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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 7.1.1

Concept of non-performance

There is non-performance when a party does not carry out all its contractual obligations in the agreed form, regardless of the cause.

1. Unitary nature of the notion of non-performance

This article defines the concept of non-performance used in these Principles and characterises it according to two essential aspects: its unitary and objective nature. Under this article, there is non-performance in any case of non-performance by a contracting party of any of its main or collateral contractual obligations, where the non-performance is total or merely defective, non-conforming or delayed. This wide notion of non-performance is inspired by the Anglo-American legal tradition, where breach of contract is an all-encompassing category.

In civil law Caribbean systems there is no legal definition of breach or non-performance of the contract; however, case law has inferred it from rules on performance and different forms of non-performance (delay of the obligor, defective performance, etc.) as well as from the rights of the obligee in cases of non-performance (judgment of the Supreme Court of Justice of Colombia, Civil Chamber, of 4 July 2002). However, the special rules on compensation for defects in sale contracts in these systems makes adoption of an all-encompassing notion difficult.

Apart from CISG, which only offers an implicit concept of non-performance in Articles 45 and 46, all other international texts on contract law harmonisation accept an all-encompassing notion of non-performance in the same way as common law. Thus, Articles 7.1.1 UP; 1:301 (4) PECL; III-1:102 (3) DCFR; and 87 CESL embrace, within the notion of non-performance, all cases where a contract party does not adapt its behaviour to the contractual programme, establishing first a general rule and second a list of type of cases of non-performance. The OHADAC Principles share also this encompassing notion but unlike the definitions of uniform texts, do not provide a list of types of non-performance, preferring a general rather than a casuist rule that will be applicable to all kinds of contracts.

The choice of a single concept is not merely theoretical or aesthetic, but is based on its proven efficiency which enables the creation of a framework of remedies that is consistent with respect to contractual liability and is available for all non-performance, regardless of contract type, with the exceptions mentioned in this section (Articles 7.1.3 and 7.1.8 of these Principles).

The total and definitive non-performance of the obligation is the first assumption envisaged in Article 7.1.1.

Example 1: A, an IT consultancy in country X has undertaken to deliver a custom software application to B, a pharmaceutical firm in country Y, on 9 July. In mid-June, after the software has already been created, A decides to sell it to C, a rival pharmaceutical company, which had offered a higher price.

The second kind of non-performance deals with delayed or out of time performance. Civil law systems consider late performance as a specific institution, because a mere delay does not lead per se to obligor's responsibility, the “constitution in default” or “in mora” being necessary (Article 1.608 of the Colombian Civil Code; Article 1.084 of the Costa Rican Civil Code; Article 295 of the Cuban Civil Code; Article 1.139 Dominican and French Civil Code; Article 1.428 of the Guatemalan Civil Code; Article 1.355 of the Honduran Civil Code; Article 2.080 of the Mexican Civil Code; Article 1.859 of the Nicaraguan Civil Code; Article 985 of the Panamanian Civil Code; Article 1.053 of the Puerto Rican Civil Code; Article 999 of the Saint-Lucian Civil Code; Article 1269 of the Venezuelan Civil Code) only if specific conditions are met: the main ones being formal notice to the obligor to perform its obligation and penalties for delivery.

This rigidity of civil law legal systems is eased, in many cases, by legal and case law exceptions with the simple requirement of formal notice or interpellatio. Some commercial codes also do not provide for the serving of formal notice (e.g. Article 418 of the Costa Rican Commercial Code; Article 677 of the Guatemalan Commercial Code; Article 232 of the Panamanian Commercial Code; Article 94 of the Puerto Rican Commercial Code). This makes it possible to align civil law solutions with those of the common law systems or international solutions in harmonised texts, much closer to international trade requirements. To enable the exercise of the rights and actions available in case of breach of contract, international codification does not provide for a formal act of constitution in default (mora) [Articles 45 to 52 and 61 to 65 CISG; Article 7.1.1 UP; Article 1:301 (4) PECL; Article III-1:102 (3) DCFR].

In line with international texts, under the OHADAC Principles, a delay by the obligor in performing its obligations constitutes a case of non-performance and entails its contractual liability without the need for notification or formal notice for payment.

This kind of non-performance presupposes the possibility of performance and the fact that performance, even delayed, is still satisfactory for the obligee. If the obligation becomes definitively impossible or no longer corresponds to the obligee's interests, the situation is no longer that of a delay, but that of a definitive and complete non-performance as mentioned above, with different legal effects. This will always be the case where non-performance is subject to an essential time period. In this case, this is fundamental non-performance equivalent to fundamental breach in common law systems [judgment of the Supreme Court of Bahamas in Canadian Imperial Bank of Commerce v Owners of MV “New Light” (1997), N. 1217 of 1994 (Carilaw BS 1997 SC 87)].

Example 2: The initial facts are the same as in example 1, but here, the IT consultancy does not perform the obligation to deliver on 9 July, because work to solve technical difficulties has been harder than foreseen. However, delivery is still possible, although one month later, and the pharmaceutical firm is still interested in the software. This is a case of late performance of the obligation.

Thirdly, early performance constitutes non-performance where the established period had been agreed upon in favour of the obligee or of both parties. The OHADAC Principles accept early performance whenever it does not prejudice the obligee or its legitimate interests; in these cases, early performance would constitute a breach of contract (Article 6.1.3).

Fourthly, defective performance is considered to be a breach of contract. This term covers a broad range of assumptions where the obligor's performance does not meet the contract obligations. While civil codes of French and Spanish tradition deal only with lack of identity or integrity of obligations (partial performance governed by Article 6.1.5 of these Principles) and establish a special regime of compensation in sale contracts, the OHADAC Principles follow the line of common law systems and international texts, unifying all cases of defective obligations, whether by quantity, quality or function, and also including aliud pro alio (the delivery of something different from that which was agreed).

Example 3: The facts are the same as in example 1. Firm A delivers the software on 9 July, as agreed, but after its download onto the hardware of the pharmaceutical firm B, the system does not provide the output agreed in the contract.

Example 4: A, a carriage firm, buys some high-powered refrigerators for the transportation of deep frozen fish. However, after delivery, A realises that the refrigerators do not have the advertised characteristics that led to the purchase.

Example 5: A, a construction firm of country X, builds the ceiling of the grandstand of the stadium of a football club in country Y. Once the work is finished, the first rains reveal leaks in the ceiling.

Lastly, the lack of cooperation of any party to the contract to achieve full effect also constitutes non-performance. This includes, in a broad sense, non-performance inherent to duties to cooperate, which is particularly significant in some contracts (e.g. construction contracts). In civil law systems of French or Spanish tradition, these cases are known under the generic term of mora credendi and admit two different models of legal treatment. The first model corresponds to legal systems which lack general discipline in the treatment of mora creditoris, but has many fragmented applications of principles on which this doctrine is based (Articles 1.257 to 1.264 of the French and Dominican Civil Code; Article 1.044 of the Haitian Civil Code; Article 1.351 of the Honduran Civil Code; Article 1.130 of the Puerto Rican Civil Code; Article 2.098 of the Mexican Civil Code; Article 2.057 of the Nicaraguan Civil Code). The second model characterises legal systems which have a specific regulation of mora creditoris (Article 252 et seq. of the Cuban Civil Code; Article 1.429 of the Guatemalan Civil Code; Article 695 et seq. of the Honduran Commercial Code; Article 6:58 et seq. of the Dutch and Suriname Civil Code).

For their part, common law systems, because of their single concept of non-performance, do not use the mora creditoris as an autonomous legal institution since the obligee is responsible, in the same way as the obligor, for the breach of contract. However, there are also references to the obligee's duty to cooperate (Section 37.1 English of the Sale of Goods Act; Section 38.1 of the Sale of Goods Act of Bahamas, Montserrat, Antigua and Barbuda, and Trinidad and Tobago; Section 39.1 of the Sale of Goods Act of Belize and Section 37.1 of the Sale of Goods Act of Jamaica), which is the base of the civil law institution of mora credendi [Seubert Excavators Inc v Eucon Corp (1994), 871 P.2d 826, 831 Idaho], and to the very offer of performance and subsequent unjustified refusal by the obligee as a case of breach of contract [Lea v Exelby (1608), 78 English Reports (ER) 1112; Ball v Peake (1660), 82 ER 941].

Equally the Unidroit Principles do not include a rule on mora creditoris, although its effect can be recognised under Article 7.1.2 (interference by the other party), which corresponds with the duty to cooperate envisaged in Articles 1:202 PECL and III-1:104 DCFR.

Example 6: The facts are the same as in Example 1. The pharmaceutical firm B had to provide consultancy firm A with certain information which was necessary for the custom software. B is afraid of divulging strategic information, and avoids providing A with some information.

