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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 7.3.1

Right to terminate the contract

1. A party may terminate the contract in case of a fundamental non-performance by the other party.

2. A party may also terminate the contract where the non-performance is non-fundamental, if the additional period conceded under article 7.1.6 has expired, and the other party has failed to perform or remedying the non-performance, unless the consequences of non-performance are minor.

1. The configuration of non-performance in relation to termination of the contract in accordance with an objective model

In all the legal systems, the remedy of termination is a consequence of the synallagma. Thus, in bilateral or reciprocal contracts, each one of the parties is only obliged to render its performance subject to receiving what has been promised to it and consequently, in view of the non-performance of the other party, the aggrieved party has the right to be released from the obligation incumbent on it. However, the possibility to terminate the contract in the case of non-performance clashes with a cardinal principle of the law of contracts: pacta sunt servanda. For this reason, and for other practical and economic reasons, the different legal systems impose more or fewer obstacles and requirements on the remedy of termination of the contract.

The investigation or not of the cause of the non-performance for granting the unsatisfied obligee the possibility to terminate the contract makes the difference between the subjective and objective models of non-performance in relation to termination of the contract in the systems of the Caribbean area.

In the “fault-based” systems the termination appears with a distinct sanctioning nature (termination-sanction of private law), and is conceived as a reproach to the negligent or wilful misconduct of the non-conforming obligor; while the hypothesis of fault-free non-performance is realigned with the doctrine of the risks (e.g. Articles 1.068-1.072 Panamanian Civil Code; Article 1.344 Venezuelan Civil Code). On the other hand, in common law systems, the imputability or not of the non-performance is not conditional on the right to terminate the contract (in the same sense, Article 6:265.1º Dutch and Suriname Civil Code).

In the uniform law, the objective tendency also prevails. In the UP, the unsatisfied obligee has the right to terminate the contract entirely regardless of the criterion of imputation (Articles 7.3.1 et seqq.). In a similar manner, in the CISG the party injured through the non-performance will be able to resort to the remedy of termination, provided that the required conditions are met (fundamental non-performance), regardless of fault (Articles 45 and 61).

For their part, the PECL and the DCFR, despite accepting a unitary and objective concept of non-performance, distinguish in the regulation of the termination of the contract the cases in which the non-performance must be a complete and permanent impediment which the obligor does not have to answer for, in which case the contract is terminated automatically [Articles 9.303 (4) PECL and III-3:104 (4) DCFR]. And in the same vein, this is set out in Article 126 Draft Project of Reform of the French Law of Obligations of 2013.

This last-named solution is the one whose adoption has been preferred for the OHADAC Principles, in accordance with some laws in force in the zone, in which the contract is “automatically destroyed” as a consequence of the impossibility of performance due to force majeure (Article 7.1.8 of these Principles). An objective concept of non-performance of termination is adopted, concerning the specialisations through the concurrence of cause of justification solely for the termination of the contract, which will be ipso iure in this case (paragraph 4 of Article 7.1.8).

2. Serious or fundamental non-performance or the granting of an additional period for performance as requirements for the termination of the contract

The majority of the systems of the civil law tradition, through the influence of Article 1.184 French Civil Code, articulate the termination of the contract for non-performance as an implicit condition for termination of the contract in bilateral or synallagmatic contracts for the case in which one of the obliged parties does not perform what is incumbent on it (Article 1.546 Colombian Civil Code; Article 692 Costa Rican Civil Code; Article 1.184 Dominican Civil Code; Article 1.535 Guatemalan Civil Code; Article 974 Haitian Civil Code; Articles 1.386 Civil Code and 747 Honduran Commercial Codes; Article 1.949 Mexican Civil Code; Article 1.885 Nicaraguan Civil Code; Article 1.009 Panamanian Civil Code; Article 1.077 Puerto Rican Civil Code; Article 141 Venezuelan Commercial Code). Exceptions to the rule are Article 306 Cuban Civil Code, which regulates the termination among the causes of extinction of the obligations; and Article 1.167 Venezuelan Civil Code, which governs it among the effects of the contract, as a specific effect of bilateral contracts. And in the majority of commercial codes it is not regulated in accordance with the pattern of the implicit termination condition either, whether it is foreseen generally (Articles 870 Colombian Commercial Code) or for particular contracts (e.g. Articles 973 and 1.325 Colombian Commercial Code; Article 463 Costa Rican Commercial Code; Article 329 Cuban Civil Code; Article 711 Guatemalan Civil Code; Article 376 Mexican Commercial Code; Article 759 Panamanian Commercial Code; Article 250 Puerto Rican Civil Code)

Due to this lack of coordination of termination of the contract as a remedy in its own right for the non-performance, these codes of the French and Spanish legacy do not limit the criteria for its exercise by constructively requiring, for example, fundamental non-performance. However, that requirement has been claimed by the doctrine and by the court rulings based on grounds of equity (judgment of the Supreme Court of Justice of Colombia 18 December 2009, Exp. 41001-3103-004-1996-09616-01; 22 October 2003, Exp. 7451; and 11 of September of 1984, Gaceta Judicial, volume 176, no. 2415). The Draft Project of Reform of the French Law of Obligations of 2013 (Article 132) also establishes the seriousness of non-performance as a prerequisite of the remedy of termination of the contract.

