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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 5.1.1

Contracts for an indefinite period

1. Each party may end a contract involving continuous or periodic performance of obligations unilaterally, at any time and without invoking any cause, by giving a reasonable period of notice.

2. Whenever the reasonable period of notice is observed, the party who decides to end the contractual relationship must only compensate the other party for the reasonable expenses that it has already made towards the performance of the contract.

Legal systems render the obligations null and void sine die. Historically, civil codes tended to include a provision related to the leasing of services, in which lifelong procurement is prohibited, some of which still exist (Article 1.780 French and Dominican Civil Code; Article 1.550 Haitian Civil Code; Article 1.754 Honduran Civil Code; Article 2.995 Nicaraguan Civil Code; Article 1.335 Panamanian Civil Code; Article 1.569 Saint Lucian Civil Code).

However, it is generally admitted that the parties enter into a contract in which no expiry date has been agreed, and this does not result from its nature or circumstances either, or in which it is expressly established that the contract will remain in effect for an indefinite period. The validity of these contracts is generally dependent, both in the civil law or continental as well as in the common law systems, on the parties being able to be released by unilateral will (with or without a period of notice). Thus, for example, the French Civil Code expressly establishes in its Article 1.780 that one person may engage his services only for a definite period; consequently, the leasing of services without any determination of duration will always be able to end through the will of any of the contracting parties. And we find a similar provision in Article 1.755 Honduran Civil Code.

This power of unilateral withdrawal from the contract is an exception to the principles of enforceability and irrevocability of contracts (Article 1.2 OHADAC Principles and its commentary), for contracts concluded for an indefinite period.

The legal systems of the OHADAC territory, without containing a general rule on the withdrawal from contracts outside the sphere of consumer law, if they govern this for certain contracts that are made to last, such as, for example, construction contracts (Article 1.794 French and Dominican Civil Codes; Article 2.011 Guatemalan Civil Code; Article 7:764 Dutch and Suriname Civil Codes; Article 1.346 Panamanian Civil Code; Article 1.639 Venezuelan Civil Code); the company (Article 1.246 Costa Rican Civil Code; Article 1.865 Dominican Civil Code; Articles 1.844.7º French Civil Code; Article 1.634 Haitian Civil Code; Article 1.879 Honduran Civil Code; Article 2.720 Mexican Civil Code; Article 3.285 Nicaraguan Civil Code; Article 1.391 Panamanian Civil Code; 1.591 Puerto Rican Civil Code; 1.673 Venezuelan Civil Code); agency contracts (Article 2.189 Colombian Civil Code; Article 1.278 Costa Rican Civil Code; Article 409 Cuban Civil Code; Article 2.003 French and Dominican Civil Codes; Article 1.717 Guatemalan Civil Code; Article 1.767 Haitian Civil Code; Article 1.911 Honduran Civil Code; Article 2.595 Mexican Civil Code; Article 3.345 Nicaraguan Civil Code; Article 1.423 Panamanian Civil Code; Article 1.623 Puerto Rican Civil Code; Article 1.655 Saint Lucian Civil Code; Article 1.704 Venezuelan Civil Code); the service contract in general (Article 7:408 Dutch and Suriname Civil Code); and commercial commissions or mandates (Article 1.279 Colombian Commercial Code; Article 197 Puerto Rican Commercial Code).

The codes of the Caribbean countries of the civil law or continental tradition also tend to provide that if no particular expiry date of a contract concluded for an indefinite period has been agreed, the parties may end it through a notice of termination, by giving a sufficient period of notice. Thus, they provide, for contracts for the lease of goods, Articles 1.151 Costa Rican Civil Code, 7:228.2º Dutch and Suriname Civil Code, 1.717 Honduran Civil Code, 2.478 Mexican Civil Code, 1.322 Panamanian Civil Code, 1.560 Saint Lucian Civil Code and Article 1.615 Venezuelan Civil Code; for commercial supply contracts, Articles 977 Colombian Commercial Code and 802 Honduran Commercial Code; for commercial hosting Articles 1.197.2º Colombian Commercial Code and 871 Guatemalan Commercial Code; and for agency contracts Article 7:437 Dutch and Suriname Civil Code.

In the same manner, Anglo-American law permits the release in contracts for an indefinite period (provision of consultancy, supply, licensing services ...), granting the parties the power to terminate the contract unilaterally, without the need to cite any reason and without the need to give a period of notice either if this has not been agreed [Baird Textile Holdings Ltd v Mark & Spencer (2001), EWCA Civ 274; Crediton Gas Co v Crediton Urban Council (1928), Ch. 147 44; Jani King (GB) Ltd v Pula Enterprises Ltd (2007), EWHC 2433 QB (2008); Servicepower Asia Pacific Pty Ltd v Service-power Business Solutions Ltd (2009) EWHC 179 (2010); sections 3:06 (5) and 3:10 Restatement (Third) of Agency; section 118 Restatement (Second) of Agency]. However, English case law has determined that unless the agreement contains a clause in which the parties are expressly granted the power of withdrawal, this will not in all cases be present in the contract as an implied term, unless the “presumption of perpetual duration” can be applied in the contracts in which there is no determination of the contract's duration [Llanelly Ry & Dock Co v L & NW Ry (1875), LR 7 HL 550].