2. Objective character of the non-performance notion

Aside from its unitary nature, the concept of non-performance in the OHADAC Principles is objective and neutral. Consequently, and in accordance with Article 7.1.8 of these Principles, the breach of the contract is ascertained regardless of the cause for which the obligor has not performed its contractual obligation. This is irrespective of whether or not the breach of contract is justified. Although force majeure renders inoperative certain actions in contract, it constitutes a case of non-performance because the obligee's right has been infringed, even the prejudice was justified.

Example: Firm A bought an apartment building to be operated as a hotel in a specific location, based on the architectural drawings. The building was to the extreme west of all the other future buildings in residential complex project and overlooked the sea and without no buildings in front of it. Seller firm B had to modify the original plan during the construction of the complex due to requirements by public authorities, which modified permissions and imposed the sitting of a green zone. Consequently, the residential complex was reorganised, modifying the number of blocks, so that the property bought was no longer in the original location but further east, with another building opposite which partially concealed the original view. In this case, there is a non-performance by the seller, although it is justified in accordance with Article 7.1.8 of the OHADAC Principles. Consequently, A has no right to damages for breach of contract, but firm B is contractually liable and A could exercise its right to avoid the contract, unless B offers A a commodum representationis (e.g. the delivery of another building in another location, but with similar features to those required in the original contract).

French and Spanish legal systems do not technically have a subjective notion of non-performance, insofar as only fault is required for a remedy in damages (comment on Article 7.4.1 of these Principles; however, due to the weight of tradition, fault is considered as the central point of breach of contract, and cases of lack of fault are dealt with under risk doctrines (comment on Article 7.3.1 of the OHADAC Principles). On the contrary, objective doctrine is inherent to common law systems, where breach of contract doctrine is construed regardless of obligor's fault, insofar as contract parties are not obliged in respect of a promise for future conduct, but in respect of a given result. This is also the approach in the Dutch and Suriname civil codes.

The objective approach also prevails in harmonised texts. Thus, in Articles 46 and 61 CISG, non-performance is determined regardless of whether there is fault of the contract party in breach of contract or a cause of exoneration of responsibility included in Article 79, which does not entail the absence of contractual liability, but merely the reduction of remedies against breach of contract. Even more clearly, PECL and DCFR define non-performance in Articles 1:301 (4) and III-1:102 (3), respectively, in a neutral way, and set out in Articles 8:108 PECL and III-3:104 DCFR what is known, under a good technical expression, as “excuse due to an impediment”. Thus, they specify that there is non-performance and the obligor is not exonerated, although, since the non-performance is justified, the obligee has no right to specific performance or to damages [Article 8:101 (2) PECL; Article III-3:101 (2) DCFR]. Similar rules are found in UP (Articles 7.1.1 and 7.1.7 on force majeure). Likewise, in Article 87 CESL non-performance is defined as “any failure to perform that obligation, whether or not the failure is excused”, and excuses for non-performance are governed by Article 88 CESL.

Commentary

Article 7.1.2

Fundamental non-performance

A non-performance of a contractual obligation is fundamental if:

  1. strict observance of the obligation which has not been performed is of essence under the contract; or
  2. the non-performance substantially deprives the other party of what it was entitled to expect under the contract, unless at the time of conclusion of the contract, it has not been foreseen or could not reasonably have been foreseen such result; or
  3. the non-performance is of a nature that leads the obligee to believe that, in view of the circumstances, it cannot rely on the future performance of the other party.

The notion of serious or fundamental non-performance is important in order to determine the framework of remedies and defences open to the aggrieved party against the damage to its contractual rights.

Legal systems inspired by French and Spanish tradition do not determine in written law the concept of fundamental breach of contract. This is developed by case law, where an important breach of contract is required in order to open the termination remedy (comment on Article 7.3.1 of these Principles). Likewise, some commercial codes, in particular in the provisions that regulate contracts, require significant non-performance as a fair cause to terminate the contract (e.g. Article 973 of the Colombian Commercial Code for supply contracts or Article 1.325 of the Colombian Civil Code for agency contracts; Article 711 of the Guatemalan Commercial Code for supply contracts; or Article 773 of the Honduran Civil Code for sale contracts). Dutch law does not recognise or applies this concept.

In common law systems, however, there is a broad development of the concept called “substantial failure in performance”, both in case law and in written law [Boone v Eyre (1789), 1H Black 273; Glaholm v Hays (1841), 2 Man & G 25; Universal Cargo Carrier Corp v Citati (1957), 2 QB 401; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisa Ltd (1962), 2 QB 26; Photo Production Ltd v Securicor Transport Ltd. (1980), UKHL 2; Thompson v Corroon (1993), Privy Council Appeal Antigua and Barbuda 42 WIR 157; Sections 241 and 242 Restatement (Second) (Second) of Contracts; Section 2-612 (2) UCC; Sections 31 (2) of the Sale of Goods Act of England and Jamaica; Sections 32 (2) of the Sale of Goods Act of Bahamas, Montserrat, Barbuda, and Trinidad and Tobago; and Section 32 (2) of the Sale of Goods Act of Belize].

In harmonised law, Article 25 CISG defines the concept of fundamental breach from tests on “fundamental detriment” and “foreseeable result”, which determine an objective concept of fundamental breach that inspires all other international texts. Based on this approach, Articles 7.3.1 (2) UP, 8:103 PECL and III.3:502 DCFR add other tests that require the consent of the parties as well as the subjective or intentional element (difficult to prove). Article 87.2 CESL comes back to the objective model by specifying that non-performance is fundamental if “a) it substantially deprives the other party of what that party was entitled to expect under the contract, unless at the time of conclusion of the contract the non-performing party did not foresee and could not be expected to have foreseen that result; or (b) it is of such a nature as to make it clear that the non-performing party's future performance cannot be relied on”.

The article proposed in the OHADAC Principles also opts for an objective concept of fundamental non-performance, like English law and international texts on sale contracts, establishing a list of circumstances that are used to determine cases of fundamental non-performance. Despite the general nature of these criteria, it is possible that some specific assumptions, considered by the parties as cases of serious non-performance be left out of the list. That is why it is recommended to add clauses to the contract that complete the rule.

The first criterion derives from the nature of the contractual obligation, which, by mutual agreement of the parties or because the contract itself and the circumstances of performance are essential for the satisfaction of the obligee's interests.

Example 1: Parties have agreed that goods must be delivered at a given time, after which the obligee will no longer be interested in the performance. Absence of performance at that fundamental time constitutes a serious non-performance.

The second circumstance refers to when the non-performance substantially deprives the obligee of what it was reasonably entitled to expect according to the nature and the terms of the contract. Whether such a deprivation is fundamental or not must be analysed on a case-by-case basis under contextual circumstances. Moreover, there is no fundamental breach if serious damage to contractual rights derived from non-performance were not reasonably foreseeable when the contract was concluded. The foreseeable nature also depends on the declarations of the parties and circumstances taken into account at that time (information disclosed by the parties, preliminary agreements, etc.).

Example 2: A and B have agreed that A will build a garage for B to park heavy machinery. They agree on a project, but A reserves the right to make minor changes. After work has begun, A decides to make changes to the project due to economic reasons. These changes consist in reducing the opening of the door by 5 cm on each side. When the work is delivered, it is discovered that some heavy machines that were to be parked inside the garage are larger than the dimensions of the door. This serious loss of functionality of the structure could not have been foreseen by A, given that B did not inform it at any time about the size of machinery which would be parked in the garage.

Finally, the third criterion deals with non-performance which, according to circumstances, provides the aggrieved party with enough reason to reasonably believe that the other party will not perform in the future. In the wording of this third parameter of serious non-performance, the OHADAC Principles have ignored the consideration of subjective elements that are on the contrary present in UP, PECL and DCFR, which refer to “intentional” non-performance. That does not prevent such an intention from being taken into account in order to consider the circumstances that lead one party to be convinced of the future non-performance. However, an inflexible mention of the party's intention could result in specific difficulties of application, and not only in common law systems.

Example 3: In the same case as in example 2, the construction firm A brings the work to a standstill just as it had begun, due to the offer from firm C to carry out construction work under more advantageous terms. Since A cannot reasonably assume both projects, it decides not to perform the contract agreed with B. The circumstances of this example characterise the non-performance as fundamental, so that B has the right to terminate the contract and it is not obliged to give an additional period of performance [Article 7.3.1 (1) OHADAC Principles].

SPECIFIC CLAUSE ON FUNDAMENTAL NON-PERFORMANCE

The wide range of hypotheses that give rise to fundamental non-performance under this Article calls for the inclusion, in certain contracts, of a clause specifying the cases of fundamental breach for a given contract.

“Particularly, non-performance of obligations established in clauses (...) of this contract will be considered fundamental breach of this contract.”