Traditionally, the English and United States legal systems (and the legal systems under their influence), have adjudicated filters for avoiding indiscriminate recourse to the termination of the contract. In their classic approximation, these laws divide the contractual clauses into conditions and warranties, granting to the injured party only the non-performance of the former the right to terminate the contract (e.g., following the regulations of Section 53 Sale of Goods Act of England: section 53 Sale of Goods Act of Bahamas, Montserrat, Antigua and Barbuda and Trinidad and Tobago, with identical drafting; and secs. 52 and 54 Sale of Goods Act of Jamaica and Belize, respectively).

A contracting party is also permitted to terminate the contract (even though we are not in the presence of a condition) in the case of a renunciation or repudiation of the contract by the other party. One can say that an obligor repudiates the contract if it demonstrates its intention not to perform through its behaviour or words or expressly declares that it will be impossible for it to execute the performance in its fundamental terms.

However, the rigid classification between the contractual terms is made flexible by judicial and legislative means and hence, in some cases, the judges consider that the clause is of an “intermediate” type (intermediate or innominate term), permitting the termination based on an assessment whether the non-performance is sufficiently serious and involves serious consequences for the obligee [Hong-Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962), 2 QB 26]. The introduction of the third category of contractual clauses has served to place emphasis on the termination of the contract in the consequences of non-performance, although such a shift of criterion has been more formal than substantive, since, from the historical and practical point of view, the principle for considering that non-performance grants authority to terminate the contract was that it had seriousness, i.e., its consequences seriously affect the result or benefit that the obligee claimed to obtain with the contract. It is the principle known as substantial failure in performance for United States' Dependent Territories. [Article 2, Particle 7: Remedies UCC; sections 241 and 242 Restatement (Second) of Contracts].

On the other hand, in the Dutch and Suriname Civil Codes, the filter used for avoiding whimsical terminations is the technique of Nachfrist. Thus, while non-performance would even be possible, the obligee will not be able to declare the termination of the contract without a declaration that the obligor is in default beforehand (Article 6:265.2º Dutch and Suriname Civil Code). In consequence, the obligee must notify the obligor in writing, granting it an additional period for rendering the performance. And the termination will take place only after this period has passed in an unsatisfactory manner. Neither the default nor the additional period is required if the parties have agreed a fundamental term (fatale termijn). Also worth noting is that termination without notice if the execution of the performance is temporarily or definitively impossible, without it mattering whether this is due to its fault or force majeure. As a limit related to the institution of non-performance, the cited provision excludes the termination if the non-performance “in view of its minor nature or importance, does not justify the termination and its effects”.

In the same sense, the uniform law uses a combined mechanism of fundamental breach and the technique of Nachfrist. These regulations on termination can be found in Articles 49 and 64 CISG; 7.3.1 UP; 9:301 PECL; III-3:502 DCFR; and 114 and 134 CESL.

Following this line of inspiration, the OHADAC Principles adopt a solution which, although not included in some of the national laws, however, is not alien to them. The power of terminate the contract is granted to the unsatisfied contracting party in the presence of any non-performance, comprising delay and defective performance. In the presence of the fundamental non-performance provided in Article 7.1.2 or in a clause established by the contracting parties, the aggrieved obligee will be able to terminate the contract, without the need to grant an additional period, which in these cases does not make any sense. But, if the performance continues to be possible and useful to the obligee (non-fundamental non-performance, either for delay or for the existence of defects in the performance), will be able grant an additional period, in order to grant it a final opportunity to perform. The regulations provided in Article 7.1.6 imply that the obligee has the right to terminate the contract once the period has passed, although it is non-fundamental non-performance. However, a correction is introduced in order to prevent the opportunist contracting party from using the termination route for escaping from a bad transaction, claiming non-performance of minor importance. For this reason, it is established that the remedy of termination of the contract will not be able to be established if the non-performance is of minor nature, unless, as we have seen, they also include Article 6:265 Dutch and Suriname Civil Code and Directive 1999/44/EC (Article 3.6).

Commentary

Article 7.3.2

Anticipated non-performance and inadequate assurance

1. If before the date of performance of the contract it becomes obvious that one of the parties will fundamentally fail to perform its obligations, the other party may terminate the contract.

2. Where a party has good reasons to believe that there will be a fundamental non-performance by the other party, it may grant it a reasonable period of time to provide an adequate assurance of due performance, and meanwhile withhold its own performance. If no such assurance is provided and the period has expired, it will be entitled to terminate the contract.

1. Termination of the contract for anticipated non-performance

The rule proposed in the first paragraph describes what common law knows as anticipatory breach of the contract, allowing one party to terminate the contract before the agreed period of time when a fundamental breach is foreseeable to the obligee. The rule is not only useful for the obligee (which can use these solutions against breach without waiting for the contract to be breached, thus having to search for a new provider in the market) but also for the obligor, whose duty to damages will be limited.

The right to terminate a contract before its breach is based upon the idea that one party should not bear the consequences of a breach if it is clear and foreseeable that the other party will not be able to perform within the agreed period of time. This right can be understood as a way to protect credit, which is somewhere in between the fundamental breaches of anticipated non-performance, and delayed and failed performance. Thus the party who terminates the contract on the grounds of anticipated non-performance is enabled to use any remedies for breach of contract, including damages. However, damages shall not be claimed if upon the agreed period of time the obligor offers a justification of its non-performance ex Article 7.1.8 of these Principles.

