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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 7.4.1

Right to damages

1. The obligee is entitled to damages for loss caused by the non-performance of the contract, either exclusively or together with any other remedies, unless the non-performance is excused under these Principles.

2. Only loss for non-performance, including future losses, which may be established with a reasonable degree of certainty will be recoverable.

3. The obligee has the right to full compensation for damage. Damages shall include any loss and any reasonable gain of which the obligee was deprived.

4. The non-economic loss as a result of the non-performance of the contractual obligations will also compensable, including suffering, loss of enjoyment or emotional distress.

1. Independence and compatibility of the right to compensation for damages

Compensation for damages is integrated in the framework of remedies that comprise contractual liability. The breach of the agreed obligation provokes an impairment of the obligee's interest, and the damages serve to compensate for damage that it produces. Thus, the right to be paid damages arises in the presence of any non-performance, provided this is not justified.

In English law, it is said that non-performance of the obligation agreed in the contract (primary obligation) gives rise to the secondary obligation to pay damages (secondary obligation to pay damages), which is the normal remedy, since common law is restrictive in the recognition of the claim for performance [Photo Production Ltd v Securicor Ltd. (1980), UKHL 2].

In the legal systems of the civil law or continental tradition the duty to pay damages for the damage resulting from non-performance of contract is also generally considered (Articles 1.613 et seqq. Colombian Civil Code; Articles 701 et seqq. Costa Rican Civil Code; Article 293 Cuban Civil Code; Articles 1.146 et seqq. French and Dominican Civil Code; Articles 1.433 et seqq. Guatemalan Civil Code; Articles 936 et seqq. Haitian Civil Code; Articles 1.360 et seqq. Honduran Civil Code; Articles 2.107 et seqq. Mexican Civil Code; Articles 1.860 et seqq. Nicaraguan Civil Code; Articles 986 et seqq. Panamanian Civil Code; Articles 1.054 et seqq. Puerto Rican Civil Code; Articles 996 and 1.001 et seqq. Saint Lucian Civil Code; Articles 1.264 et seqq. Venezuelan Civil Code). However, in some systems of this tradition, the question of the independence of the remedy of damages has been raised. This has occurred in Colombia, where the court rulings have accepted the independence of the actions in civil matters, as occurs in commercial matters [Article 925 Colombian Commercial Code; judgment of the Supreme Court of Colombia, Social Cassation Chamber, of 3 October 1977 (Gaceta Judicial, CLV volume no. 2396, 1977, p. 320-335); against, rulings of the Supreme Court of Justice, Social Cassation Chamber, of 2 June 1958, (Gaceta Judicial, volume LXXXVIII, no. 219, pp. 130-134) and of 14 August 1951 (Gaceta Judicial 1951, p. 55-63). Likewise, in Venezuela, the legislator's silence has brought the doctrine to discuss the possibility of exercise of the action for damages regardless of the termination or specific performance, or if it is subordinated to these remedies. The court rulings declared the autonomy of the action in the important judgment of 10 November 1953 (CFC/SCMT, 10/11/1953, Gaceta Forense, 2a E., No 2, pp. 431 ss.), despite the main part of the doctrine continues to have difficulties with the construction of a general rule of the independence of the action. On the other hand, the Dutch and Suriname Civil Codes design a basic regulation applicable to contractual or non-contractual damage, i.e., to any obligation to pay damages in Articles 6:74 et seqq.

In paragraph 1 of this principle the right to contractual damages is comprised as an independent remedy compatible with other remedies. It is independent because, in the framework of these Principles, the injured party can opt to exercise it as a unique remedy for defective or non-conforming performance, or for the impossibility of performance imputable to the obligor. But it can also be exercised with other remedies with which it is compatible, for example, for compensating for the damage resulting from contractual termination related to fundamental non-performance, or combined with the right to specific performance in the case of late performance, for compensating for the damage that the delay has caused to the obligee.

2. Irrelevance of the fault

The majority of the systems of the civil law or continental tradition assume the fault of the non-conforming contracting party as a prerequisite for the granting of the claim for damages to the aggrieved contracting party. They are, then, subjective or “fault-based” systems (Articles 1.147 and 1.148 French and Dominican Civil Code; Articles 937 and 938 Haitian Civil Code; Article 1.424 Guatemalan Civil Code; Articles 1.360 and 1.362 Honduran Civil Code; Articles 1.860, 1.862, 1.863, 1.864 Nicaraguan Civil Code; Articles 986, 988, 989, 990 Panamanian Civil Code; Articles 1.054, 1.056, 1.057 and 1.058 Puerto Rican Civil Code). Other codes, like the Cuban (Article 293), the Saint Lucian (Article 1.002) and the Venezuelan (Article 1.264), appear to opt for the objective thesis; however, in this last-named code in reality liability based on fault is established, which is absolutely presumed by the legislator (Articles 1.271 and 1.272 Venezuelan Civil Code).

The Dutch and Suriname legal systems, although they reflect a spirit of objectivity, do not manage to dissociate themselves entirely from the fault. Thus, article 6:75 Dutch and Suriname Civil Code establishes that for a duty to pay damages to exist the non-performance must to be imputable to the obligor, either because it has been due to its fault, or because it is a risk which it must tolerate based on a law, a legal transaction or a “generally accepted opinion” (of in het verkeer geldende opvatting). As can be seen, reference is made to the imputation through fault and also through risk (subjective and objective imputation).

Among the clearly objective systems are the laws of the Anglo-American sphere, where the obligor incurs liability through the mere fact of non-performance, if there are no positive reasons that can excuse it, and this without the need to find out whether or not it has incurred fault. In this same vein, the Article 77 CISG regulates the remedy for damages objectively, providing in Article 79 that this will only occur if a ground for exemption provided in this provision applies. The UP is also found in this group (Article 7.4.1) and the two harmonisation proposals of the law in Europe: Articles 9:501 (1) PECL and III-3:701 (1) DCFR. And likewise, Article 159.1 CESL opts for the objective system.

In accordance with this tendency to objectification, and in accordance with the adoption of a concept of objective non-performance (commentary at Article 7.1.1 of these Principles), the fault of the non-conforming obligor has been dispensed with in the proposed rule for granting the injured party the right to damages. Consequently, this will occur provided that the non-performance by the obligor is not justified due to the concurrence of force majeure (Article 7.1.8) or is covered by a clause of exemption or limitation of liability (Article 7.1.7).

3. Irrelevance of the declaration that the obligor is in default

On the other hand, in the majority of the Caribbean civil law or continental legal systems, in the case of delay in the performance there will not be liability if there is no declaration that the non-conforming contracting party is in default. In these laws, the declaration that the obligor is in default marks the beginning of the transfer of the risks for the loss of the goods due and also of the duty to pay damages for the damage caused by the delay in the performance (Article 1.615 Colombian Civil Code; Article 1.084 Costa Rican Civil Code; Article 255 Cuban Civil Code; Article 1.146 French and Dominican Civil Code; Article 1.433 Guatemalan Civil Code; Article 936 Haitian Civil Code; Article 1.364 Honduran Civil Code; Article 2.105 Mexican Civil Code; Article 1.859 Nicaraguan Civil Code; Article 985 Panamanian Civil Code; Article 1.053 Puerto Rican Civil Code; Article 999 Saint Lucian Civil Code; Article 1.269 Venezuelan Civil Code). In the same way, the Dutch and Suriname Civil Code requires the declaration that the obligor is in default in the cases in which the performance is however possible or if it is only temporarily impossible (Article 6:74.2º). However, some codes of commerce dispense with the requirement of the declaration that the obligor is in default for there to be liability for the delay in the performance of the commercial obligations (Article 418 Costa Rican Commercial Code; Article 63 Cuban Commercial Code; Article 677 Guatemalan Commercial Code; Article 85 Mexican Commercial Code; Article 232 Panamanian Commercial Code; Article 94 Puerto Rican Commercial Code).

