1. The right to avoid the contract

It is commonly accepted in Caribbean legal systems that defects of the consent of a contractual party does not immediately void the contract. Defects of consent, on the contrary, enable the aggrieved party to avoid the contract, which is effective until that right is exercised. Legal systems provide for the right to avoid the contract in various ways. Some of them, inspired by the French Civil Code (Article 1.304), do not distinguish between voidness and avoidability and they provide for an action in nullity, although in cases of defects of consent only the aggrieved party is entitled to exercise this right (Article 1.304 of the Dominican Civil Code; Article 910 of the Haitian Civil Code; Article 1.253 of the Puerto Rican Civil Code; Article 925 of the Saint Lucian Civil Code; Article 1.346 of the Venezuelan Civil Code). In other legal systems, the expression “relative nullity” is related to defects of consent (Article 1.741 of the Colombian Civil Code; Article 836 of the Costa Rican Civil Code; Article 1.587 of the Honduran Civil Code; Article 2.227 and 2.230 of the Mexican Civil Code; Article 2.201 of the Nicaraguan Civil Code or Article 1.144 of the Panamanian Civil Code), due to the influence of the French doctrine, which created the concept in order to set absolute nullity against another kind of nullity (or “rescission” under some of these civil codes) restricted to the entitled parties whose interests are protected by the rule. This doctrine approach was crystallised in the Proposals for Reform of the French law on obligations of 2013 (Article 89).

For its part, English law distinguishes between void and voidable contracts, the latter being subject to the power of avoidance, so that cases of innocent or fraudulent misrepresentation entitle the aggrieved party to avoid or rescind the contract (Article 1 Misrepresentation Act 1967 or Article 2 Bermuda Law Reform Act 1977). The same applies to threats [Ting v Borelli (2010), 79 WIR 204] or undue influence [decision of the Supreme Court of Jamaica in Turnbull & Co v Duval (1902), AC 429]. The Guatemalan Civil Code (Articles 1.257 and 1.303) also uses the term “avoidability” in cases of contracts subject to defects of consent. More recently, Dutch and Suriname Civil Code considers as avoidable contracts concluded under threat, fraud or abuse (Article 3:44) or mistake (Article 6:228) and Cuban Civil Code provided that mistake, fraud and threat are causes of voidness of the contract at the request of the aggrieved party (Articles 73 y 74). Regardless of conceptual divergences, there is uniformity in the characterisation of contracts affected by defects of consent as merely voidable at request of the aggrieved party, in contrast with void contracts.

An apparently discordant note in this uniformity comes from the treatment of some forms of mistake in common law, which leads to voidness instead of avoidability of contracts. However, such discordance is more apparent rather than real: as detailed in the commentary to Article 3.4.1 of these Principles, these special cases of common mistake that void the contract are not standard cases of mistake-defect under the civil law tradition. Thus, the case of common mistake called res extincta, which happens where the object of the contract disappears before the contract's conclusion without the parties' knowledge and determines the voidness of the contract (Section 6 Sale of Goods Act of 1979; Section 8 Sale of Goods Act of Montserrat; Section 8 Sale of Goods Act of Antigua and Barbuda; Section 8 Sale of Goods Act of Bahamas; Section 8 Sale of Goods Act of Trinidad and Tobago; Section 8 Sale of Goods Act of Belize; Section 7.1 Sale of Goods Act of Jamaica), as well as cases of mistake “res sua”, which occurs where the buyer does not know that it is already the owner of the sold goods [Abraham v Oluwa (1944), 17 NLR 123], are considered in these Principles as cases of initial impossibility (Article 3.1.3). Therefore, the right to avoid the contract provided in this Article does not apply to these cases. Likewise, the case of mutual mistake, where each party operates under a radical misunderstanding concerning a contract or object, is not considered in this Principles as a case of defect of consent giving a power of avoidance, but as a case of absence of consent (Article 3.1.1).

A more precise characterisation of hypotheses covering each defect of consent that would entitle a party to avoid the contract is found in the description of these defects in Section 4 of Chapter 3 of these Principles and, likewise, in Article 2.3.6 in relation to contracts concluded by the agent in cases of conflict of interests with the principal.

2. Avoidance by notification

There are two different legal traditions in the Caribbean legal systems concerning the manner in which the right to avoid the contract is implemented.