This rule is found in common law [Hochster v de La Tour (1853), 2 E&B 678]; Universal Cargo Carriers Corp v Citati (1957), 2 QB 401; Frost v Knight (1872), LR 7ex 111; Federal Commerce & Navigation Ltd v Molma Alpha Inc (1979), AC 757; and Woodar Investment Development Ltd v Wimpey Construction UK Ltd, (1980), WLR 277] and has been mentioned in Section 250 of the Restatement (Second) of Contracts and in Section 2-610 UCC. In common law Caribbean systems, case law recognises expressly this solution against breach of contract, allowing the obligee to terminate the contract when it is clear that the obligor will not perform its obligations [judgment of the High Court of Trinidad and Tobago in Jemmott v Rodríguez (2009), No. 2888 de 2006 (Carilaw TT 2009 HC 49)].

In civil law systems there are no general rules which allow the obligee to terminate the contract on the grounds of anticipated non-performance of the obligor. However, this possibility is not entirely unknown in these systems, since they permit to terminate a contract in case of foreseeable non-performance, particularly in sale contracts (Venezuelan Civil code section 1.530). There is a principle which is favourable to the termination of the contract due to intentional breach by the obligor, which would permit the recognition of this remedy for breach of contract, based on the following Articles: 1.546 Colombian Civil Code, 306 Cuban Civil Code, 1.184 Dominican and French Civil Code, 1.432 Guatemalan Civil Code, 1.386 Honduran Civil Code, 1.949 Mexican Civil Code, 1.009 Panamanian Civil Code, 1.077 Puerto Rican Civil Code, and 1.167 Venezuelan Civil Code.

Regulation of non-performance in Article 6:80 Dutch and Surinam Civil Code and in the Draft project of reform of French law on obligation of 2013 (Article 128) is more explicit. Articles 116 and 136 CESL consider the risk of anticipated non-performance (by the buyer or the seller, respectively) as a reason to lawfully terminate a contract if the breach is fundamental.

In a similar way, the anticipated non-performance has been widely accepted in international texts on uniform contract law (Article 72.1 CV; Article 7.3.3. UP; Article 9:304 PECL; Article 3:504 DCFR), which, as the Principles, require two conditions in order to allow the obligee to terminate the contract before the expiry of the agreed time period for performance.

Firstly, it is necessary that the future breach is evident [Chilean Nitrate Sale Corp v Marine Transport Co Ltd (The Hermosa) (1982), All ER 234], a mere suspicion not being sufficient even if it is well founded; therefore, the obligor must show a lack of capacity or willingness for performance, which can be expressly declared by the obligor or inferred from its behaviour. Otherwise, if the obligor's behaviour only raises doubts about his willingness or capacity to perform the obligation, the aggrieved party may demand a guarantee of performance within a reasonable period of time, according to the second paragraph of this Article. This solution will also be applicable when there is a threat of delay in the performance: if one party is committed to perform, but with certain delay, the aggrieved party will be able to terminate the contract if the time for performance is fundamental under the contract.

Secondly, the foreseen breach must be a fundamental one [Afovos Shipping Co SA v Pagnan and Lli (The Afovos) (1983), 1 WLR 195] in the sense conveyed by Article 7.1.2 of the OHADAC Principles, insofar as it causes the obligee a qualified damage, that deprives it substantially from what it had the right to expect from the contract, obviously unless the other party had not foreseen or had not been able to foresee this outcome.

Example 1: A family company of design, manufacture and marketing of jewellery signs a sale contract. The company agrees to deliver a hundred unique pieces designed especially for an event to be celebrated on 5t January. On 2 January the company notifies the client that the delivery of the pieces on time is impossible. Therefore, the customer may terminate the contract.

2. Termination of the contract due to inadequate performance guarantees

Thus, as in paragraph 1 the evidence of the fundamental non-performance is required, paragraph 2 of this Principle is in conformity with the existence in the obligee of a well-founded or reasonable suspicion in that regard. Hence, the measures provided are not the same, since in this second case the contracting party is not directly authorised to terminate the contract.

For the sake of the protection of its interest, the solution offered by this rule to the contracting party that fears the fundamental non-performance of the other consists in suspending its own performance (if however it has not rendered its performance), while it requests from the other party that it provides the adequate guarantees that permit it to trust in the performance, in a reasonable period.

If the obligee does not receive the said guarantees and continues to believe in a well-founded and reasonable manner that the other party will not perform, it will be able to terminate the contract in accordance with the provisions in article 7.3.3 of these Principles, since the failure to provide the performance guarantee is considered to be anticipated non-performance of the obligation and opens up the means of the remedy of termination of the contract.

Example 1: A of country X, a renowned architect and owner of a construction company, undertakes to realise the project and the construction of the new buildings which accommodate the offices of the merchant B, of country Y, and must be delivered on a particular date, stipulated in the contract as a fundamental term. A short time after signing the contract, B obtains knowledge that A has accepted another large-scale project. Subsequently fearing that his construction will not be completed in the period provided, B requests from A to assure it in a reasonable manner in a period of ten days that he will perform in time. If A does not do it, B will have the right to terminate the contract.