Commentary

Article 7.1.3

Remedies for non-performance

1. In case of non-performance, the obligee, without affecting the right to cure by the debtor, may resort to the remedies set out in this Chapter, but may not claim damages if the non-performance is excused under article 7.1.8 of these Principles.

2. The remedies for non-performance may be cumulated if they are not incompatible with each other.

3. The obligee who is exercising its right to performance may change the remedy if it has not obtained satisfaction of its claim.

1. Available remedies and possibility of accumulation

The option chosen of the unitary concept of non-performance makes it possible to present, in these Principles, a harmonious set of measures, actions and remedies developed in sections 2, 3 and 4 of this Chapter. This framework comprises the right to performance, termination of contract and right to damages. It also comprises suspension of the performance itself, as specified in Article 7.1.4.

Romanist legal systems have not developed a system of non-performance and remedies in written law, but treat this matter in a fragmented manner, for example by moving contract termination to the chapter on conditional obligations. This is because they consider that the right to terminate the contract is an implicit resolutive condition in reciprocal obligations (comment on Article 7.3.1). Conversely, common law systems, despite its inclination for avoiding categories and classifications, establishes a system of remedies, as in international texts and Article 125 of the Proposals for the Reform of French Law on obligations of 2013.

The starting point for the application of all these remedies that establishes contractual liability in the OHADAC Principles is the non-performance by one of the contracting parties. Thus, in some cases, these remedies are available only under specific conditions. For example, the direct right to termination requires fundamental non-performance [Article 7.3.1 (1) OHADAC Principles], and the aggrieved party has no right to damages where non-performance is excused by a justified cause under Article 7.1.8 of the OHADAC Principles.

Despite the general declaration in paragraph 1 of this Article, the array of remedies is not available for the aggrieved party where non-performance is caused exclusively by its action or omission [Article 7.1.2 UP; Article 8:101 (3) PECL; Article III- 3:101 (3) DCFR; Article 106.5 and 131.4º CESL]. A different hypothesis arises where the aggrieved party has participated in the cause of non-performance or in its effects that is regulated in Article 7.4.4 of these Principles.

The second paragraph envisages the possibility of accumulation of remedies for contractual responsibility, as far as they are compatible. Particularly, remedy of damages is compatible with specific performance and termination of the contract (Articles 7.3.5 and 7.4.1 and their respective commentaries). The right to specific performance and the right to terminate the contract are logically incompatible, insofar as no one can intend the extinction and the preservation of the contract at the same time.

2. Ius variandi between remedies

Paragraph 3 of this Article deals with the exercise of ius variandi as one of the remedies, which is recognised in some domestic legal systems in the Caribbean sphere.

Under French law, although the Civil Code does not expressly provide it, case law admits the freedom to change remedies in the course of the judicial procedure (including appeal). This means that the fact that a party has chosen to terminate a contract does not prevent it from demanding specific performance and vice versa, since the French Cour de Cassation considers that both constitutes “two different forms of exercising the same right” (Cass. 3 civ., 26 April 1989). In most other legal systems, however, ius variandi cannot be freely chosen, but is subject to restrictions justified by the protection of the other contract party and by its right to trust that obligee's declaration will not be modified and organise its interest according to it. Thus, Articles 1.386 of the Honduran Civil Code, 747 of the Honduran Commercial Code, 1.949 of the Mexican Civil Code, 1.536 of the Guatemalan Civil Code, 1.009 of the Panamanian Civil Code and 1.077 of the Puerto Rican Civil Code favour a change of remedy from the specific measure of protection to the right to termination, and not on the contrary. Besides, the possibility of changing the remedy is conditioned in most legal systems by the impossibility of specific performance.

In common law systems, this question does not arise given that specific performance is not a usual remedy. However, insofar as these systems allow the termination of contract through a mere notification without the need of previous notice, they have implemented rules to avoid sudden changes of opinion by the obligee, so that if this party renounces the right to termination it only will be able to revoke its decision through a reasonable notification [Charles Rickards Ltd v Oppenheim (1950), 1 KB 616].

In international texts on contract law harmonisation, whereas the UP expressly envisage the possibility of changing remedies (Article 7.2.5), the PECL and the DCFR do not directly solve this question, although commentaries on Articles 8:102 PECL and III-3:102 DCFR establish a set of criteria to modify the original claim.

Following the line of these international texts and according to Caribbean civil law systems, the ODAHAC Principles allow a change of remedies from the specific performance to termination of contract, where the obligee has not obtained due satisfaction of its right under its first attempt, providing that the ius variandi was not exercised out of time and did not prejudice the obligor. Consequently, if the obligee has opted for specific performance and has notified the obligor in this sense, and the obligor, trusting in this decision, has adopted certain measures to perform its obligations, the obligee cannot change the remedy on a whim. Contractual loyalty and legal certainty are the limits of the ius variandi. However, the obligee may change the remedy if, after having opted for performance, this becomes impossible or if the new remedy obtained after request for performance also turns out to be non-conforming with the contract.

Example: The firm A in country X asked the marketing firm B in country Y to design a project for an advertising campaign to promote certain products according to quality guidelines agreed in the contract. The initial project delivered did not correspond to the contractual requirements and contained serious defects. Despite this, firm A opts for specific performance and gives B a new deadline to correct its defective performance. The persisting faults in the new project eventually lead B to terminate the contract.

Commentary

Article 7.1.4

Withholding performance

1. Where parties must perform their obligations simultaneously, either party may withhold performance until the other party has tendered its performance or has effectively performed its obligations.

2. The party who must perform its obligation at a later time than the other party may withhold performance until the other party has performed its obligations.

3. In any case, either party will be able to cancel the performance of its obligation as soon as it becomes clear that the other party will not perform theirs on the due date.

The proposed rule takes up the concept of exceptio non adimpleti contractus, which is a defensive solution, granted to the obligor of a reciprocal obligation in order to allow it to legally deny the performance of the obligation it was bound to provide, as long as the other party has not performed or will refuse to perform its obligation.

In those systems which follow French tradition, the basis of the exceptio lies in the general theory of cause: the reason of this remedy for breach of contract is that the cause of the obligation of one of the parties disappears, in reciprocal obligations, when the other party does not comply with its own obligation. Therefore, in OHADAC countries which follow this tradition, the exercise of the exceptio is based on articles rules relating to the bilateral nature of reciprocal obligations and on the principle of simultaneous performance underlying this kind of obligation (Article 1.609 of the Colombian Civil Code; Article 692 of the Costa Rican Civil Code; Article 295 of the Cuban Civil Code; Articles 1.146 and 1.184 of the French and Dominican Civil Code; Article 1.432 of the Guatemalan Civil Code; Article 974 of the Haitian Civil Code; Article 1.356 of the Honduran Civil Code; Article 1.949 of the Mexican Civil Code; Article 1.860 of the Nicaraguan Civil Code; Article 985 of the Panamanian Civil Code; Article 1.053 of the Puerto Rican Civil Code). Article 1.168 of the Venezuelan Civil Code is more specific, as it expressly explains that each party can refuse to perform its obligation until the other party has performed its obligation. Articles 262 and 263 of the Dutch Civil Code, which are literally reproduced in the same articles of the new Suriname Civil Code, expressly regulate the withholding of performance, by allowing its application even when it is foreseeable that the obligor will not perform. Likewise, this tendency to expressly regulate withholding performance also appears in Article 160 of the Proposals for the reform of the French law on obligations of 2008. This reform specifically acknowledges the right to withhold performance in reciprocal obligations, and excludes its use in those cases contrary to good faith. This means that the performance of the obligation should be withheld in an equivalent proportion to the breach of the other party. Articles 125 and 126 of the Proposals for the Reform of French Law on obligations of 2013 also expressly acknowledge this exception.

This solution is also found in common law systems which recognise this exception to non-performance as they allow the obligee to withhold the performance of its obligation until the reciprocal obligation has been performed by the other party [Bollech v Charles County (2003), MD, 166 F. Supp 2d 443; SMR Technologies Inc v Aircraft parts international Combs, Inc (2001) WD Ten. 141 F. Supp. 2d 923, 932; Pack v Case (2001), Ut. CA, 30 P. 3d 436, 441; Universal Cargo Carriers Corporation v Citati (1957), 2 QB 401.450]. However, in common law countries this right to withhold performance is limited to situations where there is a fundamental breach of contract and in those cases where the contract, whether implicitly or explicitly, make the performance of a specific obligation conditional upon the performance of another obligation [Section 53(1)(a) of the English Sale of Goods Act; of Montserrat, Antigua and Barbuda, the Bahamas and Trinidad and Tobago; Section 52(1)(a) of the Jamaican Sale of Goods Act; Section 54(1)(a) of the Sale of Goods Act of Belize and section 2-609 UCC]. In any other case, the obligee must comply with the terms of the contract, although it can claim damages when there has been a breach of contract.