For the lawyers of the Anglo-American sphere, default is an alien concept. In the case of non-performance, the duty to pay damages runs from the date agreed in the contract for the performance of the obligation. If no day for the performance has been agreed, the obligor must perform in a reasonable period of time and the right to damages will come into existence when that period expires, without which the obligee must meet some requirement. In the same way, from the time when it does not perform, the contracting party assumes the risks (section 20 United Kingdom Sale of Goods Act and 1979; section 22 Sale of Goods Act of Bahamas, Montserrat, Barbuda, Trinidad and Tobago and Belize; and section 21 Sale of Goods Act of Jamaica), and will not already be able to claim frustration for being released from the obligation in the case of impossibility of the performance, since it will be considered that self-induced frustration exists.

Following the slipstream marked by the common law systems, the declaration that the obligor is in default or the communication of the non-performance is not necessary, as a condition for being able to claim damages for the delay in the CISG, UP, PECL and DCFR.

In the proposed rule, in accordance with the explanations in the commentary of article 7.1.1 in connection with the concept of non-performance, the requirement of the determination that the obligor is in default for the duty to pay damages to arise has been omitted. And this is the case despite, as we have seen, a great number of systems of the Caribbean area making the obligation to pay damages of the delayed performance dependent on the obligor having been summoned. However, this option will clash directly with the Anglo-American legal conceptions, for which default is a “disruptive” institution, as well as that it constitutes a more practical, rapid and secure system, as required by commercial transactions.

4. The requirement of certainty of the recoverable damage

The remedy of damages has a compensatory function, and consequently the simple non-performance of the contract is not sufficient for the duty to pay damages to arise, but the said non-performance needs to cause damage to the obligee and this needs to be certain (paragraph 2).

Example 1: A, company of country X, has not performed its obligation to deliver to the company B, of country Y, certain unascertained goods whose price is decreasing. Since B has not paid the price, however, if it manages to buy the goods from another provider for a price lower than that agreed in the original contract, it will not have suffered any damage, and consequently A will not have to pay damages to it although it has not performed the contract.

Example 2: Advised negligently by its attorney who spotted some unfounded prospects of benefit, A decides to invest its savings in a transaction. If finally it turns out that, by chance, the economic results that it obtains are beneficial, A will not be able to claim damages from its attorney, despite the fact that he/she has not performed though not acting with the due diligence according to his/her lex artis, since no effective damage exists.

An exception to this affirmation which is the golden rule in the majority of the legal systems, are the so-called nominal damages of common law. The symbolic damages are granted to the plaintiff through the mere fact of non-performance, although this has not caused it effective damage [Surrey Civil Code v Bredero Homes Ltd (1993), 1 WLR 1361] or, if there is damage, it is not possible to prove its existence [Columbus & Co Ltd v Clowes (1903), 1 KB 244] or its amount [Erie County Natural Gas and Fuel Co Ltd v Carrol (1911), AC 105]. However, the usual objective of nominal damages is no other than to confirm the breach of the plaintiff's right.

As well as this particular feature of common law, and although much less known, there also exists in France an exception to the principle of the compensatory nature of damages in article 1.145 French Civil Code, according to which, concerning a particular obligation not to make, the obligor will be obliged to pay damages for the simple breach of the obligation. This same exception is found in Articles 1.612 Colombian Civil Code, 1.145 Dominican Civil Code, 1.326 Guatemalan Civil Code, 2.104 in fine Mexican Civil Code, 1.001 Saint Lucian Civil Code, and 1.266 Venezuelan Civil Code. In addition, all the systems consider another exception for the pecuniary obligations (commentary at Article 7.4.6 OHADAC Principles).

It is implicitly required that the damage results from non-performance, i.e., that it is a consequence of this, which presupposes a sufficient causal nexus between the non-performance and the damage caused.

The rule of this paragraph 3 also includes the obligation to pay damages for the future damage, namely, which however has not occurred but can be established with a reasonable degree of certainty. Hypothetical damage or damage based on mere conjectures or hopes is excluded. Future damage often takes the form of loss of profits or loss of opportunity. Articles 74 CISG, 7.4.3 UP, 9:501 (2) (b) PECL and III-3:701 (2) DCFR refer to future damage in the uniform law.

5. The principle of full reparation

The principle of the full reparation of the damage, according to which the damages aim to re-establish as far as possible the balance of interests destroyed by the non-performance of the contract and place the aggrieved party in the situation in which it would have been in if this had not taken place, represents the essence of the remedy of damages, has to be considered the axis of the calculation of the damages in all of the OHADAC legal systems [Article 1.613 Colombian Civil Code; Article 1.149 French and Dominican Civil Code; Article 1.434 Guatemalan Civil Code; Article 939 Haitian Civil Code; Articles 6:95 and 6:96 Dutch and Suriname Civil Code; Article 1.365 Honduran Civil Code; Articles 2.108, 2.109 and 2.115 Mexican Civil Code; Article 1.865 Nicaraguan Civil Code; Article 991 Panamanian Civil Code; Article 1.059 Puerto Rican Civil Code; Article 1.004 Saint Lucian Civil Code; Article 1.273 Venezuelan Civil Code; section 1-106 UCC; section 347 Restatement (Second) of Contracts; judgment of the High Court of Barbados in Vaugh v Odle (1982), No. 765, Carilaw BB 1982 HC 44; Article 74 CISG; Articles 7.4.2 and 7.4.3 UP; Article 169 CESL).

A consequence of the principle of full reparation is the preference in the majority of the systems for positive interest or performance as a general measure of the damages related to contracts. The compensation for damages for positive interest involves placing the obligee in the same situation and with the same economic results that it would have been in if the non-performance had not occurred. On the other hand, the so-called “negative or confidence interest” strives to place the obligee in the situation that it was in before the conclusion of the contract.

In English law, the rule of the payment of damages for positive interest is included in the judgment of the case Robinson v Harman in 1848 (1 Ex Rep 850) even though, sometimes, the contracting party can claim only the negative interest, for example because the loss of benefit is very difficult to prove [Anglia TV v Reed (1971), 3 All ER 690; McRae v Commonwealth Disposals Commission (1951), 84 CLR 377]. United States law, in the same vein, permits the aggrieved party to choose between positive or negative interest (sections 347 and 349 Restatement (Second) of Contract), which is the practical result to which English law likewise leads.

The Caribbean systems of the civil law or continental tradition do not dogmatically include the distinction between positive or negative interest, despite the courts indeed having picked up the difference. In the PECL and DCFR it is expressly recognised in both provisions (Article 9:502 and III-3:702) under the heading “general calculation of the damage”, and equally positive interest is present in Article 160 CESL.

However, despite being considered the most appropriate form for providing a response to the principle of full reparation and to promote confidence in contracts, preference has been given not to establish definitively the option for the obligation to pay damages for the interest of performance in this Principle. Sometimes, it will be difficult to calculate and to grant, and consequently preference has been given to an open rule that permits the aggrieved contracting party (or the judge or arbitrator) to establish a calculation of the damage adequate to the circumstances.

The principle of full reparation also functions as a limit to the remedy of damages, in order to avoid the enrichment of the victim, and involves the prohibition of so-called “punitive damages”, whose nature is sanctionary. In English law, although admitted in some cases of non-contractual civil liability, non-performance of contract cannot substantiate the award of punitive damages, rejected in the judgment Addis v Gramophone Co. Ltd (1909, AC 488). In the United States this rule contrary to punitive damages is enshrined in numerous statutory rules and in Section 1-106 UCC, although the courts indeed grant it in cases of non-contractual liability and, including, in cases in which, having non-performance of contract, an action of tort is exercised jointly [St Louis and SFR Cov v Lilly (1916), 162 SW 266; Armada Supply Inc v S/T Agios Nocolas (1986), 639 F. Supp. 1161, 1162; Thyssen Inc v SS Fortune Star (1985), 777 F.2d 57, 63].