The general rule on the “adequate guarantee of performance” has been developed in United States law and is included in Section 2-609 UCC, but is not specifically enshrined in any other legal system of the zone. However, in some of these systems, the seller's power to withhold its performance in the presence of the suspicion of non-performance of the other party, fundamentally in the presence of the risk of insolvency, is indeed regulated for contracts for the sale of goods, although they do not grant the power of termination. Hence, this is done in Articles 1.073 Costa Rican Civil Code; 1.613 Dominican and French Civil Code; 1.624 Honduran Civil Code; 2.287 Mexican Civil Code; 2.594 Nicaraguan Civil Code; 1.237 Panamanian Civil Code; 1.356 Puerto Rican Civil Code; 1.407 Saint Lucian Civil Code; 1.493 Venezuelan Civil Code. In English law, however, we do not find any equivalent rules. The rule is expressly included in Article 6:80 (1) (c) Dutch and Suriname Civil Code, as well as in the harmonised law (Article 7.3.4 UP; Article 8:105 PECL; Article III-3: 505 DCFR).

What these reasonable guarantees consist of will depend on each contract and on the circumstances involved in each case, although it has to be taken into account that the rule must not be interpreted in the sense of requiring the obligor to provide guarantees per se from the legal point of view (in rem or ad personam), but that, sometimes, a simple commitment to perform on the part of the obligor and other actions by it likely to arouse in the obligee confidence in the performance will be sufficient.

Example 2: In the case of the construction contract of example 1, it will be sufficient for B to undertake to perform, providing proof to A, in addition, that it has increased its workforce in order to be able to attend to the two projects.

Commentary

Article 7.3.3

Exercise of the right to terminate

1. Unless otherwise agreed, the right to terminate the contract will be exercised by notice to the other party.

2. Where the obligee has established an additional period for performance stating, under paragraph 3 of Article 7.1.6, the automatic termination of the contract if the other party does not perform within the period, new notice will not be required and the contract will be terminated at the end of the additional period or of a reasonable period from the time of notice.

3. In cases of defective non-performance or late offer to perform, the obligee loses the right to terminate the contract if it does not exercise it within a reasonable time after it has, or ought to have, become aware of the non-performance or of a late offer to perform or after the expiry of the additional period for performance.

The proposal adopts a system of extrajudicial termination by simple notification to the non-conforming party given by the aggrieved contracting party due to the non-performance. This is the model that has actually been converging in comparative law and which we can find, with some differences of the regulations, in the Dutch and Anglo-American traditions.

However, the legal systems of civil law tradition, in line of principle, adopt a model of judicial termination, a legacy of Article 1.184 French Civil Code and, through the influence of this, of Article 1.124 Spanish Civil Code. Now that the non-performance has been verified, the obligee will not be able to declare the contract unilaterally terminated, but it must request the termination judicially. The decision regarding the termination is definitively in the hands of the judge, who will control a priori the opportunity of resorting to this remedy. The system is the obligor of the conception of the termination as a sanction, whose application must be reviewed by the judge (Article 1.546 Colombian Civil Code; Article 692 Costa Rican Civil Code; Article 1.184 Dominican and French Civil Codes; Article 1.582 Guatemalan Civil Code; Article 974 Haitian Civil Code; Article 1.386 Honduran Civil Code; Article 1.949 Mexican Civil Code; Article 1.885 Nicaraguan Civil Code; Article 1.009 Panamanian Civil Code; Article 1.077 Puerto Rican Civil Code; Article 1.167 Venezuelan Civil Code).

Despite this, the model recognises exceptions to the judicial termination. Traditionally, the codes have regulated one for the sale of movable properties, in which termination is provided ipso iure or automatically if the buyer has not presented itself to collect the goods in the period provided (Article 1.085 Costa Rican Civil Code; Article 1.657 French and Dominican Civil Code; Article 1.442 Haitian Civil Code; Article 1.664 Honduran Civil Code; Article 1.2752º Panamanian Civil Code; Article 1.394 Puerto Rican Civil Code; Article 1.531 Venezuelan Civil Code). Another exception to judicial termination, this time based on an agreement and not based on the law, is given in the presence of an express termination clause in the contract for the sale of real estate properties (Article 1.656 French and Dominican Civil Codes; Article 1.441 Haitian Civil Code; Articles 1.663 Honduran Civil Code; Article 1.275.1º Panamanian Civil Code; Article 1.393 Puerto Rican Civil Code).

In addition, in the majority of these systems the judicial termination has been relaxed by the case law, for the sake of the facilitating legal and economic transactions. In a word, the necessity of turning to the judge for the termination of the contract in the presence of non-performance is not established as a logical indisputable and fundamental principle in these laws. The Draft Project of Reform of the French Law of Obligations of 2013 pursues the path of the suppression of this requirement.

A peculiar characteristic of Dutch law is that it welcomes the two models, permitting the aggrieved obligee to choose between both (Article 6:267.1º Dutch and Suriname Civil Code).

Anglo-American law follows a model of extrajudicial termination characterised by its scarce formal requirements. The termination of the contract for non-performance does not occur automatically, but the obligee has the power to opt between terminating the contract or maintaining it. It is unsatisfied obligee's prerogative to opt between one remedy and another, evaluating their economic consequences, without the automatic mechanism of the measure being able to impose on it an untimely termination. The problem focuses on determining how the obligee will have to exercise the said option. On this point, the broad formal freedom recognised by these systems makes it possible for the remedy of termination to be exercised without the need for any declaration of the obligee, it is sufficient for it to provide proof through its “unequivocal” conduct, of the decision to terminate the contract [Sookraj v Samaroo (2004), UKPC 50]. Normally, silence or mere inactivity will not be sufficient for this purpose, although the rule is not absolute, since silence sometimes clearly demonstrates that the contract is considered to be terminated [Vitol SA v Norelf Ltd (1996), AC 800].

