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Tuesday, May 24th 2022

The ACP Legal Association

  • OHADAC and ACP Legal

    The partisans of this project, called OHADAC (Organisation for the Harmonisation of Business Law in the Caribbean), decided to meet within the framework of the association ACP Legal, to help interested Caribbean States to implement the project.

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  • OHADAC in brief

    This brochure has been published by the ACP Legal Association.

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OHADAC PRINCIPLES ON INTERNATIONAL COMMERCIAL CONTRACTS

Article 3.1.1

Validity of mere agreement

A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement.

Under the OHADAC Principles on International Commercial Contracts, the mere agreement of the parties is sufficient for the valid conclusion, modification or extinction of the contract, without any further requirements. This rule distinguishes the OHADAC Principles from most Caribbean legal systems inspired by Article 1.108 of the French Civil Code, which require, aside from the consent of the parties, additional conditions of validity of the contracts, such as a legal and possible object and the existence of “cause” (e.g. Article 1.502 of the Colombian Civil Code; Article 1.108 of the Dominican Civil Code; Article 1.552 of the Honduran Civil Code; Articles 1.872 and 2.447 of the Nicaraguan Civil Code; Article 1.112 of the Panamanian Civil Code; Article 1.213 of the Puerto Rican Civil Code; 1.141 of the Venezuelan Civil Code). The Principles differ also from English Law in this point, insofar as in common law systems the mere exchange of promises is not sufficient to conclude a contract, because the intention of the parties to create a legal relationship and, particularly, the presence of consideration are conditions generally required. A very particular case is the Santa Lucian Civil Code, which combines civil law and common law traditions in Article 923, considering “cause” and “consideration” as synonymous.

Nevertheless, the OHADAC Principles follow a trend observed in European and international legislation on contract law harmonisation, which only require the consent of the parties to be valid (Article 3.1.2 UP), or at most include the additional requirement that parties must intend to be legally bound (Article 2:101 PECL; Article II-4:101 DCFR; Article 30 CESL). Likewise, the Dutch and Suriname Civil Code only require the intent of the parties for a contract to be valid (Article 6:217).

In the Proposals for Reform of the law of obligations (2013), cause is no longer a condition of contract validity (Article 85). Some Caribbean civil law systems have also excluded cause from the list of conditions of contract validity (Article 1.251 of the Guatemalan Civil Code; Article 1.794 of the Mexican Civil Code).

The historical origin of both cause and consideration is closely linked to the distinction between gifts and contracts (gratuity or onerous character of obligations), which are of little significance in international commercial contracts. Furthermore, as conditions of contract validity, the two concepts have always been ambiguous and even irritating. They are included in domestic legal systems only because they fulfil certain functions that are nonetheless completely superfluous, especially in the field of international trade.

On the one hand, cause has served as a check for agreements that pursue illegal goals. In cross-border contracts, this function is channelled through the application of national and international mandatory rules (Article 3.3.1 of these Principles). The same applies to the illegality of the purpose.

On the other hand, the requirement of cause as a condition of contract validity aims to exclude the legal effectiveness of apparent agreements if the parties have no actual intention to be bound. It therefore has the same function as “intention” in common law. This role usually refers to effectiveness of commitments and agreements in the family or social sphere, but has a lesser impact in international trade. At any event, the role of cause and consideration is also not justified, because the question of whether or not there has been an agreement between the parties is a matter of interpretation, which must be resolved in accordance with the rules set out Section 1, Chapter 4 of these Principles. Thus, it is not necessary to add another condition to the agreement of parties to deprive simulated contracts of effectiveness if it is deemed that an apparent agreement is not an agreement and that, consequently, where there is simulation there is no consent and, therefore, no contract. Likewise, when a party is threatened with physical violence, the contract lacks consent, and the case is not treated as a defect of consent and invalidates the contract in accordance with Article 3.1.1. Consequently, in the OHADAC Principles, the condition of the true intent to be bound is subject to the sole condition of the existence of an agreement and the very notion of “agreement”.

The fact that the cause and consideration do not determine the validity of the contract does not mean that these two notions are not significant for other purposes. For example, the purpose of the contract or the consideration are the basis of many rules, such as the rule provides for the rescission of the contract due to frustration of purpose (Article 6.3.2) or those determining the essential breach of contract (Article 7.1.2).

Finally, the Principles opt for a personal characterisation of contracts, excluding specific kinds such as that related to “real contracts”, which require additional requirements of validity, generally related to acts of disposal or transfer of goods. Such categories have clearly fallen into disuse, so that the OHADAC Principles align themselves with the predominant trend both in comparative and international law.

Commentary

Article 3.1.2

No requirements as to form

Contracts will be enforceable regardless of the form of conclusion.

This Article states the principle of validity of the contract regardless of the form, which is consistent with the principle that validity of contract only depends on an exchange of declarations of intention through offer and acceptance. Consequently, a contract is valid regardless of the form of conclusion and its existence is a simply a question of proof of declarations of intention.