6. Emerging damage and loss of profits

According to paragraph 3 of the proposed Principle, damage includes what is known as emerging damage (damnum emergens) and loss of profits (lucrum cesans) under Roman law. Emerging damage consists of the effective and known loss suffered and covers, firstly, intrinsic damage, namely, the value of the performance not rendered (or the additional work on the defectively rendered performance), but also any expense incurred by the obligee and which has become useless through the non-performance or the impairment to the obligee's goods, including non-patrimonial ones, resulting from the non-performance of the performance due. The loss of profits concerns the reasonable gains which have ceased to be obtained, i.e., the advantages whose acquisition has been frustrated by the non-performance. The obligation to pay damages of both concepts is commonplace [Article 1.613 Colombian Civil Code; Article 1.149 French and Dominican Civil Code; Article 1.434 Guatemalan Civil Code; Article 939 Haitian Civil Code; Article 6:96.1º Dutch and Suriname Civil Code; Article 1.365 Honduran Civil Code; Articles 2.108 and 2.109 Mexican Civil Code; Article 1.865 Nicaraguan Civil Code; Article 991 Panamanian Civil Code; Article 1.059 Puerto Rican Civil Code; Article 1.004 Saint Lucian Civil Code; Article 1.273 Venezuelan Civil Code; Article 74 CISG; Article 7.4.2 (1) UP; Article 9:502 PECL; Article III-3:702 DCFR; Article 160 CESL]. In common law, there is no doubt that the expectation interest covers the two elements, although the distinction is not used very much by the courts.

The loss of profits involves a certain degree of uncertainty and randomness, by taking concrete shape normally when moving forward towards the future. Hence, the simple possibility or hope of realising gain is not sufficient for its determination, but a certain objective and reasonable probability that it will occur has to exist. This “reasonableness” referred to in paragraph 3 of the provision will be an advantage taking into account the ordinary course of events and the special circumstances of the specific case.

Example: The vessel “Calixto”, owned by the company A of country X, was brought to the shipyard of B of country Y, for cleaning and painting work of its bottom to be carried out in the same. For carrying out the construction not in accordance with the professional expertise required, a slippage of the vessel occurred, due to which it has been stranded in a defective manner, causing it significant damage which resulted in a delay of three months in its delivery to A. The merchant A requested damages, comprising the loss of gain through the stoppage of the vessel that it could not carry out the fishing chores during these three months. In the estimation of this loss of profits, the average of the catch made by the boat in the same months in previous years will be referred to, cautiously assessing and excluding the doubtful or unfounded gains or gains founded only on hopes.

7. Contractual moral damage

Even though it will not be very frequent in commercial contracts, paragraph 4 of the Principle provides that recovery of the damage resulting from the non-performance of contract will also include, where appropriate, non-economic damage or moral damage.

In the OHADAC area, however, there is no common position regarding the obligation to pay damages for this damage. The starting point in English law is the negative position, represented in the well-known judgment in the case Addis v Gramophone (1909, AC 488), and repeated in a multitude of cases, including the recent case [Johnson v Gore Wood & Co (2002), UKHL 65]. However, in recent times, the misgivings have been softening and the English courts and courts of the Caribbean States of the common law tradition have admitted the compensation of the contractual moral damage in two types of cases: firstly, if the contract consists in providing pleasure, relaxation or peace [cases Jarvis v Swans Tours (1973), QB 233; Ruxley Electronics and Construction v Forsyth (1996), UKHL 8; Farley v Skinner (2002), AC 732; judgment of the High Court of Barbados in Brathwaite v Bayley (1992), Carilaw BB 1992 HC 23; Jamaica Telephone Co Ltd v Rattray (1993), 30 JLR 62]; secondly, if the non-performance of contract causes physical disadvantages and discomforts [Watts v Morrow (1991), 4 All ER 937; judgment of the High Court of Barbados in Harvey-Ellis v Jones (1987), Carilaw BB 1987 HC 44].

In French law, although the Civil Code does not consider it expressly, the doctrine and the court rulings have defended the view that moral damage is generally recoverable. Equally, the judgment of 9 December of 2010 of the Plenary Council of the Colombian Constitutional Court in the judgment C-1008/10 has established the reparation of the patrimonial and non-patrimonial damage in contractual matters, consequently with the principle of full reparation. In Cuba, the doctrine favours the obligation to pay damages, based on Article 294 Cuban Civil Code, which refers to non-contractual liability for the stipulation of damages for non-performance of contract. However, in other civil law or continental legal systems, given the silence of the civil codes, the courts show themselves restrictive in its recognition: hence, it occurs in Mexico or in Venezuela, where the judgment of the Supreme Court of Justice, Social Cassation Chamber of 12 August 2011, declared that the damages for contractual moral damage occurs only in the cases in which, together with contractual liability, non-contractual fault occurs. In Holland, moral damage appears to be limited to the cases of Aquilian liability, although, based on article 6:106 Dutch and Suriname Civil Code, it is also maintained regarding contractual liability. At the European Community level, the judgment of the Court of Justice of the European Community of 12 of March of 2002 (As. C-168/00: Simone Leitner/TUI Deutschland GmbH & Co KG) declares the obligation to pay damages for moral damage.

Equally, the doctrinal proposals of the uniform law recognise that the repairable damage is not limited to pecuniary damage, but includes the pains, discomforts, the psychological stress or, in general, the “moral damage” that the non-performance can cause to the other contracting party [Article 7.4.2. (2) UP; Article 9:501 (2) PECL: Article III-3:701 DCFR].

Under the proposed rule the suffering or the emotional anxiety, the loss of leisure or pleasure, as well as the injury to the personal or professional reputation will be recoverable. The damages can come from economic damage, which will be the most normal course of action, or of other measures that are adequate to the case in question, such as the publication of a press notice or notice of relief, etc.

Example: A, a known tenor of the country X, is contracted for the inauguration of the new national opera theatre of the country Y. If there are a few months before the start and the action of A having been published in national and international media, the organizers of the event decide to contract a ultimately fashionable young European tenor, terminating the above contract. A will then be able to claim damages, not only for the economic injury that involves not obtaining the remuneration agreed by the action and other expenses made in view of the performance, but also for the damage caused to his reputation, being demeaned by the artist, with an international broadcast.

Commentary

Article 7.4.2

Scope of damages

The obligor is liable only for loss which the parties foresaw or could reasonably have foreseen at the time of the conclusion of the contract as a likely result of the non-performance.

1. The rule of remoteness of the damage in the national systems

A strict application of the principle of full compensation for the damage would involve an exorbitant risk for the obligor, hampering the legal and economic transaction. Hence, criteria have been developed for limiting the scope of recoverable damage. The main criterion, used by the majority of the legal systems of the zone, is the so-called “rule of remoteness”.

The rule is enshrined in Articles 1.150 and 1.151 French Civil Code using the parameters of foresight and remoteness as a criterion for the determination of the recoverable damage if the non-performance is not fraudulent, and in this second case limiting the compensation to damage that is an “immediate and direct consequence of non-performance of contract”. The doctrine of remoteness permits a sharing of the risks of the contract between the parties, so that the non-conforming contracting party will only be liable for the foreseen damage or the damage that the parties would have been able to foresee at the time of the conclusion of the contract. Hence, the rule of remoteness is based on the agreement of intent itself.

The rule of remoteness has been incorporated in the civil law or continental legal systems (Article 1.617 Colombian Civil Code; Articles 1.150-1.151 Dominican Civil Code; Articles 940-941 Haitian Civil Code; Article 1.366 Honduran Civil Code; Article 1.866 Nicaraguan Civil Code; Article 992 Panamanian Civil Code; art 1.060 Puerto Rican Civil Code; Articles 1.005-1.006 Saint Lucian Civil Code; Articles 1.274-1.275 Venezuelan Civil Code), generally differentiating between good faith obligor and fraudulent obligor, for making the first one liable only for the foreseen damage or the damage that it has been able to foresee at the time of the conclusion of the contract and the second one for all of the damage that is an immediate and direct consequence of the non-performance.

Other codes of the zone, however, only support a criterion of adequate causality, making the non-conforming obligor liable for damage that is an immediate and direct consequence of the non-performance of the obligation, without distinguishing between fault or fraud at the time of determining the extent of the recoverable damage [Article 704 Costa Rican Civil Code; Article 6:98 Dutch and Suriname Civil Code; Article 1.434 Guatemalan Civil Code; Article 2.110 Mexican Civil Code].

In English law, the judgment in the case Hadley v Baxendale (1854, EWHC J70) tends to be considered the starting point of the rule of “remoteness of damages”. In this, the criteria of “remoteness or unforeseeability of damages” appear, connecting these with the “just and reasonable consideration of the parties” at the time of the conclusion of the contract. The future development of the manner of understanding the “rule of remoteness” distances it from the connection with the contract, placing the emphasis on the remoteness of the damage by the contracting party obliged to pay damages. However, the judgment in Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) (2008, UKHL 48) implies a return to the rule that bases remoteness in what was agreed by the parties in the contract and in the subsequent interpretation. These very principles have been also applied by the Caribbean courts [judgment of the High Court of Barbados in Frederick v Lee (2007), No. 662, 2006, Carilaw BB 2007 HC 18]. The rule of remoteness likewise informs Section 2-715 UCC.