Notwithstanding the above, in the majority of cases, the termination will be exercised through the obligee's notification to the obligor; and occasionally it is required by the law. But the notification is not required if the obligee, in order to satisfy the duty to mitigate damage, has implemented a contract of substitution of the non-performed contract, in which case it is understood that it has opted for the termination [Guston v Richmond-upon-Thames LBC (1981); section 2.706 UCC; section 48.3 Sale of Goods Act of England and of Bahamas, Montserrat, Antigua and Barbuda and Trinidad and Tobago; secs. 47.3 and 49.3 Sale of Goods Act of Jamaica and Belize, respectively].

In the uniform law, the right to terminate the contract is exercised extrajudicially through the unilateral declaration of the aggrieved obligee. Thus, this is established in articles 26 CISG and 118 and 138 CESL.

The exercise through notification to the other party is likewise provided in Articles 7.3.2. (1) UP, 9:303 (1) PECL and III-3:507 (1) DCFR. These texts furthermore comprise the limits of the right to terminate the contract [Article 7.3.2. (2) UP; Article 9:303 (2) PECL; Article III-3:508 (1) DCFR].

Finally, with respect to the form that will have to be adopted by the obligee's declaration of intent for it to declare the contract terminated, in general the majority of the systems express a preference for freedom of form, although not in such an extreme manner as we have seen in the system of common law. Following this principle, the CISG (Article 26) speaks only of the notice, just like the UP [Article 7.3.2 (1)], the PECL [Article 9.303 (1)], the DCFR [Article III-3.507 (1)] and the CESL (Articles 118 and 138). The two texts of the Principles and those of the DCFR, by establishing the concept of “notification”, explain that this can be given by any means appropriate to the circumstances [Articles 1.9 UP; 1.303 (1) PECL; Article I-1.109 (2) DCFR]. The tendency to formal freedom presents exceptions in some systems. This is the case in the Dutch and Suriname legal system, which requires that the obligee's declaration be given in writing (Articles 6:267 Dutch and Suriname Civil Code), although without requiring a specific written form, and consequently the private document will be sufficient (Article 3:37.1º Dutch and Suriname Civil Code).

In keeping with these texts, in the OHADAC Principles, the right to terminate the contract is exercised, unless agreed otherwise, through a unilateral declaration by the injured party to the other party, opting for the simple formula of the notification (paragraph 1), with freedom of form, without prejudice to the written form being advised in practice, in order to facilitate the proof.

The termination then involves the exercise of a power of legal pattern or facultative right on the part of the obligee. The model shows evident advantages from the practical point of view, since, in addition to the flexibility, validity and lowest economic cost of the remedy, an elimination of the uncertainty was achieved which hovers over the contract on the assumption of judicial termination during the entire time that the process lasts, favouring the promptness of the transaction. This does not mean that the parties can resort to the recourse indiscriminately and without control; rather, the requirement of fundamental or serious non-performance or the granting of the additional period for performance, as prerequisites of the right to terminate the contract, are submitted to a reply by the aggrieved party, the means of litigation remaining open in the case of disagreement.

In the cases of termination through the passage of the additional period of performance, normally the injured party will issue two notifications to the other party: the first one setting the new grace period and the other one declaring the termination. However, in accordance with the provisions of Article 7.1.6 (3) of these Principles, it is possible for the obligee to grant the new period in a single notification and declare that if the obligor does not perform within this period, the contract will be terminated automatically upon its expiry. This possibility is also expressly provided in Articles 7.1.5 (3) UP; 8:106 (3) PECL; III-3:507 DCFR; 115.3 and 135.3 CESL. In such cases, a new notification would be reiterative, which is why paragraph 2 of the provision dispenses with it.

And, finally, in paragraph 3 the limits to the right to terminate the contract are established based on an untimely exercise, as has been seen in Article 7.2.2 (4). In the cases of late performance and non-conforming performance, the obligee's silence can make the obligor think that it accepts the performance, and that the termination right is not going to be exercised. Thus reason, the injured party must communicate its decision to terminate the contract within a reasonable period. If the obligee has granted the obligor an additional period for the performance, the reasonable period for the notification of the termination of the contract will begin to run from the time of the termination of that additional period; and in the other cases, it will be calculated from the time when it knew or ought to have known the offer of the performance outside of the period or the lack of conformity of the performance.

What must be understood by a “reasonable period” will depend of each contract, the nature of the purpose, the period initially established for the performance and the circumstances of the non-performance. Thus, in the case of perishable goods, the period is reduced, and also in which it is possible to obtain a replacement transaction easily, in order to prevent abuses from exploiting from the fluctuation of the prices.

Commentary

Article 7.3.4

Effects of termination

1. Termination releases both parties from their obligations under the contract in future.

2. Termination will not affect any provision for the settlement of disputes or any other term regulating the rights and obligations of the parties in case of termination.

3. Each party may require restitution of its performance providing that it simultaneously proceeds to the restitution of the performance received. If restitution in kind is impossible or excessively difficult, it has to be made in money. However, the party who terminates is not obliged to return the value if it proves that the loss or destruction of the object was caused by force majeure.

4. The party obliged to perform restitution shall return the benefits received as a result of the performance and it is entitled to claim for necessary or preserving expenses.

1. The releasing effect of the termination of the contract

There are two typical consequences of the termination of the contract: the release of the parties from the not yet performed obligations (releasing effect) and the possible restitution of the performance already received (restitutory effect).