International texts that harmonise contract law also expressly regulate this defence against breach of reciprocal obligations. The UP mentions withholding of performance in Article 7.1.3., where it is stated that the party who has reason to reasonably believe that the other party will fall into a fundamental breach can demand a guarantee of performance and also withhold its own obligations in the meantime (Article 7.3.4). The Article 9:201 of the PECL allows withholding of performance as a way of putting pressure on the obligor, even when the non-performance is not particularly important, whenever the cost of the withheld performance is not disproportionate to the non-performed obligation and the party withholding performance is acting in good faith. It is also possible to withhold one's own performance when it is foreseeable that the other party will not comply with its part, even when it is not a fundamental breach. The DCFR also specifically regulates the right to withhold performance in reciprocal obligations (Article III-3:401), even when faced with foreseeable non-performance, and links its use to the principle of good faith and fair dealing (Article I-1:103). In the CISG system, withholding of performance is allowed when it is foreseeable that the obligor will not perform (Article 71), and a fundamental breach is not necessary, although it is required that this non-performance extends to a substantial part of the obligations and is communicated to the other party, which can avoid the withholding, offering enough guarantees of performance in the future. In the same way, this right to withhold performance is recognised in Articles 113 and 115 of the CESL.

Paragraphs 1 and 2 of this Article are dedicated specifically to the concept of exceptio non adimpleti contractus as a solution to non-performance, all the while distinguishing the situation where the obligee must perform its obligation either at the same time or after the obligation of the obligor. This measure, which is accepted in one way or another in all the OHADAC territories, allows the obligee to respond to non-performance and to exert pressure on the other party to perform. The breach of contract does not need to be fundamental in order to justify the use of the exceptio by the obligee. It is more in the cases of fundamental breach described in Article 7.1.2 that the obligee usually draw upon to the right to terminate the contract (Article 7.3.1). Therefore, the scope of this remedy would be in those cases where the non-performance of the obligation reveals a basic breach in the accuracy of contractual obligation, which generally is still useful to the obligee if it is performed successfully. This solution is different from that of contract termination, in which the seriousness of the breach creates a situation of breakdown of the basic elements of contract with respect to the possible satisfaction of the obligee's interests.

Example: an IT company signs a contract in which it is bound to maintain and repair their customer's computers. The client undertakes to pay in consideration a monthly amount of money within the first five days of the month. Two months after signing the contract, the customer has not yet made the monthly payment; therefore, the IT company is no longer bound to maintain and repair its customer's computers.

Paragraph 3 of the proposed rule allows one party to withhold its own performance when it is foreseeable that the other party will breach its obligation. This is a possibility both in common law [Section 41(1) of the English Sale of Goods Act; of Montserrat, Antigua and Barbuda, The Bahamas and Trinidad and Tobago; Section 42(1) Sale of Goods of Belize; Section 40(1) Sale of Goods of Jamaica] and in civil law countries (Article 336 of the Costa Rican Commercial Code; Article 1.653 of the French and Dominican Civil Code; Article 1.828 of the Guatemalan Civil Code; Article 6:263 of the Dutch and Suriname Civil Code; Article 752 of the Honduran Commercial Code; Article 384 of the Nicaraguan Commercial Code). Likewise, the CISG provides special rules for cases in which it is clear that the other party will either not perform a substantial part of its obligations or fall into a fundamental breach within the agreed period of time (Article 71). Also in the PECL system, when one party is obliged to perform before the other, it must have the right to defer or postpone its obligation if it is clear and foreseeable that the other party will not perform before the agreed period of time. In this situation, the party who was to perform first has the right to terminate the contract on the grounds of anticipatory breach (e.g., Article 9:304).

Commentary

Article 7.1.5

Cure of non-conforming performance

1. The obligor may cure any non-performance, at its expense, on condition that:

  1. it notifies the obligee, without undue delay, of the manner and timing of the cure; and
  2. the cure is appropriate to the circumstances; and
  3. the obligee has no legitimate interest in refusing the cure; and
  4. the cure is effected promptly.

2. The obligee may withhold its own performance pending cure.

3. Notwithstanding cure, the obligee retains the right to claim damages for delay and for any harm caused or not prevented by the cure. However, the rights of the obligee that are not compatible with the cure will be suspended from the time of the effective notification of the commitment to cure until the expiry date of the reparation.

4. The notification that a contract has been terminated does not exclude the right of the obligor to cure its non-performance.

The possibility of the cure of non-performance intends to favour preservation of the contract as well as to mitigate damage caused by its breach. The proposed regulation is similar to the solutions in international texts on harmonisation of contract law. These texts expressly envisage this right, which is widely recognised both in common law and in civil law systems.

The right to cure non-conforming performance is expressly regulated in Section 2-508 UCC and has also been recognised in the landmark English case [Borrowman Philips & Co v Free & Hollis (1878), 4 Q.B.D. 500 CA]. The new Suriname Civil Code reproduces the same solution on this issue as the Dutch Civil code and specifically recognises the right to cure for non-conforming performance, when it declares that the obligee can refuse the obligation of the obligor if it fails to offer immediate compensation for damage and payment for expenses caused by non-performance (Article 6:86 Civil Code). In both cases it is provided that the right to repair non-conforming performance ends when the obligee notifies the obligor its choice of either claim damages instead of the performance or to terminate the contract (Article 6:87 Civil Code).

In other countries belonging to OHADAC a specific rule on this right of the obligor cannot be found. This is because French and Spanish laws, from which these systems are often derived, do not have specific rules in this respect, although the right to cure non-conforming performance is recognised by courts [judgement of the Cour de Cassation (Civ) of 24 February 1970]. However, if the defendant makes an offer to cure the non-conforming performance after requesting the termination of the contract, the cure can be refused [judgement of the Cour de Cassation (Civ) of 15 February 1967]. The right to cure non-conforming performance can also be inferred from Articles 1.609 and 1.546 of the Colombian Civil Code; 295 and 306 of the Cuban Civil Code; 1.138 Dominican and French Civil Code; 937 of the Haitian Civil Code; 1.386 of the Honduran Civil Code; 1.949 of the Mexican Civil Code; 1.859 and 1.885 of the Nicaraguan Civil Code; 985 and 1.009 of the Panamanian Civil Code; 1.053 and 1.077 of the Puerto Rican Civil Code; and 1.269 and 1.167 of the Venezuelan Civil Code.

The OHADAC Principles include a specific rule on this right, which is recognised in all OHADAC countries, following the model of the texts on contract law harmonisation (Article 48 CV, Article 7.1.4. UP, Article 8:104 PECL and Articles III-3:201 to 3:204 DCFR). The proposed rule contains a detailed description of the conditions under which the obligor may exercise this right, particularly those related to the notification and scope of the cure, as well as to the rights of the obligee.

This article requires that the obligor, immediately after receiving the obligee's notice of its intention to take the measures intended to cure the non-performance, notifies the obligee in its turn and without undue delay of its intention to cure the non-performance itself. Moreover, the timing for the exercise of this right is fundamental, because the obligor cannot force the obligee to wait the performance for a prolonged period of time. However, the absence of prejudice to the obligee may under no circumstances justify the delay of the obligor. The notice must explain exactly how and when the cure will take place. This may be reparation and/or substitution, as well as any other activity intended to cure the non-performance and to provide the obligee with all that it is expecting according to the contract.

It is also necessary that the cure be suited to the circumstances of the contract, in such a way that it is reasonable to allow the obligor to make another attempt at performance. The factors to be taken into consideration in determining the appropriateness of the cure include whether the proposed cure promises to be successful in resolving the problem and whether the necessary or probable delay in effecting the cure would be unreasonable or would itself constitute a fundamental non-performance. However, the right to cure is not defeated by the fact that the obligee subsequently changes its position after it has received notice of cure.

Example: Company A signs a contract with Company B, according to which A commits to the installation of a construction waste-processing facility. Company A is responsible for the planning, drawings and execution of the project as well as the assembly of the aggregate plant. It is also bound to deliver it completely equipped and ready for use, its purpose being to transform construction waste into recycled material, which should be fit for selling before 1 January. However, by the due date, a hopper with its feeder and five out of ten conveyor belts, all being tools necessary for the recycling process, had yet to arrive and be installed. That very same day Company A wrote to their client and notified that everything would be delivered, installed and working in the facility by 10 January.

Finally, the interest of the obligee to refuse the reparation of the breach must be taken into consideration (this interest must be legitimate). The cure of the non-conforming performance shall not be denied to the obligor merely because the obligee no longer wishes to continue the contractual relationship. This limitation to the cure of non-conforming performance is consistent with the idea of fundamental breach, but also with the anticipatory breach, inasmuch as it should be understood that the obligee will have the option for legally refusing cure if it has grounds to believe the obligor will not be capable of curing the non-performance.