The freedom of form principle is generally admitted in comparative law. Caribbean systems of civil law tradition usually recognise it expressly [e.g. Articles 1.008 of the Costa Rican Civil Code; 411 of the Costa Rican Commercial Code; 50 of the Cuban Civil Code; 1.574 of the Guatemalan Civil Code; 3:37 and 6:226 (6.5.2.9.) of the Dutch and Suriname Civil Code; 1.574 of the Honduran Civil Code; 1.796 of the Mexican Civil Code; 2.448 y 2.449 of the Nicaraguan Civil Code; 1.230 of the Puerto Rican Civil Code; 1.355 of the Venezuelan Civil Code). Article 79 of the Proposals for the Reform of the Law on Obligations prepared by the French Ministry of Justice in 2013 is in the same sense. English Law also maintains the principle of no requirements as to form (Beckham v Drake, 1841, 9 M & W, 79, 92; Article 4 Sale of Goods Act 1979), as well as the USA law (Section 3 Restatement Second on Contracts). The same principle is included in Articles 11 CISG; 1.2 up; 2:101 (2) PECL; II-1:106 DCFR; and 6 CESL.

All legal systems, however, have exceptions to this principle and sometimes require some form as a mandatory condition of validity of certain contracts. Such contracts are named “solemn” in civil law and this expression is common in several civil codes (e.g. Articles 1.007 and 1.009 of the Costa Rican Civil Code; 411 of the Costa Rican Commercial Code; 1.500 of the Colombian Civil Code; 1.577 of the Guatemalan Civil Code; 1544 of the Honduran Civil Code; 2.228 Mexican Civil Code; 7 Proposals for the Reform of the Law on Obligations, 2003). In Section 6 of the Restatement (Second) on Contracts they are known as “formal contracts”.

In some cases, it is difficult to distinguish between cases where a formal requirement is effectively a condition of validity of the contract and cases where it is a condition that produces non-contractual effects, such as the acquisition of a right in rem, transfer of ownership or the constitution of a company. However, in all the legal systems there are clear cases where a formal requirement (written, notary document, etc.) are conditions of contract validity that lead to nullity if they are not observed. In civil law Caribbean systems is usual to find written or public document requirements as validity conditions for contracts on immovable assets, companies, deposit, agency or simply over certain amount (e.g. Articles 51, 339, 396.3 and 424 of the Cuban Civil Code; 1.575 of the Guatemalan Civil Code; 1.575 of the Honduran Civil Code; 2.319 and 2.690 of the Mexican Civil Code; 2.483 and 3.182 of the Nicaraguan Civil Code; 931, 1.347, 1.348, 1.834 and 2.127 of the French and Dominican Civil Code; 1.131 and 1.358 of the Civil Code; 1.232 of the Puerto Rican Civil Code).

Common law also has significant exceptions. On one hand, in gratuitous contracts or contracts without consideration, the mandatory formal requirement (deed) is an alternative to consideration. On the other hand, some written rules have introduced formal requirements for some contracts, which could be called “solemn”. This is the case of the requirement of deeds in hiring immovable property (Sections 52 and 54 of the Law of Property Act of 1925), of written form in obligations related to negotiable instruments (Sections 3 and 17 of the Bill of Exchange Act of 1882), security interests [Bill of Sales Act 1878 (Amendment) Act of 1882], sales of immovable property (Section 2 of the Law of Property Act of 1989), or “note of memorandum” in guarantees (Article 4 of Statute of Frauds of 1677). Given that such requirements are stated in written law, in many cases they are applied in the Commonwealth countries by incorporation in specific acts, such as Section 47 Property Act, Cap. 236 (Barbados); Section 43 (1) Property Act, Cap. 192 (Belize); Section 4 (1) Conveyancing and Law of Property Act, Ch. 10:04 (Saint Kitts and Nevis); and Section 4 (1) Conveyancing and Law of Property Act, Cap. 26:01 (Trinidad and Tobago); Section 6 (1) Sale of Goods Act (Ch 393) of Antigua and Barbuda; Section 6 (1) Sale of Goods Act (Ch 15.18) of Montserrat; Section 6 (1) Sale of Goods Act (Ch 337) of Bahamas; Section 6 (1) Sale of Goods Act (Ch 83:30) of Trinidad and Tobago; Section 6 (1) Sale of Goods Act (Ch 261) of Belize; Section 5 (1) Sale of Goods Act of 1895 of Jamaica Contracts in Writing Act of Antigua and Barbuda, Ch 100. Likewise, Caribbean case law of common law countries shows precedents about the mandatory presence of these formal requirements as a condition for the validity of the contract [e.g. Court of Appeal of Jamaica in Singer Sewing Co v Montego Bay Co-operative Credit Union Ltd (1997), 34 JLR, 251]; Court of Appeal of Cayman Islands in Strada Investments Ltd v Temora Investment Ltd (1996, CILR, 246); Privy Council in Elias v George Sahely & Co (Barbados) Ltd (1982, 3 WLR, 956). In US law, formal requirements are required in contracts under seal, settlements, bills of exchange and negotiable instruments (Section 3 UCC).