On the one hand, tradition inspired by French law considers that a contract cannot be avoided by a mere notification, but requires a judicial action brought by the aggrieved party in a more or less short time, which ends with a judicial decision stating the voidness of the contract. Besides Article 1.304 of the French and Dominican Civil Code, this approach is followed by Cuban Civil Code (Article 114) and Venezuelan Civil Code (Article 1.346), which establish a limitation period for the avoidance action of five years; Colombian Civil Code (Article 1.750), Costa Rican Civil Code (Article 841), Honduran Civil Code (Article 1.593), Nicaraguan Civil Code (Article 2.208), Panamanian Civil Code (Article 1.151) and Puerto Rican Civil Code (Article 1.253), which provide for a period of four years; Guatemalan Civil Code, which provides for a period of two years in cases of fraud and mistake (Article 1.312) and of one year in cases of duress or serious threat (Article 1.313); and Mexican Civil Code, which establish periods of sixty days in cases of mistake and six months in cases of duress (Articles 2.236 y 2.237). A rare case is found in Haitian Civil Code, which provides a period of ten years (Article 1.089), as well as Saint Lucian Civil Code (Article 2.119).

On the other hand, under the common law tradition the power of avoidance is exercised by a mere notification of the will to avoid the contract addressed to the other party without delay, although the time spent in negotiations to achieve an agreement is not considered [Erlanger v New Sombrero Phosphate Co (1978), 3 App. Cas. 1.218]. Likewise, the Dutch and Suriname Civil Code (Article 3:49) allows a-non judicial avoidance, but the period is extended for three years (Article 3:52). This model of non-judicial avoidance is also followed in international texts on contract law harmonisation (Article 3.2.11 UP; Article 4:113 PECL; Article II-7:209 and II-7:210 DCFR; Article 52 CESL).

The OHADAC Principles have preferred a non-judicial system of avoidance for many reasons. First, the self-monitoring system can help reduce procedural expenses and increase legal certainty by putting an end to the uncertainty specific to situations of avoidability. Moreover, it reinforces the position of the aggrieved party, given that the voidness is effective right from the notification and the aggrieved party has therefore the right to obtain the restitution of whatever has been performed and, in case of delay, to compensation. Furthermore, the system of non-judicial notification transfers the burden of litigation to the other party, given that once the avoidance is notified, if the other party wishes to demand the performance, it is obliged to sue before the courts and prove the validity of the contract. Lastly, as analysed below, the non-judicial avoidance system is perfectly compatible with legal systems that provide a mandatory judicial system of avoidance.

Obviously, the fact that the avoidance could be carried out by serving notice to the other party does not mean that the question of the ineffectiveness of the contract does not need to be resolved before a court or arbitral tribunal. These Principles take into account the fact that parties may disagree on the presence of a defect of consent. In this respect, without prejudice to the effectiveness of the declaration of avoidance, the choice of the Principles does not entail the parties' waiving of the right to act before courts in order to declare the contract as valid and enforceable because it is not affected by a defective consent under the applicable law or the agreement by the parties resulting from these Principles chosen by the Parties.

3. Period to exercise the right of avoidance

The OHADAC Principles propose a rule on the right to avoid the contract that aims as much as possible to reconcile the common law tradition, which allows avoidance by notice, and the civil law tradition, also widespread in Caribbean countries, which require a judicial action within a determined period. In this sense, on the one hand avoidance by non-judicial notice is possible; on the other hand, there is a determined period to exercise such a right, so that imprecise formulas that do not favour legal certainty, especially in a context of legal diversity, are disregarded. In order to establish the period to exercise the right to avoid the contract, the Principles have had to disregard the use of wordings such as “within a reasonable time, having regard to the circumstances” (Article 3.2.12 UP; Article 4:113 PECL; Article II- 7:210 DCR), which are not very compatible with or legal traditions.

However, the requirements of swiftness in international contracts as well as the need not to excessively extend the inherent uncertainty of avoidable contracts mean that the limitation period must be shorter than that envisaged in civil law systems. That is why the period proposed in these Principles is six months, which is the same as provided in cases of avoidance due to threat in Article 2.237 Mexican Civil Code. Likewise Article 52 CESL provides a period of six months in cases of mistake and one year in case of fraud, threat or abuse.