In the Caribbean systems of the civil law tradition, the articulation of the termination for non-performance as an implicit termination condition in the synallagmatic contracts (commentary at Article 7.1.1) implies the application of the typical effects of these: leave the things in the pre-existing state before the conclusion of the contract. This ex tunc validity is similar to that established in the cases of nullity of the contract. However, this theoretical termination-annulment of the contract is a source of problems in the practical application, which is why the court rulings recognise important exceptions to the rule of the retroactive validity, as are those related to the contractual clauses of extrajudicial solution of disputes and the contracts for continuous performance or periodic performance.

On the contrary, in the English and American legal systems and the laws under their influence the termination only produces effects from the time when it is exercised by the obligee, and does not affect the obligations met or those enforceable before the termination. Hence, the releasing effect only operates in a forward direction: the parties are released from the obligations although not due at the time of the termination of the contract, but they continue to be obliged to meet the obligations due beforehand. And the same idea is the included in systems in the Dutch sphere, in which the termination lacks retroactive effects [Articles 6:269 and 6:271 Dutch and Suriname Civil Code].

Based on what the traditions have in common, paragraph 1 of the proposed rule includes the releasing effect of the termination. The termination only produces effects that are exercised by the contracting party affected, releasing the parties from their future obligations, but without affecting the obligations met or those due and enforceable before the termination of the contract.

Example: A and B conclude a construction contract, A being the principal and B the agent. If the principal opts to terminate the contract for non-performance by the agent, B will have the right to receive from the party the price corresponding to the construction that it has satisfactorily executed before the termination, and also the duty to deliver to A the part of construction carried out.

In this same vein, the international texts of the uniform law also govern the discharging effect [Article 81.1 CISG; Article 7.3.5 (1) UP; Article 9:305 (1) PECL; Article III-3:509 (1) DCFR].

2. Contractual clauses not affected by termination

A consequence of the survival of the contract is the applicability after the termination of the clauses of the terminated contract that do not directly concern the object of the performance: contractual clauses on liquidated damages and other contractual penalty clauses; those related to an extrajudicial solution of disputes resulting from the contract; those related to the choice of forum, those related to the choice of applicable law, the contractual clauses on confidentiality or restraint of competition, etc., whose survival is referred to in paragraph 2.

This rule is commonplace in all the systems. Thus, in the Anglo-American systems, the so-called ancillary obligations are not affected by the remedy of termination [Heyman v Darwins (1942), AC 356, HL]. In the Dutch or Suriname Codes no rule exists which expressly includes the criterion, but it is deduced from Articles 6:269 and 6:271]. In the civil law tradition, the applicability of these contractual clauses in the stage following the termination of the contract is one of the exceptions recognised by the case law for retroactive validity. Article 138 of the Draft Project of Reform of the French Law of Obligations of 2013 is pronounced in this regard.

Example: A design company and manufacturer of luxury automobiles includes in the commercial contracts for the performance that it realises to the engineers the following clause: “Both parties recognise that the information and documentation received in any type of format (digital or analog, etc.) from the other, or to which it has access on account of this being necessary for providing the service that is the purpose of the contract, all of which is of a highly confidential nature, and it must not be disclosed or used for a purpose different to the activity that is the purpose of this contractual agreement”. Once the contract is terminated by the company for non-performance by one of the engineers of the agreed provision related to the date of delivery of the project, that clause shall continue to be applicable for a reasonable period and the termination shall not release the contracting party from its obligation of confidentiality.

Likewise, the rule is contained in the international texts of the uniform law: Articles 81.1 CISG; 7.3.5 (3) UP; 9:305 (2) PECL; III.- 3:509 (2) DCFR.

3. The restitutory effect of the termination of the contract

The restitutory effect of the termination is included, based on a limited retroactivity, in paragraph 3 of the proposed provision, with a view only to the elimination of the situation existing between the parties as a consequence of the non-performance. One opts then for the modern model of validity of the remedy of termination, adopted by the Dutch and Suriname Civil Code, and by some texts of the uniform law.

Indeed, while Anglo-American law represents the absence of retroactive validity (with some exceptions), the civil-law systems propose as a general rule restitution with in rem effects, a consequence of the retroactivity of the termination; in the model proposed the focus is on the problem with the greatest empiricism, opting for the establishment of some simple rules that make it possible to settle the economic situation existing between the parties after the termination.

It is an option which, however, is not absolutely alien to any of the traditions present in the Caribbean zone. If it is certain that the theoretical starting points of the systems are those indicated in the above paragraph, it is no less so that the case law and legislative development has qualified the rigid initial postures in connection with the non-retroactivity or retroactivity of the termination.

Thus, in Anglo-American law, although the general rule is the absence of restitutory effect, in some circumstances the party that has rendered its performance in full or in part is permitted the power to recover it (restitutory remedy).

In the contract for the sale of goods, the termination by the seller for non-performance of the buyer normally has as its sole effect a personal restitution obligation, without which it is accompanied by the recovery of the ownership of the goods sold to the detriment of third parties or the obligees of the buyer [Articles 38-48 Sale of Goods Act of England; secs. 39-48 Sale of Goods Act of Bahamas, Montserrat, Antigua and Barbuda and Trinidad and Tobago; secs. 40-49 Sale of Goods Act of Belize; secs. 40-47 Sale of Goods Act of Jamaica; sections 2-703 (2) and 2-706 UCC; while Section 2-702 (2) UCC considers a limited exception to this rule]. However, the justified rejection of the goods by the buyer (termination) indeed brings about the recovery of the ownership of the goods by the buyer, both in English law [Kwei Tek Chao v British Traders Ltd (1954), 2 QB 459], as well as in the UCC [section 2-401 (4); Article 2-602 (2)].