Articles 5.1.8 UP, 6:109 PECL and III-1:109 (2) DCFR provide for the power of withdrawal in contracts concluded for an indefinite period, always with the obligation to give a reasonable period of notice.

Accordingly, the notice of termination or withdrawal is regulated as the most usual form of termination of contracts for an indefinite period, without the need to cite any reason and give a reasonable period of notice, for the purpose of avoiding the disadvantages resulting from the exercise of the power, in paragraph 1 of the proposed rule in these OHADAC Principles. The withdrawal by giving a reasonable period of notice aims to balance the interests of both contracting parties: the interest of the party that wishes to be released from the contract as well as that of the contracting party that prefers its continuation, due to having made investments with a view to its performance, which will only be profitable for it if the contract lasts for a determined period of time, or due to it being difficult for it to conclude a similar alternative contract with another party immediately.

The proposed rule aims to “fill a gap” in connection with the common law legal systems which, excluding agency contracts, do not contain a provision that imposes the period of notice, nor can they infer this as an implicit term of the contract [Baird Textile Holdings Ltd v Mark & Spencer (2001), EWCA Civ 274].

The reasonable nature of the period of notice will depend on numerous factors, including the nature and purpose of the contract, the time that it has lasted, the reasonable investments that have been made, the economic situation and any other circumstances existing at the time of the exercise of the withdrawal, etc. However, the variety of the situations that may exist make it advisable in some contracts for the parties to establish the period through a contractual clause, in order to avoid problems of interpretation.

Example 1: The financier A hires the legal services of the professional law firm B for an indefinite period. Either of the parties can withdraw unilaterally from the contract by giving notification to the other party a reasonable period beforehand.

The period of notice has a legal nature as an obligation, whose non-performance gives rise to compensation. In effect, as stated in paragraph 2 of the proposed rule, the party that withdraws from the contract in compliance with of the period of notice granted will only have to compensate the reasonable expenses that the other contracting party has incurred for the purpose of the performance of contract, and which they were not able to avoid despite the period of notice (normally due to being prior investments).

However, the party that does not comply with the period of notice disregards the interests of the counterparty, and is obliged to pay damages for non-performance of contract, in accordance with the provisions of Section 4 of Chapter 7 of these Principles.

Example 2: In the facts of example 1, if the constructor decides to terminate the contract with the professional law firm B, without communicating this to it by giving sufficient notice beforehand, it must pay damages not only for the reasonable investments that B has made with a view to the performance, but also for the resulting loss of profits, for example, resulting from the rejection of other clients, and other expenses resulting from the non-performance for which damages would be payable in accordance with these Principles.

Finally, unilateral withdrawal, as the ordinary manner of terminating a contract concluded for an indefinite period, should not be confused with the case of hardship provided in Article 6.3.1 of these Principles. In the case of hardship, unforeseen circumstances determine that the performance becomes excessively disproportionate for one of the parties, which will be able to terminate the contract without the need to observe a period of notice (or renegotiate this if this has been agreed). However, the rule of this provision does not require a change of circumstances, since this is a withdrawal ad nutum whose only requirements are the existence of a contract for an indefinite period and the observance of a period of notice.

CLAUSES ESTABLISHING A PERIOD OF NOTICE

As has been noted, sometimes it is appropriate to include in the contract a clause in which the parties determine the adequate period of notice, which prevents the contracting parties from compensating the damages related to the confidence in the performance of the contract.

Option A: Clause with a period of notice in contracts for a definite period

“The parties may terminate this contract, by unilaterally withdrawing from the same and without the need to invoke any reason, by giving a written period of notice with a duration of (...).”

Option B: Clause with a period of notice in contracts for an indefinite period

“At any time during the contract period, the parties are empowered to withdraw unilaterally from the same, without the need to invoke any reason, by giving a written period of notice equivalent to one month per year of the contract period, with a maximum period of six months.”

Commentary

Article 5.1.2

Contracts for a definite period

1. Where, in a contract involving continuous or periodic performance of obligations, the parties have determined the period of duration, the contract terminates at its expiry.

2. However, if one party has given notice to the other expressing its intention to renew the contract, the party who does not wish to renew must notify the other of its decision within a reasonable time before the expiry of the contract.

