et seq. BGB require non-performance and fault. The non-performing party can, however, excuse itself by bringing forward and (if necessary) proving that it acted neither negligently nor intentionally (see §§ 280(1) 2 and 286(4) BGB). b) Quality of obligations distinguished. Concerning the contract’s obligations to perform, a debtor is liable only on the basis of the parties’ agreement and his promise to perform. There is no additional pre-requisite for his liability. Also, there is no need to find a party at fault in order to have its obligations extinguished, such as in cases of impossibility or other impediments (Grundmann, in Münchener Kommentar (2007), § 276 no. 24). Concerning remedies for non-performance of contractual obligations, the picture is more complex. Even though the concept of fault is usually fundamental for non-performance, the number of exceptions is large. Neither termination (§ 323 BGB) nor price reduction (§§ 437, 441, 536(1), 638 BGB) requires the non-performing party’s fault. Similarly, the creditor’s right to demand performance after an initially unsuccessful attempt to perform (Nacherfüllung) is not dependent on fault (§§ 439(1), 635, 662, 675 BGB). It is for damages where individual fault will be required. A damage claim will usually require that the defaulting party be found to be at fault for the non-performance. In this regard, however, there may be further exceptions concerning contractual guarantees (see §§ 276(1) 1, 311(2) BGB; for more details see Grundmann, in Münchener Kommentar (2007), § 276 no. 29). 5. German peculiarity: § 285 BGB. If performance has become impossible, but the non-performing party receives something in place of the subject matter that it would have had to perform/deliver (e.g., payment by an insurer), it is obliged to disgorge the substitute under § 285 BGB (so called commodum ex re or commodum ex negotiatione). As paragraph (2) illustrates, the claim can exist concurrently with a claim for damages in lieu of performance (which will then, however, be reduced by the value of the substitute).

Comparison and Evaluation 1. General. As to the structure of compensation for damages in cases of nonperformance, a doctrinal dichotomy exists between the PECL/DCFR on the one side and German law on the other side. This difference materializes in three elements. First, the regimes have established different structural concepts of obligations to perform and other duties. Depending on whether a duty is characterized as an obligation to perform or as a different duty, the available remedies vary. The PECL and the DCFR are less clearly structured in this regard. In practice, however, the divergence may be less

539

T.W. Dornis determinative than the principal dichotomy suggests. Similarly, an apparent divergence exists between the PECL/DCFR system of guarantee liability for contractual promises and the German rule of fault-based liability. Guarantee liability is an issue of constant approximation among different legal families: as it appears, the rule of fault liability has internationally fallen out of favour. Uniform law under the CISG implements the guarantee rule (Article 79). In Germany, the 2002 reform also further eliminated the fault principle’s predominance. Hence, a constant trend appears to point towards the common law paradigm of no-fault liability (Grundmann, in Münchener Kommentar (2007), § 276 no. 31). Finally, as to the question of fault, the systems of the PECL/DCFR and German law structurally differ with regard to their limitations on causation and damages. The PECL and the DCFR (like the CISG) follow a rule of foreseeability. Several European civil law jurisdictions (e.g., France, Italy) also limit damages under this concept (for an instructive historical analysis see Ferrari (1993), pp. 1257 et seq.). German law, by contrast, does not establish a comparable limitation and appears to extend the scope of compensation under a theory of adequate causation. 2. Categories of ‘obligations to perform’ and other ‘duties.’ One doctrinal dichotomy has already been mentioned in the context of contract termination regarding divergent concepts of fundamental non-performance and the Nachfrist mechanism (see above Article 9:301 PECL). While German law has developed a detailed typology of contractual obligations to perform (reciprocal or unilateral) and other duties to protect, neither the PECL nor the DCFR has established a comparably complex classification. In terms of practical outcome, the differences may not be of much concern. a) Obligations to perform versus other duties. German law distinguishes between so-called primary and secondary obligations to perform (Hauptleistungspflichten and Nebenleistungspflichten; see above Article 9:301/GERMAN LAW comment 2). This distinction depends on whether the relevant obligation to perform is reciprocally correlated to a counter-obligation of the other party. Both primary and secondary obligations to perform can be enforced by the creditor; i.e., non-performance may result in all kinds of remedies (specific performance, termination, damages, etc.). Beyond the category of obligations to perform another class of duties exists. These are subsidiary or ancillary duties that are not directly aimed at effectuating performance (Nebenpflichten, see § 241(2) BGB). While non-performance on obligations to perform will give rise to the normal remedies, a breach of subsidiary duties will result only in damages. These duties are intended only to protect the parties’ extra-contractual interest in the integrity of other assets or entitlements (so-called Integritätsinteresse; e.g., roofer must not damage the employer’s car while repairing the roof). Importantly, there is no specific enforcement of subsidiary duties (the issue, however, is not uncontested; see, e.g., Medicus/Lorenz (2010), no. 509). The categorization of obligations and duties under the PECL and the DCFR is less differentiated than the German system. The DCFR generally defines an ‘obligation’ as a ‘duty to perform’ (Article III.-1:102(1) DCFR). According to Article III.-1:102(2) DCFR, ‘performance of an obligation’ is ‘the doing by the debtor of what is to be done under the obligation’ (or, alternatively, a forbearance owed). With regard to the reciprocity of obligations, Article

540

Chapter 9: Particular Remedies for Non-performance III.-1:102(4) DCFR establishes a structure similar to German law. Beyond these ‘duties to perform,’ however, no separate category of obligations exists. Yet, there is a distinction that effectuates a similar outcome in terms of practical results. The DCFR makes clear that the ‘duty to act in accordance with good faith and fair dealing’ is not a duty to perform per se but a duty required in the performance of other obligations (see Article III.-1:103(1) and (3) DCFR; see also von Bar/Clive (2009), Comments on Article III.-1:103, p. 676). Hence, breach of the duty will not give rise to a remedy for non-performance. It will only exclude the party in breach from exercising a right that it would have absent its violation of good faith and fair dealing (von Bar/Clive (2009), Comment E on III.-1:103, 678). Among the potentially innumerable different duties of acting in good faith and dealing, two specific categories stand out. First, under Article III.-1:104, the DCFR explicitly establishes an obligation to cooperate among the parties. This obligation, while derived from the general duty of good faith and fair dealing, has been designed as an actual duty or obligation to perform. Non-performance will therefore result in the regular remedies (von Bar/Clive (2009), Comments on Article III.- 1:104, pp. 685 and 687). In addition, as the language of Article III.-1:103(3) DCFR illustrates (‘directly’), an obligation to perform may also ensue from the general duty to act in good faith and fair dealing. In other words, the duty to act in accordance with good faith and fair dealing may not directly create an obligation to perform, but the parties’ agreement, upon being construed in accordance with the principle, may be found to contain a tacit or implied term that creates an obligation to perform (von Bar/Clive (2009), Comment E on Article III.-1:103, p. 678). The situation under the PECL is similar, even though the PECL do not clearly distinguish between different categories of ‘duty’ and ‘obligation’ (see also von Bar/Clive (2009), Comments on III.1:104, p. 685). Under Article 1:202 PECL, a ‘duty to cooperate’ exists. Breach of this duty is explicitly explained as giving rise to remedies for non-performance in Article 1:301(4) PECL (Lando/Beale (2000), p. 120). Similar to the DCFR, the duty to act in accordance with good faith and fair dealing (Article 1:201(1) PECL) has not been designed to directly create an obligation to perform. It will, however, inter alia, have to be considered when implied terms of a contract are to be determined (Article 6:102(c) PECL). b) Comparison. In essence, both systems of categorization will yield similar results. Primary and secondary obligations to perform may be found under all regimes by close interpretation (and, if necessary, gap-filling) of the contract. The obligation to cooperate as established under the PECL and the DCFR will comprise many constellations that German law has classified as giving rise to subsidiary or ancillary duties only. This category also goes beyond German law insofar as it may cover instances where German law applies only the rules of mora creditoris (§§ 293 et seq. BGB). The PECL and the DCFR may even establish an obligation to perform and grant the full range of remedies. With regard to the category of subsidiary and ancillary duties concerning protection of the other party’s assets and entitlements, German contract law is principally broader in reach than the PECL and the DCFR. Under the latter regimes, violation of the duty to protect the other side’s interests may, in some constellations, result in a limitation of a party’s claims under the principle of good faith and fair dealing. Yet, a category of ancillary and protective duties is not acknowledged as such.

541

T.W. Dornis Many constellations may thus be an issue of tort law and delict (see critically insofar Dauner-Lieb/Quecke (2008), pp. 158–159). 3. Fault, foreseeability, and efficiency. a) Guarantee v. fault liability. In accordance with international uniform law, the PECL and the DCFR have established no-fault liability for non-performance. This also is the principal rule in common law (see explicitly Bundestags-Drucksache 14/6040, p. 131). In terms of economic reasons, holding parties to a contractual agreement liable for their promises, without an additional pre-requisite of fault, is most efficient: it sets optimum incentives for the parties to tailor their contractual agreement and their promises in accordance with potential losses that might result from non-performance. In addition, it largely avoids subsequent decision-making by third parties (i.e., courts) on an issue as vague as fault. With the no-fault standard, the PECL and the DCFR apparently establish stricter liability. This, however, appears to be the case only upon a first look. Closer scrutiny reveals that, in combination with the limiting pre-requisite of foreseeability, the PECL and the DCFR systems of liability are not more stringent than German law. b) Foreseeability versus adequate causation. This is the second dichotomy: The PECL/DCFR and German law are founded on different standards of causation and foreseeability. Under both the PECL and the DCFR, liability exists only for losses that have been foreseen or that could reasonably be expected to have been foreseen at the time of contract conclusion. German law, by contrast, applies the so-called principle of adequate causation (Adäquanztheorie), which requires the losses to have occurred in the ordinary course of things. A concept of foreseeability, even though rudimentarily incorporated into § 254 BGB, is non-existent as a limitation on damages (Canaris (2001), p. 517; see also below Article 9:504 PECL/GERMAN LAW). In substance, the German approach to assessing the probability of losses under a standard of the ‘optimal observer’ in the shoes of the non-performing party is stricter. The optimal observer will usually foresee more than do the concrete parties. c) Practical convergence. Notwithstanding this dual divergence, the approaches do not differ much in their practical outcomes. The wider standard of adequate causation under German law is inseparably connected to the more narrow fault principle. Vice versa, the more comprehensive guarantee liability under the PECL and the DCFR is correlated with a restricting conception of foreseeability for damages (cf. also Schlechtriem/Schwenzer (2008), Article 74 no. 4 (for Article 74 CISG)). In this regard, the PECL/DCFR and German law reflect two different combinations of wellbalanced liability standards. In essence, as explained above (see comment 2.a)), the system of combining strict liability for contractual promises with a standard of limitations on foreseeable damages appears to be more efficient and economically sound: making the parties’ liability dependent on what they have promised provides an optimal incentive for promulgating a cost-efficient agreement. The parties–and not the judge–will determine the ‘adequate’ standard of liability in their negotiated agreement. In addition, combination of the guarantee principle with a rule of foreseeability will foster the parties’ willingness to exchange information. Each side has an interest in transparency in order to better assess (and possible insure) its own risk of liability (see extensively Faust (1996), pp. 223 et seq.; Cooter/Ulen (2000), p. 247).

542

Chapter 9: Particular Remedies for Non-performance Principles of European Contract Law Article 9:504: Loss Attributable to Aggrieved Party The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party contributed to the non-performance or its effects. Article 9:505: Reduction of Loss (1) The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party could have reduced the loss by taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the loss. 1. General. The rules of Article 9:504 and 9:505 PECL specify and amend the general principle set out in Article 8:101(3) PECL, which states that a party may not resort to any of the remedies in Chapter 9 to the extent that its own act caused the other party’s non-performance. Two constellations need to be distinguished. First, the aggrieved party’s conduct may have been a cause of the other side’s non-performance. Second, the aggrieved party may not (only) have contributed to the non-performance as such, but it may (also) have exacerbated the effects by its own conduct. The latter category also involves cases where the aggrieved party has failed to avoid or reduce the loss by a mitigating (in)activity. An aggrieved party’s contribution to the other side’s nonperformance is structurally different from its contribution to the emergence of losses and the failure to prevent their further accrual. In the first constellation, the causal event for the damage has not yet occurred at the time the aggrieved party interferes. The damage could still be prevented. In the second case, the damaging event has already occurred; the question is merely how extensive its consequences will be. In this regard, the formal textual distinction under the PECL (and the DCFR) is systematically inconsistent. Yet, the statutory text refers to some jurisdictions’ traditional dichotomy between ‘contributory negligence’ and ‘failure to mitigate’ (as can be found, e.g., in English law). European civil law systems (notably German law), by contrast, do not distinguish accordingly. Nevertheless, the formal distinction under German law (i.e., between § 254(1) and (2) BGB) is not consistent either (see below GERMAN LAW comment 1). 2. Doctrinal characterization unclear. Reduction of the non-performing party’s liability in cases where the aggrieved party has contributed to the non-performance or its effects, or where it has failed to mitigate the loss, cannot be explained as being due to an actual ‘non-performance’ by the aggrieved party. A doctrinal characterization is questionable. Evidently, Article 8:101(3) PECL applies only to cases where a party’s act has ‘caused the other party’s non-performance.’ This may cover constellations under Article 9:504 PECL; yet, it will not directly apply to constellations under Article 9:505

543

T.W. Dornis PECL. In addition, even though a general duty to cooperate exists under Article 1:202 PECL, it may be doubted whether this duty still exists with regard to the avoidance or mitigation of damages. After all, the explicit purpose of Article 1:202 PECL is to ‘give full effect to the contract.’ At least after non-performance has occurred, the contract as such may no longer be effectuated. Hence, strictly speaking, there is no obligation to perform – that is, an obligation to avoid loss or to mitigate damages – on the side of the aggrieved party. Article 9:504 and 9:505 PECL will therefore have to be characterized as clarifying a special aspect of the general duty to act in accordance with good faith and fair dealing (Article 1:201 PECL). 3. Excuse and vicarious liability. As a consequence, it is also questionable whether rules on third-party conduct (Articles 1:305 and 8:107 PECL) and excused nonperformance (Article 8:108(1) PECL) should apply in the context of an aggrieved party’s contribution to its own damages. Regarding excuse, it is evident that mere causation in the sense of a sine qua non requirement will not suffice for an aggrieved party’s contribution to be regarded as reducing the other side’s obligation (see also Magnus (2008), p. 223). At the same time, a requirement of fault would be too far-reaching, since such a requirement has not even been established to govern in cases of actual non-performance. In this regard, vicarious liability and excuse should be considered specifications of the general principles of fairness and efficiency. These principles should therefore also govern in the context of loss avoidance and mitigation. Hence, an analogous application is indicated. 4. Concept of ‘reasonability’ (Article 9:505 PECL). According to the PECL commentary, an ex ante perspective should be the governing principle for determining the reasonableness of the steps needed to reduce the loss or the expenses incurred. Otherwise, restitution for expenses that appear reasonable at the time of acting but that ultimately increase the damage would not be possible (Lando/Beale (2000), pp. 446–447 (Illustration 10)). In order to avoid divergent standards and outcomes, this perspective should govern under both paragraphs of Article 9:505 PECL. a) ‘Reasonable steps’ for loss reduction (paragraph (1)). The assessment of what is reasonable to undertake in order to reduce the loss must consider both the costs of the measure undertaken to reduce the damage and the potential costs of an increase in losses without mitigating activity. In other words, there must be a balancing between the costs that have to be invested for mitigating and the costs ensuing without the mitigating measure. For the latter position, the costs have to be determined by the potential increase in losses and the probability of their realization. This also reconciles the aggrieved party’s freedom of activities (particularly freedom from quasi-obligatory standards of loss avoidance and mitigation) and the non-performing party’s conflicting interest in minimizing liability for damages. The analysis corresponds to the economic theory of tort law, which balances costs and benefits (for the theory in general see Posner (1972), 32 et seq.; for German law and a critique see, e.g., Grundmann, in Münchener Kommentar (2007), § 276 nos. 62 et seq.). b) ‘Expenses reasonably incurred’ (paragraph (2)). Regarding the standard for assessing the reasonability of expenses that an aggrieved party should incur in order to mitigate the loss, it is necessary to undertake the same efficiency analysis as with the

544

Chapter 9: Particular Remedies for Non-performance question of reasonable steps (above 4.a)). Concerning recovery for cover transactions with an optimum outcome, the PECL commentary uses the example of a case in which the transaction requires further expenses prior to its actual conclusion and effectuation (Lando/Beale (2000), p. 446 (Illustration 5)). Since in such a constellation the aggrieved party usually is the cheapest cost avoider, it is most efficient to allow for additional expenses in order to make the transaction possible. Finally, as the PECL commentary explains, if the aggrieved party takes steps and incurs expenses that go beyond what is required under the standard of reasonability, the measures will still lead to a reduction of damages (Lando/Beale (2000), p. 447). Consequently, however, this will also require recovery for expenses up to the standard of reasonability under Article 9:505(2) PECL. A corresponding apportionment or proportional reduction is required.

Draft Common Frame of Reference Article III. – 3:704: Loss attributable to creditor The debtor is not liable for loss suffered by the creditor to the extent that the creditor contributed to the non-performance or its effects. Article III. – 3:705: Reduction of loss (1) The debtor is not liable for loss suffered by the creditor to the extent that the creditor could have reduced the loss by taking reasonable steps. (2) The creditor is entitled to recover any expenses reasonably incurred in attempting to reduce the loss. The DCFR provisions clarify the PECL rules. Their scope of application is not universal (see, e.g., Article VI.-5:102: Contributory fault and accountability). Within the context of contractual obligations, however, the PECL and the DCFR widely correspond.

German Law § 254 BGB: Contributory fault (1) If fault on the part of the victim has contributed to the origin of the harm, the duty to compensate as well as the extent of the compensation to be provided depends on the circumstances, and in particular on the extent to which the harm has been predominantly caused by the one or the other party. (2) This also applies if the victim’s fault is limited to the fact that he has omitted to draw the debtor’s attention to the risk of an unusually high level of harm of which the debtor neither knew nor ought to have known, or that he has omitted to avert the harm or to reduce it. The provisions of § 278 apply correspondingly.

545

T.W. Dornis 1. General. Mere causal contribution of the aggrieved party does not suffice for a reduction of the other side’s liability under German law. § 254 BGB requires the aggrieved party to have violated or disregarded its own interests (so-called Obliegenheit, as a non-enforceable obligation against oneself). Similar to the PECL and the DCFR, the formal distinction in German law between different constellations is not fully in accordance with the doctrinal structure. Paragraph (1) concerns the aggrieved party’s contributory activity (or inactivity) regarding the coming into existence of the damages. This concerns the damaging event. Paragraph (2) covers the omission to warn as to the possibility of extraordinary extensive damages, the failure to avoid the creation of damages, and, finally, the failure to mitigate damages after a damaging event has occurred. Only the last category concerns situations where the damaging event can no longer be avoided–that is, where it is only about ‘damage mitigation.’ All other instances concern ‘damage avoidance.’ Application of the norm further requires the aggrieved party to have acted intentionally or negligently (fault principle, see below 3.). Overall, the provision gives the decision-maker wide discretion in balancing the parties’ complementary activities (or omissions) that have contributed to the existence and extent of damages. 2. Doctrinal peculiarity: violation of an Obliegenheit. With respect to contractual damages, the aggrieved party’s violation need not necessarily be contrary to a statutory norm. Defaulting on a contractual obligation or disregarding its own concerns under the parties’ agreement (Obliegenheitsverletzung) will suffice. As has been commonly acknowledged, the aggrieved party’s Obliegenheit under § 254 BGB is not an actual obligation to perform that could be breached in the traditional sense of the term. It denotes a failure to take appropriate measures in order to protect one’s own interests. It is ‘fault committed against oneself’ (see, e.g., BGH NJW 1997, 2235; and also Markesinis/Unberath & Johnston (2006), p. 476). Hence, violating, breaching, or failing to fulfil an Obliegenheit will not lead to liability for non-performance. It will only ensue a loss of rights for the ‘violating’ party. 3. Requirement of fault. As § 254(1) BGB implies, the aggrieved party must not have been at fault in its contribution to the other side’s non-performance or in its contribution to the damages. This appears to refer to § 276(1) BGB. The rule on fault for non-performance does not, however, strictly speaking, comprise the breach of an Obliegenheit – for the Obliegenheit does not constitute an actual obligation to perform (neither vis-à-vis oneself nor in relation to the other party) in terms of avoidance or mitigation of damages. Regardless, the rules on causation and fault apply analogously (see above Articles 9:501 et seq. PECL/GERMAN LAW comment 4). 4. Vicarious liability. With regard to liability for third-party conduct, § 254(2) 2 BGB refers to the rule on vicarious liability in § 278 BGB. This reference concerns both constellations under § 254(1) and § 254(2) 1 BGB (BGH NJW 1951, 477; Oetker, in Münchener Kommentar (2007), § 254 no. 126). In other words, an aggrieved party will be answerable for a statutory representative or persons whom it uses for the fulfilment of or for giving regard to its Obliegenheit(en) to the same extent as for the party’s own default. Whenever § 254 BGB is relevant to the aggrieved party’s failure to avoid or

546

Chapter 9: Particular Remedies for Non-performance mitigate losses within an existing contractual relationship, an analogous application of § 278 BGB will not be contested (see extensively Oetker, in Münchner Kommentar (2007), § 254 nos. 126 et seq.). 5. Legal consequences. a) Contribution to origin of damages. The reduction of damages under § 254(1) BGB depends on the circumstances of the case. The decisionmaker has considerable discretion in allocating the damages between the parties through a balancing of the parties’ contributions (see extensively Oetker, in Münchener Kommentar (2007), § 254 nos. 105 et seq.). Primarily, a so-called prevalence of causation will determine the ultimate allocation (Überwiegen der Verursachung; see, e.g., BAG NJW 1998, 2923). This does not mean giving equal regard to all factors that may have contributed causally, as would be the case, for example, under the theory of equivalent causation (see above Articles 9:501 et seq. PECL/GERMAN LAW comment 3). Instead, the decision-maker must evaluate and assess the parties’ contributions under an ex ante perspective on each contribution’s probability of causation. In short, the more likely one side’s contribution was to cause a damage (or to exacerbate damages), the more it points towards loss bearing by the respective party (BGH NJW-RR 2000, 272). The degree of fault is of secondary import, and it will usually correspond to the balancing of or probabilities for the parties’ causal contributions (Grüneberg, in Palandt (2012), § 254 no. 59; the issue is, however, not uncontested; see, e.g., Oetker, in Münchener Kommentar (2007), § 254 nos. 110–111). On this basis, if both sides act negligently, damages will usually be divided according to the proportions of the parties’ contributions. Only in extraordinary cases may a claim for damages be fully extinguished or not affected at all where the other party acted negligently (or negligently failed to act). This is the case whenever the aggrieved party intentionally contributes to the other side’s non-performance (BGH NJW 1991, 3208). Vice versa, a claim for damages based on intentional non-performance will generally not be reduced by simple negligence contributing to the aggrieved party’s nonperformance (see also BGH NJW 1992, 310; different for mitigation of damages: BGH VersR 1964, 94). Case law has also established a 100% rule in cases of extremely divergent degrees of negligence (see, e.g., BGH NJW-RR 1991, 1240). b) Omission to warn, prevent, and mitigate. Under § 254(2) 1 BGB, the principle of balancing and loss allocation among the parties appears to apply wholly. Yet, in practice, it is regularly used to hold the aggrieved party responsible for the full amount of damages that have accrued due to its failure to warn, prevent, or mitigate (see below COMPARISON AND EVALUATION comment 2). c) Separate portions of damage. A balancing of contributions must be undertaken separately for each portion of damage that has accrued (if different positions can be distinguished). For example, if contributory fault concerns only one among several objects, a corresponding reduction will effectuate damages only insofar as the specific object is concerned. Even though, like German law, neither the PECL nor the DCFR explicitly provides for such a separation and apportionment, both regimes allow for the application of a similar rule.

547

T.W. Dornis Comparison and Evaluation 1. Principal structural divergence. As to the doctrinal dichotomy between the PECL/DCFR and German law, it is principally the German fault principle for contributory negligence that appears to establish a difference. Under the PECL and the DCFR, exclusion of liability for the non-performing party under the rules of contribution to non-performance, to its effects, and mitigation of losses, is independent of individual fault. The difference, however, is attenuated in practice. The correlation between § 254(2) 1 BGB and the rule of foreseeability has been mentioned above (Articles 9:501 et seq. PECL/COMPARISON AND EVALUATION Comment 3; see also Markesinis/Unberath & Johnston (2006), pp. 477–478). In addition, an analogous application of rules on vicarious liability and excuse under the PECL and the DCFR further narrows down potential deviations. Nevertheless, it still appears that the concept of reasonability under the PECL/DCFR strongly contrasts with the German concept of balancing the parties’ contributions under § 254 BGB. A second look, however, will dissolve this perception as well. 2. Reasonability versus balancing of contributions. A closer analysis is needed to distinguish between the different constellations of contribution. a) Contribution to non-performance and its effects. First, as to contribution to non-performance and its effects (Article 9:504 PECL), German law primarily gives regard to the parties’ individual causation (see § 254(1) BGB (insbesondere)). The same analysis applies under the PECL and the DCFR: it is contribution to non-performance or its effects only. There is generally no excuse (apart from potentially analogous application of Article 8:108(1) PECL). The parties’ causation is what determines the outcome. Even though German case law looks at how probable each contribution was for the development of the damage, and also requires a balancing of all contributions, the practical outcome will hardly differ. The illustrations in the PECL and the DCFR commentaries suggest at least an implied balancing technique for the determination of contributory proportions (see, e.g., Lando/Beale (2000), p. 444 (Illustration 1 and 2)). b) Reduction of the loss. Concerning the mitigation of losses, German law, under § 254(2) 1 BGB, also generally applies a balancing approach. Hence, the losses are allocated among the parties according to their contribution’s causation (see, e.g., BGH NJW 2001, 3257; BGH NJW-RR 2009, 46). In practice, however, application of the rule is more straightforward: unless the non-performing party has acted intentionally or recklessly, any additional losses ensuing from a failure on the side of the aggrieved party must be borne by the latter (see, e.g., Grüneberg, in Palandt (2012), § 254 no. 63; the issue is, however, not uncontested; for convincing arguments in favour of the straightforward rule see Oetker, in Münchener Kommentar (2007), § 254 no. 76). With regard to the constellation of failed mitigation, the PECL/DCFR system of ‘reasonable steps’ is similar to the German concept (see also Huber (2008), p. 731 no. 120). There as well, it has been suggested that the scope of responsibility for loss mitigation on the side of the aggrieved party is restricted by what a reasonable and dutiful person would be expected to undertake to limit further extension of the damage (see Oetker, in Münchener Kommentar (2007), § 254 no. 76 (‘Der Geschädigte soll im Rahmen des von

548

Chapter 9: Particular Remedies for Non-performance einem vernünftigen und sorgfältigen Menschen zu Erwartenden dazu beitragen, dass der Schaden nicht unnötig groß wird.’). By and large, therefore, responsibility for contribution to non-performance, to its effects, and a failure to mitigate losses leads to the same practical outcomes under the PECL, the DCFR, and German law.

Principles of European Contract Law Article 9:506: Substitute Transaction Where the aggrieved party has terminated the contract and has made a substitute transaction within a reasonable time and in a reasonable manner, it may recover the difference between the contract price and the price of the substitute transaction as well as damages for any further loss so far as these are recoverable under this Section. Article 9:507: Current Price Where the aggrieved party has terminated the contract and has not made a substitute transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further loss so far as these are recoverable under this Section. 1. General. Article 9:506 and 9:507 PECL mirror the rules of the CISG on damages recoverable in cases where a cover transaction has or has not been concluded (Articles 75 and 76 CISG). These rules extend the approach of a so-called concrete and abstract computation of damages for all kinds of contracts. The ‘cover price’ is the most basic means for measuring damages. It will serve either as a concrete item in the calculation or as a hypothetical figure established by the ‘current price.’ 2. Termination and substitute transaction. Article 9:506 PECL provides that in cases of contract termination where the aggrieved party has actually made a reasonable cover transaction, the party can recover the price difference between the market price (i.e., the price for the substitute transaction) and the contract price. In addition, it can demand payment of damages for further losses incurred. The only qualitative prerequisite for the cover transaction is that it must be made ‘within a reasonable time and in a reasonable manner.’ This is intended to ensure that the aggrieved party stays within the confines of the contractual agreement when concluding the cover transaction. The aggrieved party must choose a substitute that is most closely equivalent to the contract’s subject matter regarding nature, quality, and price. 3. Termination without substitute transaction. In cases where the aggrieved party, after termination, does not conclude a contract for a substitute transaction, the party may recover the difference between the market price (at the time of termination) and the contract price (Article 9:507 PECL). In addition, it can demand payment for further losses, if applicable. This is the so-called abstract calculation of damages. The PECL

549

T.W. Dornis (and the DCFR) define the ‘current’ price by the time only – in other words, it is the price that is current at the time of contract termination. Different from the CISG (Article 76(2)), there is no explicit reference to the place where the ‘current’ price needs to exist. However, it must be implicitly inferred from the commentary’s illustration (see Lando/Beale (2000), p. 450) that the price needs to be the ‘market’ price. Hence, computation of the exact ‘current’ price for an abstract calculation of damages may also require a prior determination of the market for the products at issue.

Draft Common Frame of Reference Article III. – 3:706: Substitute transaction A creditor who has terminated a contractual relationship in whole or in part under Section 5 and has made a substitute transaction within a reasonable time and in a reasonable manner may, in so far as entitled to damages, recover the difference between the value of what would have been payable under the terminated relationship and the value of what is payable under the substitute transaction, as well as damages for any further loss. Article III. – 3:707: Current price Where the creditor has terminated a contractual relationship in whole or in part under Section 5 and has not made a substitute transaction but there is a current price for the performance, the creditor may, in so far as entitled to damages, recover the difference between the contract price and the price current at the time of termination as well as damages for any further loss. The DCFR rules on substitute transactions and recovery of price differences clarify the largely similar PECL rules. Most notably, both rules are intended only to quantify damages. None of the provisions provides an independent ground of liability. The DCFR commentary further explains that application of the provisions may not always require a mere comparison of nominal prices: sometimes – for example, in the case of lease contracts – the comparison of ‘prices’ requires looking at the full (hypothetical) time of contract duration. The analysis then establishes an evaluation of future values and not just nominal prices. At the same time, changing the analysis to a comparison of values makes it possible to compare different kinds of contracts (e.g., sales and lease contracts; see von Bar/Clive (2009), Comments on Article III.-3:706, pp. 940–941).

German Law 1. General. As to the computation of damages, § 249(1) BGB, inter alia, provides for recompensation of lost gains (lucrum cessans; see above Articles 9:501 et seq. PECL/GERMAN LAW comment 2.c)). The provision of § 252 BGB is intended to clarify this point. Yet, § 252, second sentence BGB has established the foundation for what is commonly – albeit incorrectly – known as a so-called abstract calculation of damages

550

Chapter 9: Particular Remedies for Non-performance (abstrakte Schadensberechnung). An aggrieved party may make a calculation by establishing a case for its concrete losses under the specific constellation of the contract at issue. Alternatively, the party may refer to the gain that it would have expected to obtain under regular circumstances. In this regard, the presumption of § 252 BGB simplifies the aggrieved party’s burden of establishing that a gain would actually have occurred under regular circumstances (Emmerich, in Münchener Kommentar (2007), Vor § 281 no. 46). Per se, however, this way of calculating damages is not ‘abstract’: the nonperforming party can still prove that no damage has actually occurred. Compensation for truly ‘abstract’ damages in this sense will be granted only if the non-performing party has to pay damages under an abstract-theoretical calculation without the option to prove that, in the concrete case, no actual damages have occurred on the side of the aggrieved party. This is the case under, for example, § 376(2) German Commercial Code (HGB). 2. ‘Abstract calculation’: presumption of damages for commercial sales. The merchant’s computation of damages under § 281 BGB is also often referred to as a constellation of abstract calculation. However, it relieves only the aggrieved party’s burden of proof. As dominant opinion in theory and practice contends, a rebuttable presumption exists that a merchant (as buyer) could have resold the goods (under a sales contract) for the market price. The gains would have been the difference between the market price and the contract price. Even though the merchant/buyer has not made a cover transaction, he will be entitled to recover his lost (‘abstract’) gains (BGH NJW 1951, 918; BGH NJW-RR 2006, 243). Correspondingly, a merchant/seller whose buyer has not accepted the goods will be entitled to (‘abstractly’) calculate his damages as constituting the difference between his own manufacturing or purchase costs and the contract price he lost due to the other party’s non-performance (BGH NJW 2000, 1409). If the merchant/seller sells the rejected goods to a third party, his damages will be calculated as the lost gain he would have made under a second contract (BGH NJW 1994, 2478; BGH NJW 2000, 1409). While case law insists on the aggrieved party’s being a merchant and does not allow for abstract calculations in consumer contracts or transactions (see, e.g., BGH NJW 1980, 1742, 1743), this has been criticized in scholarly commentary (see, e.g., Oetker, in Münchener Kommentar (2007), § 252 nos. 48–49 with further references).

Comparison and Evaluation Unlike German law, the PECL and the DCFR do not limit the so-called abstract calculation of damages according to the status of the parties. Non-merchants, too, may choose to calculate their damages either concretely or abstractly. German law is more restrictive in this regard, containing only a few statutory rules on abstraction. In addition, even though arguments to the contrary have convincingly been put forth, case law and dominant theory still limit application of the quasi-abstraction principle to merchants.

551

T.W. Dornis Principles of European Contract Law Article 9:508: Delay in Payment of Money (1) If payment of a sum of money is delayed, the aggrieved party is entitled to interest on that sum from the time when payment is due to the time of payment at the average commercial bank short-term lending rate to prime borrowers prevailing for the contractual currency of payment at the place where payment is due. (2) The aggrieved party may in addition recover damages for any further loss so far as these are recoverable under this Section. In general, interest starts to accrue from the time a payment is due (see Article 7:102 PECL). Paragraph (1) provides for interest on primary obligations only. There is no interest on secondary obligations (e.g., damages). Also, interest cannot be demanded on interest. The general rate of interest is fixed by reference to the average commercial bank short-term lending rate for the currency and the due place of the payment. Of course, the parties can agree to modify or exclude the rule in paragraph (1). Interest and damages are formally distinguished from each other. Interest is not to be seen as a kind of damage. The rules on damages will therefore not apply. Most notably, payment of interest cannot be refused by reference to an excuse under Article 8:108 PECL. If an aggrieved party claims damages, Article 9:508 PECL provides for compensation of losses due to non-payment or delay in payment under paragraph (2). Loss exceeding what can already be recovered by interest payment must be compensated for under the general rules on damages (Articles 9:503 et seq. PECL). Yet, even though interest is not seen as a specific kind of damage, the PECL (and their commentary) make implicit reference to its compensatory function in paragraph (2) (‘for any further loss’; see also Lando/Beale (2000), p. 451 (‘best yardstick for assessing the creditor’s loss’)). Further rules on interest, most notably when it is to be added to capital, can be found in Article 17:101 PECL.

Draft Common Frame of Reference Article III. – 3:708: Interest on late payments (1) If payment of a sum of money is delayed, whether or not the non-performance is excused, the creditor is entitled to interest on that sum from the time when payment is due to the time of payment at the average commercial bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place where payment is due. (2) The creditor may in addition recover damages for any further loss. Article III.-3:708 DCFR clarifies the PECL rules on delay of payment of money without significant modifications. Under Article III.-3:709, 710, and 711 DCFR, the rules on

552

Chapter 9: Particular Remedies for Non-performance interest have been extended and further specified. Article III.-3:709 DCFR is identical to Article 17:101 PECL; the provision concerns the rules on when interest will be added to the capital. Article III.-3:710 (Interest in commercial contracts) and 3:711 (Unfair terms relating to interest) DCFR provide further details on capital interest.

German Law § 246 BGB: Statutory rate of interest If interest on a debt is payable by virtue of statute or of a legal transaction, the interest rate is 4% per year, unless otherwise provided. § 247 BGB: Basic rate of interest (1) The basic rate of interest is 3.62 per cent. lt changes on the 1st January and 1st July each year by the percentage points by which the base factor rose or fell since the last change of the basic rate of interest. The base factor is the rate of interest for the most recent major refinancing operation of the European Central Bank before the first calendar day of the half year concerned. (2) The Deutsche Bundesbank will publish in the Bundesanzeiger the applicable basic rate of interest without delay after the points in time mentioned in paragraph 1 sentence 2. § 288 BGB: Interest during delay (1) A money obligation bears interest during the delay. The rate of interest during delay for the year is five percentage points above the basic rate of interest. (2) For legal transactions in which no consumer participates, the rate of interest for demands for payment is eight percentage points above the basic rate of interest. (3) The creditor can demand higher interest on a different legal ground. (4) A claim for further loss is not excluded. § 289 BGB: Prohibition of compound interest Default interest is not to be paid on interest. The right of the obligee to compensation for damage caused by the default remains unaffected. 1. General. Under German law, there is no principal claim for interest on due payments. Only upon the parties’ contractual agreement or an express statutory direction will interest accrue from the time a payment is due. Just a few specific instances of interest for due payments exist under the German Commercial Code (see § 353, first sentence and § 354(2) HGB) and the BGB (see, e.g., § 641(4) BGB; for further examples see Grundmann, in Münchener Kommentar (2007), § 246 no. 19).

553

T.W. Dornis Beyond the category of interest for due payments, a creditor must seek recourse in the special rules on delayed performance (§§ 286, 288 BGB). This, however, requires fulfilment of the pre-requisites for delay of performance (see below comment 3). 2. Interest rate. The German BGB still does not–though it has been recommended several times (see, e.g., Bundesminister der Justiz (1992), pp. 114 et seq.)–provide for a basic, variable, and market-oriented interest rate on due payments. As a result, there are different provisions on interest rates. Most fundamentally, § 246 BGB and § 352 HGB provide for fixed rates (4% and 5%). These rules, however, are applicable only if the parties have not agreed on a different interest rate or if no special statutory provision applies. The most common special rule on interest rates is § 288 BGB (for other exceptions see Grundmann, in Münchener Kommentar (2007), § 246 no. 39). In this regard, § 247 BGB functions as a basic reference on interest. The provision was introduced (together with § 288 BGB) during the implementation of the Late-Payment Directive 2000/35/EC (29 June 2000). 3. Interest upon delayed payment. a) Dual interest rate. The norm on interest for delayed payments in § 288 BGB provides for a dual rate: the interest rate is no longer a fixed and unalterable value but variable depending on the changes in § 247 BGB and on the parties to the obligation. If there are no consumers involved, the interest rate will be 8% above the basic interest rate. Otherwise, it will be 5% above the basic interest rate. b) Prerequisite: delay of performance. Interest under § 288 BGB can accrue on all kinds of monetary obligations, both primary and secondary. Most notably, it also springs from a claim for damages (Ernst, in Münchener Kommentar (2007), § 288 no. 12). As clarified in § 289 BGB, however, interest will not accrue on a claim for interest (see also generally § 248 BGB). There is no need for the aggrieved party to prove an actual damage due to non-payment or delayed payment in order to be entitled to a claim for interest. Yet, the interest will not accrue automatically. It requires fulfilment of the prerequisites for delay (§ 286 BGB). Interest will start to accrue from the time that pre-conditions for delay exist. It will end with the debtor’s payment to extinguish the obligation by performance. A fluctuation in the interest rate according to § 247 BGB will be immediately reflected in the computation of interest under § 288 BGB. 4. Other foundations and further damages. As § 288(3) BGB provides, the creditor may be entitled to a higher interest rate if the parties have agreed accordingly. An agreement on the interest rate will also govern in cases of delayed payment. This issue was contested even before the 2002 reform. Case law and practice require the parties to have specifically agreed on a higher interest rate (i.e., a rate beyond the legal rate under § 288 BGB) before it can be applied in cases of delay (BGHZ 104, 337). This has been duly criticized: after the 2002 reform as well, the parties’ agreement on the interest rate will generally prevail, even in cases of delayed performance. In other words, the contractual interest rate will also apply in cases of delay (see Ernst, in Münchener Kommentar (2007), § 288 nos. 22–25). Regardless of the position one takes, the issue is no longer of much practical relevance: the statutory interest rate in

554

Chapter 9: Particular Remedies for Non-performance § 288(1), (2), and § 247 BGB will usually exceed the rate that the parties have agreed on. Finally, if the pre-conditions of delay under § 286 BGB have been established, the creditor can claim damages under the general rules (§§ 249 et seq. BGB).

Comparison and Evaluation The most evident difference between the rules on interest under the PECL/DCFR regimes and those under German law is the former regimes’ identification of a general duty to pay interest without a further pre-requisite. Only if the aggrieved party demands further loss will the general rules on damages have to be applied. Quite differently, German law does not provide for a claim for interest on due payments per se. Unless it is specifically provided for by a statutory provision or the parties’ agreement, no interest accrues upon delay of the payment after the due date (see also Leible (2008), p. 111). In practice, as is often the case, this difference is not of critical relevance. Under German law, the threshold for finding a delay of payment and a debtor’s corresponding obligation to pay damages under §§ 286 and 288 BGB is low. Most notably, § 286(2) and (3) BGB establish numerous instances where the debtor is liable for late performance without an additional notification from the time the payment has become due or thirty days after the due date. In addition, the debtor bears the burden of proving a lack of fault on his side, which is another pre-requisite for liability for delayed performance (see § 286(4) BGB). Practically, this further reduces the threshold for a finding of the debtor’s liability.

Principles of European Contract Law Article 9:509: Agreed Payment for Non-performance (1) Where the contract provides that a party which fails to perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party shall be awarded that sum irrespective of its actual loss. (2) However, despite any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the loss resulting from the non-performance and the other circumstances. 1. General. The provision concerns only the extension of liability for losses, not its limitation. For the restriction of liability by clauses setting a sum below the amount of likely losses, see above Article 8:109 PECL. In principle, the PECL follow the civil law approach by allowing for an enforcement of stipulated damage clauses without regard to their purpose. This is different in common law jurisdictions, where so-called penalty clauses are treated distinctly from liquidated damages clauses. The latter are valid since they are a simple pre-estimation of damages by the parties in situations of insecurity. The former will not be enforced for they are deemed an attempt to compel performance of the principal obligation (for the common law’s general hesitation to compel a party

555

T.W. Dornis to perform, see above comments on Article 9:101). The PECL acknowledge both functions of a stipulation for damages: it may be efficient both for providing an incentive to perform (e.g., if the damage award is high) and for avoiding costs of loss estimation and computation in cases of uncertainty. An aggrieved party will therefore not be obliged to prove its actual losses. Article 9:509 PECL covers stipulations for failure to perform, which include both a complete failure to perform and delayed performance. The provision does not expressly, however, cover non-conformity of performance. Besides, a stipulation of damages will generally not exclude the aggrieved party’s right to demand damages under the general rules (Articles 8:102 and 9:501 et seq. PECL). The aggrieved party may sue for its full actual damages. It can then, however, not rely on the damage clause and a relief from the burden to prove its actual damages. Insofar as the interests affected are not identical, the aggrieved party may demand stipulated damages and performance concurrently: if the non-performing party has tendered too late, the aggrieved party may demand performance and request payment of stipulated damages for the delay in time. 2. Grossly excessive stipulation. A court will reduce the stipulated amount to a ‘reasonable amount’ whenever the specified sum is ‘grossly excessive in relation to the loss resulting from the non-performance and the other circumstances.’ The provision does not distinguish the parties’ status (i.e., merchants, consumers). The court will decide without regard to whether the sum was reasonable at the time of stipulation. Evidently, the escape applies only in cases of drastic disproportionality. The court must take into account the relationship between the stipulated amount and the actual losses. In this regard, it should consider whether the loss may be attributable to the aggrieved party (Article 9:504 and 9:505). It is not relevant what loss was actually foreseeable at the time of contract conclusion (Lando/Beale (2000), p. 455). As the commentary further explains, the court should also respect the parties’ intention in their determination of the ‘reasonable amount’: the sum should not be reduced to actual losses; rather, an ‘intermediate’ figure should be set (Lando/Beale (2000), p. 454). Evidently and unavoidably, the concept of ‘reasonability’ fails to provide a workable and precise guideline for decision-making (see generally Eidenmüller et al. (2008), p. 675 (critically as to the parallel DCFR provision)). As with any provision of this kind, it would need to be set in action first in order to develop a life of its own (for practical judge-made guidelines see below German law comment 6.).

Draft Common Frame of Reference Article III. – 3:712: Stipulated payment for non-performance (1) Where the terms regulating an obligation provide that a debtor who fails to perform the obligation is to pay a specified sum to the creditor for such non-performance, the creditor is entitled to that sum irrespective of the actual loss. (2) However, despite any provision to the contrary, the sum so specified in a contract or other juridical act may be reduced to a reasonable amount where it

556

Chapter 9: Particular Remedies for Non-performance is grossly excessive in relation to the loss resulting from the non-performance and the other circumstances. The DCFR rule on stipulated damages mirrors the PECL provision, apart from minor textual differences. As to its scope of protection, Article III.-3:712 DCFR extends the rule to other juridical acts, most notably unilateral stipulations. It also clarifies that the rule does not apply to statutory stipulations of damages.

German Law § 339 BGB: Payability of contractual penalty Where the obligor promises the obligee, in the event that he fails to perform his obligation or fails to do so properly, payment of an amount of money as a penalty, the penalty is payable if he is in default. If the performance owed consists in forbearance, the penalty is payable on breach. § 340 BGB: Promise to pay a penalty for non-performance (1) If the obligor has promised the penalty in the event that he fails to perform his obligation, the obligee may demand the penalty that is payable in lieu of fulfilment. If the obligee declares to the obligor that he is demanding the penalty, the claim to performance is excluded. (2) If the obligee is entitled to a claim to damages for nonperformance, he may demand the penalty payable as the minimum amount of the damage. Assertion of additional damage is not excluded. § 341 BGB: Promise of a penalty for improper performance (1) If the obligor has promised the penalty in the event that he fails to perform his obligation properly, including without limitation performance at the specified time, the obligee may demand the payable penalty in addition to performance. (2) If the obligee has a claim to damages for the improper performance, the provisions of § 340 (2) apply. (3) If the obligee accepts performance, he may demand the penalty only if he reserved the right to do so on acceptance. § 342 BGB: Alternatives to monetary penalty If, as penalty, performance other than the payment of a sum of money is promised, the provisions of §§ 339 to 341 apply; the claim to damages is excluded if the obligee demands the penalty.

557

T.W. Dornis § 343 BGB: Reduction of the penalty (1) If a payable penalty is disproportionately high, it may on the application of the obligor be reduced to a reasonable amount by judicial decision. In judging the appropriateness, every legitimate interest of the obligee, not merely his financial interest, must be taken into account. Once the penalty is paid, reduction is excluded. (2) The same also applies, except in the cases of §§ 339 and 342, if someone promises a penalty in the event that he undertakes or omits an action. § 344 BGB: Ineffective promise of a penalty If the law declares that the promise of an act of performance is ineffective, then the agreement of a penalty made for the event of failure to fulfil the promise is likewise ineffective, even if the parties knew of the ineffectiveness of the promise. § 345 BGB: Burden of proof If the obligor contests the payability of the penalty because he has performed his obligation, he must prove performance, unless the performance owed consisted in forbearance. 1. General. German law distinguishes between so-called accessory stipulations of damages (§§ 339, 342 BGB) and non-accessory or independent stipulations (§ 343(2) BGB). The former category, as do the respective rules under the PECL and the DCFR, concerns the stipulation of damages if another existing obligation between the parties is not fulfilled by the promisor. The latter is one party’s promise to pay damages in cases where no other actual obligation exists–in other words, the promise to pay damages is the only obligation between the parties (see extensively Gottwald, in Münchener Kommentar (2007), Vor § 339 nos. 1–2). As to the stipulation, a dual function is generally acknowledged: it provides an incentive to perform (or prevent non-performance) and it simplifies the computation of damages (see, e.g., BGH NJW 2003, 1805, 1808; BGH NJW 2001, 2622, 2624). Within the category of accessorystipulations, German law further distinguishes between an actual promise of damages (Strafversprechen) and a mere predetermination of damages (Schadensersatzpauschale). The latter category is not within the scope of §§ 339 et seq. BGB (BGH NJW 1992, 2625; the distinction can be explicitly found in § 309 no. 5 and no. 6 BGB). Whether the parties’ agreement on the payment of a certain amount of damages is a promise or a mere predetermination is an issue of contract interpretation and construction: the terminology chosen by the parties is largely irrelevant; most determinative is the relation between the amount of damages the parties have agreed on and the actual amount of losses that will accrue in such situations. Whenever the parties’ agreement illustrates that efficiency of damage computation was not the only (or prior) intention, but that they primarily intended to establish an incentive to compel performance by establishing the threat of high damage payments, a real damage promise exists and

558

Chapter 9: Particular Remedies for Non-performance §§ 339 et seq. BGB apply (for the complexity of determination see, e.g., Gottwald, in Münchener Kommentar (2007), Vor § 339 nos. 34–35). 2. Limitations. Special rules limiting the promise of damages in general terms and conditions exist under §§ 307, 309 no. 5 and no. 6 BGB. A consumer’s promise to pay damages is generally invalid. Yet, even a merchant’s promise may be void in cases of gross disproportionality between the promised damage and the actual loss caused by and the severity of non-performance (see, e.g., BGH NJW 2003, 1805, 1808; BGH NJW 2000, 2106). In addition, a tenant’s promise vis-à-vis the landlord is invalid (see § 555 BGB; for further examples see Gottwald, in Münchener Kommentar (2007), Vor § 339 nos. 15 et seq.). Most determinative, however, are the limitations in §§ 340, 341, and 343 BGB that are addressed below (see below 4., 5., and 6.). 3. Principle of fault. The forfeiture of stipulated damages usually requires delayed performance (see § 339, first sentence BGB). Even though there is no need to prove actual damages on the side of the aggrieved party, the prerequisites for finding delayed performance must be fulfilled. This means that the German fault principle applies (see § 286(4) BGB; for the principle in general see above Articles 9:501 et seq. PECL/GERMAN LAW Comment 1 and 4). As a result, the non-performing party will be liable for third parties under § 278 BGB. In addition, the non-performing party may prove that it acted without fault (§ 280(1) 2 BGB). 4. Stipulation for non-performance (§ 340 BGB). In constellations where damages have been stipulated for complete or partial non-performance, there can be no concurrent claims for damages and stipulated damages. The aggrieved party can demand either full performance (or the outstanding remainder of performance) or the stipulated amount of damages. As soon as the aggrieved party claims damages, the other side’s obligation to perform will be discharged (§ 340(1) 2 BGB). Vice versa, merely demanding performance does not discharge the obligation to pay stipulated damages. Yet, accepting performance will discharge the obligation to perform and also exclude a claim for stipulated damages (Gottwald, in Münchener Kommentar (2007), § 340 nos. 9–10). The claim for stipulated damages will not require a showing of actual losses. If the aggrieved party can make a claim for general damages, the stipulation ofdamages may allow for a claim on the stipulated amount as minimum damages without the requirement of proof. Yet, there is no cumulation of general damages and stipulated damages as long and insofar as both cover the same interest (Gottwald, in Münchener Kommentar (2007), § 340 nos. 15–16). Claiming stipulated damages will not forfeit a claim for actual damages. The aggrieved party may claim all damages beyond the stipulation under the prerequisites of general damages (§ 340(2) 2 BGB; BGH NJW 1992, 1096, 1097). Termination of the contract will not exclude a claim for stipulated damages (§ 325 BGB). 5. Stipulation for non-conformity and delay (§ 341 BGB). If stipulated damages have been agreed on for cases of non-conforming or delayed performance, a cumulation of claims for stipulated damages and performance is possible under § 341(1) BGB. The difference between § 340 and § 341 BGB regarding the cumulation is crucial and requires a thorough interpretation of the parties’ agreement: if payment of damages has

559

T.W. Dornis been agreed on for cases in which a specific interest has been disappointed–and not just the general interest in complete performance–a cumulation under § 341(1) BGB is possible (see, e.g., BAG NJW 1971, 2008; RGZ 112, 361, 366; Gottwald, in Münchener Kommentar (2007), § 341 no. 1). If the contract has been terminated and the aggrieved party demands damages in lieu of performance, cumulation with stipulated damages is possible (RGZ 94, 203, 208). § 340(2) BGB applies analogously. Also, acceptance of performance will not forfeit a claim for stipulated damages if the aggrieved party has reserved the claim upon acceptance (§ 341(3) BGB). 6. Reduction by the court. The most central protection for debtors of a stipulated damages obligation is the courts’ discretion in reducing a damage award under § 343 BGB. The provision is not subject to the parties’ disposition (BGH NJW 1952, 623; BGH NJW 1968, 1625). Even though its scope is formally limited and does not cover promises by merchants or non-consumers (see § 348 German Commercial Code (HGB)), practice has developed numerous instances where comparably strict limitations will apply (e.g., §§ 138, 242, 307 BGB; see extensively Gottwald, in Münchener Kommentar (2007), § 343 no. 4). Most fundamentally, a reduction of stipulated damages requires unreasonability in the sense of a disproportionately high award. The court must take into account all legitimate interests of the aggrieved party, and not only monetary concerns. Courts have looked at, inter alia, the significance of the concrete non-performance for the aggrieved party (BGH NJW 1994, 45, 46–47), the parties’ economic and financial backgrounds, the actual and potential losses, and the nonperforming party’s degree of fault (BGH NJW 1983, 941, 942–943; BGH NJW-RR 2002, 608; extensively Gottwald, in Münchener Kommentar (2007), § 343 nos. 17 et seq.). With regard to potential losses, it does not necessarily matter what actual loss has occurred (see, e.g., RGZ 103, 99). Interestingly, the lawmakers have intentionally not clarified the point in time that should be determinative for an evaluation of reasonability. While the issue is contested, it appears most reasonable to take an ex post perspective when deciding on the validity of the stipulated damages award (Gottwald, in Münchener Kommentar (2007), § 343 no. 18).

Comparison and Evaluation 1. General. There exist several differences between the PECL/DCFR and German law. Most of these differences, however, are hardly ever significant in practice. By and large, German law is more detailed in its treatment of stipulated damages. For the category of accessory stipulations, it excludes mere predetermination of damages from the scope of limitations under §§ 339 et seq. BGB. Even though neither the PECL nor the DCFR explicitly identifies cases of predetermination, the outcome remains the same: there are hardly any limitations for agreements where the parties have sincerely intended to establish an adequate predetermination of potential damages. 2. Convergence on concurrence. The three regimes’ treatment of concurrence of claims for damages and performance appears disparate on its face. German law strictly distinguishes between stipulations concerning a complete or partial failure to perform

560

Chapter 9: Particular Remedies for Non-performance and stipulations concerning delayed, defective, or non-conforming performance. It will, however, always be the parties’ agreement on the specific obligation at issue that determines whether stipulated damages can legitimately be claimed in addition to performance. In essence, cumulation is usually excluded if the stipulation covers the same interest reflected in the outstanding (part of the other side’s) performance. This results from the general prohibition on cumulation and is intended both to avoid overcompensation of the aggrieved party and to protect the non-performing debtor (see also BGH NJW 2008, 2849). Quite similarly, both the PECL and the DCFR exclude overcompensation by making the stipulation a practical substitute for actual losses. Only where the parties’ agreement specifies an intent to allow for excess recompensation beyond the stipulated amount will the courts have to consider an award of general damages. Like German law, therefore, construction of the parties’ agreement determines the possibilities of concurrent claims for stipulated damages and performance. 3. Different metric of reasonability. Concerning the reduction of stipulated damages by the courts, German law has developed a wide array of factors to consider when determining the reasonability of an award. In this regard, actual losses on behalf of the aggrieved party appear to be less relevant. By contrast, potential losses and the individual parties’ circumstances have sometimes been deemed of ultimate import in practice. In this sense, both the PECL and the DCFR, according to their comments, are less flexible: not only will actual losses be determinative, but the foreseeability of damages is explicitly irrelevant for evaluations of reasonability. While the latter restriction appears to be duly founded on the text of the provision, giving regard to ‘other circumstances’ (Article 9:509(2) PECL, Article III.-3:712(2) DCFR) strongly suggests an extended array of considerable facts for determining whether stipulated damages are reasonable.

Principles of European Contract Law Article 9:510: Currency by which Damages to be Measured Damages are to be measured by the currency which most appropriately reflects the aggrieved party’s loss. If a damage award is in a specific currency, fluctuating exchange rates may lead to over- or under-compensation of the aggrieved party. Article 9:510 PECL therefore fixes the specific currency in which contractual damages are to be measured. In doing so, it follows the English rule on the currency of damages. In other jurisdictions, damages are generally awarded in the local currency (see, e.g., BGH WM 1977, 478, 479). In addition, damages for non-performance may be awarded in the currency of the contract (see, e.g., Schmidt, in Staudinger (1997), § 244 BGB no. 17). Of course, it is critical to consider the issue of currency when determining an ultimate computation of damages. Nevertheless, deciding on a specific currency may not be necessary. A proper calculation of damages can give regard to fluctuations in exchange rates without necessarily requiring a specific currency to be set.

561

T.W. Dornis Draft Common Frame of Reference Article III. – 3:713: Currency by which damages to be measured Damages are to be measured by the currency which most appropriately reflects the creditor’s loss. The DCFR provision is identical to the PECL rule on currency for damages.

German Law § 244 BGB: Money debts (1) If a money debt expressed in a currency other than the Euro is payable in Germany, payment may be made in Euro unless payment in the other currency is an express term of the contract. (2) The debt is converted at the rate applicable at the place of payment at the time of payment. § 245 BGB: Debt payable in a specific type of coin If a debt is payable in a specific type of coin which is no longer in circulation at the time of payment, payment is to be made in the manner which would have been applicable if the type of coin had not been specified. 1. General. The German BGB does not provide for an explicit rule on monetary obligations. The special provisions of §§ 244 and 245 BGB concern only so-called foreign currency obligations (Fremdwährungsschulden)–that is, obligations that have been specifically set in a foreign currency. Furthermore, rules on other obligations are generally not applicable to monetary claims without modification. One example is the rule on non-exculpability for monetary obligations: mere incapacity to pay one’s financial obligations (i.e., an incapacity that would extinguish other obligations under § 275 BGB) will not discharge a debtor from his monetary obligations (see generally Grüneberg, in Palandt (2012), § 245 BGB no. 14; for the DCFR see also Huber (2008), p. 737). As a result, the debtor must perform, regardless of whether he has sufficient means to pay. 2. Nominal versus money value obligations. In addition, it is important to distinguish between different categories of monetary obligations. First, a monetary obligation may be a so-called nominal obligation (Geldsummenschuld). Nominal obligations must generally be discharged by payment of the exact and specified amount of monetary currency units. For example, if payment of EUR 100 is due, the debtor must pay EUR 100 (BGHZ 61, 31, 38; BGH NJW 1981, 818, 820). The actual value of the amount (and currency units) specified is irrelevant to the debtor’s duty to perform. The creditor will bear the risk of invalidation (for exceptions, see § 313 BGB). The second category is the

562

Chapter 9: Particular Remedies for Non-performance so-called money value obligation (Geldwertschuld). These obligations are founded on a value basis. There is no fixed amount of currency units that must be paid in order to fulfil the obligation. In these cases, the ultimate nominal amount of the obligation is determined by its purpose, not by an initial nominal determination (BGHZ 28, 259, 265; BGH NJW 1993, 2531, 2533). This is the category where, inter alia, monetary obligations for compensation of damages can be found. Monetary obligations within this category are nominally determined at the time of decision-making on the ground and validity of the claim. In other words, the creditor will not bear a risk of invalidation before that time.

Comparison and Evaluation Even though the PECL and the DCFR offer a method for preventing the aggrieved party from bearing a risk of loss due to fluctuating currency exchange rates, a similar result can be achieved by flexible computation for a conservation of value. The differences may thus not be overly significant in practice.

563

CHAPTER 10

Plurality of Parties M. Gebauer

SECTION 1:

PLURALITY OF DEBTORS

Principles of European Contract Law Article 10:101: Solidary, Separate and Communal Obligations (1) Obligations are solidary when all the debtors are bound to render one and the same performance and the creditor may require it from any one of them until full performance has been received. (2) Obligations are separate when each debtor is bound to render only part of the performance and the creditor may require from each debtor only that debtor’s part. (3) An obligation is communal when all the debtors are bound to render the performance together and the creditor may require it only from all of them. 1. Plurality of Parties. The general model of an obligation regards a legal relationship between two parties, one creditor and one debtor. A specific kind of an additional creditor is given when the parties to a contract stipulate in favour of a third party (Article 6:110 PECL). Chapter 10 contains general rules about the plurality of parties. It is divided into two sections, dealing with the plurality of debtors on the one hand and the plurality of creditors on the other. In both sections, three different kinds of obligations and claims respectively are addressed. § 1 deals with solidary, separate and communal obligations, and Section 2 is concerned with solidary, separate and communal claims. The terminology in the case of more than one creditor is the mirror image of that used for the plurality of debtors. The situation of a plurality of debtors or creditors can arise in relation to both contractual and non contractual obligations (Lando et al. (2003),

565

M. Gebauer p. xxi). In reciprocal contractual obligations, the different debtors (or creditors) on one side of the contractual relationship are also creditors (or debtors) within the same relationship. The mirror image in this case does not mean, however, that solidary debtors, for example, necessarily do have to play the role of solidary creditors at the same time. Solidary debtors may turn out to be separate or communal creditors, depending on the contents of the contract. Three students, living in a rented apartment, may be separate or solidary debtors towards the owner of the apartment, but they may act as communal creditors towards the owner as their debtor. 2. Plurality of debtors. The terminology used by the Principles is not drawn from any specific national system. The essence of solidary and separate obligations, however, is known in most legal systems (Lando et al.(2003), pp. 59-60). The ‘main originality’ of the Principles lies in expressly recognizing the so called communal obligation which is not codified in any of the European legal orders (no. 1). Eight of the eleven Articles regarding the plurality of debtors are dedicated to solidary obligations only. This clear focus is due to the practical importance and theoretical difficulty of claims against solidary debtors. The Principles do not intend to cover all kinds of multiple obligations but only those with a legally significant link among them and which call for regulation because of their importance and difficulty. Parallel obligations, for example, arising from a number of distinct contracts concluded by one creditor in order to meet a single objective are not addressed by the Article 10:101–10:111 PECL (Lando et al.(2003), pp. 59-60). 3. Solidary obligations. The definition in Article 10:101(1) PECL reflects the important features of solidary obligations: All the debtors are bound to render one and the same performance and the creditor may require if from any of them until full performance has been received. Thus the creditor is not obliged to involve all the debtors or even to warn them. Comment B in Lando et al. (2003) gives an illustration: A lends EUR 10,000 to B and C. The contract contains a clause of solidarity. A can claim repayment of the loan from B or C according to choice. If the selected debtor fails to perform and if this non-performance is fundamental, the creditor may terminate a contract under Article 9:301 PECL. The creditor may also withhold performance under Article 9:201 PECL, as long as he has not received performance by the selected debtor. Another debtor, however, may perform as a third person under Article 7:106 PECL, in order to avoid the termination or to stop the creditor from withholding performance. 4. Separate obligations. As Article 10:101(2) PECL defines, obligations are separate when each debtor is bound to render only part of the performance and the creditor may require from each debtor only that debtor’s part. Comment C in Lando et al. (2003) gives a simple illustration: A lends EUR 10,000 to B and C. The contract provides that B must repay EUR 8,000 and C EUR 2,000. A can claim only the agreed part from each. The necessary division of the claim has consequences to the effects of nonperformance. If one debtor fails to perform and if this non-performance is fundamental, the creditor may not terminate the whole contract under Article 9:301 PECL. He may terminate the contract as a whole under Article 9:302 PECL (Contract to be Performed in Parts) only if the non-performance of the separate obligation is fundamental to the

566

Chapter 10: Plurality of Parties contract as a whole. If this is not the case, he may exercise his right to terminate only in relation to the part concerned. Illustration (given by Comment C in Lando et al. (2003), p. 61): Three farmers, A, B and C, order twelve sacks of winter wheat seed from a producer, D, for a price of EUR 9,000. The contract provides that each buyer is liable only for a one-third share (EUR 3,000). A becomes insolvent. D could terminate the contract only partially. Similarly, the creditor may, as a general rule, withhold performance under Article 9:201(1) PECL only partially. There is one situation, however, in which withholding will necessarily be total. This is the case where the creditor cannot divide his own performance and the debtors of the separate obligations have only a communal right towards the creditor of the separate obligations (as their debtor). Comment C in Lando et al. (2003) to Article 10:101 gives the following illustration to this situation: Two farmers, A and B, order an agricultural machine from a manufacturer, C. The contract provides that the two buyers are to be under separate obligations for the price, payable on delivery. A and B having a communal right against C for delivery of the machine (see Article 10:201(3) PECL), C can withhold delivery so long as A does not pay A’s part of the price. 5. Communal obligations. Article 10:101(3) PECL defines that an obligation is communal when all the debtors are bound to render the performance together and the creditor may require it only from all of them. In the English version, the Principles speak of ‘an obligation’ in the case of a communal one, but they are defining solidary and separate obligations in the plural. The German translation of the Principles (von Bar/Zimmermann (2005), pp. 581, 629) does not follow this distinction (‘Bei der Gesamtschuld …’; ‘Bei der Teilschuld …’; ‘Bei der gemeinschaftlichen Schuld’). The characteristic feature of a communal obligation is that performance has to be rendered in common by the several debtors. The debtors must work together, there is no independent performance which is due only to a single debtor. This necessary collective engagement makes the difference to separate obligations. And the communal obligation is distinguished from solidary obligations in that the creditor may not ask the whole performance from one of the debtors; the creditor can take action only against all the debtors together. Comment D in Lando et al. (2003) gives two illustrations. In the first one, a recording company enters into a single contract with several musicians who are to play a symphony with a view to making a record. In the event of non-perfomance, the recording company will have to take action against all the musicians. In the second illustration, the owners of a piece of ground wish to have a house built. If they approach contractors in different trades, asking for a single performance (namely the construction of the house), and if the co-contractors agree to work together to achieve that result, the obligation will be a communal one. As a consequence of the specific feature of the communal obligation, the creditor may, in case of non-performance, terminate the contract under Article 9:301 PECL or withhold performance under Article 9:201 PECL, even if there is only one nonperforming debtor.

567

M. Gebauer Since the notion of a communal obligation is unknown in most national laws, one of the main originalities of the Principles is regarded in expressly recognizing this concept. Note 1 to Article 10:101 PECL refers to German law which ‘is the only legal system to find a place for the communal obligation (Gemeinschaftliche Schuld). It is not recognized expressly in the BGB but is recognized by the case law and the majority of writers’. The legislator of the BGB rejected the concept; during the twentieth century, however, it turned back into German doctrine (Meier, in Schmoeckel (2007), pp. 2469–2472; Meier (2010), pp. 128–230).

Draft Common Frame of Reference Article III. – 4:101: Scope of Section This Section applies where two or more debtors are bound to perform one obligation Article III. – 4:102: Solidary, divided and joint obligations (1) An obligation is solidary when each debtor is bound to perform the obligation in full and the creditor may require performance from any of them until full performance has been received. (2) An obligation is divided when each debtor is bound to perform only part of the obligation and the creditor may claim from each debtor only performance of that debtor’s part. (3) An obligation is joint when the debtors are bound to perform the obligation together and the creditor may require performance only from all of them together. 1. General. Chapter 4 in Book III of the DCFR regards the plurality of parties and is clearly modelled on Chapter 10 of the Principles. Like the Principles, it contains two sections dealing with plurality of debtors and creditors respectively. The DCFR is counting some Articles more than the Principles, mainly because each section in the DCFR starts with a separate Article on the Scope of Section (Article III.-4:101 and Article III.-4:201 DCFR). Within Section 1, the clear focus lies on solidary obligations (Article III.-4:106–Article III.-4:112 DCFR). 2. Deviation in terminology. As to the definition of a solidary obligation, Article III.-4:102 (1) DCFR states: ‘[…] each debtor is bound to perform the obligation in full […]’, whereas Article 10:101(1) PECL defines: ‘[…] all the debtors are bound to render one and the same performance […]’. Similar terminological deviations regarding the performance of an obligation are to be found in the definitions of the other two plurality types on the side of the debtors (Article III.-4:102(2) and (3) DCFR). Regarding the plurality of creditors however, the DCFR changes the term ‘claim’ as used by the Principles (Article 10:201 PECL) into a ‘right to performance’ (Article III.-4:202 DCFR). Under the Principles, a ‘claim’ is a ‘right to performance of an obligation’ (Lando et al.

568

Chapter 10: Plurality of Parties (2003), p. xvii) whereas the concept of ‘claim’ seems to be somewhat different under the DCFR, namely ‘a demand for something based on the assertion of a right’ (von Bar/Clive (2009), Comments on Article III.-4:101 and 4:102, pp. 998 et seq.). What the PECL define as a communal obligation is called joint obligation by the DCFR. By introducing this terminological deviation, the drafters of the DCFR probably did not intent to diverge in substance. The joint obligation must not be confused, however, with the joint liability in English law which lies much closer to the solidary obligation. In case of a joint (or communal, as the Principles define) obligation, each of the debtors is obliged to collaborate with the others to provide the common performance. This is not a feature of the joint liability according to English law (Meier, in Schmoeckel (2007), p. 2475, and with more references on p. 2429 in footnote 207 and on p. 2474 in footnote 479). Finally, the DCFR introduces in Article III.-4:102(2) the divided obligation instead of the separate obligations as defined in the Principles. 3. One obligation only. Even if the last mentioned deviation (divided instead of separate) is not intended to diverge in substance either, it is probably due to another and more fundamental change in the framework of the DCFR. This change is clearly expressed in Article III.-4.101 DCFR. It provides that Section 1 of Chapter 4 ‘applies where two or more debtors are bound to perform one obligation’. There are two or more debtors but there is only one obligation. And this is valid not only regarding the joint obligation but also the divided and the solidary obligations. The Principles, by contrast, assume that at least the solidary and the separate obligations may consist of more than one obligation. What is the reason for this deviation introduced by the DCFR? Like the model rules of the DCFR, the Principles do not intend to cover all cases of plurality of debtors. They rather deal with those cases which call for regulation because of their practical importance or theoretical difficulty. (Lando et al. (2003), p. 59). In order to draw this line and to confine the scope of the whole section, Article III.-4:101 DCFR seems to reduce the relevant cases on those where the debtors are bound to perform ‘one obligation’. The advantage of this reduction provided by the DCFR is not very clear. Whether a solidary obligation, for example, is described as a single obligation with two or more legal relationships and debtors, or as a plurality of different yet solidary obligations against the co-debtors, cannot make the difference. Such a distinction, however, reminds of a doctrinal dispute in legal history. During the nineteenth century, the majority of German legal doctrine drew a fundamental distinction between the so called ‘Korrealobligation’ on the one hand and the so called ‘Solidarobligation’ on the other (both within what today we would call solidary obligation). The ‘Korrealobligation’ was regarded as one obligation only (Windscheid (1891), § 293, pp. 120–123), but not the ‘Solidarobligation’. Parallel and similar developments can be found in France and even in England (see Meier, in Schmoeckel (2007), pp. 2426–2432). The main reason for this distinction during the nineteenth century was to explain the different effects of events and defences or of a judgment against one of the debtors. In the case of a ‘Korrealobligation’, the judgment that pronounced the non-liability of

569

M. Gebauer one debtor was regarded as liberating the other debtors as well (Windscheid (1891), § 295, p. 128). Presumably, the DCFR does not intend to open a new discussion of this kind: According to Article III.-4:101(a), a decision of a court as to the liability of one solidary debtor does not affect the liablilty to the creditor of the other solidary debtors. But the DCFR assumes that each kind of relevant plurality (i.e., even the divided obligation) requires the existence of a single obligation in order to fall into the scope of Chapter 4 of Book III. The requisition of one single obligation is not very helpful as a criterion to exclude those parallel obligations that do not fall within the scope of Chapter 4. In practice however, the criterion could work as an escape device in order to avoid legal consequences that do not seem appropriate in the single case. The assumption of such a ‘fear of legal consequences’ and the corresponding ‘need to escape’ from the applicable rules is strengthened by the fact that in contrast, a number of model rules in the DCFR are less flexible than the corresponding rules in the Principles: There is a strong default rule in favour of a solidary obligation (Article III.-4:103 DCFR), much stronger than the corresponding rule in the Principles (Article 10:102(1) PECL) because the default rule in the DCFR is not limited to contractual obligations. Moreover, the Model Rule in the DCFR on the apportionment between solidary debtors states that they are liable to equal shares (Article III.-4.106 DCFR) without expressly mentioning that this can only work as a default rule (as clearly expressed by Article 10:105 PECL). And finally, debtors bound by a divided obligation are liable to equal shares (Article III.-4.104 DCFR) and creditors whose rights are divided are entitled to equal shares (Article III.-4.204 DCFR). Again, these provisions of the DCFR are not formulated as default rules (by contrast to Article 10:103 and Article 10:202 PECL). In order to avoid the consequences of such rigid rules, one may argue in the single case that there is more than one obligation.

German Law § 420 BGB: Divisible performance If several people owe divisible performance or if several people may demand divisible performance, then in case of doubt each debtor is only obliged to render an equal proportion and each creditor is only entitled to an equal proportion. § 421 BGB: Joint debtors If several people owe a performance in such a way that each is obliged to effect the whole performance, but the creditor is only entitled to demand the performance once (joint debtors), the creditor can demand the performance, as he wishes, entirely or in part from each of the debtors. All the debtors remain under an obligation until the effectuation of the whole performance. 1. Plurality of Parties. The rules of the BGB on plurality of parties are located in the last chapter of the general part of Book II (Law of Obligations). They apply to both

570

Chapter 10: Plurality of Parties contractual and non-contractual obligations. The construction of the chapter is somewhat confusing because within the chapter there is no clear separation between the rules on the plurality of debtors on the one hand and creditors on the other. Some of the rules even do apply to both kinds of plurality, for example the first rule (§ 420 BGB) on divisible performance, regarding both the right to performance of two or more creditors and the performance in case of two or more obliged debtors. The major part of the rules (§§ 421–427 and § 431 BGB) is dedicated to solidary obligations. §§ 428–430 BGB regard the solidary claims and § 432 BGB is concerned with communal claims. The sixth type of plurality covered by both the Principles and the DCFR, the communal obligation, was rejected by the German legislator (Meier, in Schmoeckel (2007), pp. 2470 et seq.). However, today it is very widely recognized in German doctrine (cf. Larenz (1987), pp. 630 et seq.; Meier, in Schmoeckel (2007), pp. 2472–2475, with references including the opposite point of view). 2. Plurality of debtors. §§ 420–421 BGB mention all the types of debtors’ plurality that were addressed by the German legislator. The practical significance of divided or separate obligations is much lower than one could assume by simply regarding the criterion of divisibility of performance as mentioned in § 420 BGB. In practice, the divided obligation is very often displaced by the solidary obligation, mainly because § 427 BGB states that if two or more persons jointly bind themselves by contract to render divisible performance then, in case of doubt, they are liable as solidary debtors. In other words, the divisibility of performance in many cases does not prevent from being liable as solidary debtors. In contrast and according to § 431 BGB, if two or more persons owe indivisible performance, they are liable as solidary debtors. But § 431 BGB does not apply if the debtors must work together in order to perform the obligation. If this is the case, there will be a communal, not a solidary obligation (Gebauer, in Soergel (2010), § 431 no. 1).

Comparison and Evaluation 1. Structure. PECL and DCFR address three types of creditors and three types of debtors. All these types are known in German law as well, although the BGB did not expressly adopt the communal obligation. Compared to the rules of the BGB, the structure of both PECL and DCFR is well arranged. 2. Language. The terminology of the DCFR deviates from those of the PECL. The separate obligations changed into a divided obligation, and the communal obligation was converted into a joint obligation. Further deviations regard the somewhat different meanings of performance, obligations or claims. 3. Scope of application. Another transformation seems to be more important: The model rules of the DCFR apply only where two or more debtors are bound to perform one obligation. The sense of this reduction to a single obligation is not very clear. At first glance, it looks like a late come back of a pandectistic discussion. In practice, it could narrow the scope of application of the model rules on plurality compared to the

571

M. Gebauer rules of the PECL. Under the DCFR, one may feel invited to avoid the application of the rules on plurality by bringing forward the argument that there is more than one obligation. The tension to avoid the application of the DCFR is increased by the fact that the model rules of the DCFR seem to be less flexible than the PECL regarding the apportionment between solidary debtors (Article 10:105), the liability under separate obligations (Article 10:103), the apportionment of separate claims (Article 10:202 PECL) and the default rule in favour of solidary obligations (Article 10:102 PECL).

Principles of European Contract Law Article 10:102: When Solidary Obligations Arise (1) If several debtors are bound to render one and the same performance to a creditor under the same contract, they are solidarily liable, unless the contract or the law provides otherwise. (2) Solidary obligations also arise where several persons are liable for the same damage. (3) The fact that the debtors are not liable on the same terms does not prevent their obligations from being solidary. 1. General. Article 10:102 PECL is concerned with the different situations where solidary obligations arise. It is primarily the intention of the parties that decides about the solidary character of the obligations and, according to Comment A in Lando et al. (2003), also about the separate or communal character of an obligation. Since in many cases even the parties to a contract will not say whether the obligations shall be solidary, communal or separate, default rules are very important. 2. Presumption of solidarity in contractual obligations. Article 10:102(1) PECL contains the general principle that contractual obligations will be solidary if the debtors owe the same performance under the same contract. Comment B gives the following illustration: Several friends conclude a contract with a landlord for the rent of a holiday villa in the south of France. The landlord can claim the whole rent from one of the tenants under the rule in Article 10:102(1) PECL. Article 10:102(1) PECL is only a default rule which can be displaced. Even within contractual obligations, such a rule is not unanimously recognized by the national laws. In a number of legal orders, solidarity in contractual obligations is not presumed and there is no solidarity unless it is provided for (no. 1). According to the common tradition of the Ius Commune, there was a presumption in favour of separate obligations (Meier, in Schmoeckel (2007), pp. 2397–2402). 3. Solidarity between joint wrongdoers. Article 10:102(2) PECL sets out a widely recognized rule in favour of the victim. If a harm is caused by several people, the obligations of reparation arising out of the harm are solidary. Comment C in Lando et al. (2003) points out that solidarity applies whatever the nature of the responsibility. In

572

Chapter 10: Plurality of Parties other words it makes no difference if one of the debtors responds contractually, the other one non-contractually. 4. Debtors not liable on same terms. The rule adopted in Article 10:102(3) PECL is also quite generally admitted in national laws (no. 3). It has the conequence that the existence of a qualification such as a condition or a time limit does not prevent solidarity. Comment D in Lando et al. (2003) illustrates, inter alia, that the solidary character of an obligation is not excluded if one debt is secured and the other ones are unsecured.

Draft Common Frame of Reference Article III. – 4:103: When different types of obligation arise (1) Whether an obligation is solidary, divided or joint depends on the terms regulating the obligation. (2) If the terms do not determine the question, the liability of two or more debtors to perform the same obligation is solidary. Liability is solidary in particular where two or more persons are liable for the same damage. (3) The fact that the debtors are not liable on the same terms or grounds does not prevent solidarity. 1. General. By contrast to Article 10:102 PECL, Article III.-4:103 DCFR is not only concerned with the question when solidary obligations arise but also with divided (separate) and joint (communal) obligations. According to Article III.-4:103(1), the determination of all these types primarily depend on the intention of the parties. This feature of the DCFR, however, is not very innovative since under the PECL the determination by the parties is accepted as well. The second paragraph in its second sentence (joint wrongdoers) and the third paragraph (Debtors not liable on same terms) are also clearly modelled on the corresponding rules of the PECL. 2. The strong presumption in favour of solidary obligations. The main difference between PECL and DCFR lies in the first sentence of the second paragraph of the model rule. The presumption in favour of solidarity is not limited to contractual obligations, like in the PECL, but extended to all cases where the ‘liability of two or more debtors to perform the same obligation’ is at stake. Under a comparative point of view, this solution is very interesting. In other modern codifications, like in the Dutch BW in Article 6:6, the presumption as regards obligations in general (whether they are contractual or non-contractual) is liability in equal shares (Busch et al. (2006), p. 17). However, the Italian Civil code in Article 1294 Codice civile provides for a presumption of solidarity even in case of non-contractual obligations.

573

M. Gebauer German Law § 420 BGB: Divisible performance If several people owe divisible performance or if several people may demand divisible performance, then in case of doubt each debtor is only obliged to render an equal proportion and each creditor is only entitled to an equal proportion. § 421 BGB: Joint debtors If several people owe a performance in such a way that each is obliged to effect the whole performance, but the creditor is only entitled to demand the performance once (joint debtors), the creditor can demand the performance, as he wishes, entirely or in part from each of the debtors. All the debtors remain under an obligation until the effectuation of the whole performance. § 427 BGB: Joint contractual obligation If more than one person jointly binds himself by contract to render divisible performance then, in case of doubt, they are liable as joint debtors. § 431 BGB: More than one debtor of indivisible performance If more than one person owes indivisible performance, they are liable as joint debtors. § 840 BGB: Liability of more than one person (1) If more than one person is responsible for damage arising from a tort, then they are jointly liable. (2)–(3) […] 1. General. The structure of the BGB regarding plurality of debtors and the question whether there are separate or solidary obligations is somewhat confusing and overlapped by the criterion of divisibility. § 420 BGB is the starting point and looks like the general rule. In practice however, this rule very early turned out to be the exception (Crome (1902), p. 369). During the nineteenth century, the presumption in favour of separate obligations was generally accepted (Meier, in Schmoeckel (2007), p. 2397, with references). The German legislator introduced the presumption of solidarity in contractual obligations, § 427 BGB. In case of a joint contractual obligation, § 431 BGB is to be regarded as the equivalent to § 427 BGB: If performance is divisible, only in case of doubt the debtors are solidary debtors. But if performance is indivisible, the debtors are always solidary debtors. And in case of a non-contractual obligation, § 431 BGB correlates to § 420 BGB: If performance is divisible, in case of doubt the debtors are separate debtors; if performance is indivisible, the debtors are solidary debtors (see Meier, in Schmoeckel (2007), p. 2471). In addition to § 427 and § 431 BGB, there are a

574

Chapter 10: Plurality of Parties lot of specific legal rules that provide solidary obligations (see the overview Grüneberg, in Palandt (2013), § 421 no. 2) 2. Presumption of solidarity in contractual obligations. § 427 BGB practically is the most important rule and sets out the presumption that the debtors are solidary debtors when they are bound by a common contractual obligation. 3. Solidarity between joint wrongdoers. If two or more persons are debtors of a non-contractual obligation, the determination of the plurality-type cannot be subject to the intention of the parties. Regarding the tortuous liability, § 840(1) BGB contains the widely accepted rule that the tortfeasors respond as solidary debtors. German courts extended the rule by analogous application to cases where one of the debtors responds contractually, the other one non-contractually (see e.g., BGH NJW 1994, p. 2231). 4. The rules on solidary obligations and their scope of application: Additional requirements. One of the most disputed questions among German commentators during the last 100 years was the issue whether or not § 421 BGB is to be regarded as a final definition of a solidary obligation or just a description of its legal consequences. One of the main reasons for this discussion was to avoid a ‘wrong’ recourse between solidary debtors under § 426 BGB. Different criteria were developed in order to avoid legal consequences that did not seem to be appropriate. The major part of German doctrine as well as the BGH still today require that the different obligations stay on an equal level (‘Gleichstufigkeit’) in order to be regarded as solidary (see BGH NJW 2007, 1208, 1210 with references). Other commentators are favouring a broader concept of solidary obligations (Ehmann (1972), in particular pp. 23 et seq., pp. 62 et seq. For a broader discussion including the historical developments see Meier, in Schmoeckel (2007), pp. 2554–2570; Meier (2010), pp. 846–856).

Comparison and Evaluation As far as the different rules of presumption are concerned, the provisions of the PECL seem preferable to the complicated German construction of divisible and indivisible performance. Especially a provision like § 431 BGB should be avoided on the European level. In substance, § 427 BGB is very similar to Article 10:102 PECL. The DCFR goes further in that the presumption is not limited to contractual obligations. The additional requirements in German law on solidary obligations are quite complicated and can hardly be recommended on the European level. However, under the PECL and in particular under the DFCR, there might also be a tension to narrow the scope of solidary obligations in order to avoid legal consequences that do not seem appropriate in the single case. This is not only a question of drafting abstract rules but also of developing case law. And rigid rules like those provided by the DCFR may also invite the courts to develop escape devices.

575

M. Gebauer Principles of European Contract Law Article 10:103: Liability under Separate Obligations Debtors bound by separate obligations are liable in equal shares unless the contract or the law provides otherwise. The default rule applies when the share of the separate obligations cannot be established otherwise and, of course, when there is no solidary obligation. The presumption provided in Article 10:102(1) PECL for contractual obligations makes separate obligations more rare. The comment gives the following illustration: A and B undertake to repay a sum of EUR 10,000 to C. The contract contains a clause excluding solidarity between the debtors. A and B will each have to repay EUR 5,000. If the contract in the given illustration provides that A must repay EUR 6,000 and B EUR 4,000, the presumption is rebutted, of course.

Draft Common Frame of Reference Article III. – 4:104: Liability under divided obligations Debtors bound by a divided obligation are liable in equal shares. The first thing that strikes the reader is the lack of ‘unless the contract or the law provides otherwise’. Presumably, the drafters of the DCFR did not intend to change the default rule into a rigid rule. However, the reason for removing this important part remains unclear. As a rigid rule the provision would hardly make sense. Again, practice could avoid the legal consequences by bringing forward the argument that the debtors are bound to perform more than one obligation and thus falling out the scope of the section on plurality of debtors (Article III.-4:101 DCFR).