With respect to the time as from which the time available for exercising the right of avoidance is computed, the Principles take into account a common denominator in Caribbean countries. For example, the computation of the period to avoid a contract due to threat begins generally when the threat ends (e.g. Article 1.750 of the Colombian Civil Code; Article 841 of the Costa Rican Civil Code; Article 1.313 of the Guatemalan Civil Code; Article 3:52.b of the Dutch and Suriname Civil Code; Article 1.593 of the Honduran Civil Code; Article 2.237 of the Mexican Civil Code; Article 1.253 of the Puerto Rican Civil Code; Article 2119 of the Saint Lucian Civil Code; Article 1.346 of the Venezuelan Civil Code).

A common approach in case of mistake or fraud seems more controversial. Caribbean legal systems have three different periods that can determine the beginning of the period to avoid a contract. For some legal systems, this period is when the aggrieved party discovers the truth (Article 1.304 of the French and Dominican Civil Code; Article 1089 of the Haitian Civil Code; Article 2.236 of the Mexican Civil Code; Article 2.119 of the Saint Lucian Civil Code; Article 1.346 of the Venezuelan Civil Code and, more recently, in Dutch law, Article 3:52 Civil Code). In other legal systems, the period begins on the day the contract is concluded (Article 1.750 of the Colombian Civil Code; Article 841 of the Costa Rican Civil Code; Article 1.312 of the Guatemalan Civil Code, Article 1.593 of the Honduran Civil Code and Article 2.208 of the Nicaraguan Civil Code). Finally, in other cases the time of performance is preferred as the first day of the period (Article 1.151 of the Panamanian Civil Code and Article 1.253 Puerto Rican Civil Code). Even some civil codes provide that avoidability is not subject to any limitation period, as an exception to the general rule (Article 843 of the Costa Rican Civil Code; Article 1.595 of the Honduran Civil Code; Article 2.210 of the Nicaraguan Civil Code; Article 1.153 of the Panamanian Civil Code); such an approach is also implied in some systems that establish the moment of the conclusion of the contract as the beginning moment of limitation periods for contracts. For its part, in common law systems the right to avoid the contract is preserved while the aggrieved party does not know or should not have to know the truth in cases of fraudulent misrepresentation [Aaron's Reff Ltd v Twiss (1896), AC 273]. However, the point of view changes in cases of innocent misrepresentation, because the time passed after the contract's conclusion may be an obstacle to avoid the contract, even if the aggrieved party has not known the truth beforehand [Leaf v International Galleries (1950), 2 KB 86].

To overcome these differences, the Principles have considered that the beginning for the computation of the limitation period is the moment when the aggrieved party knew or should have known the truth. This rule is shared by the international texts on contract law harmonisation (Article 3.2.11 UP; Article 4:113 PECL; Article II-7:211 DCFR; Article 52 CESL). This is the solution that best protects the aggrieved party, because this party may exercise its right to avoid the contract from that moment. The same approach justifies the beginning of the period when undue influence ceased or, if it has not ceased, from the moment when the aggrieved party could freely act. In cases of conflict of interests between the agent and the principal, the initial moment is when the principal knew the conclusion of the contracts as well as the conflict of interests. The occasional delay of this moment in relation with the moment on the contract's conclusion is a source of uncertainty, which is in some way compensated through a short limitation period of six months, within which the aggrieved party must notify its will to avoid the contract to the other party.

4. Impact of international mandatory rules

The OHADAC Principles cannot prevent the application of national overriding mandatory rules on the right to avoid the contract (paragraph III of the Preamble). In exceptional cases, a national court may consider the overriding character of its rules or of the rules of the law applicable to the contract or even of a third state, establishing the mandatory need of a judicial procedure of avoidance, which cannot be waived. The choice of the Principles is not irrelevant in these cases. Both parties have recognised the effects of the avoidance notified within a period of six months, but this does not prevent from taking legal action for avoidance afterwards, within the mandatory period provided by the domestic law which is considered as overriding mandatory rule.