3. Where a contract involving continuous or periodic performance of obligations for a definite period continues to be performed after that period has expired, it becomes a contract for an indefinite period.

This provision is applied to contracts involving continuous performance whose contract period has been determined by the parties and it is provided that, at the end of the said period, the contract will be extinguished.

The general rule in the systems of the OHADAC territory is extinction through compliance with the agreed term in the long-term contracts (for the lease of goods, this is provided in Articles 2.008 Colombian Civil Code, 1.737 French and Dominican Civil Codes, 1.928 Guatemalan Civil Code, 1.508 Haitian Civil Code, 7:228.1 Dutch and Suriname Civil Codes, 1.716 Honduran Civil Code, 2.483 Mexican Civil Code, 1.455 Puerto Rican Civil Code, 1.561 Saint Lucian Civil Code and 1.599 Venezuelan Civil Code; for partnership agreements, this is included in Articles 1.237 Costa Rican Civil Code, 1.865 Dominican Civil Code, 1.844.7 French Civil Code, 1.634 Haitian Civil Code, 1.879 Honduran Civil Code, 2.685 and 2.720 Mexican Civil Code, 1.391 Panamanian Civil Code, 1.591 Puerto Rican Civil Code and 1.673 Venezuelan Civil Code; for commissions, in Articles 2.189 Colombian Civil Code, 1.278 Costa Rican Civil Code, 2.003 French and Dominican Civil Codes, 1.717 Guatemalan Civil Code, 1.767 Haitian Civil Code, 2.595 Mexican Civil Code, 1.423 Panamanian Civil Code, 1.623 Puerto Rican Civil Code and 1.704 Venezuelan Civil Code; for commercial hosting, Articles 1.197 Colombian Commercial Code and 871 Guatemalan Commercial Code).

However, some codes provide for contracts of lease that if, at the contract period, the hirer remains in possession of the goods with the approval of the hire company, the contract is understood to be renewed and is converted into a contract for an indefinite period, and the rules governing these will henceforth be applied to them (Article 1.738 French and Dominican Civil Code; Articles 1.507 Haitian Civil Code; Article 7:230 Dutch and Suriname Civil Code). And they also regulate the tacit renewal upon the expiry of the period established for the lease, the Articles 392.1 of the Cuban Civil Code, 1.888 Guatemalan Civil Code, 1.456 Puerto Rican Civil Code 1.600 and 1.614 Venezuelan Civil Code.

Likewise, in common law, the continuation of the execution of contract at the end of the agreed contract period, involves its renewal, and it can be terminated through withdrawal by one of the parties, even though nothing has been agreed [Winter Garden Theatre (London) Ltd v Millenium Productions Ltd (1948), AC 173].

Despite this preference for tacit renewal in the civil law or continental legal systems, in paragraph 2 of the proposed provision it has been decided not to have the automatic renewal of the contract. On the contrary, the regulations formulated rely on the will of the contracting parties, by establishing the possibility that one of them demonstrates to the other its intent to continue the contractual relationship, and if the latter does not wish to do this, they must notify this within a reasonable period before the expiry of the contract.

Example 1: A agrees to distribute B's products in the country X for five years. Six months before the expiry of the contract, A notifies to B its intention to renew the distribution contract, which B is opposed to, hence communicating this to A within 15 days of having received that notification.

If the decision against the renewal of the contract is not communicated to it within a reasonable period, the contracting party that has demonstrated its interest in the continuation may rely on it.

Example 2: In the facts of example 1, once four months have passed from the date of the notification, without having received notification from B objecting to the renewal, A will be able to rely on the contract being renewed and will organise its future performance for that purpose.

The projected solution is based on the greatest possible respect for the free will of the contracting parties, instead of forcing the application of some rigid legal standards, which only make sense if there is a weak party to be protected. This system of renewal is the same one which is also stated in Article 1:301 (2) of the European Principles on Commercial Agency, Franchise and Distribution Contracts.

Once the contracting party has received from the other party the notification of its wish to renew the contract, the consideration of the reasonableness of the period for communicating the decision not to renew the contract will depend, among other things, on the time of the receipt of the notification, the nature and purpose of the contract, and the foreseeable expenses in preparation of the performance, etc. It does not appear admissible that the party that wishes to renew the contract unilaterally establishes in the notification that, if it does not receive a response in a fixed-term period, it will understand that the contract has been renewed. This would imply leaving the contract to the discretion of one of the parties. Both contracting parties can of course agree on the periods for notifying the decision to continue the contract and its response in a contractual clause.

The communication of the decision not to continue the contract within an unreasonable period after having received the notification of renewal will make the contracting party liable for the damage that might have caused to the other contracting party through the confidence in the renewal of the contract (expenses in preparation of the performance, loss of profits...).

