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Tuesday, Jan 25th 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 4.2.1

Construction of the contract

1. The content of contracts exclusively derives from the agreement of the parties.

2. Where the parties have not expressly agreed a contractual term that is decisive in determining their respective obligations, such a term can be inferred implicitly considering its objective reasonableness and the purpose of the contract.

1. Options for regulating the construction of contracts

This article deals with filling in contract gaps. Integration presupposes that the contract has been validly concluded. Therefore, the provisions of chapter 2 of these Principles must be particularly considered with respect to the minimum requirements for determining the object of the contract required to establish the conclusion of the contract. In many cases, a contract that initially incomplete or insufficiently determined may be deemed to be concluded simply because the parties have performed it. In other cases, regardless of this fact, the contract will be considered as concluded even though there are gaps concerning aspects with no impact on its conclusion. In all these cases, judges and arbitrators are faced with the need to make up for omissions by filling in gaps left by the negotiation of the parties.

As is the case for contract interpretation, there are two opposing approaches in comparative law for filling contract gaps and achieving contract integration. Civil law systems usually adopt a flexible criterion for contract integration, which provides in principle a latitude freedom to implement gap filling. This criterion is commonly stated in an “open texture rule” that incorporates a so-called “general clause” or principle. The most widespread principle in Caribbean civil codes states that contracts are binding not only in relation with contract terms expressly agreed by the parties but also by virtue of requirements derived from “good faith”, “equity” or from the “nature of the contract” itself [Articles 1.023 of the Costa Rican Civil Code; 1603 of the Colombian : 1.135 of the Dominican and French Civil Code; 1.546 of the Honduran Civil Code; 1.159 of the Guatemalan Civil Code; 925 and 926 of the Haitian Civil Code; 6:2 (6.1.1.2) and 6:248 (6.5.3.1) of the Dutch and Suriname Civil Code; 1.796 of the Mexican Civil Code; 2.480 of the Nicaraguan Civil Code; 1.109 of the Panamanian Civil Code; 1.210 of the Puerto Rican Civil Code; 956 of the Saint Lucian Civil Code; 1.160 of the Venezuelan Civil Code]. A similar rule is maintained in Articles 3, 11 and 103 of the Proposals for Reform of the French law on obligations of 2013. The same principle is known in the USA (Sections 1-203 UCC and 205 of the Second Restatement). Articles 1.621.II Colombian Civil Code and Article 1.160 of the Dominican and French Civil Code follow the same criterion by presuming that clauses that are commonly used in a contract shall be filled even if they have not been expressed.

Conversely, English law uses the “implied-in-law terms” doctrine to fill contract gaps. To some extent, this common law doctrine seems rather similar to the civil law approach: the “implied-in-law” terms that are contract obligations imposed by law, custom or case law coincide with the general requirement of civil law systems of subjecting the contract beyond contract terms to any legal mandatory obligation. However, the question is controversial as far as the method used in filling gaps in the broader sphere of obligations subject to the free will of parties is concerned. In this respect, English courts have recourse to “implied-in-fact terms”, that are contractual terms not expressed by the parties but reasonable and above all necessary for the contract to work and to make business sense. Caribbean common law systems follow the traditional criteria of English case law (“officious bystander test” and “business efficacy test”), as demonstrated for instance in decisions of the High Court of Trinidad and Tobago in Costa v Murray and Murray (Carilaw TT 1977 HC 82) and Pierre v Port Authority of Trinidad and Tobago (Carilaw TT 1969 HC 23), the latter being a decision referring to the obligation of transporting goods safely and appropriately as an implied term that does not need to be expressed.

The difference between general clauses in civil law and implied terms in common law lies in the specific criteria for the inference of non-express obligations. Whereas civil law points preferably to fairness criteria such as good faith or equity, English law is rather based on mere contract efficiency, validating implied obligations that are indispensable for the contract to work or to have business sense (reasonability) regardless of whether or not they are fair and of their axiological basis. Such a trend is obvious, for instance, in the decision of the Privy Council (Saint Lucia) in Marcus v Lawaetz (Carilaw LC 1986 PC 2). However, as it has been pointed out in the commentary to Article 4.1.2, although there is a recent trend in English law to consider good faith as a canon for contract interpretation or integration, such an approach remains controversial.