German Law § 420 BGB: Divisible performance If several people owe divisible performance or if several people may demand divisible performance, then in case of doubt each debtor is only obliged to render an equal proportion and each creditor is only entitled to an equal proportion. In its presumption of equal shares and in its limited scope of application, the provision resembles Article 10:103 PECL.

Comparison and Evaluation Article 10:103 PECL is preferable to the corresponding rule of the DCFR. A provision of liability in equal shares is only necessary as a default rule and should clarify the character of a presumption.

576

Chapter 10: Plurality of Parties Principles of European Contract Law Article 10:104: Communal Obligations: Special Rule when Money Claimed for Non-performance Notwithstanding Article 10:101(3), when money is claimed for non-performance of a communal obligation, the debtors are solidarily liable for payment to the creditor. The provision is innovative. As the communal obligation is not used in most laws there is little to be found on its operation (Lando et al. (2003), p. 67). The legal consequence that each debtor is held liable for the whole certainly is not self-evident. The comment on the rule calls it is an ‘extension of the principle of the communal obligation’ and gives the following illustration: A contracts with B, a firm of masons and plumbers, and C, a carpenter, for the construction of a country cottage. B and C undertake a communal obligation of collective performance. B does its work but C does not. In any proceedings by A for damages, B cannot avail itself of the fact that it has done its part of the work. However, B can avail itself of that fact in the context of its remedies against C.

Draft Common Frame of Reference Article III. – 4:105: Joint obligations: special rule when money claimed for nonperformance Notwithstanding III. – 4:102 (Solidary, divided and joint obligations) paragraph (3), when money is claimed for non-performance of a joint obligation, the debtors have solidary liability for payment to the creditor. The model rule is clearly modelled on Article 10:104 PECL with deviations only in terminology.

German Law § 431 BGB: More than one debtor of indivisible performance If more than one person owes indivisible performance, they are liable as joint debtors. § 431 BGB does not in particular address the relation between the primary (communal) obligation on the one hand and the secondary obligation for damages when money is claimed for non-performance on the other. The communal obligation is widely accepted yet not codified in German law and thus there is no provision on this specific issue. But the communal obligation is often mentioned in the context of § 431 BGB since the legal consequences of the provision do not apply if the debtors must work

577

M. Gebauer together in order to perform the obligation. As far as the secondary obligation (money claimed for non-performance) is concerned, it is not clear under German law whether or not there is solidarity among the debtors. A claim for money is divisible and therefore the solidarity does not follow from § 431 BGB. As mentioned in the note to Article 10:104 PECL (see Lando et al. (2003), p. 67), the Bundesarbeitsgericht held that in general a debtor who is not responsible for the non-performance is not liable to the creditor (BAG NJW 1974, 2255). The Bundesgerichtshof, however, pointed out in a case of 1951, that there might be solidary liability even of the debtor not being responsible for the non-performance (BGH NJW 1952, 217). In German doctrine, the question is disputed (in favour of solidary obligation see e.g., Stürner, in Jauernig (2011), § 431 no. 4; for a different view see Reinicke/Tiedtke (1988), pp. 17 et seq.)

Comparison and Evaluation The provision of the PECL and the DCFR is quite rigid towards the communal debtors. It has the advantage of legal certainty but does not take into account whether or not the parties to a contract did intend to take responsibility for the non-performance of another person. In applying the provision there is no place for any interpretation of the contract. The provision would be more flexible if formulated as a default rule.

Principles of European Contract Law Article 10:105: Apportionment Between Solidary Debtors (1) As between themselves, solidary debtors are liable in equal shares unless the contract or the law provides otherwise. (2) If two or more debtors are liable for the same damage under Article 10:102(2), their share of liability as between themselves is determined according to the law governing the event which gave rise to the liability. 1. Presumption of equality. The rule adopted by paragraph 1 is widely accepted in national laws. It is contained in many civil codes and elsewhere recognized by doctrine (References in Lando et al. (2003), p. 68, Note 1). However, it is only a default rule. Comment A in Lando et al. (2003) points out that unequal sharing may result from an express or implied provision of the contract or from the law and gives, inter alia, the following illustration: D lends EUR 60,000 to A, B and C who are made solidarily liable. A is to receive EUR 30,000, B and C are to receive EUR 15,000 each. A pays the whole amount and can reclaim a share from B and C but again there is in the circumstances an implied provision of the contract that A can reclaim from each of B and C only the amount of their part of the loan, namely EUR 15,000, and not EUR 20,000. 2. Rule for cases of damage. Paragraph two contains a conflict rule that refers to the law governing the event giving rise to the liability in order to determine the share of

578

Chapter 10: Plurality of Parties liability among the debtors. Comment B in Lando et al. (2003) explains that ‘the relevant rules will be contained in national laws or possibly in the future in international instruments providing for a uniform law on civil liability for damage caused to another’. The conflict rule, however, does only work if the events giving rise to the liability of the debtors are governed by the same law. Today, the relevant conflict rules are contained in the EC-Regulations Rome I and Rome II (see below under GERMAN LAW): The recourse is governed by the law that governs the obligation of the performing debtor.

Draft Common Frame of Reference Article III. – 4:106: Apportionment between solidary debtors (1) As between themselves, solidary debtors are liable in equal shares. (2) If two or more debtors have solidary liability for the same damage, their share of liability as between themselves is equal unless different shares of liability are more appropriate having regard to all circumstances of the case and in particular to fault or to the extent to which a source of danger for which one of them was responsible contributed to the occurrence or extent of the damage. 1. Rule for cases of damage. Starting with the second paragraph, the provision makes clear that the principle of equal shares is only a default rule. In addition, the provision mentions different criteria which may lead to unequal sharing. By appointing the relevant criteria on its own and having regard to the European legislation of the last years, it is consequent that the DCFR contains no conflict rule. 2. Principle of equality. As to the apportionment between the solidary debtors beyond liability for the same damage, the model rule of the DCFR at first glance seems to provide a rigid rule of equal shares. It makes not clear that again this must be a default rule, a presumption only. The illustration mentioned in Comment A to Article 10:105 PECL (see Lando et al. (2003), p. 67) clarifies that there must be the possibility to rebut the presumption. As a rigid rule, the provision of equality does not work.

German Law § 426 BGB: Duty to settle and transmission of demand (1) The joint debtors are in their relationship with one another under the obligation in equal fractions, in so far as no other provision has been made. If it is not possible to obtain from one of the joint debtors the contribution which falls to him, the deficit must be born by the remaining debtors who are obliged to settle. […]

579

M. Gebauer Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) - Article 16 – Multiple liability If a creditor has a claim against several debtors who are liable for the same claim, and one of the debtors has already satisfied the claim in whole or in part, the law governing the debtor’s obligation towards the creditor also governs the debtor’s right to claim recourse from the other debtors. The other debtors may rely on the defences they had against the creditor to the extent allowed by the law governing their obligations towards the creditor. Regulation (EC) No 864/2007 of 11 July 2007 on the law applicable to noncontractual obligations (Rome II) - Article 20 – Multiple liability If a creditor has a claim against several debtors who are liable for the same claim, and one of the debtors has already satisfied the claim in whole or in part, the question of that debtor’s right to demand compensation from the other debtors shall be governed by the law applicable to that debtor’s non-contractual obligation towards the creditor. 1. The right to demand compensation and the principle of equality. § 426(1) BGB does not only contain a rule upon the apportionment among the debtors but gives also a right to demand compensation to the debtor who satisfied the claim of the creditor. This debtor’s claim against the other debtors was an innovation of the BGB. During the nineteenth century, such a general legal claim was not accepted under the Ius Commune (Meier, in Schmoeckel (2007), p. 2483, with many references). The phrase at the end of the first sentence in § 426(1) BGB, ‘in so far as no other provision has been made’ (‘soweit nicht ein anderes bestimmt ist’), was always interpreted extensively. ‘Another provision’ may not only arise from an agreement between the parties or a legal provision, but also from the whole circumstances of the legal relationship (Stürner, in Jauernig (2011), § 426 nos. 4–9; Meier, in Schmoeckel (2007), p. 2505). 2. Cases of damage. As far as wrongful damage is concerned, German courts since 1910 (RGZ 75, 251, 256) applied § 254 BGB by means of analogy. § 254(1) BGB reads as follows: If fault on the part of the victim has contributed to the origin of the harm, the duty to compensate as well as the extent of the compensation to be provided depends on the circumstances, and in particular on the extent to which the harm has been predominantly caused by the one or the other party.

Thus causal participation and the degree of fault became relevant factors. 3. European conflict rules. As mentioned above in the context of the conflict rule on the apportionment contained in Article 10:105(2) PECL, according to the relevant EC-Regulations the recourse is mainly governed by the law that governs the obligation of the performing debtor.

580

Chapter 10: Plurality of Parties Comparison and Evaluation The main difference between German law and PECL on the one hand and the DCFR on the other regards the formulation of the principle of equality. As long as it is not made clear that the principle is a mere presumption, it cannot work. In practice, as a rigid rule its application would be avoided by stating that there is no solidary obligation in the single case.

Principles of European Contract Law Article 10:106: Recourse Between Solidary Debtors (1) A solidary debtor who has performed more than that debtor’s share may claim the excess from any of the other debtors to the extent of each debtor’s unperformed share, together with a share of any costs reasonably incurred. (2) A solidary debtor to whom paragraph (1) applies may also, subject to any prior right and interest of the creditor, exercise the rights and actions of the creditor, including accessory securities, to recover the excess from any of the other debtors to the extent of each debtor’s unperformed share. (3) If a solidary debtor who has performed more than that debtor’s share is unable, despite all reasonable efforts, to recover contribution from another solidary debtor, the share of the others, including the one who has performed, is increased proportionally. 1. Personal right of recourse. According to paragraph (1) the debtor who has performed more than his share has a personal action against the other debtors to the extent that they have not paid or performed their shares. This right of recourse is widely accepted in national laws. 2. Subrogatory recourse. Like many national laws, paragraph (2) allows the solidary debtor to exercise the rights and actions of the creditor. The main advantage for the debtor who has performed more than a proper share lies in the fact that he may benefit from securities obtained by the creditor. However, the right of subrogatory recourse must not be exercised to the creditor’s disadvantage. 3. Effect of inability to recover. Paragraph (3) deals with the risk of non-payment by one of the solidary debtors and provides a proportional share. Commet D in Lando et al. (2003) gives the following illustration: A, B and C are under a solidary obligation to repay a sum of EUR 12,000, A being liable for EUR 6,000, and B and C for EUR 3,000 each. The creditor claims the full amount from A who pays the full EUR 12,000. B is insolvent. The shares of the two solvent debtors, A and C, are then increased in proportion to their respective shares. The ratio of A’s share to C’s share is 2:1. So, of the EUR 3,000 due by B, EUR 2,000 is apportioned to A an EUR 1,000 to C, which increases A’s share to EUR 8,000 and C’s to EUR 4,000.

581

M. Gebauer Draft Common Frame of Reference Article III. – 4:107: Recourse between solidary debtors (1) A solidary debtor who has performed more than that debtor’s share has a right to recover the excess from any of the other debtors to the extent of each debtor’s unperformed share, together with a share of any costs reasonably incurred. (2) A solidary debtor to whom paragraph (1) applies may also, subject to any prior right and interest of the creditor, exercise the rights and actions of the creditor, including any supporting security rights, to recover the excess from any of the other debtors to the extent of each debtor’s unperformed share. (3) If a solidary debtor who has performed more than that debtor’s share is unable, despite all reasonable efforts, to recover contribution from another solidary debtor, the share of the others, including the one who has performed, is increased proportionally. Apart from some smaller deviations in terminology, the model rules are completely modelled in substance and structure on Article 10:106 PECL.

German Law § 426 BGB: Duty to settle and transmission of demand (1) The joint debtors are in their relationship with one another under the obligation in equal fractions, in so far as no other provision has been made. If it is not possible to obtain from one of the joint debtors the contribution which falls to him, the deficit must be born by the remaining debtors who are obliged to settle. (2) In so far as a joint debtor satisfies the creditor and can demand settlement from the remaining debtors, the creditor’s demand against the remaining debtors passes to him. The transmission cannot be claimed to the creditor’s disadvantage. Like the PECL and the DCFR, § 426 BGB provides a personal right to recourse, in addition a subrogatory recourse and finally the same proportional share in case of inability to recover contribution from another solidary debtor.

Comparison and Evaluation The provisions of the PECL, the DCFR and German law are very similar in substance and structure. German law, however, stipulates both the apportionment and the recourse between solidary debtors in one provision. By contrast to German law, PECL and DCFR expressly mention in paragraph (1) the ‘share of any costs reasonably

582

Chapter 10: Plurality of Parties incurred’. Whereas, the PECL, as stated in Comment A, do not give a right of recourse before performance whereas it is accepted in German law that the co-debtors are obliged to contribute to the settlement of the debt before it has been satisfied (see also Meier, in Schmoeckel (2007), p. 2529).

Principles of European Contract Law Article 10:107: Performance, Set-off and Merger in Solidary Obligations (1) Performance or set-off by a solidary debtor or set-off by the creditor against one solidary debtor discharges the other debtors in relation to the creditor to the extent of the performance or set-off. (2) Merger of debts between a solidary debtor and the creditor discharges the other debtors only for the share of the debtor concerned. 1. General. In case of solidary obligations the single obligations between the creditor and the debtors cannot be completely unrelated since at least performance of the obligation will discharge the other debtors as well (see the definition of solidary obligations in Article 101(1)PECL). Article 10:107–10:110 PECL deal with the question what kind of events will affect or not affect the other relationships and debtors as well. 2. Performance and Set-off. The extinction of an obligation by performance or by set-off has a discharging effect on the other debtors in relation to the creditor. However, having regard to the right of recourse of the performing debtor and in particular to his subrogatory recourse, the discharging effect must be limited (for the difficult relation between the discharging effect of performance on the one hand and subrogatory recourse on the other in Roman Law and in German legislative history, see Meier, in Schmoeckel (2007), pp. 2435 et seq.). As to the effect of set-off, Comment A in Lando et al. (2003) gives the following illustration: A lends EUR 2,500,000 to B, C and D who are associates in a financial group. B becomes a creditor of A for EUR 500,000 and gives notice of set-off (see Article 13:104 PECL). The solidary debt will be reduced to EUR 2,000,000. The set-off will benefit the other debtors. 3. Merger. Where merger of debts (confusio) operates between one of the debtors and the former creditor (e.g., by means of inheritance or of amalgamation), the other debtors are discharged only for the share of the debtor concerned. In other words the claim is reduced by the amount affected. Comment B in Lando et al. (2003) gives an illustration: A is creditor of a solidary debt of EUR 12,000 owed by B, C and D in equal shares. Following on an amalgamation, B becomes entitled to A’s right. The right acquired by B is extinguished in relation to B by the operation of merger of debts (confusio) but subsists in relation to C and D to the amount of EUR 8,000. By contrast to performance and set-off, merger therefore is an event having only a ‘single effect’, not an ‘overall effect’.

583

M. Gebauer Draft Common Frame of Reference Article III. – 4:108: Performance, Set-off and Merger in Solidary Obligations (1) Performance or set-off by a solidary debtor or set-off by the creditor against one solidary debtor discharges the other debtors in relation to the creditor to the extent of the performance or set-off. (2) Merger of debts between a solidary debtor and the creditor discharges the other debtors only for the share of the debtor concerned. The model rule of the DCFR is completely identical with the wording of Article 10:107 PECL.

German Law § 422 BGB: Effect of fulfilment (1) Fulfilment by a joint debtor is also effective for the remaining debtors. The same applies to performance in place of fulfilment, and to deposit and set-off. (2) A demand which belongs to a joint debtor cannot be set off by the remaining debtors. § 425 BGB: Effect of other facts (1) Facts other than those cited in §§ 422 to 424 are only effective, unless the obligation leads to a different conclusion, for and against the joint debtor personally affected by them. (2) This applies in particular, without limitation, to notice of termination, to default, to fault, to impossibility of performance in the person of a joint debtor, to limitation and to the new beginning, suspension and suspension of expiry of a period of limitation, to the merger of the claim with the debt and to a final and absolute judgment. 1. General. The structure of the BGB differs somewhat from the structure of the PECL. The events having an ‘overall effect’ on the other obligations and debtors are addressed by §§ 422–424 BGB, whereas the other events (with a ‘single effect’) that do not affect the other debtors are addressed by § 425 BGB. 2. Performance, Deposit and Set-off. The discharging effect of performance (fulfilment, ‘Erfüllung’), deposit (not addressed by the PECL and the DCFR) and set-off was already accepted during the nineteenth century under the Ius Commune (Meier, in Schmoeckel (2007), pp. 2434–2437). The same is valid for performance in place of fulfilment (‘Leistung an Erfüllungs statt’). It means that a debtor extinguishes his

584

Chapter 10: Plurality of Parties obligation with the permission of the creditor by effecting a performance other than the one which is due (for Dutch law see Busch et al. (2006), p. 38). 3. Merger. Like the PECL and the DCFR, § 425(2) BGB gives only a ‘single effect’ to merger of debts (confusio). Towards the co-debtors the claim is reduced by the amount affected, and the other debtors are obliged pro rata (BAG NJW 1986, 3104). Insofar the co-debtors are affected as well.

Comparison and Evaluation In substance, German law is in accordance with PECL and DCFR, as far as performance, set-off and merger (confusio) are concerned. German law, by contrast to PECL and DCFR, also gives a discharging (‘overall’-)effect to deposit.

Principles of European Contract Law Article 10:108: Release or Settlement in Solidary Obligations (1) When the creditor releases, or reaches a settlement with, one solidary debtor, the other debtors are discharged of liability for the share of that debtor. (2) The debtors are totally discharged by the release or settlement if it so provides. (3) As between solidary debtors, the debtor who is discharged from that debtor’s share is discharged only to the extent of the share at the time of the discharge and not from any supplementary share for which that debtor may subsequently become liable under Article 10:106(3). 1. Effect of release or settlement. Paragraph (1) gives a limited ‘overall-effect’ to release or settlement. The other debtors are discharged for the share of the discharged debtor. If, for example, A is a creditor of a solidary debt of EUR 12,000 owed by B, C and D in equal shares, and A releases B, then the right of A subsits in relation to C and D to the amount of EUR 8,000. Comment A expressly compares such an effect with the effect of merger under Article 10:107(2) PECL (see Lando et al. (2003), p. 72). Paragraph (2) allows the parties to give even an unlimited ‘overall-effect’ of release or settlement if they want the other debtors to be totally discharged. In the given example, A could agree with B on the release of B, C and D. 2. Effect on later liability for supplementary share. Paragraph (3) is quite innovative by stipulating that the discharged debtor should nonetheless bear a supplementary burden under Article 10:106(3) PECL due to the insolvency of another debtor. Comment B in Lando et al. (2003) gives an illustration: A has agreed to a commercial lease in favour of a partnership, the partners B, C and D being, under the applicable law, solidarily liable for the partnership debts. Arrears of EUR 60,000 mount up. A releases B. C and D remain bound but only for EUR 40,000. If D turns out to be insolvent, B will be bound to pay EUR 10,000 in spite of the release.

585

M. Gebauer Draft Common Frame of Reference Article III. – 4:109: Release or settlement in solidary obligations (1) When the creditor releases, or reaches a settlement with, one solidary debtor, the other debtors are discharged of liability for the share of that debtor. (2) As between solidary debtors, the debtor who is discharged from that debtor’s share is discharged only to the extent of the share at the time of the discharge and not from any supplementary share for which that debtor may subsequently become liable under III. – 4:107 (Recourse between solidary debtors) paragraph (3). (3) When the debtors have solidary liability for the same damage the discharge under paragraph (1) extends only so far as is necessary to prevent the creditor from recovering more than full reparation and the other debtors retain their rights of recourse against the released or settling debtor to the extent of that debtor’s unperformed share. 1. Effect of release or settlement. Paragraph (1) resembles Article 10:108(1) PECL, providing the limited ‘overall-effect’. However, the unlimited ‘overall-effect’ of release or settlement, allowed by Article 10:108(2) PECL on agreement between the creditor and one of the debtors, is cancelled in the DCFR. It is not clear why the drafters of the DCFR did so and whether such a stipulation of release in favour of a third party shall be allowed or excluded under the model rules of the DCFR. Also by contrast to the PECL, paragraph (3) introduces the real ‘single-effect’ of release or settlement in case of liability for the same damage. It seems to be a rule in favour of the victim who is not prevented from recovering from the other debtors the full balance of the reparation. Paragraph (3) expressly states that the other debtors retain their rights of recourse against the released or settling debtor. Under paragraph (3) the release or settlement seems to work only as a pactum de non petendo. 2. Effect on later liability for supplementary share. The rule in paragraph (2) repeats Article 10:107(3) PECL.

German Law § 423 BGB: Effect of release Release agreed between the creditor and a joint debtor is also effective for the other debtors if the parties to the contract intended to terminate the whole obligation. § 424 BGB: Effect of default by the creditor (mora creditoris) The default of the creditor in relation to a joint debtor is also effective for the other debtors.

586

Chapter 10: Plurality of Parties 1. Release. § 423 BGB stipulates the freedom of the parties to agree upon an unlimited ‘overall-effect’ of release, as provided in Article 10:108(2) PECL. If not so agreed, the general rule will be the ‘single-effect’ (Einzelwirkung) of release, i.e., a pactum de non petendo with the effect that the other debtors are not discharged and that they retain their right of recourse against the released debtor (BGH NJW 2000, 1942, 1943). But that is just the general rule. According to German case law, the creditor and one of the debtors may also agree that the release shall have a limited ‘overall-effect’ (BGH NJW 2000, 1942, 1943: beschränkte Gesamtwirkung), like Article 10:108(1) provides it as the general rule (for the historical developments see Meier, in Schmoeckel (2007), pp. 2530–2536). 2. Settlement. The same is valid under German law as far as settlement is concerned. § 423 BGB does not expressly address settlement. However, under German case law the same rules apply to settlement (BGH NJW 2000, 1942, 1943). Note 1 to Article 10:108 PECL states that according to German case law ‘a settlement has, in principle, no effect on those who are not parties to it’. That is true yet the same is valid for release. Both release and settlement may be interpreted as having an ‘overall-effect’, even if the general rule is different from the general rule provided by the Article 10:108(1) PECL. 3. Mora creditoris. By contrast to the PECL, German law provides for a special rule as to the mora creditoris in the case of solidary obligations. § 424 BGB stipulates that the legal effects of the default of the creditor not only apply to the debtor concerned but to the other solidary debtors as well. The same is valid under Dutch law (Busch et al. (2006), pp. 7, 39).

Comparison and Evaluation Under the PECL, release and settlement have an ‘overall-effect’, a limited one according to Article 10:108(1) PECL and an unlimited one according to Article 10:108(2) PECL. The limited effect is the default rule. The model rules of the DCFR contain the same general rule of a limited ‘overall’-effect. They do not mention, however, the unlimited ‘overall-effect’ as provided by the PECL. However, the model rules of the DCFR introduce the ‘single-effect’ in case of solidary liability for the same damage. Under German law, the ‘single-effect’ is the default rule. Both release and settlement, according to the parties intention and the interpretation of their agreement, may have an ‘overall-effect’ under German law as well. The default rule of the PECL and the DCFR is preferable, for it seems to be consistent with the typical interest of the parties to the agreement that the other debtors shall not retain their rights of recourse against the released or settling debtor.

Principles of European Contract Law Article 10:109: Effect of Judgment in Solidary Obligations A decision by a court as to the liability to the creditor of one solidary debtor does not affect:

587

M. Gebauer (a) the liability to the creditor of the other solidary debtors; or (b) the rights of recourse between the solidary debtors under Article 10:106. The effect of judgment in solidary obligations has been a very disputed question since the days of the early Ius Commune (Meier, in Schmoeckel (2007), pp. 2448–2451, 2545–2546); so it cannot surprise that national laws adopt very different solutions to the problem of a court decision as to the liability of one debtors, as the comments and the notes points out. There are three groups: full effect, partial effect, no effect. The PECL take a clear position against any effect, regarding both the liability to the creditor of the other debtors and the rights of recourse between the solidary debtors.

Draft Common Frame of Reference Article III. – 4:110: Effect of judgment in solidary obligations A decision by a court as to the liability to the creditor of one solidary debtor does not affect: (a) the liability to the creditor of the other solidary debtors; or (b) the rights of recourse between the solidary debtors under III. – 4:107 (Recourse between solidary debtors). The model rules of the DCFR adopt exactly the same solution as the PECL.

German Law § 425 BGB: Effect of other facts (1) Facts other than those cited in §§ 422 to 424 are only effective, unless the obligation leads to a different conclusion, for and against the joint debtor personally affected by them. (2) This applies in particular, without limitation, to notice of termination, to default, to fault, to impossibility of performance in the person of a joint debtor, to limitation and to the new beginning, suspension and suspension of expiry of a period of limitation, to the merger of the claim with the debt and to a final and absolute judgment. According to § 425(2) BGB a final court decision on one debtor’s liability has no effect on the co-debtors. This legislative decision was taken against the major part of German doctrine during the nineteenth century (Meier, in Schmoeckel (2007), pp. 2450–2451), mainly for procedural reasons.

588

Chapter 10: Plurality of Parties Comparison and Evaluation PECL, DCFR and German law yield the same result that a final court decision against one of the solidary debtors has no effect on the liability of the other solidary debtors and on the rights of recourse between the solidary debtors.

Principles of European Contract Law Article 10:110: Prescription in Solidary Obligations Prescription of the creditor’s right to performance (‘claim’) against one solidary debtor does not affect: (a) the liability to the creditor of the other solidary debtors; or (b) the rights of recourse between the solidary debtors under Article 10:106. According to paragraph (a) the effect of prescription is personal to the debtor concerned; it does not affect the liability of the other debtors to the creditor. The different solutions in national laws reflect the different ways in which prescription of actions operates in the systems concerned, as Note 1 in Lando et al. (2003), p. 75 points out. Paragraph (b) aims to protect a debtor who has paid more than that debtor’s share. As the comment explains, a debtor should be protected whose debt has prescribed but who nonetheless pays (see Lando et al. (2003), pp. 74–75). The comment in Lando et al. (2003) gives the following illustration: A has lent EUR 20,000 to B and C, who are solidary debtors. After three years the claim against B has prescribed but, because C has acknowledged the claim, the period of prescription against C has not yet expired. At this stage A cannot compel B to pay but can proceed against C for the whole amount. By virtue of the rule in paragraph (b), if C pays the whole amount he will be able to reclaim EUR 10,000 from B.

Draft Common Frame of Reference Article III. – 4:111: Prescription in solidary obligations Prescription of the creditor’s right to performance against one solidary debtor does not affect: (a) the liability to the creditor of the other solidary debtors; or (b) the rights of recourse between the solidary debtors under III. 4:107 (Recourse between solidary debtors). The model rule of the DCFR repeats the corresponding rule in the PECL.

589

M. Gebauer German Law § 425 BGB: Effect of other facts (1) Facts other than those cited in §§ 422 to 424 are only effective, unless the obligation leads to a different conclusion, for and against the joint debtor personally affected by them. (2) This applies in particular, without limitation, to notice of termination, to default, to fault, to impossibility of performance in the person of a joint debtor, to limitation and to the new beginning, suspension and suspension of expiry of a period of limitation, to the merger of the claim with the debt and to a final and absolute judgment. According to § 425(2) BGB, prescription of the creditor’s right to performance does not affect the liability of the other solidary debtors. And in accordance with Article 10:110 PECL, already the Reichsgericht held that prescription neither affects the right of recourse between the solidary debtors (RGZ 69, 422, 226; see also Meier, in Schmoeckel (2007), p. 2544).

Comparison and Evaluation PECL, DCFR and German law yield the same result that prescription of the creditor’s right of performance against one of the solidary debtors has no effect on the liability of the other solidary debtors and on the rights of recourse between the solidary debtors.

Principles of European Contract Law Article 10:111: Opposability of Other Defences in Solidary Obligations (1) A solidary debtor may invoke against the creditor any defence which another solidary debtor can invoke, other than a defence personal to that other debtor. Invoking the defence has no effect with regard to the other solidary debtors. (2) A debtor from whom contribution is claimed may invoke against the claimant any personal defence that that debtor could have invoked against the creditor. 1. Invoking defences against creditor. Paragraph (1) draws a distinction between defences inherent in the debt itself and defences personal to each of the debtors. Only the defences inherent in the debt itself can be pleaded by all the debtors. The other defences are exclusive to the debtors concerned. According to the comment in Lando et al. (2003), defences inherent in the debt are those which flow from the contract itself, such as ineffectiveness as a result of illegality or non-compliance with a formal requirement. However, personal defences are those which relate only to the personal position of one of the debtors. As personal defences the comment in Lando et al. (2003)

590

Chapter 10: Plurality of Parties mentions Article 4:103 (Mistake), 4:107 (Fraud), 4:108 PECL (Threats) and gives the following illustration: A, B and C borrow EUR 50,000 from D at a rate of interest of 12%. The contract is in French. C, who does not speak French, is subject to an error producing a lack of true consent. B, if persued by the creditor, cannot take advantage of this. 2. Invoking defences against other debtors exercising right of recourse. Paragraph (2) goes further by providing that personal defences can be pleaded against a debtor who claims a contribution from a co-debtor, and the comment in Lando et al. (2003) points out that it makes no difference whether the recourse is by personal action (Article 10:106(1) PECL) or based on subrogation (Article 1:106(2) PECL), giving the following illustration: The facts are as in the last illustration (C is subject to an error). B, having paid the whole amount to D, now seeks recourse against C. C can found on the lack of true consent to defeat B’s claim. The note on paragraph (2) in Lando et al. (2003) mentions that the rule is not expressed in a general form in national laws and continues: ‘There is generally, however, nothing to cast doubt on it’. Paragraph (2) contains a clear solution in favour of the debtor from whom contribution is claimed. Yet from the other debtor’s point of view who has performed more than that debtor’s share (and also from the creditors point of view) the solution may be challenged. Take the example of set-off: A, B and C are solidary debtors. B, having paid the whole amount to the creditor, now seeks recourse against A. Can A invoke the defence of set-off against B by stating that he (A) could have invoked set-off with his own claim against the creditor? If this is the case and A is now exercising set-off by giving notice to B, then the creditor obtained an unjustified enrichment to B’s disadvantage because the creditor had no right to performance against B. Things may turn out to be somewhat complicated for the creditor and for B. B, for example, then bears the risk that the enriched creditor becomes insolvent. Anyway, the solution provided by paragraph (2) is defensible and clearly protects the interests of the debtor from whom the contribution is claimed.

Draft Common Frame of Reference Article III. – 4:112: Opposability of other defences in solidary obligations (1) A solidary debtor may invoke against the creditor any defence which another solidary debtor can invoke, other than a defence personal to that other debtor. Invoking the defence has no effect with regard to the other solidary debtors. (2) A debtor from whom contribution is claimed may invoke against the claimant any personal defence that that debtor could have invoked against the creditor. The model rule is clearly modelled on Article 10:111 PECL and repeats its wording.

591

M. Gebauer German Law § 422 BGB: Effect of fulfilment (1) […] (2) A demand which belongs to a joint debtor cannot be set off by the remaining debtors. § 422(2) BGB addresses the question whether a solidary debtor may invoke against the creditor the defence that another debtor could set-off a claim against the creditor. The answer is in accordance with Article 10:111(1) PECL. Before 1900, however, the question was very disputed (Meier in Schmoeckel (2007), pp. 2548–2550). As to the problem addressed by Article 10:111(2) PECL there is no clear solution under German law. In the above mentioned case of set-off, the major part of the German doctrine and case law seems to make a difference whether the recourse is by personal action (§ 426(1) BGB) or based on subrogation (§ 426(2) BGB) (see e.g., the references Gebauer in Soergel (2010), § 426 no. 53). If this is the case then the debtor from whom contribution is claimed cannot invoke against the claimant the personal defence that that debtor could have invoked against the creditor. However, there are different positions on this issue in German doctrine (for a deeper analysis see Meier, in Schmoeckel (2007), pp. 2550 et seq.).

Comparison and Evaluation The first rule provided by both PECL and DCFR that a solidary debtor may not invoke against the creditor a personal defence of another debtor is accepted by most legal orders. The second rule however, on invoking personal defences against other debtors exercising their right of recourse, is innovative and gives rise to some discussion.

SECTION 2: PLURALITY OF CREDITORS Principles of European Contract Law Article 10:201: Solidary, Separate and Communal Claims (1) Claims are solidary when any of the creditors may require full performance from the debtor and when the debtor may render performance to any of the creditors. (2) Claims are separate when the debtor owes each creditor only that creditor’s share of the claim and each creditor may require performance only of that creditor’s share. (3) A claim is communal when the debtor must perform to all the creditors and any creditor may require performance only for the benefit of all.

592

Chapter 10: Plurality of Parties 1. General. The second section of Chapter 10 deals with plurality of creditors and the terminology is the mirror image of that used for a plurality of debtors. Solidary, separate and communal claims are thus, broadly speaking, the converse of solidary, separate and communal obligations (Lando et al. (2003), p. 77). Again, the terminology is new and not taken from any specific legal order. Putting together the terminology of the PECL, of the DCFR and of German law is somewhat confusing since the DCFR introduced a new terminology, like in the case of more than one debtor. For example, what the PECL call ‘communal’, the DCFR labels ‘joint’, and what is named ‘joint’ in the English translation of the BGB means ‘solidary’ in the terminology of PECL and DCFR. In order to avoid confusion, as far as possible, the following comments will try to keep with the terminology of the PECL. 2. Solidary claims. By contrast to the obligations, the PECL do not lay down any presumption in favour of solidary claims. Solidary claims always imply a contractual agreement to that effect. Comment B in Lando et al. (2003) explains it with the risks inherent in solidarity of claims (notably, that one creditor may claim and squander the whole funds). The characteristic feature of solidary claims is that each creditor can obtain from the debtor the totality of the debt. However, the debtor can make payment of the whole debt to one of the creditors, at the debtor’s choice, thereby being discharged in relation to all the creditors. Solidarity of claims is frequently encountered in relation to bank accounts, as Comment B in Lando et al. (2003) explains, particularly joint accounts where the holders are solidary creditors of the bank. 3. Separate claims. Separate claims are frequent in practice. If case of separate claims there is a presumption in favour of equal shares (Article 10:202 PECL). 4. Communal claims. Communal claims depend on the intention of the parties, or they can result from the very nature of the obligation. As Comment D in Lando et al. (2003) explains, the latter is the case when the performance is indivisible and when it can be rendered only for the benefit of all the creditors. Comment D in Lando et al. (2003) gives, inter alia, the following example: A group of friends hire a car with a driver for a communal excursion. The driver’s performance can only be rendered for the benefit of the whole group, the members being accordingly creditors of a communal claim. It is not necessary that the creditors act in concert against the debtor. Article 10:201(3) PECL makes it clear that ‘any creditor can require performance’ but only for the benefit of all. However, in case of non-performance by the debtor all creditors will have to act together to terminate the contract under Article 9:301 PECL or to withhold their performance under Article 9:201 PECL. Comment D in Lando et al. (2003) gives an illustration by referring to the last illustration (The friends hire a car with a driver for a communal excursion): The driver does not turn up on the agreed day. The group of friends want to terminate the contract and recover the money paid in advance. They will have to give notice of termination jointly to the debtor or authorize one of them to give notice on behalf of all.

593

M. Gebauer Draft Common Frame of Reference Article III. – 4:201: Scope of section This section applies where two or more creditors have a right to performance under one obligation Article III. – 4:202: Solidary, divided and joint rights (1) A right to performance is solidary when any of the creditors may require full performance from the debtor and the debtor may perform to any of the creditors. (2) A right to performance is divided when each creditor may require performance only of that creditor’s share and the debtor owes each creditor only that creditor’s share. (3) A right to performance is joint when any creditor may require performance only for the benefit of all the creditors and the debtor must perform to all the creditors. Article III. – 4:203: When different types of rights arise (1) Whether a right to performance is solidary, divided or communal depends on the terms regulating the right. (2) If the terms do not determine the question, the right of the co-creditors is divided. 1. Deviation in terminology. The DCFR changed the term ‘claim’ as used by the Principles (Article 10:201 PECL) into a ‘right to performance’ (Article III.-4:202 DCFR). Under the Principles, a ‘claim’ is a ‘right to performance of an obligation’ (Lando et al. (2003), p. xvii) whereas the concept of ‘claim’ seems to be somewhat different under the DCFR, namely ‘a demand for something based on the assertion of a right’ (von Bar/Clive (2009), Comments on Article III.– 4:201, 4:202, 4:203, pp. 998 et seq.). What the PECL define as separate is called divided by the DCFR. And what the PECL define as communal is called joint by the DCFR. Like in the case of plurality of debtors (see the Comments above on Article 10:101 PECL and Article III.-4:102 DCFR) this seems not to be meant as a change in substance. 2. One obligation only. The other deviation again seems to be more fundamental in the framework of the DCFR. Similar to Article III.-4:101 DCFR (see the comments above on Article 10:101 PECL and Article III.-4:101 DCFR), Article III.-4:201 DCFR defines the scope of the section on plurality of creditors and provides that it ‘applies where two or more creditors have a right to performance under one obligation’. There are two or more creditors but there is only one obligation. And this is valid not only regarding the joint and the solidary, but also the divided right to performance. Again, the reason for

594

Chapter 10: Plurality of Parties this deviation is not clear. It could limit the scope of the rules on plurality of parties and serve as an escape device. 3. Default rule. By contrast to the PECL, Article III.-4:203(2) DCFR introduces a clear default rule in favour of separate claims (divided right of co-creditors).

German Law § 428 BGB: Joint creditors If more than one person is entitled to demand performance in such a way that each may demand the entire performance but the debtors is only obliged to effect the performance once (joint creditors), the debtor may at his discretion effect performance to each of the creditors. This also applies if one of the creditors has already sued for performance. § 420 BGB: Divisible performance If several people owe divisible performance or if several people may demand divisible performance, then in case of doubt each debtor is only obliged to render an equal proportion and each creditor is only entitled to an equal proportion. § 432 BGB: More than one creditor of indivisible performance (1) If more than one person is to demand indivisible performance, then to the extent that they are not joint creditors, the debtor may only effect performance to all of them jointly and each creditor may only demand performance for all of them. Each creditor may demand that the debtor deposit the thing owed for all creditors or, if it is not suitable for deposit, that it be surrendered to a court-appointed depositary. (2) Apart from this, a fact only relating to the person of one of the creditors has no effect for and against the other creditors. § 320 BGB: Defence of unperformed contract (1) A person who is a party to a reciprocal contract may refuse his part of the performance until the other party renders consideration, unless he is obliged to perform in advance. If performance is to be made to more than one person, an individual person may be refused the part performance due to him until the complete consideration has been rendered. The provision of § 273 (3) does not apply. (2) […] § 351 BGB: Indivisibility of the right of withdrawal If, in a contract, there is more than one person on one side or the other, the right of withdrawal may be exercised only by all and against all of them. If the right of

595

M. Gebauer withdrawal is extinguished for one of the persons entitled, it is also extinguished for the others. § 718 BGB: Partnership assets (1) The contributions of the partners and the items acquired for the partnership as a result of management are the joint assets of the partners (partnership assets). (2) Partnership assets also include anything acquired due to a right belonging to the partnership assets or as compensation for destruction, damage or removal of an item belonging to the partnership assets. § 741 BGB: Co-ownership by defined shares Where more than one person is jointly entitled to a right, then, unless the law leads to a different conclusion, the provisions of §§ 742 to 758 apply (co-ownership by defined shares). § 747 BGB: Disposal of a share and joint objects Each part owner may control his own share. The part owners may control the joint object in its entirety only jointly. § 754 BGB: Sale of joint claims The sale of a joint claim is only allowed if it cannot yet be collected. If collection is possible, then each part owner may demand joint collection. The three plurality types provided by the PECL and the DCFR are known in German law as well. In principle, they work the same way. Solidary claims imply a contractual agreement to that effect, but they are rare in practice (Stürner, in Jauernig (2011), §§ 428–430 no. 2). The elements of the definition are to be found in § 428 BGB, §§ 429 and 430 BGB contain further provisions as to the regime of solidary claims and the apportionment. In case of separate claims, as a default rule the creditors are entitled to equal shares (§ 420 BGB). They are bound to each other by the fact that according to § 351 BGB the right to terminate the contractual relationship may only be exercised by all of them. And in case of a reciprocal contract the debtor will have the right to withhold performance against any of them until the creditors have performed their own obligations (§ 320(1) second sentence BGB). The category of communal claims, as distinct from indivisible claims, ‘is not directly known except in German law’ (no. 4 to Article 10:201 PECL). This type of plurality seems to balance the interests of the creditors and the debtor in a quite good way. The application of § 432 BGB, however, is limited or overlapped by other specific provisions on partnership assets and co-ownership. The relationship between § 432 BGB and the rules on co-ownership by defined shares (§§ 741–758 BGB) is a quite disputed question in German law (Rütten (1989), pp. 66–75; Gebauer, in Soergel (2010), before § 420 no. 5; for a deeper analysis regarding both historical development

596

Chapter 10: Plurality of Parties and actual discussion with references to doctrine and case law see Meier, Schmoeckel (2007), pp. 2611–2616 and pp. 2616–2630). The same is valid for partnership assets, community property of spouses and the plurality of heirs (Gebauer, in Soergel (2010), before § 420 no. 6; Meier, in Schmoeckel (2007), pp. 2630–2635). As far as partnerships are concerned, the rules on plurality of creditors do not apply, of course, if the partnership in question enjoys legal capacity (on the legal capacity of partnerships see BGHZ 146, 341 = BGH, NJW 2001, 1056). The application of § 432 BGB on communal claims requires, according to the wording of the rule, that there be indivisible performance. This requirement caused some constructive difficulties in the past. What counts in case of contractual relationships, is the intention of the parties (Meier, in Schmoeckel (2007), p. 2637).

Comparison and Evaluation 1. Structure. PECL and DCFR address three different types of creditors. All these types are known in German law as well. Compared to the rules of the BGB, the structure of both PECL and DCFR is better arranged. 2. Language. The terminology of the DCFR deviates from the one of the PECL. The solidary claims were changed into solidary rights, the separate claims were changed into divided rights and the communal claim was converted into a joint right. 3. Scope of application. Another transformation, like in the case of plurality of debtors, seems to be more important: The model rules of the DCFR apply only where two or more creditors have a right to performance under one obligation. The sense of this reduction to a single obligation is not quite clear. 4. Default rule. By contrast to the PECL, the DCFR introduced a clear default rule in favour of separate obligations (for the historical origins of this default rule in German law and its displacement in practice by the communal obligations (§ 432 BGB) see Meier, in Schmoeckel (2007), pp. 2611–2616 and pp. 2636–2637). 5. Communal obligations and indivisibility. § 432 BGB seems to combine the communal obligations with indivisibility of performance. PECL and DCFR are clearly preferable in not doing so.

Principles of European Contract Law Article 10:202: Apportionment of Separate Claims Separate creditors are entitled to equal shares unless the contract or the law provide otherwise. Article 10:202 PECL is the counterpart to Article 10:103 PECL (Liability under separate obligations). It lays down the general rule and is subject to the same exceptions

597

M. Gebauer resulting from the contract or the law. The comment in Lando et al. (2003) gives the following illustration: A and B lend EUR 10,000 to C. In the absence of any special provision, C owes EUR 5,000 to each of the creditors. Conceivably, however, a clause in the contract might provide for a different apportionment because, for example, of a debt owed by one of the creditors to the other.

Draft Common Frame of Reference Article III. – 4:204: Apportionment in cases of divided rights In case of divided rights the creditors have equal shares. The first thing that strikes the reader is the lack of ‘unless the contract or the law provides otherwise’. Presumably, the drafters of the DCFR did not intend to change the default rule into a rigid rule. However, the reason for removing this important part remains unclear. As a rigid rule the provision would hardly make sense. Again, practice could avoid the legal consequences by bringing forward the argument that the creditors have rights to performance under more than one obligation, thus falling out the scope of the section on plurality of creditors (Article III.-4:201 DCFR).

German Law § 420 BGB: Divisible performance If several people owe divisible performance or if several people may demand divisible performance, then in case of doubt each debtor is only obliged to render an equal proportion and each creditor is only entitled to an equal proportion. In its presumption of equal shares the provision resembles Article 10:202 PECL.

Comparison and Evaluation Article 10:202 PECL is preferable to the corresponding rule of the DCFR. A provision of a right to equal shares is only necessary as a default rule and should clarify the character of a presumption.

Principles of European Contract Law Article 10:203: Difficulties of Executing a Communal Claim If one of the creditors in a communal claim refuses, or is unable to receive, the performance, the debtor may discharge the obligation to perform by depositing the

598

Chapter 10: Plurality of Parties property or money with a third party according to Articles 7:110 or 7:111 of the Principles. In case of a communal claim the debtor must render the performance to the creditors together. Article 10:203 PECL is concerned with the situation that one of the creditors refuses, or is unable, to receive the performance. In this situation the provision aims to protect the debtor in order to give him an effective discharge. The comment in Lando et al. (2003) gives the following illustration: A and B buy a second hand car from C, the contract making it clear that they have a communal claim. B is hospitalized and, because of his condition, is not able to receive the performance or give a mandate to A. C wants to deliver the car at the agreed time. C cannot deliver the car for the sole benefit of A, because A and B have a communal claim. C will be able to deposit the car with a third party for the benefit of A and B according to the rules laid down in Article 7:110 of the Principles.

Draft Common Frame of Reference Article III. – 4:205: Difficulties of performing in cases of joint rights If one of the creditors who have joint rights to performance refuses to accept, or is unable to receive, the performance, the debtor may obtain discharge from the obligation by depositing the property or money with a third party according to III. – 2:111 (Property not accepted) or III. – 2:112 (Money not accepted). Apart from insignificant changes in the wording, the model rule mirrors Article 10:203 PECL.

German Law § 432 BGB: More than one creditor of indivisible performance (1) If more than one person is to demand indivisible performance, then to the extent that they are not joint creditors, the debtor may only effect performance to all of them jointly and each creditor may only demand performance for all of them. Each creditor may demand that the debtor deposit the thing owed for all creditors or, if it is not suitable for deposit, that it be surrendered to a court-appointed depositary. § 378 BGB - Effect of deposit where taking back is excluded If taking back the deposited thing is excluded, the debtor is freed from his obligation by deposit in the same way as if he had rendered performance to the creditor at the time of deposit.

599

M. Gebauer § 379 BGB - Effect of deposit where taking back is not excluded (1) If taking back the deposited thing is not excluded, the debtor may refer the creditor to the deposited thing. (2) As long as the thing is deposited, the creditor bears the risk and the debtor is not obliged to pay interest or provide compensation for emoluments not taken. (3) If the debtor takes back the deposited thing, the deposit is deemed not to have occurred. The second sentence of § 432(1) BGB is construed in a somewhat different way than the corresponding provisions in the PECL and the DCFR because under German law it is each creditor who may demand that the debtor deposit. Yet it yields to similar results. The note to Article 10:203 PECL states that ‘only German law has a rule comparable to Article 10:203 PECL (§ 432(1) second sentence BGB)’, and continues: ‘In other laws a similar result can be obtained by applying the general mechanisms of deposit (in this type of situation) and consignation’ (see Lando et al. (2003), p. 81).

Comparison and Evaluation The different approaches of PECL and DCFR one the one hand and German law on the other tend to protect different interests and to avoid different risks. German law rather places emphasis on the interests of the creditors. The fact that the debtor must render the performance to the creditors together and that any creditor may require performance (for the benefit of all) does prevent the risk that one of the creditors refuses to enforce performance. However, from the other creditors’ point of view it does not prevent the risk that one of the creditors refuses, or is unable to receive, the performance. This is the risk of mora creditoris against the will of the other creditors. And this risk can be eliminated by a rule like § 432(1) BGB second sentence. The debtor’s interests, however, can be protected by applying the general mechanisms of deposit.

Principles of European Contract Law Article 10:204: Apportionment of Solidary Claims (1) Solidary creditors are entitled to equal shares unless the contract or the law provides otherwise. (2) A creditor who has received more than that creditor’s share must transfer the excess to the other creditors to the extent of their respective shares. Paragraph (1) provides that in the absence of an agreement specifying the share due to each of the creditors the sharing will be in equal parts. And paragraph (2) lays down the rule that a creditor who has received more than that creditor’s share cannot be allowed to keep the excess. The comment in Lando et al. (2003) gives the following illustration:

600

Chapter 10: Plurality of Parties A and B are solidary creditors of C for an amount of EUR 10,000. C pays EUR 10,000 to B. A has a right to recourse against B for EUR 5,000.

Draft Common Frame of Reference Article III. – 4:206: Apportionment in cases of solidary rights (1) In the case of solidary rights the creditors have equal shares. (2) A creditor who has received more than that creditor’s share must transfer the excess to the other creditors to the extent of their respective shares. Again, what is lacking in the model rule of the DCFR is the part ‘unless the contract or the law provides otherwise’. And again, it remains unclear why the drafters of the DCFR cancelled that important part in the wording of the model rule. Presumably, they did not intend to provide for a change in substance.

German Law § 430 BGB: Duty of the joint creditors to adjust advancements The joint creditors are entitled in equal proportions in relation to each other unless otherwise specified. The provision combines both paragraphs of the PECL and the DCFR in one rule.

Comparison and Evaluation Article 10:204 PECL and § 430 BGB are preferable to the corresponding rule of the DCFR. A legal rule on the apportionment of solidary claims providing for equal shares should clarify its character of a presumption.

Principles of European Contract Law Article 10:205: Regime of Solidary Claims (1) A release granted to the debtor by one of the solidary creditors has no effect on the other solidary creditors. (2) The rules of Articles 10:107, 10:109, 10:110 and 10:111(1) apply, with appropriate adaptations, to solidary claims. 1. Release by one solidary creditor. By contrast to the rule provided by the PECL for the case of solidary obligations (Article 10:108 PECL), a release under paragraph (1) agreed to by one of the solidary creditors has no effect to the other creditors. Comment

601

M. Gebauer A in Lando et al. (2003) gives an illustration to the intended effect that one creditor cannot dispose of the claim to the detriment of the other or others: A and B are solidary creditors of C for the amount of EUR 10,000. A grants a total release to C, who is therefore discharged in relation to A. A will no longer therefore be able to sue for the recovery of the claim. B remains creditor of C for the whole amount of EUR 10,000. 2. Application of certain rules for solidary obligations. As far as payment, set-off, merger (confusio), a court decision or prescription are concerned, paragraph (2) refers to the corresponding rules on passive solidarity. By this means, a repetition of the relevant rules provided for the case of plurality of debtors is avoided (Lando et al. (2003), pp. 82–83). a) ‘Overall effect’. Both payment and set-off between the debt due by the debtor and one of the claims will discharge the debtor in relation to the co-creditors (see Article 10:107(1) PECL). The same is valid for merger (confusio). The debt in case of confusio is extinguished but, as Comment B in Lando et al. (2003) points out, the debtor who has thus become creditor is exposed to the right of recourse of the other creditors, as provided by Article 10:204(2) PECL. The comment in Lando et al. (2003) gives the following illustration: A and B are solidary creditors of C for an amount of EUR 10,000. B dies and C, his sole heir, succeeds. A will be able to claim EUR 5,000 from C, the new co-creditor, by virtue of Article 10:204(2) PECL. b) ‘Single effect’. Like in the case of passive solidarity, by virtue of Article 10:205(2) and Article 10:109 PECL, a court decision has effect only between the parties to the litigation. The same is valid for prescription (see Article 10:110 PECL).

Draft Common Frame of Reference Article III. – 4:207: Regime of solidary rights (1) A release granted to the debtor by one of the solidary creditors has no effect on the other solidary creditors. (2) The rules of III. – 4:108 (Performance, set-off and merger in solidary obligations), III. – 4:110 (Effect of judgment in solidary obligations), III. – 4:111 (Prescription in solidary obligations) and III. – 4:112 (Opposability of other defences in solidary obligations) paragraph (1) apply, with appropriate adaptations, to solidary rights to performance. The model rule of the DCFR contains some smaller changes in the wording but is clearly modelled on Article 10:205 PECL.

German Law § 429 BGB: Effect of changes (1) The default of a joint creditor is also effective against the other creditors.

602

Chapter 10: Plurality of Parties (2) If claim and debt are combined in the person of a joint creditor, the rights of the other creditors against the debtor expire. (3) Apart from this, the provisions of §§ 422, 423 and 425 apply with the necessary modifications. In particular, without limitation, if a joint creditor transfers his claim to another party, the rights of the other creditors are unaffected. 1. Application of certain rules for solidary obligations. The technique of legislation by reference to the rules on passive solidarity is used by German law as well (§ 429(3) BGB). It applies as far as performance (§ 422 BGB), release (§ 423 BGB) and other events mentioned by § 425 BGB are concerned. 2. ‘Single effect’. By virtue of §§ 429(3), 423 BGB and as a general rule, a release granted to the debtor by one of the solidary creditors has no effect on the other solidary creditors. But according to the wording of §§ 429(3), 423 BGB, release agreed between the debtor and a joint creditor can also be effective for the other creditors if the parties to the contract clearly intended to terminate the whole obligation. During the twentieth century, however, it became the predominant view in doctrine and case law that such an ‘overall effect’ in case of release required a specific power of disposition that is not simply given by active solidarity (see Meier, in Schmoeckel (2007), pp. 2588–2589 with references; Gebauer, in Soergel (2010), § 429 no. 4; for a different view see Larenz (1987), p. 626). By virtue of §§ 429(3), 425 BGB, a court decision has effect only between the parties to the litigation. The same is valid for prescription. 3. ‘Overall effect’. In contrast, the application of §§ 429(3), 422 BGB yields an ‘overall effect’ of, inter alia, performance and set-off. Not by virtue of § 429(3) BGB but by virtue of the rules provided in § 429(1) and § 429(2) BGB, an ‘overall effect’ is also given to mora creditoris and to merger.

Comparison and Evaluation As to the ‘overall’ effect of performance, set-off and merger, PECL, DCFR and German law reach an identical result. The same is valid for the ‘single effect’ of a court decision and of prescription. As to the ‘single effect’ of release, the situation in German law is less clear than in the PECL and the DCFR. The accordance in many details must not hide the fact, however, that many of these common solutions have been very disputed in legal history and are still disputed within Europe under a comparative point of view (see no. 1 on Article 10:205 PECL and Meier, in Schmoeckel (2007), pp. 2586–2598).

603

CHAPTER 11

Assignment of Claims R. Freitag

Preliminary Remarks (1) Very generally speaking, PECL, DCFR and German law can be considered as being based on a common set of fundamental principles. This is obviously true with regard to PECL and DCFR, since the authors of the DCFR have only cautiously modified the PECL’s rules on assignment in the process of their incorporation into the DCFR (von Bar/Clive (2009), Introduction nos. 40 et seq.). Consequently many articles of PECL and DCFR use identical wordings. Also PECL and DCFR on the one hand, and German law on the other hand, show a substantial number of significant similarities and deviate somewhat from the laws of countries following the Roman-law tradition. Most strikingly, German law and PECL/DCFR alike allow for ‘silent assignments’ (stille Abtretungen), i.e., they consider the assignment to be valid immediately upon the conclusion of an assignment contract entered into between assignor and assignee without any participation of or notification to the debtor (the notification of the assignment is of relevance only with regard to the enforceability of the assigned claim against the debtor and the determination of priority of competing assignments. Furthermore, PECL, the DCFR and German law explicitly allow for the assignment of future claims and accept the concept of security assignments (although all three legal regimes envisage different systems of protection for third parties). It is also possible under PECL, the DCFR as well as under German law to conclude agreements on bulk assignments (Globalzessionen) of all present, future and contingent claims of the assignor as well as assignments of future claims. (2) The aforementioned similarities between PECL, DCFR and German law, however, do not mean that striking differences of great practical and doctrinal importance cannot be observed: Above all, this is true for the scope of application of the assignment rules of PECL, the DCFR and German law – PECL and the DCFR necessarily have a more limited approach than national substantive law, which must also provide for rules on the assignment of rights and on legal assignments/

605

R. Freitag assignments by operation of law. Moreover, PECL/DCFR on the one hand and German law on the other hand differ with regard to the question whether a contract obliging the creditor to the transfer has patrimonial effect in the sense that it is also the assignment agreement and brings about the transfer of the claim (this is the position of PECL/ DCFR) or whether the assignment agreement is considered as being legally separated and independent from the underlying obligation to assign under the Abstraktionsprinzip (principle of abstraction – this is the position of German law). Furthermore, PECL/DCFR on the one hand, and German law on the other hand, take divergent approaches on the question of contractual limitations or exclusions of assignments. The same is true with regard to the possibility of a valid acquisition by an assignee acting in good faith of a claim from an assignor who is not (no longer) the owner of the relevant right. PECL/DCFR and German law might also have divergent opinions on the possibility of the creditor granting the isolated right to demand performance from the debtor to a third party – in the third party’s name – (Einziehungsermächtigung). As regards a bilateral comparison of PECL and the DCFR they especially treat security assignments differently in the sense that PECL treat security assignments like definite and unconditional transfers whereas the DCFR submits security assignments to the special regime of Book IX on ‘property security in movable property’.

SECTION 1: GENERAL PRINCIPLES Principles of European Contract Law Article 11:101: Scope of Application (1) This Chapter applies to the assignment by agreement of a right to performance (‘claim’) under an existing or future contract. (2) Except where otherwise stated or the context otherwise requires, this Chapter also applies to the assignment by agreement of other transferable claims. (3) This Chapter does not apply: (a) to the transfer of a financial instrument or investment security where, under the law otherwise applicable, such transfer must be by entry in a register maintained by or for the issuer; or (b) to the transfer of a bill of exchange or other negotiable instrument or of a negotiable security or a document of title to goods where, under the law otherwise applicable, such transfer must be by delivery (with any necessary endorsement). (4) In this Chapter ‘assignment’ includes an assignment by way of security. (5) This Chapter also applies, with appropriate adaptations, to the granting by agreement of a right in security over a claim otherwise than by assignment. 1. Limitation to contractual transfers. Pursuant to Article 11:101(1) the PECL’s assignment regime is applicable to ‘assignments by agreement’ only, i.e., to contractual assignments. Consequently, neither the transfer of claims by operation of law (cessio

606

Chapter 11: Assignment of Claims legis) nor any unilateral transfer (as in the case of the setting up of a trust) is covered by PECL. 2. Purpose of transfer. Paragraphs (4) and (5) extend the scope of application to security assignments and to any other security interest in claims such as pledges, equitable assignments (von Bar/Zimmermann (2005), p. 660), usufruct etc. 3. Nature of the assigned right (claim). a) According to paragraph (1) the assignment rules of PECL apply to contractual assignments of contractual claims only, whereas paragraph (2) clarifies that non-contractual claims may, while being subject to applicable restrictions and limitations resulting from the specific nature of the claim, also be assigned under the PECL-regime. Since contractual assignments of contractual claims are of overwhelming practical importance and since PECL focus on contract law, PECL contain a number of rules specifically applicable to assignments of contractual claims (see Article 11:102, 11:201(2), 11:204 lit. (b) PECL). The limitation of Article 11:101 PECL to transfers of ‘claims’ results in transfers of ‘rights’ being excluded from the scope of application. b) As regards the contents of the claim it follows from paragraph (1) that section I is applicable not only to claims for the payment of money (receivables) but to any claim for ‘performance’. Although the right to performance is limited under Articles 9:101 et seq. PECL Article 11:101 PECL is not to be (mis)understood in the sense that only claims granting the right to specific performance are covered. On the contrary, claims for damages fall under Articles 11:101 et seq. PECL since they are to be classified as claims for receivables. c) Article 11:101(3) PECL contains a list of certain types of claims, the transfer of which is not covered by PECL because of their nature which subjects them to specific rules which could cause frictions with PECL. This exception applies to registered financial instruments, investment securities and to negotiable instruments.

Draft Common Frame of Reference Article III. – 5:101: Scope of Section (1) This Section applies to the assignment, by a contract or other juridical act, of a right to performance of an obligation. (2) It does not apply to the transfer of a financial instrument or investment security where such transfer is required to be by entry in a register maintained by or for the issuer or where there are other requirements for transfer or restrictions on transfer. Article III. – 5:102: Definitions (1) An ‘assignment’ of a right is the transfer of the right from one person (the ‘assignor’) to another person (the ‘assignee’).

607

R. Freitag (2) An ‘act of assignment’ is a contract or other juridical act which is intended to effect a transfer of the right. (3) Where part of a right is assigned, any reference in this Section to a right includes a reference to the assigned part of the right. Article III. – 5:103: Priority of provisions on proprietary securities and trusts (1) In relation to assignments for purposes of security, the provisions of Book IX apply and have priority over the provisions in this Chapter. (2) In relation to assignments for purposes of a trust, or to or from a trust, the provisions of Book X apply and have priority over the provisions in this chapter. 1. General. The scope of application of Part III Chapter 5 Section 1 of the DCFR as defined in Article III.-5:101 and III.-5:103 differs slightly from the relevant rules of PECL. As regards the covered types of transfer, it follows from Article III.-5:101(1) DCFR that not only contractual assignments but also transfers of claims brought about by other judicial acts fall within the scope of the DCFR. 2. Financial instruments and investment securities. Article III.-5:101(2) DCFR exempts from the scope of application ‘financial instruments’ or ‘investment securities’ not only if their transfer needs registration but also if there are any other requirements of or restrictions on their transfer. As regards security assignments, the provisions of Book IX, as regards the creation of trusts Book X are to be respected according to Article III.-5:103(1) and (2) DCFR respectively.

German Law § 398 BGB: Assignment A claim may be transferred from the creditor to another party by contractual agreement (Assignment). The assignment agreement renders the assignee creditor of the assigned claim. § 412 BGB: Transfer of claims by operation of law §§ 399 to 404, 406 to 410 above are to be applied analogously to transfers of claims by operation of law. § 413 BGB: Transfer of rights Unless otherwise provided for, the provisions on the transfer of claims are applicable to the transfer of other rights analogously. 1. Nature of assigned right. §§ 398 et seq. BGB are applicable regardless of the nature of the assigned claim which might be contractual or non-contractual in the widest sense (including claims resulting from provisions of family law, law of succession and

608

Chapter 11: Assignment of Claims company law). According to § 413 BGB, §§ 398 et seq. BGB also govern the transfer of rights, esp. the transfer of membership in companies. With regard to claims contained in negotiable instruments, §§ 398 et seq. BGB only partly apply: Where the applicable law allows for the transfer of the claim by simple assignment (i.e., not by transfer of the relevant negotiable instrument), §§ 398 et seq. BGB apply; where the title to the relevant claim is transferred by transfer of the negotiable instrument any such operation is not covered by §§ 398 et seq. BGB. The application of §§ 398 et seq. BGB to assignments of future claims is uncontested (BGHZ 7, 365, 367; Busche, in Staudinger (2005), § 398 BGB no. 63). 2. Types of transfer. According to § 398 and § 412 BGB, §§ 398 et seq. apply to contractual assignments as well as to transfers of claims by operation of law. Additionally, a number of the BGB-rules on assignment are of relevance in insolvency proceedings and enforcement of court orders by way of attachment (seizure). 3. Purpose of transfer. § 398 applies not only to definite transfers of title but also to security assignments as well as to pledges (see § 1274 BGB), usufruct (see § 1069 BGB) and other similar transfers.

Comparison and Evaluation 1. General. a) The scope of application of PECL and DCFR with regard to the transfer of claims is significantly smaller than the reach of §§ 398 et seq. BGB especially with regard to transfers effected by operation of law. For PECL this is the necessary consequence of PECL’s limitation to issues of contract law. The same is true mutatis mutandis for the DCFR which covers a broader spectrum of legal issues than PECL but does not have the same universal approach as national laws. However, it is to be regretted that neither PECL nor the DCFR cover the consequences of transfers of claims by operation of law at least insofar as PECL/DCFR themselves provide for a cessio legis (namely in the context of their rules on solitary debtors in Article 10:106(2) PECL and Article III.-4:107(2) DCFR). b) The general uncertainties as to the determination of the exact scope of application of PECL/DCFR as a whole pose serious problems in the context of assignments: If one assumes that PECL/DCFR supersede each and every rule of national law applicable to assignments, a significant number of rules on assignments contained in the German Commercial Code (Handelsgesetzbuch – HGB) (esp. § 354a, §§ 355 et seq., potentially also § 25(1) 2 and § 28(1) 2) would not be applicable under PECL/DCFR although these rules are tailored to the specific needs of commerce. The same is true with regard to rules on the assignment of claims or on closely connected subjects contained in regulatory laws esp. in the financial sector (see §§ 22a et seq. of the German Banking Code (Kreditwesengesetz) on the Refinanzierungsregister). 2. PECL/DCFR and national procedural law. As concerns the relationship between substantive law on assignments and procedural rules governing attachments by virtue of court orders or the opening of insolvency proceedings, frictions between PECL/

609

R. Freitag DCFR and national law on civil procedure and insolvency proceedings seem unavoidable: On the one hand, a general priority of the unified rules of PECL/DCFR over national law would significantly disturb the traditional national systems of creditor protection whereas on the other hand, the patrimonial regime of PECL/DCFR would suffer if one accepted a superiority of national law over PECL/DCFR. PECL and DCFR take divergent positions on this topic. For details see comments on PECL Article 11:401 below. 3. Assignment and underlying obligation to assign. One of the characteristics of German law is the so called Abstraktionsprinzip which is closely linked to the Trennungsgrundsatz (principle of separation). According to these principles, the transfer of the claim is perfected only upon the conclusion of an assignment agreement which is clearly separated and has to be legally distinguished from the underlying contract obliging the assignor to the transfer of the claim. Therefore under German law an assignment agreement might be valid even if the underlying agreement is invalid. PECL do not deal deliberately with these questions but leave them to applicable law (von Bar/Zimmermann (2005), pp. 663 et seq.). The DFCR explicitly addresses the problem in Article III.-5:104 by stating that a valid assignment is dependent on the existence of a valid obligation to assign (no. (1) lit. (d)) and that the assignment may be part of the contract, judicial act etc. obliging the assignor to assign (no. (3)) (see comment on PECL Article 11:104 below). 4. Bulk assignments (Globalzessionen) and security assignments (Sicherungsabtretungen). a) Neither PECL nor German law provide for specific rules on bulk assignments. However, under PECL the application of Articles 11:101 et seq. to bulk assignments is generally accepted (Rudolf (2006), p. 258.) and in German law §§ 398 et seq. BGB are applied to bulk assignments as well. Article III.-5:106(2) DCFR explicitly addresses the assignment of a ‘bundle’ of claims (see comment under PECL Article 11:102 below). b) Not all national jurisdictions allow for security assignments in order to secure protection of unsecured creditors. German law subjects security assignment to certain restrictions as to their effects in the case of insolvency of the assignor and in case of competing assignments in favour of suppliers (see comment on Article 11:401 below). PECL do not foresee any such restrictions and might therefore significantly interfere with national regimes of creditor protection, which could be detrimental to their acceptance. Due to the extended scope of the DCFR in general and probably also due to a more sensitive approach, Article III.-5:103(1) and 5:110(3) DCFR subject the conclusion and effects of security assignments to the restrictions of Book IX – the insertion of similar restrictions into PECL is highly recommended. 5. Einziehungsermächtigung. PECL/DCFR and German law might have divergent opinions on the possibility of the creditor granting to a third party the isolated right to demand performance from the debtor in the third party’s own name of a claim which remains de jure with the creditor. In German law, the possibility of the granting of an isolated Einziehungsermächtigung is not mentioned in §§ 398 et seq. but is generally accepted by jurisprudence and doctrine (BGHZ 4, 153, 165; Rohe, in Bamberger/Roth

610

Chapter 11: Assignment of Claims (2009), § 398 BGB nos. 91 et seq.). Neither PECL nor the DCFR address Einziehungsermächtigungen and it seems rather improbable that they accept this legal concept although it is of a great practical importance, at least in German law.

Principles of European Contract Law Article 11:102: Contractual Claims Generally Assignable (1) Subject to Articles 11:301 and 11:302, a party to a contract may assign a claim under it. (2) A future claim arising under an existing or future contract may be assigned if at the time when it comes into existence, or at such other time as the parties agree, it can be identified as the claim to which the assignment relates. 1. Assignability. Article 11:102(1) PECL states that – as a general principle – contractual claims are assignable unless otherwise provided for in Article 11:301 PECL and Article 11:302 PECL. With regard to these exceptions please refer to the comments on Article 11:301 and 11:302 PECL. 2. Future Claims. a) According to Article 11:102(2) PECL future claims can be validly assigned if at the time of the potentially assigned claim’s coming into existence it can be ascertained that the claim is actually the object of the relevant assignment agreement. Pursuant to Article 11:101(2) PECL it is irrelevant whether the claim is not yet existing because it will result from a contract not yet concluded or because, under an already existing contract, the conditions of its existence have not yet been met. Quite strikingly, Article 11:102(2) PECL also accepts the validity of the assignment of a future claim if the claim can be reasonably identified at the time determined by the parties. Meaning and consequences of this rule, which intends to grant ‘more flexibility’ to the parties (Lando et al. (2003), p. 91), are unclear but it would seem that the parties may only agree on a date for the taking of effect of the assignment which is subsequent to conclusion of the assignment agreement. b) With regard to further legal aspects of assignments of future claims please refer to the comments on Article 11:202(2) PECL below.

Draft Common Frame of Reference Article III. – 5:105: Assignability: general rule (1) All rights to performance are assignable except where otherwise provided by law. (2) A right to performance which is by law accessory to another right is not assignable separately from that right.

611

R. Freitag Article III. – 5:106: Future and unspecified rights (1) A future right to performance may be the subject of an act of assignment but the transfer of the right depends on its coming into existence and being identifiable as the right to which the act of assignment relates. (2) A number of rights to performance may be assigned without individual specification if, at the time when the assignment is to take place in relation to them, they are identifiable as rights to which the act of assignment relates. Under Article III.-5:105(1) DCFR, all rights to performance are assignable which also broadens the scope of application of the DCFR’s rules on assignment to noncontractual claims. That accessory rights may not be assigned separately from the secured claim (Article III.-5:105(2) DCFR) is a logical consequence of the concept of accessory rights and therefore did not merit mentioning. Article III.-5:106(1) DCFR states that future claims may be assigned also, while Article III.-5:106(2) DCFR explicitly allows for bulk assignments.

German Law German law considers claims to be generally assignable subject to the exceptions contained in §§ 399, 400 BGB, the details of which shall be explained in the context of Articles 301 and 302 PECL below. The assignability of future claims is uncontested under the condition that the assigned claim is reasonably identifiable at the latest at the time the intended transfer is to take effect (BGHZ 7, 365, 367; Roth, in Münchener Kommentar (2007), § 398 no. 81). Furthermore, for the purpose of the evaluation of the validity of an assignment, no distinction is made with regard to the reason for the non-existence of the claim at the time of the assignment, i.e., future claims deriving from existing legal foundations (Rechtsgrund) can be the object of assignments as well as claims deriving from not even concluded contracts. However, assignments of future claims deriving from future contracts are binding upon the liquidator over the assignor’s assets (Insolvenzverwalter) only if at least the legal foundation of the assigned claim has come into existence prior to the opening of the insolvency proceedings (Roth, in Münchener Kommentar (2007), § 398 no. 85). Also, only future claims resulting from already existing legal foundations are subject to seizures (attachments) by court order pursuant to §§ 828 et seq. of the German Code on Civil Procedure (Zivilprozessordnung – ZPO).

Comparison and Evaluation That contractual claims are assignable is practically undisputed in all European legal orders. That PECL limits assignments to contractual claims whereas the DCFR and German law have a broader scope of application is due to the limited approach of PECL to contract law only. As far as the assignment of future claims is concerned, PECL/ DCFR and German law adhere to a large extent to the same principles.

612

Chapter 11: Assignment of Claims Principles of European Contract Law Article 11:103: Partial Assignment A claim which is divisible may be assigned in part, but the assignor is liable to the debtor for any increased costs which the debtor thereby incurs. 1. General. Under Article 11:103 PECL, partial assignments are valid with relation to ‘divisible’ claims, including, but not limited to, claims in receivables. Although PECL do not detail the concept of divisibility with regard to claims other than claims for the payment of money, it seems adequate to consider a claim divisible if its value is not adversely affected in the case of its fulfilment in several tranches. Since partial assignments result in a multiplication of claims directed against the debtor and might therefore burden the debtor with increased costs of administration and of performance, the assignor is liable for such increased costs. 2. Partial assignment of secured claim. If the partially assigned claim has been secured by accessory rights, the assignee obtains the relevant accessory security pro rata the assignee′s share in the formerly undivided claim by operation of law (Article 11:201(1)(a) PECL) whereas any non-accessory rights and securities attached to the claim must be transferred to the assignee by the assignor pursuant to Article 11:204(c) PECL.

Draft Common Frame of Reference Article III. – 5:107: Assignability in part (1) A right to performance of a monetary obligation may be assigned in part. (2) A right to performance of a non-monetary obligation may be assigned in part only if: (a) the debtor consents to the assignment; or (b) the right is divisible and the assignment does not render the obligation significantly more burdensome. (3) Where a right is assigned in part the assignor is liable to the debtor for any increased costs which the debtor thereby incurs. Under paragraph (1), claims in receivables may in all cases be assigned in part whereas claims in non-monetary obligations may be partially assigned only with the consent of the debtor (paragraph (2) lit. (a)) or in case of paragraph (2) lit. (b), i.e., if the claim is divisible and if the rendering of performance to several creditors is not overly burdensome for the debtor. In all cases of partial assignment the assignor has to reimburse the debtor any increased costs incurred as a result of such partial assignment (paragraph (3)).

613

R. Freitag German Law 1. General. Despite the lack of any written rules on the subject in the German Civil Code, the validity of partial assignments is generally accepted by jurisprudence and doctrine under the double condition that: (i) the claim is divisible (RGZ 146, 398, 402; BGH NJW 2006, 2845; Busche, in Staudinger (2005), § 398 BGB nos 46 et seq.) and (ii) the partial assignment does not violate the principle of ‘Treu und Glauben’ pursuant to § 242 BGB (bona fides). Partial assignments are considered to conflict with bona fides esp. in the case where a very significant number of partial assignments substantially increases the costs of performance for the debtor (Roth, in Münchener Kommentar (2007), § 398 no. 64). German statutory law does not foresee that the assignor is liable to the debtor for additional costs caused by partial assignments and therefore the existence of a relevant liability is debated in doctrine but should be accepted (see Busche, in Staudinger (2005), § 398 BGB no. 46) 2. Legal relationship between debtor and assignees and between assignees. German jurisprudence and doctrine pay specific attention to the effects of the multiplication of legal relationships between the debtor and the several creditors in cases of partial assignments. Jurisprudence and the majority opinion in legal doctrine consider the legal relationships between each of the several creditors and the debtor to be distinct and independent of each other (Teilgläubigerschaft under § 421 BGB, see Nörr/ Scheyhing/Pöggeler (1999), § 8 II no. 37). This raises the question how payments by the debtor to one of the several creditors are to be attributed to the several claims. Primarily it is accepted that it is up to the debtor to choose and identify the claim to be fulfilled (analogous application of § 366(1) BGB). In the absence of a relevant choice (which requires knowledge of the partial assignment), each of the several claims shall be fulfilled pro rata of the relevant creditor’s participation in the formerly uniform claim (analogous application of § 366(2) BGB). Because this approach burdens the debtor with the determination of the exact share of each of the assignors to the assignee(s), other authors tend to consider the several creditors to be owners of a communal claim (Gesamthandsgemeinschaft) the performance of which may only be demanded jointly by all creditors and which can be fulfilled by the debtor by performance to all of the creditors (Roth, in Münchener Kommentar (2007), § 398 no. 66). Accessory security rights regarding the partially assigned claim are distributed between the several creditors pro rata their respective participation in the formerly undivided claim by operation of law (RGZ 131, 88, 91) whereas independent security rights have to be transferred to the partial assignees pro rata their share.

Comparison and Evaluation 1. General. German law, PECL and DCFR alike allow for partial assignments of divisible claims but differ slightly in the applicable legal regimes. While neither German law nor PECL mention any limitations as to the division of claims by way of

614

Chapter 11: Assignment of Claims partial assignments, Article III.-5:107(2) lit. (b) DCFR excludes partial assignments which would overly burden the debtor, such limitation being also generally acknowledged by German jurisprudence; under PECL one would have to revert to the general principles of good faith and fair dealing under Article 1:201(1). That, on the other hand, Article III.-5:107(1) and (2) DCFR presume that the division of claims in receivables may never cause unacceptable burdens to the debtor is not fully convincing esp. in case of a very significant number of assignees. That in the case of an acceptable partial assignment the assignor is liable for any increased costs due to the division of the claim seems evident but is not generally acknowledged in German law but is rightly so by PECL as well as by the DCFR. 2. Rights affecting the legal position of all creditors in case of partial assignments. Neither German law nor PECL nor the DCFR contain explicit rules on either of: (i) the distribution between the partial creditors of creditor rights affecting the legal foundation of the formerly united claim or the position of all creditors (Gesamtrechte) and (ii) the qualification of the legal relationship between the multiple partial creditors. The first topic interlocks with Article 11:201(1) lit. (a) PECL stating that the assignee acquires together with the assigned claim the assignor’s ‘rights to performance’. The decisive question is whether the assignor or the assignee is entitled to terminate the contract in case of non-performance by the debtor. Logical priority, however, is to be accorded to the unclear determination of the legal interrelationship between the several claims and/or creditors: Only if the multiple partial claims are considered ‘separate’ in the sense of Article 10:201(2) PECL does the aforementioned question of the partition of rights between the creditors arise, whereas the qualification of the multiple partial claims as ‘communal’ pursuant to Article 10:201(3) PECL necessarily leads to the conclusion that only all creditors acting jointly may demand payment or may make use of any other rights related to the claim (it seems to be generally acknowledged that the several partial claims are not considered solidary in the sense of Article 10:201(1) PECL). From the creditors’ point of view the following issues are at stake: A qualification of the claims as separate will lead to a creditors’ race for enforcement in case of doubtful solvency of the debtor, whereas their qualification as communal might render enforcement practically impossible in case of multiple partial assignments resulting in the co-existence of unknown co-creditors. From the debtor’s perspective it would be most convenient to consider the claims separate and to leave the distribution of any proceeds to the creditors. The latter is the majority position under German law but as to PECL and DCFR regrettably no indication in the Commentaries can be found.

Principles of European Contract Law Article 11:104: Form of Assignment An assignment need not be in writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.

615

R. Freitag PECL do not contain any specific rules on the legal requirements to be met for the valid conclusion of assignment agreements; Article 11:104 PECL only states that no formal requirements (including participation of the debtor who does not even have to be notified of the transfer (Lando et al. (2003), p. 96) have to be observed when concluding an assignment agreement. Formation and validity of assignment agreements are subject to the general rules of PECL as to the formation and validity of contracts in general and it results from the fact that PECL do not subscribe to the ‘Abstraktionsprinzip’ (see preliminary remarks before Article 11:101 PECL) that a contract for the sale or other transfer of claims falling within the scope of PECL is also to encompass the assignment agreement under Articles 11:101 et seq PECL.

Draft Common Frame of Reference Article III. – 5:104: Basic requirements (1) The requirements for an assignment of a right to performance are that: (a) the right exists; (b) the right is assignable; (c) the person purporting to assign the right has the right or authority to transfer it; (d) the assignee is entitled as against the assignor to the transfer by virtue of a contract or other juridical act, a court order or a rule of law; and (e) there is a valid act of assignment of the right. (2) The entitlement referred to in paragraph (1)(d) need not precede the act of assignment. (3) The same contract or other juridical act may operate as the conferment of an entitlement and as the act of assignment. (4) Neither notice to the debtor nor the consent of the debtor to the assignment is required. Article III. – 5:110: Act of assignment: formation and validity (1) Subject to paragraphs (2) and (3), the rules of Book II on the formation and validity of contracts and other juridical acts apply to acts of assignment. (2) The rules of Book IV.H on the formation and validity of contracts of donation apply to gratuitous acts of assignment. (3) The rules of Book IX on the formation and validity of security agreements apply to acts of assignment for purposes of security. Article III. – 5:111: Right or authority to assign The requirement of right or authority in III. – 5:104 (Basic requirements) paragraph (1)(c) need not be satisfied at the time of the act of assignment but has to be satisfied at the time the assignment is to take place.

616

Chapter 11: Assignment of Claims 1. General. Article III.-5:104 DCFR details the ‘basic requirements’ for valid assignments which are supplemented by the general rules of Book II on the formation and validity of contracts pursuant to Article III.-5:110(1). In addition, Article III.-5:104(4) DCFR states that the participation of the debtor in the transfer of the claim is not a condition for the validity of the assignment. Further rules regarding the formation and validity of the assignment are to be found in a number of additional provisions which unfortunately are not grouped in a coherent order. 2. DCFR and ‘Abstraktionsprinzip’. Under paragraph (1) lit. (d) the assignor must be obligated to the assignee to transfer the claim either by virtue of a contract or other judicial act, a court order or a rule of law. This requirement clearly derogates from the German ‘Abstraktionsprinzip’ which allows for valid assignments even in cases in which no valid obligation to assign exists. Furthermore, paragraph (3) states that the assignment agreement may already be contained in the underlying contract obligating the creditor to assign the claim in the sense that the underlying contract ‘may’ operate as assignment agreement. Since the DCFR does not differentiate between contracts creating mere obligations and distinct acts of transfer of property such ‘operation’ will automatically be the case if the relevant contract or other judicial act falls within the scope of application of the DCFR. Only if the obligation to assign is contained in a contract, judicial act or court order not covered by the DCFR and governed by a national law following the ‘Abstraktionsprinzip’ paragraph (3) does it not apply. 3. Relevant time. As to the moment at which the requirements under paragraph (1) have to be fulfilled one has to differentiate as follows: According to paragraph (2) the contract or other judicial act etc. obligating the assignor to transfer the claim may be concluded or become effective (as the case may be) even after the transfer. This leads to the argumentum e contrario that all of the other conditions mentioned in paragraph (1) would have to be fulfilled at the time of conclusion of the assignment agreement. However, with regard to the requirement of the existence of the claim (paragraph (1) lit.(a)) it follows from Article III.-5:106 that the assigned claim may come into existence subsequently. The same is true for the requirement of existing right and authority of the assignor (paragraph (1) lit.(c) DCFR): As regards to the existence of the transferred claim it derives from Article III.-5:111 that the time of the coming into existence of the claim is decisive and that this moment may be subsequent to the time of conclusion of the assignment agreement. With respect to the authority of the assignor the priority rules of Article III.-5:121 allow for the valid assignment of a claim by a person who has ceased to be the owner of the assigned claim (for details see comments on Article III.-5:121 DCFR and under Article 11:401 PECL below). Finally, Article III.-5:118 deals with cases in which the contract from which the assigned claim stems is subsequently avoided, withdrawn, revoked etc. – for details please refer to comments on Article 11:201 PECL below.

617

R. Freitag German Law Assignment agreements have to obey the general rules on the formation and validity of contracts and therefore no specific formal requirements are to be met. However, specific cases of assignments require specific forms under German law: The assignment of shares in private limited companies is to be notarized pursuant to § 15 GmbHG, transfers of claims secured by mortgages (Hypothek and Grundschuld) need to be notarized according to § 1154, § 1192 BGB. Also, assignment agreements entered in the context of other contracts or judicial acts which are subject to formal requirements have to fulfil the relevant formal requirements.

Comparison and Evaluation One of the deficits of PECL Article 11 is to be seen in the lack of any detailed rule on the formation of assignment agreements. The authors of the DCFR have filled this gap by providing a comprehensive set of rules regarding the formation and validity of assignments which might only be criticized for the not very convincing order in which the relevant provisions are to be found within the DCFR. It is also a laudable achievement of the DCFR that it explicitly points out that no participation whatsoever of the debtor is required.

SECTION 2: EFFECTS OF ASSIGNMENT AS BETWEEN ASSIGNOR AND ASSIGNEE Principles of European Contract Law Article 11:201: Rights Transferred to Assignee (1) The assignment of a claim transfers to the assignee: (a) all the assignor’s rights to performance in respect of the claim assigned; and (b) all accessory rights securing such performance. (2) Where the assignment of a claim under a contract is associated with the substitution of the assignee as debtor in respect of any obligation owed by the assignor under the same contract, this Article takes effect subject to Article 12:201. 1. General. The assignment renders the assignee not only proprietor of the assigned claim but also of any and all accessory rights securing performance by virtue of Article 11:201(1) lit. (b) PECL. This rule is complemented by Article 11:204 lit. (c) PECL obliging the assignor to transfer all non-accessory security rights to the assignee. 2. Rights to performance. Article 11:201(1) lit. (a) PECL also declares the assignee to be entitled to the ‘rights to performance’: This provision is undoubtedly applicable to

618

Chapter 11: Assignment of Claims the right to demand performance, to the taking of any action relating to late payment (esp. to the giving of notice of non-performance to the debtor) as well as to the taking of any other action necessary or at least reasonably useful with regard to the enforcement of the claim. The wording of Article 11:201(2) PECL might indicate that the assignee is not entitled to any rights the exercise of which would affect the legal foundation of the assigned claim (the underlying contract). This understanding would deprive the assignee of the right to declare termination of the contract because of a default by the debtor etc. If this were the case then it would be plausible to consider the assignor to be obliged to make use of such right in favour of the assignee upon the assignee’s demand. 3. Assignment and substitution. In case the parties agree that the new creditor shall not only acquire all of the rights associated with the claim but that the assignee shall also substitute the assignor in the latter’s position as debtor under the underlying contract with the debtor, Article 12:201 PECL on substitution is applicable pursuant to Article 11:201(2) PECL.