2. The rule of remoteness of damage in the international texts of harmonisation of contract law

The CISG drinks from the well of common law and welcomes the doctrine of remoteness in its Article 74: after proclaiming the principle of full reparation in its first subparagraph, limits its scope in the second, in accordance with the criterion of remoteness refers only to the knowledge held by the non-conforming obligor, as English case law had understood before the case Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas), and not to the agreement between both parties expressly or tacitly contained in the contract. The optional instrument of the sale of goods (CESL) contains a similar rule in Article 161. The UP includes the rule in its article 7.4.4. Just like the CISG, the UP refers to remoteness of damage at the time of the conclusion of the contract and only with respect to the non-conforming party. In the commentary, it is clarified that the non-conforming party must not suffer the reparation of damage that it could not foresee at the time of concluding the contract, or the risks which, for that reason, it could not consider and cover with insurance.

A compromise solution between the civil law or continental trend and common law appears to be included, however, in articles 9:503 PECL and III-3:703 DCFR, which cover the rule of remoteness as understood in the English manner, and thus referring only to the non-conforming obligor, but establishing a special rule for the cases of intentional or deliberate non-performance, in the French manner.

3. The rule of remoteness in the OHADAC Principles

In the proposed provision the rule of remoteness is presented, establishing a distribution of the risks through the consequences of non-performance of the contract based on private autonomy. Thus, reference is made to the damage foreseen by the parties or damage which they would reasonably have been able to foresee, i.e., to the liability for the risks covered within the scope of the agreement of intent. The reinterpretation made by the UP, PECL and DCFR which, as we have seen, directs the rule of remoteness only to the non-conforming party, is thus rejected.

On the contrary, the provision in which the rule is proposed refers both to parties and to the nature of the damage, permitting the contracting parties to know what they are bound by and what consequences are set out in the event of not complying with what has been agreed. This is also the reason for connecting “foresight or reasonable remoteness” to the time of the conclusion of the contract.

According to this rule, therefore, the non-conforming party will be liable for damage that is a probable consequence of its non-performance according to the ordinary course of events, and have been provided as covered risks in the contract or were reasonably foreseeable according to the circumstances that were taken into account at the time of concluding the contract (for example, based on the previous commercial relations existing between the parties or the information revealed by the same).

Example: A fire is generated in a car park due to a lack of vigilance and control by A, the owner company; the flames cause significant damage due to combustion in a truck belonging to the professional company B, an art dealer, which is parked there. A will be liable for a failure to observe the duty of care, for the damage suffered by the truck driver. But its liability does not extend to the loss of a collection of old photographs of great value which are found inside it, since the content has not been the purpose of an express declaration and the company owning the car park could not reasonably foresee that a cargo of such value would be kept in the vehicle.

The exception, which, as we have seen, is provided by some legal systems and rules of harmonisation regarding the liability of the obligor, whose non-conforming behaviour is fraudulent or greatly negligent has not been included in the proposed rule. The reasons for this legislative option are various: firstly, the contrary solution would oblige the legal operator to deal with the thorny issue of the investigation of the intentionality of the obligor, an often complicated task given that it belongs to the subjective realm, and is alien to the logic of commercial transactions. Secondly, the common law and some civil law or continental legal systems do not know the difference, which is not found in the CISG, the CESL or in the UP. The third reason is of a practical nature and is endorsed by the experience of the established court rulings of some legal systems which indeed enshrine the distinction between the imputation to the fraudulent obligor and the obligor at fault: given that only what is foreseeable is causally necessary, the extension of liability ends up being the same in both cases.

Commentary

Article 7.4.3

Duty to mitigate

1. The obligor is not liable for any loss that the obligee could have prevented or reduced by taking reasonable steps.

2. The obligee is entitled to recover reasonable expenses in which it incurred in attempting to mitigate the loss, even if the measures have been unsuccessful.

The so-called “duty to mitigate” is enshrined in this article, i.e., the rule which prevents the party injured through the non-performance from claiming damages for the losses that could have been prevented, reduced or offset, simply taking reasonable steps appropriate to the specific circumstances.

The mitigation of the damage constitutes a fundamental principle of the Anglo-American law of contracts; a leading case in the area is considered to be the pronouncement on the case British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd (1912, AC 673). The principle is also applied by the courts in the Caribbean territories under the common law influence [e.g. judgment of the Court of Appeal of Jamaica in National Transport Co-operative Society Ltd v Attorney General (2011), Civ. App. no. 117].

In the Caribbean legal systems of civil law or continental tradition, the civil codes do not include the obligee's duty to reduce the damage caused by the non-performance; however, the rule can be based on contractual good faith, enshrined as a general principle. Indeed, we can find a positive application of the duty in some commercial codes (e.g. Articles 1.074, 1.077, 1.078 and 1.079 Colombian Commercial Code). The Dutch and Suriname Civil Code does not expressly include the duty to mitigate, but the doctrine is understood to be included in Article 6:101, which regulates the concurrent negligence as a limit to contractual damages and which will be dealt with in the commentary of Article 7.4.4 of these Principles.

In reality, both the duty to mitigate and concurrent negligence are limits that can be related to causality: the obligor must only to be liable for the damage effectively caused by it, and not for the damage that is due to the victim's own conduct facilitating or aggravating the harm. These limits are present in all the systems, as can be asserted by the non-conforming obligor to restrict the amount of the recoverable damage.

The analysis of the rule under discussion makes it possible to mark out three rules. According to the first rule, the injured party does not have the right to obtain recovery of the damage that could be (and should be) prevented or reduced by taking the reasonable steps adequate to the circumstances (paragraph 1). In reality, and despite its English name as “duty to mitigate”, it is not a real obligation, since it does not entail the correlative right, but is an obligation whose infringement will be the reduction of the amount of the damages. The objective of the imposition of the rule is to prevent the passivity of the party injured through the non-performance from increasing harm that could have been easily reduced.

The “reasonable steps” will vary from one case to another, depending on the circumstances, and at times will exist simply in the realisation of a replacement transaction in accordance with Article 7.4.6 of these Principles. What is not required, in any case, is for the aggrieved contracting party to take steps that can entail economic risk.

Example 1: A, an “online” sales company, hires the constructor B to repair the cover of its ship used to store supplies, work which must be completed in one month, before the start of the storm season. Once the agreed date is reached, the construction has not yet been completed. Given the threat of the rains and that A is aware, on the one hand, that if it stops its activity this would entail great losses for it and, on the other hand, that the goods that it stores are delicate and would be irreparably damaged by the rains, decides to hire C, a plastics manufacturing company, to make a temporary cover in order to protect the roof of the boat until the repairs are completed.

In accordance with a second rule, the mitigated damage is not recoverable. Thus, if the obligee manages to reduce or prevent the damage, it will not be able to claim damages for the mitigated damage.

Example 2: A fishing company of country X, has concluded a contract with B, of country Y, to deliver the catches made each day. The morning of the day “d”, the merchant B does not arrive in the port to collect the fish and A decides to sell them on the wharf, obtaining a better price that that agreed with B. Consequently, A will not be able to claim any damage from B.

Including if the steps taken would have exceeded reasonable limits, resulting in an extraordinary reduction of the damage that it may have suffered, it will not be compensated in respect of the difference. This is because, as we have seen, damages have a merely compensatory function (commentary of Article 7.4.1).

A third rule indicates that the injured party must to be reimbursed for the expenses that it has incurred due to its mitigating action, provided that those expenses were reasonable, and this regardless of the success or failure of the steps (paragraph 2).

Example 3: In the factual case of example 1, the company A will be able to seek from B the reimbursement of the expenses caused by the commissioning of the protective plastic cover of the ship used to store supplies.

On the contrary, if the obligee has taken extraordinary and disproportionate steps that have increased the damage, it will not be able to recover the expenses or seek damages for the further damage.

The duty to mitigate is detailed in Article 77 CISG; Article 7.4.8 UP; Article 9:505 PECL; Article III-3:705 DCFR; and Article 163 CESL.