Example: A contract between a Colombian firm and a Cuban firm is submitted to Colombian Courts and to the OHADAC Principles. Colombian Law is also applied to the contract according to Colombian private international law rules. One of the parties argues that it agreed under mistake. According to Article 3.5.1 of the OHADAC Principles, this party may avoid the contract by notice to the other party within six months from the moment when it knew or should have known of the mistake. The notification implies the effects of avoidance set out in the Principles, insofar as they are compatible with the Colombian rules if they are considered as international mandatory rules. In that case, according to the Article 1.750 of the Colombian Civil Code and providing that mistake justifies the right to avoid a contract under Colombian law, the aggrieved party could sue Colombian courts to avoid the contract in a period of four years after the conclusion of the contract, even if more than six months have passed since it knew or should have known of the mistake.

Caribbean legal systems provide that the extinction of the right to avoid a contract by confirmation [Article 1.338 of the French and Dominican Civil Code Article 1.304 of the Guatemalan Civil Code; Article 3:55 of the Dutch and Suriname Civil Code; Article 2.233 of the Mexican Civil Code; Article 1.145 of the Panamanian Civil Code; Article 1.262 of the Puerto Rican Civil Code; Article 1.351 of the Venezuelan Civil Code; Scholey v Central Railway Co of Venezuela (1868), LR 9 Eq 2006], ratification (Article 1.752 of the Colombian Civil Code; Article 839 of the Costa Rican Civil Code; Article 1.591 of the Honduran Civil Code; Article 2.206 of the Nicaraguan Civil Code) or validation (Article 68.1 of the Cuban Civil Code). All these concepts refer to the express or implied declaration of intention of the party entitled to opt for its validity.

To ensure the convergence of rules relating to confirmation in Caribbean legal systems, the Principles have opted for the same approach as most of these legal systems: firstly, since confirmation is a unilateral act of the party entitled to avoid the contract, the participation of the other party is not necessary; secondly, confirmation is valid only if the cause of avoidability has ceased and therefore the aggrieved party acts with full freedom and knowledge; thirdly, confirmation may be express or implied. This is also the approach unanimously set out in international and European texts on contract law harmonisation (Article 3.2.9 UP; Article 4:114 PECL; Article II-7:210 DCFR; Article 53 CESL).

However, there remain some divergences, albeit perfectly reconcilable, between the rule set out in the OHADAC Principles and the rules relating to confirmation in some Caribbean legal systems.

First, some legal systems do not expressly provide that the cause of avoidability must have disappeared as a condition of an effective confirmation (Article 1.752 of the Colombian Civil Code; Article 1.338 of the French and Dominican Civil Code; Article 2.206 of the Nicaraguan Civil Code; Article 1.351 of the Venezuelan Civil Code). Such an omission does not contradict these Principles, because it can be easily inferred also in those legal systems that since confirmation is a voluntary act, to be valid, the cause of the avoidance must no longer exist.

Secondly, under these Principles and in accordance with the rule of freedom as to the form (Article 3.1.2), express confirmation is not subject to special formal requirements. It suffices that the will of the aggrieved party to validate the contract or to renounce the right to avoid has been expressed in any way, but not in concrete terms or under a special form. Under the Principles, this is a mere question of proof of the confirming will. However, some legal systems require that the confirmation is made with the same formal requirements of the confirmed contract (Article 1.753 of the Colombian Civil Code; Article 839 of the Costa Rican Civil Code; Article 1.305 of the Guatemalan Civil Code; Article 1.591 of the Honduran Civil Code; Article 2.206 of the Nicaraguan Civil Code; Article 1.145 of the Saint Lucian Civil Code]. This formal requirement does not create an insurmountable divergence in relation with the proposed rule in the OHADAC Principles, given that an express confirmation which does not respect some formal requirements may be effective as a tacit confirmation. That is also the case with some legal systems, which do not require a specific form of express confirmation (Article 1.338 of the French and Dominican Civil Code; Article 1.351 of the Venezuelan Civil Code).