Draft Common Frame of Reference Article III. – 5:115: Rights transferred to assignee (1) The assignment of a right to performance transfers to the assignee not only the primary right but also all accessory rights and transferable supporting security rights. (2) Where the assignment of a right to performance of a contractual obligation is associated with the substitution of the assignee as debtor in respect of any obligation owed by the assignor under the same contract, this Article takes effect subject to III. – 5:302 (Transfer of contractual position). Article III. – 5:118: Effect of initial invalidity, subsequent avoidance, withdrawal, termination and revocation (1) This Article applies where the assignee’s entitlement for the purposes of III. – 5:104 (Basic requirements) paragraph (1)(d) arises from a contract or other juridical act (the underlying contract or other juridical act) whether or not it is followed by a separate act of assignment for the purposes of paragraph (1)(e) of that Article. (2) Where the underlying contract or other juridical act is void from the beginning, no assignment takes place. (3) Where, after an assignment has taken place, the underlying contract or other juridical act is avoided under Book II, Chapter 7, the right is treated as never having passed to the assignee (retroactive effect on assignment). (4) Where, after an assignment has taken place, the underlying contract or other juridical act is withdrawn in the sense of Book II, Chapter 5, or the contractual relationship is terminated under any rule of Book III, or a donation is revoked

619

R. Freitag in the sense of Book IV. H Chapter 4, there is no retroactive effect on the assignment. (5) This Article does not affect any right to recover based on other provisions of these model rules. 1. General. Although Article III.-5:115 DCFR and Article 11:201 PECL have almost identical wordings, slight differences are to be observed. Under Article 11:201(1) lit.(b) PECL the assignee becomes owner of ‘all accessory rights securing performance’, whereas under Article III.-5:115(1) (second part) DCFR the assignee acquires ‘all accessory rights and transferable supporting security rights.’ This discrepancy implies that the DCFR differentiates between ‘accessory rights’ on the one hand and ‘transferable supporting security’ on the other hand. All rights directly relating to the claim such as the right to demand performance, to declare late performance etc. are to be considered ‘accessory rights’, any additional rights and claims legally separated from the assigned claim qualify as ‘transferable supporting security rights’ (von Bar/Clive (2009), Comment C on Article III.-5: 115, pp. 1055–1056). 2. Subsequent ‘invalidation’ of underlying contract, Article III. - 5:118. Even though a valid transfer of the claim generally irrevocably transfers the title to the claim, the assignee loses ownership upon the retroactive avoidance of the underlying contract under Book II, Chapter 7 (Article III.-5:118(3) DCFR). Other remedies of the debtor without retroactive effect such as withdrawals under Book II, terminations under Book III and revocations of donations under Book IV do affect the legal position of the assignee (Article III.-5:118(4) DCFR).

German Law § 401 BGB: Transfer of Accessory Security Rights and Preferential Rights (1) Upon the coming into effect of the assignment all mortgages, ship mortgages, pledges and accessory guarantess are transferred to the assignee. (2) The assignee is entitled to all preferential rights relating to the claim in the case of execution of judgment or insolvency proceedings. 1. General. The assignment renders the assignee owner of the claim pursuant to § 398, 2 BGB. Accessory rights securing performance of the assigned claim are transferred to the assignee together with the assigned claim under § 401(1) BGB. This provision is applied analogously with regard to independent security rights relating to the claim in the sense that the assignor is obliged to their transfer to the assignee by separate agreement(s) (Roth, in Münchener Kommentar (2006), § 398 no. 14). 2. Rights and actions relating to the claim. Furthermore all additional rights attached to the assigned claim (Hilfsrechte), esp. in case of non-performance, are transferred to the assignee in analogous application of § 401 BGB. This concerns the right to demand

620

Chapter 11: Assignment of Claims payment of damages, to demand a reduction of the purchase price or to give notice of non-performance to the debtor. No such transfer is operated under § 401 BGB with regard to the right to terminate the underlying contract and other rights affecting the legal foundation of the assigned claim (Gesamtrechte) such as the right to avoid the underlying contract for mistake, the right to terminate the contract etc. Such Gesamtrechte stay with the assignor who may only make use of them with the consent of the assignee and must make use of them upon the assignee’s demand (BGH NJW 1985, 2640, 2641; Grüneberg, in Palandt (2010), § 401 nos. 4 et seq.; Roth, in Münchener Kommentar (2006), § 398 nos. 99 et seq.). 3. Substitution. German law does not link the effects of an assignment of a claim to a parallel substitution (Schuldübernahme) by the assignee of the assignor’s obligations under the underlying contract.

Comparison and Evaluation 1. General. PECL and DCFR as well as German law provide for almost identical rules regarding accessory rights attached to the assigned claim. Unfortunately neither German law nor PECL nor the DCFR contain explicit rules on the different treatment of the above mentioned ‘Hilfsrechte’ regarding the assigned claim only and ‘Gesamtrechte’ affecting the underlying contract. This is all the more astonishing since Article III.-5:118 DCFR deals with the reverse situation in which the underlying contract is avoided, withdrawn, terminated or revoked by the debtor. It seems preferable to assume that PECL/DCFR follow the German model. 2. Substitution. The solution proposed by PECL/DCFR seems preferable to German law since it takes into account the adverse effects of an isolated legal treatment of assignment and substitution. Principles of European Contract Law Article 11:202: When Assignment Takes Effect (1) An assignment of an existing claim takes effect at the time of the agreement to assign or such later time as the assignor and assignee agree. (2) An assignment of a future claim is dependent upon the assigned claim coming into existence but thereupon takes effect from the time of the agreement to assign or such later time as the assignor and assignee agree. 1. General. Article 11:202 PECL defines the time at which assignments become effective and differentiates between assignments of existing (1) and future (2) claims. In both cases, the effectiveness of the assignment depends on a valid assignment agreement of the parties and the (coming into) existence of the claim whereas the transfer does not require the notification of the assignment to the debtor which is of

621

R. Freitag relevance for the determination of priority of competing assignments and for the application of the rules on debtor protection only. 2. Assignment of existing claims. An assignment of an existing claim takes effect upon the valid conclusion of the assignment agreement. The principle of party autonomy laid down in Article 1:102 PECL demands the possibility to postpone the taking of effect of the transfer by agreement of the parties. 3. Assignment of future claims. a) Article 11:202(2) PECL is applicable to ‘future claims’ only but unfortunately does not give a definition of the term and therefore leaves open to discussion whether only claims expected to result from not yet concluded contracts qualify as ‘future claims’ or whether also claims expected to stem from already existing contracts are addressed by Article 11:202(2) PECL. The Commentary on Article 11:301 (Lando et al. (2003), p. 108) states that the term ‘future claim’ within the meaning of Article 11:301(1) lit (c) PECL is limited to the first category. It is probable but unclear whether this limitation, which already is doubtful under Article 11:301 PECL is also to be applied to Article 11:202 PECL. Since a differentiation between different categories of future claims is not convincing, the term future claim as used by Article 11:202(2) PECL should be understood as encompassing any future claim regardless of the reason of its non-existence at the time of conclusion of the assignment agreement. b) Under Article 11:202(2) PECL, the assignment of a future claim only takes effect upon the assigned claim coming into existence – whereupon the transfer has retroactive effect in the sense that the claim shall be deemed to have been transferred at the time of the conclusion of the assignment agreement (or at such later time as agreed by the parties). The latter rule, which seems to imply that PECL accept the transfer of not (yet) existing claims, is explained in the Commentary (Lando et al. (2003), p. 100) with reference to the priority rule of Article 11:401 PECL (competing assignments) and therefore is commented on in the context of this provision (please refer to comment on Article 11:401 PECL below). c) It is of no practical importance that neither Article 11:202(2) nor Article 11:102(2) PECL explain whether the title in an assigned future claim is vested directly in the person of the assignee upon the coming into existence of the assigned claim (Direkterwerb) or whether the title passes to the assignee only after the assignor gained ownership at least for one minimal moment (Durchgangserwerb für eine logische Sekunde). Whereas this question plays an important role in German law with regard to the consequences of an intermediate bankruptcy of the assignor or attachments of the claim by creditors of the assignor, PECL deal with the relevant issues in Article 11:401 without reference to the doctrinal debate in German law.

Draft Common Frame of Reference Article III. – 5:113: New creditor As soon as the assignment takes place the assignor ceases to be the creditor and the assignee becomes the creditor in relation to the right assigned.

622

Chapter 11: Assignment of Claims Article III. – 5:114: When assignment takes place (1) An assignment takes place when the requirements of III. – 5:104 (Basic requirements) are satisfied, or at such later time as the act of assignment may provide. (2) However, an assignment of a right which was a future right at the time of the act of assignment is regarded as having taken place when all requirements other than those dependent on the existence of the right were satisfied. (3) Where the requirements of III. – 5:104 (Basic requirements) are satisfied in relation to successive acts of assignment at the same time, the earliest act of assignment takes effect unless it provides otherwise. That the valid conclusion of the assignment usually renders the assignee owner of the relevant claim (Article III.-5:113) DCFR is evident. The exceptions to this rule are mentioned in Article III.-5:114 DCFR which allows the parties to postpone the effects of the assignment in paragraph (1). Article III.-5:114(2) DCFR determines the time of transfer with regard to assignments of future claims in conformity with Article 11:202(2) PECL. With regard to Article III.-5:114(3) which deals with priority rules please refer to comments under Article 11:401 PECL.

German Law 1. General. Assignments of existing claims take effect upon the conclusion of the assignment agreement under § 398, sentence 2 BGB (wording of the provision under Article 11:101 PECL). Party autonomy (§ 311 BGB) allows the parties to agree on a postponement of the effectiveness of the assignment. German law does not consider a notification of the assignment to the debtor a condition for the effectiveness of the transfer nor does a notification play any role in the determination of priority among competing assignments. 2. Assignment of future claims. The ownership of a future claims passes to the assignee upon the coming into existence of the future claim or at such later time as agreed by the parties (BGHZ 88, 205, 206; Rohe, in Bamberger/Roth (2009), § 398 BGB no. 69). Whether the title is transferred directly to the assignee without passing through the property of the assignor or whether it can only be acquired indirectly is much debated and of decisive importance with regard to the legal consequences of the opening of bankruptcy proceedings over the assignor’s assets or in case of attachments of the claim by creditors of the assignor in the time between the conclusion of the assignment agreement and the coming into existence of the claim. Jurisprudence (BGHZ 104, 351, 355; Grüneberg, in Palandt (2010), § 398 BGB no. 12) and majority legal doctrine differentiate as follows: If the legal basis of the future claim already exists at the time of the assignment agreement the claim is directly vested in the person of the assignee. Otherwise, i.e., if the legal basis of the future claim does not exist at the time of conclusion of the assignment agreement, the claim passes on to the assignee only

623

R. Freitag through an intermediate ownership by the assignor and is therefore subject to subsequent attachments by court order or bankruptcy law.

Comparison and Evaluation Although PECL, DCFR and German law follow the same principles with regard to the taking of effect of assignment of existing claims, their positions on future assignments differ strongly: Whereas in German law a future claim, the legal foundation of which has not yet been laid at the time of conclusion of the assignment agreement, is affected by subsequent attachments before the coming into existence of the claim, this is not the case under PECL. This immunization of assignments of future claims against the effects of the opening of insolvency proceedings over the assignor’s assets as well as against subsequent attachments seems unacceptable: Not only would the fundamental principle ‘par conditio creditorum’ be pushed aside in favour of one creditor only, but moreover the insolvency administrator would even be deprived of the economic benefits of contracts concluded by himself for the insolvent assignor’s assets because all claims thus generated would directly pass on to the relevant assignee. The DCFR takes an intermediate position because pursuant to Article III.-5:103(1) DCFR the rules of Book IX are to be applied to security assignments. This concept might cause problems if only Books I – III were to be enacted.

Principles of European Contract Law Article 11:203: Preservation of Assignee’s Rights against Assignor An assignment is effective as between the assignor and assignee, and entitles the assignee to whatever the assignor receives from the debtor, even if it is ineffective against the debtor under Article 11:301 or 11:302. 1. Relative effectiveness of invalid assignments: Where the assignor may not assign the claim under Article 11:301 or Article 11:302 PECL because of contractual limitations to the assignability contained in the underlying contract between assignor and debtor, the transfer is effective as between assignor and assignee, i.e., ownership of the assigned claim passes from the assignor to the assignee. PECL ensure debtor protection by ordering that an assignee under such ‘illegal’ transfer cannot effectively enforce the claim against the debtor. 2. Additional obligations of assignor. In the case of violation of Article 11:301 or Article 11:302 PECL the parties to the assignment agreement have to act in order to achieve a situation as close to the intended assignment as possible. Therefore the assignor has to hand over to the assignee the proceeds received from the debtor and shall enforce the claim against the debtor in favour of the assignee. The wording of Article 11:203 PECL does not, however, make clear whether the ‘entitlement’ of the assignee to the proceeds received by the assignor is proprietary or if Article 11:203

624

Chapter 11: Assignment of Claims PECL merely gives the assignee a claim against the assignor (Milo, in Busch et al. (2006), p. 98).

Draft Common Frame of Reference Article III. – 5:108: Assignability: effect of contractual prohibition (1) A contractual prohibition of, or restriction on, the assignment of a right does not affect the assignability of the right. (2) However, where a right is assigned in breach of such a prohibition or restriction: (a) the debtor may perform in favor of the assignor and is discharged by so doing; and (b) the debtor retains all rights of set-off against the assignor as if the right had not been assigned. (3) Paragraph (2) does not apply if: (a) the debtor has consented to the assignment; (b) the debtor has caused the assignee to believe on reasonable grounds that there was no such prohibition or restriction; or (c) the assigned right is a right to payment for the provision of goods or services. (4) The fact that a right is assignable notwithstanding a contractual prohibition or restriction does not affect the assignor’s liability to the debtor for any breach of the prohibition or restriction. Article III. – 5:122: Competition between assignee and assignor receiving proceeds Where the debtor is discharged under III. – 5:108 (Assignability: effect of contractual prohibition) paragraph (2)(a) or III. – 5:119 (Performance to person who is not the creditor) paragraph (1), the assignee’s right against the assignor to the proceeds has priority over the right of a competing claimant so long as the proceeds are held by the assignor and are reasonably identifiable from the other assets of the assignor. Article III.-5:108(1) addresses assignments entered into in violation of the underlying contract between assignor and debtor. The DCFR at least theoretically goes beyond the solution of Article 11:203 PECL since the DCFR considers the assignment valid without any limitation (including vis à vis the debtor). Practically, the remaining provisions of Article III.-5:108 DCFR ensure debtor protection to the same extent as PECL. Namely under Article III.-5:108(2) lit. (a) DCFR the debtor is entitled to payment to the assignor in which case, pursuant to Article III.-5:122 (first alternative) DCFR, the assignee has a patrimonial interest in any proceeds collected by the assignor if they are reasonably distinguishable from the other assets of the debtor.

625

R. Freitag German Law 1. No relative validity of invalid assignment. The majority opinion in German law considers assignments in violation of §§ 399, 400 BGB (for the wording of these provisions please refer to comments on Article 11:301 PECL) to be devoid of any legal effects vis à vis the debtor, the assignee and the assignor (BGHZ 40, 156, 160; BGH ZIP 1997, 1072, 1073; Roth, in Münchener Kommentar (2007), § 398 no. 36). 2. Effects of violation of §§ 399, 400 BGB on obligation to assign. The impossibility of performance by the assignor in case of unassignability of the claim does, in the light of the reform of the German law of obligations of 2001 (Schuldrechtsreform), not affect the validity of the contract obliging the would be-assignor to transfer the claim under §§ 275(1), 311a(1) BGB. The frustrated assignee is entitled to remedies for nonperformance and can especially claim damages under § 311a(2) BGB in case the assignor knew or ought to have known of the unassignability. Also, it is generally accepted that the parties to a contract intended to create obligations that cannot be fulfilled because of impossibility of performance have to treat each other in such manner as to achieve a solution that is as close to the intended but unachievable effects of the contract as possible.

Comparison and Evaluation PECL and DCFR on the one hand, and German law on the other hand take opposite positions on the legal consequences of violations of the provisions on unassignability. Whereas assignment agreements violating the underlying contract are valid at least as between assignor and assignee, German jurisprudence considers agreements in violation of §§ 399, 400 BGB to be void. As to the practical consequences of this difference one has to differentiate: Although the assignee seems to be better protected under PECL than under German law, even under PECL the assignee cannot enforce the assigned claim against the debtor and therefore has to rely on the cooperation of the assignor which probably will not be available in case of the assignor’s insolvency – at least if one understands Article 11:203 PECL as not having patrimonial effects. The comparison would result in significant practical differences if Article 11:203 PECL was to be understood in parallel to Article III.-5:122 DCFR which states that any proceeds received by the assignor under the unenforceable assignment are property of the assignee if they can be reasonably separated from the other assets of the assignor. From an overall perspective DCFR seems to provide for the most convincing regime: Debtor protection can be reasonably assured even in cases in which the assignment violates contractual obligations of the assignor and it seems adequate to entitle the assignee to the proceeds gathered by the assignor.

626

Chapter 11: Assignment of Claims Principles of European Contract Law Article 11:204: Undertakings by Assignor By assigning or purporting to assign a claim the assignor undertakes to the assignee that: (a) at the time when the assignment is to take effect the following conditions will be satisfied except as otherwise disclosed to the assignee: (i) the assignor has the right to assign the claim; (ii) the claim exists and the assignee’s rights are not affected by any defences or rights (including any right of set-off) which the debtor might have against the assignor; and (iii) the claim is not subject to any prior assignment or right in security in favor of any other party or to any other incumbrance; (b) the claim and any contract under which it arises will not be modified without the consent of the assignee unless the modification is provided for in the assignment agreement or is one which is made in good faith and is of a nature to which the assignee could not reasonably object; and (c) the assignor will transfer to the assignee all transferable rights intended to secure performance which are not accessory rights. 1. General. Article 11:204 PECL contains a list of fundamental undertakings and warranties of the assignor the non-performance of which gives rise to assignor’s liability vis-à-vis the assignee. Under lit. (a), the assignor is liable for the non-existence of the claim, assignor’s lack of right to the assigned claim as well as for the existence of any prior assignment and any encumbrance. In contrast the assignor is not liable for non-performance by the debtor, i.e., the assignee bears the economic risk of the assigned claim. Under lit. (b), the assignor undertakes not to modify the assigned claim without the consent of the assignee by agreeing with the debtor to modifications of the contract from which the assigned claim has arisen. Pursuant to lit. (c) the assignor promises to transfer to the assignee any and all non-accessory security rights relating to the claim (accessory security rights are transferred to the assignee by operation of law according to Article 11:201 (1) lit. (b) PECL). 2. Warranty as to inexistence of prior assignments. The assignor warrants among others the absence of prior assignments, Article 11:201 lit. (a)(iii) PECL. This rule only at first glance seems to overlap with Article 11:201 lit. (a)(i) PECL whereby the assignor undertakes that the assignor is actually owner of the assigned claim. The existence of Article 11:201 lit. (a)(iii) PECL is explained by the fact that the mere existence of a prior assignment does not necessarily void the subsequent transfer because under Article 11:401 PECL priority among competing assignments is given to the assignment which is first notified to the debtor (Article 11:401(1) PECL) and the mere priority of the conclusion of the assignment agreements is of relevance only where no such notification is given (Article 11:401(2) PECL).

627

R. Freitag 3. Party autonomy. The parties may deviate from the rules laid down in Article 11:204 PECL by agreement under Article 1:102 PECL. It is therefore conceivable that the assignor undertakes to reimburse the assignee in the case of non-performance by the debtor or that the assignee shall bear the risk of the unenforceability of the claim. No exception to the rule of party autonomy is meant by the wording of Article 11:204 lit. (a) PECL which seems to imply that the assignor may derogate from his obligations by unilateral disclosure of the facts leading to the non-existence of the claim etc. On the contrary, this rule can only apply under the double condition that: (i) the assignor makes clear that he does not give the warranties under Article 11:204 lit. (a) and (ii) PECL the assignee accepts these limitations.

Draft Common Frame of Reference Article III. – 5:112: Undertakings by assignor (1) The undertakings in paragraphs (2) to (6) are included in the act of assignment unless the act of assignment or the circumstances indicate otherwise. (2) The assignor undertakes that: (a) the assigned right exists or will exist at the time when the assignment is to take effect; (b) the assignor is entitled to assign the right or will be so entitled at the time when the assignment is to take effect. (c) the debtor has no defences against an assertion of the right; (d) the right will not be affected by any right of set-off available as between the assignor and the debtor; and (e) the right has not been the subject of a prior assignment to another assignee and is not subject to any right in security in favor of any other person or to any other incumbrance. (3) The assignor undertakes that any terms of a contract or other juridical act which have been disclosed to the assignee as terms regulating the right have not been modified and are not affected by any undisclosed agreement as to their meaning or effect which would be prejudicial to the assignee. (4) The assignor undertakes that the terms of any contract or other juridical act from which the right arises will not be modified without the consent of the assignee unless the modification is provided for in the act of assignment or is one which is made in good faith and is of a nature to which the assignee could not reasonably object. (5) The assignor undertakes not to conclude or grant any subsequent act of assignment of the same right which could lead to another person obtaining priority over the assignee. (6) The assignor undertakes to transfer to the assignee, or to take such steps as are necessary to complete the transfer of, all transferable rights intended to secure the performance which are not already transferred by the assignment, and to

628

Chapter 11: Assignment of Claims transfer the proceeds of any non-transferable rights intended to secure the performance. (7) The assignor does not represent that the debtor has, or will have, the ability to pay. Article III.-5:112 DCFR further details the undertakings and warranties of the assignor vis-à-vis the assignee without substantial differences from Article 11:204 PECL.

German Law § 402 BGB: Duty of Information; Provision of Documents The assignor has to provide to the assignee all information necessary for the enforcement of the claim and all documents in the possession of the assignor and evidencing the claim. § 403 BGB: Duty to Provide Notarized Deed of Assignment The assignor has to provide to the assignee a notarized deed of assignment upon the assignee’s demand. The costs of such deed are for the assignee’s account. The assignee has to advance to the assignor the means to cover the costs to be incurred for the making of such deed. 1. General. The fundamental undertakings and warranties of the assignor are to be found in: (i) the general rules on assignments (§§ 398 BGB et seq.), (ii) sales law (§§ 433 et seq. BGB) which is applicable to the sale of rights and claims pursuant to § 453 BGB and (iii) the general rules on non-performance of §§ 275 BGB et seq. In addition, §§ 402, 403 BGB as well as § 401 BGB (in analogous application) stipulate certain auxiliary obligations of the assignor which shall enable the assignee to effectively enforce the claim against the debtor. 2. Assignor’s warranties and liabilities. a) §§ 433 et seq. BGB on the sale of goods are to be applied ‘analogously’ to sales of claims and rights pursuant to § 453 BGB. In addition, sales law is partly superposed by the general rules on non-performance (breach of contract) esp. in case of insurmountable impediments to performance (Unmöglichkeit). This technique has resulted in an abundantly complex legal regime and a significant number of doctrinal debates over the liability of the vendor of a claim. The legal regime of seller’s liability can be described as follows: b) Where the sold claim does not exist at the time of conclusion of the sales contract, majority opinion applies § 275(1) BGB on ex ante-impossibility of performance (anfängliche Unmöglichkeit). In this case the seller is liable for damages under § 311a(2) BGB if at the time of conclusion of the sales contract the seller knew or should have known (acting diligently) of the non-existence of the claim. If the sold claim does not belong to the assignor but to a third party, most authors proceed as shown under a) above and apply the rules of §§ 275, 311a(2) BGB on anfängliche Unmöglichkeit

629

R. Freitag (Westermann, in Münchener Kommentar (2004), § 453 no. 10; Beckmann, in Staudinger (2004), § 453 no. 7). With regard to defects of the claim other than its non-existence or the missing ownership of the seller, i.e., with regard to the existence of a right of the debtor to withhold performance, the prescription of the claim, the existence of a valid pledge or other encumbrance etc. most authors apply § 435 BGB arguing that all defects of a claim are by their nature ‘legal defects’ within the meaning of this provision. As concerns the existence of a right of the debtor to avoid the underlying contract or to make use of a right to set-off or to reduce the amount of the claim, it is generally accepted that the mere existence of such rights constitutes a defect of the sold claim within the meaning of § 434 BGB. If, however, the debtor effectively and validly makes use of such rights after conclusion of the sales contract and before the taking of effect of the assignment and thereby eliminates the sold claim, the rules on subsequent impossibility of performance (nachträgliche Unmöglichkeit) are applied (Westermann, in Münchener Kommentar (2004), § 453 no. 10; Beckmann, in Staudinger (2004), § 453 no. 6). In this case the seller is liable under § 275, § 280(1), (3), § 283 BGB for ‘subsequent impossibility of performance’ unless he proves that he could not have known of the relevant right to ‘avoid’ the claim – this excuse being of theoretical relevance only. If the debtor makes the relevant declaration after the taking of effect of the assignment, majority opinion considers this to be a case of § 434 BGB or § 435 which results in the liability of the seller under a legal warranty. If the elimination of the claim has retroactive effect such as a declaration of set-off (see § 389 BGB) or the avoidance of the contract for vitiated consent or mistake (see § 142(1) BGB) one might be tempted to solve these cases along the lines of anfängliche Unmöglichkeit as explained under a) above but the majority opinion favours the application of § 435 BGB (or § 434 BGB) nonetheless. 3. Additional undertakings. §§ 401, 402, 403 BGB stipulate auxiliary undertakings of the assignor vis-à-vis the assignee. a) Under § 402 BGB, the assignor has the obligation to provide to the assignee all information and documents relating to the assigned claim and necessary or useful for the enforcement of the claim. b) § 403 BGB obliges the assignor to provide to the assignee upon the assignee’s demand a notarized deed of assignment the costs of which are for the assignor’s account. This document shall enable the assignee to enforce the claim against the debtor otherwise hindered by § 410 BGB which gives the debtor the right to withhold performance unless the assignee produces a written deed of assignment. c) § 401 BGB stipulates that the title to any rights accessory to the transferred claim passes on to the assignee automatically. With regard to independent (nonaccessory) security rights § 401 BGB is generally applied analogously, i.e., the assignor may demand from the assignor the transfer of such independent security rights.

Comparison and Evaluation That PECL and DCFR state the relevant warranties of the assignor in the provisions on assignments and not in sales law is more convincing than the overly complicated

630

Chapter 11: Assignment of Claims solution of German law which contains a coherent regime of warranties and undertakings in sales law only. Also, it appears to be a significant advantage of PECL and DCFR that they stipulate ‘warranties’ of the assignor with regard to the existence of the claim and the title of the assignor whereas under German law the assignor may at least theoretically evade a liability under § 311a(2) BGB and § 280(1), (3), § 283 BGB by proving that he could not be expected to know of the existence of the relevant obstacle to the transfer. On the other hand the adverse effects of German law are mitigated in real life by explicit contractual warranties by the assignor.

SECTION 3: EFFECTS OF ASSIGNMENT AS BETWEEN ASSIGNEE AND DEBTOR Principles of European Contract Law Article 11:301: Contractual Prohibition of Assignment (1) An assignment which is prohibited by or is otherwise not in conformity with the contract under which the assigned claim arises is not effective against the debtor unless: (a) the debtor has consented to it; or (b) the assignee neither knew nor ought to have known of the non-conformity; or (c) the assignment is made under a contract for the assignment of future rights to payment of money. (2) Nothing in the preceding paragraph affects the assignor’s liability for the non-conformity. 1. General. Article 11:203 and Article 11:301(1) PECL together state that assignments in violation of contractual limitations of the assignability of the claim in general are valid but cannot be enforced against the debtor. Only in the exceptional cases mentioned in Article 11:301(1) lit. (a) – (c) PECL is the transfer of a contractually unassignable claim valid vis-à-vis the debtor. 2. Exceptional validity against debtor. a) Under lit. (a), the consent of the debtor to the assignment validates the assignment – volenti non fit iniuria. b) Article 11:301(1) lit. (c) PECL generally exempts assignments of future receivables (future rights to payment of money) from the general principle, i.e., the debtor cannot effectively exclude their transfer. The Commentary (Lando et al. (2003), p. 108) explains the term ‘future receivable’ as being limited to claims arising out of future contracts only, i.e., ‘future claims’ for payment of money deriving from already existing contracts do not fall under this provision. c) Article 11:301(1) lit. (b) PECL protects assignees who acquire claims in good faith, i.e., who neither know nor ought to know, acting diligently, of the applicable contractual limitation to assignability.

631

R. Freitag 3. Liability of assignor for non-conformity. An assignor who is not able to transfer to the assignee a fully enforceable claim is liable for non-conformity of the claim under Article 11:301(2) PECL.

Draft Common Frame of Reference 1. Wording of Article III.-5:108. For the wording of Article III.-5:108 DCFR (Assignability: effect of contractual prohibition) see above under Article 11:203 PECL. 2. Contents. a) Under Article III.-5:108(1) DCFR, claims can generally be validly assigned even if the transfer constitutes a violation of a contractual limitation to assignability. b) The interests of the debtor are partially protected by Article III.-5:108(2) DCFR which allows the debtor to rely on the contractual limitation in the sense that the debtor may discharge the obligation by giving performance to the assignor (lit. (a)) and by declaring set-off against the assignor without observing the restrictions otherwise applicable to set-off in case of assignments and contained in Article III.-5:116 DCFR. This rule does not apply, however, in the cases covered by Article III.-5:108(3) DCFR: The debtor cannot invoke Article III.-5:108(2) DCFR if he has consented to the assignment (lit. (a)) or has caused the assignee to believe that there was no limitation to the transferability (lit. (b)). In addition, Article III.-5:108(3) lit. (c) DCFR states that Article III.-5:108(2) DCFR is generally inapplicable with regard to claims for payment for the delivery of goods and services. This rule strongly deviates from Article 11:301(1) lit. (c) PECL and covers the vast majority of claims in receivables. It is explained in the Commentary (Lando et al. (2003) p.108) with reference to the arbitrary character of Article 11:301(1) lit. (c) PECL. German Law § 399 BGB: Exclusion of assignment in case of change of contents or by agreement A claim may not be assigned either if performance cannot be made to a person other than the original creditor without a change of the contents of claim or if the assignment is excluded by agreement with the debtor. § 405 BGB: Assignment in reliance on deed The debtor may not invoke against the assignee any contractual limitations to the transferibiliy of the claim or the fact the debtor entered into the obligation for the sake of appearance only if the debtor has issued a deed over the assigned claim and the assignee has entered into the assignment agreement in good faith upon presentation of such deed.

632

Chapter 11: Assignment of Claims § 354a HGB: Validity of the assignment of a monetary claim (1) An assignment agreement relating to a claim for the payment of money entered into in violation of a contractual exclusion of assignability under § 399 BGB is valid if (cumulatively) (i) each of assignor and assignee is a merchant [Kaufmann within the meaning of § 1 et seq. HGB] and (ii) if the assignments either falls within the scope of both parties’ commercial activities or if the debtor is a public entity with or without a distinct legal personality. Notwithstanding the aforesaid the debtor is entitled to discharge the obligations under the assigned claim by payment to the assignor. Any contactual provision not in conformity with this § 354a is void. (2) Paragraph 1 above does not apply to assignments of claims under loan agreements by credit institutions within the meaning of the German Banking Act. 1. General. German law on contractual limitations to assignability is overly complicated: As a general rule § 137 BGB states that the owner of a title may not validly exclude the transferability of the title but may only be held liable for damages in case of breach of such contractual limitation. With regard to contractual limitations of assignability, § 399 BGB, 2nd alternative contains an exception to § 137 BGB whereby contractual restrictions on assignments effectively hinder the transfer of the relevant claim to the assignee not only with relative but with absolute effect. § 354a(1) HGB, as an exception to the exception, states that contractual limitations of transferability of receivables agreed either between two merchants (Kaufleute in the sense of §§ 1 et seq. HGB) or agreed by a public entity cannot hinder a valid assignment. Under § 354a(2) HGB (as an exception to the exception to the exception), banks cannot transfer their claims resulting from corporate credits if the relevant loan agreements contain limitations to the transferability of the banks’ claims. 2. § 399 BGB. a) If debtor and creditor agree on an exclusion or limitation of the transferability of the claim, any assignment agreement in violation of such exclusion or limitation is void even as between assignor and assignee. German jurisprudence has held that confidentiality undertakings entered into by banks and obliging the banks not to disclose any information about their clients to third parties are not to be understood as contractual exclusions of assignment under § 399 BGB (BGHZ 171, 180; BVerfG NJW 2007, 3707). b) Even if the assignee has entered into the assignment agreement in good faith with regard to the (in)existence of a contractual limitation of transferability of the claim, this good faith is protected only in the rare cases covered by § 405 and § 1138 BGB. Under § 405 BGB the assignee may become owner of an otherwise (by virtue of contractual limitations) untransferable claim if (i) the debtor has issued a written deed (Urkunde) in which the claim is specified and the limitation is not mentioned, (ii) the assignee has entered into the assignment agreement upon presentation of the deed which he must have read and (iii) the assignee has acted in good faith, did not know

633

R. Freitag and ought not to have known of the limitation. § 1138 BGB applies to the assignment of claims secured by registered mortgages. 3. § 345a HGB. § 354a(1) HGB shall ensure that merchants may validly assign their claims for receivables either as security for loans or in the course of other commercial transactions such as factoring, forfeiting etc. § 354a(2) HGB was introduced in 2008 in the aftermath of the financial crisis and shall enable corporate debtors to effectively exclude the transferability of the banks’ claims under corporate loans mainly in order to avoid that the assignee claims from the assignor the giving of information under § 402 BGB (for details see comments on Article 11:204 PECL).

Comparison and Evaluation From the perspective of German law, which considers contractual limitations to the assignability to effectively hinder any transfer of the relevant claim, it is striking that PECL and the DCFR allow for the valid transfer of ‘unassignable’ claims and that the debtor is not at all protected in case the assignee has acquired a claim for receivables (PECL) or a claim for payment for delivery of goods or services (DCFR). One might argue that only if contractual limitations to transferability are accepted by law as an effective obstacle to the transfer will market forces be able to determine the real (bargaining) price to be paid by the assignor to the debtor for the exclusion of such limitations. However, the practical differences between German law and PECL/DCFR are in many cases mitigated by § 354a(1) HGB.

Principles of European Contract Law Article 11:302: Other Ineffective Assignments An assignment to which the debtor has not consented is ineffective against the debtor so far as it relates to a performance which the debtor, by reason of the nature of the performance or the relationship of the debtor and the assignor, could not reasonably be required to render to anyone except the assignor. Article 11:302 PECL deals with cases in which the mere assignment would ultimately result in a change of the contents of the claim. This might for example be the case if a debtor under a loan agreement intended for the financing of a specific economic purpose would transfer to a third party his claim for the payment of the loan. For other examples please refer to Commentary (Lando et al. (2003), p. 110).

Draft Common Frame of Reference Article III. – 5:109: Assignability: rights personal to the creditor (1) A right is not assignable if it is a right to a performance which the debtor, by reason of the nature of the performance or the relationship between the debtor

634

Chapter 11: Assignment of Claims and the creditor, could not reasonably be required to render to anyone except that creditor. (2) Paragraph (1) does not apply if the debtor has consented to the assignment. The wording of Article III.-5:109(1) DCFR is identical to Article 11:302 PECL. Paragraph (2) adds that in case of consent of the debtor to the transfer paragraph (1) is not to be applied.

German Law § 400 BGB: Unassignability of claims not subject to pledge A claim may not be assigned to the extent that it cannot be subject of an attachment. 1. § 399, 2nd alternative BGB. § 399, 2nd alternative BGB contains the same rule as Article 11:302 PECL and Article III.-5:109 DCFR. 2. Unassignability under § 400 BGB. German law considers assignments of claims devoid of any legal effect where no valid pledge of the claim is possible. This provision relates to §§ 850 et seq. of the German Code on Civil Procedure (Zivilprozessordnung – ZPO) which stipulate that claims for the payment of money under labour contracts are not subject to attachment by court order to the extent that the debtor is dependent on the payment for subsistence.

Comparison and Evaluation That neither PECL nor the DCFR contain provisions similar to § 400 BGB is due to the general limitation of both legal regimes to questions of substantive law.

Principles of European Contract Law Article 11:303: Effect on Debtor’s Obligation (1) Subject to Articles 11:301, 11:302, 11:307 and 11:308, the debtor is bound to perform in favor of the assignee if and only if the debtor has received a notice in writing from the assignor or the assignee which reasonably identifies the claim which has been assigned and requires the debtor to give performance to the assignee. (2) However, if such notice is given by the assignee, the debtor may within a reasonable time request the assignee to provide reliable evidence of the assignment, pending which the debtor may withhold performance.

635

R. Freitag (3) Where the debtor has acquired knowledge of the assignment otherwise than by a notice conforming to paragraph (1), the debtor may either withhold performance from or give performance to the assignee. (4) Where the debtor gives performance to the assignor, the debtor is discharged if and only if the performance is given without knowledge of the assignment. 1. General remarks on Articles 11:303 et seq. Article 11:303–Article 11:308 PECL contain a complex regime of debtor protection rules in the case of valid assignments as well as in cases of missing or invalid transfers. Article 11:303 PECL deals with the protection of the debtor in the case of valid assignments only – which explains why the debtor may in all cases covered by Article 11:303(1)–(3) PECL perform to the assignee and may validly discharge the obligation by payment to the assignor only if he is not aware of the assignment (Article 11:303(4) PECL). Article 11:303 PECL is complemented by Article 11:308 PECL which addresses modification agreements entered into between the assignor and a debtor. Article 11:307 PECL is dedicated to debtor protection under valid assignments with regard to the continuing possibility to raise defences (in the widest sense) vis-à-vis the assignee. In contrast, Article 11:304 PECL protects the debtor effecting performance to the assignee in good faith in the case of a missing or invalid assignment. 2. Right to withhold performance until receipt of notice of assignment. a) Pursuant to Article 11:303(1) PECL the debtor may withhold performance to the assignee under a valid assignment until receipt of a written notice of assignment reasonably identifying the assigned claim and requiring the debtor to give performance to the assignee. Either the assignor or the assignee may give the relevant notice although a notice of assignment given by the assignee is generally less reliable than a notice originating from the assignor. b) In order to protect the debtor against doubtful notices of assignment issued by a potential assignee, Article 11:303(2) PECL gives the debtor an additional right to withhold performance until the assignee has provided ‘reliable evidence’ of the assignment which in most cases will require the producing of a deed of assignment signed by the assignor or other documents issued by the assignor (Lando et al. (2003), p. 112). 3. Protection of debtor in case of knowledge of assignment otherwise obtained. Where the debtor has gained knowledge of the assignment other than by notice of assignment under Article 11:303(1) PECL, the debtor may, according to Article 11:303(3) PECL, choose between performing to the assignee and the withholding of performance. 4. Valid discharge of obligation by performance to assignor. If a valid assignment has occurred, the debtor may discharge the obligations under the assigned claim by giving performance to the assignor in two cases only: It results from Article 11:303(1) and Article 11:301 and 11:302 PECL that in case of assignments in breach of Article 11:301 or Article 11:302 PECL the debtor may perform to the assignor because the assignment is not binding on the debtor. In addition, the debtor may perform to the

636

Chapter 11: Assignment of Claims assignor if he did not know of the assignment under Article 11:303(4) PECL (see Lando et al. (2003), p. 112). As to other actions or omissions of the debtor vis-à-vis the assignor which affect the existence of the assigned claim such as declarations of avoidance or set-off or withdrawal etc., Article 11:303(4) PECL has to be applied analogously.

Draft Common Frame of Reference Article III. – 5:119: Performance to person who is not the creditor (1) The debtor is discharged by performing to the assignor so long as the debtor has not received a notice of assignment from either the assignor or the assignee and does not know that the assignor is no longer entitled to receive performance. (2) Notwithstanding that the person identified as the assignee in a notice of assignment received from the assignor is not the creditor, the debtor is discharged by performing in good faith to that person. (3) Notwithstanding that the person identified as the assignee in a notice of assignment received from a person claiming to be the assignee is not the creditor, the debtor is discharged by performing to that person if the creditor has caused the debtor reasonably and in good faith to believe that the right has been assigned to that person. Article III. – 5:120: Adequate proof of assignment (1) A debtor who believes on reasonable grounds that the right has been assigned but who has not received a notice of assignment, may request the person who is believed to have assigned the right to provide a notice of assignment or a confirmation that the right has not been assigned or that the assignor is still entitled to receive payment. (2) A debtor who has received a notice of assignment which is not in textual form on a durable medium or which does not give adequate information about the assigned right or the name and address of the assignee may request the person giving the notice to provide a new notice which satisfies these requirements. (3) A debtor who has received a notice of assignment from the assignee but not from the assignor may request the assignee to provide reliable evidence of the assignment. Reliable evidence includes, but is not limited to, any statement in textual form on a durable medium emanating from the assignor indicating that the right has been assigned. (4) A debtor who has made a request under this Article may withhold performance until the request is met. 1. Discharge of obligation by performance to assignor. Under Article III.-5:119(1) DCFR, the debtor may validly discharge the obligation by performing to the assignor

637

R. Freitag under the double condition that: (i) the debtor has not received a notice of assignment from the assignor or the assignee and (ii) the debtor has no knowledge of the assignment, i.e., acts in good faith. 2. Discharge of obligation by performance to purported assignee. If the assignor gives a notice of assignment to the debtor specifying an assignee, the debtor may validly discharge the obligation by performing to the designated person, Article III.-5:119(2) DCFR. Where a purported assignee has given notice of assignment to the debtor the debtor may rely on such notice and give performance to the purported assignee if the creditor has caused the debtor reasonably and in good faith to believe that the right has been assigned to that person, Article III.-5:119(3) DCFR. 3. Adequate proof of assignment and right to withhold performance. a) The notices of assignment mentioned in Article III.-5:119 DCFR do not have to be in writing but may be given in any form (von Bar/Clive (2009), Comment C on Article III.-5:119, p. 1068). In order to ensure reliable information of the debtor and the proof of the existence and contents of the notice, the debtor may request the notice to be issued in ‘textual form on a durable medium’ under Article III.-5:120(2) DCFR and, pending the delivery of such formal notice, the debtor may withhold performance under Article III.-5:120(4) DCFR. b) If a debtor, who has not received any notice of assignment, believes on reasonable grounds that the right has been assigned, the debtor may request the purported assignor to provide a notice of assignment or a confirmation that the right has not been assigned or that the assignor is still entitled to receive payment. Pending such conformation performance may be withheld under Article III.-5:120(4) DCFR.

German Law § 407 BGB: Valid discharge of claim by performance to assignor (1) The debtor may discharge the obligations under the assigned claim by giving performance to the assignor and may validly take any action, omission and other judicial act regarding the assigned claim vis à vis the assignor as long as the debtor has no knowledge of the assignment. (2) The assignee is bound by a judgment rendered in a dispute between the debtor and the assignor unless the debtor had knowledge of the assignment at the time the legal proceedings became pending. § 410 BGB: Provision of deed of assignment (1) The debtor may withhold the giving of performance to the assignee until presentation of a deed of assignment issued by the assignor. Any notice of termination or declaration of late performance by the assignee is void if the assignee does not present to the debtor a deed of assignment issued by the assignor upon the giving of such notice or declaration and if the debtor rejects

638

Chapter 11: Assignment of Claims such notice or declaration without undue delay because of the lack of presentation of such deed. (2) Para. (1) above does not apply if the assignor has notified the debtor of the assignment in writing. 1. Right to withhold performance. The debtor may withhold performance to the assignee under § 410 BGB until he has received (whether from the assignor or the assignee) a deed of assignment issued by the assignor (§ 410(1) 1 BGB). Pending receipt of such deed of assignment the debtor may refuse acceptance of any unilateral declaration or action of the assignee such as a notice of cancellation or a demand for performance etc., § 410(1) 2 BGB. 2. Valid discharge of obligation by performance to assignor. a) That the debtor may discharge his obligation under the assigned claim if he did not positively know of the assignment is explicitly stated in § 407(1) BGB. Any other acts or declarations made or omitted by the debtor vis-à-vis the assignor which adversely affect the existence of the assigned claim, i.e., declarations of avoidance, modifications of the claim agreed on between the debtor and the assignee etc. are to be treated like payments to the assignor b) Jurisprudence (RGZ 83, 184, 188; BGHZ 52, 150, 153 et seq.; BGHZ 102, 68, 71 et seq.) puts the consequence of § 407(1) BGB at the disposition of the debtor who may invoke the actual change of ownership of the claim after having gained knowledge of the assignment. After having gained knowledge of the transfer, the debtor may therefore declare that any monies paid to the assignor are to be restituted under § 812(1) BGB (unjust enrichment). This leads to a ‘rebirth’ of the debtor’s obligations under the assigned claim in the hands of the assignee to whom performance is hence to be made. In practice, the debtor will opt for the application of the actual legal status mainly if he wishes to fulfil the assigned claim by declaring set-off with a counterclaim directed against the assignee especially in case of insolvency of the assignee.

Comparison and Evaluation 1. The legal regimes of PECL, the DCFR and German law destined to assure sufficient debtor protection differ significantly. From the German perspective, PECL appear to be overly complicated and surprising insofar as they consider notices of assignment given by the assignee to be binding on the debtor although the assignee is not a reliable witness of a valid transfer in his (or her) own favour. The fact that Article 11:303 PECL only applies to valid assignments does not affect this negative verdict because it is the notice of assignment itself which is to provide proof of the transfer to the debtor and the debtor thus should only be allowed to rely on notices given by the former creditor (assignor). This being premised the regimes adopted by German law and the DCFR are substantially more convincing. 2. With regard to contractual modifications of the assigned claim agreed between debtor and assignor covered by § 407(1) BGB these cases are at least partially (and not very convincingly) dealt with in Article 308 PECL. Also, PECL and the DCFR lack rules

639

R. Freitag comparable to § 407(1) BGB allowing the debtor to take actions vis-à-vis the assignor which result in the extinction of the assigned claim other than by the giving of performance, i.e., by declaration of avoidance, rescission, withdrawal, set-off etc. 3. Under PECL, the debtor’s right to withhold performance in the case of knowledge of the assignment (Article 11:303(3) PECL) does not have a counterpart in German law resulting in PECL being more protective than the BGB. However, PECL do not (at least not explicitly) enable the debtor to opt for the actual legal situation as explained in the comment on § 407(1) BGB above. Articles 5:119 DCFR, 120 pursue an intermediate path with: Article III.-5:119(2) DCFR is closer to § 410(1) BGB than to Article 11:303(1), (2) PECL. In contrast, the DCFR is more flexible and modern than German law and PECL because the notice of assignment does not have to be in writing. 4. The rules contained in Article 11:303(4) PECL and § 407(1) BGB find their counterpart in Article 5:119(1) DCFR which ensures a higher standard of debtor protection by enabling the debtor to discharge the obligation by performing to the assignor even in case of knowledge of the assignment if such knowledge has not been corroborated by a notice of assignment given by assignor or assignee.

Principles of European Contract Law Article 11:304: Protection of Debtor A debtor who performs in favor of a person identified as assignee in a notice of assignment under Article 11:303 is discharged unless the debtor could not have been unaware that such person was not the person entitled to performance. A debtor performing to a third party who is not the actual assignee is validly discharged of the obligation if the performance has been made in reliance in good faith on a notice of assignment conforming to Article 11:303 PECL, i.e., coming either from the assignor or the assignee. Amazingly, the Commentary states that notices of assignment given by potential assignees are to be considered reliable as such (see Lando et al. (2003), p. 114).

Draft Common Frame of Reference Under Article III.-5:119(2) DCFR the debtor may rely on a notice of assignment given by the (purported) assignor (for wording of Article III.-5:119 DCFR see under Article 11:303 PECL above). The debtor may rely on a notice of assignment given by the purported assignee only if the assignor has caused the debtor to believe in good faith that an assignment has taken place (Article III.-5:119 (3) DCFR).

German Law § 409 BGB: Effects of notification of assignment by assignor (1) The assignor is bound by any notice of assignment given to the debtor without regard to the existence or validity of an assignment. A deed of assignment

640

Chapter 11: Assignment of Claims executed by the assignor and presented to the debtor is tantamount to such notification. (2) The assignor may only revoke a notification under para. (1) above with the consent of the person designated as assignee in such notification. Under § 409(1) BGB, the debtor may discharge the obligation to any person designated as assignee either in a notice or deed of assignment, provided such notice or deed has been issued by the owner of the claim. Majority opinion applies this rule even if the debtor has knowledge of the invalidity of the purported assignment (Roth, in Münchener Kommentar (2007), § 409 no. 2).

Comparison and Evaluation The protection granted to the debtor under PECL is not convincing because it overly protects the debtor to the detriment of the creditor: A debtor who relies on a notice of assignment emanating from a purported assignee and therefore from a potential impostor should not be protected in his belief in the correctness of such notice. Therefore the solutions of German law and the DCFR which require the creditor to persuade the debtor of the existence of a valid assignment are surely to be preferred.

Principles of European Contract Law Article 11:305: Competing Demands A debtor who has received notice of two or more competing demands for performance may discharge liability by conforming to the law of the due place of performance, or, if the performances are due in different places, the law applicable to the claim. 1. General. Where the debtor receives multiple demands for performance under the possibly assigned claim he needs to be protected against the dangers of either performing to the wrong party or illegally withholding performance. Since PECL do not provide for a solution to this problem they allow for the application of substantive national law. The debtor may choose between the law applicable at the due place of performance or, in case of multiple places of performance, the law applicable to the claim. 2. Specifics. The Commentary on Article 11:305 PECL makes clear that it is irrelevant whether the competing demands originate from several potential assignees or from the assignor and one (or more) assignee(s) (Lando et al. (2003), pp. 114–115). Also, the wording indicates that the demands for performance do not have to meet the requirements for notices of assignment under Article 11:303. Finally the Commentary on Article 11:305 PECL correctly points out that the place of performance is to be determined by application of the general rule on performance under PECL to be found

641

R. Freitag in Article 7:101 (Lando et al. (2003), p. 115). The specific rule of Article 11:306(1) PECL does not apply in the context of Article 11:305 PECL for the obvious reason that in the cases covered by Article 11:305 PECL it is unclear whether the assignment has taken effect or in favour of which person.

Draft Common Frame of Reference Provisions dealing with competing demands for payment are neither to be found in the rules of the DCFR on assignments nor in the context of the rules on performance (Articles III.-2:101 et seq. DCFR).

German Law German law considers the uncertainty of the debtor as to the identity of the creditor a general issue of contract law to be dealt with in the context of performance: A debtor who is in reasonable doubt about the identity of his creditor under a claim for the payment of money may make use of the possibility of Hinterlegung given by §§ 372 et seq. BGB and of the Hinterlegungsordnung. The Hinterlegung consists of a payment of the amount owed into an escrow account held with the local court (Amtsgericht). If the debtor renounces the right to demand repayment of the monies paid into the escrow account the claim is considered to be fulfilled as if performance had been made to the actual creditor, § 378 BGB. If the debtor does not renounce the right to repayment, the actual creditor may only demand payment of the amounts on the escrow account as long as they have not been repaid to the debtor who is in addition excused from the application of the rules on late payment (Dennhardt, in Bamberger/Roth (2009), § 379 no. 2).

Comparison and Evaluation 1. PECL. The fallback on national substantive law ordered by Article 11:305 PECL is understandable because rules on the topic of multiple claimants are most often to be found in national substantive laws and are closely linked to administrative procedures which PECL as a transnational private legal order cannot impose on the states. With regard to the determination of the applicable legal order it would seem more plausible to follow the approach of Article 12 of the Rome I-Regulation (Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (Rome I), OJ L 177/6) and to primarily look at the proper law of the claim (Article 12(1) lit. (b) Rome I) and to take into account the law of the state of performance only in second lieu (Article 12(2) Rome I). 2. DCFR. Probably for the reason explained above under 1., the DCFR does not contain a provision equivalent to Article 11:305 PECL. Consequently the debtor has to rely on national substantial law which is to be determined according to Article 12(1) lit. (b), (2) of the Rome I-Regulation (see above under 1.) leading to acceptable results.

642

Chapter 11: Assignment of Claims Principles of European Contract Law Article 11:306: Place of Performance (1) Where the assigned claim relates to an obligation to pay money at a particular place, the assignee may require payment at any place within the same country or, if that country is a Member State of the European Union, at any place within the European Union, but the assignor is liable to the debtor for any increased costs which the debtor incurs by reason of any change in the place of performance. (2) Where the assigned claim relates to a non-monetary obligation to be performed at a particular place, the assignee may not require performance at any other place. In principle assignments cannot work to the detriment of the debtor and the assignee therefore has exactly the same rights under the assigned claim as were formerly vested in the person of the assignor. The assignee therefore would not be entitled to demand performance at any place other than the place of performance under the claim pursuant to Article 7:101 PECL. Article 11:306(1) PECL contains an exception to this rule with regard to assigned receivables: Under Article 7:101(1) lit. (a) PECL, the debtor has to effect payment either at the agreed place of performance or – in the absence of such agreement – at creditor’s place of business and thus bears the risks and costs associated with the transport of the money to the creditor’s place of business. If the claim has been assigned, Article 11:306(1) PECL obliges the debtor to effect payment at the demand of the assignee: (i) at any place within the country in which the contractual place of performance under the claim is situated or (ii) within the EU if the contractual place of performance is situated in the EU also. The increased costs of such performance at another place of performance are for the assignor’s account.

Draft Common Frame of Reference Article III. – 5:117: Effect on place of performance (1) Where the assigned right relates to an obligation to pay money at a particular place, the assignee may require payment at any place within the same country or, if that country is a Member State of the European Union, at any place within the European Union, but the assignor is liable to the debtor for any increased costs which the debtor incurs by reason of any change in the place of performance. (2) Where the assigned right relates to a non-monetary obligation to be performed at a particular place, the assignee may not require performance at any other place. The wording of Article III.-5:117 DCFR is identical to that of Article 11:306 PECL.

643

R. Freitag German Law § 270 BGB: Place of performance of claims for payment of money (1) Unless otherwise agreed between the parties the debtor has to transfer at his own cost any monies to the residence (Wohnsitz) of the creditor. (2) In case of obligations which fall within the scope of commercial activities of the creditor, payment is to be effected at the place of business of the creditor. (3) If due to a change in the creditor’s residence (Wohnsitz) or place of business (as the case may be) the costs or risk of transmission increase, such increase of costs or risk is for the creditor’s account. (4) The provisions of § 269 (place of performance) remain unaffected. Claims for the payment of money are payable at the agreed place or, in the absence of such agreement, at the place designated by § 270 BGB. Under § 270(1), (2) BGB the debtor bears the risk and costs of transport of the monies to the creditor’s domicile (if the creditor is a consumer) or place of business (if the creditor is a businessperson) at the exception of the risk of a delay in payment (see § 270(4) BGB), the latter exception being irreconcilable with the mandatory provisions of Directive 2000/35/EC on combatting late payment in commercial transactions (OJ 2000 L 200/35) and Directive 2007/64/EC on payment services in the internal market (OJ 2007 L 319/1) (see Unberath, in Bamberger/Roth (2009), § 270 no. 15). It results from § 270(3) BGB that the relevant domicile or place of place of business of the creditor is not determined at the time of conclusion of the contract but at the time of the payment (Bittner, in Staudinger (2009), § 270 no. 11): In case of a subsequent change of domicile or place of business by the creditor, any additional costs of performance are for the creditor’s account. If the subsequent change of place of performance results in an increased risk of performance this risk is for the debtor’s account if the creditor is a consumer and for the creditor’s account if the creditor is a professional. It seems obvious that § 270(3) BGB applies also to changes of the place of performance as a result in a change of ownership of the claim due to an assignment but neither jurisprudence nor doctrinal opinions on the topic are to be found.

Comparison and Evaluation Both PECL and the DCFR are less favourable to the assignee than German law with regard to the consequences of an assignment of receivables on the place of performance. Under PECL and DCFR, the debtor has to effect payments to a place other than originally agreed only if the new place of performance is: (i) situated within the same state as the old place of performance or (ii) in a state other than the old place of performance and the new and the old state of performance both are Member States of the EU. Under German law, the debtor must accept subsequent changes to the place of performance without any spatial limitations and is only partially protected against increased costs and risk by virtue of § 270(3) BGB which obliges the assignor to hold

644

Chapter 11: Assignment of Claims the debtor harmless against any liability of debtor vis-à-vis the assignee. With regard to PECL and DCFR, it would seem appropriate to broaden the scope of application of Article 11:307 PECL and Article III.-5:117 DCFR to the Member States of the European Economic Area.

Principles of European Contract Law Article 11:307: Defences and Rights of Set-Off (1) The debtor may set up against the assignee all substantive and procedural defences to the assigned claim which the debtor could have used against the assignor. (2) The debtor may also assert against the assignee all rights of set-off which would have been available against the assignor under Chapter 13 in respect of any claim against the assignor: (a) existing at the time when a notice of assignment, whether or not conforming to Article 11:303 (1), reaches the debtor; or (b) closely connected with the assigned claim. 1. Preservation of debtor’s rights and defences. It is universally accepted that the legal position of the debtor may not and cannot be adversely affected by assignment. In line with this principle Article 11:307(1) PECL states that the debtor may raise to the detriment of the assignee any objection or defence against the claim already existing at the time of the (coming into effect of the) assignment. 2. Set-off. a) Article 11:307(2) lit. (a) PECL allows the debtor to declare set-off against the assignee with counterclaims directed against the assignor if a right of set-off ‘would have been available against the assignor’ in respect of the assigned claim at the time of notification of the assignment to the debtor. This wording seems to imply that the debtor may exercise his right of set-off against the new creditor only if all requirements for a valid declaration of set-off as against the assignor had been met at the time of the notification of the assignment, including the maturity of the counterclaim (as to this requirement see Article 13:101 lit. (b) PECL). However, the Commentary (Lando et al. (2003), pp. 118–119) holds that Article 11:307(2) lit. (a) PECL is to apply regardless of whether the counterclaim had been due at the time of notification of the assignment and that the rule is designed to preserves potential rights to set-off also at least in cases in which the assigned claim and the relevant counterclaim become due at the same time. b) Even if the above conditions are not fulfilled the debtor may declare set-off with counterclaims which are ‘closely connected with the assigned claim’. Unfortunately no clarification on the requirements as to the ‘closeness of connection’ is given. It seems that the rule is to apply in cases in which it would be against the principles of ‘good faith’ and ‘fair dealing’ (Article 1:201 PECL) to deprive the debtor of the right of set-off directed against the assignor. One might think of counterclaims for damages etc.

645

R. Freitag against the assignor resulting from the same contract under which the assigned claim has arisen.

Draft Common Frame of Reference Article III. – 5:116: Effect on defences and rights of set-off (1) The debtor may invoke against the assignee all substantive and procedural defences to a claim based on the assigned right which the debtor could have invoked against the assignor. (2) The debtor may not, however, invoke a defence against the assignee: (a) if the debtor has caused the assignee to believe that there was no such defence; or (b) if the defence is based on breach by the assignor of a prohibition or restriction on assignment. (3) The debtor may invoke against the assignee all rights of set-off which would have been available against the assignor in respect of rights against the assignor: (a) existing at the time when the debtor could no longer obtain a discharge by performing to the assignor; or (b) closely connected with the assigned right. 1. Right to invoke defences against the assignee. The wording of Article III.-5:116(1) DCFR is identical to that of Article 11:307(1) PECL. Article III.-5:116(2) DCFR limits the scope of application of this provision in cases in which the debtor has caused the assignee to believe the relevant right or defence did not exist (lit. (a)). Furthermore, under Article III.-5:116(2) lit. (b) the debtor may not invoke as against the assignee a breach of a contractual limitation to assignment by the assignor. This rule is as a logical extension of Article 5:108(1) DCFR which states that contractual limitations to the assignability of the claim do not hinder a valid transfer (see von Bar/Clive (2009), Comment C on Article III.-5:108, pp. 1035–1036). 2. Set-off against assignee. Article III.-5:116(3) DCFR is again identical to Article 11: 307(2) PECL.

German Law § 404 BGB: Rights and defences of debtor as against the assignee The debtor may raise against the assignee all defences and rights existing as against the assignor at the time of the assignment. § 406 BGB: Set-off against assignee The debtor may set-off against the assignee all counterclaims directed against the assignor, unless either (i) the debtor acquired the counterclaim after having gained

646

Chapter 11: Assignment of Claims knowledge of the assignment or (ii) if the counterclaim matures (cumulatively) (a) after the debtor has gained knowledge of the assignment and (b) later than the assigned claim. 1. Rights and defences against assignee. § 404 BGB states that the assignment may not work to the detriment of the debtor who may raise against the assignee any and all objections in the widest possible sense (BGHZ 31, 148, 149) existing against the claim at the time of the transfer of the claim. 2. Set-off. German rules on debtor protection with regard to rights of set-off in the context of assignment are overly complicated. One has to differentiate as follows: a) If the debtor had already validly declared set-off vis-à-vis the assignor before the taking of effect of the assignment § 404 BGB applies, i.e., the assignee does not acquire the claim to the extent is has been extinguished due to set-off. b) § 406 BGB allows the debtor who has no knowledge of the assignment to exercise against the assignee a right of set-off originally directed against the assignor in order to perpetuate existing rights of set-off (Erhalt von Aufrechnungslagen) in three cases: First, it is evident that the assignor may not deprive the debtor of an existing right of set-off and thus force the debtor to actual performance by way of an assignment of the claim. The debtor may therefore declare set-off against the assignee if all conditions for a valid declaration of set-off (including maturity of the counterclaim, see § 387 BGB) had already been met at the time the debtor is informed of the assignment. Second, even though no right of set-off against the assignor existed at the time of the assignment, the debtor may declare set-off against the assignee under the cumulative conditions that: (i) the debtor has acquired the counterclaim before gaining knowledge of the assignment and (ii) the counterclaim becomes due before the assigned claim. Third, the restrictions of § 406 BGB do not apply to assignments of receivables for collection (Inkassozessionen) (BGHZ 25, 360, 367; Rohe, in Bamberger/Roth (2009), § 406 no. 6). c) For details on German law with regard to cases covered by Article 307(2) lit. (b) PECL (counterclaim closely connected to assigned claim) see under ‘COMPARISON AND EVALUATION’ below. d) That a debtor who in ignorance of the assignment declares set-off vis-à-vis the assignor validly discharges the obligations under the assigned claim follows not from § 404 BGB but from § 407(1) BGB (see comment on German Law under Article 11:304 PECL above).

Comparison and Evaluation 1. General. PECL, DCFR and German law have identical positions on the general principle of preservation of rights and defences of the debtor in case of assignment. The fact that Article III.-5:116(2) lit. (a) DCFR has no parallel in PECL and German law is of no practical relevance since the same result can easily be achieved under the principles of good faith and fair dealing contained in Article 1:201 PECL and § 242 BGB (see in this sense von Bar/Clive (2009), Comment C on Article III.-5:116, p. 1058).

647

R. Freitag 2. Set-off. With regard to the possibility of a discharge of the debtor’s obligations under the assigned claim by declaration of set-off with a counterclaim directed against the assignor, PECL, DCFR and German law treat it like the situation in which the right of set-off already existed at the time the debtor gained knowledge of the assignment. With regard to the preservation of rights of set-off not yet existing at the relevant time striking differences are to observed: Under German law, a right of set-off may only be exercised by the debtor if the counterclaim directed against the assignor is to become due before the assigned claim whereas PECL do not pay attention to the order in which assigned claim and counterclaim mature. Furthermore German law does not contain a specific rule on the possibility to exercise a right of set-off with ‘closely connected claims’. However it seems that most cases falling under Article 11:307(2) lit. (b) PECL and Article III.-5:116(3) lit. (b) DCFR can be solved under German law also in favour of the debtor: German jurisprudence (BGHZ 56, 111, 114 et seq.; BGHZ 63, 338, 342) considers a counterclaim which has come into existence only after the debtor has gained knowledge of the assignment as having been acquired before the debtor’s information of the assignment if its ‘legal foundation’ (Rechtsgrund) had been laid before the assignment, i.e., if the counterclaim results from the same contract or other legal relationship as the assigned claim.

Principles of European Contract Law Article 11:308: Unauthorised Modification not Binding on Assignee A modification of the claim made by agreement between the assignor and the debtor, without the consent of the assignee, after a notice of assignment, whether or not conforming to Article 11:303(1), reaches the debtor does not affect the rights of the assignee against the debtor unless the modification is provided for in the assignment agreement or is one which is made in good faith and is of a nature to which the assignee could not reasonably object. 1. General. The assignment renders the assignee owner of the claim. In principle, therefore, only the assignee is entitled to agree to modifications of the claim with the debtor whereas modifications agreed between the assignor and the debtor have a relative effect between these parties only and do not bind the assignee. However, if the debtor at the time of conclusion of the modification agreement with the assignor does not have knowledge of the assignment the debtor’s good faith is to be protected. 2. Article 11:308. Article 11:308 PECL addresses situations in which the debtor has received a notice of assignment and therefore cannot rely on the continuance of ownership by the assignor. In these cases, the modification of the claim is not binding on the assignee unless the assignee has consented to it individually or ex ante in the assignment agreement or if it is made in ‘good faith and is of a nature to which the assignee could not reasonably object’. The purpose of this provision is to protect the debtor against the adverse effect of the assignment to be seen in the duplication of contractual partners – whereas the assignor as original contracting party may agree to

648

Chapter 11: Assignment of Claims changes to the remaining contractual rights, modifications to the transferred claim require the consent of the assignee. In certain cases, PECL seems to consider that a ‘package deal’ between debtor and assignor modifying the remaining contract as well as the assigned claim is binding on the assignee if his refusal to consent to the relevant modification would be against the principle of good faith.

Draft Common Frame of Reference Pursuant to Article III.-5:112(4) DCFR (for the wording please refer to Article 11:204 PECL above) the assignor undertakes not to change the terms and conditions of the underlying contract in such manner as to affect the assigned claim. In case of violation of this provision, the assignor is liable vis-à-vis the assignee.

German Law Under § 407(1) BGB, the debtor may modify the assigned claim by agreement with the assignor unless the debtor has knowledge of the assignment. If these conditions are not met the debtor must reach agreement with the assignee on the relevant modification. Only in very exceptional cases would the principle of good faith (§ 242 BGB) require the assignee to consent to the modification asked for by the debtor.

Comparison and Evaluation Article 11:308 PECL neither has a counterpart in German statutory law nor in the DCFR – and seems to be overly protective of the debtor, although the practical impact of Article 11:308 PECL would appear to be rather limited.

SECITON 4: ORDER OF PRIORITY BETWEEN ASSIGNEE AND COMPETING CLAIMANTS Principles of European Contract Law Article 11:401: Priorities (1) Where there are successive assignments of the same claim, the assignee whose assignment is first notified to the debtor has priority over any earlier assignee if at the time of the later assignment the assignee under that assignment neither knew nor ought to have known of the earlier assignment. (2) Subject to paragraph (1), the priority of successive assignments, whether of existing or future claims, is determined by the order in which they are made. (3) The assignee’s interest in the assigned claim has priority over the interest of a creditor of the assignor who attaches that claim, whether by judicial process or otherwise, after the time the assignment has taken effect under Article 11:202.

649

R. Freitag (4) In the event of the assignor’s bankruptcy, the assignee’s interest in the assigned claim has priority over the interest of the assignor’s insolvency administrator and creditors, subject to any rules of the law applicable to the bankruptcy relating to: (a) publicity required as a condition of such priority; (b) the ranking of claims; or (c) the avoidance or ineffectiveness of transactions in the bankruptcy proceedings. 1. General. Article 11:401 determines the order of priority among competing potential creditors of the same claim and differentiates between the determination of priority: (i) among competing contractual assignors (paragraphs (1), (2)), (ii) among contractual assignments and attachments (paragraph (3)) and (iii) in the bankruptcy of the assignor (paragraph (4)). The general rule applicable in all cases is contained in paragraph (2) and determines priority with regard to the chronological order in which the assignments are made, i.e., are to come into effect (see under 2. below). 2. Priority among competing contractual assignments. a) As a general rule, Article 11:401(2) PECL determines priority among competing contractual assignments – whether of existing or of future claims – with regard to the chronological order in which they are made. The earlier assignment prevails over the subsequent transfer because the assignor cannot validly pass on a title no longer belonging to his assets – ‘nemo dat quod non habet’ (Lando et al. (2003), pp. 121–122). The wording of Article 11:401(2) PECL seems to imply that priority is determined in accordance to the time of conclusion of the competing assignment agreements and that no regard is to be had to their taking of effect under Article 11:202 even in cases in which the second assignment shall take effect prior to its predecessor. This interpretation is supported by the contrast to paragraph (3), which – in relation to the determination of priority between contractual assignments and attachments – explicitly refers to Article 202. A disregard of Article 202 in the context of paragraph (2) clearly would not be convincing under the referred principle ‘nemo dat quod non habet’ because as long the earlier assignment is not effective the assignor can still validly transfer the title to a subsequent acquirer. b) Pursuant to paragraph (1), the priority rule of paragraph (2) does not apply if cumulatively: (i) the subsequent assignment is first notified to the debtor and (ii) the assignee under the subsequent assignment neither knew nor ought to have known of the prior assignment – in this case the later assignment prevails over the earlier transfer according. Everything therefore depends on the determination of negligence on the part of the subsequent assignee. For example it would be plausible to consider that banks in Germany would have to be aware of the existence of security assignments in favour of suppliers of future receivables – and vice versa, i.e., a supplier would have to expect that his customer to whom delivery is made under an extended reservation of title already has transferred to his bank all future claims. c) The interrelationship between paragraphs (1) and (2) of Article 11:401 PECL needs clarification: One could argue that paragraph (2) lacks practical importance since an assignee who does not claim performance from the debtor under the assigned claim

650

Chapter 11: Assignment of Claims is not significantly interested in the claim and therefore will not contest the possible legal priority of a competing assignment. 3. Priority among contractual assignments and attachments. Priority among contractual assignments and attachments is determined under Article 11:401(3) PECL by application of the basic priority rule (Article 11:401(2) PECL) by comparing the time of the: (i) taking of effect of the contractual assignment and (ii) the time when the attachments takes effect. The term attachment is to be understood as to encompass any lien (gesetzliches Pfandrecht) or attachment by court order (Pfändungspfandrecht) (see Commentary under B.). 4. Priority of assignment in case of bankruptcy of assignor. The opening of insolvency proceedings over the assets of the assignor does not – in principle – affect the validity and effects of a prior assignment. This rule is subject to the exceptions of paragraph (4) lit. (a) – (c) which refer to the priority rules of the applicable lex concursus with regard to (i) any requirements as to the publicity of the assignment (esp. its registration) the fulfilment of which is obligatory for the assignment’s effectiveness in case of insolvency (lit. (a)), (ii) to the order of claims in case of insolvency (lit. (b)) and (iii) to actions to set transactions aside (Insolvenzanfechtung) by virtue of insolvency or to rules on the invalidity of contracts for reasons of insolvency law (lit. (c)).

Draft Common Frame of Reference Article III. – 5:121: Competition between successive assignees (1) Where there are successive purported assignments by the same person of the same right to performance the purported assignee whose assignment is first notified to the debtor has priority over any earlier assignee if at the time of the later assignment the assignee under that assignment neither knew nor could reasonably be expected to have known of the earlier assignment. (2) The debtor is discharged by paying the first to notify even if aware of competing demands. Article III. – 5:122: Competition between assignee and assignor receiving proceeds Where the debtor is discharged under III. – 5:108 (Assignability: effect of contractual prohibition) paragraph (2)(a) or III. – 5:119 (Performance to person who is not the creditor) paragraph (1), the assignee’s right against the assignor to the proceeds has priority over the right of a competing claimant so long as the proceeds are held by the assignor and are reasonably identifiable from the other assets of the assignor. 1. Priority rule (Article III. – 5:121(1)). Wording and contents of Article III.-5:121(1) DCFR equal Article 11:401(1) PECL whereas the provisions contained in Article

651

R. Freitag 11:401(2)–(4) PECL have no parallel in the DCFR. It results from the not very clear Commentary (von Bar/Clive (2009), Comment A on Article III.-5 121, pp. 1074–1075), however, that Article III.-5:121(1) DCFR is to be applied to contractual assignments only whereas priority of attachments or liens (whether in case of insolvency or by virtue of a court order or legal liens) is to be exclusively determined under a chronological priority rule identical to Article 11:401(2) PECL without regard to the time of notification of a competing prior assignment. This results in the priority of any silent assignment which has been agreed on before the time the relevant attachment or lien is to take effect. Book IX is to be applied by virtue of Article III.-5:103(1) DCFR in order to ensure a sufficient regime of protection for third parties and creditors. It derives from Article III.-5:114(3) DCFR. 2. Valid discharge of debtor (Article III.-5:121(2). This rule gives legal certainty to the debtor who renders performance to the assignee whose rights in the claim have first been notified to the debtor: Upon such performance, the debtor is validly discharged of the obligations under the assigned claim even if the relevant assignee’s rights in the claim are inferior to those of another assignee under paragraph (1) and even if the debtor is aware of the existence of competing assignments. 3. Distributions of proceeds. Under Articles III.-5:108 and III.-5:119 DCFR, the debtor may validly discharge the obligation by rendering performance to a potential assignee who has no rights in the assigned claim (at least vis-à-vis the debtor) (Article III.-5:108(2) lit. (a) DCFR) or who’s rights in the claim are inferior to the rights of another assignee under Article III.-5:121 DCFR.

German Law § 408 BGB: Multiple Assignments (1) In case a creditor who has previously assigned the claim enters into a subsequent assignment agreement with a third party regarding the same claim, § 407 is to apply accordingly with relation to the debtor giving performance or rendering judicial acts to such third party. (2) Paragraph (1) above applies if the previously assigned claim is transferred to a third party by court decision or if the assignee under the previous assignment agreements acknowledges to the third party that the claim has passed to the third party by operation of law. 1. General. Under German law, priority among competing assignments, transfers of claims by operation of law as well as attachments etc. is in principle (subject to any contractual postponement of the effects of the assignment) determined according to the chronological order in which the relevant assignment agreements are concluded (BGHZ 30, 149 et seq.; BGHZ 32, 367, 370; Busche, in Staudinger (2005), § 398 no. 32). In the presence of a valid prior assignment any subsequent assignment is devoid of

652

Chapter 11: Assignment of Claims legal effects on the relevant claim because the assignor is no longer entitled to the claim (nemo dat quod non habet, see Lando et al. (2003), pp. 121–122). 2. Assignment of future claims. Majority opinion is that the priority rule applies to assignments of future claims also in the sense that the assignee under the earlier assignment agreement prevails over the assignee under a subsequent assignment agreement (in case the parties have postponed the date of effectiveness of the transfer such date shall be decisive) (BGHZ 30, 149 et seq.). Others correctly point out that neither assignment can be considered as having priority because, at the time of conclusion the assignment agreements, the assignor is not yet owner of the assigned future claim and therefore is not (yet) entitled to the transfer (Verfügung eines Nichtberechtigten within the meaning of § 185 BGB). The assignor becomes owner of the claim and can validly transfer the claim only upon its coming into existence – at this later point in time all of previous assignments have the same rank. This results in a division of ownership of the claim in proportion to the amount of each assignee’s claim (Neef, WM 2005, 2365 et seq.; Freitag/Freitag (2008), 343 et seq.). 3. Bulk assignment of receivables to banks (Globalzession) versus extended reservation of title by suppliers (verlängerter Eigentumsvorbehalt). German companies regularly assign to their suppliers of goods as security the claims for future receivables the companies expect to become creditor of against their own customers under future contracts of resale of the goods delivered by the relevant suppliers (verlängerter Eigentumsvorbehalt). Such assignments of future receivables often compete with bulk assignments in favour of banks as security for loans. Since generally the bulk assignments in favour of the banks are regularly entered into before the conclusion of the relevant supply contracts under which the same claim against the supplier of the assignor is assigned to the supplier, the banks’ security interest in the relevant claim would prevail over the security interest of the supplier in the insolvency proceedings over the assignor’s assets. Jurisprudence and great parts of doctrine consider that these consequences discriminate against the suppliers of goods (Warenkreditgeber) in favour of the banks (Geldkreditgeber). Where the bank as assignee under a security bulk assignment of future receivables has knowledge of the intention of the debtor (and assignor) to enter into receivable assignments in favour of suppliers in the future (such knowledge to be assumed because of the fact that extended reservations of title are customary), the bulk assignment is void pursuant to § 138 BGB (see Article 4:109 PECL) (BGHZ 30, 149, 153 = NJW 1959, 1536; BGHZ 32, 361, 365), unless its contains a clause (dingliche Freigabeklausel) exempting from its scope assignments of future receivables in favour of suppliers. Obviously this jurisprudence results in a discretionary discrimination against banks and is contested in doctrine which partly prefers a partial assignment of the relevant claim to both of bank and supplier (see Beckmann, in Staudinger (2004), § 449 nos. 142 et seq.; Roth, in Münchener Kommentar (2006), § 398 BGB nos. 147 et seq.). 4. Protection of debtor in case of multiple assignments. § 408 BGB ensures that the debtor is protected in case of multiple assignments by ordering that § 407 BGB is to be applied analogously.

653

R. Freitag Comparison and Evaluation The significant differences in the priority rules of PECL, DCFR and German law have substantial practical effects. That priority among competing contractual assignment is at least partly to be determined with regard to the chronological order of the giving of the relevant notices of assignment under PECL and the DCFR is convincing: The German system, which exclusively has regard to the chronological order in which the assignment agreements have been concluded, leaves too much room for manipulation by the assignor and his preferred assignee who can often easily backdate their agreement. However, PECL rules on the effects of assignments in insolvency proceedings overly endanger the interests of the unsecured creditors of the assignor (for details see comment on Article 11:202 PECL above). The DCFR pursues an intermediate and acceptable path by applying the rules of Book IX to security assignments. Both PECL and the DCFR, however, have to accept that the application of the concept of good faith with regard to the acquisition of claims is subject to the serious objection that the assignee cannot even trust that the ‘acquired’ claim exists.

654

CHAPTER 12

Substitution of New Debtor: Transfer of Contract/Transfer of Contractual Position S. Leible

SECTION 1: SUBSTITUTION OF NEW DEBTOR Principles of European Contract Law Article 12:101: Substitution: General rules (1) A third person may undertake with the agreement of the debtor and the creditor to be substituted as debtor, with the effect that the original debtor is discharged. (2) A creditor may agree in advance to a future substitution. In such a case the substitution takes effect only when the creditor is given notice by the new debtor of the agreement between the new and the original debtor. 1. General. This provision deals with debt assumption, and with the discharging effect on a former debtor (privative debt assumption). In practice, the uses of debt assumptions are manifold. Thus, in the purchase of a business, the buyer can take over the existing debt, and pay a correspondingly lower purchase price to the alienator. Further, it is conceivable that the construction of a building is halted because the client no longer meets his payment obligations. In such a case, a solvent tenant intending to move into the property, as quickly as possible, may assume the debt of the owner in order for the works to resume. In such a case of debt assumption, the assuming party takes over, in the place of the original debtor. The latter will, thus, be freed of his obligations. The debt assumption and the discharging effect is, thus, a contractual succession in the position

655

S. Leible of the debtor while preserving the character of the debt. This implies that an actual change of debtor has to take place. A partial assumption of debt (or cumulative debt assumption), like a contractual agreement through which a third party accedes to an existing debt, and is, therefore, liable for it alongside the original debtor, is not specially regulated, as it is in German Law, and is contrary to the Unidroit principles (compare Article 9.2.5 PICC). A regulation of the cumulative assumption of debt was rightly seen as unnecessary because the provisions that apply to the treatment of a majority of debtors, in Chapter 10, suffices in cases where the obligation arising from the debt relationship is not influenced by the partial assumption of the debt. Roman law, which is present to this extent in the Code Civil, recognized an assumption of debt to be irreconcilable with the nature of an obligation. This undeniable practical need for the possibility to include an assumption of debt, by contract, was resolved through the legal concept of novation. The novation is based on the premise that the obligation is always personal. An obligation could not be separated from the person of the creditor, or debtor, without being voided (compare Meyer-Pritzl, in Schmoeckel (2007), §§ 414–418 nos. 3 et seq.). A characteristic feature of the novation is that the earlier obligation is voided. The new obligation, with the same terms, but with different parties, takes its place. The Roman law concept of novation shows its longstanding impact, in the Code civil in Articles 1271–1281 c.c.: De la Novation (compare Giger, (1975), pp. 82–86). By contrast, the idea of debt assumption as a contractual succession into the debt, while maintaining its character presupposes an understanding according to which the debt itself – similar to a good or other movable object – is transferable. In most countries, like in America, for example, this conception has prevailed. It, therefore, makes sense that the PECL follow this model. For a detailed account of debt assumption in the PECL, see Adame-Martínez (2005), pp. 245–280; Leible (2005), pp. 233–244; Maurer (2010). 2. Definition. a) Assignment. (compare Chapter 11 of the PECL) The assumption of debt with a discharging effect is the counterpart of the assignment. In an assumption of debt, a new debtor takes the place of the previous debtor, while by contrast, an assignment of debt leads to a change in creditors. However, the assignment does not require the consent of all three parties. The change of creditors brought about by an assignment can take place without the consent of the debtor. b) Transfer of the Contract. (Article 12:201 PECL) A transfer of contract is closely related to, but not identical to an assumption of debt. According to the Principles, it is generally possible that a party to a debt obligation transfers rights to a third party that will also take over the debt. However, with the transfer of single rights, and with the assumption of single debts, the third party has not yet become party to the debt obligation, as a whole. A need for such a change of parties to the entire debt obligation, and, thus, a transfer of the contract, arises, above all, in cases of continuous debt obligations, such as tenancy agreements or employment contracts. Thus, through a transfer of the contract, the third party becomes a party to the debt obligation, as a whole, as opposed to an assumption of single debts (and in cases of assignments: single rights). The transfer of the contract, thus captures, all legal positions of a party resulting from the contract. The third party takes the place of the

656

Chapter 12: Substitution of New Debtor previous contracting party. As a result, the third party is not only obliged to assume the obligations but, as opposed to a new debtor in the case of a debt assumption, it is also entitled to all rights and, in particular, the right to alter the legal relationship. c) Novation (renewal of the contract). A novation terminates the original contractual relationship and replaces it with a new one (see above). This can arise between the same parties, but does not have to. The assumption of debt, according to Article 12:101 PECL, leads to a change of the debtor, while the original contractual relationship remains, otherwise, unchanged. d) Contract for the benefit of third parties (Article 6:110 PECL). In the case of a contract for the benefit of third parties (Article 6:110 PECL), a third party acquires a right of its own by virtue of the contract concluded between the promissor and the promissee, but does not acquire the right of the promissor. e) Agreement on an assumption of the duty to perform; Performance by a third party (Article 7:106 PECL). Neither an agreement between a debtor and a third party, stipulating that the third party fulfils this debt, nor performance by a third party result in a change of debtors. Article 7:106 PECL merely specifies whether the performance by a third party can be characterized as a performance of the contractual duty that the creditor may not reject. 3. Regime. According to the first paragraph of Article 12:101 PECL, an assumption of debt with a discharging effect is only possible through the agreement of all three parties; namely, the debtor, the creditor, and the third party, as the new debtor. a) Consent of the debtor. aa) Principle. The agreement between the debtor and the third party has no single influence on the debt obligation between the creditor and the debtor. In accordance with the rules of the national legal systems and the Unidroit principles (compare Article 9.2.3 PICC), an assumption of debt with discharging effect pursuant to Article 12:101(1) PECL always requires the consent of the creditor. A new debtor should not be forced onto the creditor against the creditor’s will. This is because he assumes the risk of his debtor’s insolvency. Accordingly, it is possible that the new debtor is, either, not as solvent, not as trustworthy, and/ or not as reliable as the previous one. The risk of ending up with a worse debtor than before can arise even where the creditor gives his consent. However, the creditor is, at least, given the opportunity to assess the new debtor prior to giving his consent. Furthermore, in this case, the change stems from his decision to bear the risk. If the creditor is misled regarding the new debtor’s solvency, then he can challenge the debt assumption (compare Article 4:103 PECL). The requirement of consent could, however, be questionable with regard to Article 7:106 PECL. According to this Article, the creditor cannot refuse acceptance of a performance that a third party performs on behalf of the debtor, and with the debtor’s consent. The only exceptions are performances that require personal delivery. Naturally, this does not contradict Article 12:101 PECL. The performance with discharging effect, by a third party, leaves the original contractual relationship untouched. The obligated party was, and still remains the original debtor. It is merely the duty to perform that expires, by virtue of the performance of a third party. Furthermore, he is only freed from his obligation to perform when the third party performs, in accordance

657

S. Leible with the contract. He will, thus, continue to be responsible for disruptions in performance or non-performance (Article 8:107 PECL). In the case of Article 7:106 PECL, the creditor only loses his debtor when what he receives from a third party is exactly what the creditor owed him, according to the contract. Indeed, in this scenario his consent is not required. In the case of a change in debtors, however, if he has not yet received performance of the contractual duty, but simply assumes the risk of the future ability to perform the contract of a third party, then it would be unjust to impose this risk upon him without his consent. In general, there will, first, be an agreement between the old debtor and the third party, to which the creditor then gives his consent. However, a common agreement between the parties is also imaginable. bb) Explicit or implicit declarations. This declaration of consent does not have to be made explicitly, but it has to be definitive and irrevocable. An implicit declaration is sufficient. It has to be unmistakable that the creditor gives his consent to a final change of the creditor. An implicit declaration will be presumed to exist, for example, when the debtor and the third party have agreed on the change of the debtor, and the creditor addresses claims to the third party without, either consenting to, or rejecting the change. cc) Prior consent. According to Article 12:101(2) PECL, the creditor can give his consent to a future assumption of debt, in advance. If the third party has not yet been identified at this stage, then the creditor has no influence on the specific person that will become the new debtor. This risk is assumed, autonomously, by the creditor. However, according to the second sentence, a pre-requisite for the discharging effect of a debt assumption is that the creditor be informed of the agreement between the new and the existing debtor. The creditor cannot be left in the dark regarding the identity of the debtor. (1) According to the unambiguous wording, this communication is a prerequisite for effectiveness. This rule does not seem entirely convincing. In some legal systems – such as, the German one, for example, – the assumption of debt, with the prior consent of the creditor, is effective even without a subsequent message. In support of this solution, it should be pointed out that, due to his prior consent, the creditor cannot prevent the assumption from coming into effect. Thus, an agreement between old and new debtor should be sufficient. The creditor has an interest in being informed about the date that the debt assumption came into effect. For this purpose, it would have been sufficient to award a corresponding right to be informed that would generally arise against the old debtor due to a tacit contractual duty, according to Article 6:102 PECL. (2) According to the second sentence of the second paragraph of Article 12:101 PECL, a communication of the agreement by the new debtor is necessary. Contrary to the rule in Article 9.2.4(2) of the Unidroit principles, no communication by the old debtor, or by some other source, is sufficient. The rationale behind this rule is that a communication by the old debtor, or even the (possibly unknown) third party, is not suited to induce the necessary trust of the creditor in authenticating the change in debtors. If the communicator is also the new debtor, then the creditor can more easily expect that the third party really wishes to take the place of the old debtor.