Commentary

Article 7.4.4

Loss attributable to the obligee

The obligor is not liable for loss suffered by the obligee to the extent that the conduct of the latter has contributed to the non-performance or its results.

As has been indicated in the commentary of the above article, the injured party's conduct contributory to the causation of the damage constitutes the other limit of the damages intimately connected with the causal nexus.

Even though it is related with the duty to mitigate, and some systems even regulate it jointly [Article 6:101 Dutch and Suriname Civil Code), it is not the same limit. The duty to reduce the damage does not arise until the non-performance occurs; it is then when the obligee must take the reasonable steps to reduce the resulting damage. However, in this rule the widest possible assumption is made, in which the obligee contributes to the occurrence of the non-performance itself or the damage. In reality, the proposed rule simply aims to impute to the liable party only the part of the damage for which it is effectively liable, which is why we are facing a problem of causality or objective imputation.

The provision covers two different factual cases. In one of these, the non-performance occurs due entirely or partly to the conduct of the obligee, for example through the non-performance of its duties to collaborate if they were necessary for the performance of a service under the liability of the obligor, non-performance of contracts which had some connection, or for the acts and omissions of persons for whom the obligee must be liable, etc.

Example 1: The pharmaceutical company A, of country X, hires C, of the country Y, to construct a building for new laboratories, regarding a project that B, a known architect had made for it. Once constructed, it is noted that the construction does not provide the seismic resistance required, since it is demonstrated that it is due to an error in the project; subsequently, C will not be liable for the non-performance.

The second case concerns the injured party's conduct (action or omission) that affects the aggravation of the damage occurred through the non-performance.

Example 2: The fruit and vegetable company A of country X had sold 3 tonnes of avocados to the company B of country Y, for making jars of guacamole. Under the terms of the contract there is a clause in which it is specified that those avocados must be delivered in a state of maturity which permits their storage in refrigerated rooms for at least one week. Once the goods have been delivered, the avocados begin to rot on the second day. It was demonstrated that although B had not performed by delivering overripe avocados, the temperature of A's refrigerated rooms was not adequate for the maintenance of the fruits in the optimum condition. Subsequently, B will not be liable for all of the damage.

The consequence, in any case, will be the exclusion or reduction of the liability, depending of the degree of intervention of the injured party's conduct in the non-performance or in the causation of the damage.

In the Caribbean legal systems of the civil law or continental tradition this limit, although not generally enshrined in the codes, has been developed in the established court rulings. Indeed, both in contractual liability as well as in Aquilian liability, the courts understand that the concurrence of the obligee‘s negligence in the occurrence of the non-performance or its effects must produce a reduction of the quantum for damages, proportionate to the degree of participation by the aggrieved party, or including an extension of liability if there has been exclusive fault on the part of the aggrieved party.

In common law the question of the intervention of fault on the part of the aggrieved party in the production of the damage will not be considered relevant, in light of the claims for contractual damage until 1945, a date on which the Law Reform (Contributory Negligence) Act was passed. There is similar legislation in other states of the Commonwealth, as well as in some North American countries. The new rule imputes the reduction of the damages through concurrence of the fault on the part of the victim in cases of non-contractual liability (tort). Until then, the problem of contributory negligence had been scarcely discussed in English law, since the solid development of the established case law of the doctrine of the duty to mitigate would make it possible to terminate satisfactorily the majority of the cases. However, the possibility to extend the application of the rule to contractual liability has been raised subsequently. In any case, it has been argued that including in the case of contractual liability, if the defendant manages to demonstrate that the harm caused is due exclusively to the negligent action of the actor, would not be liable at all [Lambert v Lewis (1982), AC 255].

The PECL and the DCFR include in some provisions the case of losses attributable to the aggrieved party (Article 9:504 PECL) or to the obligee (Article III-3:704 DCFR), declaring that it will not be the liability of the non-conforming. In a similar manner, article 162 CESL provides that the obligor will not be liable for the losses suffered by the obligee insofar as this objective has contributed to the non-performance or its effects. In greater detail, the UP, establishes in its article 7.4.7 that if the damage is due in part to an act or omission of the injured party or another happening through which that party assumes the risk, the amount of the damages will be reduced insofar as such factors have contributed to the damage, taking into consideration the conduct of each of the parties. Hence, it provides for the reduction of damages, which, as we will see, occurs in the civil law or continental legal systems. No specific provision on concurrent negligence is included in the CISG, however, the question will be able to be subsumed in the case of article 80.

Commentary

Article 7.4.5

Calculating the damages

1. The obligee who has terminated the contract and has concluded a reasonable replacement transaction may recover the difference between the price agreed in the contract and the price of replacement transaction.

2. The obligee who has terminated the contract without making any replacement transaction, but there is a current price for the performance contracted for, may recover the difference between the contract price at the time of termination. Current price means the usual price for performance in similar circumstances in the place where performance was due or, in the absence, current price in another place which could be reasonably considered.

3. The provisions of the preceding two paragraphs shall be without detriment to any compensation due to the obligee for additional damages for any further loss, under this Section.

To facilitate the calculation of the damage in contractual liability if there has been a termination of the contract, some systems positively embody rules of specific and abstract calculation. One of these is based on the actual price, for example, because a substitute or replacement transaction has been made. The abstract calculation is carried out if the damages are calculated based on a standard, which can be the market value of the goods which the obligee must have received.

In the harmonised law, patterns are expressly included for the assessment of the damage in the non-performance of termination that is liable for these specific and abstract calculation systems. Thus, Articles 75 CISG, 7.4.5 UP, 9:506 PECL, III-3:706 DCFR and 164 CESL establish that if the obligee has carried out a replacement transaction in reasonable time and manner, the damages must consist of the difference between the price established in the non-performed contract and the price of the substitute transaction. In addition, there will be damages for any other demonstrated loss. If no replacement transaction has been made, Articles 76 CISG, 7.4.6 (1) UP 9:507 PECL, III-3:707 DCFR and 165 CESL denote a system of abstract calculation: the difference between the contractual price and the market price.

Such calculation criteria are not included in the Caribbean civil codes, but are indeed taken into account by the courts at the time of the stipulation of the amount payable as damages, above all in commercial contracts. In addition, a specific form of calculation of the damages is detailed, although under the aspect of specific performance, regarding the affirmative covenant, which the obligee can mandate to be executed at the expense of the obligor in the case of non-performance (Article 1.610 Colombian Civil Code; Article 695 Costa Rican Civil Code; Article 290 Cuban Civil Code; Article 1.144 French and Dominican Civil Code; Article 1.323 Guatemalan Civil Code; Article 934 Haitian Civil Code; Article 1.357 Honduran Civil Code; Article 2.027 Mexican Civil Code; Article 1.849 Nicaraguan Civil Code; Article 983 Panamanian Civil Code; Article 1.051 Puerto Rican Civil Code; Article 997 Saint Lucian Civil Code; Article 1.266 Venezuelan Civil Code).

In other systems, the rules on the specific and abstract calculation are established only for the purpose of the regulation of the contract for the sale of goods; this thus occurs in articles 7:36 and 7:37 Dutch and Suriname Civil Code; and in the rules of the English tradition, although referring only to the abstract calculation [secs. 50 (3) and 51 (3) Sale of Goods Act of England, and with identical drafting: secs. 50 (3) a 51(3) Sale of Goods Act of Antigua and Barbuda, Bahamas, Trinidad-Tobago, Belize, Montserrat, and secs. 49 (3) a 50 (3) Sale of Goods Act of Jamaica]. The United States legislation, however, provides both calculation criteria: specific calculation [sections 2-706 (1) and 2-712 (1) UCC], and abstract calculation (section 2-713 UCC).

In the rule of these Principles the two assessment criteria of the damage are included. Paragraph 1 makes reference to the specific calculation, based on a substitute transaction or replacement transaction, executed in reasonable time and form. The damages will be calculated based on the difference between the price agreed in the contract and the price obtained in the replacement transaction. If the substitute transaction made by the obligee is not reasonable, due to comprising an exorbitant difference with the price agreed in the non-performed contract, this rule will not be applied.