Thirdly, some Caribbean legal systems limit the tacit confirmation to cases of voluntary performance by the aggrieved party of its contractual obligations (Article 1.754 of the Colombian Civil Code; Article 839 of the Costa Rican Civil Code; Article 1.304 of the Guatemalan Civil Code; Article 1.591 of the Honduran Civil Code; Article 2206 of the Nicaraguan Civil Code). In other cases, although this case is mentioned, other hypotheses of tacit confirmation are not expressly disregarded (Article 1.338 of the French and Dominican Civil Code and Article 90 of the Proposals for reform of the French law on obligations of 2013; Article 2.234 of the Mexican Civil Code; Article 1.351 of the Venezuelan Civil Code). On the contrary, the OHADAC Principles do not mention any kind of acts of the aggrieved party which necessarily imply the confirmation of the contract. The search for a lowest common denominator among the legal systems involved excludes the possibility of characterising some acts of confirmation, which are set out only in some domestic systems. Therefore, the tacit confirmation under the Principles is not immediately considered in relation with some kinds of acts considered in the abstract, but must be inferred from the actual behaviour of the aggrieved party, which reveals a will to renounce the contract according to the surrounding circumstances in each case. Even the voluntary performance of a contract, usually considered as a paradigmatic case of tacit confirmation, could exceptionally not be considered as a waiving of the right to avoid the contract, if the performance intends to avoid a greater harm, such as a penalty due to non-performance or the execution of a guarantee.

This flexible or open approach on tacit confirmation is compatible with the above mentioned legal systems, which restrict confirmation to cases of performance by the aggrieved party of its contractual obligations. Certainly, a domestic law of this kind cannot be disregarded by these Principles; that is why under such systems the performance of a contractual obligation by the party having the power to avoid the contract has the effect of a confirmation ope legis (by law). This does not contradict the possibility, by virtue of the choice of the Principles by the parties, to extend cases of tacit confirmation beyond the acts of performance of the aggrieved party to any acts able to reveal the will to renounce the avoidance of the contract (e.g. acceptation without objections of the performance of the other party, novation of the contract, resale of the goods received by virtue of an avoidable contract to a third party).

The principle on which contract avoidance rules are based in Caribbean legal systems is restitution ad integrum. This is the elimination of consequences of the contract for the parties, leaving them in the original condition as if the contract had not been concluded. This principle even becomes a rule in some legal systems (Article 1.746 of the Colombian Civil Code; Article 844 of the Costa Rican Civil Code; Article 1.596 of the Honduran Civil Code; Article 2.211 of the Nicaraguan Civil Code). According to this principle, the most significant consequence of contract avoidance is the obligation of each party to restore whatever it has received from the other party (Article 75 of the Cuban Civil Code; Article 1.314 of the Guatemalan Civil Code; Article 2.240 of the Mexican Civil Code; Article 1.154 of the Panamanian Civil Code; Article 1.255 of the Puerto Rican Civil Code). Likewise, Article 3:53.1 Dutch and Suriname Civil Code provides that avoidance has retroactive effect and refers to the duty to undo what has been done as the most important consequence of voidness (Article 3:53.2). In common law legal systems restitution of what has been received by both parties is also the most significant effect of voidness [decision of the Supreme Court of Bahamas in American British Canadian Motors Ltd v Caribbean Bottling Co Ltd (1973), No. 46 of 1971 (Carilaw BS 1973 SC 5)]. In French law, the effect of restitution in the avoided contracts derives from the right to claim the undue payment (Article 1.377 of the French and Dominican Civil Code) as well as in the Saint Lucian Civil Code (Article 979).

However, the intention to return the parties to the situation they would have been in if the contract had not been concluded requires more than a mere reciprocal restitution of the goods received. Legal systems must therefore resolve three questions: compensation for the benefits or profits that goods or services usually produce; reparation for damage caused to the goods and expenses incurred; material or legal impossibility of restitution of goods or services.

Some Caribbean legal systems expressly provide, as a natural consequence of the contract avoidance, the obligation to restitution of goods and any profit obtained from them as well as the restitution of the price and legal interests on money (Article 1.746 of the Colombian Civil Code; Article 1.154 of the Panamanian Civil Code; Article 1.255 of the Puerto Rican Civil Code). Likewise, the right to receive compensation due to the use of contractual goods by the other party [Hulton v Hulton (1917), 1 KB 813] or because the profits obtained through its exploitation [Erlanger v New Sombrero Phosphate Co (1978), 3 App.Cas. 1218)] is recognised at least in English equity law. Among the international texts on contract law harmonisation Article 172.2 of the CESL provides that the duty of restitution includes legal or natural fruits derived from what had been received.