The two approaches mentioned above seem to work together, but only apparently. In some cases, they are both found in the most recent international texts on contract law, but in a confusing manner. Thus, UNIDROIT Principles opt for a special rule (Article 4.8) providing an appropriate solution through the intent of the parties, the aim and nature of the contract, general criteria as good faith and fairness, and even the most pure “common sense”. However, it must be stressed that the same indications are used in Article 5.2 UP to define “implied terms”. If both articles and their commentaries are compared, there is no appreciable distinction between a gap filled under Article 4.8 UP and an implied obligation determined with similar criteria under Article 5.2 UP. But in fact if there is an implied term there is no room for gaps, so that Article 4.8 UP would never be actually applied.

In this sense, the proposed regulation in Article 6:102 PECL is more consistent. Under the section “implied terms”, PECL state a unique principle for contract integration. To some extent, the terminology is closer to English law, but an essential difference about the sources of implied terms remains: intent of the parties, nature and object of the contract, and good faith. With minimal variations, the PECL model of regulation is followed in Articles II-9:101 DCFR and 68 CESL, which introduce the notable feature of excluding such integration if the parties have deliberately left a gap risk, thus accepting the risk of so doing. In this case, the literality of contract will prevail.

2. Minimum rule

Drafting of a convergent rule on integration of contract between Caribbean civil and common law systems is today considered unfeasible.

The rule proposed is consciously vague and open, to enable the incorporation of the two prevailing cultures, insofar as it does not prevent or require the necessary incorporation of non-agreed obligations inspired by good faith or equitable principles to determine the reasonableness of a term in the light of contract aims. It must be noted, on the one hand, that many civil law systems are characterised by case law actually reluctant to modify parties' agreement on the ground of justice arguments, especially in sophisticated trade spheres. On the other hand, it must be stressed that Article 4.1.1 prevents the modification of the contract when the terms are clear. Strictly speaking, the proposed rule does not force English law's reluctance to accept good faith and also it does not prevent its consideration. It can therefore be accepted by all the legal systems involved without significantly increasing the risk of divergence of solutions, given the actual diversity of criteria derived from the integration criteria within domestic courts themselves.

Otherwise, if the contract parties are interested in incorporating expressly a rule for equitable integration of the contract inspired by the good faith principle, they may opt to introduce a specific clause in the contract, whose enforceability will be recognised by courts and arbitrators from legal systems inspired by English law.

GOOD FAITH CLAUSE

“This contract will be interpreted in accordance with the requirements of good faith. Each party shall observe good faith towards the other party and hereby warrants that in its dealings with the other it shall not perform any act or omission, which may prejudice or detract from the rights, potential assets or interests of the other party. Each party shall co-operate with the other party to the fullest extent in assisting each other to the benefit of both parties.”

Commentary

Article 4.2.2

Modification in a particular form

1. Where parties have agreed on a particular form to modify or terminate the contract, modification or termination of the contract shall not be made in another form.

2. However, the parity whose statements or conduct have induced the other party to act reasonably based on that conduct shall be bound by its own acts and precluded from invoking this Article.

With this type of clause, parties are seeking to prevent acts or statements made or issued during the performance of the contract from being considered as a change in the contract terms, unless they take a particular form. The use of these clauses is especially useful when the contract is governed by civil law systems, which make it easier to infer obligations not included in the contract or changes based on the true intent of the parties, which may be appreciated from subsequent behaviour. The rule proposed in this article is similar to that contained in Article 29.2 CISG and in Article 2.1.18 UP. Rules in the PECL (Article 2:106) and in the DCFR (Article II-4: 105) set the rule in a weaker form.

The exception in second paragraph intend to avoid unreasonable effects of the clause when one of the parties, through their conduct, makes statements or acts that reasonably induce the other party to accept or act in accordance with that conduct, involving a modification of the conditions included in the contract.

Example 1: Company A, located in San Juan, Puerto Rico, concludes a contract with Company B, located in Guadalupe, for the construction and turnkey delivery of an industrial facility. The contract, besides a “no oral modification clause”, incorporates an obligation of technical assistance to train A's technicians in the operation of the installation. The contract provides that this training should take place on A's premises. Later, A writes a message to B stating that it considers that it is more appropriate that the training be carried out on B's premises in Guadalupe. Based on this statement, B prepares all processes and requirements in its facilities in order to deliver the agreed training. Two days before the due date, A asks that B gives the training in accordance with what was agreed in the contract. B can invoke A's conduct to justify its refusal to carry out the training obligation on A's premises, offering to provide training in Guadalupe.