658

Chapter 12: Substitution of New Debtor Such an arrangement, however, is not binding. In particular it is not clear why a communication by the original debtor should not have the same effect. Through his prior consent, the creditor has authorized the debtor to look for a successor in the contractual debt relationship. While this authorization to look for a replacement is, thus, attributed to the debtor, the communication of the replacement is not. However, as the discharging effect of Article 12:101(1) PECL acts in his favour, he has a special interest in informing the creditor. Instead, he will have to wait until the potential new debtor informs the creditor. This becomes practically relevant when the creditor makes claim against the original debtor before he is notified by the new debtor of the change in debtors. The original debtor will, thus, be liable to pay. In this case, the agreement with the new debtor is not valid, despite the consent of the creditor, and will, at best, lead to compensation claims in the contractual relationship between the creditor and the third party. Further, the rule has unpleasant consequences when the creditor brings a claim against the old debtor, and when the new debtor communicates the debt assumption to the creditor during the ongoing court proceedings. In this case, a settlement remains the only option. All this could be avoided if a communication of the new debtor was not necessary, and a communication of the debt assumption by the original debtor would suffice. In contrast, the increase in legal certainty following from this rule is minor. This is because the new debtor also has the possibility to authorize the old debtor to communicate the debt assumption to the creditor. While this will rarely happen in practice, it is possible according to Article 3:201(2) PECL. A simple communication by people not listed in Article 12:101(2) second sentence PECL does not lead to a further debt, or to a waiver of (possibly) existing defences. It is only conceivable that the previous communication will be held against a new debtor who denies having taken over the contractual position of the previous debtor (compare Article 1:201(1) PECL). (3) It is further questionable in the case of a prior consent by the creditor, at which point in time the debt assumption becomes effective. The German translation is ambiguous in this regard because the wording ‘wenn’ can be understood, in both temporal and conditional senses. The original English language version of course uses the term ‘when’, and the corresponding commentary uses the term ‘after’. A retroactive effect of the communication, on the point in time that the agreement between old and new debtor was concluded, is not provided in the instrument, and the agreement, therefore, becomes effective ex nunc. It is not possible to find reasons for such a limitation because the justified interests of the creditor are not available, to argue against an ex tunc effect. The creditor has ceded control already by giving his consent. He cannot prevent the debt assumption from taking place at the point in time at which he receives the communication. It follows that nothing contradicts an ex tunc effect. (4) Article 12:101(2) PECL is not only applicable when the identity of the debtor is undefined, but also when it has already been determined. This is because the provision primarily aims to give the creditor knowledge of the point in time at which the debt assumption becomes effective (compare Lando et al. (2003), p. 127 Comment D).

659

S. Leible dd) Missing consent. An agreement between the third party and the creditor alone does not free the debtor of his to the creditor. This is because a new debtor should not be imposed on the creditor against his will (see above). If the debtor agrees to a debt assumption with a third party, and the creditor denies his consent, then the effect of this agreement is limited to the relationship between the debtor and the third party. The third party does not automatically become an additional debtor for the creditor, and the creditor cannot freely choose to make claims on the original debtor, or the third party. Yet, this is not completely impossible. The emergence of an additional right of the creditor against the third party, however, requires that the contract between the debtor and the third party be a contract for the benefit of a third party; in this case, for the benefit of the creditor. Of course, this will only, very rarely, be the case. This is because Article 6:110 PECL requires, either an express agreement on a right for the benefit of a third party or, conversely, the differentiability of a party intention, to this effect, that results from the meaning and purpose of the contract, or the circumstances of the case. Generally, the debtor and the third party will only have agreed upon the debt assumption by the third party, to free the debtor from his obligations. This goal will not be achieved if the creditor refuses to give his consent to the debt assumption. This means that the parties cannot be assumed to have benefited the creditor by giving him a new, additional debtor. For such a partial assumption of debt that is not regulated by Chapter 12 (see above), more and more specific reference points are necessary. b) Consent of the original debtor. Article 12:101(1) PECL not only requires the consent of the creditor and the third party, but also the consent of the debtor. Thus, an agreement between the creditor and the third party, alone, does not lead to a debt assumption. Such a rule is not the only possible one. Thus, some European legal systems, and the Unidroit principles (see Article 9.2.1 (b) PICC) allow a change of the debtor without the consent of the creditor. As in the case of an assignment, the creditor does not have a say, even though his legal position is directly, affected, albeit positively. This rule seems to be founded on the principle that no one should be forced to accept unwanted benefits. This is, of course, not uncontested (for a critical view see, for example Zimmermann (2005), pp. 467, 483 f.). It would, thus, be possible to argue that this result could also be achieved through a unilateral debt waiver by the creditor. This is possible in various national legal systems. By contrast, according to the majority opinion, German law does not know a waiver of claims, and only accepts a waiver of unilateral rights that enables a party to alter the legal relationship (Gestaltungsrechte) – such as a termination or dismissal – of single defences, and of property rights (cf. Looschelders (2011), no. 434). It is strongly contested whether the PECL allows a unilateral waiver due to the lack of an explicit rule dealing with this question (see in this regard, including footnotes Vogenauer (2010), pp. 247, 259 et seq.). The circumstances under which Article 12:101 PECL require the consent of the old debtor for a change of debtors, argues in favour of the proposition that a unilateral debt waiver is not allowed, but, instead, requires the consent of the debtor. c) Partial assumption of debt. Article 12: 101 PECL does not explicitly deal with an assumption of only a part of the contractual liabilities, but it obviously does not exclude it. Such a partial assumption is possible insofar as the contractually agreed

660

Chapter 12: Substitution of New Debtor performance, and consequently the claim, is separable. A special protection, as required by Article 11:103 PECL for partial assignments, is not necessary because the creditor has to give his consent for an effective debt assumption to be recognized. The original debtor and the transferee are then partial debtors alongside one another, see Article 10:101(2) PECL. d) Form. In line with Article 2:101 PECL, Article 12:101(2) PECL does not provide formal requirements for a debt assumption agreement, and corresponds with the rule in most national codifications. Formal requirements should, however, at least be complied with when the creation of the debt that is supposed to be transferred, as well, was submitted to a particular formal requirement. In such cases, the third party transferee requires protection, too. This is particularly important the formal requirements that can be found in the law of the European Union are concerned. Thus, according to Article 5(1) of the Timesharing Directive (Directive 2008/ 122/EC of the European Parliament and of the Council of 14 January 2009 on the protection of consumers regarding certain aspects of timeshare, long-term holiday products, and resale and exchange contracts, OJ 2009 L 33/10), timesharing contracts are required to be concluded in writing. A requirement for a contract to be concluded in writing is further required, for example, by Article 10(1) of the Consumer Credit Directive (Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC, OJ 2008 L 133/66) in cases of credit contracts (‘on paper or on another durable medium’). If the third party taking over the debt from a consumer credit contract is also a consumer, then he should receive the same protection as the original debtor. There are no reasons for treating such cases differently. Additionally, a non-application of the formal requirement would run counter to the effet utile of the Consumer protection Directives, and would, therefore, violate EU law. The Principles, thus, fall behind the contract law acquis communautaire, and require a revision or an addition to this effect (see also Zimmermann (2007), pp. 109, 111).

Draft Common Frame of Reference Article II. – 5:201: Scope This Section applies only to the substitution or addition of a new debtor by agreement. Article III. – 5:202: Types of substitution or addition (1) A new debtor may be substituted or added: (a) in such a way that the original debtor is discharged (complete substitution of new debtor); (b) in such a way that the original debtor is retained as a debtor in case the new debtor does not perform properly (incomplete substitution of new debtor); or

661

S. Leible (c) in such a way that the original debtor and the new debtor have solidary liability (addition of new debtor). (2) If it is clear that there is a new debtor but not clear what type of substitution or addition was intended, the original debtor and the new debtor have solidary liability. Article III. – 5:203: Consent of creditor (1) The consent of the creditor is required for the substitution of a new debtor, whether complete or incomplete. (2) The consent of the creditor to the substitution of a new debtor may be given in advance. In such a case the substitution takes effect only when the creditor is given notice by the new debtor of the agreement between the new and the original debtor. (3) The consent of the creditor is not required for the addition of a new debtor but the creditor, by notice to the new debtor, can reject the right conferred against the new debtor if that is done without undue delay after being informed of the right and before it has been expressly or impliedly accepted. On such rejection the right is treated as never having been conferred. Article III. – 5:204: Complete substitution A third person may undertake with the agreement of the creditor and the original debtor to be completely substituted as debtor, with the effect that the original debtor is discharged. Article III. – 5:206: Incomplete substitution A third person may agree with the creditor and with the original debtor to be incompletely substituted as debtor, with the effect that the original debtor is retained as a debtor in case the new debtor does not perform properly. Article III. – 5:208: Addition of new debtor A third person may agree with the debtor to be added as a debtor, with the effect that the original debtor and the new debtor have solidary liability. 1. General. The rules of the DCFR on the substitution of debtors apply, as well as the rules in the PECL, only to the substitution of a new debtor, by agreement, and not to transfers of obligations, by operation of law (Article III.-5:201 DCFR). However, contrary to the PECL, the DCFR differentiates between complete and incomplete substitution (Articles III.-5:204, III.-5:206 DCFR). In case of a complete substitution, the original debtor is wholly discharged (Article III.-5:202(1)(a) DCFR). Incomplete substitution means that the original debtor is retained as a debtor, in the case that the new debtor does not perform properly (Article III.-5:202(1)(b) DCFR). Thus, the DCFR goes beyond the PECL which regulates only what is, here, called a complete substitution. Article III.-5:202(2) DCFR contains a default rule for situations in which the creditor simply accepts a new debtor, but does not make clear what type of substitution

662

Chapter 12: Substitution of New Debtor was intended. In those cases of doubt, both debtors share joint liability because this is least damaging to the creditor. The required consent of the creditor to the substitution (Article III.-5:203(1) DCFR), needs not to be given expressly, but, rather, it must be definite and unequivocal (cf. 12:101 PECL). In addition, it may be given – corresponding to Article 12:101(2) PECL – in advance (Article III.-5:203(2) DCFR). Besides, as under Article 12:101(1) PECL, the original debtor has to agree to the substitution, as well. 2. Addition of a new debtor. Moreover, the DCFR includes rules which concern the addition of a new debtor (Articles III.-5:202(c), III-5:203(3), III.-5:208 DCFR). By contrast, the addition of a new debtor is not dealt with by any specific rule in the PECL because, in such a case, the result is to create a plurality of debtors; a topic, otherwise, treated in Chapter 10 of the PECL. Pursuant to Article III.-5:208 DCFR, both the original and the new debtor share joint liability. That means that they are liable, in equal shares (Article III.-4:106 DCFR). Because the creditor is not prejudiced, the creditor’s consent is not required (Article III.-5:203(3) DCFR). However, in light of party autonomy, the consent of the original debtor is necessary because he is locked into a set of rules on joint liability (Article III.-5:208 DCFR).

German Law § 414 BGB: Contract between obligee and transferee A debt may be assumed by a third party by contract with the obligee in such a way that the third party steps into the shoes of the previous obligor. § 415 BGB: Contract between obligor and transferee (1) If the assumption of the debt is agreed between the third party and the obligor, its effectiveness is subject to ratification by the obligee. Ratification may only occur when the obligor or the third party has informed the obligee of the assumption of the debt. Until ratification, the parties may alter or cancel the contract. (2) If ratification is refused, assumption of the debt is deemed not to have occurred. If the obligor or the third party requests the obligee, specifying a period of time, to make a declaration relating to the ratification, the ratification may only be declared before the end of the period of time; if it is not declared it is deemed to be refused. (3) As long as the obligee has not granted ratification, then in case of doubt the transferee is obliged to the obligor to satisfy the obligee in good time. The same applies if the obligee refuses ratification.

663

S. Leible § 416 BGB: Assumption of a mortgage debt (1) If the acquirer of a plot of land assumes a debt of the alienor for which there is a mortgage on the land, by contract with the latter, the obligee may only ratify the assumption of the debt if the alienor notifies him of it. If six months have passed since receipt of the notice, the ratification is deemed to have been granted unless the obligee has previously refused it to the alienor; the provision of § 415 (2) sentence 2 does not apply. (2) Notice by the alienor may only be made when the acquirer has been entered in the Land Register as owner. It must be made in writing and must include the statement that the transferee steps into the shoes of the previous obligor unless the obligee declares his refusal within that period of six months. (3) The alienor must, on the demand of the acquirer, notify the obligee of the assumption of debt. As soon as the grant or refusal of the ratification is definite, the alienor must inform the acquirer. 1. General. §§ 414 to 416 of the German Civil Code (BGB) (and also §§ 417 and 418 BGB) deal only with the discharging (privative) debt assumption. The cumulative debt assumption (Schuldbeitritt) is not explicitly dealt with in the BGB. It is, however, possible according to § 311 I BGB. A debt assumption with discharging effect is defined as a contractual succession of debtors while leaving the character of the debt unchanged (Mot. II, 142 /Mugdan II, 78; RGZ 70, 411, 415; Nörr/Scheyhing/Pöggeler (1999), p. 222). For the creditor, the debt assumption – just as a waiver and an assignment – is a disposition of the claim, because the direction of the claim changes by virtue of the change in debtors because the defendant and the assets of the liable party are exchanged. For the old, as well as the new debtor, however, a debt assumption cannot be a disposition because the character of the debt is not a right. According to a widely held view, the debt assumption creates obligations for the transferee (Larenz (1987), p. 603; Grüneberg, in Palandt (2012), § 414 no. 1; Stürner, in Jauernig (2011), §§ 414, 415 no. 1). This is not reconcilable with the view of the legislator set out in § 414 BGB which states that a succession should maintain the identity. The transferee does not create new obligations through his contract with the creditor, but, instead, enters into a continuing obligation of the old debtor. His obligation does not immediately arise out of the contract, but, rather, from the contractual succession. This, however, is only an acquisition for the creditor (see more specifically Nörr/Scheyhing/Pöggeler (1999), p. 223; Meyer-Pritzl, in Schmoeckel (2007), §§ 414–418 no. 18; Rieble, in Staudinger (2005), § 414 BGB no. 5). The debt assumption is separate from the underlying, original transaction from which it must be distinguished. This underlying, original transaction will generally be an agreement between the old debtor and the transferee, or an agreement between the transferee and the creditor. It also follows that the debt assumption is immune from an unjust enrichment claim, but only if the causal relationship is effective.

664

Chapter 12: Substitution of New Debtor 2. Definition. Whether, a debt assumption was agreed to, according to the will of the parties, is to be determined through an interpretation of the intentions of the parties (§§ 133, 157 BGB). Above all, it is important in determining whether the transferee wants to adopt the debt in lieu of the old debtor. A debt assumption is to be distinguished, in particular, from forms of debt that assume joint liability, partial assumptions of debt, and from a guarantee and a surety. These are legal relationships that lead to a joint liability of the third party, alongside the debtor. They offer the creditor an additional debtor and, thus, further security of performance. Only the personal guarantee (Bürgschaft) is regulated by statute (§§ 765 et seq. BGB). The admissibility of guarantees and partial assumptions of debt are based on the principle of freedom of contract (§ 311 BGB). Through a guarantee, a third party can promise the creditor every result and, thus, every performance by the debtor. In contrast with a surety, a guarantee contract does not lead to an accessory, but, rather, to a separate debt. Further, a debt accession leads to a separate debt held by the third party, which exists alongside the debt of the debtor. A debt accession is not accessorial, either. Its content and scope are determined at the moment of its creation, according to the original debt. From this point onwards, the main and the primary debt part ways. They remain linked only through the simultaneous fulfillment of the debt, as a whole. Due to the possible danger of the change in debtors for the creditor the determination of the intention to release the debtor of his debt is subject to strict conditions. This does not necessarily have to be explicit, but it should clearly follow from the declarations of the creditor. In particular, it needs to be considered to what extent the solvency of the old debtor and the transferee differs, as well as which economic goals the debtor is pursuing with the agreement. In cases of doubt, it must be assumed that the creditor does not want to release the original debtor from his debt, but, rather, wishes to obtain additional security (BGH, NJW-RR 1991, 817, 818; Möschel, in Münchener Kommentar (2007), § 414 no. 3; crit. Rieble, in Staudinger (2005), § 414 no. 26). 3. Rule. The BGB regulates two different varieties of the debt assumption. § 414 BGB deals with the case of an agreement between creditor, and the third party assuming the debt. Such an arrangement does not necessitate the involvement, or the consent of the former debtor. § 415 BGB, further, allows the debt assumption in the form of an agreement on the assumption of debt between the debtor and the third party. The consent of the creditor is required for the effectiveness of such a business. Alternatively, a debt assumption can also ensue through a trilateral contract between the creditor, the original debtor, and the new debtor, § 311 I BGB (see only Larenz (1987), p. 607). a) § 414 BGB. According to § 414 BGB, an agreement between the creditor and third party is sufficient for a debt assumption. The consent of the creditor is necessary because the change of debtors relates to his claim, and can potentially void it. The transferee must give his consent because he will incur a duty to perform. Neither the involvement, nor the consent of the former debtor, is required. The debtor can, thus, be freed of his debt against his will. The act of transferral between the creditor and the transferee, thus, relieves the original debtor of the debt. Thus, the debt assumption

665

S. Leible under § 414 BGB is an exceptionally permissible disposition for the benefit of a third party (see for an accurate account Rieble, in Staudinger (2005), § 414 no. 8). By contrast, it can be argued that this is not compatible with the principle of freedom of contract because this principle, presumably, also subjects any beneficial change in rights to the consent of the affected party. Thus, the original debtor would not have to accept a forced discharging of his debt. Instead, he would be entitled to a right of refusal analogous to § 333 BGB (see e.g., Larenz (1987) p. 603; Westermann, in Erman (2004), § 414 BGB no. 1; Stürner, in Jauernig (2011), §§ 414, 415 no. 1). This is, of course, not very convincing because there is a lack of a regulatory gap that does not leave room for the formation of an analogy. The wording, and the intention of the legislator, are clear. By disregarding the requirement of the consent of the original debtor, the legislator consciously departed from the principle of free movement of contract. Additionally, § 333 BGB is does not fit, perfectly, because the provision is aimed at transactions resulting in obligations. However, the operational debt assumption is abstract. Whether or not the benefit of discharge, as it is when addressed at the debtor, is not covered by a legal basis, should be determined separately. And finally, the legal consequence foreseen by § 333 BGB is of little help. This is because a retroactive rejection would cause a ‘relapse’ of the debt, and act as a resolute condition of the debt assumption, thus, leading to great legal uncertainty. The fact that, according to German law, the debtor does not have a ‘right over or to his debt’ results from other provisions of the BGB, and specifically from the possibility for the creditor to accept a discharging third party’s performance against the will of the debtor (§ 267 (1) sentence 2 BGB) or to enter into a release with one of several debtors with the effect to the other debtors, § 423 BGB (see Möschel, in Münchener Kommentar (2007), § 414 no. 6; Rieble, in Staudinger (2005), § 414 BGB no. 10, each with further references). Additionally, it is noteworthy that a parallel can be drawn with the assignment which § 414 BGB follows. The only possibility to create a right of consent with ‘tangible effects’ for the debtor rests in an analogy with § 399 Alt. 2 BGB. Of course, this requires that the debtor links the verfügende Abtretung to his consent through a separate agreement with the creditor, and, thereby, turns it into a pre-condition of effectiveness (see regarding this point Rieble, in Staudinger (2005), § 414 nos. 10 and 34 with more details). b) § 415 BGB. A debt assumption can also take place through an agreement between the debtor and the third party intending to take over the debt. Such a case requires an authorization by the creditor (§ 415(1) sentence 1 BGB). The authorization can only be given after the communication of the debt assumption (§ 415(1) sentence 2 BGB). This is supposed to protect the debtor and the transferee, as contractual parties, from the debtor’s interference with their legal relationship, acquired through a prior authorization that deprives them of the possibility to repeal, or to modify, the debt assumption expressly provided by § 415(1) sentence 3 BGB. § 415 of the BGB does not regulate the assumption of debt through a trilateral contract. This is because the agreement between the debtor and the assuming party is possible without the agreement of the creditor. In this case, however, the agreement only has a binding effect as an assumption of the duty to perform, according to § 415(3)

666

Chapter 12: Substitution of New Debtor BGB. The authorization is necessary to give effect to the agreement on the debt assumption as it applies to the creditor. The doctrinal consequences of § 415 BGB are unclear. According to the so-called offer theory (Angebotstheorie) (Heck (1929), p. 226), the agreement between the old debtor and the assuming party creates an obligation on the assuming party to conclude the deal with the creditor. The communication of § 415(1) sentence 2 BGB would, thus, be an offer to assume the debt that the creditor accepts with his consent. However, according to the assignment theory accepted by a majority (see for example Larenz (1987), p. 604; Grüneberg, in Palandt (2012), § 415 no. 1), the assignment then passes through non-authorized parties, in contract, and between old debtor and the assuming party that the creditor then later authorizes (§ 185(2) BGB). In particular, the wording “authorization – ‘Genehmigung’”, and the legislative history (see Mot. II S. 144, Prot I 406 ff, 410 f; Jakobs/Schubert (1978), pp. 846 f, 848, 853) argue against the offer theory in favour of the majority opinion. Against a commonly held view (see for example Flume (1992), p. 547; Nörr/ Scheyhing/Pöggeler (1999), p. 245), this dispute is in no way obsolete because the opposing theories lead to disparate solutions in certain cases (compare Rieble, in Staudinger (2005), § 415 BGB no. 10 f; Stürner, in Jauernig (2011), § 415 no. 3; Meyer-Pritzl, in Schmoeckel (2007), §§ 414–418 no. 22 f.). Thus, according to the offer theory, §§ 145 et seq. BGB applies to an authorization pursuant to § 415 BGB. Further, it potentially requires a particular form to be respected, and has the effect of a contractual acceptance ex nunc. According to the assignment theory, however, the §§ 182 et seq. BGB are applicable. The authorization, however, is not effective ex nunc, but, rather, leads back to the formation of the contract (§ 184(1) BGB), and is free of any formal requirement related to § 182(2) BGB. This even applies in those cases where the contract for the assumption of debt is particularly subject to the formal requirements of § 414 BGB (see under e) et seq.). § 415(3) BGB contains a double interpretative rule. In cases of doubt, the agreed upon debt assumption is linked to an internal assumption of the duty to perform, and extends until the creditor decides on the authorization (§ 415(3) sentence 1 BGB). Likewise, it applies in the case where the creditor refuses the authorization, or does not react to a period fixed by the debtor or the assuming party, pursuant to § 415(2) BGB. c) Prior agreement of the creditor. The case of a prior agreement initiated by the creditor is not explicitly regulated (§ 183 BGB). According to the majority opinion, a prior agreement is permissible and makes the, otherwise, required communication under § 415 BGB redundant (RGZ 60, 416; BGH NJW-RR 96, 194; NJW 98, 1645f; crit. Rieble, in Staudinger (2005), § 415 BGB no. 86). However, it is possible to revoke the agreement before it becomes effective (§ 183 sentence 1 BGB). d) Object of the debt assumption: the (existing) claim. As a matter of principle, any kind of debt can be taken over, independent of whether it is of contractual or legislative origin. The debt can either be a primary or a secondary duty of performance. The claim does not have to be actionable or enforceable. Conditional or future claims can also be the object of a debt assumption (Rieble, in Staudinger (2005), § 414 no. 31 f.). Despite the fact that §§ 414 et seq. BGB (as opposed to § 399 BGB on assignments) do not contain rules on the necessary capacity of the assuming party, assumption is,

667

S. Leible however, barred if the debt requires performance by the debtor, in person. The transfer of the debt fails when the claim would have to change its content (compare § 399 Alt. 1 BGB). This is because the safeguarding of the identity is a pre-condition for every succession. As with all assignments of claims, a debt assumption only has to be definable, and not immediately defined in the contract. It is a matter of interpretation that determines the extent to which the debt assumption applies to additional costs, such as interest, damages for late performance, and expired contractual penalty payments. A partial debt assumption is possible insofar as the performance and, accordingly, the claim, is separable. In this case, the old debtor and the transferee are liable, alongside each other, as partial debtors according to § 420 BGB. It is also possible to combine debt assumption and a partial assumption of debt that results in a scenario where the transferee will be individually liable for a part of the debt, and jointly liable for the rest of the debt, together with the original debtor (compare Rieble, in Staudinger (2005), § 414 nos. 52–54). e) Effective contract on the assumption of debt: formation of contract. aa) Intention to release the debtor. As the creditor loses his original debtor through a debt assumption, and particularly where the new debtor is not solvent, the decision to enter into a debt succession must be unambiguous, but not explicit. This is the case for a contractual declaration pursuant to § 414 BGB, and for a declaration of consent pursuant to § 415 BGB. The courts are not competent to assume an intention to enter into a debt succession; not even in cases where the transferee is obviously the better debtor. In cases of doubt, it must be assumed that a creditor only agreed to a debt assumption that is beneficial to him (BGH NJW 1983, 678; Möschel, in Münchener Kommentar (2007), § 414 no. 3; Larenz (1987), p. 610). An intention to release the debtor from his obligations can be presumed, for example, when the creditor lays a claim against the transferee, fully knowing that the latter made an offer to assume the debt. A creditor’s simple acceptance of the performance of an obligation by the transferee is, however, different. This is due to the fact that the creditor is always allowed to accept the performance of contractual duties from third parties (§ 267 BGB). If the transferee has undertaken to perform in relation to the creditor (assumption of the duty to perform § 415(3) BGB), then he performs as an agent of the debtor (§ 328 BGB). The creditor is not even allowed to refuse the transferee’s performance. Bringing an action, and offsetting it against a claim, is only possible against the transferee, as the new debtor. Both, therefore, indicate the consent of the creditor to the change in debtors (compare Rieble, in Staudinger (2005), § 414 no. 49 with more details). bb) Intention to assume of the third party. It has to be possible to infer from the explanation of the third party that it not only wants to perform, in the debtor’s place, but that it also wishes to owe the debt. Here, too, the mere performance of parts, or the entirety of the debt, is not an expression of an intention to enter into a debt succession. It, thus, has to be distinguished from an assumption of the duty to perform, and the relationship between the debtor and the third party (§§ 415(3), 329 BGB) that gives no rights to the creditor. The third party’s announcement that it will perform, in lieu, of the debtor, could be the communication of a mere assumption of the duty to perform, and does not represent an offer to assume the debt.

668

Chapter 12: Substitution of New Debtor cc) Condition, limitation. Like every assignment, a debt assumption can be subjected to time limitations and conditions. The debt assumption can be joined with an underlying transaction into one and the same causal contract. Such a linkage would have the consequence that every mistake in the underlying transaction would have an effect on the debt assumption. dd) Failures of intent. The debt assumption comes into force by virtue of two concurring declarations of intent. Whether or not they agree is to be determined according to their objective, explanatory value. For example, if the creditor has objectively declared a debt assumption, despite only wanting a partial assumption of debt, or if the transferee was mistaken as to the extent of the debt, the only remaining option is an appeal pursuant to § 119(1) 1st variant BGB. In addition, the transferee’s ability to perform is of essential importance to the creditor. In other words, a mistake regarding this ability is grounds for an appeal pursuant to § 119(2) BGB. Fraud is a different case. In case of a debt assumption pursuant to § 414 BGB, the original debtor is not party to the contract, and thus, becomes a third party according to § 123(2) sentence 1 BGB. If the debtor has deceived the transferee and the creditor into agreeing on a debt assumption pursuant to § 414 BGB, then the deceived party is only authorized to dispute the agreement with the other party to the contract where the other party was , or should have been, aware of the deceit (§ 123(2) sentence 1 BGB) (Möschel, in Münchener Kommentar (2007), § 417 no. 14; Rieble, in Staudinger (2005), § 414 no. 56). In case of a debt assumption pursuant to § 415 BGB, the original debtor is not a third party, and is, itself, a party to the contract. Accordingly, an appeal against the agreement must be explained to him. For example, if he maliciously deceived the transferee, this can later affect his agreement to the contract. With such an appeal, the transferee has destroyed his consent to the contract, and the authorization of the debt assumption that has potentially been given, by the creditor, will have no effect (more specifically Rieble, in Staudinger (2005), § 415 nos. 29–34). If the debt assumption comes about by virtue of a trilateral contract, the maliciously deceiving party is never a third party. The appeal must, therefore, be addressed to both parties to the contract. ee) Power of disposition of the creditor. Because the debt assumption is a disposition for the creditor, the effectiveness of the agreement (§ 414 BGB), or of his consent (§ 415 BGB), depends on whether the creditor possesses a power of disposition. If he makes a disposition as a non-authorized party, then recourse may be had to § 185 BGB in certain circumstances. The authorization, through the authorized party, then makes the disposition effective. ff) Form. As a matter of principle, an assumption of debt is effective without having to respect a specific form. If the underlying obligation is submitted, by statute, to a particular form, then this requirement also applies to the debt assumption insofar as the debtor is to be protected from a particular debt. In such a case, it is important to determine whether the debtor assumes this debt following an obligation transaction (Verpflichtungsgeschäft), or after disposing a debt assumption (verfügende Schuldübernahme).

669

S. Leible The main case arises from § 311b(1) BGB, which aims to protect against the obligation to transfer, or to acquire immovable property. Correspondingly, the provision is applicable to the assumption of such an obligation, but not to the assumption of a purchase price obligation. The same applies to § 766 BGB. This provision aims to protect against a guarantee obligation, and therefore, has to be extended to the assumption of a guarantee obligation (see Rieble, in Staudinger (2005), § 414 no. 60; Möschel, in Münchener Kommentar (2007), § 414 BGB no. 4). Insofar as the formal requirement relates to the causal transaction underlying the assumed debt, and aims to protect the debtor from a certain obligation – for example a gift – this does not apply to the abstract-disposing succession (Rieble, in Staudinger (2005), § 414 no. 61). Consumer protection provisions and, in particular, §§ 491 et seq. BGB, are applicable by analogy due to their protective purpose in circumstances where the relationship between the creditor and the new debtor becomes personal, and the assumed debt falls into the material scope of the respective norms (see Möschel, in Münchener Kommentar (2007), § 414 no. 5; Rieble, in Staudinger (2005), § 414 no. 62). 3. § 416 BGB. Even if, as a matter of principle, the acquirer of a plot of land, can claim an unburdened transfer from the alienator (§ 442(2) BGB), in practice, he often assumes the mortgage covering the plot of land as discounted against the purchasing price. This is linked to the assumption of the personal debt. In an acquisition of a plot of land, § 416 BGB makes the assumption of an obligation over the property that is linked to a mortgage, easier for the acquirer. The requisite authorization, by the creditor, can be assumed to have been given, in the case of silence, pursuant to § 416 BGB (§ 416(1) sentence 2 BGB). This legal fiction does not disadvantage the creditor because he is protected by the mortgage (§ 1113 BGB). The type and content of the communication are determined by § 416(2) BGB, and cannot be altered by agreement. During the period, the authorization, the refusal to give an authorization under § 415 BGB and its third paragraph, remain applicable. This norm presupposes that the alienator of the plot of land is also a personal debtor of the secured claim that is to be assumed. If he is not, other ways have to be found to make a debt assumption possible. This is because § 416 BGB merely serves to clarify § 415 BGB. This norm should not, however, prevent the conclusion of a debt assumption in another way. § 416 BGB is simply not applicable in such a case, and therefore, the alleviation of § 416(1) sentence 2 BGB becomes irrelevant. A debt assumption is, however, possible pursuant to §§ 414, 415 BGB.

Comparison and Evaluation The essential difference between PECL and DCFR, on one hand, and German law, on the other, is in the scope of the requirement to give consent. While a debt assumption with discharging effect is only possible with the consent of all of the three parties involved in the transaction, according to PECL and DCFR, § 414 BGB also allows debt assumptions based only on an agreement between the creditor and the third party assuming the debt. The underlying rationale seems to be that no one should be forced

670

Chapter 12: Substitution of New Debtor into a debt assumption against his will. In the end, this is merely a coherent realization of the principle of freedom of contract, also advocated by a significant number – albeit, not the majority – of German lawyers, and that is attempted to be enforced by virtue of § 337 BGB. Both regimes require the consent of the creditor because a debt assumption can affect the value of his claim. The consent can always be given before and after the debt assumption. It is not convincing, of course, that, in PECL and DCFR, the discharging effect of the agreement between the original and the new debtor depends on a communication by the new debtor (see above). At most, this would be convincing insofar as the prior consent of the creditor is not given. When this consent has been given, it is not, however, understandable why the debt assumption should fail only because of a missing communication by the new debtor. Furthermore, it is doubtful that a debt assumption only becomes effective when the communication is received, and thus, that the communication does not have a retroactive effect on the point in time where the original and the new debtor came into agreement. Legitimate creditor interests that argue against such a retroactive effect do not exist. Because the creditor has already lost the possibility to influence the agreement at the moment he gives his consent, he cannot escape a debt assumption at the moment of receipt of the communication. This means, however, that the communication should also be given ex tunc effect. The concerns regarding the absence of formal requirements contained in secondary legislation in PECL and DCFR have been mentioned above. This shortcoming is reflected in the regulation of the debt assumption. The effet utile of the rules of EU law that bind to this effect need to be accounted for, by giving an extensive interpretation of the secondary norms, such as it is done with the implementation provisions in German law. The question treated by § 416 BGB does not apply to the PECL or the DCFR because neither one applies to the law of immovable property.

Principles of European Contract Law Article 12:102: Effects of Substitution on Defences and Securities (1) The new debtor cannot invoke against the creditor any rights or defences arising from the relationship between the new debtor and the original debtor. (2) The discharge of the original debtor also extends to any security of the original debtor given to the creditor for the performance of the obligation, unless the security is over an asset which is transferred to the new debtor as part of a transaction between the original and the new debtor. (3) Upon discharge of the original debtor, a security granted by any person other than the new debtor for the performance of the obligation is released, unless that other person agrees that it should continue to be available to the creditor. (4) The new debtor may invoke against the creditor all defences which the original debtor could have invoked against the creditor.

671

S. Leible 1. General. The debt assumption pursuant to Article 12:101 PECL is a transaction that operates to transfer a succession into debt, while maintaining its identity (see above). The debtor takes over the original debt, with the same content and accessory rights (e.g., the claim to interest), as they existed before the debt assumption. Article 12:102 PECL regulates the concomitant objections and securities. 2. Objections of the new debtor. a) Rights and objections from the relationship with the original debtor. Article 12:102(1) PECL clarifies that the new debtor cannot oppose the creditor with rights or objections that originate from his relationship with the original debtor. Even a mistake in the debt assumption contract between the original and the new debtor that make the agreement void, or voidable, does not affect the relationship between the new debtor and the creditor. The creditor can proceed against the new debtor even when he knew, or should have known, that the contract between the original and the new debtor was faulty. Thus, the new debtor may not even object to a declared rescission, a declared challenge or the lack of an (effective) agreement between the parties. The debt assumption is, in these senses ‘abstract’. In other words, its effectiveness is independent of the effectiveness of the causal agreement between the new and original debtor. This directly serves the protection of the creditor. He should not have to deal with defects, or particularities of the transaction between the original and the new debtor. This is the only way to protect him from exposure to incalculable risks. However, the separation between the debt assumption, and the underlying causal transaction, cannot be fully upheld. If the original debtor has induced the consent of the new debtor through deceit, then the new debtor can, at least, challenge, the debt assumption contract under Article 4:111. b) Objections arising out of the original debt relationship. Due to the debt assumption, the new debtor receives the same legal position with regard to the assumed debt, as the original debtor. Article 12:102(4) PECL, thus, only states the obvious. As a matter of principle, the debt assuming party can, thus, have recourse to all objections against the creditor that the original debtor could have had against the creditor. For example, he can have recourse to the objection of an exceeded time limitation, or a deferment of payment. The decisive moment for the validity of an objection is the formation of the contract, by virtue of the assumption of debt by the new debtor. The new debtor can have recourse to all objections that the original debtor could have had recourse to, at this point in time. It is even sufficient for these objections to originate from events that occurred at this point, even if the objections only arise later. The assuming party can also have recourse to an extended time limitation that occurred later, if this provision was specified in the contractual relationship. Possible objections that may be raised by the original debtor raise after the effective debt assumption, and thus, after the consent of the creditor to the debt assumption, cannot be used by the new debtor. This is because he has not taken over this legal position. Further limitations result from the fact that only the debt, and not the contract, were assumed. Thus, the new debtor does not have the right to dispose of the claim

672

Chapter 12: Substitution of New Debtor without the consent of the original debtor. Further, he is barred from unilaterally withdrawing from the contract. In particular, he cannot use his right to alter the legal relationship without the consent of the original debtor because he has only assumed the obligations of the original debtor, but has not become a direct party to the contract. In addition, the debtor can, of course, not dispose of the original debtor with an existing claim. Furthermore, the transferred debt would be erased from the property of the original debtor. c) Objections from the relationship of the new debtor with the creditor. Article 12:102 PECL does not regulate all objections that is exist between the new debtor and the creditor. Such objections can, of course, apply subject to general rules. Thus, the assuming party can, for example, have recourse to a retroactively granted deferment of payment etc. 3. Objections of the original debtor. Article 12:102 PECL does not deal with remaining objections of the original debtor. Because the party assuming the debt only assumes the individual debt, but not – as in the assumption of a contract –the debt relationship in a broader sense, the original debtor retains all rights that arise from his position as a party to the contract. This includes, for example, all rescission and resignation rights. A pre-existing power to offset ceases due to lack of reciprocity. The original debtor, however, will not normally be interested in this because the debt that would be erased from his property is not one that he would continue to be liable for. 4. Situation of the (personal or material) securities for the debt. A distinction has to be made between securities that are offered by the original debtor, and securities that are offered by the third party. a) Securities offered by the original debtor. The discharging effect of the change of debtors extends to securities that the original debtor has offered to the creditor to fulfil his obligations (Article 12:102(2) PECL). This is due to the accessory character of securitization rights, and the interest of the original debtor to be wholly discharged of his obligations. An interest of the original debtor that is worthy of protection does not exist when the security pertains to an item of property that was transferred to the new debtor as part of the transaction between him and the original debtor. In such cases, they are generally released of their obligations, too. Article 12:102(2) PECL, thus, specifies that in this case, the securities remain intact. This can have practical significance in the case of a retention of the title to the goods for which the original debtor owes part of the purchase price to the creditor. b) Securities offered by third parties. Article 12:102(3) PECL applies to third parties that have offered a security, such as a guarantee or a surety, for the performance of the contractual debt by the original debtor. If the securities offered by third parties were to remain intact, in the case of a change in debtor’s legal position, then third parties would be affected. This is because they would be exposed to the risk of being held liable more readily because the new debtor is less solvent, or less willing to perform. Another rule would appear too close to a contract, at the expense of a third party. As the change of debtors takes place without the consent of the third party offering the security, these third party have to be protected. This is done through Article 12:102(3) PECL. At the moment the change of debtors takes place, the securities

673

S. Leible offered by third parties for the contractual duties are erased. The opposite is only true if the offerer of the security has already clarified, at the time he offered the security, that the security should remain valid, regardless of a change of debtors. This will, however, rarely be the case due to the list of incalculable risks involved. Furthermore, the third party can, of course, reclaim the security at the moment the change of debtors takes place (Article 12:102(3) Hs. 2 PECL). If neither of these is the case, the security will, automatically, cease to exist, and can, at best, be offered anew. It is self evident that the creditor can have recourse to all securities that the debtor has offered him prior to the assumption of the debt, and to all securities that the debtor has offered during or after the debt assumption (Article 12:102(3) Hs. 1 PECL).

Draft Common Frame of Reference Article III. – 5:205: Effects of complete substitution on defences, set-off and security rights (1) The new debtor may invoke against the creditor all defences which the original debtor could have invoked against the creditor. (2) The new debtor may not exercise against the creditor any right of set-off available to the original debtor against the creditor. (3) The new debtor cannot invoke against the creditor any rights or defences arising from the relationship between the new debtor and the original debtor. (4) The discharge of the original debtor also extends to any personal or proprietary security provided by the original debtor to the creditor for the performance of the obligation, unless the security is over an asset which is transferred to the new debtor as part of a transaction between the original and the new debtor. (5) Upon discharge of the original debtor, a security granted by any person other than the new debtor for the performance of the obligation is released, unless that other person agrees that it should continue to be available to the creditor. Article III. – 5:207: Effects of incomplete substitution (1) The effects of an incomplete substitution on defences and set-off are the same as the effects of a complete substitution. (2) To the extent that the original debtor is not discharged, any personal or proprietary security provided for the performance of that debtor’s obligations is unaffected by the substitution. (3) So far as not inconsistent with paragraphs (1) and (2) the liability of the original debtor is governed by the rules on the liability of a provider of dependent personal security with subsidiary liability.

674

Chapter 12: Substitution of New Debtor Article III. – 5:209: Effects of addition of new debtor (1) Where there is a contract between the new debtor and the creditor, or a separate unilateral juridical act by the new debtor in favour of the creditor, whereby the new debtor is added as a debtor, the new debtor cannot invoke against the creditor any rights or defences arising from the relationship between the new debtor and the original debtor. Where there is no such contract or unilateral juridical act the new debtor can invoke against the creditor any ground of invalidity affecting the agreement with the original debtor. (2) So far as not inconsistent with paragraph (1), the rules of Book III, Chapter 4, Section 1 (Plurality of debtors) apply. 1. General. Contrary to the PECL, the DCFR also distinguishes the effects of a substitution between a complete and an incomplete substitution (Articles III.-5:205; III.-5:207 DCFR). 2. Effects of complete substitution. The rule concerning the effects of a complete substitution in Article III.-5:205 DCFR corresponds largely to Article 12:102 PECL. Only Article III.-5:205(2) DCFR, which expresses, for the sake of clarity, that the new debtor cannot exercise any right of set-off available to the original debtor against the creditor in order to effect set-off, has no corresponding rule in the PECL itself. Nevertheless, this is dealt with in Comment D to Article 12:102 PECL (Lando et al. (2003), pp.131-132). Apart from that, the PECL and the DCFR rules differ only in the order of their paragraphs. 3. Effects of incomplete substitution. Pursuant to Article III.-5:207(1) DCFR, the effects of an incomplete substitution on defences and set-offs are basically the same as the effects of a complete substitution. Since the original debtor, however, retains a subsidiary liability for the case of non-performance by the new debtor, any personal or proprietary security provided for the performance of the original debtor’s obligations is unaffected by the substitution (Article III.-5:207(2) DCFR). Finally, Article III.-5:207(3) DCFR determines that the original debtor has become a provider of a dependent personal security with subsidiary liability (cf. Book IV. Part G. Chapter 2 DCFR). Paragraph 3 is only a default rule which can be modified by agreement between the parties. 4. Effects of addition of a new debtor. Contrary to the PECL, the DCFR includes rules concerning the addition of a new debtor (cf. Article 12:201 PECL). So far as it is not inconsistent with Article III.-5:209(1) DCFR, the general effect of such an addition of a new debtor is expressed pursuant to Article III.-5:209(2) DCFR as a joint liability between the new and the original debtor. Thus, the rules of Book III, Chapter 4, Section I (Plurality of debtors) apply.

675

S. Leible German Law § 417 BGB: Objections of the transferee (1) The transferee may raise against the obligee the objections that arise from the legal relationship between the obligee and the previous obligor. He may not set off a claim to which the previous obligor is entitled. (2) The transferee may not derive objections relating to the obligee from the legal relationship between the transferee and the previous obligor on which the assumption of debt is based. § 418 BGB: Extinction of security rights and preferential rights (1) As a result of the assumption of debt, the suretyships and security rights created for the claim are extinguished. If there is a mortgage or a ship mortgage for the claim the same thing occurs as if the obligee waives the mortgage or the ship mortgage. These provisions do not apply if the surety or the party that owns the mortgaged object at the time of the assumption of debt gives his consent. (2) A preferential right linked to the claim in case of insolvency proceedings may not be asserted in the insolvency proceedings relating to the assets of the transferee. 1. General. § 417 BGB deals with the objections that a new debtor can raise to oppose a claim for performance, by the creditor. This norm merely states the obvious by stating that an obligation does not become free of objections merely because it is transferred to another debtor. The creditor is not supposed to obtain legal advantages because of the debt assumption. The transfer of the objection is the consequence of an act of succession. If, and because, the debt is transferred as an identical debt, all available defences against it remain available, as a matter of principle. The assuming party, thus, assumes the position of the old debtor, as it is. Thus, the assumption neither leads to a strengthening, nor a weakening, of the debt (vgl. Mot II 146). Neither is an implied waiver of objections linked to a debt transfer, as such; even if the assuming party knew of the existence of the objection before the assumption. This is because the intention of the parties is exclusively aimed at the debt succession while maintaining the identity of the debt. 2. Objections of the new debtor. a) Objections of the new debtor against the debt assumption. § 417 BGB does not mention those objections that address the effectiveness of the abstract-dispositive assumption contract. That these objections pertain to the assuming party is presupposed as self-evident and is, as a matter of principle, the general opinion amongst scholars (see only Rieble, in Staudinger (2005), § 417 nos. 7–10; Möschel, in Münchener Kommentar (2007), § 417 no. 14). The assuming party can, thus, oppose a claim by the creditor, by alleging that the act of succession did not come into force because the assumption contract between the debtor and the creditor

676

Chapter 12: Substitution of New Debtor (see § 414 BGB), or rather, the debt assumption contract concluded with the original debtor as authorized by the creditor (see § 415 BGB) are not effective. If § 416 BGB applies, the assuming party can then rely on the fact that the fiction of authorization does not come into play (Rieble, in Staudinger (2005), § 417 nos. 7–10; Möschel, in Münchener Kommentar (2007), § 417 nos. 14–17). b) Objections by the new debtor related to the claim. aa) From the original debt obligation. Pursuant to § 417(1) sentence 1 BGB, the assuming party can have recourse to all objections that were available to the original debtor. The relevant consideration is the conclusion of the contract for the debt assumption. It also regards § 415 BGB because the authorization has a retroactive effect (§ 184(1) BGB). At this point, the debt assumption becomes effective. The assuming party receives all objections that the old debtor could have had recourse to at this point, including those that were potentially available at this time, and only materialized later. The assuming party cannot, however, have recourse to objections that the old debtor only received after the assumption of the contract. All powers not attached to the claim, but instead attached to the position of the party remain available to the original debtor, such as rights to challenge, revocation, reduce, and termination. Because the debt assumption is only a succession in view of the claim, it is, therefore, not regarded as the underlying debt obligation in the broader sense. The assuming party becomes debtor but not, however, a party to the contract. With the succession, the claim and the underlying debt obligation are separated, but both remain linked. Thus, the claim is erased by a challenge of the underlying debt obligation by the original debtor, and the declaration of a withdrawal, a revocation, a termination, or the conclusion of an annulment contract erase the foundation of the debt. As soon as this has happened, the assuming party can rely on this objection to erase that right. It is questionable whether the mere existence of these rights of the original debtor, and thus, the mere possibility of enforcing them, give a right to an assuming party to a dilatory plea (by analogy with § 770(1) BGB). The dominant opinion, therefore, rightfully opposes this. By contrast, with a surety allowing the creditor to rely on the main debtor, in the case of a debt assumption, the debtor cannot rely on anyone during the interim period (Möschel, in Münchener Kommentar (2007), § 417 no. 5 with more details). Highly personal objections such as those found, for example, in §§ 519, 1629a, 1975 BGB, are not capable of succession. They cannot be relied on by the assuming party because such limitations on liability relate only to a question of property in relation to the original debtor (Rieble, in Staudinger (2005), § 417 no. 16 with more details). The right of retention found in § 273 BGB is also not transferable because it pertains to the original debtor as the creditor in the connected opposing claim. bb) Of his own right. Besides the objections assumed from the original debtor, the assuming party can also rely on original objections of his own, such as arising from a deferment agreed by him with the creditor etc. c) Objections arising from the causal transaction. aa) Causal transaction between assuming party and debtor (§ 417(2) BGB). § 417(2) BGB prohibits the assuming party from encumbering the creditor with an objection arising out of the causal relationship

677

S. Leible with the debtor. The rule relies on two ideas. On one hand, it relies on the abstract nature of the debt assumption, which is effective independent of its purpose as a material succession transaction. On the other hand, it relies on the relativity of the debt obligations because the legal cause of the debt assumption is a matter unrelated to the creditor (Rieble, in Staudinger (2005), § 417 no. 20 with more details). It is debated whether § 417(2) BGB additionally protects the creditor from a risk of ineffectiveness following the fundamental transaction, by using an exclusion of objections. The wording and legislative history of the norm argue against this. § 417(2) BGB does not limit the private autonomy of the original debtor and the assuming party for the benefit of the creditor. Further, in particular, it does not prohibit the piercing of the abstractness of the act of disposal by arguing for the unity of the transaction, or by suggesting that they are conditional upon one another. If the creditor does not want to bear the risks involved in a debt assumption pursuant to § 415 BGB, then he can refuse to give his authorization and limit himself to a debt assumption pursuant to § 414 BGB. bb) Causal transaction between the assuming party and the creditor. Although it is rare, in practice, it is possible that the underlying causal transaction of the debt assumption is between the creditor and the assuming party. The debt succession remains effective because of its abstractness. If the underlying transaction suffers from a defect, then the assuming party can ask the creditor to transfer the debt back, and the assuming party can acclaim for unjust enrichment to the creditor’s claim for performance (arg. § 821 BGB). 3. Elimination of the power to offset for the assuming party (§ 417(1) sentence 2 BGB). The assuming party cannot make a claim that pertains to the original debtor. This follows from the reciprocity of the claims required by § 387 BGB. In the case of an existing offsetting, each succession of the claim, or the debt, leads to the elimination of the existing power to offset. Additionally, the assuming party lacks any kind of power of disposal concerning the claims of the original debtor. § 417(1) sentence 2 BGB does not state anything about the offsetting declared by the original debtor (or the creditor). It eliminates the claim, in order for the debt assumption to be ineffective. Obviously, the assuming party can rely on this (Mot II 146). 4. Rights of securitising and preferential rights, § 418 BGB. § 418 BGB regulates the state of the securitising and preferential rights linked to the claim, and protects third parties from a change, in debtor, with disadvantageous consequences. In the same way that §§ 414, 415 BGB offer the creditor a right of consent, and like the respective debtors ability to perform determines the risk that the creditor is exposed to, the security offerers named in § 418(1) BGB also offer a right of consent. This protects them from being held liable for the assuming party who is unable to perform the obligation, even though they only took over the risk of non-performance when the security was offered. The opposite is only true if the security offerer agrees to the maintenance of the securities (§ 418(1) sentence 3 BGB). The disadvantage that the creditor suffers is the consequence of his free choice to release the original debtor from his liability. The reference made in § 418(1) sentence 2 BGB to the rules on waiver of a mortgage is illuminating to this extent. The consent

678

Chapter 12: Substitution of New Debtor of the creditor to the debt assumption has the effect of a waiver of his securities (see Rieble, in Staudinger (2005), § 418 no. 3). a) Securities (Paragraph 1). The surety and the pledge named in § 418(1) sentence 1 BGB also erase a mortgage. The reference in § 418(1) sentence 2 BGB merely clarifies that the mortgage is not eliminated without replacement, as would be the case in an annulment (§ 1183 BGB), but does become a land charge belonging to the owner (Eigentümergrundschuld). It is questionable if and to what extent § 418(1) BGB can be applied by analogy to the securities not named therein. The starting point is that the provision is directed at contractually founded accessory securities that continue to be liable for the same claim – because of the maintenance of the identity of the transferred debt – even if it is aimed at a different debtor. § 418 BGB loosens this accessory character. § 418(1) BGB is, thus, applicable, by analogy, to a land charge securing a debt (Sicherungsgrundschuld), and a transfer of property in movables securing a debt (Sicherungsübereignung) (see Möschel, in Münchener Kommentar (2007), § 418 nos. 2 and 5). It is unclear whether statutory securities fall under § 418(1) BGB because they are not created for this claim in the same sense of § 418(1) sentence 1 BGB. An analogous application is advocated by many if the interests of the security offerer are the same; especially when he is free to choose the debtor, like in § 566(2) BGB (Möschel, in Münchener Kommentar (2007), § 418 no. 2; Larenz (1987), p. 609 footnote 16). By contrast, the securities remain valid, if the security offerer consents (§ 418 (1) sentence 3 BGB) to the continuous liability of the security for the debt of the assuming party. According to the wording, only a prior consent is possible (§ 183 BGB), but not, a later authorization (§ 184 BGB). This is also due to reasons of legal certainty because, otherwise, the discharging of the security would remain in an interim state until the creditor is satisfied (see Rieble, in Staudinger (2005), § 418 no. 22; Möschel, in Münchener Kommentar (2007), § 418 no. 8). § 418(1) BGB is also applicable if the original debtor is the offerer of the security while, contrary to Article 12:102(2) PECL, no distinction is made according to the type of the security. The same is true for a prior security offered by the assuming party (contrary to Article 12:102 PECL). This results from the wording and the legislative history of the norm. The legislator deleted precisely the limitation that the security had to be offered by a third party (Jakobs/Schubert (1978) p. 877 f.; Rieble, in Staudinger (2005), § 418 nos. 25–27). b) Preferential insolvency rights, § 418(2) BGB. § 418(2) BGB protects the remaining creditors of the assuming party. Rights of preferential performance in a case of insolvency are so specific to the debtor that the necessary requirements have to be fulfilled by every debtor. They are not, therefore, transferred to the assuming party (see Rieble, in Staudinger (2005), § 418 no. 29).

Comparison and Evaluation 1. § 417 BGB corresponds roughly to Article 12:102 (4) PECL, and § 418 BGB applies to Article 12:102(3) PECL. In their substance, the provisions of the PECL and the DCFR

679

S. Leible are equivalent to the rules of German law. That is not very surprising. The fact that the new debtor has the same legal position as the original debtor, regarding the assumed debt, results from the very ‘nature’ of the debt assumption, which is defined as a contractual succession into the debt while maintaining the character of the debt. Additionally, it is self-evident that the debtor can use objections resulting from his relationship with the creditor to oppose the latter. This rule is, therefore, not mentioned specifically in either of the regulatory regimes. The rules also coincide, to the extent that, the assuming party cannot oppose the creditor with any objections that arise out of the former’s agreement with the debtor. Due to the principle of abstraction, this is only true in German law for the causal transaction underlying the transfer. To the extent that the material transfer transaction is not effective, the third party can, however, use this to challenge the creditor. This is because, in that case, he has not actually assumed the debt. Because there is only a debt, and not a contract assumption, all powers attached to the party position, but not to the claim, remain with the original debtor. 2. The situation of the securities offered for the debt is regulated in broadly the same way by PECL, DCFR and German law. Because a change of debtors can have negative consequences for the security offerer, the offered securities only continue to exist with his consent. The more specific German provisions are simply due to the lesser regulatory volume of the PECL and the DCFR, which do not deal with either rights in immovable property or with insolvency law.

SECTION 2: TRANSFER OF CONTRACT Principles of European Contract Law Article 12:201: Transfer of Contract (1) A party to a contract may agree with a third person that that person is to be substituted as the contracting party. In such a case the substitution takes effect only where, as a result of the other party’s assent, the first party is discharged. (2) To the extent that the substitution of the third person as a contracting party involves a transfer of rights to performance (‘claims’), the provisions of Chapter 11 apply; to the extent that obligations are transferred, the provision of Section 1 of this Chapter apply. 1. General. Article 12:201 PECL regulates the transfer of contract; specifically, the transmission of the position as a party. Transfer of contract means that, by virtue of a contract, a party is discharged from an existing contractual relationship, and in his place comes a third person as a party to the contract. Due to this, all existing rights and obligations, benefits and burdens, arising from the contract apply to the discharging party. Correspondingly, the former party loses all his rights and obligations.

680

Chapter 12: Substitution of New Debtor The formation of a majority of debtors, through contract extension, is not covered by Article 12:201 PECL. There is a practical need for such a change of party in the entire obligation; especially in business acquisitions and in continuing obligations, such as a contractual transfer of contracts for rent, lease, loan, labour, beer supply or subscription. 2. Demarcation. a) Debt Assumption. The assumption of debt is only dealing with the position of the debtor, in a strict sense. The new debtor takes the place of the original obligor, however, only with respect to concrete claims that result from the contract. The transfer of the contract, however, leads to a transfer of the totality of all the claims and rights of an obligation. The new party to the contract, in place of the old party, is not only obliged from the obligation, but, at the same time, entitled. b) Novation. Unlike the dissolution of contract with subsequent new formation (novation), there is succession in the case at issue. Novation leads to the new conclusion of a contract, by destroying the identity of the obligation. This has an effect on objections and defences (Einwendungen and Einreden) against the debt. A succession upholds the identity of the obligation, and leads to the preservation of objections and defences. Novation, however, leads to their loss because the objections and defences from the previous obligation only continue with the new obligation where this is specifically agreed. Both legal institutions shall be separated from each other, by interpretation. The issue at stake is whether there has been a change of essential parts of the original agreement, or only a change of mere side agreements. The latter does not prevent the identity of the obligation. In this case, there is a transfer of the contract. 3. Regulation. Under Article 12:201(1) PECL, each party to a contract may agree with a third person that that person is to be substituted as the contracting party. However, the substitution takes effect only where there is an assent of the other party to the contract (Article 12:102(1) sentence 2). The consent can be given, in advance, or afterwards. Although not specifically mentioned, a transfer of contract based on a trilateral agreement is also possible permitted. Where there is no consent, the transfer is void. In this case, the effect of the agreement between the other party and the third party is in question. While one can certainly assume that there is an internal obligation to indemnify the other, in case of a failed assumption of debt, the opposite is true in the case of a failed transfer of contract. In this instance, the transferee did not just want to assume a burden because of the transfer of contract, but to acquire rights at the same time. A reinterpretation of the failed transfer of contract, in a bunch of assignments of rights and assumption to perform the debtor’s obligation, (‘Erfüllungsübernahme’) should only come into consideration in exceptional cases. However, in any case, it is possible for the first party to separately assign rights to third parties because the consent of the debtor is not required. While there is no debt assumption without the consent of the other parties (see Article 12:101 PECL), the performance of these duties can, however, be agreed upon with the third party. According to Article 8:107 PECL, the party then remains liable for the orderly performance. A modification of the contract is more than a combination of assignment and debt assumption. It is a unitary transaction; not a simple package of single assignments of

681

S. Leible claims and debt assumptions. The contract to be assumed cannot be reduced to its constituent parts because it is more than the sum of its contractual parts. Rights to alter the legal relationship and accessory duties are transferred to the new contractual party, which would not be possible in the case of a bundled individual transfer of the claims. To the extent that the replacement of the existing contractual party, through a third party, contains the transfer of claims and obligations, nothing argues against applying the provisions on the disposal of obligation or the debt assumption. This is exactly what is provided for by Article 12:201(2) PECL.

Draft Common Frame of Reference Article III. – 5:302: Transfer of contractual position (1) A party to a contractual relationship may agree with a third person that that person, with the consent of the other party to the contractual relationship, that that person is to be substituted as a party to the relationship. (2) The consent of the other party may be given in advance. In such a case the transfer takes effect only when that party is given notice of it. (3) To the extent that the substitution of the third person involves a transfer of rights, the provisions of Section 1 of this Chapter on the assignment of rights apply; to the extent that obligations are transferred, the provisions of Section 2 of this Chapter on the substitution of a new debtor apply. Apart from minor changes that do not have a bearing on substance, the rule corresponds to the PECL. The title expresses more clearly that it only and specifically concerns the exchange of one contractual party.

German Law Art. 2 GG [Personal freedoms] (1) Every person shall have the right to free development of his personality insofar as he does not violate the rights of others or offend against the constitutional order or the moral law. (2) […] § 311 BGB: Obligations created by legal transaction and obligations similar to legal transactions. (1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract between the parties is necessary, unless otherwise provided by statute. (2)–(3) […]

682

Chapter 12: Substitution of New Debtor 1. General. German civil law acknowledges a legal subrogation of a contract only as a consequence of transfer of immovable property in the area of tenancy law, according to §§ 566, 581(2) BGB, and as a consequence of a transfer of business in labour law according to § 613a BGB (for further examples in civil law, see Rieble, in Staudinger (2005), § 414 no. 93). However, the BGB does not expressly provide for the possibility to transfer a contract, by a transaction of the parties (gewillkürter Vertragsübergang). According to the concept of the Civil Code, only claims and debts can be transferred, but not the contract as a whole. In the legislative procedure leading to the BGB, it was assumed that assignment of claims and assumption of debt for succession were sufficient, and referred the parties to a pooling of assignments and assumptions of debts or alternatively, to the exchange of a party by a termination agreement and conclusion of a new contract – similar to the ‘debt assumption’ by novation under Roman law (Rieble, Staudinger (2005), § 414 no. 94). However, it is, by now generally recognized that the parties may – under the principle of freedom of contract – also agree on a transfer of the contract, as the legal successor to the overall position of a Party (cf. Nörr/Scheyhing/Pöggeler (1999), pp. 180–184; Rieble, in Staudinger (2005), § 414 no. 95 with more validation). In addition, and in contrast to the PECL and the DCFR, a succession into a statutory obligation, for instance, due to ‘negotiorium gestio’ or delict, by a deliberately chosen transfer of contract, is also considered as admissible. The transfer of the contract leads to a change in the contractual relationship and is therefore a disposing act (Verfügungsgeschäft). The underlying obligation (Verpflichtungsgeschäft) usually arises from the contract between the transferor and the transferee of the contract. It is considered to be the causa for the transfer. 2. Agreement on assumption of contract. a) Multilateral Transaction. A transfer of contract can be affected by trilateral contract, or by agreement between two parties with the consent of the third party (cf. Möschel, in Münchener Kommentar (2007), Vor § 414 no. 8; Larenz (1987), p. 618 footnote 43; Nörr/Scheyhing/Pöggeler (1999), p. 191). Thus, the involvement of all three parties is always required. The approval of the third party may be declared prior to the agreement (consent) or subsequent to the agreement (ratification) (§§182–184 BGB). As a measure of precaution, it is also possible to already give consent in the main contract. The transfer of contract fails if one of the parties refuses to give its consent. The legal concept of § 415(3) BGB, according to which it can be assumed from a failed debt assumption that, in case of doubt, the transferee is obliged to the obligor to satisfy the obligee in good time, cannot be transferred to a failed contract transfer (vgl. Rieble, in Staudinger (2005), § 414 no. 114 with more validation). The transferee of the debt, in the sense of § 415 BGB, only wanted to accept one obligation, which is why a commitment to the debtor to satisfy the obligee would, therefore, be a ‘minus’. A transfer of contract gives the acquiring party, alongside his duties, rights, which is why its failure cannot lead to the internal transfer of only the duties. Furthermore, a reinterpretation of the failed contract transfer into a bunch of assignments of rights and ‘contractual undertakings to perform the obligation of another’ (Erfüllungsübernahme)

683

S. Leible pursuant to § 415(3) BGB is only possible in exceptional cases (cf. e.g., Nörr/ Scheyhing/Pöggeler (1999), p. 196). The extent of the transfer of the contract can be limited. The parties may agree that only certain, well-defined parts of the contractual rights and obligations shall be transferred to the transferee. The borderline to (bundled) assignments and debt assumption must be carried out through the interpretation of the agreement. In this case, it is determined whether a change of the parties is intended, and leads to a splitting of the contract, or is just a splitting of certain obligations (Rieble, Staudinger (2005), § 414 no. 105; Möschel, in Münchener Kommentar (2007), Vor § 414 no. 7). b) Form. aa) The agreement to transfer a contract is, basically, not subject to any formal condition. The contrary might be true if the main contract contains form requirements. In this case, it depends on whether the relevant formality is intended to protect only against the contractual transaction (Verpflichtungsgeschäft), or merely against the corresponding obligation of the consumer. For example, § 311b (1) BGB precisely concerns the performance (Verfügung) because the transfer of contract leads to the very same commitment for the contractor, which § 311b BGB seeks to protect (Nörr/Scheyhing/Pöggeler (1999), p. 196 f.; Rieble, in Staudinger (2005), § 414 no. 116). In the case of the contract, by consent (of the remaining part), § 182 (2) German Civil Code is relevant. Therefore, the consent or authorization of the assignment of a main contract that is submitted to a particular form, is not itself subject to any condition as to form. This leads, of course, to the fact that, in economically identical situations, formalities of a statement depend on the chosen legal construction. This does not appear plausible (cf. Nörr/Scheyhing/Pöggeler (1999), p. 196 f.; Röthel/Heßeler (2008), pp. 1001, 1003). Thus, a teleological reduction of § 182(2) BGB is necessary. bb) The same problem arises with regard to the transfer agreement. In this event, a distinction must be made. Is the consumer who accesses to the contract, a party on the trilateral agreement of the transfer of contract, and where any of his partner are businessman, rules on consumer protection are applicable. In case of the consent model, the consumer protection is, of course, no longer present provided that the consumer gives approval (§ 182(2) BGB). Again, a teleological reduction of the rule is necessary. cc) A form requirement for alteration of contract, provided by the main contract, also comprises the assumption of contract.

Comparison and Evaluation The provisions of the PECL and the DCFR are mainly consistent with the legal situation in Germany. However, PECL and DCFR have the advantage of greater legal certainty, whereas the transfer of the contract under German law, though widely accepted, has not been regulated explicitly. The lack of consideration of consumer-friendly form requirements can be regarded as a shortcoming of PECL and DCFR, as is already the case in assumption of debt.

684

CHAPTER 13

Set-Off D. Looschelders & M. Makowsky

General Introduction. If two persons owe each other obligations of the same kind, especially the payment of money, it would be impracticable to mutually perform these obligations. In this situation, set-off allows a simplified settlement. The mechanism can be explained by a simple example: A has a claim of EUR 5,000 against B. B on his part has a claim of EUR 4,000 against A. If B declares set-off, both claims expire to the amount of EUR 4,000. As a result B must only pay EUR 1,000 to A. Accordingly, the Draft Common Frame of Reference (DCFR) prepared by the Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group) defines set-off as ‘the process by which a person may use a right to performance held against another person to extinguish in whole or in part an obligation owed to that person’ (Article III.-6:101(1)). Nevertheless, set-off is not only based on practicability in sense of an easier performance of opposite claims. It is also traditionally founded on the idea of fairness and equity. The creditor of a claim acts against good faith if he tries to enforce his claim without regard to the fact that he has to perform a claim due to the opposing party, too (cf. Berger (1996), pp. 61 et seq.). Furthermore, set-off aims to protect the creditor of a claim by giving him the opportunity to enforce his claim unilaterally without a trial and without regard to the financial capacity of the opposing party. This is the so called enforcement function of set-off (see Article 13:101, German Law, no. 1). The decisive question is how far the enforcement function shall be granted with special regard to the interests of the other party. Therefore, the rules on set-off have to provide a fair reconciliation of the interests of both parties. The PECL regulate set-off in Chapter 13 (Article 13:101 to Article 13:107). In German law the central provisions for set-off can be found in the §§ 387 et seqq. of the German Civil Code (BGB). There are, however, other relevant regulations elsewhere in the BGB (e.g., §§ 215, 244, 366, 367 BGB) and the Code of Civil Procedure (ZPO) as well (e.g., §§ 145, 302 ZPO). The DCFR regulates set-off in Chapter 6 of Book III (Article 6:101 to Article 6:108). In the main, the provisions of the Principles for set-off have

685

D. Looschelders & M. Makowsky been adopted with only slight deviations in wording. Therefore, the following analysis of the Principles’ provisions also applies to those of the DCFR. The DCFR has added one more provision, namely Article III.-6:101 DCFR which defines set-off and the scope of the provisions. Another modification has been made in Article III-6:102 (c) DCFR regarding the requirements of set-off. The Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law (COM (2011) 635 final) does not address the question of set-off. According to Recital 27 of the proposal, this issue is governed by the pre-existing rules of the national law, which is applicable under the Rome I Regulation (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations). In contrast to the PECL and the DCFR, the proposal also contains no provision according to which the limitation of a claim does not prevent set-off. This problem needs to be solved by the applicable national law (crit. Looschelders (2012), 581, 691). The legal institution of set-off is recognized in the English common law as well as in the continental European law (cf. Zimmermann (1999), p. 708 and id. (2002b), pp. 18 et seq.). Terminologically six Member States of the EU use a word deriving from the latin word ‘compensatio’, e.g., ‘Kompensation’ in Austria as an alternative term to ‘Aufrechnung’; ‘compensation’ in France or ‘compensation’ in the traditional Scottish terminology (cf. Zimmermann (2002b), p. 21). The Principles, however, resort to ‘set-off’ in its European legal terminology. This prevents misunderstandings especially with English lawyers who have a different understanding of the term ‘compensation’ (cf. Zimmermann (1999), p. 709). From a comparative view set-off raises three general questions. First, the question is whether set-off is a substantive or a procedural device. Second, it has to be discussed whether set-off effects ex lege or needs to be declared by one party. Third, in case there is a need for such a declaration, it is questionable whether the claims expire from the time set-off is declared or with a retrospective effect. With regard to the first two questionable points the German law is in accordance with the Principles. Referring to question three, there is a fundamental divergence between the two (see Article 13:106 PECL and § 389 BGB).

Principles of European Contract Law and DCFR Article 13:101 PECL: Requirements for Set-off If two parties owe each other obligations of the same kind, either party may set off that party’s right to performance (‘claim’) against the other party’s claim, if and to the extent that, at the time of set-off, the first party: (a) is entitled to effect performance; and (b) may demand the other party’s performance.

686

Chapter 13: Set-Off Article III. – 6:101 DCFR: Definition and scope (1) ‘Set-off’ is the process by which a person may use a right to performance heldagainst another person to extinguish in whole or in part an obligation owed to that person. (2) This Chapter does not apply to set-off in insolvency. Article III. – 6:102 DCFR: Requirements for set-off If two parties owe each other obligations of the same kind, either party may set off that party’s right against the other party’s right, if and to the extent that, at the time of set-off: (a) the performance of the first party is due or, even if it is not due, the first party can oblige the other party to accept performance; (b) the performance of the other party is due; (c) each party has authority to dispose of that party’s right for the purpose of the set-off. 1. General. The Principles consider set-off as a matter of substantive law, not as a procedural device. If the requirements of Article 13:101 PECL are fulfilled and one party declares set-off, the opposing obligations are discharged (Article 13:106 PECL). Any subsequent action filed by either of the parties has to be dismissed as unfounded, as their claims have ceased to exist. The term ‘claim’ stands for the right to performance of an obligation (cf. Lando et al. (2003), Introduction to Part III, xvii). In the context of set-off, the claim of the party declaring set-off is usually called cross-claim, the claim of the opposing party is called principal claim. Despite of the substantive nature of set-off, the Principles allow the defendant to declare set-off in the course of legal proceedings. In this case, however, it is necessary that such a plea is admissible under the applicable rules of civil procedure, too. If set-off is allowed in the course of legal proceedings, it has an immediate effect on the substantive legal status which has to be considered by the judge in the current trial. If set-off is not allowed for procedural reasons, it has no effect on the substantive legal status. Therefore, the claim can still be asserted in another trial (see Lando et al. (2003), p. 139). 2. Requirements for set-off. Mutuality. Set-off can only be taken into consideration if the claims exist between the same two parties. From this requirement, Comment B (1) in Lando et al. (2003), pp. 139–140 draws the conclusion that a surety cannot set off a personal claim against the creditor with the creditor’s claim against the main debtor. Furthermore, the Principles demand that the claims have to exist in the same capacity or in the same right: therefore, there can be no set-off between a debt owed by a person as an individual and one due to that person as a representative or fiduciary; the latter debt is regarded as being owed to the person on whose behalf or benefit has been acted. An exception to the requirement of mutuality exists where a claim has been assigned. According to Article 11:307(2) PECL the debtor can assert set-off rights

687

D. Looschelders & M. Makowsky against the assignee which would have been available against the assignor. But in this case the claim against the assignor must have existed at the time when a notice of assignment reached the debtor, or must be closely connected with the assigned claim. Further, the Principles take the view that a surety should also be protected against a claim by the creditor, if the creditor can declare set-off against a claim of the main debtor and vice versa. But Comment B (1) also admits that this question has to be left to a set of principles dealing with suretyship (see Lando et al. (2003), p. 139–140). b) Obligations of the same kind. Further, the Principles require the opposite obligations to be of the same kind. Whether this requirement is fulfilled depends on the state of the obligations at the time when set-off is declared. Typically, a money claim is set off against another money claim. For the Principles, the prime example of relevant non-monetary obligations is securities (see Lando et al. (2003), p. 140). Whether two obligations are of the same kind can be questionable with regard to foreign currency debts. This problem is regulated in Article 13:103 PECL. c) Cross-claim has to be due. Set-off gives the creditor of the cross-claim the possibility to enforce his claim. Therefore, the Principles confirm in accordance with all legal systems that the cross-claim has to be enforceable. This means in particular that the cross-claim has to be due. Furthermore, there must be no defence available to the other party. Finally, set-off cannot be declared if the cross-claim relates to a natural obligation (see Lando et al. (2003), p. 140). Under the Principles, set-off may also be excluded in case the cross-claim is not ascertained to its existence or value (see Lando et al. (2003), p. 141). This question is dealt with in Article 13:102 PECL. The requirement of enforceability is lacking in case the cross-claim is already time-barred. Therefore, it is questionable whether set-off is still admissible. Prescription of the cross-claim is dealt with in Article 14:503. According to this provision a time-barred claim may nonetheless be set off, unless the debtor has invoked prescription previously or does so within two months of notification of set-off. Thus, the opposing party can prevent set-off with a time-barred claim by invoking prescription. This is explained by the fact that under the Principles set-off has no retrospective effect (see Lando et al. (2003), Comment on Article 14:503, pp. 205–206). d) Party declaring set-off is entitled to perform. The principal claim does not necessarily have to be due, but the person declaring set-off must be at least entitled to effect performance. The very same is meant by Article III.-6:102 (a) DCFR which allows set-off in case the principal claim is not due, if ‘the first party can oblige the other party to accept performance.’ If the principal claim has become subject to an order of attachment, it is no longer performable. Therefore, set-off is excluded in this case (see Lando et al. (2003), pp. 140–141). The DCFR particularly addresses this problem in Article III-6:102 (c): each party must have the authority to dispose of its right for the purpose of set-off. If the principal claim has been seized, set-off is no longer possible, as the party receiving notice of set-off no longer has authority to dispose of its right (c.f. COMPARISON AND EVALUATION No 4). 3. Obligations to be performed at different places. Whether set-off is also allowed in case the obligations have to be performed at different places, is not expressly regulated in

688

Chapter 13: Set-Off the PECL. Comment D explains that set-off is not excluded in this situation because it would be unlikely that the creditor of the principal claim would be prejudiced by the set-off (Lando et al. (2003), p. 141). 4. Insolvency set-off. Comment E clarifies that the Principles do not deal with set-off in insolvency (Lando et al. (2003), p. 141). This is due to the fact that most legal systems regard set-off in insolvency as an essential part of their national insolvency systems (see no. 7). The DCFR explicitly outlines this limitation of scope in Article III.-6:101(2).

German Law § 387 BGB: Requirements If two parties owe each other performances of the same kind, each party may set off his claim against the other party’s claim as soon as he can demand the performance owed to him and can effect the performance which he owes. § 390 BGB: No set-off against claims subject to a defense A claim which is subject to a defense cannot be set off. § 215 BGB: Set-off (…) after the commencement of the limitation period Limitation does not exclude set-off and asserting a right of retention if the claim was not time-barred when set-off or the refusal of performance could have been declared for the first time. § 391 BGB: Set-off in case of different places of performance (1) Set-off is not excluded by the fact that the claims have different places of performance or delivery. However, the party setting off has to compensate for the damage that the other party incurs because he does not receive performance at the specified place or cannot effect performance there due to the set-off. (2) If it is agreed that the performance is to be effected at a specified time and place, it is to be presumed, in case of doubt, that set-off against a claim with another place of performance shall be excluded. § 392 BGB: Set-off against a confiscated claim The set-off of a debtor’s claim against a confiscated claim of the creditor is only excluded, if the debtor has acquired his claim after confiscation, or if his claim has only become due after confiscation and later than the confiscated claim. § 395 BGB: Set-off against claims of public corporations

689

D. Looschelders & M. Makowsky Set-off against a claim of the Federal Government or of a Land or against a claim of a municipality or of another association of municipalities is only admissible if the performance is to be effected to the same fund from which the claim of the party setting off is to be discharged. § 829 ZPO: Seizure of a monetary claim (1) If a monetary claim is to be seized, the court has to forbid the garnishee to pay the debtor. At the same time the court has to order the debtor to abstain from any disposition of the claim, especially its collection. (2)–(4) […] 1. General. The provision of § 387 BGB is the equivalent of Article 13:101 PECL and sets up the requirements for set-off. Under German law, set-off is considered as a matter of substantive law as well. Set-off is also admissible in the course of legal proceedings. In this case, it has a substantive as well as a procedural nature (cf. BGHZ 23, 17, 23; Larenz (1987), § 18 VI c). If set-off is not allowed for procedural reasons, the cross-claim is not discharged and can be asserted in another trial (cf. Gursky, in Staudinger (2011), Preliminary Statement to §§ 387 et seq. nos. 31 et seq.) Regarding the admissibility of a contingent set-off in legal proceedings see below Article 13:104, GERMAN LAW, no. 2. According to modern understanding (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 39) set-off has two main functions: set-off effects redemption of the principal claim and is the most important substitute performance as such (redemption function). Moreover, set-off enables the debtor to enforce his own claim without a trial (enforcement function, cf. BGHZ 130, 76, 80). The enforcement function is highly developed in German law. It receives practical relevance especially if there are doubts about the financial capacity of the opposing party or if the own claim has already been time-barred in the meantime (cf. § 215 BGB). 2. Requirements for set-off. a)Mutuality. According to § 387 BGB, set-off requires that the claims exist between the same parties (mutuality). On the one hand, the party declaring set-off must have a claim against the opposing party (cross-claim). On the other hand, it is necessary for the opposing party to have a claim against the party declaring set-off (principal claim). The debtor of the principal claim cannot set off a third party’s claim, even if the third party consents thereto. There are some exceptions to the principle of mutuality stated in the BGB (cf. §§ 406, 409, 566d BGB). For example, according to § 406 BGB, in case of assignment the debtor may set-off claims against the assignee which originate from his relationship to the assignor. However, set-off is excluded, if the debtor, when acquiring the claim, was aware of the assignment or if the claim became due after the debtor obtained knowledge of the assignment and later than the assigned claim became due. In these cases, the debtor has never had a legitimate prospect of declaring set-off (cf. Looschelders (2012), nos. 1124 et seq.).

690

Chapter 13: Set-Off Further exceptions of mutuality can arise from the principle of good faith, § 242 BGB. For example, the debtor of a fiduciary or the debtor of a nominee may be allowed by good faith to declare set-off with a claim against the beneficiary or the person behind the nominee (cf. BGHZ 110, 47, 81; Looschelders/Olzen, in Staudinger (2009) § 242 BGB nos. 689 et seq.). In § 395 BGB, the requirement of mutuality is regulated more strictly: Set-off with public corporations is only admissible if principal and cross-claim relate to the same fund. The provision aims to protect public funds. Therefore, it only excludes set-off against claims relating to different public funds. By contrast, the public corporation is entitled to declare set-off regardless to § 395 BGB (cf. Schlüter, in Münchener Kommentar (2012), § 395 no. 1). Moreover, there is one important exception to § 395 BGB. According to § 226(3) of the German Tax Code (Abgabenordnung, AO), set-off against tax claims is admissible even though the cross-claim relates to a different public fund (Grüneberg, in Palandt (2012), § 395 no. 3). b) Obligations of the same kind. The mutually owed obligations have to be of the same kind. Therefore, set-off is only possible with money-debts or obligations concerning fungible goods (§ 91 BGB). If the claims are not of the same kind, the parties can only assert a right of retention (§§ 273 et seq. BGB). Claims are of the same kind, even if there is a difference in their amount (§ 395 BGB: ‘as far as they are coextensive’). The inadmissibility of part performance according to § 266 BGB is not applicable on set-off (Medicus/Lorenz (2010), no. 306). Moreover, it is not necessary for the claims to have the same kind of legal nature or legal ground. Therefore, claims based on public law can be set off with claims based on private law (cf. BGHZ 16, 124, 127; Grüneberg, in Palandt (2012), § 387 no. 8). § 391(1) BGB ascertains that the claims are of the same kind, even though they have to be performed at different places. In these cases, set-off is therefore admissible, but the person declaring set-off has to compensate for the damage that the other party sustains. In this context, especially the costs of transport can become relevant (cf. Gursky, in Staudinger (2011), § 391 no. 5). If set-off causes very high damages to one party, it may be presumed that the parties have implicitly agreed on the exclusion of set-off (cf. Gernhuber (1994), § 12 III 9). c) Validity, maturity and enforceability of the cross-claim. § 387 BGB requires that the party declaring set-off can demand the performance due to him. This means that the cross-claim must be enforceable, i.e., entirely valid and due (§ 271 BGB). As a claim subject to a defence is not entirely valid, § 390 BGB provides that such claim cannot be set off with. In this context the defence only has to exist; it does not have to be raised (BGH NJW 2001, 287; Grüneberg, in Palandt (2012), § 390 no. 1). Examples of relevant defences are the right of retention (§ 273 BGB) and the defence of non-performance of the contract (§ 320 BGB). Set-off can also not be declared with cross-claims relating to a natural obligation (cf. BGH NJW 1981, 1897; Gursky, in Staudinger (2011), § 387 no. 132). However, set-off is also allowed in case the cross-claim is unascertained (see below Article 13:102, GERMAN LAW). There is one very important exception to the requirement of enforceability with regard to limitation. Pursuant to § 215 BGB set-off is possible, if the cross-claim is barred by limitation at the time when set-off is declared but was not barred when set-off could have been declared for the first time. Once the possibility of set-off evolves, it

691

D. Looschelders & M. Makowsky cannot be lost by limitation (cf. Looschelders (2012), no. 417; crit. Bydlinski (1996), 276, 293 et seq.). d) Party declaring Set-Off is entitled to perform. Set-off is not possible until the party declaring set-off is entitled to effect performance to the other party. Hence, it is not necessary for the principal claim to be due, but it has to be performable. Normally, the requirement of performability of the principal claim is no practical obstacle to set-off because in absence of an agreement to the contrary the debtor is allowed to effect performance immediately, in case of doubt even prior to a specified time (§ 271 BGB). In contrast to the cross-claim, the principal claim may also be subject to a defence, because a debtor is not prevented from performing claims subject to a defence. Therefore, set-off is also possible against a claim which was already timebarred when set-off could have been declared for the first time (cf. Gursky, in Staudinger (2011), § 387 no. 114; Looschelders (2012), no. 418). In case a party declares set-off unaware of the existence of a perpetual plea, back payment can be considered pursuant to § 813 BGB (cf. Gursky, in Staudinger (2011), § 387 no. 115; Larenz (1987), § 18 VI a 4). However, § 813 BGB does not ascertain the plea of statute of limitation, which leads to the fact that back payment cannot be considered in a situation in which performance happened unaware of the statute of limitation. e) Seized claim. If the principal claim has been confiscated, the debtor may not effect performance to the creditor anymore (§ 829(1) 1 ZPO). The prohibition of performance (Arrestatorium) generally applies to set-off as well (Gursky, in Staudinger (2011), § 392 no. 2). However, this may not affect the debtor’s reasonable prospect of set-off. Therefore, § 392 BGB provides that set-off is only excluded, if the debtor has acquired his claim after confiscation, or if his claim has only become due after confiscation and later than the confiscated claim. In both cases the debtor could not rely on the enforcement of his claim by set-off. Hence, he is not worthy of protection (cf. Schlüter, in Münchener Kommentar (2012), § 392 no. 1). Conversely, if the counterclaim has been confiscated, the party is no longer allowed to set off with its seized claim (§ 829(1) 2 ZPO). The prohibition to collect the debt (Inhibitorium) also comprises the denial to set-off (Seiler, in Thomas/Putzo (2012), § 829 no. 33). 3. Insolvency set-off. In German law, insolvency set-off is ruled in §§ 94 et seqq. Insolvency Act (Insolvenzordnung, InsO). Analogously to § 392 BGB the provisions aim to protect the reasonable prospect of set-off even in insolvency (cf. Becker (2010), nos. 1186 et seq.). If a creditor of an insolvent has been entitled to set-off by law or agreement at the time when the insolvency proceedings have been opened, the right to set-off is not excluded by the proceedings (cf. § 94, 95 InsO). § 96 InsO contains some specific exclusions of set-off in insolvency (cf. Becker (2010), nos. 1193 et seq.).