Example 3: In the facts of example 1 and 2, if, fifteen days before the expiry of the distribution contract, B communicates to A its decision not to renew the contract, B will be liable for the damage that the untimely notification might have caused to A.

However, if they wish, the parties can include an automatic renewal clause in their contract.

Finally, it is provided in paragraph 3 of the proposed rule that the contract will not be renewed for a period equal to an initial contract period, but it is converted into contract for an indefinite period [Articles 1:301 (3) European Principles on Commercial Agency, Franchise and Distribution Contracts and Article III.-1:111 DCFR], and consequently Article 5.1.1 of these OHADAC Principles applies.

CLAUSES IN CONTRACTS FOR AN INDEFINITE PERIOD INVOLVING CONTINUOUS PERFORMANCE

In some contracts it will be convenient for the parties to specify the periods in which they must notify one another of their wish to renew and the decision against the renewal of the contract, with the object of avoiding conflictive situations. This is because, often, communications which, in the opinion of one of the parties, have been made on the appropriate date may appear untimely to the other party:

Option A: Establishment of the time of notifications on voluntary renewal

“If one of the parties wishes to renew the contract period, it must notify this to the other party in the period of (...) months before the expiry of the contract.

If the other party does not wish to accept the renewal, it must notify this to the other party in a period of (...) days from the receipt of the declaration of renewal or from when, once the contracting party has sent it, it would not have been able to ignore it reasonably.”

It is possible that the parties prefer that the contract will not be extinguished automatically upon the expiry of the established contract period, but that the parties have to express their intent to terminate it, through a notification to the other party within the established period of notice:

Option B: Automatic renewal for periods equal to the initially agreed period

“The parties will be able to terminate the contract at the end of the contract period, by notifying the other party of their intent not to renew it (...) days before the date of termination of the contract.

Once the agreed contract period has expired without any of the parties having demonstrated their intention not to renew it, the contract will be understood to be tacitly renewed for successive equal periods.

The party that decides to terminate the contract at the end of the initial period or any of its renewals will not be obliged to pay damages to the other party, provided that it observes the indicated period of notice.”

The obligation to communicate the intent to terminate the contract ties in with the provision of the automatic tacit renewal of paragraph 2. Hence, in the absence of express termination by the parties, exercised in the above-mentioned manner, the contract will be renewed tacitly for equal successive periods.

If the power of termination of the contract is exercised in time and form, the damages will not be paid, as indicated in paragraph 3 of the clause. It is a question of terminating a contract at the end of the contract period provided, and consequently no harm has to be generated for the parties (that are already relying on that termination). The breach of the agreed period for giving notice of termination, however, will involve a non-performance of contract which will give rise to damages in accordance with the normal regulations on non-performance of the contract (Chapter 7, Section 4).

As an alternative, the parties will be able to prefer that the contract is not renewed by periods equal to the initial periods, but that it will be converted into a contract for an indefinite period, with the subsequent application of the regulations governing this (Article 5.1.1 OHADAC Principles):

Option C: Automatic renewal and conversion into a contract for an indefinite period

“The parties will be able to terminate the contract at the end of the contract period, by notifying the other party of its intent not to renew it, (...) days before the date of termination of the same.

Once the agreed contract period has expired without any of the parties having demonstrated its intention not to renew it, the contract will be converted into a contract for an indefinite period.”

In accordance with the OHADAC Principles, in the fixed-term contracts for continuous performance, the parties may not terminate the contract unilaterally. The termination prior to the time provided by one of the parties, apart from the case of hardship of Article 6.3.1, must be considered to be non-performance of contract.

However, in the scope of the Principles, the parties are expressly permitted to agree a clause in the contract through which the power of unilateral withdrawal ad nutum with a reasonable period of notice is granted to both contracting parties:

Option D: Unilateral withdrawal

“At any time before the termination of the contract period, the parties are empowered to withdraw from the contract unilaterally, without the need to invoke any reason, by giving a reasonable period of notice.

The contracting party that withdraws unilaterally from the contract must compensate the other party for the expenses that it would have incurred with a view to the performance of contract (and pay damages to it for the loss of profits that have been caused to it upon the termination of the contract prior to the date provided).”

Paragraph 2 of the clause includes the obligation, incumbent on the party that withdraws from the contract, to compensate the other contracting party for the reasonable expenses that it has been unable to avoid incurring despite the notice. Likewise, in certain contracts, the parties may consider the possibility to include compensation for the loss of profits (final subparagraph of the clause, which is indicated in brackets); since the belief in the continuation of the contract until its termination can make the contracting party trust in a legitimate expectation of gain, which is invalidated for it when carrying out other transactions.

Commentary

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OHADAC principles on international commercial contracts.pdf