When the obligor has given effective notice that it intends to cure the non-performance of its obligation, and as long as the above-mentioned conditions are met, the obligee shall withhold performance until the cure is completed. Nevertheless, the obligee will not be able to exercise any action inconsistent with the performance of the contract, which justifies that the notice for the termination of the contract does not exclude the obligor's right to cure the non-conforming performance.

If the obligee has correctly terminated the contract (pursuant to Article 7.3.1.), the effects of termination will be suspended by an effective notice of cure, and they will begin only when the period for cure has expired without the fundamental non-performance having been cured.

The obligor will be held liable for any harm occasioned by the non-performance, even if the cure is successful. It is also responsible for any additional damage caused by the cure itself, for the delay in the performance of the contract or for any other damage, which could not have been prevented by the cure (principle of full compensation).

If the obligee receives an effective notice of cure of the non-performance, it shall accept this cure and cooperate with the obligor, allowing, for instance, any inspection that is reasonably necessary for the obligor to carry out the cure. If the obligee refuses to allow the cure when it is required, the notice to terminate the contract will be null and void and the obligee will not be able to pursue damages, which could have been prevented through the cure of the non-performance.

Commentary

Article 7.1.6

Extension of time for performance

1. In the event of non-performance, the obligee may grant the other party, by notice, an extension of time for performance.

2. During the period of extension, the obligee may withhold performance of its own obligations and claim payment for damage but it will not be able to resort to any other remedy for non-performance of its obligations, except in the case where the other party gives notice that it will not perform in the extension period.

3. If the delay in performance is not an essential non-performance, the obligee which has given notice to the other party of the provision of an additional reasonable period for performance may terminate the contract at the end of such period. An unreasonable additional period of performance is considered to be extended to a reasonable time.

4. In any case, on notifying the concession of this extension the obligee may stipulate that the contract will be terminated automatically if the other party does not perform within the agreed period.

The concept that inspires this article of the OHADAC Principles is the Nachfrist of German Law (§ 323 BGB). The acknowledgement of this additional period for performance is based upon the broad concept of non-performance handled by the OHADAC Principles, under which it is not necessary to warn the obligee in case of non-performance, so that termination of contract is carried out by the obligee and not the judge or an arbitrator. Whenever a fundamental breach occurs or when the other conditions for terminating the contract are met (Articles 7.3.2 and 7.3.3 of these Principles), the obligee may terminate the contract by notifying the party which has not performed.

In civil law systems, the granting of an additional period of time to perform can be based on those precepts that enable judges, if there are justified causes, to determine a time frame for performance before it orders the termination of the contract (Article 1.184 of the French and Dominican Civil Code; Article 974 of the Haitian Civil Code; Article 1.386 of the Honduran Civil Code; Article 1009 of the Panamanian Civil Code; Article 1.077 of the Puerto Rican Civil Code). More explicitly, Article 134 of the Proposals for the reform of French law on obligations of 2013 permits the obligee to terminate the contract by notifying the obligor which does not perform in a reasonable period of time, after having been requested. Furthermore, Article 748 of the Honduran Commercial Code establishes that the obligee should demand the obligor to perform within an adequate period of time, not less than 15 days, unless the nature of contracts, trade practices or the agreement allows a shorter period. After this deadline, if the contract has not been performed, it will be rightfully terminated.

We can find some analogies between the Nachfrist technique and certain common law institutions. For instance, when the terms of a lease contract state that the lessor can terminate it on the ground of non-payment by the lessee, even if one single rent is owed, Section 146 of the English Law of Property Act establishes the granting of an additional period to perform. Moreover, a judge may grant a new deadline or grace period (relief against forfeiture). In consumer matters, the granting of an additional period of time to perform is also required (Articles 87 and 88 Consumer Credit Act 1974, for the United Kingdom; and Sections 5-110 and 5-111 Uniform Consumer Credit Code for the USA).

The possibility of providing the obligor with an additional period of time to perform can also be found expressly in international texts on harmonisation of contract law. Thus, Articles 47(1) and 63(1) CV recognise, respectively for the buyer and the seller, the possibility to settle an additional period of time of reasonable duration, so that the other party can perform its contractual obligations. Similarly, Article 7.1.5 UP allows the obligee to grant the other party a reasonable additional period for the performance of its own obligation, at the end of which it may terminate the contract ex Article 7.3.1(3). Likewise, Article 8:106(3) PECL refers to the granting by the obligee of an additional period for performance, during which the obligee can withhold performance and claim damages. That same benefit is recognised to the obligor in accordance with Article III.-3:503 DCFR. Similarly, Articles 115 and 135 CESL regulate termination due to delay after the additional period of performance was notified.

These Principles describe this remedy to breach of contract in the same way as the above mentioned international instruments. They clearly state that during the additional period to perform set by the obligee, this party is not allowed to take any legal action against the obligor, but it may withhold its own performance and claim damages caused by non-performance or delay. However, the obligee may not expect specific performance nor terminate the contract during the additional period granted by the notice.

The introduction of this rule into the OHADAC Principles implies that the termination of the contract shall only be acceptable on two assumptions: when there is a fundamental breach and when there are no grounds to confer an additional period for performance. Thus, by granting a reasonable period of time to perform, the party which afterwards wishes to terminate the contract may do so with the full knowledge that the initial breach (whether fundamental or not) will not be a hindrance. Based upon this, the proposed rule distinguishes two situations that shall be differently approached. In cases where the obligee has an immediate right to terminate the contract as a consequence of a breach of the other party (fundamental breach), if the obligee is still willing to accept the performance, it cannot change its view without first notifying it the obligor. When there is a delay in performing, which cannot be considered fundamental (because the agreed period of time was not part of the nature of the contract and because the delay has not yet caused the obligee major problems), the obligee may terminate the contract only after notifying this to the obligor within a reasonable period of time.

In the first situation, the granting of an additional period for performance does not grant the obligee any added right, although it is a useful solution. Even when the delay or non-performance is fundamental and consequently the obligee may immediately terminate the contract, it might not wish to do so, because it may prefer the exact obligor's performance, as long as it is done within a reasonable period of time. The established procedure in this situation offers the obligor a last chance to perform or to correct the defective performance, without losing the obligee's right to claim the specific performance or to terminate the contract, if the obligor has not performed by the end of the set period of time. However, the fact that the obligee cannot use these remedies during the additional period for performance protects the obligor from a sudden change of opinion of the obligee. In these cases, if the contract has still not been performed by the end of this additional period, the right to terminate it on the grounds of fundamental breach becomes operative.

Nevertheless, in the second situation, when the delay of performance is not a fundamental breach, the obligee will not be entitled to immediately terminate the contract on the sole ground of the completion of the period. Nonetheless, once the additional period set by the obligee to the obligor for performance is over, the obligee may terminate the contract. The deadline set by the obligee must be reasonable, because in cases where the delay does not entail a fundamental breach, the obligee has an additional right. The decision of what is a reasonable time shall be made by judges or arbitrators, which must take into consideration aspects such as the initial deadline to perform the obligation; the obligee's need for a timely performance, as long as this is an obvious necessity for the party who has performed; the nature of the goods; the services or rights that have to be provided; or the situation which caused the delay (the additional period for performance should be longer if one party has been unable to perform due to the bad weather, rather than if had it simply forgotten its obligations).

Example: A textile company signs a sale contract under which it undertakes to deliver 100,000 denim jeans to its client, from sizes 38 to 44, before 1 March, with the purpose of selling them during the spring season. However, by the set date, the selling company only delivers 25,000 jeans, with wrong sizes and of inferior quality to the one agreed. The buyer grants the seller an additional period of 30 days to deliver all the goods in the agreed conditions. At the end of the extension period the textile company has still not performed its obligation. In this situation, the buyer has the right to terminate the contract.

Regardless of the essential nature of the non-performance, the final paragraph enables the obligee which notifies an additional period to state that the contract will be considered as automatically terminated if the obligor does not perform during the additional period. Then, once the period has expired, the contract is considered as terminated as also stated in paragraph 2 of Article 7.3.3.

Commentary

Article 7.1.7

Exemption clauses

A clause that limits or excludes one party's liability for non-performance or which allows one party to render performance substantially different from what the other party reasonably expected, may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract and to the circumstances under which the non-performance took place.

1. Definition of exemption clauses and the need for their regulation

In the international sphere, clauses imposing on contract parties, or on only one contract party, a greater or lesser liability than that legally envisaged in case of non-performance are common. This formula makes it possible to adjust the liability regime of contract parties when agreed conditions are met. This option is particularly relevant in certain transactions in high-risk economic sectors or transactions with partners located in countries whose financial systems are not sufficiently stabilised.

Most legal systems in Caribbean sphere recognise the freedom of parties in organising their contractual liability, although there are many differences in relation with the scope and limits of this power.

In Caribbean civil law systems, although there are no legal provisions for clauses restricting contractual liability, they are considered in case law. Despite the rich case law on this matter, the absence of specific, clear and precise written rules which permit such clauses entails some uncertainty when it comes to harmonisation.