692

Chapter 13: Set-Off Comparison and Evaluation 1. Similarities. According to the prevailing approach among the continental legal systems both the Principles and German law regard set-off as a matter of substantive law. They also agree in the admissibility of declaring set-off in the course of legal proceedings. From the view of the prevailing opinion in Germany, in this case set-off also has a procedural nature, but the effect of set-off on the substantive legal status is regarded in the same way as under the Principles. Especially, in case set-off is not allowed due to procedural reasons, the cross-claim is not discharged and can therefore be asserted in another proceeding. The requirements for set-off pursuant to the Principles are very similar to those established by German law, too. This comes to no surprise as all European legal systems which recognize set-off generally agree on these requirements somehow or other (Zimmermann (2002b), pp. 44 et seq.). A lot of the similarities are based on the nature of set-off. For example, under no legal system set-off can be taken into account without the existence of two opposite claims. In this context, both German law and the Principles recognize that the requirement of mutuality must not be applied too formal and technical. Therefore, they allow the debtor of a claim raised by a fiduciary to declare set-off with a cross-claim against the beneficiary, provided that the latter is to be regarded as the true creditor of the principal claim. Furthermore, both regulations provide – under certain conditions – an exception from the requirement of mutuality in case of assignment in order to protect the debtor in this case. Additionally, it is obvious that the claims have to be of the same kind. The only questionable thing is, in which cases the claims are of the same kind. As the other party has to be protected from the enforcement of a claim which is not entirely valid or which is not due yet, the validity and the maturity of the cross-claim are also quasi-natural requirements of set-off. Furthermore, if the parties have agreed that the principal claim shall not be performed before a certain time, the party declaring set-off cannot be allowed to undermine this agreement unilaterally. Therefore, the party declaring set-off has to be entitled to effect performance. 2. Set-off with time-barred claims. A very important difference between the Principles and German law, however, has to be noted with regard to set-off of claims that are already time-barred. According to § 215 BGB set-off with a time-barred (counter-)claim is allowed, if it was not time-barred, when set-off could have been declared for the first time. On the other hand the Principles allow set-off only, pursuant to Article 14:503 PECL, if the opposing party pleads the defence of limitation neither before nor within two month after receipt of the declaration of set-off. The difference between both solutions does not primarily arise from the fact that under German law the notice of set-off has a retrospective effect (§ 389 BGB) whereas under the PECL the obligations are discharged as from the time of notice (Article 13:106 PECL). From the view of German law the possibility to declare set-off with a time-barred claim is no necessary consequence of the retrospective effect but a mere question of fairness and reasonableness (Grothe, in Münchener Kommentar (2012), § 215 no. 2). The exclusion of set-off with time-barred claims would correspond to the fact that also according to German

693

D. Looschelders & M. Makowsky law the requirements of set-off have to be given at the time of the declaration of set-off. Article 14:503 PECL shows as well that the ex nunc-effect of set-off does not generally exclude the admissibility of set-off with time-barred claims. Therefore, the decision depends on the evaluation of two conflicting interests: legal certainty which corresponds with the protection of the debtor of a time-barred claim on the one hand and the protection of the creditor of the time-barred claim according to the enforcement function of set-off on the other hand. Article 14:503 PECL provides legal certainty for the opposing party which receives the declaration of set-off: it can avoid being exposed to claims which have already been time-barred. The provision is based on the idea that claims are affected by the ‘obfuscating power of time’ also in case of set-off (cf. Lando et al. (2003), p. 205). The disadvantage of this solution is that the protection of the party declaring set-off – the creditor of the time-barred claim – is considerably curtailed: This party may rely on the mere existence of its claim and therefore wait with the declaration of set-off until the other party demands the performance of the principal claim (cf. BGHZ 48, 116, 117; Gursky, in Staudinger (2011), § 390 no. 34; Gernhuber (1994), § 12 VII 7; crit. Peters, in Staudinger (2009), § 215 no. 2). Especially in cases where the debtor can interpret the creditor’s conduct accordingly it is not the debtor but the creditor who is worthy of protection. Moreover, the solution of German law provides that set-off and the right of retention are treated uniformly. According to the Principles a debtor whose claim is time-barred keeps his right of retention (see comment on Article 14:101 in Lando et al. (2003), p. 158), but set-off is excluded with limitation of the claim. This seems to be inconsistent. 3. Obligations to be performed at different places. German law expressly clarifies that the obligations are of the same kind, even if they have to be performed at different places (§ 391(1) BGB). The provision aims to prevent a too narrow understanding of claims being of the same kind (Gursky, in Staudinger (2011), § 391 no. 2). The Principles demonstrate, however, that such a clarification is not compulsory (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 49). Moreover, German law grants the party getting notice of set-off a claim for damages incurred by the fact that the party does not receive the performance at the specified place or that it cannot effect performance at the destined place (§ 391(1) 2 BGB). The practical relevance of this provision is minimal as damages incurred by set-off are rare (cf. Gursky, in Staudinger (2011), § 391 BGB no. 4). If the parties have specified not only the place but also the time of performance, set-off will regularly be excluded anyway (§ 391(2) BGB). Actually, this is not a question of claims being of the same kind anymore but refers to the exclusion of set-off by agreement. Therefore, the problem will be dealt with later on (see below Article 13:107, GERMAN LAW, no. 2). 4. Set-off with seized claims. In general, German law and the Principles agree that set-off is excluded in case the principal claim is subject to an order of attachment. This idea also underlies Article III.-6:102 (c) DCFR which stipulates that each party must have authority to dispose of its right. In certain cases, § 392 BGB still allows set-off with a seized principal claim. The provision is based on the idea that the debtor’s reasonable

694

Chapter 13: Set-Off prospect of set-off is to be protected. However, the security right of the execution creditor is charged from the beginning with the possibility of set-off. In the converse case, where the counterclaim has been confiscated, German law prohibits set-off with the seized claim (§ 829(1) 2 ZPO). The Principles do not directly address this problem. The solution of the DCFR can again be found in Article 6: 102 (c) DCFR: each party must have authority to dispose of its right. If the counterclaim has been seized, the party giving notice of set-off lacks this authority and set-off fails. Therefore Article 6:102 (c) DCFR appears to be a reasonable extension, or at least clarification of the requirements of set-off compared with the Principles’ provision. 5. Public funds. § 395 BGB has no equivalent in the PECL. The provision contains a traditional protection of public corporations (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 43). This privilege is not very consistent because private corporations can also have different funds (cf. Medicus/Lorenz (2010), no. 315). However, under the modern technologies for data processing, the need for such a protection has decreased considerably (cf. Gursky, in Staudinger (2011), § 395 no. 3). With regard to tax claims the dispensability of the protection has been acknowledged by § 226(3) AO. Therefore, the protection of public corporations should not be extended on private corporations but be completely abolished.

Principles of European Contract Law and DCFR Article 13:102 PECL: Unascertained Claims (1) A debtor may not set off a claim which is unascertained as to its existence or value unless the set-off will not prejudice the interests of the other party. (2) Where the claims of both parties arise from the same legal relationship it is presumed that the other party’s interests will not be prejudiced. Article III. – 6:103 DCFR: Unascertained rights (1) A debtor may not set off a claim which is unascertained as to its existence or value unless the set-off will not prejudice the interests of the creditor. (2) Where the claims of both parties arise from the same legal relationship it is presumed that the creditor’s interests will not be prejudiced. 1. General. Article 13:102 PECL protects the claimant in case the defendant tries to protract legal proceedings by invoking set-off with a dubious cross-claim which cannot be easily proved or the existence of which is not certain. It ensures that the interests of the other party will not be prejudiced by the declaration of set-off with an unascertained claim. 2. Judicial discretion. The protection of the claimant by the Principles can be described as a compromise between two other possible approaches. Set-off can only be declared if the cross-claim is ascertained (‘liquidity’) or set-off is even possible

695

D. Looschelders & M. Makowsky where the cross-claim is unascertained (see Lando et al. (2003), p. 144). According to Article 13:102 PECL the judge may adjudicate upon the principal claim regardless of the declared set-off by the defendant if the cross-claim cannot be readily ascertained and the principal claim is otherwise ready for adjudication. In exercising his discretion, the judge has to consider all circumstances of the case, such as the probable duration of the proceedings concerning both of the claims, or the effect of a delay on the claimant. Moreover, he will have to distinguish two cases: if both claims arise from the same legal relationship, it is presumed that the interests of the claimant are generally not prejudiced by set-off. Therefore, in this case the judge will consider the set-off, even if the claim is unascertained. However, if the claims do not arise from the same relationship, commercial predictability and fairness demand that the claimant who has an ascertained claim can pursue that claim unaffected by the declaration of set-off. The decision on the principal claim will only be based on the merits of that claim. The declaration of set-off must be regarded as ineffective and the defendant will have to pursue his claim independently (cf. Zimmermann (2002b), p. 56). See Lando et al. (2003), pp. 144–145). 3. Right to withhold performance. The problems discussed above are irrelevant when the defendant has a right to withhold his performance in terms of Article 9:201 PECL. Comment B points out that in these cases the principal claim is not ready for adjudication (Lando et al. (2003), p. 145). Therefore, there is no need for the defendant to declare set-off with an unascertained claim.

German Law § 145 ZPO: Separation of trials (1)–(2) […] (3) If the defendant invokes set-off with a cross-claim which does not arise from the same legal relationship as the claim pursued by the action, the court may rule that the action and the set-off are tried separately; the provision of § 302 applies with appropriate adaptations. § 302 ZPO: Decision with reservation (1) If the defendant has invoked set-off with a cross-claim, the decision on the principal claim, in case the trial is ready for adjudication only in this respect, may be made with the reservation of the decision on the set-off. (2) If the judgement does not contain a reservation, the amendment of the judgement can be applied for according to the provision of § 321. (3) A decision which is made with reservation of the decision on the set-off is regarded as a final decision with respect to remedies and execution. (4) Regarding the set-off, for which the adjudication is reserved, the lawsuit remains pending. As far as it results from the further proceeding, that the claim of the plaintiff was unfounded, the former judgement is to be abolished, the

696

Chapter 13: Set-Off claim is to be dismissed and a different decision about the costs has to be made. The plaintiff is bound to pay for the damages the defendant incurred due to the enforcement of the judgement or an effort made to avert the enforcement. The defendant is entitled to assert a claim for compensation in the pending lawsuit; if the claim is asserted, it is considered as pending at the moment of payment or performance. 1. General. Several legal systems, e.g., English and French law, traditionally demand liquidity of both claims as an additional substantive requirement for set-off. From this view, set-off is only admissible if the opposing claims are undisputed or immediately provable (cf. Kegel (1938), pp. 160 et seq.; see Lando et al. (2003), p. 145, notes to Article 13:102, 1). German law deals with the problem of liquidity procedurally, which corresponds to modern tendencies in European law (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 nos. 56 et seq.). In result, the admissibility of set-off does not depend on the question whether the cross-claim is ascertained or not (Gursky, in Staudinger (2011), § 387 no. 147). 2. Judicial discretion. According to the German Code of Civil Procedure (ZPO) the judge has to distinguish two cases as well: If the defendant invokes set-off with a cross-claim arising from the same legal relationship, both claims will be considered in the trial. The court may, however, already decide on the principal claim, if it is otherwise ready for adjudication, with reservation of the decision on the set-off (§ 302 ZPO). This possibility was created to achieve fast but provisional enforceable titles (cf. Musielak, in Musielak (2012), § 302 ZPO no. 2). If the claims do not arise from the same legal relationship, the court may rule – within its discretion – that the action and the set-off are tried separately (cf. § 145(3) ZPO). The court will decide in favour of the principal claim with reservation of the decision on set-off (§§ 145(3), 302 ZPO). In case of dismissal of the principal action, the court will give a final judgment without regard to the set-off (cf. Stadler, in Musielak (2012), § 145 ZPO no. 11). 3. Same legal relationship. For differentiating these cases – and hence deciding the question of set-off in court – it is decisive whether the principal claim and the cross claim arise from the same legal relationship (connectivity): According to German jurisdiction the claims must arise from internally related facts so that it would seem unconscionable to treat one claim irrespective of the other (cf. BGHZ 25, 360, 363 et seq.).

Comparison and Evaluation With regard to set-off with unascertained claims, German law and the Principles have quite similar criteria. Especially, both refer to the question whether the claims arise from the same legal relationship. However, there is a considerable difference in their approach. The Principles only allow set-off with unascertained claims if there will be no prejudice to the other party. Where the claims arise from the same legal relationship,

697

D. Looschelders & M. Makowsky it is presumed that the other party is not prejudiced. Consequently, set-off with unascertained cross-claims that arise from the same legal relationship as the principal claim is normally accepted (Zimmermann (2002b), p. 56). With regard to the substantive admissibility of set-off, German law does not distinguish between ascertained and unascertained claims. In this regard, it is also not relevant whether the claims arise from the same legal relationship or not, but if they do not, the court may rule that the action and the set-off are tried separately. Therefore, in case the claims do not arise from the same legal relationship, the judge will make a decision on the principal claim with reservation of the decision of set-off. In this case, the solutions of both regulations seem to be quite similar. Nonetheless, the German solution is preferable because it reserves the possibility of set-off to the creditor of the cross-claim. However, the Principles’ privilege of unascertained claims arising from the same legal relationship as the principal claim outreaches the corresponding provisions of German law. According to the Principles a judge will regularly decide on the cross-claim along with the principal claim because it is presumed that the claimant will not be prejudiced in this situation (see Lando et al. (2003), pp. 144–145). Under German Law, even in case the claims arise from the same legal relationship the judge will make a decision first on the principal claim, if the trial is ready for adjudication only in this respect, with reservation of the decision of set-off (cf. § 302(2) ZPO). Admittedly, the claimant runs the risk that he has to pay damages to the defendant when his enforcement turns out not to have been based on a valid title (cf. § 302(4) ZPO; crit. Zimmermann (2002b), p. 54). But the early execution of the title can avoid the risk that the debtor has become insolvent by the time that the final decision is made. The same is true if the debtor does not set-off with his (cross-) claim but puts forward a counterclaim with his claim arising from the same legal relationship. In this case, the judge may as well make a decision first on the principal claim if the trial is ready for adjudication only in this respect (cf. § 301(1) ZPO). Therefore, the German solution is consistent too.

Principles of European Contract Law and DCFR Article 13:103 PECL: Foreign Currency Set-Off Where parties owe each other money in different currencies, each party may set off that party’s claim against the other party’s claim, unless the parties have agreed that the party declaring set-off is to pay exclusively in a specified currency. Article III. – 6:104 DCFR: Foreign Currency set-off Where parties owe each other money in different currencies, each party may set off that party’s right against the other party’s right, unless the parties have agreed that the party declaring set-off is to pay exclusively in a specified currency. 1. General. Article 13:103 PECL clarifies that debts in different currencies are ‘of the same kind’ in the sense of Article 13:101 PECL and can be set-off against each other. An exception is made if the parties have agreed that the creditor of the cross-claim has to

698

Chapter 13: Set-Off pay exclusively in a specified currency (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 48). In this case it is to be assumed that the parties wanted to exclude set-off. Therefore, set-off is not admissible. Article 13:103 PECL is influenced by Article 8(6) of the Council Regulation on the Introduction of the Euro, no. 974/98 of 3 May 1998 (OJEC 1998, L 139/1). It facilitates set-off in case of foreign currency debts without injuring the legitimate interests of the creditor of the principal claim. The provision reflects a modern view which can also be found in many national legal systems (cf. Zimmermann (2002b), pp. 49 et seq.; see also Lando et al. (2003), p. 147). 2. Exchange rate. Since 1 January 2002 conversion is no longer a problem in the Euro-zone. With regard to other currencies, Comment B stipulates that the unified rate of exchange shall be applied, if such a rate exists (Lando et al. (2003), p. 147). In all other cases, conversion shall be performed on basis of the buying rate for the currency of the principal claim.

German Law § 244 BGB: Debts in Foreign Currencies (1) If a money debt stated in a currency other than the Euro has to be paid within the country, the payment may be done in Euro, unless payment in the other currency is expressly agreed upon. (2) Conversion occurs at the rate of exchange which is in effect at the time of payment in the place of payment. 1. Foreign currency debts. Since 1 January 2002, the Euro is the legal tender in Germany and most other European states. In contrast to the Principles of European Contract Law, the BGB does not expressly regulate that debts in foreign currencies are of the same kind and can be set off against each other. On the contrary, according to the prevailing opinion, debts in different currencies are generally not of the same kind (Grüneberg, in Palandt (2012), § 387 no. 9). However, the provision of § 244 BGB contains a general rule which complies with Article 13:103 PECL to a large extent. Commonly, real and unreal debts in foreign currencies are differentiated: a)Real foreign currency debts. Where the parties agree on a real debt in foreign currency, the debt is expressed in that foreign currency and is to be paid in that currency. Set-off with a Euro-claim is not possible; the claims are not of the same kind (OLG Hamm NJW-RR 1999, 1736; Schlüter, in Münchener Kommentar (2012), § 387 BGB no. 32). Consistently, the fact that the currencies are freely convertible has no relevance (KG NJW 1988, 2181). Moreover, the party agreement can regularly be interpreted as an implied restriction of set-off with claims in other currencies (cf. Gursky, in Staudinger (2011), § 387 BGB no. 79). b) Unreal foreign currency debts. The normal case is an unreal debt in foreign currency: Where there is no party agreement, a debt in a foreign currency can be paid

699

D. Looschelders & M. Makowsky within the country in Euro pursuant to § 244(1) BGB (and is therefore ‘unreal’). Consequently, the debtor of a foreign currency claim can set off with a Euro-claim against the creditor (cf. RGZ 106, 99, 100). The claims, however, are not of the same kind until set-off is declared (cf. RGZ 167, 60, 63; BGH WM 1993, 2011; Schlüter, in Münchener Kommentar (2012), § 387 BGB no. 32; Schaub, in Erman (2011), § 244 no. 16; dissenting opinion: Gernhuber (1994), § 12 III 5). With the declaration of set-off the debtor of the cross-claim exercises the right of substitution (‘facultas alternativa’) stated by § 244(1) BGB and the debts turn to such of the same kind. 2. Exchange rate. In case of set-off, the time of declaration corresponds with the time of payment in § 244(2) BGB. Therefore, the exchange rate is determined without any retrospectivity by the time the declaration of set-off reaches the other party (cf. RGZ 167, 60, 62; BGH WM 1993, 2011; Schlüter, in Münchener Kommentar (2012), § 387 BGB no. 32; Gursky, in Staudinger (2011), § 387 no. 81; dissenting opinion: Reichel (1926), 313, 325 et seq.). The lack of retrospectivity ensures, that the party owing a debt in foreign currency cannot decide with regard to the trend of exchange rates whether to pay the debt or to declare set-off (cf. Grothe (1994), 346, 348). Such speculations have to be prevented. The conversion shall be performed on basis of the buying rate for the foreign currency which would have been owed to the other party without set-off (cf. Vorpeil (1993), 529, 535).

Comparison and Evaluation In contrast to German law, the Principles contain an express provision concerning set-off with foreign currency debts. In German law, this question is regarded as a problem of whether the claims are of the same kind (cf. § 387 BGB). Though the provision of § 244 BGB is not specific to set-off, it leads to the same legal results as the Principles. If the parties did not agree that the debt is to be exclusively paid in a specified currency (i.e., no agreement on a ‘real’ debt in foreign currency), set-off with a claim in domestic currency is admissible. Nevertheless, the differentiation between real and unreal foreign currency debts and the idea of a ‘facultas alternativa’ under German law is quite complicated and does not fit to the modern function of money in international payment transactions (cf. Zimmermann (2002b), p. 49). Therefore, the solution of the Principles is preferable. With regard to the exchange rate German law corresponds with the Principles. The conversion occurs at the buying rate for the currency of the principal claim at the time when set-off is declared. In this respect, however, German law contains a remarkable exception from the principle of retrospectivity in order to prevent speculations regarding the potential trends of exchange rates. The authors of the Principles have also seen the danger of speculations on fluctuation of the money markets. But from their view the problem is not so relevant, because a party running the danger to be prejudiced by such a fluctuation has a strong incentive to declare set-off as soon as possible (see Lando et al. (2003), p. 147). This fits in well with the general aim of the Principles to encourage parties to declare set-off.

700

Chapter 13: Set-Off Principles of European Contract Law and DCFR Article 13:104 PECL: Set-Off by Notice The right of set-off is exercised by notice to the other party. Article III. – 6:105 DCFR: Set-off by notice Set-off is effected by notice to the other party. 1. Set-off by notice. Article 13:104 PECL states that the right of set-off does not take effect ipso iure but has to be exercised by notice to the other party. For the notice of set-off an informal, unilateral, extrajudicial declaration is sufficient. The requirements of notice can be found in Article 1:303 PECL. According to this provision, the notice may be given by any means, whether in writing or otherwise, which is appropriate to the circumstances. The notice becomes effective when it reaches the opposing party (see Article 1:103(2) PECL). Where set-off is declared, a subsequent judgment on the matter has a merely declaratory effect. As set-off is a matter of substantive law, the effects on the legal status are brought about by the notice itself. The declaration of set-off is a unilateral right to alter the legal relationship between the parties. Therefore, as the commentary confirms, it cannot be subjected to a condition or time clause (Lando et al. (2003), p. 148). In consequence, the Principles do not allow the debtor to declare set-off with effect from some future date (deferred set-off). Under the Principles, however, it is possible for a debtor to declare set-off although his claim is not due yet (declaring set-off early). In this case the declaration takes effect when the claim has become due (see Lando et al. (2003), p. 149). 2. Set-off by agreement. Based on the principle of freedom of contract the parties may also agree on set-off. If they do so, they may derogate from the requirements of set-off imposed by the Principles. The agreement for a current account implies that the debits and credits will be set off against each other at each balancing of the account. See Lando et al. (2003), p. 149.

German Law § 388 BGB: Declaration of set-off Set-off is effected by notice to the other party. The declaration is ineffective if it is made subject to a condition or a stipulation as to time. 1. General. Under German law, the obligations are not automatically discharged, when the requirements of set-off are fulfilled (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 20). It is necessary that a party declares set-off (§ 388 BGB). This declaration becomes complete upon receipt by the other party (§ 130 BGB); the provisions of §§ 104 et seq. BGB are applicable.

701

D. Looschelders & M. Makowsky 2. Declaration without condition or time limitation. The party receiving the declaration of set-off has a substantial interest in legal certainty, as set-off is a unilateral right to alter the legal relationship between the parties. Therefore, set-off may not be subjected to a condition (§ 158 BGB) nor time clause (limitation) pursuant to § 388(2) BGB. It is even not admissible to declare set-off with a cross-claim which is not due yet. If the cross-claim has not been due at the time of declaring set-off, the debtor of the principal claim has to repeat the declaration after the cross-claim has become due (cf. Gernhuber (1994), § 12 IV 1 c). It is generally accepted, however, that § 388(2) BGB does not forbid a contingent set-off in legal proceedings. In these cases the defendant primarily aims to achieve that the action is dismissed on other grounds. Set-off shall only be considered, if the court finds that the principal claim exists. As the existence of the principal claim is not an uncertain future event, the contingent set-off is not a condition in terms of § 158 BGB, but a (procedurally admissible) legal condition (Grüneberg, in Palandt (2012), § 388 no. 3). It cannot be regarded as a violation of § 388(2) BGB. See Gursky, in Staudinger (2011), § 388 nos. 30 et seq. 3. Set-off by agreement. The BGB has no specific rule on set-off by agreement. But according to the principle of freedom of contract it has always been recognized that set-off by agreement is admissible (cf. Gernhuber (1994), § 14 I 2; in greater detail Berger (1996)). In this context the parties can contract out the legal requirements of set-off. For example, they can exclude the requirement of mutuality and permit set-off with third party claims (cf. BGHZ 94, 132, 135; Schlüter, in Münchener Kommentar (2012), § 387 nos. 51 et seq.). They are also allowed to agree on set-off with claims which are not due or which have even not come into existence yet. In the second case set-off takes effect when both claims have come into existence (cf. Gursky, in Staudinger (2011), Preliminary Statement to §§ 387 et seq. nos. 74 et seq.).

Comparison and Evaluation 1. Necessity of a notice. With regard to the way set-off is functioning, two different approaches predominate within the European legal systems: Set-off leads to extinction of the opposing claims either ipso iure or by declaration to the other party. The Principles as well as German law require the declaration of set-off to the other party. It is notable, however, that even the legal systems that generally act on the assumption of an ipso iure effect demand, nevertheless, that set-off is expressly asserted in court (e.g., France, Lando et al. (2003), p. 149, Note 1; Zimmermann (2002b), p. 25). Therefore it seems to be a common experience of the European laws that an ipso iure effect of set-off without any manifestation by the parties endangers legal certainty (cf. Zimmermann (1999), p. 719). Whether an extrajudicial declaration or an assertion in court is necessary, might regularly lead to the same results. If set-off, however, is aimed at avoiding a circuit of lawsuits and a duplication of procedures, a provision is preferable that avoids legal proceedings from the beginning instead of making the effect of set-off dependent on

702

Chapter 13: Set-Off initiating such proceedings in either case (cf. Zimmermann (1999), p. 720). Thus, it is a favourable development that the Principles – in accordance with German law – have adopted the idea that an informal, unilateral and extrajudicial declaration is sufficient. If it comes to litigation with one of the claims afterwards, the judgment will not effect set-off but has only declaratory meaning. 2. Inadmissibility of conditions or time-limitations. According to the Principles as well as German law set-off cannot be subjected to a condition or time clause. Nevertheless, in this respect German law is more restrictive than the Principles because it does not allow declaring set-off early. This seems to be favourable because it promotes legal certainty and protects the debtor of the cross-claim. If the debtor of the cross-claim has no objections, set-off can easily be performed by agreement (cf. RGZ 104, 186, 188). For example, the parties may consent that set-off effects automatically when the claim becomes due (cf. BGHZ 6, 202, 204). 3. Set-off by agreement. Set-off by agreement is allowed by all legal systems (cf. Lando et al. (2003), p. 149, Note 2; Zimmermann (2002b), p. 20). The admissibility of such an agreement is founded on the principle of freedom of contract. As both parties have to agree, it is consistent that they are not bound to the legal requirements of set-off by notice. In German law, there is controversial discussion on the question whether certain provisions of the §§ 389 et seq. BGB have to be applied analogously on set-off by agreement (cf. Gursky, in Staudinger (2011), Preliminary Statement to §§ 387 et seq. nos. 68 et seq.; Berger (1996), pp. 195 et seq.). As set-off by agreement has primarily the function to allow set-off in case that the statutory requirements for set-off by notice are not given, in general only those provisions should apply which aim to protect third parties or public interests (cf. Gernhuber (1994), § 14 I 4). However, there are some logical requirements for set-off which also have to be given in case of set-off by agreement. For example, set-off cannot be effected by any means if there are not two opposite claims (cf. BGH NJW 1998, 978, 979). According to the prevailing opinion the claims also have to be of the same kind (cf. Larenz (1987), § 18 VI f). But this only means that the settlement of two claims being not of the same kind is no case of set-off at all (Gursky, in Staudinger (2011), Preliminary Statement to §§ 387 et seq. no. 68).

Principles of European Contract Law and DCFR Article 13:105 PECL: Plurality of Claims and Obligations (1) Where the party giving notice of set-off has two or more claims against the other party, the notice is effective only if it identifies the claim to which it relates. (2) Where the party giving notice of set-off has to perform two or more obligations towards the other party, the rules in Article 7:109 apply with appropriate adaptations.

703

D. Looschelders & M. Makowsky Article III. – 6:106 DCFR: Two or more rights and obligations (1) Where the party giving notice of set-off has two or more rights against the other party, the notice is effective only if it identifies the right to which it relates. (2) Where the party giving notice of set-off has to perform two or more obligations towards the other party, the rules on imputation of performance apply with appropriate adaptations. 1. General. Article 13:105 PECL regulates the case the party declaring set-off has two or more claims against the other party, or is exposed to two or more claims of that party, or both. In these cases, it is questionable whether there is a need for the party declaring set-off to identify the claims or whether the claims are discharged according to a statutory order. 2. Two or more claims. In case the party giving notice of set-off has two or more claims against the other party, Article 13:105(1) PECL states that the claim or the claims, to which the set-off relates, have to be identified by the notice. This requirement is due to the fact that set-off constitutes a form of enforcement of the cross-claim. It is not necessary, however, to identify the claim expressly, because the party’s intention may be inferred from the notice in accordance with the rule of Article 2:102 PECL. In case there is no possibility to identify the claim this way the notice of set-off is invalid. See Lando et al. (2003), p. 150, comment and Illustration 1. 3. Two or more obligations. Where the party giving notice owes two or more obligations to the other party, according to Article 13:105(2) PECL the rules in Article 7:109 PECL apply with appropriate modifications. The reference to Article 7:109 PECL is legitimated by the fact that set-off is a means of discharging obligations. The sequence of criteria stated in Article 7:109 PECL aims to correspond to the interests of both parties (see Article 7:109, Lando/Beale (2000), p. 349). Primarily, the party declaring set-off may determine, subject to Article 7:109(4) PECL, to which of the obligation set-off relates (Article 7:109(1) PECL). Failing such determination, the other party may do so (Article 7:109(2) PECL). If neither of the parties determines an obligation to be relevant for set-off, the legal sequence indicated in Article 7:109(3) PECL applies. See Lando/Beale. (2000), p. 349, Comment D and Illustration 4.

German Law § 396 BGB: Plurality of Claims (1) If either of the parties has several claims appropriate for set-off, the party setting off may determine the claims which are to be set off against each other. If set-off is declared without such determination or if the other party objects without undue delay, the provision of § 366 (2) applies with appropriate adaptations.

704

Chapter 13: Set-Off (2) If the party setting off owes the other party interest and costs besides the principal, the provision of § 367 applies with the appropriate adaptations. § 366 BGB: Crediting of performance to several claims (1) [….] (2) If the debtor does not make a determination, initially the debt due, amongst several due debts the one which offers the creditor the least security, amongst several equally secure debts the most burdensome one, under several equally burdensome debts the oldest debt is discharged, and where all debts are equally old each debt is discharged proportionally. § 367 BGB: Crediting to interest and costs (1) If the debtor must pay interests and costs in addition to the principal claim, a performance which is insufficient to discharge the entire debt is initially credited to the costs, then to the interests and finally to the principal. (2) If the debtor determines different crediting, the creditor may refuse acceptance of the performance. 1. General. If either one of the parties has several claims appropriate for set-off, the party setting off may determine the claims which are to be set off against each other. Primarily, this determination is decisive (§ 396(1) 1 BGB). If the other party, however, objects hereto without undue delay or if no determination is made, the provision of § 366(2) BGB applies with appropriate adaptations (§ 396(1) 2 BGB). The provision of § 396(2) BGB deals with interests and expenses besides the principal claim and refers to § 367 BGB. 2. Several claims or obligations. Where the party declaring set off has not determined the respective claims or the determination was objected to, § 366(2) BGB applies which provides a statutory sequence of redemption (adaptation: set-off). The provision complies with the interests and the presumable intent of the parties. Therefore, it is not applicable, if the sequence is inconsistent with the parties’ intent (cf. BGH NJW 1969, 1846, 1847; Looschelders (2012), no. 395; crit. Olzen, in Staudinger (2011), § 366 no. 44). First, the debt due is set off against, when there are several obligations. For determining the claim that is set off with (i.e., when the debtor has several claims against the creditor) the criterion of the due date fails as the cross-claim has to be due in any case (cf. Gursky, in Staudinger (2011), § 396 no. 39). If several claims are due, security of the claim is decisive: The most insecure claim will be set off with or against. The level of insecurity has to be assessed by economic measures. Possible factors are the time of limitation of a claim (cf. BGHZ 179, 1, 7), the liability of third persons and the existence of personal or real guarantees. If the criterion of the least security fails, the most bothersome claim is set off with or against. A claim can be bothersome because of the amount of due interests, imminent contractual penalties or if the claim is already

705

D. Looschelders & M. Makowsky pending in court. If the claims are equally bothersome, the provision gears to the claim’s age: the oldest claim will be set off with or against. The relevant point in time is when the claim arose and not when it became due (BGH NJW 1991, 2629, 2630). Lastly, if the sequence cannot be decided by the claim’s age, the claims are set off with or against proportionally (cf. BGHZ 179, 1, 9). 3. Interests and costs besides the principal. § 367 BGB provides for a statutory sequence of redemption, where the debtor has to perform incidental claims besides the principal claim. According to § 396(2) BGB this provision applies with the appropriate adaptations, if the party setting off owes the other party interests and costs besides the principal claim: Where the cross-claim does not cover the principal and incidental claims, it is credited first to the costs and then to the interests. Costs are all expenses incurred by enforcing the claim (e.g., legal costs). In case the party declaring set-off determines another sequence of redemption, the other party is entitled to refuse the set-off (cf. § 367(2) BGB). In consequence, set-off is regarded as not being declared (cf. Grüneberg, in Palandt (2012), § 396 no. 1; Schlüter, in Münchener Kommentar (2012), § 396 no. 5). This result, however, is not uncontested. Some authors argue for an application of the statutory sequence of § 367(1) BGB in order to handle the right to refuse pursuant to § 367(2) BGB and the right to object pursuant to § 396(1) 2 BGB equally (cf. Gernhuber (1994), § 12 VIII 3; Dennhardt, in Bamberger/Roth (2012), § 396 no. 7). The prevailing opinion does not share this argument with view to the wording of § 367(2) BGB (cf. Gursky, in Staudinger (2011), § 396 no. 51). The statutory sequence of redemption benefits the creditor. Due to the prohibition of compound interests (cf. § 248 BGB) it is advantageous for him that the debtor’s claim is first credited to the interests and then to the principal. Thus, the principal is not (totally) diminished and the creditor may continue to claim interests for it. Although § 396(2) BGB only refers to § 367(1) BGB, with regard to consumer credits the provision of § 497(3) 1 BGB should be applied with the appropriate adaptations: where the consumer sets off with a claim against the creditor that is insufficient to discharge the entire debt, the claim is – aberrant from § 367(1) BGB – credited first to the costs, then to the principal and lastly to the interests. This analogy is justified as there is no reason to grant the noticeable debt-diminishing effect only to actual payments and not to performance by set-off (cf. Gursky, in Staudinger (2011), § 396 no. 52).

Comparison and Evaluation Primarily, German Law (§ 396(1) BGB) as well as the Principles (Articles 13:105, 7:109(1) PECL) grant the party declaring set-off the right to decide, which cross-claim or principal claim is set-off with or against respectively. Generally two constellations can be distinguished: The party declaring set-off has two or more claims. The party receiving notice of set-off has two or more claims. 1. Several claims. In the first constellation, the Principles require the party declaring set-off to identify the claim it wants to set-off with. Otherwise the notice of set-off is

706

Chapter 13: Set-Off ineffective (cf. Article 13:105(1) PECL). According to German law, the omission merely effects the statutory sequence of redemption to be applicable with the appropriate adaptations (cf. §§ 396(2), 366(2) BGB). The statutory sequence also applies if the other party objects to the determination without undue delay. The idea behind the provisions of the Principles is that set-off with a claim always means its execution. Hence, the notice of set-off has to be sufficiently clear. If the party declaring set-off does not identify the claim that the set-off shall relate to, it has to bear the risk of that uncertainty (see above, comment 1; cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 70). This regulation, however, falls short of the actual aim of the Principles, i.e., the desire to encourage set-off (see above, comment 2). Like German law the Principles could have rendered set-off valid by reference to the statutory sequence of redemption (Article 7:109 PECL), if the party setting off has not made a determination of the claim. This solution is favourable as – materially – it makes no difference, whether the party setting off can choose from several own (counter-) claims or from several principal claims of the opposing party. In both cases, the prime point is to ensure that set-off is in line with the parties’ interests. The argument of legal uncertainty does not convince: using the statutory sequence of redemption allows distinct determination, which (counter-) claim is set off with. Therefore, the uniform regulation of German law is favourable which – in case the party declaring set-off makes no determination (or the other party objects hereto) – refers to the statutory sequence of redemption irrespective which party has two or more claims. 2. Several obligations. In the second constellation, where the opposing party has two or more claims, German law stipulates – as demonstrated – again that primarily the party setting off can determine the claims which are to be set off. If the party makes no determination or the other party objects, the statutory sequence of redemption applies with appropriate adaptations. The Principles refer to the sequence of redemption laid down in Article 7:109 PECL in case of several principal claims (Article 13:105(2) PECL). Pursuant to this provision primarily the party setting off can make the determination (Article 7:109(1) PECL). Otherwise the opposing party may determine (Article 7:109(2) PECL). Only subsidiary the statutory sequence of redemption applies (Article 7:109(3) PECL). 3. Transfer of the right of determination and right to object the determination. The essential difference is that according to the Principles the opposing party has a right of determination if the party declaring set-off does not exercise this right. German law does not recognize such a transfer of the determination right. Pursuant to § 396(1) BGB, however, the opposing party is granted a right to object to the determination by the party setting off. By objecting to the determination the other party can effect application of the statutory sequence of redemption. The provisions of the Principles cause sort of a race between the parties who will declare set-off first, because the determination by this party is decisive. Indeed, this encourages the institute of set-off as the parties will probably declare set-off quickly. The right to object granted by § 396(1) BGB follows the idea that it should not matter which party declares set-off first (cf. Stürner, in Jauernig (2011), § 396 no. 1;

707

D. Looschelders & M. Makowsky Medicus/Lorenz (2010), no. 314). The right to object has practical relevance for the party receiving notice of set-off especially in case one of its claims is already time-barred: Surely the party declaring set-off in contrary to the party receiving the declaration has no interest in determining the time-barred claim of the other party to be set off. But according to § 215 BGB the other party would have been allowed to declare set-off with that claim. The statutory sequence of redemption pursuant to § 392(1) 2 with § 366(2) BGB solves this problem as time-barred claims are considered as well (cf. Gursky, in Staudinger (2011), § 396 nos. 9, 12; Looschelders (2012), no. 427). This idea, however, cannot be transferred to the Principles. As already demonstrated, set-off with time-barred claims is regularly excluded under the Principles according to Article 14:503 PECL, (cf. COMPARISON AND EVALUATION, Article 13:101 PECL). 4. Interests and costs. If the party setting off owes the other party interests and costs besides the principal, German law (§ 396 (2) with § 367 (1) BGB) as well as the Principles (Article 13:105(2) with Article 7:109(4) PECL) rule that the (counter-) claim will initially be set off against the costs, then against the interests and finally against the principal. The Principles, however, allow the creditor who receives notice of set-off to unilaterally determine a different sequence for set-off (Article 7:109(4) PECL); the debtor who sets off cannot make a determination that deviates from the statutory sequence. In contrast, German law allows the debtor a different determination. In this case the creditor has the right to refuse the set-off (§ 367(2) BGB). This comparison shows that the Principles strongly advantage the creditor. As explained the statutory sequence of redemption benefits the creditor: the principal is discharged at last and hence the party can continue to claim interests for it (see above). This sequence is ensured for the creditor by Article 7:109(4) PECL as only he may determine a different sequence. The debtor on the other hand has no legal influence. Consequently, the declared set-off is always effected according to the statutory sequence or to a different sequence determined by the creditor. The German solution attempts to find a compromise between the opposing interests of the parties. According to § 367(2) BGB the debtor may determine a sequence deviating from the one laid down in § 367(1) BGB. If the creditor does not agree on this determination, he can refuse the set-off. In this case, set-off is regarded as not being declared. If the creditor does not refuse, the debtor’s determination is decisive. This differentiated solution is generally preferable as it grants the debtor the possibility to take an influence on the sequence of redemption but also protects the creditor. However, this solution has the undesirable consequence that in case of a disagreement set-off is not effected at all (crit. Gursky, in Staudinger (2011), § 396 no. 51). Since the Principles aim to encourage set-off, it is consistent that its provisions ensure set-off to become effective. Indeed this result is achieved on the debtor’s expenses. However, he may still try to agree with the creditor on the sequence, before he declares set-off.

708

Chapter 13: Set-Off Principles of European Contract Law and DCFR Article 13:106 PECL: Effect of Set-Off Set-off discharges the obligations, as far as they are coextensive, as from the time of notice. Article III. – 6:107 DCFR: Effect of set-off Set-off extinguishes the obligations, as far as they are coextensive, as from the time of notice. 1. Prospective effect. Under the Principles set-off has no retrospective effect. It is effective as from the moment when all substantive requirements of set-off are fulfilled and when the notice of set-off has become effective. The situation has to be evaluated as if both obligations had been paid in that moment (see Lando et al. (2003), p. 151). This prospective effect has the following consequences: a) Interest. The interest on both obligations runs until the time of notice. Comment B points out that in consequence the party paying the higher rate of interest has a strong incentive to declare set-off as soon as possible. b) Delay in Payment. If one party owes an obligation to another party and fails to perform without excuse, the other party may claim performance, damages or terminate the contract according to Article 8:108 PECL. Due to the prospective effect of set-off these legal consequences are not excluded by a latter notice of set-off even though the party in breach had the possibility to declare set-off much earlier, but failed to do so, e.g., because it was not aware of the existence of a claim against the other party. See Lando et al. (2003), p. 152. c) Agreed Payment for Non-Performance. If a party has not exercised the right to give notice of set-off, the interpretation of the relevant clause decides whether an agreed payment for non-performance has become due. See Lando et al. (2003), p. 152, Comment D and Illustration 1. d) Payment Made after Set-Off. Payment made after set-off can be reclaimed as it was made without a legal ground. Payments made before the declaration of set-off discharge the obligation and therefore remove the mutuality requirement. See Lando et al. (2003), p. 152. e) Prescription of Cross-Claim. The effect of prescription on the right to declare set-off is regulated in Article 14:503 PECL (see Lando et al. (2003), p. 152). This problem has already been dealt with in connection with the necessity of the cross-claim being enforceable (see Article 13:101 PECL). 2. Discharge only as far as the obligations are coextensive. Set-off discharges obligations as far as they are coextensive. Therefore, monetary obligations are discharged only to the extent of the smaller one (see Lando et al. (2003), p. 152, Comment G and Illustration 2). Comment H clarifies that it is also allowed to set off only part of the cross-claim against the other party (Lando et al. (2003), p. 152). In this case, the remaining part of the claim will not be discharged.

709

D. Looschelders & M. Makowsky German Law § 389 BGB: Effect of Set-off Set-off effects that the claims, as far as they are coextensive, are considered to be expired as from the time when they confront each other appropriate for set-off. 1. Retrospective effect. Under German law, set-off effects that both claims, as far as they are coextensive, expire retrospectively (ex tunc). The retrospective effect relates to the moment, when set-off could have been declared for the first time, i.e., when all requirements for declaring set-off were fulfilled. With the declaration of set-off all claims arising from delay in performance (§§ 280, 281, 286, 288 etc. BGB) cease retrospectively as well (cf. BGHZ 80, 269, 279; 102, 41, 50; Gursky, in Staudinger (2011), § 389 nos. 21 et seq.). In consequence of the retrospective effect of set-off, interests which have already been paid for the time between the moment when set-off could have been declared for the first time and the moment when set-off actually has been declared, can be reclaimed according to the rules on unjust enrichment, §§ 812 et seqq. BGB (cf. BGHZ 80, 269, 278; BGH NJW-RR 1991, 569; Schlüter, in Münchener Kommentar (2012), § 389 no. 6; Wagner, in Erman (2011), § 389 BGB no. 7). If one party had already paid its debts before set-off was declared, set-off is not effective because the requirement of mutuality must be given at the time when set-off is declared (cf. Larenz (1987), § 18 VI d). The retrospective effect of set-off does not affect this requirement. Thus, a party which has paid its debts not knowing about the possibility of set-off cannot reclaim the payment according to the rules of unjust enrichment. § 813 BGB cannot be applied analogously (cf. Gursky, in Staudinger (2011), § 389 no. 4). 2. Discharge only as far as the obligations are coextensive. The obligations are discharged by set-off only as far as they are coextensive. The party setting off may also set off with only parts of its cross-claim. The remaining part will not be discharged.

Comparison and Evaluation According to the Principles as well as German law set-off makes the principal and the counterclaim expire, as far as they are coextensive. However, pursuant to § 389 BGB, set-off effects expiration ex tunc, i.e., the claims are considered to be expired as from the time when they confronted each other appropriate for set-off for the first time. Under the Principles however, the claims only expire ex nunc, i.e., from the time set-off is declared. The differences between both solutions have a great practical relevance especially with regard to the interest and the legal consequences arising from delay in performance because under German law the retrospective effect of set-off also refers to these issues. The German concept is controversially discussed in legal policy (Bydlinski, (1996), pp. 276, 281 et seq.; Zimmermann (1999), pp. 721 et seq.). The objections are mainly based on the fact that the concept of retrospectivity cannot be upheld

710

Chapter 13: Set-Off consistently. First, the retrospectivity relates only to the effect of set-off, whereas the requirements for set-off need to be complied with in the (later) moment, when set-off is declared (Wagner, in Erman (2011), § 389 BGB no. 6). However, as already shown, a party may declare set-off with a time-barred claim. In this case, one of the requirements of set-off, i.e., enforceability of the cross-claim, is not fulfilled in the relevant moment, when set-off is declared. There are further inconsistencies regarding the legal consequences of retrospectivity for already transacted obligations: On the one hand, it is recognized, that a debtor, who has paid interests on an obligation or who made up for a damage caused by delay, or who paid a contractual penalty, may ask for his money back due to unjustified enrichment (§§ 812 et seq. BGB), if his obligation expires due to the retrospectivity of set-off (cf. Gursky, in Staudinger (2011), § 389 BGB no. 24). Generally, this will be even the case, when the debtor was aware of the possibility to set off, whereas the creditor relied on the delay. On the other hand, the prevailing opinion finds that a debtor who has fulfilled his obligation – unaware of the possibility to set off (e.g., with his already time-barred claim) – cannot claim restitution pursuant to the rules of unjust enrichment (e. g., § 813 BGB analogous; cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 33). The debtor has rather performed the principal claim with cause in law (cf. § 812(1) 1 BGB). Furthermore, the retrospective effect leads to questionable results especially when there are different interest rates for the claims. As set-off disposes delay in performance retrospectively, a party does not have to pay interests, even if it had to pay higher interests rates on its obligation. This prejudices the creditor of that claim. If set-off is attached ex-nunc effect, this unreasonable consequence is avoided: The delay in performance is not disposed and the higher interest debt must be paid (cf. further on this problem Bydlinski (1996), pp. 276, 286 et seq.; Zimmermann (1999), pp. 724 et seq.). In case of foreign currency, set-off German law has already accepted an exception of the principle of retrospectivity with regard to the exchange rates (see Article 13:103 PECL, GERMAN LAW, no. 4). Although this exception is certainly necessary in order to prevent speculation on fluctuation on the money markets, it shows that the principle cannot be upheld consistently. Finally, it is not true that the retrospective effect of set-off is a logical consequence of set-off. The German doctrine has been elaborated in the nineteenth century on the basis of Roman sources of law. In modern times, it is recognized that the doctrine of retrospectivity has been influenced by a misunderstanding of these sources (cf. Berger (1996), p. 63). From the view of the authors of the BGB, another very important argument in favour of the retrospective effect of set-off was the general idea of fairness and equity (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 nos. 23 et seq.; Zimmermann (2005a), 441, 443). As the modern discussion has shown that the retrospectivity does not lead to results which correspond with the idea of fairness and equity, this argument has lost its persuasiveness. Conclusively, it is favourable that the Principles attach a prospective effect to set-off. The renunciation of the principle of retrospectivity does not necessarily imply that there is no possibility to protect the legitimate prospect of a creditor to enforce his claim by set-off in case the requirements of set-off given at the time set-off could have

711

D. Looschelders & M. Makowsky been declared first have partially ceased to exist meanwhile. This refers in particular to the question whether the creditor is allowed to declare set-off with a claim which is already time-barred (see above, Article 13:101, COMPARISON AND EVALUATION, no. 2).

Principles of European Contract Law and DCFR Article 13:107: Exclusion of Right of Set-Off Set-off cannot be effected: (a) where it is excluded by agreement; (b) against a claim to the extent that that claim is not capable of attachment; and (c) against a claim arising from a deliberate wrongful act. Article III. – 6:108 DCFR: Exclusion of right of set-off Set-off cannot be effected: (a) where it is excluded by agreement; (b) against a right to the extent that that right is not capable of attachment; and (c) against a right arising from an intentional wrongful act. 1. Exclusion by agreement. According to the general principle of freedom of contract, the Principles allow the parties to exclude the right of set-off by agreement. In cases of doubt, it has to be found out by interpreting the agreement, whether the exclusion refers only to claims arising from a specific legal relationship or to all claims between the parties. Besides, Comment A points out, that the agreement has to be in correspondence with the general limitations on private autonomy (e. g., the rules dealing with unfair terms). 2. Claim not capable of attachment. Set-off should not deprive a person of claims that provide a minimum subsistence level. Therefore, set-off against a claim cannot be effected to the extent that the party concerned is not capable of attachment. See Lando et al. (2003), p. 154. 3. Claim arising from a deliberate wrongful act. A creditor who cannot obtain performance of his claim may be tempted to resort to self-help. The traditional example for this situation is the case that the creditor of an irrecoverable claim feels free to assault the debtor because he relies on the possibility of set-off. As a more realistic example, Comment C refers to the case that the creditor may try to sell some object that he holds but which belongs to the debtor to satisfy the debt out of the proceeds (Lando et al. (2003), p. 154). In order to prevent self-help in such cases, the creditor may not set-off his claim against the debtor’s claim for damages.

712

Chapter 13: Set-Off German Law § 391 BGB: Set-off in the event of different places of performance (1) [….] (2) If it is agreed that the performance is to be effected at a specified time and in a specified place, it is to be presumed, in case of doubt, that set-off against a claim with another place of performance shall be excluded. § 393 BGB: No set-off against a claim in tort Set-off is not admissible against a claim arising from an intentionally committed tort. § 394 BGB: No set-off against an unpledgeable claim There is no set-off against a claim to the extent that it is not subject to attachment. However, owed contributions may be set-off against collections arising from health insurance, assistance or burial funds, in particular from miners’ provident funds and miners’ union societies. 1. General. Set-off cannot be effected if it is excluded by agreement or statute law. 2. Exclusion by agreement. German law provides no specific rule on the exclusion of set-off by agreement, but with respect to the general principle of freedom of contract there is no doubt that the parties are free to exclude set-off by contract (Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 66). According to the rule of interpretation in § 391(2) BGB such an agreement is to be presumed, if the parties have contractually specified time and place of the principal claim and the cross-claim is to be performed at another place. In this case set-off would effect that the creditor would not receive the performance at the specified time and place. The exclusion of set-off can also be agreed upon in general terms and conditions. In business dealings with private persons, however, set-off exclusions in standard form contracts are invalid pursuant to § 309 no. 3 BGB, if they comprise uncontested claims or claims recognized by final judgments not subject to appeal. As § 309 no. 3 BGB is a specific implementation of the general prohibition of prejudicial treatment according to § 307 BGB, such clauses have to be regarded as invalid in commercial intercourse as well (cf. BGHZ 92, 312, 316; Grüneberg in Palandt (2012), § 309 no. 21; Looschelders (2012), no. 422). Even if there is a valid agreement to exclude set-off, the party receiving notice of set-off may be precluded by good faith (§ 242 BGB) to invoke this exclusion (cf. Heller (2007), 456, 462 et seq.). Especially, a party receiving notice of set-off may not invoke the exclusion, if its financial condition has impaired to a degree that the other party runs the risk of not being able to enforce its claim (cf. BGH NJW 2003, 140, 142; Looschelders/Olzen, in Staudinger (2009), § 242 nos. 709 et seq.).

713

D. Looschelders & M. Makowsky 3. Exclusion by statute law (§§ 393, 394 BGB). Exclusions by statute law can be found in the §§ 393, 394 BGB. Another important statutory obstacle to set-off is the seizure of the principal claim mentioned in § 392 BGB. As this provision refers to the legal requirement that the principal claim must be performable, it has already been dealt with above. a) Claim arising from a deliberate wrongful act. Pursuant to § 393 BGB set-off is not admissible against a claim arising from an intentionally committed tort. This provision shall prevent that the tortfeasor can assert the advantages of set-off. Also, it shall counteract the danger of a private revenge. Without the provision of § 393 BGB, a creditor of an irrecoverable claim could be tempted to harm the debtor and then to set off his irrecoverable claim against the claim for damages (Gursky, in Staudinger (2011), § 393 no. 1; crit. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 61). According to the prevailing opinion § 393 BGB is also applicable in case both claims arise from an intentionally committed tort (RGZ 123, 6, 7; BGH NJW 2009, 3508; Schlüter, in Münchener Kommentar (2012), § 393 no. 5; crit. Larenz (1987), § 18 VI b 1). b) Claim not subject to attachment. Pursuant to § 394 BGB set-off is not admissible against an unpledgeable claim (§§ 850 et seq. ZPO). The provision prevents that a debtor of an unpledgeable claim undermines the protection of enforcement by set-off. The most relevant cases are those where the claim provides a minimum standard of subsistence for the creditor. However, the exclusion of set-off also refers to claims which are not subject to attachment for other reasons (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 no. 64). There are some cases in which the party receiving notice of set-off may be precluded by good faith (§ 242 BGB) to invoke the unpledgeability of its claim (cf. Heller (2007), 456, 460). E.g. the debtor of an unpledgeable claim can declare set-off with a cross-claim arising from an intentional tort connected with the same relationship between the parties (cf. BGHZ 30, 36, 39; Larenz (1987), § 18 VI b 2)). However, with respect to public interests the minimum standard of subsistence must still be sustained (cf. BGHZ 123, 49, 57; Schlüter, in Münchener Kommentar (2012), § 394 no. 14; Medicus/Lorenz (2010), no. 274).

Comparison and Evaluation German law and the Principles have similar rules regarding the exclusion of the right to set-off (cf. Zimmermann, in Schmoeckel (2007), §§ 387–396 nos. 58 et seq.). Both allow an exclusion of set-off by agreement. Furthermore, set-off against unpledgeable claims (Article 13:107 lit. b PECL; § 394 BGB) and set-off against claims arising from a deliberate wrongful act are excluded (Article 13:107 lit. c PECL; § 393 BGB). This also complies with the general ideas of most European legal systems (cf. Lando et al. (2003), p. 155, Article 13:107, notes), although there are some differences in detail (cf. Heller (2007), 456, 479 et seq.). Besides, under German law many cases exist in which the party receiving notice of set-off is precluded by good faith (§ 242 BGB) to

714

Chapter 13: Set-Off invoke the unpledgeability of its claim (cf. Looschelders/Olzen, in Staudinger (2009), § 242 nos. 704 et seq.). This corresponds with the outstanding importance of good faith in German law. However, the concept of good faith is also recognized under the Principles (see Article 1:201(1) PECL; cf. Ranieri (2009), p. 1847; Zimmermann (2005a), 289, 295). Therefore, in most cases a similar result could be achieved under both regulations.

715

CHAPTER 14

Prescription A. Piekenbrock

SECTION 1:

GENERAL PROVISION

Principles of European Contract Law Article 14:101: Claims subject to Prescription A right to performance of an obligation (‘claim’) is subject to prescription by the expiry of a period of time in accordance with these Principles. 1. General. Chapter 14 of the Principles, which has been recently reproduced almost word for word in Chapter III.-7 of the Draft Common Frame of Reference, deals with the influence of time on individual rights. It has been known since Heraclitos that all things change by the lapse of time, even if they seem to remain the same: ‘we step and do not step in the same rivers’. Or, as Plato put it, ‘panta rhei’ (Kratylos, 402 a). What the ancient Greek philosophy found out about nature is also true for the law: the lapse of time and the change of circumstances cannot be ignored. Indeed, Plato’s ‘Laws’ contain rules on the so-called positive prescription (Nomoi, 954 c-e). Apart from philosophical writing, it was the Roman Emperor Septimus Severus who enacted that the property of land in the province of Egypt should be acquired by the bona fide possessor after ten or twenty years of peaceful and uncontested possession (FIRA I, no. 84, p. 438). This act at the beginning of the third century is the origin of the so-called praescriptio acquisitiva. About 200 years later, in 424 A.D., the Eastern Roman Emperor Theodosius II enacted that all actions, including personal ones, should be raised within thirty years (C. 7, 39, 3 pr.). This is the origin of the so called praescriptio extinctiva. In modern times, similar rules on the alteration of private individual rights after a certain lapse of time can be found throughout the EU. But notwithstanding this basic agreement on the necessity of what we shall call ‘rules on time’ in any developed legal

717

A. Piekenbrock system, the single Member States have adopted rules very different from one another. One reason for this lies in the different dogmatic concepts adopted in European legal history, which we will deal with later on. But the main problem consists in the difficulty of giving good reasons for the change in individual rights purely because of the lapse of time. That is to answer the question why a certain right such as the legal ownership of a chattel or a piece of land can be shaped by the longlasting possession by somebody else. Referring to the ownership as ‘legality’ and to the possession as ‘reality’, we face a fundamental question of legal philosophy: why can or even must legality be shaped by reality? Is it that it becomes more and more difficult to prove that the present possessor has no good title and, therefore, somebody else has always been the legal owner. Or to put it in wider terms: that reality (i.e., possession) does not match with legality (i.e., ownership)? And that we, therefore, vest reality with legality? Or to put it even more precisely: that we do not consider what might have been legality long ago as we simply do not know. And that we let reality shape legality instead? Indubitably, time can have what Windscheid called its obfuscating power (Windscheid et al. (1906), p. 544) and, therefore, there is good reason to bar individual rights in the future, even if they might have existed in the past. By that means, the alleged claimant is no more admitted to prove his alleged rights. Yet, if such a right indubitably has existed, there must be other reasons why it may be lost after a certain period of time. As the Lando Commission has emphasized, prescription can amount to an act of expropriation in case the entitled person could have proved the right having been existing before (Lando et al. (2003), pp. 174 et seq.). Therefore, a rule of law time-baring such rights needs justification both under the German constitution (Article 14(1) GG; cf. BVerfGE 112, 93, 109 et seq. – slave labour in Nazi-Germany) and the European Convention for the Protection of Human Rights (Article 1 of the First Protocol). One reason to time-bar individual rights focuses on the entitled person. If the entitled person has not exercised the alleged right for quite a while, this may act as evidence that the belatedly-alleged right never existed. And even if the right did exist, the lack of interest as shown in the permanent non usus or silence (cf. C. 7, 36, 1) may lead to the loss of it treating the enduring silence as if the claimant had renounced his claim (Schelhaas, in Busch et al. (2006), p. 175). If that were the main reason, the ‘rule on time’ would be set up as a disadvantage for the claimant being the consequence of negligence. It should, therefore, not operate when the entitled person had no fair chance to exercise his right, either for reasons beyond his control (cf. Article 14:303 PECL) or for personal reasons such as ignorance (cf. Article 14:301 PECL). This reasoning found expression in the medieval dictum ‘contra non valentem agere nulla currit praescriptio’ (cf. Clément (1902), pp. 30 et seq.; Lando et al. (2003), p. 177, citing the dictum slightly different). The other reason focuses on the defendant. The defendant may have taken a certain situation for granted for a long time such as the tenancy of a home. As far as obligations are concerned, he may have lost documents proving that he is not liable for damages suffered by the other party or that he has already performed his duties. Therefore, there can be good reason to bar any right that might put this situation into question. If that were the main reason, the ‘rule on time’ would be a benefit for the (alleged) debtor, who might not be a debtor at all (Lando et al. (2003), p. 195). It should

718

Chapter 14: Prescription then only apply to the ‘bona fide defendant’ as it was true for the medieval canon law (X. 2, 26, 20) and the General Landlaw of Prussia of the late eighteenth century (I 9 §§ 568, 569, 579 ALR 1794). Finally, the legislator can combine these two rules so that the ‘rule on time’ can only operate to the benefit of a ‘bona fide defendant’ when the bearer of the belatedly-alleged right had a fair chance to exercise it in time. The author of this comment has tried to set up separate rules on time based on each of the main reasons for the loss of personal rights by the lapse of time (Piekenbrock (2006), pp. 317 et seq.). The Principles instead are not based exclusively on one of these reasons, though they emphasize the point of view of the entitled person balanced with legal certainty (cf. Schelhaas, in Busch et al. (2006), p. 175 referring to Dutch adjudication). 2. Legal concepts. As far as the aforementioned legal concepts are concerned, there are at least three different types to be distinguished: a) French law. French law has traditionally defined prescription (la prescription) as ‘a manner of acquiring or of discharging oneself at the end of a certain time and subject to the conditions determined by law’ (Article 2219 c.c.). We can call this concept the merger of praescriptio acquisitiva and praescriptio extinctiva. This provision is still in force in Belgium and Luxembourg, whereas France has loosened the link between the two types of prescription in 2008, now providing for prescription extinctive in Article 2219 c.c. and for prescription acquistive in Article 2258 c.c. b) German law. German law instead has separated praescriptio acquisitiva and praescriptio extinctiva. It names the first ‘Ersitzung’ (§ 937 BGB), the second ‘Verjährung’ (§ 194 BGB). The same is true for the modern Italian and Portuguese codes that have emancipated themselves from their French example. These twentieth century codes only name the praescriptio extinctiva after the postclassical praescriptio (‘prescrizione’ in Italy: Article 2934 c.c.; ‘prescrição’ in Portugal: Article 300 c.c.), whereas the praescriptio acquisitiva is named after the classical Roman usucapio (‘usucapione’ in Italy: Article 1158 c.c.; ‘usucapião’ in Portugal: Article 1287 c.c.). c) English law. Finally, English law, that has never adopted the Roman concept, has for centuries suffered from the lack of proper rules on time. Thus it took until 1540 for King Henry VIII to enact general rules on the limitation of real actions (32 Henry VIII, Chapter 2). Some decades later, in 1623, King James I laid the fundaments of modern limitation law in England (Limitation Act, 1980, c. 58, as amended) and Ireland (Statute of Limitation, 1957, Public Act No 6/1957, as amended; Limitation (Northern Ireland) Order 1989, S.I. 1989/1339 (N.I. 11)), including personal actions (21 James I, Chapter 16). Prescription instead is only understood as a manner of acquiring limited rights of use over another’s land, such as easements (Cheshire et al. (2000), pp. 594 et seq.). d) The Principles’ choice. If the Principles had adopted the third concept, they might not contain the ‘rules on time’ at all, since the limitation of action is said not to bar the right, but the remedy (cf. Harris v. Quine (1869) L.R. 4 Q.B. 653 at 657 per Cockburn, C.J.; Black-Clawson Ltd. v. Papierwerke Waldhof-Aschaffenburg A.G., [1975] A.C. 591 at 615 per Lord Reid). Therefore, the limitation has always been dealt with as part of the procedure in the Common Law world (cf. e.g., Zuckerman (2003), nos 24.5 et seq.; O’Hare et al. (2003), nos 5.001 et seq.). Nevertheless in contemporary

719

A. Piekenbrock conflicts of law it has been accepted that the law governing the contract also governs the ‘rule on time’ (Article 10(1)(d) of the Rome Convention, 1980; § 1(1) Foreign Limitation Period Act, 1984; Article 1(1)(d) of the Rome I Regulation. Therefore, it seems almost natural that the Principles have not adopted the traditional Common Law concept. The same is true for the first concept, as the real property law lies far beyond the scope of regulation of the Principles. Instead, the Lando Commission has opted for the second concept, which can be described as the modern continental concept. This choice has been underlined by the terminology in the English version of the Principles using ‘prescription’ only in the sense of praescriptio extinctiva. Such a meaning is not absolutely uncommon within the English language as it is used in this way in the Malta code (Article 2107(2)) and corresponds with the ‘liberative prescription’ as defined in the Louisiana code (Article 781) or the ‘negative prescription’, as the Scots say (s. 6 Prescription and Limitation (Scotland) Act, 1973). Therefore the same terminology is used in the translation of the German code in this commentary, insofar differing from the translation used by Markesinis/Unberath & Johnston (2006), pp. 876 et seq. But it is true that in the ears of English and Irish Lawyers the terminology adopted by the Principles must have an odd ring (McGee, in Hondius (1995), p. 135). 3. Legal definition of claims. The first part of the Article under discussion contains the legal definition of a claim, which is then declared as subject to prescription. The claim is defined as the right to perform an obligation. Looking at the restricted scope of the Principles intended only to apply as general rules of contract law (Article 1:101(1) PECL), at least at first glance, it seems likely that this definition refers only to contractual obligations. However, according to the Lando Commission, Chapter 14 also applies to other rights to performance including rights to damages for harm caused by another in a non-contractual situation (Lando et al. (2003), p. xviii, 158). Therefore, the definition of a claim as subject to prescription is wider than the one for a claim as subject to assignment which is defined as a ‘right to performance under an existing or future contract’ (Article 11:101 PECL). Yet, the Article in question cannot apply to all rights to performance as based, for example, on property rights, family law and the law of succession (Lando et al. (2003), p. 159). Therefore, § 197(1) no. 2 BGB cannot conflict with the Principles, as they are restricted to the law of obligation though understood in a wide sense (Lando et al. (2003), p. xviii; this restriction has been overlooked by Franck (2007), p. 117). From a comparative point of view, it is interesting to see that the Principles follow national examples of prescription rules applicable only to the law of obligations, such as the Swiss Code of Obligations of 1881 and the Croatian Civil Obligation Act of 2005. 4. Prescription of claims. Declaring these claims subject to prescription, the Principles underline two basic rules of prescription law. a) Prescription only of claims. On the one hand, only claims can prescribe, whereas other individual rights are without the scope of regulation. This is true, for example, for the right to terminate a contract (Article 9:301 PECL). As such a right is exercised by unilateral notice to the other party (Article 9:303(1) PECL), it is no claim and therefore is not subject to prescription. Instead, the right to terminate a contract is

720

Chapter 14: Prescription governed by its own ‘rule on time’: the right is lost, when it is not exercised within a reasonable time after the party aggrieved has or ought to have become aware of the non-performance of the contract (Article 9:303(2) PECL). In the case of the aforementioned right being exercised within time, it can establish a claim subject to prescription, for instance to recover the money paid (Article 9:307 PECL). It will be discussed later, whether these two different ‘rules on time’ (on the right to terminate a contract and the claim established by the termination of the contract) have to be considered together. b) Prescription of all claims. On the other hand, all claims can prescribe. Therefore, within the scope of regulation of the Principles there are no ‘eternal’ claims not subject to prescription. This is reasonable for contractual claims as the concurring will of the parties has established the right which is then time barred due to non-performance of the claimant. Instead, claims can be established by law also in the common interest, such as the termination of an illegal situation. Under these circumstances, the non-performance of the claimant cannot legalize the situation and should not affect the claim (cf. Piekenbrock (2006), p. 386).

German Law § 194 BGB: Matters subject to Prescription (1) The right to demand that another person shall do or refrain from doing something (a claim) is subject to prescription. (2) Claims from a family law relationship are not subject to prescription insofar as they are aimed at the restoration for the future of the situation corresponding to the relationship or towards consent to a scientific test to clarify biological descent. 1. The German choice. The German ‘rule on time’ is also based on the modern continental concept and, therefore, only declares claims as defined in subsection (1) as subject to prescription. This rule of law has substantially remained unchanged since it has come into force in 1900 and has undergone only slight linguistic interventions by the great reform effective since 2002, known as the Law of Obligations Reform Act (Schuldrechtsmodernisierungsgesetz, BGBl. 2001 I, p. 3138) and been amended by the biological descent clarification Act 2008 (Gesetz zur Klärung der Vaterschaft unabhängig vom Anfechtungsverfahren, BGBI. I, p. 441), which does not need further comment in a book on contract law. § 194 (1) BGB leads back to Windscheid’s modern understanding of the Roman actio, which he declared to be nothing else but the claim in our modern meaning (Windscheid (1856), pp. 5 et seq.). 2. Scope of application. This basic rule on the scope of prescription is part of the general provisions in the first book of the civil code. Therefore, it applies not only to (contractual and non-contractual) obligations but also to claims governed by property law (real claims such as the rei vindicatio – § 985 BGB), family law and the law of succession (§ 194(1) BGB).

721

A. Piekenbrock 3. Exceptions from the prescription of claims. Generally, also German law declares all claims as subject to prescription. But due to the wider scope of regulation, there are several exceptions from this general rule. On the one hand, this is true for certain family law relationships such as the claim to establish the matrimonial community (§ 1353 BGB), maintenance claims for the time to come (§§ 1360, 1361, 1569 et seq., 1601 BGB) and the claim to equalize pension rights upon divorce (§ 1587 BGB) (cf. OLG Karlsruhe FamRZ 2002, 1633, 1634). On the other hand, in property law a number of claims that are granted also in the common interest (§§ 898, 924 BGB) or are based on publicly registered rights (§ 902 BGB) are not subject to prescription (cf. BGHZ 187, 185, 191 et seq.). Finally, the claim to end the tenancy in common does not prescribe (§ 758 BGB). All these claims have in common that the lapse of time cannot establish legal peace and certainty and, therefore, it would not be appropriate if they were time-barred.

Comparison and Evaluation 1. Correspondence of the Principles and German Law. As we have seen above, the Principles and German law follow the same concept, also adopted in Article III.-7:101 DCFR though without the definition of claims given there in Annex I. As the German ‘rule on time’ is among the oldest adopting this concept developed by the German Historical School, there can be no doubt that the Principles have followed the German example. Yet, the correspondence of the Principles and German law also includes the technique of enactment. In particular, German lawyers are familiar with legal definitions spread all over their civil code, whereas Common Law statutes and the legislature of the European Community usually contain a separate section for the legal definitions appearing at the very beginning of the enactment. From a comparative point of view, it is interesting that the Principles partly follow the Common Law tradition (cf. e.g., Article 1:301 PECL), but in our case they seem to be very German. 2. Criticism. There can be no doubt that the concept adopted is appropriate as the ‘rule on time’ not only for the law of contract, but also for the whole of private law. Yet the restricted application of prescription referring only to claims leads to the necessity to establish separate rules on time for other rights, such as the unilateral right to avoid a contract (Articles 4:107 et seq. PECL). As these remedies can concur with claims, the legislature must pay attention that the rules on time respectively applicable neatly fit together. Unfortunately, this is not always the case, as the following example shows. If one party to a contract deceives the other party, the latter is entitled to avoid either the contract (Article 4:107 PECL) or his expression of will (§ 123(1) BGB). As the avoidance is exercised by notice to the other party (Article 4:112 PECL; § 143(1) BGB), it is not a claim being subject to prescription. Instead, unilateral rights to influence a legal relationship such as the avoidance are basically governed by their own ‘rules on time’. According to the Principles, the notice of avoidance ‘must be given within reasonable time, with due regard to the circumstances, after the avoiding party knew or ought to have known of the relevant facts or became capable of acting freely.’ (Article 4:113 PECL). German law sets up a fixed time limit of one year for the victim to avoid the expression of will after having detected the fraud or having become

722

Chapter 14: Prescription capable of acting freely (§ 124(1) and (2) BGB). This leads to the conclusion that, regardless of these differences, the ‘rule on time’ applicable to the avoidance of the contract or the expression of will is stricter than the prescription of claims, the general period of which is three years (Article 14:201 PECL; § 195 BGB). Therefore, where there might be a claim concurring with the right to avoid a contract, there is inconsistency regarding the different rules on time. Under German law, the purchaser can claim damages for the breach of duty during the negotiation of the contract (§§ 311(2) no. 1, 280(1) BGB), known for decades as the culpa in contrahendo (cf. RGZ 78, 239, 240). Furthermore, the victim is entitled to a tort claim as the seller has committed a criminal offence (§§ 823(2) BGB, 263 StGB). With these claims, the purchaser can seek the annulation of the contract, even if the avoidance period has already expired (cf. RGZ 103, 154, 159; BGHZ 42, 37, 42; 167, 239, 251). It is true that the Principles avoid this inconsistency by restricting damage claims after the avoidance period has expired (Article 4:117(2) PECL). Furthermore, German law of sale refers to the prescription of claims (§ 438 BGB) to time bar the avoidance of a sales contract (§ 218(1) BGB). But these correct solutions of the conflict of ‘rules on time’ in particular cases do not alter the fact that the restricted scope of prescription requires separate rules on time easily conflicting with each other. Furthermore, the Principles cannot exclude tort claims insofar as they can concur with contractual claims, which is not only true for the German law. Therefore, there is good reason to apply the same ‘rule on time’ on all remedies granted for the same interest, whereas the distinction between the prescription of claims and the limitation of other remedies is a source of contradiction that is always ready to pour out its venom.

SECTION 2:

PERIODS OF PRESCRIPTION AND THEIR COMMENCEMENT

Principles of European Contract Law Article 14:201: General Period The general period of prescription is three years. Article 14:202: Period for a Claim Established by Legal Proceedings (1) The period of prescription for a claim established by judgement is ten years. (2) The same applies to a claim established by an arbitral award or other instrument which is enforceable as if it were a judgment. 1. General. The first Article in comment states the general period of prescription to be three years. As a general rule it only applies when there is no special prescription period set up for certain claims. Yet, in order to set up a simple and uniform ‘rule on time’ the Principles only allow little space for special prescription periods (cf. Schelhaas, in Busch et al. (2006), p. 176). On first glance, this fact might also be due to the restricted scope of the Principles not containing rules on specific contracts, but exclusively the general rules on obligations. Yet, neither the Draft Common Frame of Reference, which follows the Principles also on this topic (Article III.-7:201 DCFR) does

723

A. Piekenbrock provide specific rules on prescription for specific contractual claims such as the remedies of the buyer for lack of conformity (Article IV.A.-4:201–4:203 DCFR). Thus the only exception from the general rule is found in the following second Article, dealing with claims established by legal proceedings. 2. The general period of prescription. If Article 14:201 PECL sets up the general period of prescription to be three years, this is an imperfect rule of law as it states neither the beginning of the period nor the exact end. Regarding beginnings, the relevant regulation is found in Article 14:203 PECL, which will be commented later on. Instead, to determine the expiry of the prescription period, we also have to refer to the general rules on the computation of time (Article 1:304 PECL). According to paragraph (2) of this Article, official holidays and non-working days occurring during the period are included in calculating the period. Only if the last day is an official holiday or a non-working day, the period is extended until the first following working day. Therefore, the period of prescription can be described as a continuously running period, also known as a tempus continuum. And it is only on the very last day before the period of prescription expires that it must be possible to exercise one’s right. Therefore, this day is named an utilis dies. Tempus continuum, however, does not mean that there can be no circumstances to extend the period of prescription. On the contrary, there are several reasons to suspend the running of the period or to postpone its expiry (Article 14:301–14:305 PECL), which will also be dealt with later on. 3. The period of prescription for claims established by judgement and other enforceable instruments. As mentioned above, the only exception from the general rule of the Principles is found in Article 14:202 PECL stating, such as Article III.-7:202 DCFR, a period of ten years for all claims established by judgments, arbitral awards and other enforceable instruments. a) Judgements and arbitral awards. The Principles set up a special period of prescription for claims established by a judgement. Yet, they do not enumerate the judicial instruments to which the longer period applies, as the civil procedural law is far beyond the scope of their regulation. Instead, the Principles silently refer to the national law. As the same is true especially for multilateral conventions on the recognition and enforcement of judgments, we can refer to the definition in Article 25 of the Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters of 1968. According to this definition, adopted by all later EC regulations on European civil procedure, the Article in comment refers to ‘any judgment given by a court or tribunal of a Contracting State, whatever the judgment may be called, including a decree, order, decision or writ of execution, as well as the determination of costs or expenses by an officer of the court’. Paragraph (1) of the Article in comment merely refers to the establishment of the claim by a judgment and does not mention the enforceability. Therefore it also applies to declaratory judgements as long as they establish the claim itself and not merely single prerequisites such as the validity of a contract (cf. Lando et al. (2003), p. 167).

724

Chapter 14: Prescription For the definition of an arbitral award, we can refer to Article I(2) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. According to that definition, the term ‘arbitral awards’ shall include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted. b) Enforceable instrument. For the definition of enforceable instruments we can refer to authentic instruments and court settlements as in Articles 57 and 58 of the Brussels I Regulation. On the other hand, according to the official comment, Article 14:202 can also apply to private instruments as long as they do not require a formal act by a court but may be enforced directly (Lando et al. (2003), p. 167). This would be true, for instance, for bills of exchange under Italian law (Article 63 of the Bills of Exchange Act, 1933). Yet, Article 14:202 PECL could not apply in this case due to the special legislation on prescription in Article 70 of the Geneva Uniform Law on Bills of Exchange and Promissary Notes of 1930. Furthermore, the entry into the insolvency schedule must be understood as an enforceable instrument if the debtor has not denied his obligation and the claim therefore is enforceable against him in person (§ 201(2) and § 257(1) InsO). But the term can be understood even in a wider sense because the paragraph (2) deals with arbitral awards and other instruments enforceable as if they were a judgment. This construction of the sentence is of great interest because arbitral awards are not enforceable by law, but have to be declared enforceable by court (§ 1060(1) ZPO). Therefore, Article 14:202(2) PECL can also apply to other instruments which have to be declared enforceable. This is particularly true for advocates’ settlements as defined in § 796a ZPO. As far as claims established by an arbitral award are concerned, the prolongation of the period of prescription from three to ten years operates even before the award has been declared enforceable. Therefore, the question arises whether the same is also true for advocates’ settlements before having been declared enforceable by court or a notary public (§§ 796b, 796c ZPO). On the one hand, there is good reason to give a positive answer to that question. First, because the creditor gaining the settlement with the defendant can no more be sanctioned for negligence. Second, the settlement clears up the legal situation between the parties by the means of a contract foreclosing most of the contradicting arguments (cf. Bork (1988), pp. 310 et seq.). Thus the legal situation is very similar to an arbitral award when qualified as a contract between the parties of the arbitral clause that thereby have transferred the power to determine the content of that contract to the arbitrator (cf. Cass. civ. 3 August 2000, no. 527, Foro it. 2001, I, pp. 839, 842). On the other hand, the Lando Commission has referred to enforceability as ‘the characteristic that justifies placing these instruments on a par with a judgement’ (Lando et al. (2003), p. 171). Therefore, the settlement itself cannot operate the prolongation of the prescription period. Yet, the consequences in practice can almost be ignored, because the settlement leads to renewal by acknowledgement (Article 14:401(1) PECL). Therefore, the claimant has three years time to seek the declaration of enforceability.

725

A. Piekenbrock German Law § 195 BGB: Standard period of prescription The standard period of prescription is three years. § 196 BGB: Prescription period in the case of rights to land Claims to transfer of property in land as well as to the creation, transfer or termination of a right in land or for the alteration of the content of such a right as well as claims to counter-performance are subject to period of prescription of ten years. § 197 BGB: Period of prescription of thirty years (1) The following are subject to a period of prescription of thirty years insofar as no other provision is made: 1. Claims to delivery arising from real property or other rights in rem, sections 2018, 2130 and 2362, as well as claims serving to assert the claims for return, 2. (repealed), 3. Claims established in a legally binding way, 4. Claims arising from directly enforceable settlements or directly enforceable documents, 5. Claims which have become enforceable by establishment in insolvency proceedings, and 6. Claims to reimbursement of the costs of execution. (2) Insofar as claims under subsection (1) no 2 have regularly recurring services or support services as their content and claims under subsection (1) nos 3 to 5 have regularly recurring services becoming due in the future as their content, the standard period of prescription takes the place of the period of thirty years. 1. General. The length of the standard period of prescription in German law is equivalent with the Principles and does not need any further comment. Instead, it is interesting to see the exceptions to this standard rule. 2. Claims related to real property. The first exception concerns claims related to real property. For such claims § 196 BGB sets a special period of prescription of ten years. Though a claim to the transfer of real property rights can arise from very different legal relationships, the section in comment does not apply to the claims mentioned arising from the law of succession and mentioned in § 197(1) no. 1 BGB), as they are governed by an even longer period of prescription. Therefore, the special period of prescription for claims related to real property is basically applicable on contracts that entitle one party to such claims. But the scope of application is even smaller as the obligation to transfer real property requires an authentic instrument set up by a notary public (§ 311b(1) BGB). In such an instrument, the purchaser can submit to an executive clause (§ 794(1) no. 5 ZPO; cf. BGH NJW 1996, 2165, 2166; 1997, 2887, 2888; 2000, 951, 952) by which means

726

Chapter 14: Prescription the period of thirty years applies (§ 197(1) no. 3 BGB). Therefore, § 196 BGB applies only to claims other than agreed on in an enforceable instrument. Yet, the period of ten years also applies to claims on rights on the real estate other than the property itself, such as a usufruct, a mortgage or an easement. Finally, parliament has changed the government’s bill (BT-Drucks. 14/6040, p. 3) insofar as the special period of prescription also applies to the seller’s purchase money claim. Therefore, the seller can claim the money as long as the purchaser can claim the property. If the government’s bill had been enacted, the latter might have refused the payment after three years due to prescription. On the other hand, also the seller could have refused the transfer of the property due to the non-performance of B under § 320 BGB (BT-Drucks. 14/7052, p. 179). 3. Prescription of thirty years. § 197(1) BGB contains several categories of claims subject to a period of prescription of thirty years, which used to be the standard period before the Law of Obligations Reform Act became effective (§ 195 BGB 1900). As the claims mentioned in § 197(1) no. 1 BGB deal with property law and certain cases of the law of succession, they shall be considered no further in a commentary focused on European Contract Law. The only point of general interest is that the legislature has considerably restricted the scope of application of the exceptions repealing § 197(1) no. 2 BGB by virtue of the Inheritance law and Prescription Reform Act 2009 (Gesetz zur Änderung des Erb- und Verjährungsrechts, BGBl. I, p. 3142). According to the original version of § 197(1) no. 2 BGB enacted in 2001, the prescription period of thirty years applied to all claims arising from family law relations or the law of succession. The five other categories basically match with Article 14:202 PECL. No. 3 refers to the establishment of the claim as res judicata, based on a judgment in the wide sense or on an arbitral award (cf. RGZ 100, 118, 120; Schlosser, in Stein/Jonas (2002), § 1055 no. 12). The same is true for the entry into the insolvency schedule (§ 178(3) InsO) if the debtor has not denied his obligation or the obligation has been established (§ 201(2) InsO; cf. Schumacher, in Münchener Kommentar InsO (2008), § 178 no. 70). Therefore, it was unnecessary to mention the establishment in insolvency proceedings separately (no. 5). No. 4 refers to authentic instruments and court settlements as described above. However, the express reference to the enforceability of the settlement makes clear that also under German law an advocates’ settlement can only cause the prolongation of the period of prescription after it has been declared enforceable (cf. Grothe, in Münchener Kommentar BGB (2012), § 197 no. 25; Peters/Jacoby, in Staudinger (2009), § 197 no. 57; Niedenführ, in Soergel (2002), § 197 no. 33). Finally, no. 6 which has been inserted with the Prescription Reform Act 2004 (Verjährungsanpassungsgesetz, BGBl. I, p. 3214) is due to the fact that under German law the costs of the enforcement of a claim can be enforced by law simultaneously (§ 788(1) ZPO). Therefore, the determination of these costs by the court (§ 788(2) 1 part 2 ZPO), which leads to an enforceable decision (§ 794(1) no. 2), is optional (cf. BGHZ 90, 207, 210; Münzberg, in Stein/Jonas (2002), § 788 no. 32). The legislator wanted to make clear that the creditor is not forced to apply for a court decision in order to benefit from the longer period of prescription (cf. BT-Drucks. 15/3653, p. 17).

727

A. Piekenbrock Whereas the period of prescription of the above mentioned claims is generally set to be thirty years, § 197(2) BGB contains a counter exception similar to the former § 218(2) BGB 1900. It applies to all future claims on regularly recurring services which are governed by the standard period. If, for example, the debtor has entered into an obligation to pay EUR 1,000 per month under an authentic instrument, the claim is subject to the standard period of prescription of three years.