The limitation is supported in civil law systems based on the doctrine of actos propios (“own acts”), and in the U.S. by virtue to promissory estoppel doctrine (Section 90 Restatement (Second) of Contracts). The position of English law, however, is more restrictive [Hughes v Metropolitan Rly (1877), 2 AC 439, 448; Esso Petroleum Co Ltd v Alstonbridge Properties Ltd (1975), WLR 1474]. It is estimated that the institution of estoppel can be invoked, as in the example, to be exempted from an obligation under the contract, but not to enforce an obligation not agreed in the contract.

Example 2: company A, established in Mexico, concludes a contract to supply foodstuffs to Company B, located in Havana, including a no oral modification agreement. The contract provides a clause that the delivery of the containers must be carried FOB to Havana. Company B requests A to make a specific delivery to the port of Santiago de Cuba. Company A agrees, and the request is repeated for the next two deliveries. A refuses a fourth request, because a delivery at a different harbour as the agreed creates additional problems and extraordinary expenses. B could not claim from A an obligation not agreed in the contract based on English law. Hypothetically, B could do so under other systems and the rule established in these principles, although in the case seems unlikely to deduce from the proper acts of A that B could reasonably have been led to believe in a change of the place of delivery for all future deliveries.

In any case, the rule cannot be separated from the general rules of contract interpretation in Section 1 of Chapter 4 of these Principles, which inevitably will allow a margin of flexibility according to the legal culture of the courts or arbitrators.

Commentary

Article 4.2.3

Merger clause

The content of the contract cannot be modified or completed by previous statements or agreements if the parties have included a clause stating that the contract contains all terms agreed upon by the parties. However, such statements or agreements may be used to interpret the content of the contract.

Merger clauses are often used in international contracts to avoid that statements made by the parties during the negotiation phase, when they exchange proposals, drafts or projects, are invoked to infer from the contract, obligations not included in the final document or to alter or modify the contents of the contract as it has finally been drafted. They are especially indicated in the contracts with complex and long negotiable phases, where parties produce and exchange many messages, drafts, letters of intent, etc. These merger clauses are especially useful when the contract is governed by a civil law system or by U.S. law, because such systems can support more easily the possibility to create obligations under statements outside the contract, given that courts can determine the intent of the parties through both written statements and other extrinsic evidence [Section 209 (3) Restatement (Second) of Contracts]. When parties include a merger clause, the effect that such statements outside the formal contract can produce in relation within the alteration or the modification of what finally is featured in the contract as obligations of the parties is restricted.

Merger clauses are also important in English law, even if a wide role is recognised to the parol evidence rule, because although it is presumed that the written documents contain all the terms of the contract, this presumption may be refuted if there is proof that the parties did not intend for the written document to be the only source of obligations for the parties, but that their oral statements could be invoked as a source of collateral obligations. Outside the contract, English law does not prevent the parties from agreeing on collateral or additional obligations, including orally. However, to the extent that there is a tension between formalist and contextualist approaches around the interpretation of the contract and that the courts may apply this rule differently, the inclusion of this clause is recommended. The merger clause then serves as a mechanism for refusing collateral obligations other than the written contract [J Evans & Son (Portsmouth) Ltd v Andrea Mezario Ltd (1976) 2 All ER 930].

The possible ambiguity of the contract may be considered differently by courts. The merger clause prevents statements, offers and proposals of the parties that are not included in the text of the final contract to be recognised as mandatory or contractual, but do not limit the interpretative effect of these statements, as a contextual element that can be taken into account on the basis of the provisions of Article 4.1.2 of these Principles. Indeed, when the obligations provided in the final contract raise interpretative problems because they are ambiguous or obscure, the statements made by the parties outside the formal contract can be taken into consideration, not to introduce new obligations, but to interpret the meaning of obligations included in the contract. This is recognised, for example, in Section 217 of the Restatement (Second) of Contracts, in Section 2-202 UCC, in Article 2.1.17 UP, in Article 72 CESL, and it has been maintained in Article 8 CISG.

Articles 2:105 PECL and II-4:104 DCFR require that to be effective, the merger clause must be negotiated individually, if the parties want to prevent prior agreement from producing obligations not included in the written contract or to deprive those agreements and declarations of interpretative scope. It was not considered appropriate to include this special rule in the OHADAC Principles, so that if the integration clause is incorporated into the contract as a standard term, effectiveness will depend on the conditions referred to in Article 2.1.9 of these Principles. Certainly, to enhance the effectiveness of these clauses it is advisable that they are not incorporated in the standard terms of the contract, but as individually negotiated terms, since its scope makes it easily capable of being viewed as unreasonable conditions.

Commentary

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OHADAC principles on international commercial contracts.pdf