The principle of freedom of form in the OHADAC Principles does not prevent the consideration of formal requirements that condition contract validity in domestic laws. In many cases, such requirements are overriding mandatory rules from an international point of view and can therefore be taken into account or applied under Paragraph III of the Preamble. Thus, the law of the country where an immovable property is located or the law of the country where the company has its registered office may be applied if it deals with contracts relating to immovable goods or companies located in their country. Given the impact of such a choice on the OHADAC Principles, a court may decide to restrict the effects of the principle of freedom of form set out in these Principles when the domestic law applicable to the requires a specific mandatory form. This possibility is all the more important when there is a close link between the contract and domestic law. In particular this is the law that applies in the absence of choice.

Commentary

Article 3.1.3

Initial impossibility

The mere fact that at the time of the conclusion of the contract the performance of the obligation was impossible does not affect its validity. However, parties may invoke the rules on impossibility (force majeure).

Impossibility of contract performance and, more accurately, of the contract's object has traditionally been considered as a reason for nullity or non-existence of the contract (impossibilium nulla obligatio est). This rule is expressly set out in most Caribbean civil codes (e.g. Articles 1.518 of the Colombian Civil Code; Articles 627 and 631 of the Costa Rican Civil Code; 1.599 and 1.601 of the Dominican and French Civil Code; 1.564 of the Honduran Civil Code; 1.827 of the Mexican Civil Code; 1.832 of the Nicaraguan Civil Code; 1.123 of the Panamanian Civil Code; 1.224 of the Puerto Rican Civil Code; Article 70 of the Proposals for Reform of the French law on obligations, 2013).

However, the most recent legal texts prefer a rule similar to the one set out in the OHADAC Principles, which dispel any doubt, not only about the validity of contracts on future goods or on goods that are not in the parties' hands at the time of conclusion of the contract, but also about the validity of obligations that are materially, personally or legally impossible at the time of conclusion of the contract (Articles 3.1.3. UP; 4:102 PECL; II-7:102 DCFR).

These Principles set out the rules of validity of the contract. If the parties did not know about or could not have foreseen that the object or contract performance was not impossible, the Principles do not opt for the doctrine of mistake. This is the approach in USA and English law, where initial impossibility radically voids the contract only if it is the result of a mistake by the parties arising from a material (res extincta) or legal (res sua) impossibility at the time of conclusion of the contract [Couturier v Hastie (1856), 5 HL Cas. 673; Abraham v Oluwa (1944), 17 NLR 123].

Conversely, the approach proposed in these Principles aims to apply general rules on contract non-performance, including the rules on impossibility or force majeure (Article 7.1.8). The Principles establish a broad notion of force majeure, which can be invoked in cases of unforeseen subsequent circumstances, but also when unforeseen circumstances existed impossible at the time of conclusion of the contract and they were not and could not be known by the parties at that time. In this sense, the Principles introduce a distinction between initial impossibility and mistake, which is not very clear in the international texts of harmonisation of contract laws currently adopted.

If the parties are aware or should have known of the impossibility of the object or of the contract's performance and still decide to conclude the contract, it is inferred that they assume the risk of non-performance of the contract due to impossibility and will comply with general rules on the determination of non-performance and the remedies to be applied. Aside from the fact that this approach respects to a large extent the autonomy of parties in international commercial contracts, it also prevents the ineffectiveness of contracts that play on speculative calculations about technical developments and the evolution of circumstances foreseen at the time of conclusion of the contract.

Example 1: Building firm X, who is the owner of land not authorised for construction, concludes a contract undertaking to build an office building and sell it to a services firm within five years. The performance is legally impossible at the time of conclusion of the contract, but the builder is confident of the change of legal regime of lands in the near future and assumes the risk of non-performance if the impossibility remains and it is unable to deliver the building on time.

Example 2: Firm X manufactures electrical engines and promises firm Y, a car manufacturer, to deliver within a period of five years a batch of engines capable of certain technical achievements and reaching a level of output that is currently non-viable in the state of the art. However, the contract is valid, insofar as firm X is aware of the state of the art and is confident that its design and development department will soon achieve a prototype able to perform the required specifications.

Example 3: A plane rental firm rents a specific luxury jet to carry the senior management of a petrol firm. The contract is impossible because the jet had an accident thirty minutes before the conclusion of the contract, and the rent-a-plane firm does not know and cannot know of this accident. The contract is valid, but the plane rental firm can argue “impossibility” and notify the contract's termination with no responsibility for damages.

Commentary

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OHADAC principles on international commercial contracts.pdf