Comparison and Evaluation 1. Large correspondence between the Principles and the German law. Comparing the Principles to the German law, we shall only consider rules falling within the scope of application of the Principles, excluding those related to property law, family law and the law of succession such as § 196 BGB and § 197(1) nos. 1 and 2 BGB from further consideration. As far as the abovementioned rules are concerned there is a large correspondence between the Principles and German law. First, this is true for the length of the general or standard period of prescription. Furthermore, the exceptions to the general or standard period of prescription are very similar and only show slight differences as far as the advocates’ settlements are concerned. These differences are of minor importance considering that Principles should always avoid detailed rules but set up common guidelines for national legislation. They are neither a complete model law, which could be enacted literally, nor an EC directive. 2. The different length of the period of prescription. The main difference between the Principles and the German law concerns the quantification of time. The period of prescription of legally established or enforceable claims is three times as long in Germany as in the rules set up by the Principles. As the fixation of a specific period is necessarily arbitrary, these different options are rather difficult to evaluate: The German law keeps the ancient Roman period of thirty years which used to be the standard period until only recently (§ 195 BGB 1900), whereas the Principles have opted for a compromise between the national jurisdictions (Lando et al. (2003), pp. 166, 167) adopted also in recent legislation in Italy (Article 2853 c.c.) and Sweden (§§ 2(1), 7(1) Preskriptionslag (1981:130)). Yet, the new Finnish Prescription Act has reduced the period to only five years (§ 13(2) Lag om prescription av skulder, Finlands Författingssamling no. 728/2003), which is among the shortest within the European Union. However, the Principles do not contain the counterexception for claims on periodically due performance known in German (§ 197(2) BGB), Austrian (cf. § 1480 ABGB; SZ 39/40 and 66/142 concerning interests), Portuguese (Article 311(2) c.c.) and Dutch law (Article 3:324(3) BW; Schelhaas, in Busch et al. (2006), pp. 193, 196). The reason is supposed to be the rather short period of ten years applicable to the claims in question (Lando et al. (2003), p. 168 in Note 3), whereas in the abovementioned jurisdictions the period is either twenty years (Netherlands: Article 3:324(1); Portugal: Article 309 c.c.) or even thirty years (Germany: § 197 BGB; Austria: § 1478 ABGB). Yet, the main reason for the counterexception is that small sums can easily be afforded when paid regularly but quickly sum up to an unaffordable amount (BGHZ 31, 329, 335; 98, 174, 184), an effect happening even before ten years have passed. Many people

728

Chapter 14: Prescription can afford EUR 100 per month, but not EUR 6,000 at a time, which is the equivalent of only five years. Therefore, there seems to be good reason to privilege claims on periodically due performance even when the applicable period of prescription is ‘only’ ten years.However, the debtor of a legally established or enforceable claim knows about his obligation. Therefore, the non-performance of the obligation generally is not due to ignorance, but to insolvency (Piekenbrock (2006), p. 337) so that we do not have to consider the ‘bona fide defendant’. As the Principles do not deal with insolvency law including the discharge of the debtor, it seems adequate that they do not contain a counterexception such as § 197(2) BGB. 3. Policy considerations. This leads us to discuss why the period of prescription for established and enforceable claims is longer than the standard period. a) Acts established by a judgment. The main reason lies within the legal establishment of the claim which can be put into question only under certain conditions. Therefore, time loses its obfuscating power as far as facts in the past are concerned (Schelhaas, in Busch et al. (2006), p. 187). This is true in particular for judgements when the defendant is estopped per rem judicatam and can only oppose new facts arising after the final hearing (§ 767(2) ZPO), whether or not the judgment is enforceable. Consequently, the longer period of prescription can only apply insofar as the claim has been established by the judgment. If, for instance, the actor has only brought an action for half of the sum due to him by the defendant, the second half is not subject to the prescription of ten years under Article 14:202 PECL, even if the court has established all relevant facts for the whole claim and the parties would be estopped to put these findings into question in later proceeding (for the doctrine of issue estoppel cf. Spencer Bower et al. (1996), p. 88). The legal establishment of the claim could lead to the conclusion that there is no good reason for prescription at all: On the one hand, the claimant has pursued his right and is not guilty of negligence. On the other hand, the debtor knows or at least ought to know his obligation, so there is no reason to protect the ‘bona fide defendant’. Yet, this point of view adopted for claims established in insolvency proceedings in former Swiss law (Article 149(5) SchKG 1889) does not consider that the existence of the established claim may be put into question by performance which becomes more and more difficult to prove for the defendant or his heirs. Therefore, there is good reason for the prescription even of claims established by judgments. On the other hand, this period should not be too short. In particular as far as legally established and enforceable claims are concerned, there is always a temptation to make use of the ‘liberative prescription’ as a means to discharge an insolvent debtor (cf. BT-Drucks. 14/6040, p. 106). Yet, this would be a systematic abuse of a legal concept that has not been created for such a purpose. The discharge of insolvent debtors is part of the insolvency law and should be governed by the insolvency statutes applicable to a certain debtor. For only the insolvency law can set up the uniform conditions for the discharge applying to all debts or at least to the whole of the debtor’s estates (cf. Article 17(2) of the EC-Regulation 1346/2000 on insolvency proceedings),

729

A. Piekenbrock whereas the prescription would be governed by the lex causae which might differ from case to case. b) Other cases of establishment of a claim. The claim can also be established by arbitral awards, no matter if the establishment works by means of procedural (§ 1055 ZPO) or of substantial law, the states court either having to dismiss the case for procedural reasons (cf. Schwab/Walter (2005), ch. 21. no. 5; Münch, in Münchener Kommentar ZPO (2013), § 1055 no. 7) or to decide it on the merits according to the arbitral award (cf. Schlosser, in Stein/Jonas (2002), § 1055 no. 6; Cass. civ. 3 August 2000, no. 527, Foro it. 2001, I, pp. 839, 842). As far as court settlements are concerned, the situation is slightly different as they cannot have the force of res judicata and, consequently, § 767(2) ZPO does not apply (cf. RGZ 37, 416, 419; BGH NJW 1953, 345). In contrast, the settlement can also establish a claim that was subject to legal dispute before. In this case, the establishment necessarily operates by means of private law either through the acknowledgement of the pre-existing claim or by the creation of a new one (cf. Bork (1988), pp. 121 et seq.). Therefore, there is also good reason to apply the longer period for court settlements. c) Enforceable instruments. Instead, enforceable instruments do not establish a claim and do not even alter the burden of proof (cf. BGHZ 147, 203, 208 et seq.). Therefore, the debtor can simply contest the claim’s coming into existence without any restrictions, as § 797(4) ZPO declares § 767(2) ZPO inapplicable. Even if the claim enforceable under an authentic instrument is empirically likely to exist, there isn’t even a legal presumption of its existence. Consequently, there must be other reasons to grant the longer period of prescription to claims enforceable under an authentic instrument. These reasons must be based on the common act of the parties which is the establishment of the instrument. By this means, the claimant pursues his right and cannot be guilty of negligence, whereas the debtor must seriously face the possibility to owe the sum of money named in the authentic instrument (§ 794(1) no. 5 ZPO). It must be this acting in concert to justify the extension of the period of prescription itself, whereas unilateral acts only lead to the suspension (Article 14:302(1) PECL; § 204(1) BGB) or the renewal of the original period (Article 14:401, 14:402 PECL; § 212(1) BGB)

Principles of European Contract Law Article 14:203: Commencement (1) The general period of prescription begins to run from the time when the debtor has to effect performance or, in the case of a right to damages, from the time of the act which gives rise to the claim. (2) Where the debtor is under a continuing obligation to do or refrain from doing something, the general period of prescription begins to run with each breach of the obligation. (3) The period of prescription set out in Art. 14:202 begins to run from the time when the judgment or arbitral award obtains the effect of res judicata, or the other instrument becomes enforceable, though not before the debtor has to effect performance.

730

Chapter 14: Prescription SECTION 3:

EXTENSION OF PERIOD

Principles of European Contract Law Article 14:301: Suspension in Case of Ignorance The running of the period of prescription is suspended as long as the creditor does not know of, and could not reasonably know of: (a) the identity of the debtor; or (b) the facts giving rise to the claim including, in the case of a right to damages, the type of damage. 1. General. The two Articles in comment contain the key rules for the characterization of the rules of time being set up as a disadvantage for the claimant. For if the purpose of the ‘rule on time’ were the obfuscating power of time or the benefit of the ‘bona fide defendant’ it could not consider individual circumstances such as ignorance of the claimant (Article 14:301 PECL). 2. The prerequisites to commencement. Article 14:203(1) PECL, followed word for word in Article III.-7:203 DCFR, declares the maturity of the claim to be the main pre-requisite to commencement for the general period of prescription. Thereby the Principles assure that prescription does not operate before the claimant was legally entitled to pursue his right by enforcing his claim in court. If, for example, a building company concludes a turnkey contract, the claim for the price to pay comes into existence the very moment. Yet, under German law the maturity of the claim is postponed to the final inspection of the building (cf. § 641 BGB). This example illustrates that the maturity can occur a lot after the claim has become existing. Therefore, the period of prescription may not commence once the claim has been created, but only when the claimant was legally entitled to enforce it. a) Performance. In particular, this is true for the claims concerning the performance of contractual obligations, such as the delivery of goods or the payment of the purchase price as referred to in Illustration 1 of the Lando Commission (Lando et al. (2003), p. 168). At this point, the Principles did not have to consider whether the lex causae allows to enforce specific performance (cf. Co-operative Ins Society Ltd. v. Argyll Stores (Holdings) Ltd. [1998] A.C. 1; Peel (2007), nos. 21-016 et seq.). They only determine the commencement of the period of prescription in case the claimant may seek the performance of the contractual obligation. As underlined by Illustration 2 (Lando et al. (2003), p. 169), the maturity of the claim shall also govern the commencement of a claim that rises from legal obligations such as unjustified enrichment, though that moment will not differ from the claim’s becoming existing. b) Damages. Yet, the situation is somewhat different as far as damage claims are concerned. When the debtor violates either a main or a secondary obligation the creditor is entitled to seek damages (cf. § 280 BGB). As there are no particular rules on the maturity for such claims, they can be pursued once having come into existence. Therefore, the situation seems to be very similar to legal obligation such as unjustified

731

A. Piekenbrock enrichment. Nevertheless, the second part of Article 14:203(1) PECL does not refer to the time when the debtor has to effect performance, but to the time of the act which gives rise to the claim, although the damage to be compensated can occur a long time after the violation of the contractual duty. Let us take, for example, a tax lawyer charged with the arrangement of a will, who overlooks a chance to reduce the inheritance tax and, thereby, violates his duties. In other words: he commits the act which gives rise to the claim for damages. Yet, the claim itself comes into existence only after the death of the client and probably only if the tax legislation remains the same and the client bequeaths a certain fortune. Therefore, the damage, which is to say the tax burden, at least under German law does not occur until the revenue board has notified the tax assessment (cf. BGHZ 119, 69, 73; 129, 386, 388). Nevertheless, the Lando Commission has opted for the earlier commencement of prescription referring to the act that causes the liability (Lando et al. (2003), p. 169). c) Continuing obligation. A specific commencement has also been set up for claims arising from a continuing obligation (Article 14:203(2) PECL). Such obligations can either engage the debtor to do something or to refrain from doing something. The example given for the first alternative is a dairy due to daily delivery of milk to a restaurant. In that case, occasional failure of delivery over the last three years cannot prevent the buyer from bringing an action against the seller for further delivery (Lando et al. (2003), p. 171). This seems reasonable in particular because the seller has not failed to perform his obligation for three years but has delivered the milk most of the time. Yet, the same rule must also apply in the cause of continuous failure of performance. If, for example, the tenant of a flat fails to pay the rent, a separate period of prescription begins to run every time he is due to pay regardless of whether the claims are created regularly or only fall due by the lapse of time (cf. BGHZ 109, 368, 372 et seq.). Therefore, as far as the first alternative is concerned, paragraph (2) does not change the rule set up in paragraph (1) referring to the time when the debtor has to effect performance. It only clarifies that the debtor cannot acquire the right of non-performance in the future by virtue of prescription. Thus, the tenant has to pay the rent in the future notwithstanding the prescription of claims for payments due in the past (cf. Lando et al. (2003), p. 171). Finally, we have to discuss whether paragraph (2) also applies in cases of failure of continuous performance. The difference to the continuous failure of performance is illustrated by the case with the rented flat. In that case, the tenant is due to pay the monthly rent (§§ 535(2), 556b(1) BGB). Therefore, he is under an obligation for periodical performance. Instead, the landlord has to grant the use of the flat all over the time of tenancy (§ 535(1) BGB). Therefore, he is due to continuous performance. That second case raises the question whether the tenant’s claim can be time barred after three years from the beginning of the term of tenancy. Though the answer is all but certain, paragraph (2) is likely to time bar the tenant’s right. One reason is that the tenant has only one claim to enforce: he can bring an action against the landlord to hand over the flat. Only after the landlord has performed this obligation other claims can arise, such as to keep it in proper shape or not to interfere with the tenant’s use.

732

Chapter 14: Prescription Therefore, there is no reason the treat this one claim to hand over the flat differently from a claim to pay the purchase price, even though the buyer can fulfil all of his contractual obligation whereas the landlord cannot. Another reason is that the tenant has missed the chance to enforce his right to hand over the flat for the full period of prescription. Therefore, there is good reason to sanction his negligence. By this means, the ‘rule on time’ is the same whether or not the lex causae allows the enforcement of specific performance. If, for example, a landlord rents shop premises within a shopping mall and the tenant is due to run a grocery, under English law he is only entitled to claim damages from the tenant closing down his store (Co-operative Ins Society Ltd. v. Argyll Stores (Holdings) Ltd. [1998] A.C. 1, 16 et seq. per Lord Hoffmann). Under paragraph (1), this claim would be time barred when the closing of the grocery has occurred more than three years ago. As understood in the abovementioned manner, paragraph (2) leads to the same result for a landlord bringing an action to reopen the grocery. d) Obligations refraining from doing something. The second alternative dealt with in paragraph (2) provides a special rule for obligations refraining the debtor from doing something such as keeping pets in a rented flat (BGH NJW 2008, 218, 219) or opening a bookstore in a shopping mall instead of a grocery. In such cases there can be no doubt that the tenant has to effect performance of his obligation from the very beginning of the term of tenancy. Yet, the landlord could only bring a (precautionary) prohibitory action if the tenant gives reason to fear the breach of his obligation (cf. Schumann, in Stein/Jonas (1997), § 259 no. 9; for claims under competition law cf. BGHZ 59, 72, 74 and, nowadays, § 8(1) 2 UWG). Hence, it is obvious that the period of prescription cannot begin until the tenant has actually breached his obligation by keeping pets in the flat or by opening a shop other than he is due to run. Yet, this does not answer the main question about the prescription of claims refraining the debtor from doing something. This is whether in cases of continuing infringement the prescription begins to run at the time the contract is broken or only once the infringement has ended. In other words: Can the tenant refuse performance (Article 14:501 PECL) and keep his pets in the flat after three years as the landlord’s claim is now time barred? Can the shopkeeper who was due to open a grocery continue to sell books? Unfortunately, the Illustration 5 of the Lando Commission concerning a limited restraint of competition post contractum finitum does not clearly answer this question. The illustration is about a former employee opening his own insurance agency within the protected zone. According to the Lando Commission the prescription begins to run the very day the agency has been opened (Lando et al. (2003), p. 171). Yet, the case is only meant to illustrate that a new period begins to run although the employee had already breached the obligation by selling one insurance policy half a year before. Therefore, it does not deal with the question whether the running of the agency can be ‘legalized’ by prescription after three years, as the restraint of competition itself was limited for three years post contractum finitum. At first glance, there seems to be little reason why a new period should begin after each occasional breach of obligation, whereas there is only one period continuously running in the case of continuous infringement. Yet, from this point of view after three

733

A. Piekenbrock years the tenant could refuse to run the grocery (Article 14:501 PECL), but could still be sued to close down the bookstore. Therefore, it seems appropriate to time bar a claim for refraining the debtor from doing something after a continuous three years breach of that obligation. The main reason for this opinion is the same given for the failure of continuous performance: The claimant had enough time to enforce his right. Furthermore, the continuous infringement gives no reason to refrain from legal action, whereas occasional infringements may be easily forgiven as long as the other party quickly sets an end to the illegal behaviour. Finally, paragraph (3) deals with the commencement of the ten years prescription established in Article 14:202 PECL. As far as judgments and arbitral awards are concerned, the period of prescription generally begins to run when they obtain the effect of res judicata. This establishment of commencement seems adequate to be the basic rule of commencement because the longer period applies to legally established claims and, therefore, cannot begin to run before the effect of res judicata has taken place. Therefore, it would have been inadequate to refer to the enforceability even though judgments can be declared provisionally enforceable (cf. §§ 704, 708, 709 ZPO; in France cf. Article 514(1) c.p.c.) or even be enforceable by law before obtaining the effect of res judicata (cf. in Italy Article 282 c.p.c.). Yet, the reference to res judicata has the disadvantage that one has to refer to the lex fori in order to know whether a certain judicial remedy against a judgment does suspend the effect of res judicata (cf. § 705 ZPO). First of all, this question can be difficult to answer as far as foreign judgments are concerned. And furthermore, the answer can be somewhat arbitrary comparing, for example, Italian to French law. In modern Italian law the appeal in cassation does suspend the effect of res judicata, but not execution (cf. Articles 324, 373 c.p.c.; Piekenbrock (1998), pp. 326 et seq.), whereas in France it has remained an extraordinary means of review suspending neither execution nor the effect of res judicata unless stated otherwise for particular cases (cf. Articles 500, 527, 579 c.p.c.; Guinchard et al. (2006), nos. 1439, 1814). Therefore, it might have been better to refer to the final decision taken in the case. Instead, as far as enforceable instruments are concerned, the Principles refer to their enforceability. This alternative establishment of commencement also seems adequate because enforceability was the reason for the application of the longer period to instruments not having the effect of res judicata. Therefore, the ten year period may not run when an advocates’ settlement has only been agreed on but not been declared enforceable (§§ 795a–795c ZPO). Furthermore, the basic rules on the commencement of prescription for judgments, arbitral awards and enforceable instruments need two exceptions. First, the final part of paragraph (3) underlines that the period does not begin to run until the debtor has had to effect performance. This exception is of great importance for all claims falling due or coming into existence in the future such as periodical payments (Lando et al. (2003), p. 171). Such claims can either be established by judgments in accordance to §§ 257–259 ZPO or by enforceable instruments. Second, according to German judicature the period for claims refraining the debtor from doing something may not begin to run until the breach of that obligation even though the debtor had to effect performance all the time (cf. BGHZ 59, 72, 74 et seq.). This authority must also

734

Chapter 14: Prescription apply to Article 13:203(3) PECL because the claimant wasn’t even entitled to enforce the judgment and, thereby, to renew the ten year period (Article 14:402 PECL) as long as the debtor has not defied the court’s ruling (§ 890 ZPO). 3. Suspension in case of ignorance. As mentioned above, Article 14:301 PECL, followed almost word for word in Article III.-7:301 DCFR, contains the key rule for the characterization of the rules of time being set up as a disadvantage for the claimant, the so called discoverability criterion (Schelhaas, in Busch et al. (2006), p. 198). As the Lando Commission has clearly emphasized, prescription should not work unless the creditor has previously had a fair chance of pursuing the claim (Lando et al. (2003), p. 175). Yet, the Principles do not strictly follow the idea that a claimant deliberately omitting to exercise his right is sanctioned by the loss of it. There are rather three points on which they deviate from such reasoning of the ‘rule on time’. a) Ignorance of facts. First, the Article in comment does not refer to the knowledge of one’s rights, but only to the ignorance of facts, more precisely the ignorance of the identity of the debtor and the facts giving rise to the claim. Therefore, it is basically irrelevant whether or not the claimant did know about the legal consequences of the facts. He is obliged to clear up the legal consequences of the facts known to him and may lose his right for pure negligence. Consequently, the reference made to the identity of the debtor must be understood as meaning the identity of the person being the debtor, a fact often unknown as far as non-contractual claims are concerned. Therefore, in case of a road accident such as described in Illustration 1 (Lando et al. (2003), p. 176) prescription for the claim against the driver is suspended as long as the victim does not know who he was. Yet, as far as the claims against the holder of the car (§ 7(1) StVG) and the insurance company (§§ 115(1) no. 1 VVG, 1 PflVG) are concerned, prescription begins to run once the victim has found out their identity, regardless of whether or not he knew about their legal responsibility. Or, to put it in general terms, the debtor does not need to know that a certain person is a debtor. The last part of the rule under (b) refers to damage claims. As pointed out above (cf. sub 2.b), a damage claim comes into existence only after the act which gives rise to the claim has actually caused damages. Therefore, there would have been no need for a special regulation on damage claims if it only said that prescription is suspended as long as the creditor does not know that a certain act has caused any damage whatsoever. Yet, the rule under (b) does not simply refer to the ignorance of damage, but of the type of damage. Therefore, suspension can operate separately for certain damages unknown to the creditor who is aware of having suffered damages. The Lando Commission has illustrated the meaning of the term ‘type of damage’ by two examples: unknown collateral damages such as internal injuries suffered in a brawl and the unforeseeable aggravation of damages such as the loss of sight after an eye injury (Lando et al. (2003), p. 176). b) Diligence to find out relevant facts. The second point of deviation from the abovementioned reasoning of the ‘rule on time’ consists in the rule on negligent ignorance. If the claimant were to be sanctioned for ‘deliberately omitting’ the

735

A. Piekenbrock enforcement of his right, the ‘rule on time’ would have to refer to his real ignorance. Yet, following Article 10(1) of the Council Directive 85/374/EEC on product liability, the Principles treat someone who reasonably could have known something the same way as if he had had real knowledge, thus dealing with ‘deliberate omission’ the same way as ‘negligent omission’. Therefore, the ‘rule on time’ contains a ‘due diligence clause’. Yet, the Principles do not define the range of the ‘due diligence’ referring only to what the creditor could not reasonably know or, to put in positive words, reasonably ought to know. By this means, they try to assure the flexibility required as the discoverability criterion applies ‘across the board’, governing non-contractual damage claims as well as claims to seek performance of a contract (Lando et al. (2003), p. 175). Yet, they pay a high price in cases of damage claims when the slightest failure of the creditor’s diligence to search for the relevant facts leads to the economic loss of his claim. c) Burden of proof. Finally, it is of great interest that discoverability is not linked to the commencement of the period of prescription, but to suspension. The Lando commission has given two main reasons for this choice: First, ignorance is only one reason for the creditor’s inability to pursue his right and, therefore, systematically should be treated the same way as cases of vis major (Article 14:303 PECL). Second, the creditor should have the burden to proof ignorance being a matter in his own sphere and largely removed from the debtor’s range of perception (Lando et al. (2003), p. 177). Yet, the second argument lacks the distinction between the burden of proof and the burden of producing evidence. At least under German law there is no rule of evidence stating that the party that can more easily produce evidence has to bear the burden of proof (cf. BGHZ 145, 170, 184 et seq.; BGH NJW 2005, 2395, 2397). Therefore, the Article in comment does not fit to the reasoning of the ‘rule on time’ as to punish the creditor for deliberate or at least negligent omission. If it was based on that reasoning it would have to constitute discoverability as a pre-requisite to prescription and link it to commencement, whereas the Principles constitute the lack of discoverability as a creditor’s defence against the menacing economic loss of his claim, a ‘counterexception’ against the debtor’s defence based on Article 14:501(1) PECL.

German Law § 199 BGB: Beginning of the standard limitation period and maximum periods (1) The standard limitation period begins upon the expiry of the year in which: 1. the claim has arisen, and 2. the obligee becomes aware of the circumstances giving rise to the claim and of the identity of the obligor or ought to have become aware of those matters but for his gross negligence. (2)–(4) […] (5) If the claim is for an obligation of forbearance, the date of the infringement of that obligation replaces the date on which the claim arose.

736

Chapter 14: Prescription § 200 BGB: Beginning of other limitation periods Save where another date is provided, the limitation period for claims not subject to the standard limitation period begins when the claim arises. § 199(5) applies mutatis mutandis. § 201 BGB: Beginning of the limitation period for established claims The limitation period for claims of the type referred to in § 197(1), nos. 3 to 6, begins on the date when the decision becomes final and absolute, the enforceable title is created or the claim is established in the insolvency proceedings but not, however, before the claim arises. § 199(5) applies mutatis mutandis. § 205 BGB: Suspension of limitation in the event of a right to refuse performance Limitation is suspended during a period in which the obligor is temporarily entitled, on the basis of an agreement with the obligee, to refuse to perform. 1. The commencement of the standard period of prescription. The first section in comment contains the prerequisites to commencement of the standard period of prescription. According to § 199(1) BGB, there are two prerequisites to commencement of the standard period, which have to be fulfilled simultaneously: The coming into existence of the claim (a) and the knowledge of the relevant facts (b). It has, therefore, opted for what the Lando Commission, without further explanation, has judged to be a disadvantage: Commencement depending on two criteria (Lando et al. (2003), p. 177). a) The coming into existence of the claim. The first pre-requisite has remained unchanged since the enactment of the original version of the German code stating in § 198 BGB 1900 that prescription begins when the claim arises. Yet, the meaning of these words has slightly changed over the last decades. Originally, prescription should run once the claim had come into legal existence. If the claimant was impeached to seek performance because of the claim falling due later, prescription was supposed to be treated as initial suspended (Motive I, p. 307; Protokolle I, p. 210; Piekenbrock (2001), p. 322). Yet, the judicature has understood the rising of the claim as if it meant the falling due (cf. BGHZ 53, 222, 225; 55, 340, 341; 113, 188, 193). Following this interpretation, the Law of Obligations Reform Bill wanted to introduce the falling due of the claim as pre-requisite to commencement of prescription without the intention to change the law on that point (BT-Drs. 14/6040, p. 3, 108). Yet, parliament has replaced the falling due by the ‘classic’ pre-requisite to commencement which is the coming into existence (BT-Drs. 14/7052, p. 180). The main reason for this intervention was the German doctrine known as the ‘unity of damages’. According to this doctrine, prescription begins to run for the whole claim once the victim has suffered any damage from the act which gives rise to the claim (cf. BGHZ 67, 372, 373; 69, 380, 383; 119, 69, 71; 170, 260, 270). As the legislator did not want this doctrine to be put into question by the Reform Act, the Bill has been changed in the abovementioned manner (cf. BGH NVwZ 2007, 362, 366), and the doctrine created by judicature has been approved by parliament (Grothe, in Münchener Kommentar (2012), § 199 no. 9).

737

A. Piekenbrock By virtue of this doctrine, the claim for damages can be entirely time-barred even before certain damages have occurred. Therefore, the period of prescription begins to run once the claimant can reasonably bring a declaratory action against the debtor (RGZ 153, 101, 107; BGHZ 33, 112, 116; 48, 181, 183; 102, 246, 248; 122, 317, 325; 138, 247, 252). From the comparative point of view it is very interesting to see that these authorities deal both with claims that follow a rule of time without referring to the knowledge of the relevant facts such as § 198 BGB 1900 and with tort claims that did refer to the knowledge of the damage and the identity of the liable person even before the Law of Obligations Reform Act has become effective (§ 852(1) BGB 1900). Furthermore, in both cases the ‘unity of damages doctrine’ has ever since stood under the reservation of foreseeability (RGZ 70, 150, 157; 83, 354, 360; 87, 306, 312; BGHZ 100, 228, 232; BT-Drs. 14/6040, p. 108), whereas this question has been discussed by the Lando Commission (Lando et al. (2003), p. 176) as a matter of ignorance of the type of damage. As far as continuing obligations are concerned, German law contains only one rule laid down in § 199(5) BGB for the standard period concerning claims for an obligation of forbearance and referred to in § 200 part 2 BGB for other periods and in § 201 part 2 BGB for established claims. According to these three sections, the coming into existence is replaced by the infringement. By this means, the Law of Obligations Reform Act has followed the rule set up by § 198 part 2 BGB 1900 (BT-Drs. 14/6040, p. 3, 109). Originally, the legislator has introduced this provision for to clarify that the period cannot begin to run as long as the debtor has performed his obligation (Protokolle I, p. 211). Yet, nowadays it is understood as if to say that claims for an obligation of forbearance can be time-barred even if the infringement has continued (cf. Peters/Jacoby, in Staudinger (2009), § 199 no. 109). Yet, German law is all but certain, as far as such cases of continuous breach of obligation are concerned. On the one hand, the continuous breach of an obligation of forbearance is treated as one permanent act that gives rise to one claim which would be time-barred even though the infringement has continued. The Imperial Court has argued this way in a case very similar to the second insurance agency case (Lando et al. (2003), pp. 170 et seq.) time-barring an action against a former employee after only three months according to § 61 HGB 1900 (RGZ 63, 252, 255 et seq.). On the other hand, the continuous infringement can be treated as several repeated acts giving rise to several claims prescribing independently. By this means, the Imperial Court has prevented that acts of unfair trading such as the use of a misleading company’s name could have been ‘legalised’ by the lapse of time (cf. RGZ 80, 436, 438; Grothe, in Münchener Kommentar (2012), § 199 no. 49 and Niedenführ, in Soergel (2002) § 199 no. 61 concurring; Peters/Jacoby, in Staudinger (2009), § 199 no. 111 dissenting). The same distinction between one permanent act that gives rise to one claim and several repeated acts giving rise to several claims is discussed as far as damage claims are concerned. The latest example for such a case concerns a claim against the Federal Republic of Germany for a breach of Community law. The claim is based on the fact that Germany did not change its laws in order to be in conformity with EC-directives. In that case the Federal Court has discussed the question whether this negligence has to be treated as one permanent act or as several repeated acts (BGH NVwZ 2007, 362, 367). If the act giving rise to the claim were permanent the period of prescription would

738

Chapter 14: Prescription only run after the act has ended, whereas the period for a claim for forbearance would run with the beginning of that act. If the act were treated as repeated acts, the several claims would prescribe independently and, therefore, be time-barred earlier. b) The knowledge of the relevant facts. The second pre-requisite only applying to the general period of prescription is the knowledge of the relevant facts. By this means, the Law of Obligations Reform Act has transferred the ‘rule on time’ formerly applicable only to tort claims (§ 852(1) BGB 1900) to govern the commencement of the standard period. Yet, this rule has undergone a significant change as far as negligent ignorance is concerned. Under the former law, the judicature has always underlined that even grossly negligent ignorance could not be treated as knowledge unless the claimant has virtually closed his eyes to the relevant facts such as the identity of the liable person (cf. BGHZ 133, 192, 198; NJW 2001, 1721, 1722), whereas nowadays the claimant has the diligence to find out about his claims. Yet, under German law only the grossly negligent breach of that diligence can lead to the economic loss of the claimant’s right. If, for example, an investor, who has bought securities from a financial intermediary, has not read the prospectus and thus failed to notice that the information given to him by the intermediary was wrong, the claimant’s ignorance is not due to gross negligence (cf. BGHZ 186, 152, 160 et seq.). As far as the relevant facts are concerned, we can basically refer to the comment of Article 14:301 PECL. The only particular case worth to be mentioned is the breach of several duties under one contract such as a consultancy agreement. In such a case the Federal Court has argued that the claimant can still sue the debtor on a new reproach even three years after he has learned about other faults of the consultancy (BGH WM 2008, 89, 91), whereas the Court of Appeal had decided in the opposite sense (OLG Celle ZGS 2007, 195, 199). c) Commencement at the end of the year. Finally, the standard period of limitation only begins to run at the end of the year the prerequisites to commencement have been fulfilled. This peculiarity of German law has already existed before the Law of Obligations Reform Act came into force (§ 201 BGB 1900), yet applicable only to daily live claims (§ 196 BGB 1900) and claims on regularly recurring services such as interests (§ 197 BGB 1900). Originally, the postponement of the commencement to the end of the year was supposed to help the claimant to determine the relevant date and to keep it in mind (Motive I, p. 310). Admittedly, the second argument is no more convincing in modern IT-times and, therefore, the Law of Obligation Reform Bill wanted to eliminate § 201 BGB 1900 (BT-Drs. 14/6040, p. 99). Yet, the first argument has become even more convincing keeping in mind that commencement nowadays depends on individual circumstances often difficult to establish such as the knowledge of certain facts (BT-Drs. 14/7052, p. 180). 2. The commencement of other periods of prescription. Apart from the standard period the German general rules on prescription also contain a rule on the commencement of other periods of prescription. According to that rule laid down in § 200 BGB and following § 198 BGB 1900 other periods begin to run once the claim has come into existence, notwithstanding whether or not the claimant has had knowledge of the relevant facts. By this means, it becomes obvious that German law, unlike the

739

A. Piekenbrock Principles, does not follow one of the abovementioned arguments to justify prescription ‘across the board’. On the contrary, it still uses prescription as a means to limit the liability of the ‘bona fide defendant’. This is particularly true as far as the liability of sellers of goods (§ 438 BGB) and manufacturers (§ 634a BGB) is concerned which are both priveleged as long as they have not maliciously concealed the wrong (§§ 438(3), 634a(3) BGB). The same was also true for advocates and tax lawyers until the Prescription Reform Act 2004 has come into force (Piekenbrock (2006), pp. 333 et seq.). 3. The commencement of prescription of established claims. Finally, § 201 BGB contains, for the first time, a particular rule on commencement for established claims similar to Article 14:203(3) PECL. Yet, the former law was not to be changed (BT-Drs. 14/6040, p. 109; 14/7052, p. 180) and, therefore, can still be referred to. Hence, in case the claim falls due only after the decision has become final and absolute (i.e., it has obtained the effect of res judicata) or the enforceable title has been created, the period of prescription begins to run at that later moment (OLG Celle NJW 1964, 820, 821). This rule has been given expression by the reference to the claim’s arising as understood by the modern legislator in § 199(1)(a) BGB. In case of an established claim for an obligation of forbearance the period only begins to run once the debtor has breached his obligation. This rule has now been given expression by the reference to § 199(5) BGB in § 201 part 2 BGB.

Comparison and Evaluation 1. Scope of Correspondence. Comparing the rules on commencement under the Principles and German law, there has to be stated large correspondence as far as the standard period and the prescription of established claims are concerned. This correspondence has not happened by chance, but is the result of a conscious decision of the legislator to follow the Principles set up by the Lando Commission (BT-Drs. 14/6040, pp. 96, 103). 2. Distinctions. Yet, this does not mean that German law has adopted the Principles word for word. There are rather several distinctions leading to diverging decisions under both rules. a) Unity of damages doctrine. The first distinction lies in the unity of damages doctrine that would lead to a different solution of the second brawl case mentioned to illustrate Article 14:301 (Lando et al. (2003), p. 176) because German law has always been treating remote consequences of serious physical injuries such as fractures as generally foreseeable (BGH VersR 1957, 534; 1967, 1092; 1969, 921; NJW 1973, 702, 703) and is likely to do so in the future. At first glance, German law might be questioned whether the claimant still has a fair chance to enforce his claim for certain damages, when it is time-barred even before the specific damage has occurred. The same is true for Article 14:203(1) PECL in our tax lawyer case (cf. sub 2.b), when the damage occurs a long time after the breach of duty. Yet, a positive answer to this question can be given considering that the claimant can at least bring a declaratory action against the

740

Chapter 14: Prescription debtor to ensure that his claim can only be time-barred thirty years after the judgment has obtained the effect of res judicata (§§ 197(1) no. 3, 201 BGB) or ten years after the debtor actually had to effect performance (Article 14:202, 14:203(3) PECL). b) Ignorance. The second distinction lies in the way to deal with ignorance, which is a means of suspension under the Principles, whereas, under German law, the knowledge of the relevant facts is one of the prerequisites to commencement for the standard period. This does not only lead to diverging results as far as the honour of proof is concerned, but also to two further distinctions. The first one concerns the scope of application. Referring to the knowledge of the relevant facts as a pre-requisite to commencement for the standard period, the German legislature leaves enough space for rules on prescription such as § 438 BGB and § 634a BGB not following the idea that the ‘rule on time’ should apply when the claimant has deliberately or at least negligently missed his fair chance to enforce his right. Therefore, the German choice is more flexible than the Principles and, in particular, the Draft Common Frame of Reference applying the suspension-for-ignorance rule across the board. The second distinction concerns the relevance of ignorance occurring after the claim has arisen. Under German law, only initial ignorance is of legal relevance. Once the claimant has got aware of the relevant facts, the standard period begins to run. And if the claimant gets aware of facts giving rise to serious doubts he is dealt with as ignorant from the beginning (BGHZ 61, 195, 198; 95, 76, 79 et seq.). Yet, according to the Principles ignorance also suspends the running of the period when occurring afterwards, a scenario easily imaginable in the case of death of either party (Lando et al. (2003), p. 177). This distinction would lead to diverging decisions if, for example, the claimant knew the relevant facts and could have brought an action against the debtor before his death, whereas the heirs do not know the identity of the debtor. The evaluation of the different choices is rather difficult: Yet, one argument in favour of the Principles would be that knowledge is an individual circumstance not subject to inheritance. Therefore, even under German law the heir can be in good faith (§ 932(2) BGB) even if his predecessor was not. However, there may be good reason for the heir to bear the risk of ignorance. As far as the death of the debtor is concerned, the ignorance of the identity of the new debtor does not necessarily have to suspend the period of prescription, but can rather postpone the expiry date (Article 14:306 PECL; § 211 BGB). 3. Uncertainty about continuous obligations. Finally, both the Principles and German law do not contain clear rules on the prescription of claims for the continuous breach of obligations. In particular, the German distinction between permanent and repeated acts is arguable und has been put into question not only by the judicature (cf. BGH NVwZ 2007, 362, 367; Grothe, in Münchener Kommentar (2009), § 199 no. 13; Hopt, in Baumbach/Hopt (2012) § 113 no. 10). The cases cited prove that such a distinction is necessarily arbitrary as there is no difference between the running of a competing business and the use of a company’s name. Hence, the real reason why the claim to end the use of a company’s name was not time-barred was that public interests of fair trading are involved (§ 1 part 2 UWG). And unfair trading cannot be ‘legalized’ by the competitor’s negligence (cf. BGE 79 II 305, 313). Yet, as far as the competing business

741

A. Piekenbrock is concerned the breach of obligation does only involve the private interests of the former employer who may have his right to protect his business from competition time-barred for negligence. 4. Suspension when performance can be refused. As we have seen, the German legislator has understood the coming into existence of a claim as if to mean the falling due. Despite the question of whether such meaning has been put in proper words the rule of law expressed by them is undoubtedly adequate because the claimant has no fair chance to enforce his right before the debtor has to effect performance. Yet, this is not only true for an initial right to refuse performance such as granted in a loan to be repaid after ten years, but also for such a right agreed on afterwards. Therefore, German law contains a special provision on suspension of the period of prescriptions in such cases whereas the Principles seem to be defective on that point because agreements such as a pactum de non petendo (BGH NJW 1998, 2274, 2277) do not contain an acknowledgement renewing prescription under Article 14:401 PECL.

Principles of European Contract Law Article 14:302: Suspension in Case of Judicial and Other Proceedings (1) The running of the period of prescription is suspended from the time when judicial proceedings on the claim are begun. (2) Suspension lasts until a decision has been made which has the effect of res judicata, or until the case has been otherwise disposed of. (3) These provisions apply, with appropriate adaptations, to arbitration proceedings and to all other proceedings initiated with the aim of obtaining an instrument which is enforceable as if it were a judgment. 1. Suspension as effect of proceedings. By means of the Article in comment, the Principles have opted for suspension of prescription as effect of judicial or other proceedings. The other options rejected by the Lando Commission would have been that the period was simply kept by the initial of proceedings and, therefore, ceased to run, or the renewal of the original period (Lando et al. (2003), p. 180). All these options lead to the same result in case the proceedings lead to the establishment of the claim: A new ten year period would begin to run once the judgment had gained the effect of res judicata (Article 14:202(1), 14:203(3) PECL). Yet, they lead to different results in case the proceedings come to an end without a court decision on the merits or remain in abeyance. In case proceedings come to an end without a decision on the merits, suspending the period as long as judicial proceedings have been pending leads to the result that claimant can still bring a new action against the debtor. The same is true for the renewal of the original period as long as there are no fictions such as in § 212(1) BGB 1900 avoiding the effects of the proceedings. The main difference between these two options is rather that the claimant has less time in case of suspension, more precisely

742

Chapter 14: Prescription only what was left before the initial of proceedings. In contrast to that, renewal of the original period voids the lapse of time before the first action was brought as the original period runs afresh. Mutatis mutandis, there is the same distinction as far as proceedings remaining in abeyance are concerned. Suspending the period as long as judicial proceedings have actually been conducted opens the opportunity to resume proceedings as long as the rest of the period lasts, whereas renewal of the original period avoids earlier delays. Instead, in case the period just ceases to run the claimant could only sue the debtor if the second action has also been brought or the proceedings resumed within the original period of time. Thus, the Principles by opting for suspension as effect of proceedings steer the happy medium between the two extremes. After the basic option for suspension had been taken, the Lando Commission still had to discuss details of implementation. First, the question arose whether there should be a special provision for proceedings remaining in abeyance. The Principles have opted against such a provision and referred to the applicable procedural law (Lando et al. (2003), p. 183) that differ fundamentally from one another. For example, under German law an action remains pending even if both parties refuse further proceedings (§ 251a(3) ZPO), whereas under Italian law in case of inactivity of both parties the case is cancelled and the proceedings extinguish (Articles 181, 307, 307 c.p.c.). Second, it has been discussed whether the claimant who has brought the first action near the end of the period should be granted a minimum of time to bring a second action after proceedings have ended without a court decision on the merits. Yet, the Land Commission has opted against such a benefit for the claimant who should not be in a better position than if no action had been brought in the first place (Lando et al. (2003), pp. 181 et seq.). 2. Details on proceedings. As far as the types of proceedings are concerned, the Principles tacitly refer to the national civil procedural law of the forum state including EC regulations such as those on the European order for payment procedure and the small claims procedure. Yet, it is a matter of substantial law to provide whether a third-party notice (§ 74 ZPO) does suspend prescription though it does not initiate proceedings on the claim against the third party, a question denied by the Imperial Court as far as French law (Article 2244 c.c.) was concerned (RGZ 10, 290, 292). Furthermore, there is no provision whether suspension begins when the writ has been submitted to the court or when it has been served upon the defendant. The only decision taken by the Lando Commission is that an application for a declaratory judgment is sufficient for the purpose of suspension (Lando et al. (2003), p. 182). Paragraph (2) of the Article in comment declares the rules on suspension by judicial proceedings applicable to arbitration proceedings and other proceedings initiated with the aim of obtaining an instrument which is enforceable as if it were a judgment. Yet, there is no hint for what is meant by the other proceedings. Therefore, the question arises whether we can talk about the initial of proceedings when the advocate of the claimant asserts the claim with a letter to the advocate of the debtor in order to come to an advocates’ settlement (§ 796a ZPO). If the Principles were to be understood that way, they would give the claimant the opportunity to suspend

743

A. Piekenbrock prescription unilaterally without addressing himself to court or similar authorities. Unfortunately, the Principles do not answer this question but refer to the applicable law (Lando et al. (2003), p. 182). 3. Extent of suspension. Finally, we have to discuss to what extent the claim is suspended when an action is brought. This question is easy to answer when the claimant pursuing the defendant for damages applies for a declaratory judgment or, as far as allowed by the lex fori, for enforcement covering all damages without quantification. Yet, it can be difficult to answer when the claimant has enforced a certain amount of money and is later bringing a second action for a higher amount. From a systematical point of view the extent of suspension has to be the same as the extension of the ten year period applicable to claims established by judgment (Article 14:202(1) PECL) and, therefore, should be restricted to the amount to be enforced by the claimant.

German Law § 204 BGB: Suspension of limitation by pursuit of rights (1) Limitation is suspended by: 1. the bringing of an action for performance or for a declaration of the existence of the claim, for the attachment of an execution certificate, or for the issue of an order for execution, 2. service of an application under the simplified procedure for the maintenance of minors, 3. service of a demand for payment in a summary debt procedure, or of the European order for payment in the European order for payment procedure in accordance with Regulation (EC) No. 1896/2006 of the European order for the payment procedure (OJ EU L. 399 p. 1) 4. occasioning the notice of an application for conciliation lodged at a conciliation body established or recognised by the administration of justice of a Land or, if the parties agree to seek conciliation, at any other conciliation body which settles disputes; if notice is occasioned shortly after the lodging of the application, limitation is suspended immediately upon the giving of notice, 5. assertion of a right to set off the claim in the course of a lawsuit, 6. service of a third-party notice, 6a. service of an opt-in declaration to model proceedings regarding the claims mentioned therein, insofar as these claims are based on the same circumstances as the facts to be considered within the scope of the model proceedings and under the condition that the action for performance or for a declaration of the existence of the claim mentioned in the opt-in declaration will be brought within three months after the decision of the model proceedings has obtained the effect of res judicata,

744

Chapter 14: Prescription 7. service of an application for an independent procedure for the taking of evidence, 8. the beginning of an agreed expert opinion procedure or the appointment of an expert in accordance with § 641a, 9. service of an application for an attachment order, an interim order or an injunction, or, if the application is not served, the lodging thereof if the order for attachment, the interim order or the injunction is served on the obligor within one month of its being made or of its service on the obligee, 10. the lodging of a claim in insolvency proceedings or in proceedings for the distribution of assets under shipping law, 11. the beginning of the arbitration proceedings, 12. the lodging of an application to an administrative authority, if the admissibility of the action is conditional on a preliminary decision by that authority and the action is brought within three months after the application has been dealt with; this applies mutatis mutandis to applications which are to be made to a court or a conciliation body referred to in 4 above, the admissibility of which depends on a preliminary decision by an authority, 13. the lodging of an application to a higher court, if it is for that court to decide upon the court with jurisdiction over the claim and, within three months after the application has been dealt with, the action is brought or the application for which a decision on jurisdiction was necessary is filed, and 14. the occasioning of the notice of the first application for the grant of legal aid or procedural costs assistance if notice is occasioned shortly after the lodging of the application, suspension of limitation takes effect immediately upon the lodging of the application. (2) Suspension under subsection (1) above ends six months after a final decision has been made in respect of the proceedings commenced or their cessation in some other manner. If the proceedings come to a halt because of inaction by the parties, the date of the last procedural step of the parties, the court or other body responsible for the procedure applies instead of the date of cessation of the proceedings. Suspension begins anew if one of the parties pursues the proceedings further. (3) §§ 206, 210 and 211 apply mutatis mutandis to subsection (1), nos. 6a, 9, 12 and 13 above. § 209 BGB: Effect of the suspension A period during which limitation is suspended is not included when calculating the limitation period. 1. Suspension as effect of proceedings. In correspondence with the Principles, the Law of Obligations Reform Act has opted for suspension as effect of proceedings. Therefore, according to § 209 BGB the time of proceedings is not included when

745

A. Piekenbrock calculating the limitation period. By this choice the legislator has followed the report on the prescription law reform delivered by Peters and Zimmermann in 1981 (BT-Drs. 14/6040, p. 113), whereas the former law was based on the interruption or renewal model (§ 209 BGB 1900), yet amplified by a number of fictions (§§ 212, 215(2), 216(2) BGB 1900) bringing the whole system pretty close to suspension (Peters et al. (1981), p. 262). Yet, implementing the suspension model the German legislator has followed the former law granting the claimant a minimum of six months to bring a new action after the first proceedings have come to an end without a decision on the merits (§ 204(2) 1 BGB). Furthermore, he has retained a particular provision for proceedings remaining in abeyance, ordering the end of suspension six months after the last procedural act (§ 204(2) 2 BGB). Thus, the former law, which had ordered renewal in such cases (§ 211(2) BGB 1900), has only undergone a moderate, but no radical change. 2. Details on proceedings. As far as the types of proceedings are concerned, German law enumerates the judicial measures suspending prescription. Though there is no need to discuss each of these proceedings in a comparative commentary, it is interesting to see that the legislator has significantly enlarged the number of relevant proceedings that do not necessarily lead to the establishment of the claim itself or to an enforceable instrument, but only aim to take evidence (no. 7) or to be granted legal aid for an action (no. 14). Under the former law the independent procedure for the taking of evidence had only a restricted scope of relevance (§§ 477(2), 639(1) BGB 1900; cf. BGHZ 128, 74, 79), whereas poverty was dealt with as a case of vis major (§ 203(2) BGB 1900) (cf. RGZ 87, 52, 55; BGHZ 70, 235, 237 et seq.). This enlargement of the number of proceedings suspending prescription is of great importance when German law is the lex causae in foreign proceedings. Adjusting § 204(1) BGB to the foreign lex fori, it seems adequate to say that any judicial proceeding initiated by the claimant suspends prescription. Yet, German law clearly limits suspension to judicial and arbitration proceedings (no. 11) and does not leave room for extrajudicial assertion of the claim, for example with a letter from the claimant’s advocate addressed to the advocate of the debtor. Furthermore, German law restricts suspension to proceedings begun by the claimant, whereas actions for a negative declaration cannot suspend prescription (cf. RGZ 60, 387, 391; 71, 68, 73; BGHZ 72, 23, 28 et seq.). As far as the time suspension becomes effective is concerned, German law seems quite inconsistent first referring to the service of the writ (§§ 209(1) no. 1 BGB, 253(1) ZPO) but then referring back to submission in cases of service within reasonable time (§ 167 ZPO). Furthermore, by this sort of lawmaking the question of qualification arises in foreign proceedings (cf. Piekenbrock (2006), p. 494). 3. Extent of suspension. Finally, German law, based on the concept of limited action estoppel (§ 322 ZPO), generally restricts the effect of suspension to the amount of money the claimant asks for (RGZ 93, 158, 160; BGHZ 151, 1, 2 et seq.). The only exception allowed by authorities regards damage claims if the plaintiff has asked for a certain amount of money covering his damages when the action was brought but later turning out to be insufficient due to inflation or increase in value (RGZ 102, 143, 144; 106, 184, 185; 108, 38, 40; BGH NJW 1970, 1682; WM 1979, 1263, 1264; NJW 1982, 1809, 1810; WM 1984, 1131, 1133).

746

Chapter 14: Prescription Comparison and Evaluation 1. General. As pointed out above, the Principles and German law are based on the same suspension model, which is fair both to the plaintiff and the defendant in judicial proceedings (cf. Schelhaas, in Busch et al. (2006), pp. 206 et seq. agreeing). Yet, the model is shaped differently on details such as proceedings remaining in abeyance and the time to bring a new action after the first proceedings have come to an end without a decision on the merits. As far as these details are concerned the German options seem more adequate than the Principles though in cases of short periods such as the half-year period applicable in leasing cases (§ 548 BGB) the grant of a minimum time for the new action by virtue of § 204(2) BGB has the same effect as if the original period were renewed. The main advantage of the German choice is that a plaintiff whose case has been dismissed for lack of jurisdiction is not enforced to delay the judgment’s obtaining the effect of res judicata by virtue of an appeal in order to gain enough time for the preparation of a new action in another country. It has therefore to be appreciated that paragraph (2) of Article III.-7:302 DCFR follows § 204(2) BGB, whereas apart from that it follows Article 14:302 PECL word for word. 2. Restriction to judicial proceedings. Both the Principles and German law do not contain a provision for the suspension of prescription by unilateral acts of the claimant other than the beginning of judicial or similar proceedings although the Principles can be understood as if an advocate could suspend prescription by assertion of the claim towards a colleague to come to an advocates’ settlement. Therefore, the only way to suspend prescription (§ 203 BGB) or at least postpone the expiry date (Article 14:304 PECL) is to negotiate the claim. Yet, an advocate who is charged with the case shortly before the expiry of the prescription period cannot unilaterally open negotiations. Thus the only way to suspend prescription is to begin judicial proceedings which could have easily been avoided if also extrajudicial acts had a suspensive effect. Furthermore, such a provision would well fit to the reasoning of the rule of time as a disadvantage for the claimant who has at least negligently missed to pursue his rights. If a claimant charges an advocate who gives notice to the debtor within the period of prescription, there is no reason to treat this behaviour as negligent (cf. Piekenbrock (2006), pp. 462 et seq.). 3. Details on proceedings. Following the abovementioned reasoning of the rule of time, finally, there are two details on proceedings to discuss. First, we have seen that under German law the suspension generally becomes effective only after the writ has been served upon the defendant (§§ 204(1) no. 1 BGB, 253 ZPO), whereas the Principles do not deal with this important question at all. Yet, who wants to sanction the negligence of the claimant missing to enforce his rights should refer to his act to initiate the proceedings which is to say the submission to court (§ 253(5) ZPO) and not to the act of service performed by court (§§ 166(2), 271(1) ZPO). Second, it seems doubtful that actions for a negative declaration do not suspend prescription, because it leads to the establishment of the claim when the claimant as defendant in the declaratory proceedings prevails. And, furthermore, such proceedings usually are the defendant’s response to an extrajudicial pursue of the claimant’s rights. Thus there is

747

A. Piekenbrock no reason to treat the claimant as negligent. Finally, this is also true in case of a jactitation suit as described in Article 403 of the Malta Code of Organization and Civil Procedure, though such proceedings cannot lead to the establishment of the claim.

Principles of European Contract Law Article 14:303: Suspension in Case of Impediment beyond Creditor’s Control (1) The running of the period of prescription is suspended as long as the creditor is prevented from pursuing the claim by an impediment which is beyond the creditor’s control and which the creditor could not reasonably have been expected to avoid or overcome. (2) Paragraph (1) applies only if the impediment arises, or subsists, within the last six months of the prescription period. 1. General. The Article in comment, such as Article III.-7:303 DCFR, deals with the consequences of what is called impediment beyond the creditor’s control, also known as vis major or force majeure. It follows the abovementioned dictum ‘contra non valentem agere nulla currit praescriptio’ originally only referring to cases of vis major and not to ignorance of the relevant facts. Yet, it is obvious that a ‘rule on time’ suspending prescription for ignorance has to order suspension even more in cases of vis major. The Article is closely tied to the formula used in Article 8:108 PECL excusing a party’s non-performance due to vis major. 2. The meaning of vis major. The Principles only give one example for an impediment beyond the creditor’s control, referring to the cut off from the outside by natural disasters such as flooding and avalanches (Lando et al. (2003), p. 184). Furthermore, the cessation of the administration of justice as referred to in § 203(1) BGB 1900 must be considered as vis major. Yet, it seems reasonable to apply this Article also to other impediments such as authorities denying the claim. Thus the Federal Court has argued that claims for vaccine damages could not be time-barred before the Court had overruled its older decisions (BGH NJW 1957, 1595, 1597). Or to put it in more general terms that no claim can be time-barred as long as it has been absolutely impossible to know about its existence (BGHZ 129, 282, 289). 3. The legal consequences of vis major. Unlike the beginning of judicial proceedings, vis major does not always suspend prescription, but only when occurring within the last six months. If, for example, a two weeks cut off takes place six months and one week before the original expiry date, the expiry date is postponed by only one week. If, instead, the cut off happens the very last day of the period, the claimant would have to bring his action the day after the end of the cut off (Lando et al. (2003), p. 185).

748

Chapter 14: Prescription German Law § 206 BGB: Suspension of limitation in the event of force majeure Limitation is suspended for a period during which the obligee has, within the last six months of the limitation period, been prevented by force majeure from pursuing his rights. German law has always followed the same rule on vis major as the Principles (§ 203 BGB 1900). In particular, yet in 1891 the so called Second Commission has decided to deal with the cessation of the administration of justice the same way as with other cases of vis major, whereas the first draft wanted to suspend prescription in the first case no matter when the impediment had occurred (cf. Motive I, p. 317; Protokolle I, p. 219). As far as the commentary on this section is concerned, we can, therefore, refer to Article 14:303 PECL.

Comparison and Evaluation Comparing the German law and the Principles we can state but complete correspondence. Furthermore, to restrict the legal relevance of vis major to the last six months seems adequate, notwithstanding that the German legislator has taken this decision regarding a standard period of thirty years. As pointed out above, the period of prescription has traditionally been a continuously running period, a tempus continuum. Therefore, it is of no legal relevance if the claimant was not able to bring an action everyday for reasons beyond his control. The only good reason to postpone the expiry is if he was impeded at the end of the period.

Principles of European Contract Law Article 14:304: Postponement of Expiry in Case of Negotiations If the parties negotiate about the claim, or about circumstances from which a claim might arise, the period of prescription does not expire before one year has passed since the last communication made in the negotiations. 1. General. The Article in comment, such as Article III.-7:304 DCFR, deals with the consequences of negotiations between the parties. Such a provision becomes more and more important for alternative dispute regulation in case there is no conciliation body within the meaning of § 204(1) no. 4 BGB involved (cf. Kayser (2006), p. 119), because the parties can only be encouraged to settle their dispute extrajudicially when the claimant does not have to fear prescription and the negotiations do not come under pressure of time (Lando et al. (2003), p. 186). 2. The meaning of negotiations. The Principles referring to the pending of negotiations define the exact meaning of these two terms. Yet, the Lando Commission has understood negotiations as widely as German law (Lando et al. (2003), p. 187),

749

A. Piekenbrock referring to any kind of communication between the parties that might lead to a settlement (cf. BGHZ 93, 64, 67; BT-Drucks. 14/6040, p. 112). As far as the pending of negotiations is concerned, readiness and cooperation of both parties is needed. Therefore, negotiations cannot be opened unilaterally. Therefore, the claimant cannot suspend prescription by an invitation to negotiate, but has to wait for a positive answer showing him that there is no need to bring an action immediately. Negotiations can rather be ended unilaterally by the debtor definitely denying the claim or the claimant rejecting the debtor’s last offer. Therefore, the Article in comment refers to the last communication made in the negotiations. 3. The legal consequences of negotiations. The legal consequences which the Principles have attributed to the pending of negotiations differ from ordinary suspension. As the general period is of three years the Lando Commission has seen no need to suspend prescriptions in case negotiations have taken place shortly after the claim has come into existence and the claimant has learned about the relevant facts (Lando et al. (2003), p. 186). Insofar, the argument is the same as for the vis major cases. However, prescription would put the negotiating parties under pressure of time if talks have been started a few weeks or even days before the expiry of the period of prescription. Therefore, the expiry has been postponed as far as one year after the end of the negotiations. By this means, the influence of negotiations have been minimized yet liberating the talks from the pressure of time and bewaring the claimant from the prescription trap.

German Law § 203 BGB: Suspension of limitation in the event of negotiations If negotiations between the obligor and the obligee are underway with regard to the claim or the circumstances on which the claim is based, limitation is suspended until one of the parties refuses to continue the negotiations. The claim is not barred until at least three months have elapsed following the end of the suspension. 1. General. Modern German law has adopted a very similar general provision on negotiations whereas former law only contained rules for particular cases such as tort claims (§ 852(2) BGB 1977, BGBl. I, p. 1577), occasionally applied mutatis mutandis to similar claims (BGHZ 81, 370, 373; 93, 64, 68). This change of the law was due to the change from a long term standard period of thirty years beginning to run after the claim has come into existence to a short term period of three years beginning to run after the claimant has learned about the relevant facts. Under the old long term system, there was no need for additional suspension or the postponement of expiry. Yet, former law contained a huge number of short periods that lacked a provision on suspension by negotiations. In these cases the claimant who had been trapped by prescription was only entitled to the counterexception that the debtor was acting in bad faith (BGHZ 123, 394, 397). For such a solution seemed unsatisfactory, the Law of Obligation Reform Act has introduced a general provision on negotiations for the same reasons as the Lando Commission (BT-Drs. 14/6040, pp. 111, 112).

750

Chapter 14: Prescription 2. The legal consequences of negotiations. The legal consequences which the Reform Act has attributed to the negotiations are different from those in Article 14:304 PECL, though they do not simply follow the ‘plain vanilla solution’ adopted in § 852(2) BGB 1900 as amended by the Law of Damages Reform Act (Gesetz zur Änderung schadensrechtlicher Vorschriften, BGBl. 1977 I, p. 1577), suspending prescription as long as the negotiations have lasted. In § 203 BGB, the legislator has rather opted for the same choice as for judicial proceedings by suspending prescription (part 1) and additionally postponing the date of expiry, yet in this case only to at least three months after the negotiations have ended (part 2). This additional postponement, which has been increased by parliament from two to three months, is supposed to give the claimant enough time to bring his action in case the negotiations have come to a sudden end (BT-Drs. 14:7052, p. 180). If the claimant negotiates with the debtor, prescription is also suspended towards a surety (BGHZ 182, 76, 81 et seq.).

Comparison and Evaluation 1. General. Comparing the two provisions on negotiations on the one hand they correspond insofar as negotiations do have an influence on prescription in order to allow alternative dispute regulation without pressure of time. This choice cannot but be appreciated because it gives the parties power of control over the ‘rule on time’ which operates in their private interest. It is, therefore, linked with the provisions on agreements concerning prescription (Article 14:601 PECL; § 202 BGB) which we shall discuss later. Yet, it is interesting to see that the new German section on negotiations follows the new section on agreements. 2. Suspension versus postponement. On the other hand the Principles and German law differ from one another on to what extent negotiations influence the expiry of the period of prescription. Whereas the claimant has more time to bring his action under German law than under Article 14:304 PECL if negotiations have taken place early, he has less time if they have taken place near the original expiry date. As far as early negotiations are concerned the Principles seem more adequate because there is little reason why prescription should not expire at the end of 2010 just because the parties have negotiated for two months in early 2008. Therefore, the influence of negotiations ought to be minimized by a simple rule of postponement, whereas German law seems to grant the claimant a right to inactivity over the full period, though early negotiations do not suspend the period of prescription not beginning to run before the end of the year (§ 199(1) BGB). To evaluate the different length of postponement is rather impossible because the quantification of time is always arbitrary. Yet, German law seems more consistent on that point though the length of postponement is not the same for judicial proceedings and negotiations. But this is still better than not to postpone at all in the case of proceedings and to postpone for as much as one year in case of negotiations.

751

A. Piekenbrock Principles of European Contract Law Article 14:305: Postponement of Expiry in Case of Incapacity (1) If a person subject to an incapacity is without a representative, the period of prescription of a claim held by or against that person does not expire before one year has passed after either the incapacity has ended or a representative has been appointed. (2) The period of prescription of claims between a person subject to an incapacity and that person’s representative does not expire before one year has passed after either the incapacity has ended or a new representative has been appointed. Beside ignorance and vis major the claimant’s or the debtor’s incapacity has to have a suspensive effect on the running of the period of prescription. Yet, as long as a minor or an adult under disability has got legal representatives such as parents, guardians or tutors, claims can actually be enforced as long as the representative knows about the relevant facts. Vice versa a claim can be enforced against a minor as long as he has got his parents. Therefore, the European texts, such as Article III.-7:305 DCFR, only provide a suspensive effect on the running of the period of prescription when there is no representative to look after the interests of the minor or disabled person ordering the postponement of expiry as they do in case of negotiations. By this means, the interests of the third party prevail, whereas the minor has to sue the representative (Lando et al. (2003), p. 189). In order to give the minor a fair chance to enforce his damage claim, paragraph (2) provides a similar postponement for claims against the representative.

German Law § 207 BGB: Suspension of limitation on grounds relating to the family and for similar reasons (1) Limitation of claims between spouses is suspended during the continuance of the marriage. The same applies to claims between 1. life partners for the period during which that life partnership exists, 2. the child, and a) his parents or b) the spouse or civil partner of one parent, until the child reaches the age of 21, 3. a guardian and his ward during the continuance of the guardianship, 4. a carer and the person cared for during the continuance of a care relationship, and 5. a foster child and a foster parent during the continuance of the fostering. Limitation of claims of a child against a friend in litigation proceedings is suspended during the period of the latter’s activity as such. (2) § 208 is not affected.

752

Chapter 14: Prescription § 208 BGB: Suspension of limitation in the case of claims for infringement of the right to sexual self-determination The limitation period in respect of claims for infringement of the right to sexual self-determination is suspended until the obligee’s 21st birthday. If, when the limitation period commences, the obligee in respect of claims for infringement of the right to sexual self-determination is living with the obligor as a domestic unit, limitation is suspended until the cessation of the domestic unit. § 210 BGB: Expiry of the limitation period suspended in the case of persons without full legal capacity (1) If a person without full legal capacity or with limited legal capacity has no statutory representative, a limitation period is not completed to his benefit or detriment until the expiry of six months after the time when he acquires unlimited legal capacity or the lack of representative is cured. If the limitation period is less than six months, the period specified for limitation purposes applies instead of the period of six months. (2) Subsection (1) does not apply insofar as a person without full legal capacity is capable of suing and being sued. § 210(1) BGB basically contains the same rule as Article 14:305(1) PECL, yet providing a postponement only half as long. Furthermore, § 207(1) BGB contains provisions almost identical with Article 14:305(2) PECL so that there is no need for further comment.

Comparison and Evaluation Instead, German law and the Principles differ as far as claims within personal relationships or for sexual abuse are concerned. First, German law traditionally orders suspension of all claims within close family relationships such as marriage (§ 204 BGB 1900) and has followed this doctrine in recent legislation as far as life partnership between homosexuals (Life Partnership Act for homosexual couples(Lebenspartnerschaftsgesetz), BGBl. 2001, I, p. 266) and relations between step-parents and minor step-children are concerned although the former do not represent the latter (cf. § 204 BGB 1900 as amended by the § 1 LPart G § 207(1) no. 1, 2 BGB). Second, the Law of Obligation Reform Act has introduced a new provision on suspension of damage claims based on sexual abuse as long as the victim has not completed its twenty-first anniversary or is still living together with the transgressor in the same household (§ 208 BGB). Yet, the Lando Commission has opted against suspension between spouses or other closely related persons sharing the same household (Lando et al. (2003), p. 190). This option seems more than reasonable because the obfuscating power of time cannot be suspended by statute and there is no reason why a widow should be allowed to sue her stepchild as the heir of her husband for a loan which fell due twenty years ago.

753

A. Piekenbrock However, the sexual abuse cases do require special rules on suspension. Yet, the Lando Commission has left them to particular legislation. For Principles on European Contract Law (and not on tort law) this was a wise decision as there is no need to unify legislation on such a delicate subject, although the Lando commission wanted to set up rules on time also applying to ‘rights to damages for harm caused by another in a non-contractual situation’ (cf. Article 14:101 sub. 3, above).

Principles of European Contract Law Article 14:306: Postponement of Expiry: Deceased’s Estate Where the creditor or debtor has died, the period of prescription of a claim held by or against the deceased’s estate does not expire before one year has passed after the claim can be enforced by or against an heir, or by or against a representative of the estate. Finally, the Principles, such as Article III.-7:306 DCFR, had to deal with death as an obstacle to the enforcement of a claim. Yet, as the Principles provide suspension of the period of prescription also in case the claimant does not know the identity of the heir as the new debtor (Article 14:301(a) PECL) they only had to deal with the impossibility of legal proceedings. Accordingly, the Article in comment is provided for the case that the estate is without a legal representative who can sue or be sued for claims by or against the estate (Lando et al. (2003), p. 192). This premise is also given under German law providing that a claim cannot be enforced against the temporary heir before he has accepted the inheritance (§ 1958 BGB). Therefore, the claimant must ask for the appointment of a provisional administrator of the estates to enforce his claim (§ 1961 BGB). In order to help the claimant under such circumstances, the expiry of the period of prescription is postponed to at least one year after the enforcement of the claim has become possible

German Law § 211 BGB: Expiry of the limitation period suspended in matters relating to estates A claim that is part of or directed against an estate is not time-barred until at least six months have elapsed from the time when the inheritance is accepted by the heirs or when insolvency proceedings in respect of the estate are commenced or when the claim can be asserted by or against an agent. If the limitation period is less than six months, the period specified for limitation purposes applies instead of the period of six months. § 211 BGB basically contains the same rule as Article 14:306 PECL, yet providing a postponement only half as long. Yet as part of a national universal legal system it refers to national legal institutions such as the acceptance of inheritance and, therefore, needs adjustment when applied as the lex cause to a foreign law of succession.

754

Chapter 14: Prescription Comparison and Evaluation 1. General approval. The similarity of the Principles and German law is obvious as far as periods in matters relating to estates are concerned. And, doubtfully, there is good reason for such provisions that are based on the same idea as postponement for incapacity (cf. Grothe, in Münchener Kommentar (2012), § 211 no. 1). 2. Criticism. Yet, it seems that they can easily overshoot the mark. If, for example, the period of prescription originally expiring 10 December 2012, the debtor has died on 10 September 2012 and his only son and heir has accepted the inheritance almost immediately on 20 September 2012, there would have been ten days the claimant could not enforce his right regarding § 1958 BGB. Yet, applying Article 14:306 PECL the expiry date would be postponed as far as 20 September 2013. This extra time seems inappropriate. In particular, this is true when we compare postponement in our case to suspension for ignorance of the identity of the heir (Article 14:301(a) PECL). If the son had given notice of his father’s death only after he had accepted the inheritance, suspension for ten days seems a lot more appropriate than postponement. Furthermore, neither the Principles nor German law explicitly force the claimant to ask for the appointment of an administrator of the estates to overcome the impossibility to enforce the claim against the estate but instead postpone the expiry date by one year after he has actually done so. Yet, it seems reasonable to treat a claimant who misses to establish the premise of enforceability as negligent as if he had missed to enforce his right. This is particularly true for the Principles because Article 14:303 PECL ends suspension in case of vis major when the impediment could reasonably overcome.

Principles of European Contract Law Article 14:307: Maximum Length of Period The period of prescription cannot be extended, by suspension of its running or postponement of its expiry under these Principles, to more than ten years or, in case of claims for personal injuries, to more than thirty years. This does not apply to suspension under Article 14:302. 1. General. The last Article of the Section on extension of period, such as Article III.-7:307 DCFR, deals with the fundamental question of the maximum length of such extensions. This question is of particular interest under a system that vests ignorance or knowledge of certain facts with legal relevance either as a means of suspension (Article 14:301 PECL) or as a pre-requisite of commencement (§ 199(1) no. 2 BGB). But also as far as the other reasons of extension are concerned the ‘rule on time’ has to keep in mind that the obfuscating power of time cannot be suspended by statute. Furthermore, the (alleged) debtor must be able to treat an incident as indubitably closed (Lando et al. (2003), p. 193) and the general need for legal peace and certainty increases even if the claimant had no fair chance to enforce his right.

755

A. Piekenbrock 2. Maximum length almost across the board. To answer these needs the Principles have opted for a maximum length of period of ten years almost across the board, applicable to all but one cases of extension described in Section 3 (Lando et al. (2003), p. 195) and to all but one type of claims. By this means, the suspensive influence of circumstances such as ignorance, vis major, negotiations, incapacity and death of one party is restricted, postponing the expiry date to no more than ten years or, exceptionally, to thirty years, counted from the time laid out in Article 14:203 PECL. This so called long-stop also applies when the debtor has fraudulently concealed his responsibility, though in such a case the good faith issue (Article 1:201 PECL) can arise (Lando et al. (2003), p. 196), operating as a kind of counter exception doli specialis. a) Judicial proceedings. The first exception is for judicial proceedings which may suspend prescription as long as they last. The reason for this exception is simple though legal history knows that legislators have opted the opposite way (Nov. Val. 27, 3 and 35, 13): First, the claimant has not missed to enforce his right and cannot speed up proceedings. Second, the answer to the question whether or not the plaintiff has a claim against the defendant is under way (Lando et al. (2003), p. 195). Yet, it might have been overlooked that the plaintiff acts negligently when the proceedings remain in abeyance and that the abovementioned answer will not be given when the case will be disposed of without a decision on the merits. In these cases there were good reason for the application if the maximum period. b) Claims for personal injuries. The second exception is for claims for personal injuries including, for instance, psychiatric injury and compensation for pain and suffering (Lando et al. (2003), p. 193), to which a maximum length of thirty years applies. Yet, if a single act such as a road accident gives rise to a claim for personal injuries and for damage to property, according to the Lando Commission the exception shall only apply to the former, but not to latter (Lando et al. (2003), p. 194). Finally, it has been discussed whether there should be a second exception for claims on environmental damages, yet being left to special legislation (Lando et al. (2003), p. 195).

German Law § 199 BGB: Beginning of the standard limitation period and maximum periods (1) […] (2) Irrespective of how they arose and irrespective of awareness or grossly negligent lack of awareness, claims arising out of death, injury to body, health, or liberty are time-barred 30 years from the date upon which the act, breach of duty or other event causing the loss occurred. (3) Other claims for compensation are time-barred 1. irrespective of knowledge or grossly negligent lack of knowledge, ten years after they arose and 2. irrespective of when they arose and of knowledge or grossly negligent lack of knowledge, 30 years from the date on which the act, breach of duty or other event causing the loss occurred.

756

Chapter 14: Prescription The period which ends first is decisive. (3a) Claims based on the devolution of an inheritance or whose claiming is contingent on knowledge of a disposition mortis causa are timed-barred 30 years from the date upon which the claim has riden irrespective of knowledge or grossly negligent lace of knowledge. (4) Irrespective of knowledge or grossly negligent lack of knowledge, claims other than claims for compensation are time-barred ten years after the date upon which they arose. (5) […] 1. General. When German law declared knowledge of the relevant facts as a prerequisite to the running of the period of prescription it has also answered the needs of legal certainty and peace by virtue of long-stop rules. Yet, within the German framework the maximum periods have to be distinct prescription periods with distinct prerequisites to commencement, whereas the maximum length set up by Article 14:307 PECL counts from the time laid down in Article 14:203 PECL (Lando et al. (2003), p. 194). Notwithstanding, the German legislator could have enacted an additional long-stop rule similar to Article 14:307 PECL as far as suspension and postponement in §§ 203, 206, 207, 208, 210, 211 BGB are concerned. Yet, insofar German law has opted differently from the Principles. 2. Ten year prescription. The first distinct prescription period lasts ten years and begins to run with the coming into existence of the claim, regardless of whether the claimant has known about the relevant facts. First, this period applies to all claims but damage claims (§ 199(4) BGB). Second, it applies to damage claims not arising out of death, injury to body, health, or liberty (§ 199(3) no. 1 BGB). 3. Thirty year prescription. The second distinct prescription period lasts thirty years and begins to run from the time of the act which gives rise to the claim, regardless of whether the claim has come into existence and the claimant has known about the relevant facts. On the one hand, only this period applies to damage claims arising out of death, injury to body, health, or liberty (§ 199(2) BGB). On the other hand, it applies simultaneously with the ten year prescription to all other kinds of damage claims (§ 199(3) no. 2 BGB), depending on which of the two periods ends earlier (§ 199(3) 2 BGB). Finally, the thirty prescription period applies to certain claims under inheritance law under the conditions specified in § 199 (3a) BGB. Yet, in a commentary on principles of Contract Law this provision does not need further consideration.

Comparison and Evaluation 1. General. As we have seen, both the Principles and German law set up maximum periods of prescription running regardless of whether the claimant has known about the relevant facts or, as far as damage claims are concerned, even whether any damage has occurred and, thereby, the claim has come into existence. The main difference is that the German long-stop rule only applies to ignorance, whereas under the Principles

757

A. Piekenbrock it applies to most cases of extension. Regardless this big difference, both the Principles and German law come to equal results as far as other but damage claims are concerned: they are time-barred after ten years counted from the coming into existence of the claim. As far as damage claims not arising from the violation of particularly valuable rights are concerned, the difference between the Principles and German law is that the ten year period is counted from the act giving rise to the claim under the former, but from the occurrence of damages under the latter, whereas German law refers to the act giving rise to the claim only for the commencement of the thirty year period. 2. Violation of particularly valuable rights. Finally, both the Principles and German law know only one maximum period of thirty years as far as claims arising from the violation of particularly valuable rights are concerned. This may be justified by the particular value of life, health and the bodily integrity, but leads to further difficulties of distinction. If, for instance, a driver of a car were seriously injured in a road accident, he could claim monetary compensation for his medical treatment, for the ticket for an opera he missed due to the accident, for the loss of income (§§ 842, 843 BGB) and for pain and suffering (§ 253(2) BGB). Yet, would all these claims be for personal injuries within the meaning of Article 14:307 PECL? And if the driver were killed, would the widow’s claim for compensation for pain and suffering, allowed in Switzerland (Article 47 OR), Austria and many other European countries except Germany (cf. SZ 74/90), be for personal injuries? Yet, evaluation seems almost impossible because, indubitably, there are a lot of pros and cons for both uniformity and differentiation, reflecting the eternal conflict between legal certainty and individual justice, between law and equity. From that point of view, both the Principles and German law have opted for equity.

SECTION 4:

RENEWAL OF PERIODS

Principles of European Contract Law Article 14:401: Renewal by Acknowledgement (1) If the debtor acknowledges the claim, vis-à-vis the creditor, by part payment, payment of interest, giving of security, or in any other manner, a new period of prescription begins to run. (2) The new period is the general period of prescription, regardless of whether the claim was originally subject to the general period of prescription or the ten year period under Art. 14:202. In the latter case, however, this Art. does not operate so as to shorten the ten year period. Article 14:402: Renewal by Attempted Execution The ten year period of prescription laid down in Art. 14:202 begins to run again with each reasonable attempt at execution undertaken by the creditor. 1. General. Besides suspension effected by judicial proceedings the Principles provide one more legal institute extending the period of prescription beyond the long-stop: the

758

Chapter 14: Prescription renewal, traditionally known as interruptio temporis in Roman law (C. 7, 40, 1, 1), which leads to a new period of prescription running afresh. The two possibilities for renewal are laid down in the two Articles in comment: acknowledgement and attempted execution. 2. Acknowledgement. Acknowledgement has a long tradition as a means of renewal in German and European legal history. According to the Lando Commission the acknowledgement is no contractual declaration (Lando et al. (2003), p. 199), but has to be understood in a wider sense as illustrated by Article 14:401(1) PECL. Yet, as far as part payments or other sorts of performance are concerned there always has to be a conduct vis-à-vis the creditor expressing the debtor’s awareness that he still owes more than he has already performed. If, for example, the debtor has been charged with a claim for EUR 10,000 and only pays EUR 5,000 denying further obligation prescription is not renewed (Lando et al. (2003), p. 199). If the debtor has acknowledged the claim a new period of prescription begins to run the next day. According to paragraph (2) this new period is always the standard period even in case of part payments of an established claim applicable to the ten year period (Article 14:202 PECL). Yet, it would have gone without saying that the ten year period cannot be shortened by part payments, which just remain irrelevant when performed within the first seven years after the judgment has obtained the effect of res judicata (Article 14:203(3) PECL). 3. Attempted execution. The second possibility to renew the period of prescription is to attempt execution of an enforceable claim. By this means, the claimant who has gained a title for execution can renew the ten year period. In order to do so as long as necessary the claimant only has to apply for execution measures properly and not to withdraw his application before the attempt of execution (Lando et al. (2003), p. 201).

German Law § 212 BGB: Limitation period beginning anew (1) The limitation period begins anew if 1. the obligor acknowledges the claim to the obligee by part payment, payment of interest, the granting of security or in some other way, or 2. a judicial or official act of execution is performed or applied for. (2) The new beginning of the limitation period as a result of an act of execution is deemed not to have occurred if the act is annulled upon application by the obligee or because of a failure to fulfil the statutory requirements. (3) The new beginning of the limitation period as a result of an application for an act of execution is deemed not to have occurred if the application is not granted or is withdrawn before the act or the completed act is annulled in accordance with subsection (2) above. 1. Acknowledgement. German law is based on the same understanding of acknowledgement as Article 14:401 PECL, not referring to the contractual acknowledgement of

759

A. Piekenbrock a debt within the meaning of § 781 BGB, but instead to any conduct vis-à-vis the creditor expressing the debtor’s awareness of the claim (cf. RGZ 73, 131, 132). Nevertheless, according to the dominating opinion legal capacity to enter into a contract is needed for a valid acknowledgement (Peters/Jacoby, in Staudinger (2009), § 212 no. 9). Furthermore, the conduct must express the awareness that the debtor still owes more than he has already performed. Therefore, when the seller of a car undertakes a repair he does not acknowledge the existence of a claim unless he declares the car not to be in proper shape after the repair has been performed (BGH NJW 1988, 254). Unlike Article 14:401(2) PECL, German law does not define the exact legal consequences of renewal. On the one hand, the new period indubitably begins to run the day after the claim has been acknowledged (BGH NJW 1998, 2972, 2973). On the other hand, the new period must generally be the same applicable before the acknowledgement. In particular, German law does not provide that only the three year standard periods runs afresh after acknowledgement of an enforceable claim. Yet, as far as claims governed by the standard period are concerned, under the German framework there is not only one period to run afresh, but there may be up to three in damage claim cases. But as acknowledgement necessarily means the claimant’s awareness of the claim, generally, the three year standard period has to apply (§ 199(1) BGB). Instead in the tax lawyer case (cf. Article 14:501 PECL sub 2.b) acknowledgement of liability before the occurrence of damage has to renew the thirty year period laid down in § 199(3) no. 2 BGB). 2. Attempted execution. As far as attempted execution is concerned, we can refer to the comment on Article 14:402 PECL. In particular, German law in subsections (2) and (3) of the provision in comment explicitly provides that renewal only takes place when the claimant has lawfully attempted execution and not withdrawn his application before the judicial organ has attempted execution.

Comparison and Evaluation 1. Acknowledgement. Evaluation of renewal by acknowledgement has to consider that it is part of common European legal history, though we may not just ask ‘since when’ but also have to ask ‘why’. The Lando Commission has pointed out that the debtor who acknowledges the claim does not need the protection granted by prescription and that the claimant may be refrained from bringing an action (Lando et al. (2003), p. 198 following Spiro (1975), pp. 348 et seq.). Yet, on the other hand acknowledgement as understood by the courts does not guarantee legal certainty because its only prerequisite is that the debtor somehow expresses his consciousness of the existence of the claim (BGHZ 58, 103, 104). Such an acknowledgement does not legally bind the debtor who can still put the claim into question in court proceedings. Therefore, renewal by acknowledgement is particularly doubtful if the claim is governed by a long term period still existing under German law and there might have been good reason for the application of a long-stop rule. Nevertheless Article III.-7:401 DCFR follows Article 14:401 PECL almost word for word.

760

Chapter 14: Prescription 2. Attempted execution. Yet, as far as attempted execution is concerned there is no need for any restriction of renewal by long-stop rules, because prescription is no means of discharge of the debtor. Therefore, prescription has to be renewed as long as necessary, which is as long as the debtor does not initiate insolvency proceedings granting a discharge. Thus Article III.-7:402 DCFR was right to follow this well established rule.

SECTION 5:

EFFECTS OF PRESCRIPTION

Principles of European Contract Law Article 14:501: General Effect (1) After expiry of the period of prescription the debtor is entitled to refuse performance. (2) Whatever has been performed in order to discharge a claim may not be reclaimed merely because the period of prescription had expired. 1. General effect. The article in comment, deals with the general effects of prescription, which can either be, as the English say, to extinguish the claimant’s right or only to bar the remedy. The Principles have opted for the second, the weak choice traditionally followed both in the Civil and the Common Law world leading to the abovementioned difficulties within the conflict of laws (cf. Article 14:101 PECL). Yet, in the Civil Law world the nature of the time-barred claim has been described as a ‘naturalis obligatio’, which can no more be enforced by law, but is still the legal basis of voluntary performance excluding claims for unjustified enrichment (Piekenbrock (2006), p. 470). Obviously, regarding in particular paragraph (2) of the Article in comment the Principles are based on this European tradition. 2. Right to refuse. Furthermore, the Principles had to decide whether the loss of enforceability should operate ipso iure or whether the debtor should only be granted a right to refuse performance of the enduring claim. Once again, they have opted for the second, the weak choice. Yet, this option indubitably does not put the nature of prescription as part of substantive law into question (Lando et al. (2003), p. 202). The right to refuse performance is no procedural exception such as an arbitration clause (§ 1032 ZPO). It is instead a substantive right to refuse performance such as the exception of non-performance (§ 320 BGB), which has to be exercised either explicitly or at least implicitly invoking the lapse of time (BGHZ 156, 269, 271). As far as procedural law is concerned, the exercise of the right to refuse has to be pleaded as any other adverse right such as performance. If the plaintiff only pleads the expiry of prescription he wins his case in default proceedings (BGHZ 156, 269, 271). Yet, if he also pleads that the defendant has invoked prescription, he loses his case.

761

A. Piekenbrock German Law § 214 BGB: Effect of limitation (1) When limitation occurs, the obligor is entitled to refuse to perform his obligation. (2) Performance made in satisfaction of a claim that has become time-barred may not be reclaimed, even if made without knowledge of the time-bar. The same applies to an acknowledgement made in accordance with a contract and to a security given by the obligor. As far as the general effects of prescription are concerned German law has opted the same traditional way as the Principles and, therefore, the section needs no further comment.

Comparison and Evaluation The generally weak effect of prescription granting the debtor a disposable right to refuse performance, adopted also in Article III.-7:501 DCFR, seems adequate as long the ‘rule on time’ only works for private interests of the parties. There is neither reason to sanction the negligent claimant’s delay nor to protect the ‘bona fide debtor’ as long as the latter is willing to perform. Insofar the only remaining question is whether the debtor can recover the amount paid on a time-barred claim when he was not aware of prescription and, therefore, has not deliberately renounced his right to refuse. Both the Principles and German law give a negative answer to this question, whereas § 14(2) of the new Finish Prescription Act (cf. Article 14:201, 14:202 PECL, COMPARISON AND EVALUATION, sub 2) has opted in favour of the debtor of the time-barred claim in consumer contract cases. Yet, as we have seen, the ‘rule on time’ is also set up for public interests such as legal peace and certainty. Therefore, the Principles have opted for a particularly broad long-stop rule applicable, even limiting the suspensive effect of negotiations (cf. Article 14:307 PECL comment 1). Regarding the reasoning of such a rule it seems doubtful why a judge should not be allowed to dismiss an action for expiry of prescription ex officio. If the debtor still wants to perform his naturalis obligatio for moral reasons he is free to do so and it seems fair enough that he has no claim for unjustified enrichment only because the claim had been time-barred. Yet, if he does not perform voluntarily, the claimant’s action should be time-barred ex officio when the maximum period set up also in the public interest (Lando et al. (2003), p. 205) has expired, whereas under German procedural law judges may not even ask the defendant whether or not he wants to exercise his right to refuse (BGHZ 156, 269, 270 et seq.).

762

Chapter 14: Prescription Principles of European Contract Law Article 14:502: Effect on Ancillary Claims The period of prescription for a right to payment of interest, and other claims of an ancillary nature, expires not later than the period for the principal claim. Article 14:503: Effect on Set-Off A claim in relation to which the period of prescription has expired may nonetheless be set off, unless the debtor has invoked prescription previously or does so within two months of notification of set-off. 1. Ancillary claims. The first Article in comment deals with the effect of prescription of a claim on ancillary claims such as interests, emoluments and costs. Applying Article 14:201 and 14:203(1) PECL literally, claims for interests could only be time-barred three years after the end of the period for which the debtor had to pay the interests. Yet, by this means the existence of the principal claim would arise as a preliminary question although it was already time-barred. Therefore, the Lando Commission has opted for provision widespread in European jurisdictions which fixes a prior date of expiry of ancillary claims together with the principal claim (Lando et al. (2003), p. 203). 2. Set-off. Similar problems arises when the claimant wants to enforce his claim for set-off after the period of prescription has expired. If the claimant is sued to pay EUR 10,000 and mounts the defence of set-off, court has to establish whether or not the cross-claim has existed before the defendant has exercised his right of set-off (Article 13:104 PECL) and, under German law (§ 322(2) ZPO), the judgment can even obtain the effect of res judicata on that mere defence (RGZ 161, 167, 171; BGHZ 36, 316, 319). Therefore, the Principles have considerably restricted defence of set-off with a timebarred cross-claim. Although Article 14:503 PECL contains a general rule according to which set-off is not automatically excluded by prescription of the cross-claim, the debtor of the time-barred cross-claim can prevent set-off by invoking prescription. This can either happen before the claimant of the time-barred cross-claim has given notice to the debtor or within two months afterwards. By this means, the possibility to invoke prescription against set-off is time-limited itself, whereas the right to refuse performance under Article 14:501 PECL lasts as the debtor has not yet effected performance.

German Law § 215 BGB: Set-off and right of retention after limitation has occurred The fact that a claim is time-barred does not preclude set-off and assertion of a right of retention if the claim was not time-barred at the moment when set off could first have been made or performance refused.