Example 1: A, a cocoa export company of country X, has concluded a contract for the sale of goods with the company B of country Y, under which the first party undertakes to deliver 2 tonnes of cocoa and B, to pay 200. When the time of delivery is arrived at, A does not perform, and B is obliged to buy the cocoa from C, who sells it for 250. A must pay damages for the value of 50, i.e. the difference between the agreed price and the price paid in the replacement transaction.

The abstract calculation is detailed in paragraph 2, dealing with the market price, if any, of the performance covered by the contract. In this case, the amount of damages will be calculated taking in account the difference between the contractual price and the current price. The difficult question about the time when the calculation has to be addressed is raised, since this is the fluctuating market price (above all the price of some goods), the amount of the damage could vary considerably according to whether it is expected on one date or another. The international texts prefer to refer to the calculation at the market price at the time of the termination [Articles 76 (1) CISG; Article 7.4.6 (1) UP; Article 9:507 PECL; Article III-3:707 DCFR; Article 165 CESL]. However, in the Anglo-American system the general rules which have to be the market price of the goods at the time when non-performance occurs [Articles 50 (3) and 51 (3) Sale of Goods Act of England, and with identical drafting: secs. 50 (3) a 51(3) Sale of Goods Act of Antigua and Barbuda, Bahamas, Trinidad and Tobago, Belize, Montserrat; and secs. 49 (3) to 50 (3) Sale of Goods Act of Jamaica], or if the obligee had knowledge of the same [section 2-713 (1) UCC]. This final option claims to prevent that the parties can speculate with the non-performance in a fluctuating market. This is the rule that is also adopted for the assessment of the equivalent measure in Article 7.3.4 (3) of these Principles. However, in the case of compensation for damage the OHADAC Principles are inclined to favour the first solution, to the extent that the consideration of the price at the time of the termination is more consistent with the principle of full reparation of both emerging damage and damage through loss of profits. In the case of a notable difference or negligent or speculative termination, the rules contained in articles 7.4.2 and 7.4.3 (1) will be used for adjusting the calculation or, where applicable, opt for the reference price at the time of the non-performance.

Example 2: In the facts of example 1, if A is prepared to carry out the delivery, the cocoa is unjustly refused by B and it does not manage to place the goods, the damage will be assessed taking in account the market price of the cocoa on the day of the termination i.e. if the price agreed in the contract and the price that has not been paid is 200 and the market price 300, A will be able to recover damage for the value of 100 (300-200).

One has opted for the introduction of these calculation criteria of the damage in the non-performance of termination despite the fact that most Caribbean systems do not consider this favourably, for reasons of utility in the commercial operations, since they provide an easy, rapid and secure calculation method.

However, this article contains some simply evidential rules that do not exempt the general principles on the determination of the damage. It is a question merely of easing the burden of the proof that weighs on the obligee at the time of assessing the intrinsic damage (propter rem ipsam non habitam), not of limiting the quantum of the damages, since the injured party can recover other additional damages in accordance with this section (paragraph 3).

Commentary

Article 7.4.6

Damages for late payments of money

1. In the absence of agreement, if payment of a sum of money is delayed, the debtor is entitled to interest upon that sum, whether or not the non-performance is excused.

2. Interest shall be payable from the time when the payment is due.

3. The debtor may also claim additional damages for any further loss, if it is recoverable as provided for in this Section.

1. The obligation of payment of the interest

In this article a special rule for the calculation of the damage is established in the cases of late performance of a monetary obligation. In such cases, the majority of the Caribbean legal systems find the emerging damage and the loss of profits in a forfait: the interest. Hence, from the time when the obligor is declared to be in default (if the requirement is necessary) or from when there is a delay in the performance, the sum agreed as a principal obligation will accrue interest, which will constitute the damages, directly and without the need of any proof [Article 1.617 Colombian Civil Code; Article 706 Costa Rican Civil Code; Article 1.153 French and Dominican Civil Code; 1.435 Guatemalan Civil Code; Article 943 Haitian Civil Code; Article 1.367 Honduran Civil Code; Article 707 Honduran Commercial Code; Article 2.117.2º Mexican Civil Code; Article 1.867 Nicaraguan Civil Code; Article 993 Panamanian Civil Code; Article 223 Panamanian Commercial Code; Article 1.061 Puerto Rican Civil Code; Article 1.008 Saint Lucian Civil Code; Article 1.277 Venezuelan Civil Code; section 354 (1) Restatement (Second) of Contracts; Article 78 and 84 CISG; Articles 7.4.9 (1) UP; Article 9:508 (1) PECL; Article III-3:708 (1) DCFR; Articles 168-171 CESL].

Cuba merits a special mention, where the agreement of interest is illegal, except in the obligations stemming from operations with foreign loan or commercial entities (Article 294 Cuban Civil Code). Thus, Article 315 Commercial Code permits the agreement of interest without tax or any kind of limitation for commercial loans.

In England, until quite recently, the obligor was not obliged to pay interest for delayed payment, except if the obligation had its origin in commercial values or there was an express agreement to pay interest (in which case it is not a question of compensation for damage but of a sum due in the performance of the agreed obligation). In 1982 it was permitted by law (Administration of Justice Act) that the court can grant the payment of interest, including if the obligor has paid before the judgment, on condition that it has been done after being required judicially and, for commercial obligations, the Late Payment of Commercial Debts (Interest) Act of 1998, obliged the payment of default interest as an “implied term” in this type of contracts.

In line with all of the above, the proposed rule grants the party injured through the non-performance of the obligation of payment of a debt of money the right to the interest agreed in the contract. The right to charge the interest is not, in reality, damages; hence, the general rules on this remedy established in this section will not be applied to it. The interest is the product or fruit of the money (civil fruit), the non-conforming party is therefore obliged to make its payment although the non-performance is justified in accordance with Article 7.1.8 OHADAC Principles, since the contrary solution would determine an enrichment of the obligor, which receives interest of the sum that it should already have delivered to the other party.

Example: A of the country X, has bought 100 tonnes of coffee from B of the country Y. Once the obligation to pay the price has expired, it is impossible for A to pay the amount on account of a new national regulation that controls the outflows of capital abroad. In this case, although the non-performance is justified due to the occurrence of force majeure, A must pay to B the corresponding interest.

Due to the nature of the interest as the fruit of the money, the injured party's right to its collection is not subject to any proof of existence of certain damage, as has already been indicated in the commentary at Article 7.4.1 of these Principles.

This obligation to pay interest agreed is governed in the absence of which the parties have agreed otherwise for the non-performance, for example through the introduction of a contractual clause on the liquidation of damage in accordance with article 7.4.7 of these Principles.

2. Type of interest

The majority of the Caribbean legal systems tend to leave the determination of the rate of interest to the freedom of contract and, in the absence of agreement, the accrual of the legal interest on the money is established as a supplementary rule [Article 1.617 Colombian Civil Code; Article 1.435 Guatemalan Civil Code; Articles 6:119 and 6:120 Dutch and Suriname Civil Code; Article 1.367 Honduran Civil Code (legal interest of 6%); Article 2.117.2º Mexican Civil Code; Article 1.867 Nicaraguan Civil Code (legal interest of 9%); Article 993 Panamanian Civil Code (legal interest of 6%); Article 1.061 Puerto Rican Civil Code (legal interest of 6%)]. On the other hand, the Late Payment of Commercial Debts (Interest) Act of 1998 also permits, although with limits, the agreement of contractual interest (Article 8). The Cuban Commercial Code, however, in its regulation of commercial loans, permits the agreement of contractual interest and - in the absence of agreement in writing - the loan will be free of charge (Articles 314 and 315 Cuban Commercial Code). Interest will be regarded as any performance agreed for the benefit of the obligee (Article 315.2º Cuban Commercial Code).

Other systems in force in the zone refer directly to the legal interest (Article 1.153 French and Dominican Civil Code; Article 943 Haitian Civil Code; Article 1.277 Venezuelan Civil Code).

Articles 9:508 (1) PECL and III-3:708 (1) DCFR provide that the type of interest will be calculated in accordance with the average rate applied by the commercial banks in short term loans to qualified clients, for the currency of payment in the place where performance must be realised. The same rate is also the starting point in Article 7.4.9 (2) UP, which subsequently adds that if this rate does not exist in that place, then the same rate will be applied in the state of the currency of payment and in the absence of that rate in those places, the rate of interest will be the rate that is appropriate in accordance with law of the state of the currency of payment. The CISG, however, does not stipulate any rate of interest, given that it was impossible to reach an agreement on a standard rate. The discount rate was considered to be inadequate for correctly measuring the costs of the loan, and there was no consensus either on if whether it had to opt for the costs of the loan of the seller country or of the buyer country.