For example, in civil law systems, exemption clauses are legally admitted under the freedom of contract principle, but they are subject to limits imposed by law, public policy and good custom (Article 1.616 in relation with Article 1.604 of the Colombian Civil Code; Article 312 of the Cuban Civil Code; Article 1.547 of the Honduran Civil Code; Article 702 of the Honduran Commercial Code; Article 2.437 of the Nicaraguan Civil Code; 1.106 of the Panamanian Civil Code; Article 1.207 of the Puerto Rican Civil Code). For their part, in the Costa Rican Civil Code (Article 1.092) and the Venezuelan Civil Code (Article 1.505) exemption clauses are regulated in the field of sale contracts. In French law, the lack of written rules provokes a debate about the validity of such clauses. The main argument in favour of these clauses is based on freedom of contract established in Article 1.134 of the French and Dominican Civil Code or in Article 925 of the Haitian Civil Code, although some special rules prohibit exemption clauses in particular contracts or under special circumstances. The projects of reform of the French Civil Code deals with this question (Article 76 of the Proposals for the reform of the French law on obligations) and consider clauses depriving the main obligation of its essence as not written. Territories under Dutch law influence do not have an express regulation either. Validity of agreements limiting the contractual liability is inferred from Article 6:248 of the Dutch and Suriname Civil Code.

In England, the Unfair Contract Terms Act (UCTA) of 1977 includes a control system which has the disadvantage of not embracing all contracts and clauses, this being a regulation with limited purposes. It deals with exemption and exclusion of contractual liability clauses in certain non-individually negotiated contracts (Section 3), given that its aim is to protect weak parties, although both commercial contracts between traders and consumer contracts are included. Under the limits established in the UCTA, Article 55 of the English Sale of Goods allows modification and exclusion of rights, obligations and responsibility legally derived from the contract through an express or implied agreement. The same rule if found in Sections 55 of the respective Sale of Goods Act of Montserrat, Barbuda, Bahamas and Trinidad and Tobago; Section 54 Sale of Goods Act of Jamaica and Section 56 Sale of Goods Act of Belize. In USA law, Section 2.719 UCC provides for the modification and limitation of contractual responsibility, for example where parties expressly agree the availability of only one remedy. However, there is a limit where concurrent circumstances in a concrete case lead to the frustration of the essential purpose of such remedy; then other legal remedies shall be available. Moreover, Section 2.316 UCC states that parties interested in an exemption clause must be conspicuous and clearly mentioned in the contract.

In international texts on contract law harmonisation, Article 7.1.6 UP states that “a clause which limits or excludes one party's liability for non-performance o which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if would be grossly unfair to do so, having regard to the purpose of the contract”. The formula used in this rule, inspired by common law, is wide enough to embrace all kind of agreements about limitation of contractual liability, even the distinction between direct and indirect limitation of liability for non-performance. For its part, Article 8:109 PECL uses general terms to include all clauses that in practice could prevent the obligee from obtaining usual remedies and it does not distinguish between exemption or exclusion clauses. In the same sense, Article III-3:105 DCFR neither differentiates nor imposes a specific legal regime for each kind of clause.

The rule set out in the OHADAC Principles opts for a legal regime of exemption and exclusion clauses similar to the one established in international texts, which should eliminate questions and difficulties related to characterisation of clauses limiting contractual liability, classification or types of clauses, determination of ways of control, limits of validity and legal consequences and sanctions. Under a fragmented regime, it is not easy to interpret or integrate the interests of the obligee against the obligor, which aims at benefitting from a weaker system of contractual liability. A general legal regime for these clauses facilitates the balance of opposing interests and legal certainty, diminishing risks in international trade.

Following the line of international texts, the OHADAC Principles include a wide notion of exemption and exclusion clauses, which allows a common rule applicable to all these clauses. The terms “limit” and “exclude” must be interpreted widely as far as possible, given that both terms try to make the obligee bear risks that usually fall on the obligor. The most usual clause consists in agreeing an exclusion or limitation of damage related to the remedy of damages, but it could also be applied to other remedies for non-performance, such as termination, specific performance or reduction of the contract's price. Besides, the clause allowing a party to perform an obligation substantially different from what the other party could reasonably expect must also considered as included in that wide notion of exemption and exclusion clauses.

Example: A, a firm in country X that exports cocoa, concludes a sale contract with B, a firm in country Y. The parties agree that if cocoa available at the time of delivery is not of the first quality agreed, the seller could perform by delivering cocoa of similar basic characteristics, including an exemption clause in such a case. The time of delivery comes and the cocoa is clearly of a lower quality, so that it is not according with what the buyer reasonably expected. Therefore, the exemption clause shall not be applied.

2. Limits of the validity of clauses excluding or restricting contractual liability

Most civil law Caribbean systems state some limits of exemption clauses on the ground of the law, morality or public policy (Article 1.547 of the Honduran Civil Code; Article 2.437 of the Nicaraguan Civil Code; Article 1.106 of the Panamanian Civil Code; Article 1.207 of the Puerto Rican Civil Code). Likewise, there are similar rules declaring exemption clauses in case of fraud or serious fault of a party as void (Articles 63 and 1.522 of the Colombian Civil Code; Article 1.150 of the French and Dominican Civil Code; Article 940 of the Haitian Civil Code; Article 1.360 of the Honduran Civil Code; Articles 987-988 of the Panamanian Civil Code; Articles 1.054, 1.055 and 1.056 of the Puerto Rican Civil Code). Under these systems, liability arising from the obligor's fraud cannot be limited through parties' agreement; a clause of this kind would be inconsistent with the obligation itself, insofar as the intention to create obligations becomes absurd if the obligor is deliberately and consciously authorised not to perform.

Generally, in common law systems, validity of exemption and exclusion clauses is considered according to the “reasonableness test”, as stated in the Unfair Contract Terms Act of 1977. Indeed, some kinds of clauses restricting or limiting contractual liability are prohibited where terms are considered unjust or unreasonable in the light of the circumstances of the contract. When the Act is not applicable, the case being out of its scope of application, courts have recourse to the general doctrine of fundamental breach of contract. This doctrine implies that the obligor interested in invoking the effect of an exemption clause cannot benefit from it if the non-performance affects essential obligations of the contract, as far as it is considered as particularly serious.

Dutch and Suriname Civil Code appeal to reason and equity to give effect to any agreement excluding liability (Articles 6:2 and 6:248). This principle enables judges, in the event of those exceptional circumstances, to replace effects envisaged in the contract or in law in order to achieve an equitable solution.

In USA law, a minimum standard must be respected by any restrictive clause, in accordance with Section 2-302 of the UCC, which enables judges to cast aside unfair terms or even the whole contract where it is not reasonable (unconscionable). The Article does not determine clearly when a clause may be considered as unconscionable. This term is close to good faith and, in practice, plays an essentially coincident role. The expression “unconscionable” may be considered as synonymous of “too disproportionate” or “immoral”. The unconscionability doctrine tries to avoid unfair negotiations. Moreover, exemption clauses are contrary to public policy where there is fraudulent intention or serious fault. Particularly, the Restatement (Second) of Contracts establishes that limitation of liability shall not be accepted if there is damage intentionally caused or serious negligence.

In the field of international texts on contract law harmonisation, Article 8:109 PECL, strongly inspired by civil law, provides that exemption or exclusion clauses must not be contrary to good faith or fair dealing. Article III-3:105 (2) DCFR refers, in the same sense, to any remedy and is applied even if the exemption or limitation clause is valid under the rules on non-individually negotiated clauses, providing a kind of subsidiary protection, so that the clause cannot be invoked if it is contrary to good faith or fair dealing. In the first paragraph of the Article there is a reference the remedy in damages, establishing the nullity of clauses of exemption or exclusion of liability for injury caused intentionally or by serious negligence. The notion of good faith, however, has not been formally translated into Article 7.1.6 UP, but it can be inferred from the expression “if it would be grossly unfair”, which implies that exemption clauses must be invoked according to good faith, insofar as it is submitted that UP rules limit validity of exemption clauses on the ground of morality, good faith and civil law notion of abuse of rights.

In the rule proposed here, exemption as well as exclusion clauses are subject to the same principles with regard to admissibility. The regime controlling those clauses must be similar, regardless of their name or characterisation, favouring contract balance by avoiding a party achieves the exemption of liability through a disproportionate limitation clause. In this sense, the Article defines validity limits according to the legal systems involved, adopting a wide range of concepts all the while remaining in line with the Caribbean legal systems of the OHADAC region.