As regards the recovery of the sums paid, English and United States laws differ between one another. English law heavily restricts the scope of application of the exception to the general principle of non-retroactivity, so that the aggrieved obligee can claim the restitution of sum paid only if has had frustration of the contract [section 1 Law Reform (Frustrated Contracts) Act; Article 20 Contract Act of Belize; section 3 Law Reform (Frustrated Contracts) Act of Jamaica; section 6 Law Reform (Misrepresentation and Frustrated Contract) of Bermuda ] or in the cases of termination for breach, if it has not received any consideration (total failure of consideration); since if it has had a principle of performance, however small, it is said that there is partial failure of consideration, and one should not exercise the restitutory claim and indeed only the personal action for damages. However, often, the difficulty to distinguish between partial performance and which differs substantially from what was agreed, grants flexibility to the application of the English rule. In the United States this rule is not applied: failure of consideration is not necessary: it is sufficient that the non-performance is sufficiently serious for justifying the termination of the contract, for the party is justified to recover the sum paid beforehand, except in the cases of partial termination.

For its part, the validity the ex tunc termination with in rem effects predicated on the national systems of the Romano-German tradition, is softened by the case law, given the practical difficulties that entails the proceeding of full retroactivity. To avoid these, a wide scope of action has been granted to the means of the restitution by means of equivalent measures and, even more, exceptions have been created to the general rule based on the divisibility or indivisibility of the contractual obligations (in the continuous-performance contracts or contracts of continued performance). On the other hand, the in rem effect of the restitution ceases in the presence of a third party which has to be protected. This evolution is enshrined in Article 137.3º and 4º of the Draft Project of Reform of the French Law of Obligations of 2013.

In the proposed model, it is intended to reach the solution that the person that has rendered performance without receiving anything in exchange must be able to recover it, either in specie or by means of equivalent measures. The objective pursued is the elimination of the situation existing after the termination. This system is the one essentially followed by the proposals of the uniform law [Article 81.2º CISG; Article 7.3.6 (1) UP; Articles 9:307-309 PECL; Articles III-3:511 et seqq. DCFR].

In the rule proposed in these Principles, the termination marks the birth of a legal obligation of restitution of the benefits received by the parties. As a consequence, the party that would have been paid a sum of money beforehand and would not have received a conforming performance will be able to recover the said sum. Not concerning money, the contracting party that would have delivered goods to the other, without receiving consideration, will be able to recover it. However, in this final case, the recovery in natura of the delivered goods is impossible (for example, due to having been lost or having passed into the hands of a third party), the restitution will be done in money.

Remember we are not dealing with a claim for damages here, although in practice, on many occasions, the amount of the claim for damages can contain as one of its parts the value of the performance received and which cannot be returned. However, there are other cases in which there will not be a claim for damages, due to concerning a justified non-performance (Article 7.1.8), and the party will have to, however, restitute the sum received in order to avoid unjust enrichments.

The restitution by means of equivalent measures is also done if, although the repayment in natura is not impossible, it is not reasonable due to involving an excessive difficulty or a disproportionate economic cost.

Example 1: A, a sculptor, was hired by B to make create some carved bas-reliefs directly in the stone of the base of the main façade of his house. Once the artistic construction is completed, B does not pay the agreed price, and consequently A decides to terminate the contract. Although is not physically impossible to dismantle the bas-reliefs of the facade, the costs would be disproportionate. Subsequently, B must restitute to A the value of the construction.

For putting a figure on the equivalent measures, unless it has been agreed otherwise, the value of the performance at the time specified for the performance will be taken as a reference.

The injured party through the non-performance will not be obliged to restitute the value of the performance that would have been delivered by the non-conforming obligor if it provides proof that the loss or destruction of the goods has occurred due to a cause of force majeure (Article 7.1.8 of these Principles).

Example 2: The company A of country X, a tropical fruit-based drinks and sodas manufacturer, concludes with the orchard fruit company B of the country Y a contract for the sale of goods, binding the second party, on the delivery of five tonnes of bananas. B, who had met a better buyer for his bananas, delivers to A five tonnes of mangos. Faced with this non-performance, A decides to terminate the contract and acquire the bananas from the other producer. However, before it may realize the restitution, an explosive storm which lifted large waves, which tore down all of the boats from the jetties of the port, provoked the loss of the bananas. The company A is not liable for the perishing of the goods; it does not lose its right to terminate the contract and will not be obliged to restitute the performance to the company B.

4. The elimination of the ownership status of the obligor of the restitution

In accordance with paragraph 4 of the proposed provision, the elimination of the ownership status of the obligor of the restitution will be done in accordance with the following criteria: firstly, the obligor of the restitution has the obligation to return, either in natura or by taking equivalent measures, the fruits and benefits received from the goods, but not what it ought to have received. Secondly, it has the right to be paid the expenses that might have been incurred for the storage of the goods. And thirdly, the other expenses will be paid insofar as they determine an enrichment of the party to whom they are restituted.