763

A. Piekenbrock § 216 BGB: Effect of limitation in the case of secured claims (1) The time-bar of a claim in respect of which a mortgage, ship’s mortgage or lien exists does not preclude the obligee from seeking to satisfy his claim out of the encumbered object. (2) If a right has been procured in order to secure a claim, retransfer of the right cannot be demanded on the ground that the claim has become time-barred. If title has been reserved, the contract may be terminated even if the secured claim is time-barred. (3) Subsections (1) and (2) above do not apply to the limitation of claims for interest and other recurring obligations. § 217 BGB: Limitation of collateral performance A claim for a collateral performance dependent on the main claim becomes time-barred at the same time as the main claim, even if the specific limitation period for the first-mentioned claim has not yet expired. 1. Ancillary claims. German law (§ 217 BGB) contains the same rule on ancillary claims as the Principles and, therefore, needs no further comment on that point. 2. Set-off. Instead the provision on set-off is rather different, as § 215 BGB allows set-off as long as it has been possible before the period of prescription has expired, regardless of whether it has been noticed before or after that date. In German law, this provision, already known to the former law (§ 390 part 2 BGB 1900) is a compromise between two different opinions hold in the nineteenth century and based on the Roman law concept of compensatio legis (C. 4, 31, 14 pr.), the one generally opposing prescription of mere defences such as set-off (Savigny (1841), pp. 413 et seq.) and the other generally opposing set-off with time-barred claims (Windscheid (1856), p. 41). According to the Federal Court, it even applies when the cross-claim has been declared time-barred in a judgment on a cross-action, which has obtained the effect of res judicata (BGH WM 1971, 1366, 1367). 3. Right of retention. Furthermore, § 215 BGB for the first time explicitly provides the same rule as far as the right of retention is concerned, whereas under the former law § 390 part 2 BGB 1900 has been applied mutatis mutandis (BGHZ 48, 116, 117; 53, 122, 125). Although the legislator basically wanted to follow the former law (BT-Drs. 14/6040, p. 122) it has undergone a significant change insofar as there is no need to give notice to the seller before the period of prescription has expired, whereas under the former law the buyer of defective goods could retain the purchase price only under such circumstances (§ 478 BGB 1900). 4. Secured claims. Finally, § 216 BGB contains specific provisions for claims secured by property. Subsection (1) refers to accessory rights such a mortgage (§ 1113 BGB) or a pledge (§ 1204 BGB). If, for example a bank having failed to enforce a loan within the period of prescription can still bring a foreclosure action (§ 1147 BGB), although generally the owner is entitled to the same exceptions as the debtor (§ 1137 BGB). Yet

764

Chapter 14: Prescription this exception only refers to claims secured by property, whereas a surety can invoke prescription of the secured debt (§ 768 BGB) even after his own obligation has been legally established (BGHZ 139, 214, 216 et seq.). Furthermore, it only refers to the principal claim including regular redemption payments (Peters/Jacoby, in Staudinger (2009), 216 no. 8) but not to interests and other similar recurring obligations (subsection (3)). Subsection (2)1 of the provision in comment refers to so-called fiduciary securities such as the transfer of ownership (Motive I, p. 345). If, for example, the loan was secured by the transfer of ownership of a car, the debtor is not entitled to seek the re-transfer of ownership. Finally, part 2 explicitly provides what had only been based on case law (BGHZ 34, 191, 195 et seq.; 70, 96, 98) before the Law of Obligation Reform Act has become effective (BT-Drucks. 14/6040, p. 123): If a sales contract contains a reserve of property clause the seller can terminate the contract in case of the buyer’s non-performance even after the claim for the purchase price has been time-barred.

Comparison and Evaluation 1. General. Comparing the specific effects of prescription on ancillary claims, set-off, the right of retention and securities, the Principles as well as Article III.-7:502 and III.-7:503 DCFR follow a stricter guideline than German law. 2. Set-off. As far as set-off is concerned, the Principles’ option has to be understood with regards to two provisions which are essentially different from German law. First, German law contains no restriction as to the uncertainty of the cross-claim. Therefore, the defendant can mount the defence of set-off invoking a cross-claim which is both unascertained as to its existence or its value and time-barred. Yet, Article 13:102 PECL allows set-off under such circumstances only if both claims arise from the same legal relationship, the main pre-requisite for the right of retention under German law (§ 273 BGB). Second, German law, influenced by the legal concept of compensatio legis, provides the retrospective effect of set-off (§ 389 BGB), whereas the Principles have come off the Roman tradition, providing discharge as from the time of notice (Article 13:106 PECL). Therefore, the effect of prescription seems embedded in the legal concept of set-off governing the Principals and German law respectively, though the legal concept does not determine the ‘rule on time’ (Peters et al. (1981), p. 266). Yet, for evaluation it seems worth noting that Windscheid as the father of the legal concept adopted by both the Principles and German law has voted against set-off with claims after expiry of the period of prescription (Windscheid (1856), p. 41). Furthermore, the report on the law of prescription wanted to allow set-off with time-barred cross-claims only when arising from the same legal relationship (Peters et al. (1981), p. 311). Yet, the decisive question to answer is why the claimant of a time-barred claim should still be entitled to set-off. Set-off is a means of self-execution by notice to the other party, liberating the claimant from the necessity to apply for a writ of fieri facias. Furthermore, the possibility of set-off liberates the claimant from the risk of insolvency of his debtor and, therefore, has similar effects as securities. But it does not liberate the

765

A. Piekenbrock claimant from his burden to enforce his claim by simple notice to the other party (Article 13:104 PECL). Therefore, when the ‘rule on time’ sanctions the negligent omission of enforcement, there is no reason to excuse the claimant’s negligence just because he could still enforce the claim by set-off. We could even say vice versa that he has failed to go the most simple way of enforcement by notice to the other party. Furthermore, when we think of public policy and the obfuscating power of time, the Lando Commission has correctly pointed out that set-off with time-barred and uncertain cross-claims requires judicial proceedings on stale claims which would be incompatible with the reason of the ‘rule on time’ (Lando et al. (2003), pp. 205 et seq.). 3. Securities. As far as securities are concerned, we can refer to the evaluation of set-off mutatis mutandis. Therefore, it seems adequate that the Principles do not contain a provision similar to § 216 BGB. Thereby they follow the German report on the law of prescription which voted against privileges for secured claims (Peters et al. (1981), pp. 264 et seq.). The German legislator instead has rejected this proposal in order to ensure the equal treatment of accessory and fiduciary securities (BT-Drs. 14/6040, p. 123). Yet, it would have been better to guarantee equal treatment of all kinds of securities by providing their loss in order to avoid proceedings for stale claims.

SECTION 6:

MODIFICATION BY AGREEMENT

Principles of European Contract Law Article 14:601: Agreements Concerning Prescription (1) The requirements for prescription may be modified by agreement between the parties, in particular by either shortening or lengthening the periods of prescription. (2) The period of prescription may not, however, be reduced to less than one year or extended to more than thirty years after the time of commencement set out in Art. 14:203. 1. General. In the final Article on prescription, reproduced verbatim in Article III.-7:601 DCFR, the Principles grant power of disposal over the ‘rule on time’ to the parties as long as they are acting in concert: According to paragraph (1), they can modify the requirements for prescription and, in particular, the period of time. Yet, as far as the length of period is concerned, the power of disposal is limited both in cases of lengthening and in cases of shortening: According to paragraph (2), the period must remain within a range of one to thirty years after the ordinary time of commencement (Article 14:203 PECL). 2. Sales contract. When the parties may modify all requirements for prescription, in particular they are able to exclude suspension in case of ignorance (Article 14:301 PECL). Such an agreement would be of great importance when prescription is used as a means of limitation of liability, as German law has always done in sales law (Leenen

766

Chapter 14: Prescription (1997), pp. 15 et seq.), providing the period to run after delivery (§ 477(1) BGB 1900; § 438(2) BGB), regardless of ignorance or awareness of the buyer. The same is true for Article 5(1) of the European Parliament and Council Directive 1999/44/EC on the sale of consumer goods allowing a prescription rule such as § 438(2) BGB expressis verbis. Though the Principles, not dealing with specific contracts, do not contain a similar provision, they leave at least enough space to come to an equivalent result by virtue of an agreement. Yet, when applied to sales contracts, as far as the length of period is concerned, they would not even allow two professional parties to agree individually on what has been the law in Germany until only recently (§ 477(1) BGB 1900).

German Law § 202 BGB: Inadmissibility of agreements on limitation (1) In the case of liability for deliberate acts and omissions, the limitation period may not be shortened in advance by way of legal transaction. (2) The limitation period may not be extended by way of legal transaction beyond a period of 30 years from the beginning of the statutory period. 1. General. Traditionally, German law has only allowed agreements to shorten the period of prescription, whereas lengthening was generally impossible (§ 225 BGB 1900) and only admitted in specific cases such as sales contract (§ 477(1) 2 BGB 1900). Therefore, until the Law of Obligation Reform Act came into force, the debtor’s waiver of prescription was treated as unlawful (§ 134 BGB) and only gave rise to replicatio doli, an equitable remedy under the good faith clause of the German code (§ 242 BGB) (cf. BGH VersR 1960, 896, 897; 1972, 394, 395; 1982, 365, 366; NJW 1998, 1488, 1491). Nowadays the parties are granted the power of disposal over the ‘rule on time’, although German law puts it in negative terms, underlining the restrictions of freedom instead of freedom itself. 2. Restrictions. German law, unlike the Principles, does not contain a general provision restricting agreements to shorten the period of prescription. Instead it only inhibits such agreements as far as liability for deliberate acts and omissions is concerned (subsection (1)). Therefore, if the parties have agreed to shorten the period in an individual contract the agreement will be treated as lawful except for liability under the abovementioned circumstances, whereas a similar clause contained in trading conditions would be completely void (§ 306(2) BGB). However, agreements on lengthening the period are allowed to the same extent as under the Principles, subsection (2) restricting the parties’ power of extension to a maximum period of thirty years. Under the former law adjudication had come to the same result in cases of lawful extension agreements in sales contracts (BGH NJW-RR 1994, 1327, 1328). This maximum period counts from the beginning of the statutory period, even if the parties’ agreement is concluded afterwards and also refers to claims for regularly recurring services within the meaning of § 197(2) BGB (Peters/Jacob, in Staudinger (2009), § 202 no. 20 dissenting).

767

A. Piekenbrock Comparison and Evaluation Generally, the strengthening of the parties’ power to agree on their private individual rights autonomously is always to be highly appreciated. Yet, as far as the persisting restrictions are concerned, evaluation must distinguish between the lengthening and the shortening of period. On the one hand, lengthening the period can clash with the public interests pursued by prescription and, therefore, seems indubitably adequate. On the other hand, shortening the period can only clash with the private interests of the claimant who ought to look after his rights autonomously, although subject to specific legislation on unfair terms not individually negotiated such as Article 4:110 PECL and, of course, the Council Directive 93/13/EEC on unfair terms in consumer contracts. Yet, there is little reason why a professional party should be protected from the voluntary agreement on a period of prescription of less than one year.

768

CHAPTER 15

Illegality M. Lehmann

Principles of European Contract Law Article 15:101: Contracts Contrary to Fundamental Principles A contract is of no effect to the extent that it is contrary to principles recognised as fundamental in the laws of the Member States of the European Union. 1. General. Article 15:101 PECL renders certain contracts invalid. The provision partially fills the gap left open by the first part of the Principles which do not cover illegality, see Article 4:101 PECL. 2. Scope. Article 15:101 PECL deals only with contracts that infringe upon fundamental principles of Member State law. Contracts violating specific rules are covered by Article 15:102 PECL. 3. Fundamental principles of member state law. a) Requirements. In order for a principle to qualify as fundamental, it must be recognized as such by ‘the laws of the Member States of the European Union’. The use of the plural implies that it is not sufficient that a principle be found in the law of one or several Member States, but that it must be shared by all of them. The comments confirm this view by stating that the formulation of Article 15:101 PECL is intended to avoid the varying national concepts of immorality, illegality, public policy and so forth (Lando et al. (2003), pp. 211-212 Comment B). b) Fundamental principles of EU law. Obvious candidates for principles to be recognized as fundamental within the laws of Member States are fundamental principles of EU law. Given the supranational effect of EU law, one must consider that they are also fundamental principles of Member State law. The drafters of the PECL also had these principles in mind when they wrote the provision (see Lando et al. (2003), pp. 211-212 Comment B). Fundamental principles of EU law include the principle of the

769

M. Lehmann equality of all citizens of the Union (Article 9 Treaty on the Functioning of the European Union – TFEU), and the principle of non-discrimination (Articles 18 and 19 TFEU). Furthermore, one must consider the rights, freedoms and principles set out in the Charter of Fundamental Rights of the European Union, and the fundamental rights guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) to be fundamental principles of EU law (see Article 6(1), (3) Treaty on European Union - TEU) and consequentially also of Member State law (see also Lando et al. (2003), pp. 211-212 Comment B). The same is true of the four fundamental freedoms (free movement of goods, persons, services and capital). c) Other fundamental principles of Member State laws. The fundamental principles of EU law are very far-reaching due to the inclusion of the Charter of Fundamental Rights and the ECHR (see above b)). It is hard to find any principles that are not included in this catalogue but are nevertheless recognized as fundamental by all Member States. The comments cite the example of generally accepted norms of family life and sexual morality (Lando et al. (2003), pp. 211-212 Comment B). One is, however, hard pressed to find such norms that would be generally accepted in all Member States. The prohibition to interfere with the due administration of justice, which is also cited in the comments (see Lando et al. (2003), pp. 211-212 Comment B), is certainly recognized in each Member State. It can, however, already be based on Article 6 ECHR, see Meyer-Ladewig (2011), Article 6 EMRK, no. 2. d) Example. The comments cite as an illustration of a contract violating a fundamental principle in the sense of the provision those contracts that place undue restraints upon individual liberty, like excessive covenants not to compete, for example (Lando et al. (2003), pp. 211-212 Comment B). 4. Consequence. Article 15:101 PECL provides that a contract violating a fundamental principle of Member State law is ‘of no effect’. This consequence has been chosen in order to avoid national concepts of nullity, voidness, voidability and unenforceability (Lando et al. (2003), p. 212 Comment C). The comments further clarify that in such circumstances, a judge or arbitrator must declare the contract to have no effect.

Draft Common Frame of Reference Article II. – 7:301: Contracts infringing fundamental principles A contract is void to the extent that: (a) it infringes a principle recognised as fundamental in the laws of the Member States of the European Union; and (b) nullity is required to give effect to that principle. Article II.-7:301 DCFR is largely identical to Article 15:101 PECL. The only deviation is the additional condition of lit. b, according to which nullity must be required to give effect to the fundamental principle. The comments however clarify that this is not intended to give any discretion to the judge or the arbitrator (Bar/Clive (2009), Comment C on Article II.-7:301 DCFR, p. 537).

770

Chapter 15: Illegality German Law German law does not contain a specific provision on the violation of fundamental principles. It treats this case in the same manner as the violation of mandatory rules (see § 134 BGB, reprinted below Article 15:102 PECL).

Comparison and Evaluation The fact that German law does not contain a provision similar to Article 15:101 PECL or Article II.-7:301 DCFR can be explained by the difference in perspective between national law and European law. Whereas a European provision on illegality must look at the totality of the Member States’ legal systems and the principles rooted there, a national provision on illegality can afford to look exclusively at the prohibitions of national law. All the same, the contracts that have no effect under Article 15:101 PECL and Article II.-7:301 DCFR will also have no effect under German law given that the fundamental principles of all Member States’ laws are logically also an essential part of the German legal system.

Principles of European Contract Law Article 15:102: Contracts Infringing Mandatory Rules (1) Where a contract infringes a mandatory rule of law applicable under Article 1:103 of these Principles, the effects of that infringement upon the contract are the effects, if any, expressly prescribed by that mandatory rule. (2) Where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the contract may be declared to have full effect, to have some effect, to have no effect, or to be subject to modification. (3) A decision reached under paragraph (2) must be an appropriate and proportional response to the infringement, having regard to all relevant circumstances, including: (a) the purpose of the rule which has been infringed; (b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether the infringement was intentional; and (f) the closeness of the relationship between the infringement and the contract. 1. General. Article 15:102 PECL prescribes the effects of illegal contracts. Contrary to Article 15:201 PECL, the provision concerns the violation of a specific mandatory rule of law, not that of a fundamental principle. It partially fills the gap left open by the first part of the Principles which do not cover illegality, see Article 4:101 PECL.

771

M. Lehmann 2. Scope. Article 15:101 PECL deals only with contracts that infringe upon mandatory rules of law applying under Article 1:103 PECL. These are rules that are applicable irrespective of the law governing the contract including the law that the parties have chosen. Rules of this kind are also called ‘overriding mandatory provisions’ (see Article 9 Rome I Regulation, Article 16 Rome II Regulation) or ‘lois de police’ (see French version of Article 9 Rome I Regulation). 3. Effects. The effects of an infringement of an overriding mandatory provision are as follows: a) Rule with specific sanction. If the rule infringed upon contains a specific sanction, then that sanction will be applied, Article 15:102(1) PECL. b) Rule with no specific sanction. If, however, the rule does not provide any specific sanction, then the effects will be governed by Article 15:102(2) and (3) PECL. These provisions adopt a very flexible standard. They do not start from an automatic nullity or invalidity of the contract. On the contrary, they also allow the contract to remain in force or to be modified, Article 15:102(2) PECL. Everything depends on the specific case. The sanction must be appropriate and proportional to the infringement, as Article 15:102(3) PECL clarifies. The provision gives a ‘wash list’ of circumstances that are to be considered when deciding over the effects of illegality.

Draft Common Frame of Reference Article II. – 7:302: Contracts infringing mandatory rules (1) Where a contract is not void under the preceding Article but infringes a mandatory rule of law, the effects of that infringement on the validity of the contract are the effects, if any, expressly prescribed by that mandatory rule. (2) Where the mandatory rule does not expressly prescribe the effects of an infringement on the validity of a contract, a court may: (a) declare the contract to be valid; (b) avoid the contract, with retrospective effect, in whole or in part; or (c) modify the contract or its effects. (3) A decision reached under paragraph (2) should be an appropriate and proportional response to the infringement, having regard to all relevant circumstances, including: (a) the purpose of the rule which has been infringed; (b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether the infringement was intentional; and (f) the closeness of the relationship between the infringement and the contract. 1. General. Article II.-7:302 DCFR largely corresponds to Article 15:102 PECL. There are only a few deviations to be listed in the following.

772

Chapter 15: Illegality 2. Scope. Article II.-7:302 DCFR concerns the violation of ‘mandatory laws’, not of overriding mandatory laws that are meant by Article 15:102 PECL. The scope of the DCFR provision is therefore larger. This is due to its different purpose. Whereas the PECL are primarily intended to serve as a set of contract rules to be agreed upon by the parties (see Article 1:101(2) PECL), the DCFR is a step closer to a fully-fledged legal system. Thus, it was not considered to be appropriate to only sanction overriding mandatory rules, but all kinds of mandatory and applicable rules. 3. Effects. The effects of an infringement are largely the same as those under Article 15:102 PECL. Article II.-7:302(2)(b) DCFR merely clarifies that if the contract is void, it is ab initio, and that it can be void in whole or in part. The latter also follows from Article 15:103(1) PECL. The conditions of Article II.-7:302(3) DCFR are exactly the same as under Article 15:102(3) PECL.

German Law § 134 BGB: Statuatory Prohibition A legal transaction that violates a statutory prohibition is void, unless the statute leads to a different conclusion. 1. General. The BGB deals with illegality in a comparatively short provision. However, this provision has been supplemented by a considerable body of case law and doctrine. 2. Scope. § 134 BGB concerns the violation of all statutory prohibitions. A ‘statute’ in this sense are all legal rules (see Article 2 Introductory Law to the Civil Code – EGBGB), including those contained in acts of parliament, ministerial regulations or municipal acts. Moreover, prohibitions are always mandatory in nature. Therefore, the notion ‘statutory prohibition’ bears a close resemblance to that of ‘mandatory rules’ used, for example, in the DCFR. The scope of § 134 BGB is, however, more restrictive since it only deals with rules that prohibit certain agreements, not with those that have other content. 3. Principle. § 134 BGB starts from the premise that a contract violating a statutory prohibition is void. This means void in total and ab initio (see Ellenberger, in Palandt (2012), Überblick v § 104 no. 27; § 134 no. 13). This seems stricter than the European rules. Yet, it must not be forgotten that the BGB only deals with the violation of prohibitions and not with that of other mandatory rules. Moreover, the validity of the contract can be maintained depending on the statute that has been violated. 4. Exception. § 134 BGB implies that not every violation of a statute leads to a voidable contract (‘unless the statute leads to a different conclusion’). There may be situations where a contract violates a statutory prohibition but is nevertheless valid. Though § 134 BGB seems to presume the invalidity of the contract, it is disputed whether this may even be the case (see Ellenberger, in Palandt (2012), § 134 no. 7). 5. Points to be taken into consideration. Determining whether a contract is void must be done by using an interpretation of the statute that has been infringed upon. German

773

M. Lehmann case law and doctrine have developed a number of points that have to be used as guidance. They largely resemble the criteria mentioned in Article 15:102 PECL and Article II.-7:302 DCFR. a) Mandatory rules with explicit sanction. First, according to the unanimous opinion of courts and authors, the contract is void when the statute that has been infringed upon so orders (see Ellenberger, in Palandt (2012), § 134 no. 6; Jauernig, in Jauernig (2012), §134 no. 8; Wolf/Neuner (2012) § 45 no. 8). This result is thus the same as under Article 15:102(2) PECL and Article II.-7:302(3) DCFR. b) Text of the statute. A judge or arbitrator who must determine whether the contract is void has to look for clues in the text of the statute. For instance, the formulation ‘shall not’ (soll nicht) in a legal provision has been considered to be a hint that the contract remains valid despite the infringement of the statutory rule (see Ellenberger, in Palandt (2012), § 134 no. 6). c) Purpose of the statute. There is unanimity that in case of textual ambiguities, the effect of the infringement must be determined on the basis of the purpose of the statute infringed (see BGHZ 143, 283, 286; Armbrüster, in Münchener Kommentar (2012), § 134 no. 41; Ellenberger, in Palandt (2012), § 134 no. 7; Jauernig, in Jauernig (2011), § 134 no. 8). Rules that merely concern formal aspects (Ordnungsvorschriften) will normally not affect the contract’s validity. For example, the Reichsgericht has decided that a sales contract and the ordering of a beer in a restaurant after the statutory closing time will be fully enforceable (see RGZ 103, 263, 264). d) Person bound by the statute. A peculiar interpretative guideline that has been developed over time makes distinctions regarding the person to whom the statute is addressed. Prohibitions that target both parties to the contract have the effect of rendering the contract null and void while prohibitions that are addressed to only one party usually leave the contract intact. For instance, the requirement of a license to render banking services according to § 32(1) of the German Banking Act (Kreditwesengesetz – KWG) is addressed only to the professional party to the contract. Thus, if this party does not have a license, a contract that is entered into in violation of the statute will remain valid (see BGH Wertpapier-Mitteilungen 1966, 1101, 1102). However, this distinction has to be applied with caution. Sometimes, courts have invalidated contracts on the basis of statutes that bind only one of the parties. For instance, a legal service rendered without a license required under the Act on Legal Services (Rechtsdienstleistungsgesetz – RDG, formerly Rechtsberatungsgesetz – RBerG) will make the contract void (see BGHZ 50, 90, 92; 70, 12, 17; NJW 2000, 1560, 1561). Everything depends on an interpretation of the purpose of the statute which will prevail over any rules of thumb.

Comparison and Evaluation Though the text of the German law is very different, the results closely track those achieved by the European sources. This is due to a number of jurisprudential and doctrinal guidelines that have been developed. Although German law seems to presume the invalidity of the contract, it is not understood in this sense. Rather, the

774

Chapter 15: Illegality consequence of the violation has been made dependent by the courts and the literature on an interpretation of the statute. Differences remain, however. One of them is that the German law – in so far as it is similar to the DCFR – sanctions the violation of mandatory rules whereas the PECL are restricted to overriding mandatory laws. This difference can be explained by the diverging function of the two texts one is national another a European Source of Law. Another difference is that § 134 BGB does not permit adapting the contract. This is due to the fact that the provision only concerns prohibitions. A further difference is that the list of points to consider in making a decision on the validity is much shorter under German law than under the PECL and the DCFR. Points such as the severity and the intentionality of the infringement, or the closeness of the relationship between the infringement and the contract, are not explicitly highlighted in case law or doctrine. However, that does not exclude them from having a psychological influence in practice. The main difference is that under German law, a clear preference is given to the purpose of the statute. A clarification of this point would also serve the European provisions well.

Principles of European Contract Law Article 15:103: Partial Ineffectiveness (1) If only part of a contract is rendered ineffective under Articles 15:101 or 15:102, the remaining part continues in effect unless, giving due consideration to all the circumstances of the case, it is unreasonable to uphold it. (2) Articles 15:104 and 15:105 apply, with appropriate adaptations, to a case of partial ineffectiveness. 1. General. The provision regulates the effects of partial ineffectiveness under Article 15:101 and Article 15:102 PECL. 2. Partial invalidity. Article 15:103(1) PECL prescribes that the rest of the contract remains effective. An exception applies where it would be unreasonable to uphold the remainder, taking into account all circumstances of the case. Example: A buys a company from B. The sale of the most important business part of the company is void because it violates competition law. Taking into consideration all circumstances of the case, it would be unreasonable to uphold the rest of the contract. 3. Restitution and damages. Article 15:103(2) PECL declares that the rules on restitution and damages in case of invalidity also apply in the case of partial invalidity.

Draft Common Frame of Reference The DCFR has left out a special provision on partial ineffectiveness. The drafters have chosen to incorporate the rules for this case in other provisions. For instance, Article II.-7:302(2)(b) DCFR provides that the contract may be partially ineffective. Article

775

M. Lehmann II.-1:108 DCFR sets out that in this case, the remainder of the contract is valid. No exception is provided.

German Law § 139 BGB: Partial invalidity If a part of a legal transaction is void, then the entire legal transaction is void, unless it is to be assumed that it would have been undertaken even without the void part. 1. General. The provision deals with partial ineffectiveness. 2. Scope. § 139 BGB is not restricted to illegality, but extends to other cases as well, e.g., partial avoidance for error or fraud. 3. Principle. Under German law, the voidness of a part of legal transaction leads to the voidness of the whole contract. 4. Exception. An exception applies where it is to be assumed that the parties, had they known about the invalidity of the relevant part of the contract, would have entered into the contract anyway. 5. Restitution and damages. No special rule is provided with regard to the claims one party might have against the other due to partial ineffectiveness. In this case, general rules apply (see above Article 15:103 PECL, comment 3).

Comparison and Evaluation Whereas the PECL assume that partial ineffectiveness leaves the remainder of the contract intact, German law starts from the opposite assumption that the entire contract is invalid. However, both texts provide for exceptions which bring them closer to each other. While these exceptions seem to be built on a different standard, a closer look reveals that this is not true: The test that determines what parties would have done had they known about the partial invalidity in fact amounts to the same as the ‘unreasonableness’ test of the PECL, because if the parties would not have entered into the contract, then it would be unreasonable to uphold it. In the end, the differences seem to be rather a matter of formulation than evidence of substantial disagreement. The preferable solution might be to abstain from any presumption at all, like the DCFR does.

Principles of European Contract Law Article 15:104: Restitution (1) When a contract is rendered ineffective under Articles 15:101 or 15:102, either party may claim restitution of whatever that party has supplied under the

776

Chapter 15: Illegality contract, provided that, where appropriate, concurrent restitution is made of whatever has been received. (2) When considering whether to grant restitution under paragraph (1), and what concurrent restitution, if any, would be appropriate, regard must be had to the factors referred to in Article 15:102(3). (3) An award of restitution may be refused to a party who knew or ought to have known of the reason for the ineffectiveness. 1. General. The provision deals with claims of restitution in case of ineffectiveness of the contract. 2. Scope. Article 15:104 PECL applies if a contract is ineffective under Article 15:101 and Article 15:102 PECL. It also applies if the contract is partially ineffective, Article 15:103(2) PECL. 3. Conditions. There are three conditions for a restitutionary claim under Article 15:104 PECL: (a) one party has received something under a contract, (b) the contract is entirely or partially void, and (c) in case that the party has itself received something, it makes concurrent restitution. 4. Consequence. If these conditions are met, the other party has to restore what it has received under the contract. However, this consequence is not a strict one. a) Mitigation under paragraph 2. Article 15:104(2) PECL obliges the judge or arbitrator to take the factors referred to in Article 15:102(3) PECL into account when deciding whether to grant a claim for restitution. The same applies when he deliberates over concurrent restitution that has to be made by the claimant. This means that although the party has performed, it cannot claim restitution under all circumstances. b) Exception under paragraph 3. A restitutionary claim may be excluded if the claimant knew or ought to have known about the ineffectiveness of the contract, Article 15:104(3) PECL. This reflects the idea that a party that acts in bad faith is not worthy of protection.

Draft Common Frame of Reference Article II. – 7:303: Effects of nullity or avoidance (1) The question whether either party has a right to the return of whatever has been transferred or supplied under a contract, or part of a contract, which is void or has been avoided under this Section, or a monetary equivalent, is regulated by the rules on unjustified enrichment. (2) The effect of nullity or avoidance under this Section on the ownership of property which has been transferred under the void or avoided contract, or part of a contract, is governed by the rules on the transfer of property. (3) This Article is subject to the powers of the court to modify the contract or its effects.

777

M. Lehmann Article VII. – 1:101: Basic rule (1) A person who obtains an unjustified enrichment which is attributable to another’s disadvantage is obliged to that other to reverse the enrichment. (2) This rule applies only in accordance with the following provisions of this Book. Article VII. – 2:101: Circumstances in which an enrichment is unjustified (1) An enrichment is unjustified unless: (a) the enriched person is entitled as against the disadvantaged person to the enrichment by virtue of a contract or other juridical act, a court order or a rule of law; or (b) the disadvantaged person consented freely and without error to the disadvantage. (2) If the contract or other juridical act, court order or rule of law referred to in paragraph (1)(a) is void or avoided or otherwise rendered ineffective retrospectively, the enriched person is not entitled to the enrichment on that basis. (3) […] Article VII. – 6:103: Illegality Where a contract or other juridical act under which an enrichment is obtained is void or avoided because of an infringement of a fundamental principle (II.–7:301 (Contracts infringing fundamental principles)) or mandatory rule of law, the enriched person is not liable to reverse the enrichment to the extent that the reversal would contravene the policy underlying the principle or rule. 1. General. The DCFR regulates the restitutionary claim in the case of voidness of the contract in the special book on restitution (book VII). This is clarified by Article II.-7:303 DCFR. 2. Claim for restitution. The basic rule under the DCFR is that a party that has been unjustly enriched is obliged to return what it has received, see Article VII.-1:101 DCFR. Article VII.-2:101(2) DCFR clarifies that an enrichment is unjustified if it is based on a void contract. The restitutionary claim is, however, excluded if the reversal of the enrichment would be at odds with the purpose of the principle or rule that invalidates the contract, see Article VII.-6:103 DCFR. It must also be noted that the court can modify the contracts or its effects according to Article II.-7:303 DCFR.

German Law § 812 BGB: Claim for restitution (1) A person who obtains something as a result of the performance of another person or otherwise at his expense without legal grounds for doing so is under a duty to make restitution to him. … (2) […]

778

Chapter 15: Illegality § 814 BGB: Knowledge that debt is not owed Restitution of performance rendered for the purpose of performing an obligation may not be demanded if the person who rendered the performance knew that he was not obliged to do so or if the performance complied with a moral duty or consideration of decency. § 817 BGB: Breach of law or public policy If the purpose of performance was determined in such a way that that the recipient, in accepting it, was violating a statutory prohibition or public policy, then the recipient is obliged to make restitution. A claim for return is excluded if the person who rendered performance was likewise guilty of such a breach, unless the performance consisted in entering into an obligation; restitution may not be demanded of any performance rendered in fulfilment of such an obligation. 1. General. German law provides for a restitutionary claim in the case of illegality. The relevant rule can be found in the title of the BGB on unjust enrichment. 2. Principle. § 812(1) 1 BGB provides that a performance obtained without any legal ground must be restored. It is understood that a contract that is void according to § 134 BGB is not legal ground for performance. Thus, the performing party can claim restitution. 3. Mitigation. The principle is, however, mitigated considerably by various factors. a) Case law. First, the courts have developed the theory of the ‘restitutionary balance’ (Saldotheorie). Under this theory, a party can only claim its performance if it affects the concurrent restitution of what it has received from the other side (see RGZ 54, 137, 141; BGH NJW 1988, 3011). Generally, the results of this theory are the same as those achieved under Article 15:104(1) PECL. However, the German courts have developed two exceptions from the obligation to effect concurrent restitution where: (1) the party claiming restitution is a minor or otherwise not capable of entering into a binding obligation (BGHZ 126, 105, 107; BGH Wertpapier-Mitteilungen 2003, 1489) and; (2) the other party knew about the invalidity of the obligation (BGHZ 53, 144, 147; 57, 137, 148; BGH NJW 2001, 1127, 1130). In these cases, the party can claim restitution without being obliged to return what it has received from the other side. b) Knowledge that debt is not owed. The party that has performed under a void contract cannot claim restitution if it knew about the invalidity, § 814 BGB, first situation. The second situation covered by § 814 is that ‘the performance complied with a moral duty or consideration of decency’ will not be fulfilled if the contract infringed a prohibition. c) Performing party is guilty of breach of statutory prohibition or public policy. § 817 BGB is a provision that lends itself to misunderstandings. The first sentence allows a party to recover where the recipient has violated a statute or public policy in accepting the performance. It is a ground for restitution independent of and separate from § 812 BGB. The provision does not provide anything that would be incompatible with the PECL or the DCFR. However, the second sentence of § 817 BGB excludes any

779

M. Lehmann claim for restitution where the performing party likewise infringed a statutory prohibition or public policy. The courts have considerably widened the scope of application of this provision in two ways. First, they also apply this provision where only the performing party has infringed the law by its performance (BGHZ 50, 90, 91). Second, they have extended this provision to also apply to claims made under § 812(1) 1 BGB (BGHZ 50, 90, 91). The result is that a party whose performance is contrary to a statutory prohibition or public policy cannot reclaim performance. Example: A has paid B for rendering legal services without the permission required by statute. Though the contract between A and B is void, A cannot reclaim what he has paid to B because of § 817 S. 2 BGB. While the courts have thus considerably widened the scope of application of § 817 BGB, they have at the same time restricted it. For instance, they have decided that the provision does not stop the lender of a usury loan from reclaiming its capital since it is not the performance of the capital that violates a statutory prohibition (BGH, NJW-RR 1990, 750, 751; NJW 1995, 1152, 1153). Moreover, they have ruled that § 817 S. 2 BGB must not be applied in a way that frustrates the purpose of the statutory prohibition (see, e.g., BGHZ 41, 341, 343). Example: C rents a house from D which he wants to use as an illegal brothel. D has the right to reclaim the house in order to not further the behaviour of C.

Comparison and Evaluation All three sources provide for restitution of whatever has been performed under an illegal contract. The differences lie in the exclusions of restitution. The PECL and the DCFR avoid the German exclusion of restitution on the grounds of breach of law or public policy. This decision is commendable because the German courts have struggled for years with simultaneously extending and limiting the dubious provision of § 817 BGB. The DCFR, on the other hand, does not contain an exclusion of the restitutionary claim where the performing party knew or ought to have known of the illegality of the contract; an exclusion that is foreseen in the PECL and, to some extent (knowledge), also in the BGB. This is to be welcomed given that there is no reason to favour the receiving party over the performing party. The crucial ground for the exclusion is the purpose of the prohibition, a point which is recognized in German case law and in the text of the DCFR.

Principles of European Contract Law Article 15:105: Damages (1) A party to a contract which is rendered ineffective under Articles 15:101 or 15:102 may recover from the other party damages putting the first party as nearly as possible into the same position as if the contract had not been concluded, provided that the other party knew or ought to have known of the reason for the ineffectiveness.

780

Chapter 15: Illegality (2) When considering whether to award damages under paragraph (1), regard must be had to the factors referred to in Article 15:102(3). (3) An award of damages may be refused where the first party knew or ought to have known of the reason for the ineffectiveness. 1. General. In the case of an illegal contract, Article 15:105 PECL provides for a damages claim of the innocent party against the party that knew or ought to have known of the ineffectiveness. 2. Conditions. A claim under Article 15:105 PECL is given where: (a) the contract is ineffective according to Article 15:101 or 15:102 PECL; (b) one party knew or ought to have known of the reason for the ineffectiveness; (c) the other party has suffered a damage; and (d) this other party neither knew nor ought to have known of the ineffectiveness. 3. Consequence. The innocent party has a claim for reliance damages, i.e., it has to be put in a position it would have been in had the contract not been concluded. The claim for damages will not be granted automatically, but only after a weighing of the factors described in Article 15:102(3) PECL. In particular, the purpose of the infringed rule, the category of persons for whose protection the rule exists, and any sanction that may be imposed under the infringed rule (Article 15:102(3)(a)-(c) PECL) can exclude a damages claim.

Draft Common Frame of Reference Article II. – 7:304: Damages for loss (1) A party to a contract which is void or avoided, in whole or in part, under this Section is entitled to damages from the other party for any loss suffered as a result of the invalidity, provided that the first party did not know and could not reasonably be expected to have known, and the other party knew or could reasonably be expected to have known, of the infringement. (2) The damages recoverable are such as to place the aggrieved party as nearly as possible in the position in which that party would have been if the contract had not been concluded or the infringing term had not been included. 1. General. The provision corresponds to Article 15:105 PECL. 2. Differences. Apart from terminological deviations, the only substantial differences from the PECL is that the damages claim is consistently granted to the innocent party, independent of factors such as those listed in Article 15:102(3) PECL.

781

M. Lehmann German Law The BGB does not contain a special ground for a damages claim in the case of illegal contracts. However, according to case law (BGHZ 99, 101, 106), such a claim can be based on pre-contractual liability (culpa in contrahendo), now codified in § 311(2) BGB. The conditions are that one party caused the other to rely on the effectiveness of the contract, that this party knew or ought to have known about the illegality, and that the claimant has suffered damage. The claimant will be put in the position he had been in without the contract.

Comparison and Evaluation Under the European texts, a party relying on the effectiveness of an illegal contract will be awarded damages against a party that knew or ought to have known about the illegality. The result is the same under German law although the claim will be based on culpa in contrahendo and not on a specific provision about the consequences of illegality. Material differences exist only insofar as the PECL do not award the damages automatically, but instead depending on the factors listed in 15:102(3) PECL. This gives flexibility to the judge, and allows parallel considerations to be taken into account where they are relevant for the decision on effectiveness or ineffectiveness. The PECL solution therefore seems more sensible than that under German law and under the DCFR.

782

CHAPTER 16

Conditions M. Lehmann & S. Gohling

PRINCIPLES OF EUROPEAN CONTRACT LAW Article 16:101: Types of Condition A contractual obligation may be made conditional upon the occurrence of an uncertain future event, so that the obligation takes effect only if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition). 1. General. a) Purpose of conditions. Each legal act is based upon particular ideas of the contracting parties about the current situation and upon their expectations regarding the future. However, uncertainties and possible developments may affect the agreement. The parties may cater for them by including conditions in the contract. Conditions make the rights and obligation of the contract dependent on an uncertain occasion (see Zimmermann (1993), p. 717). b) PECL rules on conditions. The effects of conditions are dealt with in Chapter 16, which is placed in Part III of the PECL. The entire chapter deals with instruments commonly used in contractual agreements and therefore complements Chapter 6 on Contents and Effects. For that reason, in a prospective, complete edition of all three parts of the PECL, the provisions currently placed in Chapter 16 should be placed next to Chapter 6 or be included in that chapter (see Lando et al. (2003), p. 229 Comment A). c) Scope of application. Chapter 16 applies to contractual obligations that the parties have subjected to a condition. Therefore, the rules presuppose that a binding contract exists. According to Article 1:107 PECL, the rules apply with appropriate modifications to other juridical acts such as unilateral promises (see also Lando et al. (2003), p. 229 Comment A).

783

M. Lehmann & S. Gohling 2. Content of the rule. a) Types of conditions. Conditions can be either suspensive or resolutive. A suspensive condition suspends the entry into force of the contract upon the occurrence of the event. This means that the creditor cannot insist on performance as long as the event has not occurred (see Lando et al. (2003), p. 232 Comment G). A resolutive condition brings the contract to an end if the event occurs. The creditor cannot demand performance (see Lando et al. (2003), p. 232 Comment G). An obligation can also be made conditional upon the non-occurrence of an event (see Lando et al. (2003), p. 232 Comment B). In that case, the contract is either suspended or terminated if the event does not occur (e.g., the accession of a country to the WTO or a change of the currency). b) Dependence on uncertain event. According to Article 16:101 PECL, the contractual obligation must be made conditional upon the occurrence of an uncertain future event. This is an external event upon which the parties can possibly have a limited impact, but cannot control in its entirety (see Lando et al. (2003), pp. 229-230 Comment B). If the occurrence of the event depends only on the arbitrary will of one party, i.e. if one party controls the event entirely and can influence whether the event occurs or does not occur, this is not a condition in the sense of Chapter 16 PECL. In fact, in such circumstances, the declaration of intent has what in French law is called a ‘caractère potestatif’. In the parlance of the PECL, the declaration lacks the intention to be legally bound and therefore a binding contract is not concluded (see Lando et al. (2003), pp. 229-230 Comment B; Finkenauer, in Handwörterbuch des Europäischen Privatrechts, Part I (2009), p. 170). A condition is also to be distinguished from a contractual provision that suspends the obligation of one party until the other party has fulfilled his or her promise. Such a provision does not refer to an uncertain event because performance of the obligation is presumed (see Lando et al. (2003), p. 231 Comment D). Contractual terms stating that performance is not due until a certain point in time are also not conditions in the sense of Chapter 16 because a specified point in time is not an uncertain event. However, it is not always easy to draw the line between these provisions and real conditions. Some events will definitely occur although nobody can say at which moment they will take place. If the duty depends on an event happening or not happening before a certain point in time, the agreement might include a hidden condition (see Lando et al. (2003), p. 231 Comment E). Example: A and B agree that a specified amount of money shall be paid to A after A’s father will have died. The death of the father is a certain event and therefore not a condition. However, the agreement includes the hidden condition that A outlives his father. c) Future event. Article 16:101 PECL provides that the contractual obligation may be made conditional upon the occurrence of an uncertain future event. In some circumstances, however, a condition may be made subject to an event that took place in the past. This is possible where the parties do not know whether the event has really occurred or not. At first sight, such a provision seems to be conditional upon a past unknown event and therefore not to be a condition in the sense of Chapter 16. However, in such a case, the past event is not the basis of the condition, but rather the future event of notification or awareness whether the event has occurred or not. For

784

Chapter 16: Conditions this reason, those provisions are, in fact, conditions according to Chapter 16 (see Lando et al. (2003), p. 230 Comment C).

Draft Common Frame of Reference Article III. – 1:106: Conditional rights and obligations (1) The terms regulating a right, obligation or contractual relationship may provide that it is conditional upon the occurrence of an uncertain future event, so that it takes effect only if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition). (2-3) [reprinted below under Article 16-103 PECL] (4) [reprinted below under Article 16-102 PECL] (5) When a contractual obligation or relationship comes to an end on the fulfilment of a resolutive condition any restitutionary effects are regulated by the rules in Chapter 3, Section 5, Sub-section 4 (Restitution) with appropriate adaptations. 1. General. The DCFR also provides rules on conditions. Conditional rights and obligations are dealt with in Book III Chapter 1 (General provisions on obligations and corresponding rights). The Comment explains that rules on conditional rights, aside from paragraph (4), are not necessary for substantive purposes because the rules already follow from the principle of party autonomy (see von Bar/Clive (2009), Comment A on Article III.-1:106, p. 690). 2. Content of the rule. The content of Article III.-1:106(1) DCFR matches that of Article 16:101 PECL. The differences in terminology (‘terms regulating a right, obligation or contractual relationship’ instead of ‘a contractual obligation’) merely aim at clarification and do not result in material discrepancies. The effects of the termination in case of a resolutive condition becoming fulfilled are the same as those that apply in case of a termination of the contract through declaration by one of the parties, paragraph 5.

German Law § 158 BGB: Conditions precedent and subsequent (1) If a legal transaction is entered into subject to a condition precedent, the legal transaction that is subject to the condition comes into effect when the condition is satisfied. (2) If a legal transaction is entered into subject to a condition subsequent, the effect of the legal transaction ends when the condition is satisfied; at this moment the previous legal situation is restored.

785

M. Lehmann & S. Gohling 1. General. The BGB contains provisions on conditions in its first book– General Part Division 3 – Legal transactions Title IV – Conditions and specification of time. However, the rules set out in the German civil code are incomplete. They are complemented by a wide ranging case law. 2. Cases covered. a) In general. ‘Condition precedent’ is another term for suspensive condition where ‘condition subsequent’ designates a suspensive condition. The scope of § 158 BGB is, therefore, identical to that of Article 16:101 PECL. b) Potestative conditions. Under German law, a condition can be made upon an event whose occurrence exclusively depends on the will of one party (see Ellenberger, in Palandt (2013), Einf v § 158 no. 10). An example of such a condition is described in § 454(1) 2 BGB. The provision concerns the so-called purchase on approval under which a person buys something with the possibility to return it. § 454(1) 2 BGB provides that in case of doubt, such a purchase contract is subject to the condition precedent of the approval by the buyer which is entirely in his or her discretion. There is no doubt in German doctrine that this kind of condition is covered by § 158 BGB. 3. Cases not covered. a) Statutory conditions. Sometimes conditions for the validity of a contract can be found in statute. An example is the necessary approval of a transaction of a minor by his or her legal representative (§ 108(1) BGB). There is general agreement that such statutory conditions are not covered by § 158 BGB (see Ellenberger, in Palandt (2013), Einf v § 158 no. 5). They are statutory prerequisites for the formation and the validity of a contract and, therefore, apply on a level prior to § 158 BGB. b) Conditions depending on past unknown events. According to German doctrine, past or current unknown events are not future events in the sense of § 158 BGB, and the conditions referring to them are therefore not covered. As an explanation, it is argued by some authors that the actual personal uncertainty does not meet the requirement of a future unknown event (see Ellenberger, in Palandt (2013), Einf v § 158 no. 6). Others stress that the result of such a condition is that the transaction is either completely valid or invalid, depending on the existence of the event, and not subject to a condition (see Westermann, in Münchener Kommentar (2012), § 158 no. 53). 4. Content of the rule. § 158(1) BGB addresses the effects of a condition precedent or ‘suspensive condition’. It provides that the legal transaction comes into effect if the condition is met. § 158(2) BGB concerns the condition subsequent or ‘resolutive condition’. It provides that if the condition is fulfilled, then the legal transaction comes to an end and the previous legal situation is restored. As long as the condition is not satisfied, the creditor can avail itself of the rights under the contract (see Ellenberger, in Palandt (2013), § 158 no. 1). 5. Exceptions. German law states that some legal acts cannot be made conditional (see Ellenberger, in Palandt (2013), Einf v § 158 no. 12). By their nature, they would be incompatible with a condition (‘bedingungsfeindlich’). Examples are the declarations leading to a transfer of real property (§ 925(2) BGB), the acknowledgement of paternity, (§ 1594(3) BGB) and the marriage contract (§ 1311, second sentence BGB). The right to end a legal relationship by unilateral declaration, such as a dismissal or a

786

Chapter 16: Conditions withdrawal, also cannot be exercised by making it subject to a condition because the addressee should not be burdened with the uncertainty of the legal consequence (see Ellenberger, in Palandt (2013), Einf v § 158 no. 13). Apart from these exceptions, legal acts are generally open to conditions (BGH NJW-RR 2006, 182).

Comparison and Evaluation On their face, the rules on conditions provided by the PECL, the DCFR, and the BGB look very similar. However, underneath the surface of the German civil code lurks a rich case law and doctrine that has complemented and modified the letters of the statute. Certainly, such very detailed and extensive rules provided by the courts allow for subtle distinctions and a comprehensive regime that takes into account various differences that may arise in practice. However, they are a source of legal uncertainty. In this regard, the European rules clearly have an edge because they are more precise and need less qualifications than their counterparts in the BGB. One advantage of German law, however, is the clarification that some legal acts cannot be made conditional. Many of these exceptions are codified in the German civil code. Similar provisions should be inserted into the PECL and the DCFR because while these exceptions are not codified, they have to be provided by statutory interpretation, which may cause legal uncertainty.

Principles of European Contract Law Article 16:102 Interference with Conditions (1) If fulfilment of a condition is prevented by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment would have operated to that party’s disadvantage, the condition is deemed to be fulfilled. (2) If fulfilment of a condition is brought about by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment operates to that party’s advantage, the condition is deemed not to be fulfilled. 1. Purpose. A party may, in its personal interest, prevent a condition from being met or, on the contrary, create a situation where it is met. The purpose of Article 16:102 PECL is to sanction such behaviour. 2. Scope of application. The rule applies to all contractual obligations that are subject to a condition in the sense of Article 16:101 PECL. 3. Context. Article 16:102 PECL connects the rules on conditions with the basic rules of fair dealing and cooperation. According to Article 1:201(1) PECL, each party must act in accordance with principles of good faith and fair dealing. Article 1:202 PECL sets out that each party owes the other a duty to cooperate in order to give full effect to the contract. Those duties apply, as well, in the context of conditions.

787

M. Lehmann & S. Gohling 4. Content. a) Fiction of fulfilment of condition. Article 16:102 PECL sanctions a violation of the duties of good faith and fair dealing or cooperation in the context of the fulfilment of the condition. To do so, an original way has been chosen. Rather than providing a claim for damages or a possibility to terminate the contract, it is deemed that a condition is either fulfilled or not fulfilled if one party inadmissibly prevents or secures fulfilment (see Lando et al. (2003), p. 234 Comment A). This is a clear example of a legal fiction. b) Prerequisites. Article 16:102 PECL presupposes that the result of the party’s action operates to this party’s advantage. The party that either prevents or secures fulfilment has to act with deliberate intention or at least with gross negligence, because an act that unintentionally secures or prevents fulfilment is not an action in conflict with good faith and fair dealing. Not provided by the rule is a duty to not influence the fulfilment of conditions at all (see Lando et al. (2003), p. 235, Comment D). Nevertheless, such a duty can be incorporated into the agreement contractually. The principle of fictitious fulfilment or non-fulfilment is subject to limits of practicability where specific performance cannot be obtained according to Article 9:102(2) PECL (see Lando et al. (2003), p. 234 Comment B).

Draft Common Frame of Reference Article III. – 1:106: Conditional rights and obligations (1) [reprinted above under Article 16:101 PECL] (2)–(3) [reprinted below under Article 16:103 PECL] (4) When a party, contrary to the duty of good faith and fair dealing or the obligation to co-operate, interferes with events so as to bring about the fulfilment or non-fulfilment of a condition to that party’s advantage, the other party may treat the condition as not having been fulfilled or as having been fulfilled as the case may be. (5) [reprinted above under Article 16:101 PECL] 1. General. According to the comment, paragraph (4) is the only one of the provisions in Article III.-1:106 that has a substantial effect and does not solely establish a recognized terminology (see von Bar/Clive (2009), Comment A on Article III.-1:106, p. 690). 2. Scope of application. The rule applies to all contractual obligations which are subject to a condition in the sense of Article III.-1:106(1). 3. Content of the rule. At first sight, Article III.-1:106(4) DCFR seems to be identical to Article 16:102 PECL. Similar to the PECL, the rule connects the duty to act in accordance with principles of good faith and fair dealing with the condition. If a party interferes with events so as to bring about or to prevent fulfilment, the same kind of fiction applies: the condition may be treated as not having been fulfilled or otherwise, as having in fact been fulfilled. However, the DCFR features a fundamental difference

788

Chapter 16: Conditions when compared to the rules as set out in the PECL. While under the PECL, the violation of good faith and fair dealing and the duty to cooperate automatically results in fictitious fulfilment or non-fulfilment, the DCFR provides that the innocent party ‘may treat’ the condition as being fulfilled or not fulfilled (see von Bar/Clive (2009), Comment H on Article III.-1:106, pp. 694, 695). Accordingly, the innocent party can choose whether to exercise the option conferred by Article III.-1:106. If this party chooses not to treat the condition as either having been or not been fulfilled, the normal consequences of a breach of the duty to act in accordance with good faith and fair dealing, or the obligation to cooperate will be deployed (see von Bar/Clive (2009), Comment H on Article III.-1:106, pp. 694, 695). These consequences are provided by Article III.-1:103(3) and Articles III.-3:101 et seq. DCFR. Normally, the consequence will be the possibility for the other party to terminate the contract and claim damages.

German Law § 162 BGB: Prevention of or bringing about the satisfaction of the condition (1) If the satisfaction of a condition is prevented in bad faith by the party to whose disadvantage it would be, the condition is deemed to have been satisfied. (2) If the satisfaction of a condition is brought about in bad faith by the party to whose advantage it would be, the condition is deemed not to have been satisfied. 1. Purpose of the rule. The BGB contains a provision on the interference with conditions in its General Part (Allgemeiner Teil). 2. Scope of application. The rule applies to all contractual obligations that are subject to a condition in the sense of § 158 BGB. 3. Content of the rule. The rule states, similarly to the rules on interference with conditions as set out in the PECL, that a condition is deemed to have been satisfied if it is prevented or brought about in bad faith by one party who benefits from the non-fulfilment or fulfilment of the condition. There is, thus, a clear connection to the principle of good faith. It is recognized in doctrine that the rule may apply by way of analogy if the other party refuses to cooperate (see Westermann, in Münchener Kommentar (2012), § 162 no. 19). a) Practical issues. When applying § 162 BGB, it is not easy to draw the line between allowed inactivity (awaiting the occurrence of an event) and interference with the condition. Doctrine assumes that there was unfair interference where a party breaches the duty to act (see Westermann, in Münchener Kommentar (2012), § 162 no. 2). The range of such a duty has to be derived from the contract, which serves as benchmark for the requirements of good faith and fair dealing (see Westermann, in Münchener Kommentar (2012), § 162 no. 9).

789

M. Lehmann & S. Gohling b) Legal effect. The legal effect is the fiction that the condition is either satisfied or not satisfied. This result is mandatory and not up to the choice of the innocent party (see Westermann, in Münchener Kommentar (2012), § 162 no. 2).

Comparison and Evaluation Basically, there seem to not be many differences between PECL, DCFR and BGB with regard to this particular area. All three texts sanction the interference with a condition by the fictitious fulfilment or non-fulfilment of the condition. All of them make a connection to the duty of good faith. PECL and DCFR also refer to the duty to cooperate. The German rule is applied to the violation of this duty by analogy. The main difference is that the PECL and the BGB provide for an automatic fiction, while the DCFR gives the innocent party an option to choose another sanction. This makes sense because it provides flexibility for that party. An inflexible rule could cause rigid and unacceptable results. For example, it can oblige the innocent party to proceed with the contract although this party may prefer to terminate the contractual relationship and claim damages for any loss caused by the other party’s conduct. Therefore, the DCFR solution is to be preferred.

Principles of European Contract Law Article 16:103 Effect of Conditions (1) Upon fulfilment of a suspensive condition, the relevant obligation takes effect unless the parties otherwise agree. (2) Upon fulfilment of a resolutive condition, the relevant obligation comes to an end unless the parties otherwise agree. 1. Content of the rule. The rule sets out the legal effect of fulfilment of a suspensive condition (paragraph 1) and fulfilment of a resolutive condition (paragraph 2). 2. Scope of application. The rule covers all contracts with a condition, as described above. It applies unless the parties agree otherwise. 3. Content. Article 16:103 PECL sets out that the occurrence or non-occurrence of an event upon which a condition depends has effect only to the future (ex nunc) and not for the past (ex tunc). This clarification is mainly important for the transfer of property (see Lando et al. (2003), p. 236 Comment A). The ex nunc effect was chosen because it is the least complicated solution. An ex tunc effect would have to be made subject to significant exceptions in the legal systems that do not know the principles of separation and abstraction. Given that the PECL do not contain any rules dealing with the transfer of property, it was felt that such complications should be avoided (see Lando et al. (2003), p. 236 Comment A).

790

Chapter 16: Conditions Draft Common Frame of Reference Article III. – 1:106: Conditional rights and obligations (1) [reprinted above under Article 16:101 PECL] (2) Upon fulfilment of a suspensive condition, the relevant right, obligation or relationship takes effect. (3) Upon fulfilment of a resolutive condition, the relevant right, obligation or relationship comes to an end. (4) [reprinted above under Article 16:102 PECL] (5) [reprinted above under Article 16:101 PECL] Content and scope of application. Apart from a slight difference in its wording, which merely serves the purpose of clarification, the rule matches exactly Article 16:1-3 PECL.

German Law § 158 BGB: Conditions precedent and subsequent (1) If a legal transaction is entered into subject to a condition precedent, the legal transaction that is subject to the condition comes into effect when the condition is satisfied. (2) If a legal transaction is entered into subject to a condition subsequent, the effect of the legal transaction ends when the condition is satisfied; at this moment the previous legal situation is restored. § 159 BGB: Retroactive effect If, under the terms of a legal transaction, the consequences linked to the satisfaction of the condition are to become effective from an earlier time, then when the condition is satisfied the parties are under a duty to render each other the performance that they would have rendered if the consequences had occurred at the earlier time. 1. Purpose. The purpose of the rules is the same as that of Article 16:103 PECL. 2. Scope of application. The two rules apply to all contracts in which a condition has been inserted (for exceptions, see above comment on § 158 BGB, reprinted under Article 16:101 PECL). 3. Content. § 158 BGB starts from the presumption that the occurrence or nonoccurrence of an event has effect only for the future (ex nunc). However, § 159 BGB allows the parties to agree that the occurrence or non-occurrence of an event may have a retroactive effect. Practically speaking, the effect may be set for whenever the parties wish (see Westermann, in Münchener Kommentar (2012), § 159 no. 2). It is to be borne in mind, however, that such a contractual provision only operates between the parties

791

M. Lehmann & S. Gohling and does not affect third persons that are not a party to the transaction (see Ellenberger, in Palandt (2013), § 159 no. 1).

Comparison and Evaluation The PECL and the DCFR provide that the fulfilment or non-fulfilment of a condition always has an ex nunc effect on contractual rights and obligations. In contrast, German law allows the parties to agree on an ex tunc effect. This solution is preferable because it strengthens the parties’ autonomy. Any negative effects on third persons who rely on a valid property transfer are excluded by the principles of separation and abstraction, which apply in German property law and shield the validity of the transfer from any changes of the underlying sales contract.

792

CHAPTER 17

Capitalization of Interest M. Lehmann

Principles of European Contract Law Article 17:101: When Interest to be Added to Capital (1) Interest payable according to Article 9:508(1) is added to the outstanding capital every 12 months. (2) Paragraph (1) of this Article does not apply if the parties have provided for interest upon delay in payment. 1. General. The provision allows for so-called compound interest, but only at the end of each year. 2. Problem. The debtor must pay interest for outstanding sums of money that are due according to Article 9:508(1) PECL. If these interests are not paid, the question then arises as to whether he must pay additional interest on the outstanding interests; in other words ‘compound interests’. 3. Rule. Article 17:101 PECL answers this question by finding a middle ground: Compound interest is permitted, but only after each year will the capital be increased. Example: A borrows EUR 1,000 from B at a monthly interest rate of 1%. In case that no payment whatsoever is made in one year, the sum owed to B will be increased to EUR 1,050. In the next year, the interest will be calculated based on that sum. If, however, A should pay the outstanding interest before the end of the first year, then he will not owe compound interest.

793

M. Lehmann 4. Exception. Compound interest will not be granted under paragraph 2 where the parties have agreed on the interest to be paid. It is assumed that under these circumstances, they would have provided for compound interest had they wished for it.

Draft Common Frame of Reference Article III. – 3:709: When interest to be added to capital (1) Interest payable according to the preceding Article is added to the outstanding capital every 12 months. (2) Paragraph (1) of this Article does not apply if the parties have provided for interest upon delay in payment. The provision is identical to Article 17:101 PECL.

German Law § 248 BGB: Compound interest (1) An agreement reached in advance that interest due should in turn bear interest is void. (2) Savings banks, credit institutions and owners of banking businesses may agree in advance that interest not collected on deposits should be held to be fresh interest-bearing deposits. Credit institutions entitled to issue interestbearing bonds for the amount of the loans granted by them may, for such loans, have commitments made to them in advance to pay interest on interest in arrears. § 289 BGB: Prohibition of compound interest Default interest is not to be paid on interest. The right of the obligee to compensation for damage caused by the default remains unaffected. 1. General. German law is generally hostile towards compound interest. It is allowed only under very limited circumstances. 2. Rule. The BGB does not give the creditor the right to claim compound interest. In case of delayed payment, there is no default interest to be paid on the outstanding interest, § 289, first sentence BGB. Moreover, the civil code even considers the agreement of such interest as void if the agreement is made in advance, § 248(1) BGB. The reasons given for this very strict limitation on the freedom of contract is that interest built upon interest would be hard to calculate, and the legal situation (who owes what and to whom) could easily become unclear, especially for the debtor (Grundmann, in Münchener Kommentar (2012), § 248, no. 1; Grothe, in Bamberger/ Roth (2012), § 248 no. 1).

794

Chapter 17: Capitalization of Interest 3. Exceptions. There are several exceptions to this rigid exclusion. a) Agreement ex post. Compound interest can be agreed upon once the interest claim has arisen, cf. § 248(1) BGB ‘in advance’. In this case, there is no reason to fear that the debtor might be confused and unable to overlook his obligations. b) Interest on deposits. Banks can promise their clients compound interest on their deposits, § 248(2) 1 BGB. c) Financing of bonds. Banks may agree with their clients that the clients are bound to pay compound interest, provided that the bank has issued interest-bearing bonds to other holders for the amount of the loan granted to the clients, § 248(2) 2 BGB. The reason is that the bank will have to pay damages to the bondholders in the amount of compound interest should it fail to deliver on these bonds. d) Payment of damages. If the debtor has to pay damages for delayed payment, then these damages will also cover any compound interest that the creditor has to pay, § 289, second sentence BGB. e) Further statutory exceptions. There are further exceptions to the prohibition of compound interest provided for in other statutes. For instance, § 355(1) of the Commercial Code (Handelsgesetzbuch – HGB) allows interest upon interest claims on current account agreements. This applies as long as one of the parties to the agreement is a merchant – usually a bank. It is disputed whether the provision can be applied by analogy to current account agreements between non-merchants (see Langenbucher, in: Münchener Kommentar HGB (2009), § 355 no. 13).

Comparison and Evaluation Compound interests are a problem because they exponentially increase the debtor’s indebtedness. European texts therefore limit compound interests by providing that they are added to the capital only once per year. German law, in contrast, prohibits compound interest altogether and considers every agreement on such interest to be void. The drastic position of the BGB seems anachronistic. The best evidence is the series of exceptions from the prohibition that German law had to develop. Compound interest more truly reflects the damage that the creditor suffers because of late payment. In addition to not having the capital and interest at his disposition, he may himself have to pay interest to a third party for being indebted. If both parties are well informed and aware of their obligations, then there is no reason why they should not be able to react to this potential damage by agreeing on compound interest. The position of the PECL texts is, however, also not without doubt. Surprisingly, it does not take the informational asymmetry between the parties into account, but rather treats everybody on the same footing. A more sensible approach would have been to distinguish between consumers and professional parties as debtors of compound interest, for instance by providing special information duties with regard to the first.

795

Bibliography Ackermann (2007) Ackermann, T., Der Schutz des negativen Interesses, Tübingen: Mohr, 2007. Acquis-Principles (2009) Research Group on the Existing EC Private Law (Acquis Group), Principles of the Existing EC Contract Law (Acquis Principles) – Contract II, Munich: Sellier European Law Publishers, 2009. Adame-Martínez (2005) Adame-Martínez, M. Á., ‘La tercera parte de los Principios Europeos de Derecho Contractual Europeo’, In A Few Remarks on Chapter 12 of the Principles of European Contract Law, edited by Vaquer. Valencia: Tirant Lo Blanch, 2005, pp. 245–280. Akerlof (1970) Akerlof, G. A., The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, in The Quarterly Journal of Economics, Vol. 84, No. 3, 1970, pp. 488-500. Alexander (2012) Alexander, C., Neuregelungen zum Schutz vor Kostenfallen im Internet, in Neue Juristische Wochenschrift 2012, pp. 1985–1990. American Law Institute (2006) American Law Institute, Restatement of the Law – Agency Restatement (Third) of Agency, 2006. Antoniolli/Veneziano (2005) Antoniolli, L., Veneziano, A., The Principles of European Contract Law and Italian Law, The Hague, London, New York: Kluwer, 2005. Bamberger/Roth (2007) Bamberger, H. G., Roth, H. (Eds.), Beck’scher Online Kommentar zum Bürgerlichen Gesetzbuch, 7th ed., Munich: C. H. Beck, 2007. Bamberger/Roth (2009) Bamberger, H. G., Roth, H. (Eds.), Beck’scher Online Kommentar zum Bürgerlichen Gesetzbuch, 15th ed., Munich: C. H. Beck, 2009. Bamberger/Roth (2011) Bamberger, H. G., Roth, H. (Eds.), Kommentar zum Bürgerlichen Gesetzbuch, 21st ed., Munich: C.H. Beck, 2011.

797

Bibliography Bamberger/Roth (2012) Bamberger, H. G., Roth, H. (Eds.), Beck’scher Online Kommentar Bürgerlichen Gesetzbuch, 25th ed., Munich: C.H. Beck, 2012. Baumbach/Hopt (2012) Baumbach, A. & K. J. Hopt, Kommentar zum Handelsgesetzbuch, 35rd ed., Munich: C. H. Beck, 2012. Bayer (1995) Bayer, W., Der Vertrag zugunsten Dritter – Neuere Dogmengeschichte – Anwendungsbereich – Dogmatische Strukturen, Tübingen: Mohr Siebeck, 1995. Beaucamp (2003) Beaucamp, B., Das Bewerbungsschuldverhältnis nach § 311 II BGB als rechtlicher Kernbereich des Wettbewerbs, in Neue Juristische Wochenschrift 2003, pp. 3096–3097. Becker (2010) Becker, C., Insolvenzrecht. 3rd ed., Köln: Heymanns, 2010. Ben-Shahar (2004) Ben-Shahar, O., An Ex-Ante View of the Battle of the Forms: Inducing Parties to Draft Reasonable Terms, in University of Michigan John M. Olin Working paper No. 32, 2004, pp. 17 et seq. Ben-Shahar (2005) Ben-Shahar, O., An Ex-Ante View of the Battle of the Forms: Inducing Parties to Draft Reasonable Terms, in Conference on Commercial Law Theory and the CISG, in International Review of Law and Economics 2005, pp. 350 et seq. Berger (1996) Berger, K.-P., Der Aufrechnungsvertrag, Tübingen: Mohr, 1996. Beuthien (1968) Beuthien, V., Zuwendender und Leistender: ein kritischer Beitrag zur neuen Terminologie bei Leistungen im bereicherungsrechtlichen Dreieck, in Juristenzeitung 1968, pp. 323–327. Beuthien (1999) Beuthien, V. E., Gibt es eine organschaftliche Stellvertretung?, in Neue Juristische Wochenschrift 1999, pp. 1142–1146. Bloching/Ortolf (2009) Bloching, M., Ortolf, D., Schriftformklauseln in der Rechtsprechung von BGH und BAG – Zukunfts- oder Auslaufmodell, insbesondere beim Schutz gegen betriebliche Übungen?, in Neue Juristische Wochenschrift 2009, pp. 3393–3397. Bork (1988) Bork, R., Der Vergleich, Berlin: Duncker & Humblot, 1988. Bork (2011) Bork, R., Allgemeiner Teil des Bürgerlichen Gesetzbuchs, 3rd ed., Tübingen: Mohr Siebeck, 2011. Brox/Walker (2012) Brox, H., Walker, W.-D., Allgemeiner Teil des BGB, 36th ed., Munich: C. H. Beck, 2012.

798

Bibliography Bundesminister der Justiz (1992) Bundesminister der Justiz, Abschlußbericht der Kommission zur Überarbeitung des Schuldrechts, Köln: Bundesanzeiger, 1992. Busch et al. (2002) Busch, D.,et al., The Principles of European Contract Law and Dutch Law, The Hague, London, New York: Kluwer, 2002. Busch et al. (2006) Busch, D., Hondius E., van Kooten, H., Schelhaas, H., (General Ed.), The Principles of European Contract Law (Part III) and Dutch Law – A Commentary II, The Hague: Kluwer Law International, 2006. Bydlinski (1996) Bydlinski, P., Die Aufrechnung mit verjährten Forderungen: Wirklich kein Änderungsbedarf?- Zugleich eine Kritik an der Rückwirkung der Aufrechnungserklärung, in Archiv für die civilistische Praxis Vol. 196, 1996, pp. 276–304. Canaris (2000) Canaris. C.-W., Die Stellung der „UNIDROIT Principles’ und der „Principles of European Contract Law’ im System der Rechtsquellen, in Europäische Vertragsvereinheitlichung und deutsches Recht, Basedow, J. (Ed.), Tübingen: Mohr Siebeck, 2000, pp. 5–31. Canaris (2001) Canaris, C.-W., Die Reform des Rechts der Leistungsstörungen, in Juristenzeitung 2001, pp. 499–524. Canaris (2005a) Canaris, C.-W., Die Einstandspflicht des Gattungsschuldners und die Übernahme eines Beschaffungsrisikos nach § 276 BGB, in Norm und Wirkung: Beiträge zum Privat- und Wirtschaftsrecht aus heutiger und historischer Perspektive – Festschrift für Wolfgang Wiegand zum 65. Geburtstag, Bucher, E. (Ed.), Bern et al.: Stämpfli et al., 2005, pp. 179–254. Canaris (2005b) Canaris, C.-W., Grundlagen und Rechtsfolgen der Haftung für anfängliche Unmöglichkeit nach § 311a Abs. 2 BGB, in: Festschrift für Andreas Heldrich zum 70. Geburtstag, Lorenz, S. (Ed.), Munich: C. H. Beck, 2005, pp. 11–38. Canaris (2006) Canaris, C.-W., Handelsrecht, 24th ed., Munich: C. H. Beck 2006. Canaris (2009) Canaris, C.-W., Die Bedeutung des Kriteriums der Unteilbarkeit der Leistung oder der Gegenleistung im modernisierten Leistungsstörungsrecht, in Perspektiven des Privatrechts am Anfang des 21. Jahrhunderts, Beuthien, V. (Ed.), Cologne: Heymann, 2009, pp. 17–41. Cheshire et al. (2000) Cheshire, G. C., Burn, E. H., Modern Law of real property, 16th ed., London: Butterworth, 2000. Chitty (2008) Vol. I Chitty, J., Beale, H. G. (general Ed.), Chitty on Contracts Vol. I – General Principles, London: Sweet & Maxwell. 2008.

799

Bibliography Chitty (2008) Vol. II Beale, H. G. (general Ed.), Chitty on Contracts Vol. II – Specific Contracts, London: Sweet & Maxwell, 2008. Clément (1902) Clément, J., De la règle contra non valentem agere nulla currit praescriptio, Grenoble: Imprimerie Allier Frères, 1902. Cooter/Ulen (2000) Cooter, R, Ulen, T., Law and Economics, Reading, Massachusetts: Addison Wesley Longman, 2000. Crome (1902) Crome, C., System des Deutschen Bürgerlichen Rechts, Vol. II, Tübingen: Mohr, 1902. Dauner-Lieb/Dötsch (2003) Dauner-Lieb, B., Dötsch, W., Prozessuale Fragen rund um § 313 BGB, in Neue Juristische Wochenschrift 2003, pp. 921–927. Dauner-Lieb/Langen (2012) Dauner-Lieb, B., Langen, W. (Eds.), BGB Kommentar, 2nd ed., Vol. 2/2: Schuldrecht, Baden-Baden: Nomos, 2012. Dauner-Lieb/Quecke (2008) Dauner-Lieb, B., Quecke, M., Das Kaufrecht im Entwurf eines Gemeinsamen Referenzrahmens: Erste Annäherung an einen komplexen Text, in Der akademische Entwurf für einen Gemeinsamen Referenzrahmen, Schulze/von Bar/Schulte-Nölke (Eds.), Tübingen: Mohr, 2008, pp. 135–160. Derleder (2005) Derleder, P., Der Kauf aus privater Hand nach neuem Schuldrecht, in Neue Juristische Wochenschrift 2005, pp. 2481–2486. de Vries (2001) de Vries, G. J. P., Are The Principles of European Contract Law Better Than Dutch Law ?, in Principles of European Contract Law (Preadviezen uitgebracht voor de Vereniging voor Burgerlijk Recht), Hesselink, M. W., de Vries, G. J. P. (Eds.), Deventer: Kluwer, 2001, pp. 105–186. du Plessis (2006) du Plessis, J., Threats and Excessive Benefits or Unfair Advantage, in European Contract Law: Scots and South African Perspectives, MacQueen, H., Zimmermann, R. (Eds.), Edinburgh: Edinburgh University Press, 2006, pp. 151-175. Ehmann (1972) Ehmann, H., Die Gesamtschuld: Versuch einer begrifflichen Erfassung in drei Typen, Berlin: Duncker und Humblot, 1972. Eidenmüller (2007) Eidenmüller, H., Druckmittel in Vertragsverhandlungen, in Störungen der Willensbildung bei Vertragsschluss, Zimmermann, R. (Ed.), Tübingen: Mohr, 2007, pp. 103–123. Eidenmüller (2008) Eidenmüler, H., Privatautonomie, Verteilungsgerechtigkeit und das Recht des Vertragsschlusses im DCFR, in Der akademische Entwurf für einen gemeinsamen

800

Bibliography Referenzrahmen, Schulze, R., von Bar, C., Schulte-Nölke, H. (Eds.), Tübingen: Mohr, 2008, pp.73–96. Eidenmüller et al. (2008) Eidenmüller, H., Faust, F., Grigoleit, H. C., Jansen, N., Wagner, G., Zimmermann, R., The Common Frame of Reference for European Private Law – Policy Choices and Codification Problems, in Oxford Journal of Legal Studies 2008, pp.659–708. Eidenmüller/Jansen et al. (2008) Eidenmüller, H., Faust, F., Grigoleit, H. C., Jansen, N., Wagner, G., Zimmermann, R., Der Gemeinsame Referenzrahmen für das europäische Privatrecht – Wertungsfragen und Kodifikationsprobleme, in Juristenzeitung 2008, pp. 529–550. Eidenmüller (2009) Eidenmüller, H., Party Autonomy, Distributive Justice and the Conclusion of Contracts in the DCFR, in European Review of Contract Law 2009, pp. 109–131. Erman (2004) Erman, W. (fd.), Westermann, H. P. (Ed.), Erman Bürgerliches Gesetzbuch, 11th ed., Vol. 1, Münster: Aschendorf et al., 2004. Erman (2011) Erman, W. (Fd.), Westermann, H. P. (Ed.), Erman Bürgerliches Gesetzbuch, 13th ed., Vol. 1: §§ 1 – 758, AGG, UKlaG, Cologne: Schmidt, 2011. Ernst (1997) Ernst, W., Die Zurückweisung der Ware, in Neue Juristische Wochenschrift 1997, pp. 896–905. Ernst (2008) Ernst, W., Der Common Frame of Reference aus juristischer Sicht, in Archiv für die civilistische Praxis 2008, pp. 248–282. Farnsworth (2004) Farnsworth, A. E., Farnsworth on Contracts, 3rd ed., Vol. 1, 2, New York: Aspen Publishers 2004. Faust (1996) Faust, F., Die Vorhersehbarkeit des Schadens gemäß Art. 74 Satz 2 UN-Kaufrecht (CISG), Tübingen: J.C.B. Mohr (Paul Siebeck), 1996. Faust (2008) Faust, F., Informationspflichten, in Der akademische Entwurf für einen Gemeinsamen Referenzrahmen, Schulze, R., von Bar, C., Schulte-Nölke, H. (Eds.), Tübingen: Mohr, 2008, pp. 115–134. Faust (2009) Faust, F., Remedies for Breach of Contract in the DCFR, in The Common Frame of Reference: A View from Law & Economics, Wagner, G. (Ed.), Munich: Sellier European Law Publishers, 2009, pp. 19–34. Fauvarque-Cosson/Mazeaud (2008) Fauvarque-Cosson, B., Mazeaud, D. (Eds.), European Contract Law, Munich: Sellier European Law Publishers, 2008. Ferrari (1993) Ferrari, F., Comparative Ruminations on the Foreseeability of Damages in Contract Law, in 53 Louisiana Law Review 1993, pp. 1257–1269.

801

Bibliography Ferrari et al. (2012) Ferrari, F., Kieninger, E.-M., Mankowski, P., Otte, K., Saenger, I., Staudinger, A., Internationales Vertragsrecht: ROM I-VO, CISG, CMR, FactÜ, Kommentar, 2nd ed., Munich: C. H. Beck, 2012. Fleischer (2001) Fleischer, H., Informationsasymmetrie im Vertragsrecht, Munich: C. H. Beck, 2001. Flume (1992) Flume, W., Allgemeiner Teil des Bürgerlichen Rechts, 4th ed., Vol. 2: Das Rechtsgeschäft, Berlin/Heidelberg: Springer, 1992. Franck (2007) Franck, S., Die Verjährung erbrechtlicher Ansprüche – Auslegung und Kritik des § 197 Abs. 1 Nr. 2 BGB, in Zeitschrift für Erbrecht und Vermögensnachfolge 2007, pp. 114–117. Freitag (2008) Freitag, R., Vorzeitige Rückzahlung und Vorfälligkeitsentschädigung nach der Reform der Verbraucherkreditrichtlinie, in Zeitschrift für Wirtschaftsrecht 2008, pp. 1102–1109. Freitag/Freitag (2008) Freitag, R., Freitag, S., Globalzession und Gesamtrechtsnachfolge, in Zeitschrift für das gesamte Handels- und Wirtschaftsrecht Vol. 172, 2008, pp. 343–357. Gaier (2001) Gaier, R., Die Minderungsberechnung im Schuldrechtsmodernisierungsgesetz, in Zeitschrift für Rechtspolitik 2001, pp. 336–340. Gebauer/Wiedmann (2010) Gebauer, M., Wiedmann, T. (Eds.), Zivilrecht unter europäischem Einfluss: die richtlinienkonforme Auslegung des BGB und anderer Gesetze, Kommentierung der wichtigsten EU-Verordnungen, 2nd ed., Stuttgart et al.: Boorberg, 2010. Gernhuber (1994) Gernhuber, J., Die Erfüllung und ihre Surrogate sowie das Erlöschen der Schuldverhältnisse aus anderen Gründen, 2nd ed., Tübingen: Mohr, 1994. Giger (1975) Giger, H., Das Schicksal des Rechts bei Subjektwechsel bei besonderer Berücksichtigung der Erbfolgekonzeption, Vol. 2, Schlulthess, Zurich: Polygraph. Verlag, 1975. Grabau (1993) Grabau, F.-R., Über die Normen zur Gesetzes- und Vertragsinterpretation, Berlin: Drucker & Humblot, 1993. Greger/Stubbe (2007) Greger, R., Stubbe, C., Schiedsgutachten, Munich: C. H. Beck, 2007. Grigoleit (1997) Grigoleit, H. C., Vorvertragliche Informationshaftung: Vorsatzdogma, Rechtsfolgen, Schranken, Munich: C. H. Beck, 1997.

802

Bibliography Grigoleit (2003) Grigoleit, H. C., Irrtum, Täuschung und Informationspflichten in den European Principles und in den Unidroit-Principles, in Informationspflichten und Vertragsschluss im Aquis communautaire, Schulze, R., Ebers, M., Grigoleit, H.C. (Eds.), Tübingen: Mohr, 2003, pp. 201–230. Grigoleit (2007) Grigoleit, H. C., Sanktionsmechanismen bei Willensstörungen, in Zimmermann, R. (Ed.), Störungen der Willensbildung bei Vertragsschluss, Tübingen: Mohr, 2007, pp. 163–191. Grigoleit/Herresthal (2003) Grigoleit, H. C., Herresthal C., Grundlagen der Sachmängelhaftung im Kaufrecht, in Juristenzeitung 2003, pp. 118–127. Grothe (1994) Grothe, H., Bindung an die Parteianträge und „Forderungsverrechnung’ bei Fremdwährungsklagen, in Praxis des internationalen Privat- und Verfahrensrechts 1994, pp. 346 et seq. Gsell (1998) Gsell, B., Beschaffungsnotwendigkeit und Leistungspflicht: die Haftung des Gattungsverkäufers beim Eintritt nachträglicher Erfüllungshindernisse, Bielefeld: Gieseking, 1997. Gsell (2003) Gsell, B., Nutzungsentschädigung bei kaufrechtlicher Nacherfüllung, in Neue Juristische Wochenschrift 2003, pp.1969–1975. Gsell (2004) Gsell, B., Das Verhältnis von Rücktritt und Schadensersatz, in Juristenzeitung 2004, pp. 643–649. Gsell (2006) Gsell, B., Kaufvertragliche Nascherfüllung in der Schwebe: Leistungsbewirkung nach Nachfristablauf sowie bei verzögerter Wahl der Nacherfüllung durch den Käufer, in Festschrift für Ulrich Huber: zum siebzigsten Geburtstag, Baums, T., Wertenbruch, J. (Eds.), Tübingen: Mohr Siebeck, 2006, pp. 299–317. Guinchard et al. (2006) Guinchard, S., Ferrand, F., Procédure civile – droit interne et droit communautaire. 28th ed., Paris: Dalloz, 2006. Hager (1980) Hager, G., Die Prinzipien der mittelbaren Stellvertretung, Archiv für die civilistische Praxis, Tübingen Vol. 180, 1980, pp. 239–262. Handwörterbuch des europäischen Privatrechts (2009) Basedow, J., Hopt, K. J., Zimmermann, R. (eds.), Handwörterbuch des europäischen Privatrechts, Vol. 1, Tübingen : Mohr Siebeck, 2009. Hau (2003) Hau, W., Vertragsanpassung und Anpassungsvertrag, Tübingen: Mohr Siebeck, 2003. Heck (1929) Heck, P., Grundriß des Schuldrechts, Tübingen: Mohr, 1929.

803

Bibliography Heller (2007) Heller, A., Der Ausschluss der Aufrechnung, in Archiv für die civilistische Praxis 2007, pp. 456 et seq. Hellwege (2010) Hellwege, P., Allgemeine Geschäftsbedingungen, einseitig gestellte Vertragsbedingungen und die allgemeine Geschäftslehre, Tübingen: Mohr Siebeck, 2010. Hellwege (2011) Hellwege, P., Allgemeines Vertragsrecht und “Rechtsgeschäfts” –lehre im Draft Common Frame of Reference (DCFR), in Archiv für civilistische Praxis, Tübingen Vol. 211, 2011, pp. 665–702. Holmes (1881) Holmes, O. W., The Common Law, New York: Dover Publications, 1981. Hondius (1995) Hondius, E. H. (ed.), Extinctive Prescription: On the Limitation of Actions, Reports to the XIVth Congress of the International Academy of Comparative Law, The Hague: Kluwer Law International, 1995. Honnold (1999) Honnold, J. O., Flechtner, H. M., Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed., The Hague et al.: Kluwer International Law, 1999. Honsell (2010) Honsell, H. (ed.), Kommentar zum UN-Kaufrecht: Übereinkommen der Vereinten Nationen über Verträge über den Internationalen Warenkauf (CISG), 2nd ed., Heidelberg et al.: Springer, 2010. Horn (1981) Horn, N., Die Vertragsdauer als Regelungsproblem, in Gutachten und Vorschläge zur Überarbeitung des Schuldrechts, Bundesministerium der Justiz (Ed.), Vol. 1, 1981, pp. 551–645. Huber (1981) Huber, U., Leistungsstörungen, in Gutachten und Vorschläge zur Überarbeitung des Schuldrechts, Bundesministerium der Justiz (Ed.), Vol. 1, 1981, pp. 647-910. Huber (1999) Vol.1 Huber, U., Die Folgen des Schuldnerverzugs, die Erfüllungsverweigerung und die vom Schuldner zu vertretende Unmöglichkeit, Leistungsstörungen, Vol.1, Tübingen: Mohr, 1999. Huber (1999) Vol.2 Huber, U., Die Folgen des Schuldnerverzugs, die Erfüllungsverweigerung und die vom Schuldner zu vertretende Unmöglichkeit, Leistungsstörungen, Vol.2, Tübingen: Mohr, 1999. Huber (2001) Huber, P., Irrtumsanfechtung und Sachmängelhaftung, Tübingen: Mohr, 2001. Huber (2008) Huber, U., Modellregeln für ein Europäisches Kaufrecht, in Zeitschrift für europäisches Privatrecht 2008, pp. 708–744.

804

Bibliography Jacobs (2008) Jacobs, M., Erfüllungsverlangen und Erfüllbarkeit nach Ablauf der Nachfrist, in Festschrift für Hansjörg Otto zum 70. Geburtstag am 23. Mai 2008, Krause, R., Schwarze, R. (Eds.), Berlin: de Gruyter, 2008, pp. 137–155. Jakobs/Schubert (1978) Jakobs, H. H., Schubert, W., Die Beratung des Bürgerlichen Gesetzbuchs: in systematischer Zusammenstellung der unveröffentlichten Quellen, Vol. 3/1: §§ 241432,Berlin et al.: de Gruyter, 1978. Jansen/Zimmermann (2010) Jansen, N., Zimmermann, R., Vertragsschluss und Irrtum im europäischen Vertragsrecht – Textstufen transnationaler Modellregeln, in Archiv für die civilistische Praxis, Tübingen, Vol. 210, 2010, pp. 196–250. Jauernig (2007) Jauernig, O. (ed.), Kommentar zum Bürgerlichen Gesetzbuch, 12th ed., Munich: C. H. Beck, 2007. Jauernig (2011) Jauernig, O. (ed.), Bürgerliches Gesetzbuch, Kommentar, 14th ed., Munich: C. H. Beck, 2011. Kayser (2006) Kayser, J., Alternative Formen gerichtlicher und außergerichtlicher Streitbeilegung im deutschen und französischen Zivilprozess, Francfort upon Main et al.: Lang, 2006. Keating (2000) Keating, D., Exploring the battle of the forms in action, in Michigan Law Review Vol. 98, 2000, pp. 2678–2715. Kegel (1938) Kegel, G., Probleme der Aufrechnung: Gegenseitigkeit und Liquidität rechtsvergleichend dargestellt, Berlin: de Gruyter, 1938. Kirchhoff (2007) Kirchhoff, G., Das Verbot von Wertsicherungsklauseln im neuen Preisklauselgesetz, in Deutsche Notar-Zeitschrift 2007, pp. 913–924. Kramer (1999) Kramer, E. A., Contractual Validity According to the UNIDROIT Principles, in European Journal of Law Reform 1999, pp. 269–288. Kramer/Probst (2001) Kramer, E. A, Probst, T., International Encyclopedia of Comparative Law, Vol. 7, Contracts in General, Chapter 11, Defects in the Contracting Process, Tübingen/ Martinus Nijhoff, Dordrecht/Boston/Lancaster: Mohr, 2001. Kreße (2007) Kreße, B., Die mangelhafte oder schadenstiftende Leistung durch Dritte, in Versicherungsrecht 2007, pp. 452–456. Kropholler (1975) Kropholler, J., Internationales Einheitsrecht: allgemeine Lehren, Tübingen: Mohr (Siebeck), 1975.