As mentioned, some OHADAC legal systems refer to proof of good faith or similar criteria as limits applicable to these clauses, in contrast with common law systems, which are based on reasonableness and the observance of the essential obligations of the contract. Although such limits are not expressly envisaged in the Article proposed, exemption and exclusion clauses that violate them would be void. There are fundamental requirements of public policy, morality and good custom which determine contract law and are considered in most legal systems as far as they contradict a mandatory rule, so that reiteration in this respect in the rules on exemption clauses seems unnecessary. Thus, the fact that a party invokes a limitation clause in cases not envisaged or different from those considered at the conclusion of the contract is considered as contrary to good faith and fair dealing or unreasonable.

The terms “unconscionable” in common law is determined according to a mixed criterion, integrated by a subjective or contextual element inferred from the particular circumstances of the parties, and/or by an objective element derived from the atypical nature of the bargain. Therefore, if the clause turns out to favour one party, it makes that clause unconscionable or excessive, and the clause cannot be invoked. Where clauses are manifestly unfair, if their application leads to a disproportionate imbalance between the obligations of each party or to non-equitable results, the legal solution is the same as the one adopted under the fundamental breach of contract doctrine or on the ground of the reasonableness test.

Finally, in order to eliminate negligent and abusive conduct by the obligor, some civil law systems avoid limitation clauses in cases of fraud or serious fault. The express mention in this Article of such a formula seems awkward, since it is alien to common law. To overcome the clash of the different legal cultures, the rule proposed gets around limits related to subjective conduct of the obligor, but uses wide categories able to embrace them as the UP do. Thus, given that circumstances of non-performance must be considered, the intentional or negligent conduct of the party must be taken into account to avoid effect of exemption clauses.

Example: A, a firm in country X, has a plot of land where it intends to build a photovoltaic solar plant, for which it concludes a contract with B, a firm in country Y specialised in this kind of turnkey contract. The contract includes a clause excluding B's liability if the facility is not completed, certified and made operational as a result of legal changes (already announced) that concern said facility. B does not employ due care in carrying out logistics and work on the field, which results in a delay obtaining documents needed to certify the installation in the form and time defined. In this case, the non-performance is intentional and the obligor cannot invoke the application of the limitation clause set out in the contract.

Commentary

Article 7.1.8

Impossibility (Force majeure)

1. A contract party may justify breach of contract when the performance of its obligations becomes impossible due to force majeure reasons.

2. There is force majeure when the aggrieved party proves the existence of an event:

  1. alien to its responsibility and beyond its reasonable control, and
  2. whose risk it has not assumed, and
  3. which could not be reasonably expected or taken into consideration at the moment of the conclusion of the contract, and
  4. which makes impossible the performance of its obligations.

3. A party that invokes an event which makes performance impossible must give written notice to the other party as soon as possible, providing reliable evidence of that event and taking all reasonable measures to limit the effects on the performance of its contractual obligations. If this notification does not reach the other party in a reasonable period from the time when the invoking party has known or ought to have known of the force majeure event, the other party has the right do damages resulting from the absence or delay in notification.

4. The contract will be deemed to be terminated as from notification, unless the other party declares that it wishes otherwise within a reasonable period. If one of the parties has received a benefit before termination due to acts of performance made by the other party, it must compensate this party by paying a sum of money equivalent to the benefit obtained.

5. When impossibility is temporary, termination of contract will only be possible if the delay in performance significantly deprives one party of its reasonable expectations. In other cases, the party invoking force majeure must perform once the event disappears.

6. When impossibility is partial, termination of contract will only be possible if partial performance significantly deprives one party of its reasonable expectations. In other cases, the party invoking force majeure must perform partially and the obligation of the other party will be proportionally adjusted.

1. Definition of cases of force majeure

The excuse for breach of contract due to circumstances of force majeure or impossibility is common in all legal systems in comparative law and particularly in legal systems in the OHADAC area. Most traditional texts include a rule related to obligations of transfer of goods that have been lost or destroyed (Articles 1.302 Dominican and French Civil Code; 298 of the Cuban Civil Code; 1.729 of the Colombian Civil Code; 830-834 of the Costa Rican Civil Code; 1.344 of the Guatemalan Civil Code; 1.087 of the Haitian Civil Code; 1460 of the Honduran Civil Code; 2.017 of the Mexican Civil Code; 2.165-2.168 of the Nicaraguan Civil Code; 1.068 of the Panamanian Civil Code; 1.136 of the Puerto Rican Civil Code; 1.344 of the Venezuelan Civil Code). Most of the civil codes extend this rule to “obligations to do” or generally to any obligation, usually by reference to force majeure, act of God or both (Articles 64 and 1.729-1.739 of the Colombian Civil Code; Article 834 of the Costa Rican Civil Code; 299.1 of the Cuban Civil Code; 1.148 of the French and Dominican Civil Code, maintained in Article 126 of the Proposals for the Reform of the French law on obligations of 2013; 1.325 and 1.426 of the Guatemalan Civil Code; 937 and 1.087 of the Haitian Civil Code; 6:74 (6.1.8.1) and 6:75 (6.1.8.2) of the Dutch and Suriname Civil Code; 1.363 and 1.462 of the Honduran Civil Code; 2.111 of the Mexican Civil Code; 1.851, 1.864 and 2.164 of the Nicaraguan Civil Code; 34-D, 990 and 1.070 of the Panamanian Civil Code; 1.058 and 1.138 of the Puerto Rican Civil Code; 1.272 of the Venezuelan Civil Code). This institution also appears invariably in international texts for contract law harmonisation (Articles 7.1.7 UP; 8:108 PECL; III-3:104 DCFR; 88 CESL), which tend, like modern national projects, to a unique institution on force majeure, abandoning the old institution of act of God. Finally, this rule also applies in common law, especially after the leading case in English case law “Taylor v Caldwell”, reflected for instance in the decision of the High Court of Barbados of 2004 in Hulse v Knights Ltd (Carilaw BB 2004 HC 29) and in the decision of the Supreme Court of Jamaica of 2002 in Couttes Ltd v Barclays Bank plc (Carilaw JM 2002 SC 84). The rule is also included in Section 2:613 UCC and articles 1.130-1-132 of the Saint Lucian Civil Code.

The definition of force majeure cases in paragraph two incorporates the usual conditions for considering the excuse for breach of contract by the aggrieved party.

Firstly, it must obey the existence of an event beyond the responsibility and control of the obliged party and not caused by its own conduct. Certainly, these conditions may vary and result in different criteria because under some legal systems, such as the French legal system, the “beyond the control” and alien nature of the event is considered with extreme rigour in comparison with other legal systems, insofar as it must be absolutely external and irresistible [decision of the Cour de Cassation (plenary) of 14 April 2006]. The cases where a businessman or a firm argues force majeure unsuccessfully due to a strike of its workers are really illustrative. It seems reasonable that a general or sectorial strike is considered enough to justify breach of contract. However, under French law the courts sometimes have considered a particular strike insufficient in order to recognise force majeure, because the mere will of the businessman would finish the strike by acceding to the wishes of strikers. Less controversial is the fact that impossibility is imputable to the obliged party and cannot be argued when this party is in default and the event happens once the performance period has ended.

Secondly, the supervening or concurrent event must entail a risk that the obliged party does have not to assume. The aim of this rule in paragraph 2 is to cast aside the force majeure argument in contracts where the risk is inherent given the objective and aim of these contracts (insurance or speculative contracts) or where the risk has been or ought to have been assumed by a contracting party [e.g. E. Johnson & Co (Barbados Ltd) v NSR Ltd (1997, AC 400)].

Thirdly, the supervening event must be a fact that parties could not reasonably foresee or take into account at the time of conclusion of the contract. Generally, unpredictability is considered in all systems as synonymous of reasonable improbability. It must be stressed that the proposed rule does not require that circumstances or events causing impossibility are supervening or subsequent to the conclusion of the contract. It suffices that they were not have been foreseen or taken into account at the time of conclusion of the contract, although they existed at that time. In many legal systems, if the circumstances causing impossibility exist at the time of conclusion of the contract but the parties ignored them, it is usual to opt for nullity of contract due to mistake or initial impossibility of the contract's object, with similar effects (e.g. Articles 1.601 Dominican and French Civil Code; 4:103 and 8:108 PECL; II-7:201 and III-3:104 DCFR). However, this approach has some disadvantages. Firstly, mistake doctrines are more complex and irreducible in comparative law. Secondly, in modern trade law there is a significant trend to consider that a contract whose object is initially impossible is not necessarily void, apart from cases of common mistake, insofar as the parties can be confident that an originally impossible performance can become possible at the time of performance (e.g. Articles 3.1.3 UP; 4:102 PECL; II-7:102 DCFR). Hence the excuse of breach of contract by subsequent unforeseen impossibility or force majeure has the same scope when such impossibility is ignored and contemporary with the contract conclusion. This is the approach of Section 266 of the USA Restatement (Second) and in some opinions of the Articles 79 CISG. 7.1.7 UP and 88 CESL.