Such rules are not far removed from any of the legal Caribbean systems of the civil law or continental tradition and imply an application of the doctrine of the unjust enrichment or of the retroactivity of the termination. In the systems based on English law, the first criterion will probably be followed if the obligee of the restitution was the injured party through the non-performance of the contract [Planché v Colburn (1831), 8 Bing 14], or in the cases of frustration [section 1 Law Reform (Frustrated Contracts) Act; Article 20 Contract Act of Belize; section 3 Law Reform (Frustrated contracts) Act of Jamaica; and section 6 Law Reform (Misrepresentation and Frustrated contract of Bermuda]. But if the party that claims the restitution was at fault for the non-performance it does not have the right to payment of the benefits [Sumpter v Hedges (1989), 1 QB 673]. In Anglo-American law, the seller that is in possession of some justifiably refused goods (due to a lack of conformity with the contract) is treated as a mere depositary, with an obligation of reasonable care for its storage [section 36 Sale of Goods Act of England; section 37 Sale of Goods Act of Bahamas, Montserrat, Antigua and Barbuda and Trinidad and Tobago; section 38 Sale of Goods Act of Belize; section 36 Sale of Goods Act of Jamaica; section 2-602 (b) and (c) UCC]. In English law it appears to be its only obligation; however, in the United States law, if the buyer is a trader, the obligation to proceed to carry out the resale of the goods can also be imposed on it in particular circumstances (section 2-603 UCC).

5. Third party rights

This rule claims only to regulate the relations between the parties and does not affect the third party rights in connection with the goods that are they object of the contract affected by the termination, which must be determined in accordance with the applicable national laws. For example, the possible existence of a third party acquirer protected whose exercise of the remedy of termination must not be affected.

Commentary

Article 7.3.5

Compatibility between termination and damages

Termination does not exclude the right to damages for non-performance subsisting after termination. However, the defaulting party shall not be liable for any loss that the aggrieved party would have suffered, to the extent that the latter could have reduced them by taking reasonable measures.

Faced with the non-performance of contract, the aggrieved contracting party will be able to use as many remedies as it considers necessary for the defence of its right, provided that they are not incompatible [Article 7.1.3 (2) OHADAC Principles]. Specifically, the right to terminate the contract and the claim for damages shall be considered compatible remedies.

This occurs in common law, where the non-performance by a contracting party of the performance provided in the contract (primary obligation) gives rise to the secondary obligation of the payment of the damages caused by the non-performance (secondary obligation: to pay damages). And also in the systems based on the civil law or continental tradition the general rule is the compatibility of the remedies [Article 1.546.2º Colombian Civil Code; Article 692 Costa Rican Civil Code; Article 306 Cuban Civil Code; Article 1.184.2º Dominican and French Civil Codes; Article 1.535.2º Guatemalan Civil Code; 974.2º Haitian Civil Code; Article 6:277 Dutch and Suriname Civil Codes; Article 1.386.2º Honduran Civil Code; Article 1.949.2º Mexican Civil Code; Article 1.885.2º Nicaraguan Civil Code; Article 1.009.2º Panamanian Civil Code; Article 1.077.2º Puerto Rican Civil Code; Article 1.167 Venezuelan Civil Code; Articles 45 and 61 CISG; Articles 7.3.5 and 7.4.1. UP; Article 8:103 PECL; Article III-3:102 and III.-3:502 DCFR). The condition precedent for all of these is that the non-performance of termination of the contract is not justified by the concurrence of force majeure.

In comparative law more problems are created by the determination of whether the damage related to termination of the contract must be the positive interest (interest of performance) or the negative interest (interest of confidence). In the models belonging to the retroactive model an antithesis can occur that the positive interest accrues to the obligee and, however, the termination has ex tunc effects. However, the admitted rule is the claim for damages of the positive contractual interest and this is also the option pursued by the Dutch legal system (Article 6:277 Dutch and Suriname Civil Code: positief contractsbelang).

In Anglo-American law the positive interest is protected, since the objective is to place the affected party in the same situation as if the contract had been performed [“so far as money can do it (...) in the same situation (...) as if the contract had been performed”]. But if it so desires, the aggrieved obligee will be able to opt for the negative interest (reliance loss), but never for both remedies cumulatively. The limit of the combination of claims (loss of bargain, reliance loss and restitution) is the principle that prohibits the double recovery of the same damage (principle against double recovery).

In the uniform law, the general rule is the claim for damages of the so-called positive interest [Article 74 CISG; Article 7.4.2 (1) UP; Article 9:502 PECL; Article III.-3:702 DCFR; Articles 160 CESL].

In the proposed provision an open rule has been chosen, without establishing that the interest payable as damages is the positive interest or the negative interest, the aggrieved contracting party can choose between one and the other, as required.

It is important not to confuse the claim for damages with the possibility to claim the agreed sums which, as has been seen in the commentary on the above provision, derive from the non-retroactivity of the termination, such sums only being able to be obtained if they have fallen due before the termination.

Example: If in a contract for the sale of goods it has been agreed that the buyer delivers a sum as a signal (security deposits), and the contract is terminated precisely through the non-performance of that obligation of the payment of the security deposit, the seller will be able to request: a) the security deposit, as the sum agreed and due before the termination, and b) the damage caused by the non-performance of contract.

Finally, the duty to mitigate the damage is imposed on the injured party, in such a way that it will not be able to request damages for the losses that they could have been avoided by combining, for example, a replacement transaction if this is possible (commentary at article 7.4.3 OHADAC Principles).

Commentary

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