Similar problems have been raised at the time of stipulating the supplementary interest rate to the contractual rate agreed in the proposed rule. It is necessary to avoid favouring a strong currency to the detriment of another, and on the other hand the legal interests applicable in different states of the zone are very disparate. Thus, it has been understood that, concerning commercial contracts, the most adequate solution will be to leave it to the parties autonomy to regulate the question and, failing this, it will be up to arbitrators or courts to establish an ad hoc reference index or in accordance with the law that governs the contract or the own law of the forum. Hence, it is recommended to include in the contract a clause which determines the rate of interest that will govern the monetary obligations resulting from the contract, like those indicated at the end of the commentary to this provision.

3. Dies a quo of the accrual of interest

The interest begins to accrue from the day when the debt is due and is unpaid, without any need or requirement of any notification by the injured party (paragraph 2). That is to say, if a determined or determinable date for the payment would have been stipulated in accordance with the provisions of Article 6.1.2 (a) of these Principles, and the obligor does not comply, the interest will run from that time. And if a period within which the obligor must comply would have been indicated, in accordance with the provisions of Article 6.1.2 (b), the interest will accrue from the end of that period.

This is the system preferred by the rules of harmonised law, which do not require the declaration that the obligor is in default for the delay in the payment to constitute non-performance [Article 7.4.9 (1) UP; Article 9:508 (1) PECL; Article III-3:708 (1) DCFR], and also constitutes the model adopted by these Principles (Article 7.1.1). Hence, if the injured party has granted an additional period for payment in accordance with Article 7.1.6, the interest will have run from the initial date when the obligation has fallen due and not from when the time when notification was made or after the passage of the additional period.

Example: A of country X, has bought 100 tonnes of coffee from B of country Y, having stipulated 1 June as the date of delivery and payment. When the time comes, B delivers the goods, but A does not observe its obligation to pay the price, claiming that it is awaiting the collection of some sales. B decides to grant it an additional period of 30 days for the performance. Finally, A pays the price on the date of 30 June. B has the right to the interest from the date of 1 June, which was the time of the expiry of the debt.

4. Additional damages

The objective of the interests is to prevent lateness of payment from being economically beneficial for the non-conforming party, but does not inherently constitute damages, since it does not require proof of damage. Consequently, the injured party will be able to claim damages for other additional damage that the failure to comply with the date would have caused it, provided that they are recoverable in accordance with these Principles, namely, if the failure to comply is not justified and the damage claimed meets the requirements of certainty and remoteness.

Example 1: If, in the facts of the example of epigraph 1, the value of the money falls as a consequence of inflation between the time of the expiry and the time of the effective payment to such an extent that the fall is not compensated with the interest that would be due in accordance with paragraph 1 of the provision, B will not be able to claim additional damage for this reason, since the A's failure to comply was covered for a ground for justification.

Example 2: A, of country X, concludes a contract for the sale of goods of real estate properties with B, of country Y. The contractually agreed date of payment of the price is the date of 3 April; the significance of the date of performance being reflected in the date of the contract, given that A required the money to repay a loan that became due on that day, this being the real reason for the sale. The buyer B does not pay the price on the agreed date and, as a consequence, A cannot repay the loan on the expiry date and must tolerate the high default interest. The seller will be able to claim from B not only the interest that accrues on the price from the date of 3 April until the time of the effective payment, but also the interest on the loan as additional damage.

This is the solution that also adopted by the international texts [Article 7.4.9 (3) UP; Article 9:508 (2) PECL; Article III-3:708 (2) DCFR]. And, equally, it is included in some commercial codes of the OHADAC territory (e.g. Article 679 Guatemalan Commercial Code; Article 708 Honduran Commercial Code). However, it is not possible to claim additional damages in some legal systems of the zone, as in the Dutch and Suriname laws (Article 6:119, with the exception included in paragraph 1) or in Costa Rica (Article 706 Civil Code).

SPECIFIC INTEREST CLAUSES

As has been noted in paragraph 2 of the commentary of this article, the difficulty of stipulating a single interest rate that functions as an addition to the contractual interest rate, obliges the parties that have submitted their contract to the regulations of the OHADAC Principles to include in the contract a clause of determination of the applicable interest rate.

The contractual clauses proposed below distinguish according to whether a determined date for the payment has been stipulated (clause A), or on the contrary, the contracting parties have established a period within which the obligor must perform the monetary obligation (clause B).

Both respond, however, to the spirit of these Principles and, subsequently, do not require declarations that the obligor is in default, or any requirement for the delay to constitute non-performance (Article 7.1.1).

In paragraph one the rate of interest and the time of accrual is established. And paragraph two includes the possibility of damages for additional damage and is optional, since that damage will be recoverable even though nothing is indicated, through the provision of Article 7.4.6 (3) of these Principles.

Option A: Date determined for the performance

“The non-payment of the obligation of (payment of the price, repayment of the loan, etc...) on the date of performance agreed in the clause (...) of this contract will entitle the injured party to interest of (...)% from the date of expiry and until the time of the effective payment, whether the failure to pay is or is not justified.

The aggrieved party will also be able to claim damages for other additional damage, provided that is certain, foreseeable and the performance is not justified.”

Option B: Period for the performance

“The non-payment of the obligation of (payment of the price, repayment of the loan, etc...) at the contract period of time for the performance agreed in the clause (...) of this contract will entitle the aggrieved party to interest of (...)% from the final day of the period established and until the time of the effective payment, whether the failure to pay is or is not justified.

The aggrieved party will also be able to claim damages for other additional damage, provided that it is certain, foreseeable and the performance is not justified.”

Commentary

Article 7.4.7

Liquidated damages

1. Where the contract provides that a party who does not perform its obligation must pay a specified sum of money, the oblige is entitled to claim that sum irrespective of its actual loss.

2. Despite any provision to the contrary, the sum so agreed in the contract may be reduced to a reasonable amount where it is grossly excessive and disproportionate in the light of circumstances.

1. Characterisation of the penalty clauses.

As provided in paragraph 1 of this article, the contracting parties can stipulate the amount of the compensation for contractual damage, according to which the contracting party that does not perform its obligation must pay a determined sum to the injured party for the non-performance, regardless of the damage that has been caused. It is a question of the so-called “compensatory penalties” or “contractual penalty clauses” with anticipated liquidation of damage function in the civil law or continental legal systems and “liquidated damages clauses” in common law.

Indeed, the Caribbean civil law or continental legal systems admit, as a general rule, the contractual penalty clauses or conventional penalties, with very varied functions, which can be agreed in the commercial contractual sphere of the principle of the freedom of contract (Articles 1.592-1.601 Colombian Civil Code; Article 867 Colombian Commercial Code; Articles 708-714 Costa Rican Civil Code; Articles 268-269 Cuban Civil Code; Articles 1.152 and 1.226-1.233 French and Dominican Civil Code; Articles 1.436-1.442 Guatemalan Civil Code; Articles 942 and 1.013-1.020 Haitian Civil Code; Articles 6:91-6:94 Dutch and Suriname Civil Code; Articles 1.417-1.420 Honduran Civil Code; Articles 1.840-1.850 Mexican Civil Code; Article 88 Mexican Commercial Code; Articles 1.985-2.003 Nicaraguan Civil Code; Articles 1.039-1.042 Panamanian Civil Code; Articles 1.106-1.109 Puerto Rican Civil Code; Articles 1.062-1.068 Saint Lucian Civil Code; arts- 1.276-1.263 Venezuelan Civil Code).

The criterion in these systems is that the stipulated sums replace the damages that the injured party could receive for the non-performance (compensatory penalty). So that the clause has a punitive function (cumulative penalty), the parties have to expressly give it that nature through agreement (Article 712 Costa Rican Civil Code; Article 268 Cuban Civil Code; Article 1.418 Honduran Civil Code; Articles 1.991 and 1.999 Nicaraguan Civil Code; Article 1.040 Panamanian Civil Code; Article 1.107 Puerto Rican Civil Code); and equally that agreement is necessary for configuring the clause as a facultative or disclaimer clause of the obligation (Article 1.418 Honduran Civil Code; Article 1.990 Nicaraguan Civil Code; Article 1.107 Puerto Rican Civil Code).