Finally, the impediment must make the performance of the obligation impossible. Impossibility can be invoked in cases of material (physical), legal or personal impossibility of performance. It is not arguable when performance becomes simply more costly (the rule on hardship included in Section 2 of Chapter 6 of these Principles being thus applicable) or if the contract refers to generic goods or obligations to do which are replaceable. In principle, economic impossibility cannot be invoked on the ground of this Article, either. If an unforeseen event causes an exorbitant increase of costs of one obligation, particularly of the payment obligation, the generic nature of money or the material feasibility of the performance make the performance materially possible, although economically absurd. Although economic impossibility is recognised as a case of impossibility in some Caribbean legal systems, especially those inspired by USA law and the notion of impracticability (Section 2: 615 UCC and Section. 261 of the Second Restatement), it is not admitted in civil law systems inspired by French law and, in more widespread opinion, in legal systems inspired in common law either. However, cases of economic impossibility can be considered, depending on circumstances, and have the same effects as hardship or frustration of purpose included in Section 3 of Chapter 6 of these Principles.

2. Effects derived from the proof of impossibility

Paragraph 4 of this Article determines in fine the legal effects of the excuse of breach of contract due to impossibility. Such excuse implies the negation of remedies for damages as well as the termination of contract ipso jure since the notification of the event by the obliged party. These effects are not recognised in the impossibility rules in many legal systems (e.g. Articles 7.1.7 UP; 79.5 CISG), although they are characteristic in others (e.g. Article 299.1 of the Cuban Civil Code; Article 1.130 of the Saint Lucian Civil Code). In English law, termination ipso jure is considered from the time when the event happens, regardless of the time of notice. This is the option of PECL in the light of commentaries on Article 9:303 (4), as well as of Articles 88 CESL and III-3:104 DCFR. Under the rule included in these Principles, the termination is produced ipso jure since notification by the obliged party, but the other party has the right to preserve the contract. This caution is interesting in cases where impossibility is temporal or partial and, even frustrating the purpose or the expectation of the parties, a delayed or partial performance or a solution by replacement can be valuable for the other party.

The notification required in paragraph 3 of this Article is a condition for determining the time when the contract is considered as terminated owing to force majeure. The party affected by the force majeure event has an obligation of notification based on two reasons: first, this party has the duty to mitigate the effects of impossibility through expeditious notice to the other party. Otherwise, it should assume responsibility for the damage caused to the other party as a result of a delay or absence of notification. Secondly, this party must prove the events that prevent the performance of its obligations. This requirement to provide proof of the event causing impossibility seems justified and is expressly required in some legal texts in force in Caribbean countries (e.g. Articles 1302 Dominican and French Civil Code; 1.733 of the Colombian Civil Code; 1.363 and 1.461 of the Honduran Civil Code; 2.169 of the Nicaraguan Civil Code). In other words, the burden of proof for the events causing impossibility is on the party who intends to put forward the excuse of breach of contract and such proof must accompany the notification as far as possible.

Non-performance by a party exempts the other party from the performance of its obligations; this must be considered a logical effect of the termination of contract. However, benefits received must be returned when a party has performed its obligation in whole or in part and, failing that, benefits obtained by the other party by virtue of performance must be compensated. This rule is based on an elemental principle of contractual equity expressly included in Articles 299.2 of the Cuban Civil Code; 1.325 of the Guatemalan Civil Code; 1.851 of the Nicaraguan Civil Code; 1.070 of the Panamanian Civil Code. English law suffered more concerns in this regard: although case law have sometimes recognised it on the ground of lack of consideration (decision of the House of Lords of 1943 in Fibrosa Spolka Akcjna v Fairbairn Lawson Combe Barbour Ltd), in order to get around the principle “the loss lies where it falls” some specific written rules have been stated for achieving the same effects. The English Law Reform - Frustrated Contracts Act of 1942 brought about identical acts in some Caribbean common law countries: Law Reform (Frustrated) Act of Jamaica of 1968; Ch. 166 of the Law of Contract Act of Belize of 2000; Ch. 202 of Frustrated Contracts Act of Barbados of 1978; Law Reform (Misrepresentation and Frustrated Contracts) Act of 1977 of Bermuda; Article 1.132 of the Saint Lucian Civil Code. The solution in the USA has been achieved in case law and in some continental countries through quasi-contracts (unjust enrichment). Despite this diversity of courses of action, there is substantial convergence as to the final effect, which is the return of benefits and compensation for the benefits obtained.

3. Partial and temporal impossibility

Paragraphs 5 and 6 of this Article deal with the limited effects of merely temporal or partial impossibility. In these cases, it is considered that termination of contract is only reasonable if a partial or delayed performance frustrates the reasonable expectations and the objectives in the contract of the other party; that is in essence if it leads to a fundamental or essential breach of contract. The rule has been expressly included in Articles 1.376.3º of the Guatemalan Civil Code; 6:74 (6.1.8.1.) of the Dutch and Suriname Civil Code; 1.132 of the Saint Lucian Civil Code; 79.3 CISG; 7.1.7 UP; 8:108 AND 9:401 PECL; III-3:104 DCFR; and 88 CESL. English case law points to the same result (Jackson v Union Maine Insurance Co., 1874; Metropolitan Water Board v Dick, Kerr & Co, 1918; Bank Line Ltd v Arthur Capel & Co, 1919) as well as French case law, although in this last case the recognition of frustration of contract by temporal impossibility is considered more rigidly.

According to the rules proposed in these Principles, even if it is considered that temporal impossibility frustrates the contract, the other party could declare against the termination of the contract (paragraph 4). In cases where temporal impossibility does not frustrate the expectations of the parties or the aim of the contract, the obliged party does not fall into breach of contract by delay and the contract must be performed by both parties.

Example 1: A firm dealing in the retail of textile products buys a batch of seasonal garments from a wholesale firm that produces and distributes swimming trunks for its commercial chain. The swimming trunks are made in the wholesaler's garment factories located in an Asian country. An unexpectedly violent cyclone causes significant damage that delays production and prevents delivery on the established date, with a delay of at least two months. Although the impossibility is temporal, the contract must be considered as terminated by the seller, insofar as the delivery of swimming trucks two months later frustrates the reasonable expectations of the buyer, being a seasonal product which must be sold within a given time. However, the buyer has the right to notify the preservation of the contract to the party that asking for termination.

Example 2: A construction firm is obliged to build and deliver an industrial plant within a two-year period. Different phases of the constructions are achieved according to the schedule established in the contract. One month before the completion of the work, an armed uprising of a revolutionary group affects the transport of supplies necessary for concluding the works. The construction firm cannot complete the works in the established period, although 97% of the works are finished. The builder is not responsible for the delay and the other party is not entitled to terminate the contract.

In principle, the other party can withdraw the performance of its obligation while the impossibility of performance remains for the party affected by the event causing impossibility. However, this rule is subject to exceptions depending on the order of performance agreed and the character of the delayed performance, because in some cases the withdrawal of its obligation could actually result in the frustration of the contract.

Partial impossibility, for its part, does not frustrate the contract if the obligations can reasonably be performed in separate parts. Otherwise, contract will be considered as terminated if a partial performance frustrates the reasonable expectations of the other party in relation with the contract considered as a whole. This is a rule included in Articles 1.376.3ª of the Guatemalan Civil Code; 51 CISG; 9:302 (2) PECL; and III-3:506 DCFR. The proposed rule is also followed in French case law (decision of the Cour de Cassation of 1 June 1964), according to the principle stated, for instance, in Article 1.722 of the Dominican and French Civil Code. This rule faces some difficulties in common law systems, because English law permits the termination of the contract if a partial impossibility frustrates its purpose, but it finds more concerns in adjusting or adapting proportionally the involved obligations in cases of partial impossibility. This seems easier in USA law, as demonstrated by Section 2:615 b) UCC and Section 270 of the Second Restatement.

Example 1: Organisers of a congress conclude a contract with a hotel chain and rent 100 rooms in order to accommodate the participants in an international congress that will be held on the hotel premises. The congress hall becomes unfit for use because of floods and it cannot be repaired before the congress date. Although the contract can be performed partially as far as accommodation is concerned, the contract can be terminated because the expectations of the organisers must be considered as frustrated because they cannot accommodate the participants in the same location where the sessions will be held.

Example 2: A manufacturer of cars located in country X concludes a contract with a supplier of spark plugs for cars located in country Y. The contract establishes the delivery of 50,000 units within a given period. As a result of a political conflict, exports between countries X and Y are suspended by a commercial blockade. The supplier, who has already delivered 40,000 units, cannot deliver the remaining 10,000 units. The contract is not considered as terminated insofar as the car manufacturer can obtain the remaining units on the market and use the 40,000 units delivered. The supplier is not responsible for the non-performance and the manufacturer must pay the agreed price with a reduction of 20%.

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