The right to compensate normal fruits of goods or services received is compatible with legal systems which establish the retroactive effect of avoidance (Article 3:53 Dutch and Suriname Civil Code), insofar as compensation of profits can be considered an implied consequence of the retroactivity of avoidance. The same is applicable in legal systems which provide that the general effect of avoidance is to leave the parties in the same situation they would have been in if the contract had not been concluded (Article 844 Costa Rican Civil Code; Article 2.211 Nicaraguan Civil Code).

A divergent approach in relation with the OHADAC Principles can be found in legal systems which establish that the right to restitution of fruits and interests is limited to those produced from the time of the claim to avoidance, while the fruits produced until the claim are considered as compensated (Article 1.315 of the Guatemalan Civil Code; Article 1.603 of the Honduran Civil Code; Article 2.240 of the Mexican Civil Code). These rules actually provide a kind of compensation ex lege of the profits that the parties must return or receive until the time of the claim for avoidance. These rules do not seem incompatible with the Principles, which simply replace this legal compensation with a contractual compensation based on the right to compensate the actual value of the respective profits.

It seems more difficult to reconcile the rule of the OHADAC Principles with that of some Caribbean legal systems which only envisage the obligation to compensate the loss of profits or interests by the party acting in bad faith that is obliged to return the goods received. In cases of avoidable contracts, this party will be the party that has caused the avoidance or knows the cause of the avoidance, (Article 1.378 of the French and Dominican Civil Code and Article 981 of the Saint Lucian Civil Code). Likewise, Article 260 of the Proposals for Reform of the French law on obligations of 2013 states that the party acting in bad faith is obliged to restore the fruits and interests from the time it received the goods or the price, while the party acting in good faith is only obliged to return fruits or interests received after the avoidance claim. On the contrary, the OHADAC Principles conceive the consequences of avoidance from a compensatory and non-coercive perspective, as well as in Article 7.3.4, that is why good or bad faith is not considered. The application of the Principles when someone of these legal systems is the law applicable to the contract shall depend on the mandatory character attributed to the requirement of bad faith in the domestic legal systems concerned.

With respect to the quantification of profits, the Principles expressly refer to profits “reasonably” obtained. This means that profits will be measured objectively, in accordance with the normal productivity of goods or services. In other words, the right to restitution does not apply to profits actually produced by the goods when they were in the possession of the party obliged to restore. The party which delivered the goods is neither obliged to suffer the consequences of a defective administration from the other party nor, on the contrary, cannot enrich itself due to exceptionally skilled management. Hypothetical profits that could have been derived from the goods had it not been in the possession of the party obliged to restitution will also not be considered. With respect to the restitution of pecuniary obligations, the normal profit that the capital produces is interest, which shall be determined mutatis mutandis according to the comments on to Article 7.4.6 of these Principles.

Reparation due to damage or expenses of the goods is a question beyond contract obligations. With few exceptions (e.g. Article 1.746 Colombian Civil Code; Article 1.316 Guatemalan Civil Code) most legal systems do not consider it as a consequence of contract avoidance, but as a question of torts [Spencer v Crawford (1939), 3 AII ER 271, 288] or related to the transfer of possession to the owner. International texts of contracts harmonisation do not refer to this question as an effect of avoidance, either (Article 3.2.15 UP; Article 4:115 PECL; Article II-7:212 DCFR).

Finally, in some legal systems impossibility of restitution leads to a substitution of the obligation to restore in natura by the obligation to deliver the value of the goods or service [Article 75 Cuban Civil Code; Article 1.317 Guatemalan Civil Code, which refers to the value of the goods at the moment of contract conclusion; Article 1.259 Puerto Rican Civil Code, which states that the value must be determined in the moment when the goods perished). On the contrary, under Caribbean common law systems, the consequence of impossibility of restitution due to material reasons or by the transfer of the goods to a third party is the loss of the right to avoid the contract [decision of the High Court of Trinidad and Tobago in Montrichard v Franklin (1996), Carilaw TT 1996 HC 215]. The same solution is set out in the Dutch and Suriname Civil Code (Article 3:55.2): if it becomes too difficult to undo the consequences of the contract, courts may refuse the right to restitution, although the benefiting party must compensate the aggrieved party.

Like Article 7.3.4 in cases of termination of contract (whose comments are illustrative), the second paragraph of Article 3.1.5 follows the rule of compensation by equivalent, apart from those cases where the party which has the right to avoid the contract can prove the impossibility of restitution due to force majeure.