However, if the liquidated penalty has been stipulated for the cases of delay or partial or defective performance and the obligor has not performed its obligation entirely and irrevocably, the aggrieved obligee can demand the performance of the principal obligation or the damages plus the penalty (Article 1.594 Colombian Civil Code; Articles 1.229 French and Dominican Civil Code; Article 1.437 Guatemalan Civil Code; Article 1.016 Haitian Civil Code; Article 1.419 Honduran Civil Code; Article 1.846 Mexican Civil Code; Article 1.991 Nicaraguan Civil Code; Article 1.108 Puerto Rican Civil Code; Article 1.064 Saint Lucian Civil Code; Article 1.258 Venezuelan Civil Code).

For its part, in Anglo-American law, the contractual clauses through which the payment of a sum is stipulated in the case of non-performance can be of two types: contractual penalty clauses (penalty clauses) and liquidated damages clauses (liquidated damages clauses). The first ones, real penalties (consistent with what are called “cumulative penalty” in continental law), are null and void and the obligee will be able to claim only for the really suffered losses. The second (consistent with the contractual penalty clauses with the function of previous liquidation of damage) are valid. According to case law [Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915), UKHL 1], the essence of the penalty clause resides in that they are stipulated in terrorem, with the purpose to oblige the obligee to perform its principal obligation. The contractual clauses on the liquidation of damage, on the contrary, are a prior assessment of the losses that the obligee would suffer in the case of an imputable non-performance. The delimitation between a penalty clause and a clause on liquidation of damage is an interpretative question which must be unravelled in view of the existing circumstances (amount, damage that the non-performance would cause...) and the intention of the parties [judgment of the High Court of Trinidad-Tobago in Quality Really Services Ltd v Peterson (1982), Carilaw TT 1982 HC 84; judgment of the Court of Appeal of Barbados in Furniture Ltd v Clark, (2004), Civ. app. no. 21, 1997 (Carilaw BB 2004 CA 1); section 356 Restatement (Second) of Contracts].

The European texts on harmonisation of the law adopt the continental focus of accepting the contractual penalty clauses, permitting them in Articles 9:509 PECL and III-3:712 DCFR, including if, due to being of high amount, have a coercive objective or the objective to guarantee the performance. However, paragraph 2 of these provisions subjects the clause to reduction taking account of the effective loss resulting from the non-performance and other circumstances. The UP contains a practically coinciding rule in its article 7.4.13.

This disparity of criteria with which the OHADAC national systems deal with the contractual penalty clauses leads to limiting the possibility of agreement in these Principles to the so-called previous liquidation clauses or liquidated damages clauses, since the solution which signifies a consideration of the possibility of introducing real penalties (cumulative penalty or penalty clauses) would involve a mighty clash with the tradition of common law.

The contractual clauses that establish the possibility of the obligor being released from its obligation by paying the agreed amount are also not regulated in this provision since, in reality, the regulation of these contractual clauses (facultative penalty) is part of the scope of the so-called facultative obligations.

Consequently, as a result of paragraph 1 of this article, the contractual clauses in which the parties establish a sum to be paid by the non-conforming party, in the case of a failure to perform, and which functionally represent an anticipated assessment of the damage, are valid. These contractual clauses have the advantage of allowing the injured party to dispense with the proof of the certainty and the amount of the damage. The aggrieved party will not be able to seek greater damage, and the non-conforming party cannot claim that it has not suffered any damage.

Example: A and B conclude a construction contract, through which A undertakes to construct a building for B, being obliged to deliver it before 31 January. In the contract a clause is introduced in which it is provided that the constructor must pay 100 for each day of delay in the delivery of the construction. If A fulfils its obligation late, on the date of 10 February, it will be obliged to pay 1,000 whatever damage has been suffered by B.

In keeping with that provided by the national legal systems, in principle, the injured party will only have a right to claim payment of the provisions of the clause in the cases in which it would have the right to damages, i.e., if the non-performance is not justified in accordance with Article 7.1.8 of these Principles. However, there are no disadvantages for the parties to establish otherwise based on its private autonomy.

2. Reduction of the disproportionate or excessive agreed damages

In some Caribbean civil law or continental legal systems the judicial moderation of the agreed “penalty” is provided if it would have been provided for a complete non-performance and the obligation would have been performed partially or irregularly (Article 1.596 Colombian Civil Code; Article 713 Costa Rican Civil Code; Article 269 Cuban Civil Code; Article 1.231 French and Dominican Civil Code; Article 1.438 Guatemalan Civil Code; Article 1.018 Haitian Civil Code; Article 1.419 Honduran Civil Code; Article 1.844 Mexican Civil Code; Article 1.992 Nicaraguan Civil Code; Article 1.041 Panamanian Civil Code; Article 1.108 Puerto Rican Civil Code; Article 1.260 Venezuelan Civil Code).

This possibility to moderate is wide in other codes, which not only provide for the reduction for the case in which the penalty has been agreed for the complete non-performance have had a principle of performance, but in a general manner in order to avoid the excessive penalties (Articles 942 Haitian Civil Code; 6:94.1º Dutch and Suriname Civil Code; Articles 1.007 and 1.066 Saint Lucian Civil Code). In many codes markdown rules or rules on the proportional adaptation of excessive contractual penalty clauses can be found (e.g. Article 1.596 Colombian Civil Code; Article 867 Colombian Commercial Code; Article 712 Costa Rican Civil Code Article 1.843-1.845 Mexican Civil Code; Article 2.002 Nicaraguan Civil Code).

As well as to authorize the judge for their markdown, some texts permit the penalty to be increased if it would be derisory (Article 1.152 French and Dominican Civil Code; Article 942 Haitian Civil Code) or if this is required by the standards of reasonableness or equity (Article 6:94.2º Dutch and Suriname Civil Code). This provision opens up to the judges a means of control of the contractual liquidated penalty clauses, if they do not contain a previous assessment, but directly to limitation of liability in the case of non-performance, and fraudulent or seriously fraudulent non-performance will occur. In these cases, the French and Dutch laws do not permit the limitation of liability, and consequently the judges will be able to increase the agreed penalty in order to make it coincide with the damage effectively suffered by the obligee. In the other systems, the control of this type of contractual penalty clauses involves a greater difficulty, and it must resort to the applicable rules to the contractual clauses of limitation of the liability (Article 7.1.7).

In the common law legal systems, on the other hand, the contractual liquidated damages clauses cannot be modified, hence it is considered the fruit of the agreement between the parties and including if the agreed sum is very low [Cellulose Acetate Silk Co Ltd v Widness Foundry Ltd (1925), AC 20] the judge cannot increase it. However, indeed it can be invalid if it is a general condition, due to constituting an unreasonable limitation of liability (Unfair Contract Terms Act of 1977 and Unfair Terms in Consumer Contracts Regulations of 1999).

In the uniform law, the UP, PECL and the DCFR only grant the courts the power of reduction if it is evident that the sum stipulated substantially exceeds the actual loss.

Paragraph 2 of this article sanctions the moderating power of the agreed damages, in order to make possible the control of the unreasonable and manifestly abusive stipulations. It is an imperative rule that will not be able to be excluded by the parties through an agreement to the contrary. Hence, if the amount agreed by the contracting parties is manifestly excessive and disproportionate, in relation to the damage that the injured party has effectively suffered, and regarding the existing circumstances in the specific case, the judge or arbitrator will be able to mark down proportionally the agreed damages, until these are reasonable. However, the damages do not have to be adjusted to the actual losses, since it must be considered that the parties' intention that, in the use of their contractual freedom, they have claimed to introduce a deterrent measure of the non-performance.

Precisely for the sake of the respect for the freedom of contract of the parties, which, in commercial contracts, are normally situated at the level of equality, the power of the courts or arbitrators to increase the agreed amount has not been provided in this article. However, if the clause involves a limitation or exemption of liability, regarding the existing circumstances, it will have to be in accordance with the provisions of Article 7.1.7 of these Principles.

Commentary

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