805

Bibliography Krüger (2005) Krüger, H., Rechtseinheit von unten? Restatements of the Law als Alternativen internationaler Rechtsvereinheitlichung, Baden-Baden: Nomos, 2005. Laband (1866) Laband, P., Die Stellvertretung bi dem Abschluss von Rechtsgeschäften nach dem allgem. Deutsch. Handelsgesetzbuch, in Zeitschrift für das gesamte Handels- und Wirtschaftsrecht Vol. 10, 1866, pp. 183–241. Lando/Beale (2000) Lando, O., Beale, H., The Principles of European Contract Law, Part I/II. Dordrecht: Kluwer Law International BV, 2000. Lando et al. (2003) Lando, O., Clive, E., Prüm, A., Zimmermann, R. (Eds.), Principles of European Contract Law, Part III, The Hague, London, New York: Kluwer Law International, 2003. Larenz (1987) Larenz, K., Lehrbuch des Schuldrechts, 14th ed., Vol. 1: Allgemeiner Teil, Munich: C. H. Beck, 1987. Larenz (1989) Larenz, K., Allgemeiner Teil des deutschen Bürgerlichen Rechts, 7th ed., Munich: C. H. Beck, 1989. Larenz/Wolf (2004) Larenz, K., Wolf, M., Allgemeiner Teil des Bürgerlichen Rechts, 9th ed., Munich: C. H. Beck, 2004. Leenen (1997) Leenen, D., § 477 BGB: Verjährung oder Risikoverlagerung?, Berlin: de Gruyter, 1997. Leible (2005) Leible, S., Cambio de deudor, in La tercera parte de los Principios Europeos de Derecho Contractual Europeo, Vaquer (Ed.), Valencia: Tirant Lo Blanch, 2005, pp. 233 – 244. Leible (2008) Leible, S., Rechtsbehelfe bei Nichterfüllung, in Der akademische Entwurf für einen gemeinsamen Referenzrahmen, Schulze, R., von Bar, C. and Schulte-Nölke, H.,(Eds.), Tübingen: Mohr Siebeck, 2008, pp. 97–114. Leser (1975) Leser, H. G., Der Rücktritt vom Vertrag: Abwicklungsverhältnis und Gestaltungsbefugnisse bei Leistungsstörung, Tübingen: Mohr, 1975. Lindacher (1980) Lindacher, W. F., Definition und Revesibilität der Gläubigerentscheidungen nach § 326 BGB: Bemerkungen zu BGH, Urteil v. 17.1.1979 – VIII ZR 304/77, in Juristenzeitung 1980, pp. 48–53. Lobinger (2004) Lobinger, T., Die Grenzen rechtsgeschäftlicher Leistungspflichten, Tübingen: Mohr, 2004.

806

Bibliography Looschelders (2011) Looschelders, D., Schuldrecht. Allgemeiner Teil, 6th ed., Munich: Vahlen. 2011. Looschelders (2012) Looschelders, D., Das allgemeine Vertragsrecht des Common European Sales Law, in Archiv für die civilistische Praxis Vol. 212, 2012, pp. 581 et seq. Looschelders (2012) Looschelders, D., Schuldrecht Allgemeiner Teil, 10th ed., Munich: Vahlen, 2012 Lorenz (1968) Lorenz, W., Gläubiger, Schuldner, Dritte und Bereicherungsausgleich, Archiv für die civilistische Praxis Vol. 168, 1968, pp.286–317. Lorenz (2000) Lorenz, S., Gewinnmitteilungen aus dem Ausland: Kollisionsrechtliche und internationalzivilprozessuale Aspekte von § 661 a BGB, in Neue Juristische Wochenschrift 2000, pp. 3305–3310. Lorenz (2003a) Lorenz, S., Aliud, peius und indebitum im neuen Kaufrecht, in Juristische Schulung 2003, pp. 36–39. Lorenz (2003b) Lorenz, S., Zur Abgrenzung von Teilleistung, teilweiser Unmöglichkeit und teilweiser Schlechtleistung im neuen Schuldrecht, in Neue Juristische Wochenschrift 2003, pp. 3097–3099. Lorenz (2009) Lorenz, S., Die Reichweite der kaufrechtlichen Nacherfüllungspflicht durch Neulieferung, in Neue Juristische Wochenschrift 2009, pp. 1633–1637. Lücke (2007) Lücke, H. K., Simultaneity and Successiveness in Contracting, in European Review of Public Law Vol. 15, 2007, pp. 27–57. Magnus (2008) Magnus, U., The damages rules in the acquis communautaire in the Acquis Principles and in the DCFR, in Common Frame of Reference and Existing EC Contract Law, Schulze, R. (Ed.), Munich: Sellier European Law Publishers, 2008, pp.205–225. Markesinis/Munday (1992) Markesinis, B. S., Munday, R. J. C., An Outline of the Law of Agency, 3rd ed., London: Butterworths, 1992. Markesinis/Unberath (2002) Markesinis, B. S., Unberath, U., The German Law of Torts, A Comparative Treatise, 4th ed., Oxford: Hart Publishing, 2002. Markesinis/Unberath & Johnston (2006) Markesinis, B. S., Unberath, H., Johnston, A. C., The German Law of Contract: A Comparative Treatise, 2nd ed., Oxford/Portland (Oregan): Hart Publishing, 2006. Maultzsch (2007) Maultzsch, F., Die Grenzen des Erfüllungsanspruchs aus dogmatischer und ökonomischer Sicht, in Archiv für die civilistische Praxis, Vol. 207, 2007, pp. 530–564.

807

Bibliography Maultsch (2011) Maultzsch, F., Die Vorschriften zur Vertragsinterpretation im Common Frame of Reference aus rechtsvergleichender Sicht, in Zeitschrift für Gemeinschaftsprivatrecht 2011, pp. 114–121. Maurer (2010) Maurer, T., Schuldübernahme: Französisches, englisches und deutsches Recht in europäischer Perspektive, Tübingen: Mohr Siebeck, 2010. Medicus (2005) Medicus, D., Bemerkungen zur „vorübergehenden Unmöglichkeit’, in Festschrift für Andreas Heldrich zum 70. Geburtstag, Lorenz, S. (Ed.), Munich: C. H. Beck, 2005, pp. 347–357. Medicus (2010) Medicus, D., Allgemeiner Teil des BGB, 10th ed., Heidelberg: Müller, 2010. Medicus/Lorenz (2010) Medicus, D., Lorenz, S., Schuldrecht: ein Studienbuch, Teil I: Allgemeiner Teil, 19th ed., Munich: C.H. Beck, 2010. Mehring (2009) Mehring, T., Der Anspruch auf großen Schadensersatz im Werkvertragsrecht, in Zeitschrift für das gesamte Schuldrecht 2009, pp.310–317. Meier (2010) Meier, S., Gesamtschulden, Tübingen: Mohr Siebeck, 2010. Merle (2005) Merle, W., Die Vereinbarung als mehrseitiger Vertrag: Vertragsschluss durch Zustimmung zu einem Text?, in Festschrift für Joachim Wenzel zum 65. Geburtstag, Merle, W. (Ed.), Cologne: Schmidt, 2005, pp. 251–269. Meyer-Ladewig (2011) Meyer-Ladewig, J., EMRK-Europäische Menschenrechtskonvention, Handkommentar, 3rd ed., Baden-Baden: Nomos-Verlag, 2011. Michaels (1998) Michaels, R., Privatautonomie und Privatkodifikation. Zur Anwendbarkeit und Geltung allgemeiner Vertragsprinzipien, in Rabels Zeitschrift für ausländisches und internationales Privatrecht = The Rabel journal of comparative and international private law,Vol. 62, 1998, pp. 580–626. Moringiello/Reynolds (2010) Moringiello, J. M., Reynolds, W. L., Electronic Contracting Cases 2009-2010, in The Business Lawyer, Vol.66, No.1, 2010, pp.175–182. Müller (2006) Müller, M., Der Tatbestand der unzumutbaren Härte in § 306 III BGB, Munich/ Ravensburg: Grin Verlag, 2006. Münchener Kommentar (2004) Säcker, F. J. (ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 4th ed., Vol.3: §§ 433-611, Munich: C. H. Beck, 2004. Münchener Kommentar (2006) Säcker, F. J. (ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 5th ed., Vol.1: §§ 1-240, ProstG, Munich: C. H. Beck, 2006.

808

Bibliography Münchener Kommentar (2006) Säcker, F. J. (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 5.th ed., Vol.4: §§ 611-704, EFZG, TzBfG, KSchG, Munich: C. H. Beck, 2006. Münchener Kommentar (2007) Säcker, F. J., Rixecker, R. (Eds.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 5th ed., Vol. 2: §§ 241-432, Munich: C. H. Beck, 2007. Münchener Kommentar (2009) Säcker, F. J. (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 5th ed., Vol. 4: §§ 611-704, EFZG, TzBfG, KSchG, Munich: C. H. Beck, 2009. Münchener Kommentar (2010) Säcker, F. J. (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 5th ed., Vol. 10: Internationales Privatrecht: ROM I-VO, ROM II-VO, Einführung zum BGB, Munich: C. H. Beck, 2010. Münchener Kommentar (2010) Säcker, F. J. (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 5th ed., Vol. 11: Art. 25-248 EGBGB, Munich: C. H. Beck, 2010. Münchener Kommentar (2012) Säcker, F. J. (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 6th ed., Vol.1: §§ 1-240, ProstG, AGG, Munich: C. H. Beck, 2012. Münchener Kommentar (2012) Krüger, W. (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch, 6th ed., Vol. 2: §§ 241-432, Munich: C. H. Beck, 2012. Münchener Kommentar HGB (2009) Schmidt, K. (Ed.), Münchener Kommentar zum Handelsgesetzbuch, 2nd ed., Vol. 5: §§ 343-372 HGB, Munich: C. H. Beck, 2009. Münchener Kommentar InsO (2008) Kirchhof, H. P. (Ed.), Münchener Kommentar zur Insolvenzordnung, 2nd ed., Vol. 2: §§ 103-269, Munich: C. H. Beck, 2008. Münchener Kommentar ZPO (2013) Rauscher, T., Wax, P., Wenzel, J., Münchener Kommentar zur Zivilprozessordnung, 4th ed., Vol. 3: §§ 1025-1109, EGZPO, GVG, EGGVG, UKlaG, Internationales und Europäisches Zivilprozessrecht, Munich: C. H. Beck, 2013. Musielak (2003) Musielak, H.-J., Die Falschlieferung beim Stückkauf nach dem neuen Schuldrecht, in Neue Juristische Wochenschrift 2003, pp. 89–92. Musielak (2012) Musielak, H.-J. (Ed.), Kommentar zur Zivilprozessordnung, 9th ed., Munich: Vahlen, 2012. Neef (2005) Neef, A., Zur Kollision von Vorauszessionen, in Wertpapier Mitteilungen – Zeitschrift für Wirtschafts- und Bankrecht 2005, pp. 2365–2371. Nörr/Scheyhing/Pöggeler (1999) Nörr, K. W., Scheyhing, R., Pöggeler, W., Sukzessionen: Forderungszession, Vertragsübernahme, Schuldübernahme, 2nd ed., Tübingen: Mohr-Siebeck, 1999.

809

Bibliography O’Hare et al. (2003) O’Hare, J., Browne, K., Civil Litigation, 11th ed., London: Sweet & Maxwell, 2003. Palandt (2007) Palandt, O. (est.), Kommentar zum Bürgerliches Gesetzbuch, 66th ed., Munich: C. H. Beck, 2007. Palandt (2010) Palandt, O. (est.), Kommentar zum Bürgerliches Gesetzbuch, 69th ed., Munich: C. H. Beck, 2010. Palandt (2012) Palandt, O. (est.), Kommentar zum Bürgerliches Gesetzbuch, 71rst ed., Munich: C. H. Beck, 2012. Palandt (2013) Palandt, O. (est.), Kommentar zum Bürgerlichen Gesetzbuch, 72nd ed., Munich: C. H. Beck, 2013. Peel (2007) Peel, E., The Law of contract, 12th ed., London: Sweet & Maxwell, 2007. Peters et al. (1981) Peters, F., Zimmermann, R., Verjährungsfristen, in Gutachten und Vorschläge zur Überarbeitung des Schuldrechts, Vol. I, Cologne: Bundesanzeiger Verl.-Ges., 1981, pp. 77–373. Pfeiffer (1999) Pfeiffer, T., A5. Richtlinie 93/13/EWG des Rates über missbräuchliche Klauseln in Verbraucherverträgen, in Das Recht der Europäischen Union, Grabitz, E., Hilf, M., Vol. 4: Sekundärrecht, EG-Verbraucher- und Datenschutzrecht, Munich: C. H. Beck, 1999. Pfeiffer (2008a) Pfeiffer, T., Non-Negotiated Terms, in Common Frame of Reference and Existing EC Contract Law, Schulze, R. (Ed.), Munich: Sellier European Law Publishers, 2008, pp. 177–185. Pfeiffer (2008b) Pfeiffer, T., Von den Principles of European Contract Law zum Draft Common Frame of Reference, in Zeitschrift für europäisches Privatrecht 2008, pp. 679–702. Piekenbrock (1998) Piekenbrock, A., Der italienische Zivilprozeß im europäischen Umfeld, Berlin: Duncker & Humblot, 1998. Piekenbrock (2001) Piekenbrock, A., Reform des allgemeinen Verjährungsrechts: Ausweg oder Irrweg?, in Jahrbuch Junger Zivilrechtswissenschaftler 2001, Stuttgart: Boorberg, 2001, pp. 309 – 339. Piekenbrock (2006) Piekenbrock, A., Befristung, Verschweigung, Verjährung und Verwirkung, Tübingen: Mohr Siebeck, 2006.

810

Bibliography Pilar Perales Viscasillas (2001) Pilar Perales Viscasillas, M. del, The Formation of Contracts & the Principles of European Contract Law, in Pace International Law Review Vol. 13, 2001, pp. 371–397. Posner (1972) Posner, R. A., A Theory of Negligence, in The Journal of Legal Studies, Chicago: Univ. of Chicago Press, 1972, pp. 29–96. Powell (1961) Powell, R., The Law of Agency, 2nd ed., London: Sir Isaac Pitman & Sons, 1961. Prütting/Wegen/Weinreich (2012) Prütting, H., Wegen, G., Weinreich, G. (Eds.), BGB: Kommentar, 7th ed., Cologne: Luchterhand, 2012. Ranieri (2009) Ranieri, F., Europäisches Obligationenrecht, 3rd ed., Wien/New York: Springer Verlag, 2009. Reichert (1926) Reichert, H., Rückwirkung der Aufrechnung gegen Fremdgeldforderungen, in Archiv für die civilistische Praxis Vol. 126, 1926, pp. 313-332. Reinicke/Tiedtke (1988) Reinicke, D., Tiedtke, K., Gesamtschuld und Schuldsicherung, 2nd ed., Neuwied: Luchterhand, 1988. Rieble (1989) Riebe, V., Die schlechte Drittleistung, in Juristenzeitung 1989, pp. 830–834. Röthel/Heßeler (2008) Röthel, A., Heßeler, B., Vertragsübernahme und Verbraucherschutz – Bewährungsprobe für ein junges Rechtsinstitut, in Wertpapier Mitteilungen – Zeitschrift für Wirtschafts- und Bankrecht 2008, pp. 1001–1008. Rudolf (2006) Rudolf, C., Einheitsrecht für internationale Forderungsabtretungen: UNAbtretungsübereinkommen, UNIDROIT-Factoringübereinkommen, PECL, UNIDROITPrinciples, Tübingen: Mohr Siebeck, 2006. Rütten (1989) Rütten, W., Mehrheit von Gläubigern, Tübingen: Mohr Siebeck, 1989. Savigny (1841) Savigny, F. C. von, System des heutigen Römischen Rechts, Vol. 5, Berlin: Veit, 1841. Schäfer/Ott (2004) Schäfer, H.-B., Ott, C., The Economic Analysis of Civil Law, Cheltenham/ Northampton, MA: Edward Elgar, 2004. Schindler (2005) Schindler, T., Rechtsgeschäftliche Entscheidungsfreiheit und Drohung, Tübingen: Mohr, 2005. Schlechtriem/Schmidt-Kessel (2005) Schlechtriem, P., Schmidt-Kessel, M., Schuldrecht, Allgemeiner Teil, 6th ed., Tübingen: Mohr-Siebeck, 2005.

811

Bibliography Schlechtriem/Schwenzer (2008) Schlechtriem, P., Schwenzer, I. (Eds.), Kommentar zum einheitlichen UN Kaufrecht – CISG, 5th ed., Munich: C. H. Beck, 2008. Schlechtriem/Schwenzer (2010) Schlechtriem, P., Schwenzer, I. (Eds.), Commentary on the UN Convention on the International Sale of Goods (CISG), English edition, Oxford et al.: Oxford University Press, 2010. Schlinker (2007) Schlinker, S., Die Sachmängelrechte im Kauf- und Werkvertragsrecht im Falle mangelhafter Drittleistung, in Archiv für die civilistische Praxis Vol. 207, 2007, pp. 399-24. Schmidt (2011) Schmidt, H., Einbeziehung von AGB im Verbraucherverkehr, in Neue Juristische Wochenschrift 2011, pp. 1633–1639. Schmidt-Kessel (2002) Schmidt-Kessel, M., Einbeziehung von Allgemeinen Geschäftsbedingungen unter UN-Kaufrecht, in Neue Juristische Wochenschrift 2002, pp. 3444–3446. Schmidt-Kessel (2009) Schmidt-Kessel, M. (Ed.), Der Gemeinsame Referenzrahmen: Entstehung, Inhalte, Anwendung, Munich: Sellier European Law Publishers, 2009. Schmidt-Kessel (2012) Schmidt-Kessel, M. (Ed.), Ein einheitliches europäisches Kaufrecht: Eine Analyse des Vorschlags der Kommission, Munich: Sellier European Law Publishers, 2012. Schmoeckel (2007) Schmoeckel, M., Rückert, J., Zimmermann, R. (Eds.), Historisch-kritischer Kommentar zum BGB, Volume II/2: Schuldrecht Allgemeiner Teil, Tübingen: Mohr Siebeck, 2007. Schulze (2006) Schulze, R., Grundzüge eines kohärenteren europäischen Vertragsrechts, in Zeitschrift für Rechtspolitik 2006, pp. 155–159. Schulze (2007) Schulze, R. (Ed.), New Features in Contract Law, Munich: Sellier European Law Publishers, 2007. Schulze (2008) Schulze R. (Ed.), Common Frame of Reference and Existing EC Contract Law, Munich: Sellier European Law Publishers, 2008. Schwab (2003) Schwab, M., Schadensersatzverlangen und Ablehnungsandrohung nach der Schuldrechtsreform, in Juristische Rundschau 2003, pp. 133–140. Schwab/Walter (2005) Schwab, K. H., Walter, G., Schiedsgerichtsbarkeit, 7th ed., Munich: C. H. Beck et al., 2005. Schwark (1980) Schwark, E., Rechtsprobleme bei der mittelbaren Stellvertretung, in Juristische Schulung 1980, pp. 777–782.

812

Bibliography Soergel (1991) Soergel, Hs. Th., Kommentar zum Bürgerliches Gesetzbuch: mit Einführungsgesetz und Nebengesetzen, 12th ed., Vol. 2/3: §§ 433-515, Stuttgart: W. Kohlhammer, 1991. oergel (1999) Soergel, Hs. Th., Kommentar zum Bürgerliches Gesetzbuch: mit Einführungsgesetz und Nebengesetzen, 13. ed., Vol. 2, 1/2: §§ 104-240, Stuttgart: W. Kohlhammer, 1999. Soergel (2002) Soergel, Hs. Th., Kommentar zum Bürgerliches Gesetzbuch: mit Einführungsgesetz und Nebengesetzen, 13th ed., Vol. 2a, 3: §§ 13, 14, 126a – 127, 194 – 225, Stuttgart: W. Kohlhammer, 2002. Soergel (2005) Soergel, Hs. Th., Kommentar zum Bürgerliches Gesetzbuch: mit Einführungsgesetz und Nebengesetzen, 13th ed., Vol. 5/2, 3/2: §§ 320-327, Stuttgart: W. Kohlhammer, 2005. Soergel (2010) Soergel, Hs. Th., Kommentar zum Bürgerlichen Gesetzbuch: mit Einführungsgesetz und Nebengesetzen, 13th ed., Vol.5/3, 3/3: §§ 328-432, Stuttgart: W. Kohlhammer, 2010. Solomon (1997), Solomon, D., Das vom Schiedsgericht in der Sache anzuwendende Recht nach dem Entwurf eines Gesetzes zur Neuregelung des Schiedsverfahrensrechts, in Recht der internationalen Wirtschaft 1997, pp. 981–990. Spencer Bower et al. (1996) Spencer Bower, G., Turner, A. K., Handley, K. R., The doctrine of Res Judicata, 3rd ed., London: Butterworth, 1996. Spiro (1975) Spiro, K., Die Begrenzung privater Rechte durch Verjährungs-, Verwirkungs- und Fatalfristen, Vol. 1: Die Verjährung der Forderungen, Bern: Stämpfli, 1975. Staudinger (2004) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 1: Allgemeiner Teil, §§ 164 – 240 (Allgemeiner Teil 5), Berlin: Sellier-de Gruyter, 2004. Staudinger (2004) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, §§ 433-487 (Kaufrecht und Leasingrecht), Berlin: Sellier – de Gruyter, 2004. Staudinger (2005) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, §§ 397-432 (Erlass, Abtretung, Schuldübernahme, Mehrheit von Schuldnern und Gläubigern), Berlin: Sellier – de Gruyter, 2005.

813

Bibliography Staudinger (2009) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 1: Allgemeiner Teil, §§ 164-240 (Allgemeiner Teil 5), Berlin: Sellier-de Gruyter, 2009. Staudinger (2009) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, Einl. zu §§ 241 ff, 241-243, Berlin: Sellier-de Gruyter, 2009. Staudinger (2009) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, §§ 255 – 304 (Leistungsstörungsrecht 1), Berlin: Sellier-de Gruyter, 2009. Staudinger (2009) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, §§ 315 – 326 (Leistungsstörungsrecht 2), Berlin: Sellier-de Gruyter, 2009. Staudinger (2010) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 1: Allgemeiner Teil, §§ 139-163 (Allgemeiner Teil 4b), 15. ed., Berlin: Sellier-de Gruyter, 2010. Staudinger (2011) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, §§ 362 – 396 (Erfüllung, Hinterlegung, Aufrechnung), Berlin: Sellier-de Gruyter, 2011. Staudinger (2011) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 1: Allgemeiner Teil, §§ 134-138, Anh. zu § 138: ProstG (Allgemeiner Teil 4a), Berlin: Sellier-de Gruyter, 2011. Staudinger (2012) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 1: Allgemeiner Teil, §§ 90-124, §§ 130-133 (Allgemeiner Teil 3), Berlin: Sellier-de Gruyter, 2012. Staudinger (2012) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, §§ 346-361 (Rücktritt und Widerruf), Berlin: Sellier-de Gruyter, 2012. Staudinger (2013) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Vol. 2: Recht der Schuldverhältnisse, Wiener UN-Kaufrecht (CISG), Berlin: Sellier-de Gruyter, 2013. Stein/Jonas (1997) Stein, F., Jonas, M., Kommentar zur Zivilprozessordnung, Vol. 3: §§ 253-299a, 21rst ed., Tübingen: Mohr, 1997.

814

Bibliography Stein/Jonas (2002) Stein, F., Jonas, M., Kommentar zur Zivilprozessordnung, Vol. 7 and 9: §§ 704-827, §§ 916-1068, EGZPO, 22nd ed., Tübingen: Mohr-Siebeck, 2002. Stiglitz (1987) Stiglitz, J. E., Principal and Agent, in The New Palgrave: A Dictionary of Economics, Eatwell, J., Milgate, M., Newman, P. (Eds.), Vol. 3 (K to P), London: Palgrave Macmillan, 1987. Stone (1996) Stone, R., Law of Agency, London: Cavendish Publishing, 1996. Stürner (2011) Stürner, M., Die Grenzen der Primärleistungspflicht im Europäischen Vertragsrecht, in European Review of Private Law, Dordrecht: Kluwer Law International BV, 2011, pp. 167–185. Swann (2006) Swann, S., A Guide to the Principles of European Law on Unjustified Enrichment, ERA-Forum No. 2/2006. Telkamp (2010) Telkamp, M., Verkauf als Rechtsbehelf des Sachinhabers – England, Deutschland, Einheitsrecht, Marburg: Tectum Verlag, 2010. The Max Planck Encyclopedia of European Private Law (2012) Basedow, J., Hopt, K. J., Zimmermann, R. (eds.), The Max Planck Encyclopedia of European Private Law, Oxford: Oxford University Press, 2012. Thomas/Putzo (2012) Thomas, H., Putzo, H., Zivilprozessordnung, 33rd ed., Munich: C. H. Beck, 2012. Treitel (1976) Treitel, G., Remedies for Breach of Contract, Int.Enc.Comp.L. Vol. 7, Chap. 16, J. C. B. Tübingen: Mohr (Paul Siebeck), 1976. Treitel (2007) Treitel, G. H., The Law of Contract, 12th ed., Sweet & Maxwell, London 2007. Uhlenbruck/Hirte/Vallender (2010) Uhlenbruck, W., Hirte, H., Vallender, H., Insolvenzordnung Kommentar, 13th ed., Munich: Vahlen, 2010. Unberath (2003) Unberath, H., Transferred Loss, Claiming Third Party Loss in Contract Law, Oxford: Hart Publishing, 2003. Unberath (2005) Unberath, H., Die Vertragsverletzung, Tübingen: Mohr Siebeck, 2005. Unberath (2007) Unberath, H., Die Vertragsverletzung, Tübingen: Mohr Siebeck, 2007. van Kogelenberg (2009) van Kogelenberg, M., Article III.3:302 DCFR on the Right to Enforced Performance of Non-monetary Obligations: An Improvement – Albeit Imperfect – Compared with Article 9:102 PECL, in European Review of Private Law, Dordrecht: Kluwer Law International BV, 2009, pp. 599–617.

815

Bibliography Vogenauer (2010) Vogenauer, S., Verzicht auf eine vertragliche Forderung im Europäischen Vertragsrecht und im Recht der internationalen Handelsverträge, in Festschrift für Klaus J. Hopt zum 70. Geburtstag am 24. August 2010: Unternehmen, Markt und Verantwortung, Grundmann, S., Haar, B., Merkt, H. et al. (Eds.), Berlin: de Gruyter, 2010, pp. 247 et seq. Vogenauer/Kleinheisterkamp (2009) Vogenauer, S., Kleinheisterkamp, J. (Eds.), Commentary on the UNIDROIT principles of international commercial contracts (PICC), Oxford: Oxford University Press, 2009. von Bar et al. (2009) von Bar, C., Clive, E., Schulte-Nölke, H. (Eds.), Principles, Definitions and Model Rules of European Private Law, Draft Common Frame of Reference (DCFR), Outline Edition, Munich: Sellier European Law Publishers, 2009. von Bar/Clive (2009) von Bar, C., Clive, E., Principles, Definitions and Model Rules of European Private Law, Draft Common Frame of Reference (DCFR), Full Edition, 6 volumes, Munich: Sellier European Law Publishers, 2009. von Bar/Schulte-Nölke/Schulze (2008) von Bar, C., Schulte-Nölke, H., Schulze, R. (Eds.), Der akademische Entwurf für einen gemeinsamen Referenzrahmen: Kontroversen und Perspektiven, Tübingen: Mohr Siebeck, 2008. von Bar/Zimmermann (2005) von Bar, C., Zimmermann, R., Grundregeln des Europäischen Vertragsrechts, Munich: Sellier European Law Publishers, 2005. von Caemmerer (1960) von Caemmerer, E., Wandlungen des Deliktsrechts, in Hundert Jahre deutsches Rechtsleben: Festschrift zum hundertjährigen Bestehen des deutschen Juristentages 1860-1960, Vol. 2, Karlsruhe: Müller, 1960, pp. 49–136. Vorpeil (1993) Vorpeil, K., Aufrechnung bei währungsverschiedenen Forderungen, in Recht der internationalen Wirtschaft 1993, pp. 528 et seq. Wagner (2007) Wagner, G., Lügen im Vertragsrecht, in Störungen der Willensbildung bei Vertragsschluss, Zimmermann, R. (Ed.), Tübingen, Mohr, 2007, pp. 59–102. Wagner (2010) Wagner, G., Zwingendes Privatrecht – eine Analyse anhand des Vorschlags einer Richtlinie über Rechte der Verbraucher, in Zeitschrift für europäisches Privatrecht, 2010, pp. 243–278. Weller (2008) Weller, M.-P., Die Struktur des Erfüllungsanspruchs im BGB, common law und DCFR – ein kritischer Vergleich, in Juristenzeitung 2008, pp. 764–773.

816

Bibliography Wendehorst (2006) Wendehorst, C., The Draft Principles of European Unjustified Enrichment Law Prepared by the Study Group on a European Civil Code: A Comment, ERA-Forum No. 2/2006. Wendehorst (2008) Wendehorst, C., Ungerechtfertigte Bereicherung, in Der akademische Entwurf für einen Gemeinsamen Referenzrahmen, Schulze, R., von Bar, C., Schulte-Nölke, H. (Eds.),Tübingen: Mohr, 2008, pp. 215–260. Wiegand (2000) Wiegand, D., Vertragliche Beschränkungen der Berufung auf Willensmängel, Munich: C. H. Beck, 2000. Wildner (2008) Wildner, K., Art. 19 CISG: The German Approach to the Battle of the Forms in International Contract Law: The Decision of the Federal Supreme Court of Germany of 9 January 2002, in Pace International Law Review Vol. 20, 2008, pp. 1–30. Wilhelm (2011) Wilhelm, C., Die Rechtsbehelfe des Käufers bei Nichterfüllung nach dem Vorschlag der Europäischen Kommission für eine Verordnung über ein Gemeinsames Europäisches Kaufrecht (KOM [2011] 635 endg.), in Zeitschrift für das Recht des internationalen Warenkaufs und –vertriebs 2011, pp. 225–235. Williamson (1985) Williamson, O. E., The economic institutions of capitalism: firms, markets, relational contracting, New York: Free Press et. al., 1985. Windscheid (1856) Windscheid, B., Die actio des römischen Civilrechts, Düsseldorf: Buddeus, 1856. Windscheid (1891) Windscheid, B., Lehrbuch des Pandektenrechts, Vol. 3, 7th ed., Frankfurt / Main Literarische Anstalt Rütten & Hoening, 1891. Windscheid et al. (1906) Windscheid, B., Kipp, T., Lehrbuch des Pandektenrechts, Vol.1-3, 9th ed., Frankfurt / Main: Rütten & Loenig, 1906. Wolf (2000) Wolf, M., Willensmängel und sonstige Beeinträchtigungen der Entscheidungsfreiheit in einem europäischen Vertragsrecht, in Europäische Vertragsrechtsvereinheitlichung und deutsches Recht, Basedow, J. (Ed.), Tübingen: Mohr, 2000, pp. 85–128. Wolf/Neuner (2012) Wolf, M., Neuner, J., Allgemeiner Teil des Bürgerlichen Rechts, 10th ed., Munich: C. H. Beck, 2012. Zimmermann (1990) Zimmermann, R., The Law of Obligations: Roman Foundations of the Civilian Tradition, 1rst ed. Cape Town/Wetton/Johannesburg: Juta, 1990. Zimmermann (1993) Zimmermann, R., The Law of Obligations: Roman foundations of the civilian tradition, reprinted, Cape Town et al.: Juta et al., 1993.

817

Bibliography Zimmermann (1996) Zimmermann, R., The Law of Obligations: Roman foundations of the civilian tradition, Oxford: Clarendon Paperbacks, 1996. Zimmermann (1999) Zimmermann, R., Die Aufrechnung, in Festschrift für Dieter Medicus zum 70. Geburtstag, Beuthien, V. (Ed.), Cologne/Berlin/Bonn/Munich: Heymann, 1999, pp. 707 et seq. Zimmermann (2002a) Zimmermann, R., Breach of Contract and Remedies under the New German Law of Obligations, in Centro di studi e ricerche di diritto comparato e straniero (publ.), Rome 2002, pp. 1–51. Zimmermann (2002b) Zimmermann, R., Comparative Foundations of a European Law of Set-Off and Prescription, Cambridge: Cambridge University Press, 2002. Zimmermann (2005a) Zimmermann, R., Die Principles of European Contract Law als Ausdruck und Gegenstand europäischer Rechtswissenschaft, Part 1, in Jura 2005, pp. 289 et seq.; Part 2, in Jura 2005, pp. 441 et seq. Zimmermann (2005b) Zimmermann, R., Die UNIDROIT-Grundregeln der internationalen Handelsverträge 2004 in vergleichender Perspektive, in Zeitschrift für europäisches Privatrecht 2005, pp. 264–290. Zimmermann (2005c) Zimmermann, R., Restitutio in Integrum: The Unwinding of Failed Contracts under the Principles of European Contract Law, the Unidroit Principles and the Avantprojet d’un Code Européen des Contrats, in Unif. L. Rev./Rev. dr. unif. 2005, pp. 719–735. Zimmermann (2005d) Zimmermann, R., Vertrag und Versprechen – Deutsches Recht und Principles of European Contract Law im Vergleich, in Festschrift für Andreas Heldrich zum 70. Geburtstag, Lorenz, S., Trunk, A., Eidenmüller, H., Wendehorst, C., Adolff, J. (Eds.), Munich: C. H. Beck, 2005, pp. 467 et seq. Zimmermann (2006) Zimmermann, R., The Principles of European Contract Law, Contemporary Manifestation of the Old, and Possible Foundation for a New, European Scholarship of Private Law, in Beyond Borders: Perspectives on International and Comparative Law – Symposium in Honours of Hein Kötz, Faust, F., Thüsing, G. (Eds.), Köln/Berlin/ Bonn: Heymanns, 2006, pp. 111–147. Zimmermann (2007) Zimmermann, R., Der gemeinsame Referenzrahmen: ZEuP-Symposium in Graz, in Zeitschrift für Europäisches Privatrecht 2007, pp. 109 et seq. Zimmermann (2010) Zimmermann, R., Die Auslegung von Verträgen: Textstufen transnationaler Modellregelungen, in Festschrift für Eduard Picker zum 70. Geburtstag am 3. November 2010, Tübingen: Mohr Siebeck, 2010, pp. 1353–1373.

818

Bibliography Zuckerman (2003) Zuckerman, A. A.S., Civil Procedure, London: Sweet & Maxwell, 2003. Zweigert/Kötz (1996) Zweigert, K., Kötz, H., Einführung in die Rechtsvergleichung, Tübingen: J.C.B. Mohr (Paul Siebeck), 1996.

819

Index A Abstraktionsprinzip, 146, 159, 610, 616, 617 Acceptance by act of performance, 94 of an offer, 11–12, 38, 78, 80–111, 228 binding without acceptance, 22, 78–79, 279 conditional, 99, 100, 366 by conduct, 83–85, 88, 89, 91, 92, 109 default of, 377, 384, 453–454, 474 delay of, 97–98, 230, 380, 384, 411, 427 fixed time, 83–85, 94 implicit/tacit, 89, 91 implied, 90, 92, 93, 95 late, 87, 96–98 modified, 87, 98–100 time limit for, 94–96 Actio quanti minoris, 522 Adäquanztheorie, 538, 542 Additional term(s), 72, 306, 308 Agency and external relationship, 120 and internal relationship, 117–122, 431 Agent(s) acting without authority, 120, 145, 156 authority of, 117–166 commission agent, 124, 164 as contractual partner, 142, 166 declaration, 131–133

in conflict of interest, 120, 141–147 liability, 120, 136, 140, 148, 150 without authority, 136, 138–141, 151, 152, 156, 186, 535 Agreed payment for non-performance, 555–556, 709 Application of the PECL, 4, 10, 13, 19, 22, 609 Arbitration agreement, 8, 35, 139 clause(s), 2, 139, 480, 761 proceeding(s), 35, 37, 224, 742, 743, 745, 746 tribunal(s), 2, 4, 10 Assignability, 611–615, 624–626, 631–635, 646 Assignment contractual prohibition of, 631–634 effects of, 618–649 exclusion of, 632 of future claim/right, 605, 609, 611, 612, 622–624, 631, 653 multiple, 615, 652–654 Aufgedrängte Bereicherung, 522 Authorisation effect of ending or restriction of, 157–161 extension of, 156 Authority acting without or outside of, 119–120, 135–137, 145 of agents, 117–166 of the assignor, 617 delegate, 126, 149

821

Index duration of, 156, 159, 161 expiry of, 157 express, 125–127, 129 granted by law, 118, 120, 121 implied, 125–127, 129, 147, 148 of the representative, 126, 127, 130 of the subagent, 148 termination of, 158, 159 Avoidance effect of, 143, 252–253, 255, 257, 258, 263, 264 notice of, 143, 188, 189, 211, 213, 214, 244–247, 249–250, 256, 263, 266, 722 prerequisites of, 184, 186 B Bad faith, 54, 108, 140, 160, 258, 261, 262, 342, 343, 350, 474, 477, 750, 777, 789 Battle of forms, 99, 102, 219–220 Breach of an information duty, 193–195 anticipatory, 454, 502 of confidentiality, 113–116, 505, 633 of contract, 25, 28–29, 37–38, 181, 206, 245, 261, 273, 274, 329, 331, 332, 357, 361, 376, 380–382, 385, 391, 421, 423–425, 443, 445, 448, 629 of duty, 30, 35–38, 112–115, 221, 381, 382, 384, 482, 491, 723, 740, 756 fundamental, 357, 391, 407, 423, 448, 465, 481–483 of law, 779–780 of obligation(s), 375, 730, 733, 738, 741–742 of pre-contractual duty, 197, 266 C Capacity buyer’s, 529 financial, 685, 690

lack of, 167–169 legal, 6, 30, 132, 138–140, 597, 753, 760 personal, 119, 120, 122, 130–131, 133, 134, 139, 141, 144, 145, 162 professional, 170, 301 Categories of representation, 122–125 Causation adequate, 538, 540, 542 equivalent, 547 hypothetical and alternative, 537–538 limitations on, 537, 538, 540 standards on, 542 Cessio legis, 609 Change of circumstances, 22, 91–92, 340–351, 463, 717 Change of remedy, 386–390 Communication pre-termination, 503, 504 tele-, 37 transmission of a, 184, 187 of unwillingness, 453, 487 Compensation claim for, 193, 198, 243, 266, 369, 438, 483, 498, 535, 536, 659 demand, 171, 195, 330, 379, 387–390, 396, 410, 469, 507, 518, 533, 534, 536, 580 duty to pay, 507, 517 full compensation, 139, 192, 269, 386 in money, 532, 533 instead of performance, 171, 379, 396, 409–410, 533–534 limited, 193 monetary, 269, 758 for non-performance, 139, 266, 536 over-, 205, 218, 249, 265, 561 for violation of duty, 195, 379, 533 without compensation, 114, 514, 516 Conduct of the parties, 25, 109, 281–284 Confidentiality breach of, 113–116 duty of, 115, 116 of information, 114–116 interest of, 114

822

Index Confirmation of authority, 62, 153 by conduct, 250, 251 electronic, 82 formal, 63, 107–109 implicit, 251, 252 written, 38, 62, 106–108, 153, 154 Conflict of interest, 120, 141–147 Consensus lack of, 66 mutual, 57, 64, 78, 109, 110 partial, 65 Consent of the assignee, 621, 627, 628, 648, 649 of the creditor, 657–660, 662, 663, 665, 668, 670–672, 678 of the debtor, 613, 616, 631, 635, 656, 657, 660, 681 defect in/of, 212, 245, 246, 249, 266, 267, 269, 273, 274 of the other party, 312, 389, 681, 682 Construction contracts, 29, 259, 316, 476, 477, 524 Consumer business to, 68, 216, 223, 224, 234, 237, 238 contracts, 2, 71, 72, 219, 220, 233–235, 287, 409, 446 Credit Directive, 359, 661 protection, 10, 45, 81, 103, 392, 661, 670, 684 protection policy, 201, 237 sales contracts, 398, 399, 413, 431, 447, 466, 481, 482, 487, 488 Sales Directive, 300, 302–305, 327, 328, 392, 398, 399, 409, 413 unfair terms in consumer contracts, 2, 71, 219, 220, 233–235, 287, 447, 448, 768 Contract(s) binding, 58, 62, 232, 250, 783, 784 breach of, 25, 29, 37–38, 181, 206, 245, 261, 273, 274, 329, 331, 332,

357, 361, 376, 380–382, 385, 391, 421, 423–425, 443, 445, 629 commercial, 77, 107, 182, 219, 220, 553 conclusion of, 15, 60, 72, 80, 93, 102, 104, 110, 112, 152, 171–173, 379, 470, 479, 503, 524, 542, 556 consumer, 2, 71, 72, 219, 220, 233–235, 287, 409, 446–448, 480–482, 551, 762, 768 continuing, 331, 332 contractual penalty, 230, 557, 667, 705, 711 enforceable, 58, 66 formation, 60, 102, 204, 297, 301 freedom of, 3, 9–12, 20, 65, 111, 320–321, 332, 354, 358, 444, 447, 665, 670, 682, 701–703, 712, 713, 794 frustration of, 456, 463 fulfilment of the, 28, 56, 138 interpretation of, 17, 41, 278–281, 291, 295, 308–310, 361, 395, 558 reciprocal, 35, 36, 420, 422, 429, 475, 566, 595, 596 reference to contract as a whole, 290, 291, 293 termination, 205, 261, 373, 382, 383, 386–388, 391, 392, 394, 398–399, 406, 409, 414, 416–417, 420–421, 423–425, 427, 429–431, 437, 440, 442, 457, 463, 465, 476, 478–522, 525, 559, 619, 721, 785 time of conclusion, 91–93, 299–300, 305, 341, 354, 357, 394, 395, 479, 527, 629, 644 transfer of, 619, 655–684 with unidentified principal, 134 written, 59, 72, 73, 75, 234, 288 Contra Proferentem Rule, 285–288, 292–294 Co-operation, 29–30, 384, 405, 454, 455, 626, 750, 787, 788 Court, meaning of the term, 31, 37

823

Index Creditor(s) of the agent, 164, 165 interest, 346, 348, 349, 359, 379, 398–401, 415, 463, 493, 494, 695 interest of the, 349, 359, 493, 581, 582 invoking defences against, 590–591 joint, 595, 599, 601–603 new, 619, 622–624, 645 plurality of, 565, 568, 592–603 Culpa in contrahendo doctrine of, 113, 115, 204, 210, 268, 273 liability for, 196–198, 241, 242, 268, 273 rules of/on, 196–198, 302 Currency debt, 699–700 foreign currency debts, 688, 699–700 foreign currency set-off, 698–701, 711 of payment, 353, 355, 366–368, 552 specific, 561 units, 562, 563 D Damages for breach of duty, 35, 36, 113, 381, 382, 384, 723, 740 foreseeability of, 267, 399, 527, 529–531, 537, 538, 540, 542, 561, 738 for loss, 193, 194, 196, 267–268, 381, 382, 458, 527, 529, 531, 542, 548, 555, 781–782 measure of, 192–198, 265–268, 272, 386, 439, 440, 470, 527, 531 reliance, 112, 113, 139–140, 170–172, 178, 180, 181, 183, 186, 781 right to, 135, 175, 181, 193, 194, 196, 239, 329, 376, 383, 385–387, 404, 414, 417, 421, 440, 505, 527, 531, 730, 731 rules on, 268, 506, 536, 552, 555 Debtor(s) additional, 660, 665

change of the, 656, 657, 660, 665, 673, 680 identity of the, 658, 659, 731, 735, 741 joint, 570, 574, 577–580, 582, 584, 586, 588, 590, 592 new, 655–684, 741, 754 original, 501, 655–657, 659–663, 665, 666, 668, 669, 671–679 plurality of, 565–594, 597, 602, 663, 674, 675 previous, 655, 656, 659 release of, 380, 383, 457, 585–587, 603 responsibility of, 241, 432, 439, 440, 447–449 rights and defences of, 646, 647 Debts foreign currency, 688, 699–700 merger of, 583–585, 588, 590 money, 562, 691, 699 single, 567, 656 Declaration agent’s, 131–133 contractual, 668, 759 of intent, 12, 18, 21–24, 38, 39, 45–47, 52, 54, 55, 58, 60–63, 92, 93, 109, 279, 386–387, 390, 414, 668, 784 negative, 746, 747 reduction by, 523 of termination, 429, 486, 495, 498, 508, 520 unilateral, 24, 89, 275, 281, 437, 441, 639, 786–787 of will, 38, 123, 128, 131, 132, 140, 168, 169, 177–181, 185, 186, 196, 202, 203, 208, 209, 241, 245, 247, 251, 312, 498 of withdrawal, 278, 498, 677 written declaration of intent, 46 Default interest, 553, 794 Defective performance cases of, 383, 389, 390, 423, 428–430, 447–448, 481 consequences of, 364

824

Index particularly defective performance, 381, 430 Defence(s) against the assignee, 645–647 against creditor, 590–591 invoking defences, 590–591 against other debtors, 591, 592 personal, 590–592 Deposit(s) contracts, 60 discharge by, 372, 373 effect of, 599, 600 interest on, 795 Differenzhypothese, 537 Diligence, 38, 629, 631, 735–736, 739 Direct representation, 122, 123, 125–162 Discharge of obligation, 636–639 Duration of authority, 156, 159, 161 contract, 30, 235, 550 Duress, 210, 246, 264, 265 Duty to perform debtor’s, 384, 430, 562, 668 exclusion of, 346, 379, 396, 397 E Early performance, 357, 359–360, 367, 493 Einziehungsermächtigung, 606, 610–611 Elektive Konkurrenz, 486 Erfüllungsinteresse, 470, 527 Ergänzende Vertragsauslegung, 66, 104, 236, 276, 309, 310 Error(s) in motive, 177, 179, 181 in translation, 293 input, 176, 177 risk of, 321 Ersatz neu für alt, 537 Essentialia negotii, 59, 65, 66, 81, 82, 275, 313 Excuse due to an impediment, 92, 376, 383, 434–439, 497

Expectation interest, 183–185, 198, 266, 298, 470–471, 527, 535 F Fairness and equity, 685, 711 Falsa demonstratio non nocet, 62, 185, 280, 311 Fixgeschäft absolutes Fixgeschäft, 462, 487 relatives Fixgeschäft, 462, 484, 487 Foreseeability of the consequences, 395–396 of damages, 267, 529, 530, 537, 540, 542, 561, 738, 740–741 of the impediment, 92, 440 reasonable, 436 test of reasonable, 399 Formation of (a) contract(s), 53, 57–94, 96–102, 104–116, 204–205, 297, 301, 395, 616, 618, 667, 668, 672, 680, 786 rules on, 57–61, 63–68, 70, 72–80, 83, 85–102, 104–106, 108–111, 113, 115, 297, 301 Form of payment, 365–366, 512 Fraud/fraudulent behaviour, 242, 243 intent, 200, 202–204 party, 202 representation, 199 Freedom of contract importance of, 12 limits, 9, 10, 12, 447, 794 principle of, 3, 9, 12, 332, 665, 670, 701, 702, 713 Fulfilment of the contract, 28, 138, 230, 231, 234, 396, 493, 788 effect of, 138, 426, 432, 584, 592, 791, 792 place of, 234 subsequent fulfilment, 230, 231, 380, 396, 410, 426

825

Index of the/an obligation, 27, 28, 223, 262, 779, 788, 791 Fundamental breach of contract, 391, 423 delay, 402, 406, 407, 411, 496 mistake, 169, 173–177, 181–182, 187, 191, 192, 194, 198, 267 non-performance, 163–166, 175, 390–402, 404–408, 411, 413–415, 423–425, 428, 430, 431, 434, 436–438, 441, 453, 472, 476, 478–481, 483, 484, 486–491, 494, 500, 504, 540 principle(s), 12, 20–21, 123, 168, 451, 460, 537, 605, 769–771, 778 undertakings, 627, 629 G Geldsummenschuld, 562 Geldwertschuld, 562 General conditions of business, 105, 227–229, 233–237, 245 conflicting, 62, 101–102 of contract, 70, 101, 102, 220, 225, 227, 234 definition of, 67, 102, 105, 225 Gesamthandsgemeinschaft, 614 Gesamtrechte, 615, 621 Globalzession, 605, 610, 623 Good faith and fair dealing duty of, 70, 112, 115, 116, 221, 222, 270, 541, 788, 790 negotiations contrary to, 26, 86, 111–113, 341 requirements of, 9, 17, 27, 29, 41, 175, 205, 211, 214, 218–220, 228, 236, 301, 308, 789 standard of, 24–26, 58, 175, 220, 309, 343, 493 H Hauptleistungspflicht, 484, 540

Hinterlegung, 642 I Illegality, 167–169, 262, 292, 311, 456, 468, 590, 769–782 Immorality, 167–169, 769 Implied acceptance, 81, 90, 92, 93, 95 authority, 125–127, 129, 147, 148 condition, 130 terms, 236, 276, 283, 306–309, 314, 354, 360, 471, 472, 541 Impossibility economic, 348, 349, 456 initial, 38, 169–173, 175, 305, 382, 385, 468–470, 535 moral, 456, 463 of performance, 38, 361, 382–384, 429, 435, 436, 440, 441, 454, 456, 461, 468, 469, 484, 535, 584, 588, 590, 626, 629, 630 practical, 129, 257, 323, 332, 348, 349, 462 subjective, 172, 462 supervening, 384, 385, 435 temporary, 442, 456, 462 Incapacity, 156, 158, 159, 215, 254, 470, 502, 562, 752–756 Incompatible remedies, 386–390, 428, 496 Incorrect information, 174, 175, 185–187, 191–200, 239, 265, 267, 268, 270, 297, 299, 300, 304, 305, 444 Indirect representation consequences of, 162 definition of, 162 effects of, 124, 132, 163 Ineffectiveness partial, 775–776 risk of, 677 Information duty(ies), 176, 177, 193–195, 201, 202, 204, 795

826

Index Insolvency administrator, 121, 624, 650 of the agent, 136, 140, 160, 161, 164 intermediary’s, 163–166 law, 121, 651, 680, 692, 729 of the principal, 136, 139, 158, 160 proceedings, 123, 136, 140, 158, 609, 612, 620, 624, 651, 653, 654, 676, 692, 726, 727, 729, 737, 745, 754, 761 Insurance company, 537, 735 contract, 25, 232, 333, 338, 339 policy, 733 Integritätsinteresse, 540 Intellectual property, 114–116, 512 Intention to be legally bound, 15, 57, 58, 60–63, 81, 86, 275, 290, 784 common intention of the parties, 183, 185, 276, 277, 280, 290, 294, 295, 311, 312 interpretation of the, 664 Intentional act(s), 31, 37, 39, 205, 445, 446, 448, 449 Interest compound, 553–555, 706, 793–795 conflicting, 456, 462, 463, 544, 694 contractual, 493, 494, 540, 554 creditor’s, 346, 348, 349, 359, 379, 398, 400, 401, 415, 463, 493–494, 671, 695, 736 debtor’s, 348, 400, 401, 411, 430 expectation, 183, 198, 266, 298, 470, 471, 527, 535 in performance, 333, 346, 362, 363, 379, 397, 410, 427, 437, 460–462, 482, 495, 554, 561 legitimate, 123, 134, 147, 209, 219, 245, 246, 279, 359, 362–364, 404, 421, 454, 493, 558, 560, 699 monetary, 213 negative, 197, 272, 298, 302, 470, 471, 528, 535 positive, 198, 269, 272, 535

public, 13, 244, 703, 714, 741, 762, 768 reliance, 180, 183, 192, 197, 198, 204, 210, 241, 243, 252, 266, 268, 269, 470, 528 subjective, 215, 217 of the third party, 159–160 Intermediary, 117–119, 122, 141, 161–163, 165–166, 300, 311, 436, 441, 739 Interpretation contractual, 17, 41, 75, 77, 276, 278–281, 285, 291, 295, 308–310, 355, 361, 395, 558 of a declaration of intent, 18, 279–281 general rules of, 73, 129, 275–277, 328 of the PECL, 19, 20, 91, 194, 275–295 principles of, 284 rules of, 73, 129, 174, 187, 275–277, 294, 304, 306, 316, 317, 328, 344, 350, 366 supplementary interpretation of contract, 18–20, 104 Invalidity of the contract, 252, 264, 268, 292, 323, 651, 772–774 grounds of, 167–169 partial, 264–265, 292, 775, 776 per se invalidity, 219, 239, 245, 248, 249, 262 Irrevocability, 79, 83, 84, 86, 157, 333, 334, 389, 390, 499 K Knock-out rule, 102, 104, 105 L Lack of capacity, 167–169 Legal act(s), 224, 261, 280, 389, 442, 474, 734, 783, 786, 787 Lex mercatoria, 1, 3–5 Liability of the agent, 120, 136, 140, 148, 150

827

Index for culpa in contrahendo, 172, 196–198, 241, 242, 268, 269, 273, 461, 535, 782 for damages, 194, 196, 262, 432, 434, 444, 446, 448–449, 452, 468, 529, 535, 544, 579 in case of initial impossibility, 170, 172, 470 for incorrect information, 191, 193–199, 268 joint, 569, 664, 665 limitation of, 230, 444, 445, 448, 766 for loss, 193, 196, 268, 474, 543, 545, 555 non-contractual, 84, 433, 473, 531 for non-performance, 172, 444, 448, 449, 517, 542, 546 pre-contractual, 198, 266, 273, 782 for reliance damages, 112, 139, 140, 172 strict, 172, 257, 262, 301, 302, 434, 445, 542 of the subagent, 148, 150 M Malperformance, 381, 421, 492, 500, 536 Mandate, 29, 121, 157–159, 234, 310, 331, 538, 599 Modified acceptance, 87, 98–100 Monetary obligations, 354–356, 359, 367, 369, 370, 451–453, 455, 502, 554, 562, 563, 613, 709 Mora creditoris effects in case of multiple debtors, 587 general effects, 454 risk of, 600 rules on, 510, 541, 587, 603 N Nacherfüllung, 539 Nachfrist, 381, 391, 397–401, 411–413, 419, 424, 425, 427–430, 437, 441,

442, 481, 483, 484, 486–488, 526, 540 Naturalerfüllung, 464 Nature and purpose of the contract, 40, 68, 276, 281, 283, 284, 306, 308, 360 Nebenleistungspflicht, 484, 540 Nebenpflichten, 484 Negative interest (Negatives Interesse), 197, 272, 298, 302, 470, 471, 528, 535 Negotiations consequences of, 749–751 general provision on, 111, 749, 750 individual, 102, 104, 220, 238 meaning of, 225, 284, 749 pre-contractual, 242, 378, 452, 473 preliminary, 281–284 Non-monetary obligations, 355, 356, 404, 455–460, 466, 613, 643, 688 Non-performance anticipatory, 402, 414, 472–473, 476–478, 484, 495, 500–501 caused by creditor, 376, 383–385 concept of, 375, 376, 380–383, 425, 480, 481, 483, 538 damages for, 139, 140, 176, 267, 268, 272, 333, 387–389, 531, 532, 535–537, 557, 561 excused, 376, 383, 434, 440 fundamental, 163, 165–166, 175, 361, 390–395, 397–408, 411, 413–417, 423–425, 428, 430, 431, 434, 437, 438, 441, 453, 472, 476, 478–481, 483, 484, 486–491, 494, 500–501, 504, 539, 540 future, 414–417, 421, 422, 477, 501–504 meaning of the term ‘non-performance’, 32 minor, 391, 393, 394, 398–400, 426, 430, 431, 437, 452, 472, 476, 480–482, 486–488, 522, 557

828

Index remedies for, 175, 181, 191, 198, 272–274, 335, 364, 366, 377, 401, 408, 411, 412, 415, 417, 421, 443–446, 451–563, 626 risk of, 393, 395, 440, 443, 504, 581, 678 stipulation for, 559 termination for, 274, 329, 394–396, 398, 399, 406, 407, 422, 453, 479–482, 484, 488, 491–494, 497, 501–504 unitary concept of, 375, 376, 380, 381, 385, 424, 425, 480, 481, 483 Notice of avoidance, 143, 188, 189, 211, 213, 214, 244–247, 249, 250, 256, 263, 266, 722 Notice of termination, 169, 232, 387–389, 413, 414, 426, 441, 494–498, 501, 584, 588, 590, 593, 638 O Obliegenheitsverletzung, 546 Obligation to perform, 27, 318, 322, 347, 382, 421, 454, 457, 460, 468, 483, 484, 534, 539–541, 544, 546, 559, 598–599, 657–658 Offenkundigkeitsprinzip, 123, 132 Offer(s) and acceptance, 43, 93 irrevocable, 84, 85, 93 to perform, 28, 454 to the public, 79, 82, 84 rejection of, 87, 91 Ordinary circumstances, 46, 95, 97, 98 P Partial avoidance, 143, 263–264, 776 Particular remedies for non-performance, 175, 181, 191, 198, 272–274, 335, 364, 366, 377, 401, 408, 411, 412, 415, 417, 421–422, 443–445, 451–563, 626

Payment currency of, 353, 355, 366–368, 552 delay in, 230, 381, 382, 503, 552, 644, 709, 793–794 form of, 365–366, 512 of interest, 451, 528, 552, 758, 763 modalities of, 365–366 of money, 355, 365–367, 451, 452, 511, 513, 552, 607, 613, 631, 633, 635, 642, 644–645, 685 part payment(s), 758, 759 place of, 354, 367, 562, 699 theory, 83 time of, 552, 562, 699, 700 Performance(s) alternative, 354, 360–362, 457 appropriation of, 368–370 assurance of, 406, 413–417, 472, 480, 497, 501 continuous, 490, 732, 734 contractual, 30, 54, 485, 513, 529 costs of, 340, 341, 344, 347–349, 351, 353, 357, 374, 614, 644 defective, 23, 31, 33, 38, 172, 364, 375, 376, 381–383, 386, 389–391, 393, 407, 423–425, 428–430, 432, 447, 455, 481, 483 delayed, 31, 33, 382, 383, 385, 386, 391, 423–425, 428, 429, 436, 441, 478, 481, 485, 487, 529, 535, 536, 554–556, 559 divisible, 489–490, 570, 571, 574–576, 595, 598 early, 357, 359–360, 367, 493 exchanged, 211, 215, 260, 486 in good faith, 17, 27–30, 41–43 impossibility of, 382, 384, 429, 435, 436, 440, 441, 461, 469, 535, 584, 588, 590, 626, 630 indivisible, 571, 574, 575, 577–578, 595, 597, 599 late, 38, 376, 382, 486, 536, 620, 638, 667 order of, 353, 357, 358, 360, 421, 464, 471

829

Index personal, 362, 363, 379, 463 place of, 92, 353–357, 366, 641, 643–645, 689 quality of, 306, 326–328 right to refuse, 229, 418, 737, 761, 762 right to withhold, 253, 255, 257, 359, 376, 383, 384, 415–417, 419, 422, 434, 471–473, 475–477, 488, 503, 504, 596, 630, 636, 638–640, 696 specific, 136, 140, 171, 333, 338, 378, 382, 383, 386–389, 423, 427, 435, 439, 440, 442, 443, 454–460, 462–464, 466–469, 477, 481, 495, 496, 503, 540, 607, 731, 733, 788 by a third party, 322, 354, 362–365, 657 time of, 319, 354, 357–360, 454, 490, 514, 694 voluntary, 65, 761 Pfandrecht, 651 Pflichtverletzung, 38, 381, 382, 538 Plurality of claims, 703–705 of creditors, 565, 568, 592–603 of debtors, 565–594, 597, 602, 663, 674, 675 of parties, 565–603 Positive interest (Positives Interesse), 198, 269, 272, 527, 535 Power of attorney, 121, 127–129, 131, 149 Pre-contractual liability, 198, 266, 273, 782 Prescription of claims, 720–723, 732, 733, 741, 752 claims subject to, 717–723 effect(s) of, 589, 709, 761–766 expiry of, 724, 761, 762 law of, 720, 746, 765, 766 periods of, 723–730, 739, 757, 766 rules of, 524, 720, 767 Price current, 372, 549–550 determination of, 313–315, 317 fair price, 211, 213

market, 174, 182, 212, 213, 260, 315, 519, 521, 526, 549–551 purchase, 316, 415, 428, 485, 621, 655, 669, 673, 731, 733, 764, 765 reasonable, 313–318, 321, 322, 325 reduction, 376, 378, 383, 384, 386, 388–390, 402, 403, 408, 411, 412, 434, 437, 465, 488, 489, 509, 522–526, 539 right to reduce, 522–526 stated, 80–82 Private international law, 2, 3, 12–14, 19, 20, 293 Professional supplier, 80, 297–300, 302, 303, 305 Professional’s written confirmation, 62, 106–107 Promise binding promise, 45, 304, 464 contractual, 58, 172, 180, 266, 540, 542 gratuitous, 57, 79 to pay, 365, 366, 557–559 to perform, 470, 475, 539 unilateral, 22–23, 78–80, 278, 279, 335, 336, 378, 452, 473, 783 Proof, burden of, 25, 103, 138, 194, 207, 216, 218, 224, 225, 232, 247, 264, 324, 390, 458, 482, 529, 537, 551, 558, 730, 736 Property immovable, 7, 148, 371, 669, 671, 680, 682 industrial, 512 intellectual, 114–116, 512 movable, 454, 606 real, 454, 720, 726–727, 786 recovery of, 511–512, 515 re-transfer of, 509, 512, 515 return of, 506, 509 rights, 115, 252, 363, 512, 660, 720, 726 tangible, 370, 461, 512 transfer of, 165, 253, 261, 617, 678, 726, 777, 790, 792

830

Index Proposal, 80–82, 109, 118, 179, 686, 766 Public policy, 4, 12, 13, 214, 320, 323–325, 470, 766, 769, 779, 780 R Rate of exchange, 366–368, 561, 563, 699, 700, 711 Ratification by principal, 151 Reasonable alternative, 206–208, 210 belief, 126, 129, 413, 415–417, 473, 504 doubt(s), 503, 504, 642 expectations, 327, 328 grounds for believing, 193, 194 length, 328–329, 332, 360, 423, 424, 426, 428, 430, 478, 479, 496 period, 18, 36, 48, 151, 154, 329, 330, 341, 342, 396, 404, 405, 408, 410, 423–426, 429, 430, 472, 475, 479, 495, 497, 498, 523 person, 31, 62, 126, 208, 275, 277, 278, 281, 294, 307 price, 313–318, 321, 322, 325 prospect of set-off, 692, 694–695 quality, 328 reliance, 25, 193, 194, 534 standards of fair dealing, 25, 175 term(s), 144, 314, 324–326, 370, 452 time, 89, 94–96, 99, 100, 133, 134, 141, 143, 144, 147, 156, 246, 247, 249, 357–359, 361, 368, 369, 400, 402, 404, 405, 407, 413, 414, 416, 417, 425, 434, 438, 455, 458, 494–497, 499–501, 525, 549, 550, 635, 721, 722, 746 Reasonableness, standard of, 252, 307, 310, 319, 323, 488 Recovery for benefits, 515–516 of damages, 191, 194, 267, 327–328, 339, 377, 381–386, 425, 427, 438, 448, 458, 522, 525, 528, 529, 549, 552

of money paid, 511 for performance that cannot be returned, 511–513, 518–521 of property, 511–512, 515 Rejection of an offer, 86–88, 91, 93 Release of the debtor, 383, 457, 587, 665 Reliance interest, 180, 183, 192, 197, 198, 204, 210, 241, 243, 252, 266, 268, 269, 470, 528 Reliance loss, 180, 181, 183, 186, 187, 190, 298, 304, 471 Remedy(ies) of avoidance, 198 for breach, 114, 274, 331, 361, 381 change of, 386–390 choice of, 376, 383, 386, 430, 496, 498 conflicting, 408, 412, 413, 423 cumulation of, 385–388, 390 exclusion of, 272 incompatible, 386–390, 428, 496 for non-performance, 175, 181, 191, 198, 272–274, 335, 364, 366, 377, 401, 408, 411, 412, 415, 417, 421–422, 443–445, 451–563, 626 for price reduction, 522, 524 restitutionary remedy, 262, 511 restriction of, 270–272 Representation active, 132 application of rules on, 149, 150 categories of, 122–125 conditions of, 131, 133 direct, 122, 123, 125–162 indirect, 122–124, 132, 133, 161–166, 311 passive, 132, 133 Rescission of (a) contract (s), 196, 243, 252, 262 rules for, 255, 259 Responsibility creditor’s, 384 debtor’s, 241, 432, 439, 440, 442, 443, 447 for incorrect information, 191–192, 194, 197

831

Index mixed, 377–378, 384 Restitution of benefits, 454, 509, 513 claims of, 252, 253, 711, 776–777, 779 and damages, 114, 115, 196, 255, 260, 261, 267, 269, 461, 498–500, 506, 507, 511, 520, 523, 525, 528, 537, 544, 775, 776 principle of, 511 rules on, 515, 775 Restitutionary claim, 260, 266, 525, 537, 777–780 Retroactive effect, 252, 334, 505, 508, 511, 619, 620, 622, 630, 659, 671, 676, 791 Retrospective effect, 686, 688, 693, 709–711, 765, 772 Revocation for non-performance, 35, 36 of (an) offer, 83–85 of the third party’s right, 334, 336–337, 339 Risk of accidental destruction, 253 of accidental loss, 261 allocation of, 170, 172–173, 175, 347 contractual, 170, 175, 236, 347 of delay, 46, 97, 248, 355 of impossibility, 170, 173, 175 of loss, 46, 355, 438, 453, 563 of the mistake, 173, 176, 180 own risk, 85, 542, 731 shift of, 47, 105 Rücksichtnahmepflicht, 461 S Schuldübernahme, 621, 669 Scope of application of the PECL, 13, 19, 20, 22, 609 Set-off by agreement, 694, 701–703, 712–714 declaration of, 630, 645, 647, 648, 693–696, 700–703, 709, 710

effect of, 583, 675, 686, 690, 693, 694, 702, 703, 709–712, 765 enforcement function of, 685, 694 exclusion of right of, 712 insolvency, 687, 689, 692 nature of, 687, 693 by notice, 583, 688, 693–695, 701, 703, 704, 706–709, 713, 714 possibility of, 691–692, 695, 698, 710, 712 requirements for, 686–695, 701–703, 709, 711 right to, 223, 625, 627, 628, 630, 645–648, 674, 675, 687, 701, 712, 744, 763 Sicherungsabtretungen, 610 Silence as acceptation, 89, 91 and/or inactivity, 62, 63, 88–90 in response, 18, 38 Simulation, 169, 310–313, 515 Solidarity of claims, 593 clause of, 566 in contractual obligations, 572, 574, 575 passive solidarity, 602, 603 presumption of, 572–575 Solidary obligations effect of judgment in, 587–588, 602 merger in, 583, 584, 602 prescription in, 589–590, 602 rules on, 575 Specific performance claiming, 387, 439, 442 concept of, 456, 459 doctrinal structure of, 456 enforcement of, 733 exclusion of, 468 limitations on, 466 refuse, 171 remedy of, 382, 458 right to, 171, 333, 388, 389, 423, 427, 455, 463, 607

832

Index Standard of reasonableness, 252, 307, 310, 319, 322, 323, 328, 465, 488, 545 Stipulation contractual, 179, 354, 358 of damages, 556–559 grossly excessive, 556 for non-conformity, 559–560 for non-performance, 559 Störung der Geschäftsgrundlage, 460, 463 Subagency, 147–150 Subagent appointment, 148 effects of acts of, 148, 150 liability, 148, 150 Substitution assignment and substitution, 366, 534, 618, 619, 621, 656, 660, 661, 664, 666–668, 681–684 effects of, 671–673 of a new debtor, 662, 682 parallel substitution, 682 right of, 700 T Telecommunication, 37 Termination agreement, 209, 682 of authority, 159 conditions for, 274, 482, 484, 502 of the contract, 227, 455 effects, 329, 511, 785 for non-performance, 274, 482, 491, 502 by notice, 329–332, 437 notice of, 169, 232, 387–389, 413, 414, 426, 441, 494–499, 501, 584, 588, 590, 593, 638 partial, 437, 489–493, 511 right to, 26, 189, 274, 346, 347, 376, 383, 389, 391, 392, 394, 397–399, 401–403, 406, 407, 411, 412, 415, 419–424, 426, 428, 429, 434, 436, 442, 443, 461, 463, 478–480, 482,

484–492, 494–505, 507, 511, 517, 519, 523, 526, 536, 567, 596, 621, 720, 721 rules on, 262, 482 time of, 331, 504–505, 549, 550 Textual form, 33, 34, 69–71, 107, 108, 637, 638 Threat of an act, 205–207 illegitimacy of, 208–209 incidental, 207, 211 unlawful, 207–210 Time limits/limitation, 48, 84, 89, 94–97, 245–249, 251, 267–269, 331, 405, 499–501, 523, 532, 573, 668, 672, 702, 703, 722 Time of performance, 319, 354, 357–360, 454, 490, 514, 694 Tort(s) tort law, 196, 204, 210, 260, 261, 312, 340, 434, 542, 544, 754 Transfer of claim, 518, 606, 608–610, 616–618, 620, 647, 681, 726 of ownership, 124, 146, 259–260, 765 of property, 165, 253, 261, 455, 511, 617, 678, 726, 727, 777, 790, 792 of rights, 607–609, 612, 680, 682, 707–708 Trennungsgrundsatz, 610 Treu und Glauben, 280, 614 U Unascertained claims, 691, 695–698, 765 Undue influence, 212, 287 Unfair contract, 168–169, 217, 320, 444, 445 Unfairness effects of, 239 legal consequences of, 236, 249 standards of, 226–227 test, 222, 225, 226

833

Index Unilateral determination, 318–320, 323, 325 Unilateral juridical act, 59, 344, 345, 674 Unjust enrichment claim(s) for, 256, 257, 761 and contract law, 216, 412, 515, 516, 639, 664, 678, 710, 711, 779 restitution of, 252 rules on, 253, 255–257, 259, 260, 262, 264, 365, 710, 777 Unlawfulness, 203, 205, 209 Unmöglichkeit anfängliche Unmöglichkeit, 629–630 nachträgliche Unmöglichkeit, 630 Unreasonableness, 321, 324, 456, 487, 776 Usages and practices, 15–19, 40, 41, 202, 306, 315, 318, 327 V Validity of contracts, 446, 460, 467, 469, 470, 616–618

Venire contra factum proprium, 27, 73, 76, 78, 190, 250, 423, 430 Verlängerter Eigentumsvorbehalt, 653 Vertrauensinteresse, 528 Vis major cases of, 736, 748, 749 legal consequences of, 748 meaning of, 748 Vorteilsausgleichung, 537 W Warranty(ies), 627–631 Withdrawal concept of, 84 declaration of, 498, 677 right of, 85, 189, 228, 261, 346, 595–596 simultaneous, 44 timely, 87, 91, 93 Withholding of performance, 414, 417, 471–472, 475, 503–504, 636 Written statement(s), 31, 32, 301

834

EUROPEAN MONOGRAPH SERIES 1. Lammy Betten (ed.), The Future of European Social Policy, 1991 (ISBN 90-6544585-4). 2. Annemarie Loman, Kamiel Mortelmans, Harry H.G. Post & Stewart Watson, Culture and Common Law: Before and After Maastricht, 1992 (ISBN 90-654-4638-9). 3. John A.E. Vervaele, Fraud against the Community: The Need for European Fraud Legislation, 1994 (ISBN 90-654-4634-6). 4. Philip Raworth, The Legislative Process in the European Community, 1993 (ISBN 90-654-4690-7). 5. Jules Stuyck, Financial and Monetary Integration in the European Economic Community, 1993 (ISBN 90-654-4718-0). 6. Jules Stuyck & A.J. Vossestein (eds), State Entrepreneurship, National Monopolies and European Community Law, 1993 (ISBN 90-654-4773-3). 7. Jules Stuyck & A. Looijestijn-Clearie (eds), The European Economic Area EC-EFTA, 1994 (ISBN 90-654-4815-2). 8. Rosita B. Bouterse, Competition and Integration: What Goals Count?, 1995 (ISBN 90-654-4816-0). 9. René Barents, The Agricultural Law of the EC: An Inquiry into the Administrative Law, 1994 (ISBN 90-654-4867-5). 10. Nicholas Emiliou, Principles of Proportionality in European Law: A Comparative Study, 1996 (ISBN 90-411-0866-1). 11. Eivind Smith, National Parliaments as Cornerstones of European Integration, 1996 (ISBN 90-411-0898-X). 12. Jan H. Jans, European Environmental Law, 1996 (ISBN 90-411-0877-7). 13. Síofra O’Leary, The Evolving Concept of Community Citizenship: From the Free Movement of Persons to Union Citizenship, 1997 (ISBN 90-411-0878-5). 14. Laurence W. Gormley (ed.), Current and Future Perspectives on EC Competition Law, 1983 (ISBN 90-411-0691-X). 15. Simone White, Protection of the Financial Interests of the European Communities: The Fight against Fraud and Corruption, 1998 (ISBN 90-411-9647-1). 16. Morten P. Broberg, Broberg on the European Commission’s Jurisdiction to Scrutinise Mergers, 4th Edition, 2013 (ISBN 978-90-411-3339-7). 17. Doris Hildebrand, The Role of Economic Analysis in the EC Competition Rules: The European School, 2nd Edition, 2002 (ISBN 90-411-1706-7). 18. Christof R.A. Swaak, European Community Law and the Automobile Industry, 1999 (ISBN 90-411-1140-9).

EUROPEAN MONOGRAPH SERIES 19. Dorthe Dahlgaard Dingel, Public Procurement: A Harmonization of the National Judicial Review of the Application of European Community Law, 1999 (ISBN 90-411-1161-1). 20. John A.E. Vervaele (ed.), Compliance and Enforcement of European Community Law, 1999 (ISBN 90-411-1151-4). 21. Martin Trybus, European Defence Procurement Law: International and National Procurement Systems as Models for a Liberalized Defence Procurement Market in Europe, 1999 (ISBN 90-411-1167-0). 22. Helen Staples, The Legal Status of Third Country Nationals Resident in the European Union, 1999 (ISBN 90-411-1277-4). 23. Damien Geradin (ed.), The Liberalization of State Monopolies in the European Union and Beyond, 1999 (ISBN 90-411-1264-2). 24. Katja Heede, European Ombudsman: Redress and Control at Union Level, 2000 (ISBN 90-411-1413-0). 25. Ulf Bernitz & Joakim Nergelius (eds), General Principles of European Community Law, 2000 (ISBN 90-411-1402-5). 26. Michaela Drahos, Convergence of Competition Laws and Policies in the European Community, 2002 (ISBN 90-411-1562-5). 27. Damien Geradin (ed.), The Liberalization of Electricity and Natural Gas in the European Union, 2001 (ISBN 90-411-1560-9). 28. Gisella Gori, Towards an EU Right to Education, 2001 (ISBN 90-411-1670-2). 29. Brendan P.G. Smith, Constitution Building in the European Union, 2001 (ISBN 90-411-1695-8). 30. Friedl Weiss & Frank Wooldridge, Free Movement of Persons within the European Community, 2nd Edition, 2007 (ISBN 978-90-411-2545-3). 31. Ingrid Boccardi, Europe and Refugees: Towards an EU Asylum Policy, 2002 (ISBN 90-411-1709-1). 32. John A.E. Vervaele & André Klip (eds), European Cooperation Between Tax, Customs and Judicial Authorities, 2001 (ISBN 90-411-1747-4). 33. Wouter P.J. Wils, The Optimal Enforcement of EC Antitrust Law: Essays in Law and Economics, 2002 (ISBN 90-411-1757-1). 34. Damien Geradin (ed.), The Liberalization of Postal Services in the European Union, 2002 (ISBN 90-411-1780-6). 35. Nick Bernard, Multilevel Governance in the European Union, 2002 (ISBN 90-4111812-8). 36. Jill Wakefield, Judicial Protection through the Use of Article 288(2) EC, 2002 (ISBN 90-411-1823-3). 37. Sebastiaan Princen, EU Regulation and Transatlantic Trade, 2002 (ISBN 90-4111871-3).

EUROPEAN MONOGRAPH SERIES 38. Amaryllis Verhoeven, The European Union in Search of a Democratic and Constitutional Theory, 2002 (ISBN 90-411-1872-1). 39. Paul L.C. Torremans, Cross Border Insolvencies in EU, English and Belgian Law, 2002 (ISBN 90-411-1888-8). 40. Malcolm Anderson & Joanna Apap (eds), Police and Justice Cooperation and the New European Borders, 2002 (ISBN 90-411-1893-4). 41. Christin M. Forstinger, Takeover Law in EU and USA: A Comparative Analysis, 2002 (ISBN 90-411-1919-1). 42. Antonio Bavasso, Communications in EU Antitrust Law: Market Power and Public Interest, 2003 (ISBN 90-411-1974-4). 43. Fiona G. Wishlade, Regional State Aid and Competition Policy in the European Union, 2003 (ISBN 90-411-1975-2). 44. Gareth Davies, Nationality Discrimination in the European Internal Market, 2003 (ISBN 90-411-1998-1). 45. René Barents, The Autonomy of Community Law, 2003 (ISBN 90-411-2251-6). 46. Gerhard Dannecker & Oswald Jansen (eds), Competition Law Sanctioning in the European Union, 2004 (ISBN 90-411-2100-5). 47. Nauta Dutilh (ed.), Dealing with Dominance: The Experience of National Competition Authorities, 2004 (ISBN 90-411-2211-7). 48. Stefaan van den Bogaert, Practical Regulation of the Mobility of Sportsmen in the EU Post Bosman, 2005 (ISBN 90-411-2327-X). 49. Katalin Judit Cseres, Competition Law and Consumer Protection, 2005 (ISBN 90-411-2380-6). 50. Philipp Kiiver, The National Parliaments in the European Union: A Critical View on EU Constitution Building, 2006 (ISBN 978-90-411-2452-4). 51. Alexander Turk, The Concept of Legislation in European Community Law, 2006 (ISBN 978-90-411-2472-2). 52. Dimitrios Sinaniotis, The Interim Protection of Individuals before the European and National Courts, 2006 (ISBN 978-90-411-2498-2). 53. M. Holoubek & D. Damjanovic, M. Traimer (eds), Regulating Content: The European Regulatory Framework for the Media and Related Creative Sectors, 2006 (ISBN 978-90-411-2597-2). 54. Anneli Albi & Jacques Ziller (eds), The European Constitution and National Constitutions: Ratification and Beyond, 2006 (ISBN 978-90-411-2524-8). 55. Gustavo E. Luengo, Regulation of Subsidies and State Aids in WTO and EC Law: Conflicts in International Trade Law, 2007 (ISBN 978-90-411-2547-7). 56. Eniko Horvath, Mandating Identity: Citizenship, Kinship Laws and Plural Nationality in the European Union, 2007 (ISBN 978-90-411-2662-7).

EUROPEAN MONOGRAPH SERIES 57. Rass Holdgaard, External Relations Law of the European Community: Legal Reasoning and Legal Discourses, 2007 (ISBN 978-90-411-2604-7). 58. Jill Wakefield, The Right to Good Administration, 2007 (ISBN 978-90-4112697-9). 59. Dimitry Kochenov, EU Enlargement and the Failure of Conditionality: Pre- accession Conditionality in the Fields of Democracy and the Rule of Law, 2008 (ISBN 978-90-411-2696-2). 60. Despina Mavromati, The Law of Payment Services in the EU: The EC Directive on Payment Services in the Internal Market, 2008 (ISBN 978-90-411-2700-6). 61. Anne Meuwese, Impact Assessment in EU Lawmaking, 2008 (ISBN 978-90-4112720-4). 62. Ulf Bernitz, Joakim Nergelius & Cecilia Cardner (eds), General Principles of EC Law in a Process of Development, 2008 (ISBN 978-90-411-2705-1). 63. Johan van de Gronden (ed.), The EU and WTO Law on Services: Limits to the Realisation of General Interest Policies within the Services Markets?, 2008 (ISBN 978-90-411-2809-6). 64. Alina Tryfonidou, Reverse Discrimination in EC Law, 2009 (ISBN 978-90-411-2751-8). 65. Mikael Berglund, Cross-Border Enforcement of Claims in the EU: History Present Time and Future, 2009 (ISBN 978-90-411-2861-4). 66. Theodore Konstadinides, Division of Powers in European Union Law: The Delimitation of Internal Competence between the EU and the Member States, 2009 (ISBN 978-90-411-2615-3). 67. Mattias Derlén, Multilingual Interpretation of European Union Law, 2009 (ISBN 978-90-411-2853-9). 68. René Barents, Directory of EU Case Law on the Preliminary Ruling Procedure, 2009 (ISBN 978-90-411-3150-8). 69. Yan Luo, Anti-dumping in the WTO, the EU and China: The Rise of Legalization in the Trade Regime and its Consequences, 2010 (ISBN 978-90-4113207-9). 70. Patrick Birkinshaw & Mike Varney (eds), The European Union Legal Order after Lisbon, 2010 (ISBN 978-90-411-3152-2). 71. Thomas Gr. Papadopoulos, EU Law and Harmonization of Takeovers in the Internal Market, 2010 (978-90-411-3340-3). 72. Bas van Bockel, The Ne Bis In Idem Principle in EU Law, 2010 (978-90-4113156-0). 73. Veljko Milutinovic´, The ‘Right to Damages’ under EU Competition Law: From Courage v. Crehan to the White Paper and Beyond, 2010 (978-90-411-3235-2).

EUROPEAN MONOGRAPH SERIES 74. Amandine Garde, EU Law and Obesity Prevention, 2010 (978-90-411-2706-8). 75. Leonard Besselink, Frans Pennings & Sacha Prechal (eds), The Eclipse of the Legality Principle in the European Union, 2011 (978-90-411-3262-8). 76. Sacha Garben, EU Higher Education Law: The Bologna Process and Harmonization by Stealth, 2011 (978-90-411-3365-6). 77. Dimitry Kochenov (ed.), EU Law of the Overseas: Outermost Regions, Associated Overseas Countries and Territories, Territories Sui Generis, 2011 (978-90-4113445-5). 78. Pablo Ibáñez Colomo, European Communications Law and Technological Convergence: Deregulation, Re-regulation and Regulatory Convergence in Television and Telecommunications, 2012 (978-90-411-3829-3). 79. Elise Muir, EU Regulation of Access to Labour Markets: A Case Study of EU Constraints on Member State Competences, 2012 (978-90-411-3823-1). 80. Tim Corthaut, EU Ordre Public, 2012 (978-90-411-3232-1). 81. Oana S ¸tefan, Soft Law in Court: Competition Law, State Aid and the Court of Justice of the European Union, 2013 ( 978-90-411-3997-9). 82. Francesco Rossi dal Pozzo, Citizenship Rights and Freedom of Movement in the European Union, 2013 (978-90-411-4660-1). 83. Jens Hartig Danielsen, EU Agricultural Law, 2013 (978-90-411-3280-2). 84. Ulf Bernitz, Xavier Groussot & Felix Schulyok (eds), General Principles of EU Law and European Private Law, 2013 (978-90-411-4683-0). 85. Michelle Everson, Cosimo Monda & Ellen Vos (eds), European Agencies in between Institutions and Member States, 2014 (978-90-411-2843-0). 86. Stefan Leible & Matthias Lehmann (eds), European Contract Law and German Law, 2014 (978-90-411-2588-0).

The newest volume in Kluwer’s series of comparative analyses of Member State law and the Principles of European Contract Law (PECL), this book not only provides a comparison of the PECL with German law, but also takes into account the Draft Common Frame of Reference (DCFR). The latter incorporates the PECL and adds special rules that respond to current needs, notably in the area of consumer protection. Using a straightforward comparative method, the analysis reveals a significant area of convergence but also highlights the main differences between the PECL, the DCFR and German contract law. The reasons for these differences, both legal and non-legal (historical, social, economic), are clearly set forth. Aspects of the relevant laws covered include the following: –– –– –– ––

–– ––

The articles of the PECL (all parts) and the DCFR are explained individually and then contrasted with the corresponding provisions of German law. The commentary provides a comprehensive description of the law in action as well as its evolving trends. Extensive references to German case law and legal doctrine at all essential points are included. The book is a valuable guide for both non-German and German lawyers. For non-German lawyers, be they practitioners or academics, it may serve as a concise but complete and up-to-date outline of current German contract law. For German lawyers, it offers a clear insight into a wider system of contract principles which is rapidly evolving into a common European contract law.

ISBN 978-90-411-2588-0

EUROPEAN MONOGRAPHS

–– –– ––

scope of application, general duties, terminology; offer and acceptance, liability for negotiations; effects of assignment; remedies for non-performance (right to performance, withholding performance, termination of the contract, price reduction, damages and interest); representation by agents; plurality of debtors and/or creditors; order of priority among assignee and competing claimants; transfer of contract or contractual position; and periods of prescription.