UNIDROIT Principles 2016 Spanish

1 (Freedom of Contract) The parties are free to conclude a contract and to determine its content. COMMENT 1. Freedom of contract as a fundamental principle in the context of international commerce The principle of freedom of contract is of fundamental importance in international commerce. Just as merchants enjoy the right to freely decide to whom to offer their goods or services and from whom they wish to be supplied, they also have freedom to agree on the terms of each of their transactions. This freedom to contract constitutes the axis around which an open international economic order revolves, oriented towards free trade and competitiveness. 2. Economic sectors where there is no competition As might be expected, there are some exceptions to the principle set forth in this article. With regard to freedom to conclude contracts with any person, reasons of public interest may lead a State to exclude free competition in certain economic sectors. In these cases, the goods or services in question can only be acquired from a supplier, generally a public entity, which may or may not be obligated to conclude a contract with whoever requests it and within certain limits of availability of goods or services. 3. Limitation of autonomy of will by mandatory rules of law With respect to freedom to determine the content of the contract, first, the Principles themselves include provisions that the parties cannot derogate (see Article 1.5). Furthermore, there are rules of national, international or supranational origin that, if applicable according to the relevant rules of private international law, prevail over the rules set out in the Principles, and which the parties cannot derogate (see Article 1.4).

ARTICLE 1: 2 (Freedom of Form) Nothing in these Principles requires that a contract, declaration or act be concluded or evidenced in any particular form. A contract may be evidenced by any means, including witnesses. COMMENT 1. Contracts are not subject in principle to any formality This article sets forth the principle that the formation of a contract does not require compliance with any formal requirement. This principle extends also to cases of modification and termination of a contract by agreement of the parties. This principle, which is found in many legal systems, takes on special significance in the context of international commerce relations, in which thanks to modern means of communication, contracts are often concluded very rapidly and by a combination of conversations, telefaxes, paper contracts, electronic mail and Internet communications. The first sentence of the article takes into account the fact that in some legal systems compliance with certain formal requirements affects the validity of the contract, while others are merely considered as elements of evidence. The second sentence of this article is intended to clarify that the principle of freedom of form includes the admissibility of oral evidence in judicial proceedings. 2. Declarations and other unilateral acts The principle of not requiring a particular form also applies to declarations and other unilateral acts. The most important of these acts are declarations of intention made between the parties, either in the process of formation or performance of the contract (i.e. an offer, acceptance of an offer, confirmation of the contract by the party who would have the right to request its avoidance, determination of the price by one of the parties, etc.), or in other contexts (i.e. the appointment of an agent, ratification by the principal of an act performed by an agent without authority, acknowledgment by the debtor of the creditor's right before the period of limitation expires, etc.) 3. Possible exceptions under applicable law The principle of not requiring a particular form may be set aside, obviously, under the applicable law (see Article 1.4). Both national law and international treaties may impose special formal requirements, either on the contract as a whole, or on its clauses individually considered (e.g. agreement to submit to arbitration; choice of forum clauses). 4. Requirements of form agreed by the parties Nevertheless, the parties may agree on the need to observe a specific form for concluding, modifying or terminating their contract or any other declaration or unilateral act that they could perform during the formation or performance of the contract, or in any other context. In this regard, see in particular Articles 2.1.13, 2.1.17 and 2.1.18.

ARTICLE 1: 3 (Binding Character of Contracts) Every validly concluded contract is binding upon the parties. It may be modified or terminated only in accordance with its terms, by agreement of the parties or otherwise in accordance with these Principles. COMMENT 1. The principle of pacta sunt servanda This article establishes another fundamental principle of contract law, that of pacta sunt servanda. The binding character of the contract obviously presupposes that the contract has been concluded and is not affected by any cause of invalidity. The rules governing the formation of a contract are set out in Chapter 2 Section 1 of the Principles, while the grounds for invalidity are dealt with in Chapter 3, as well as in individual provisions of other Chapters (see, for example, Articles 7.1.6 and 7.4.13(2)). Other requirements for the valid conclusion of a contract may be found in the mandatory rules of applicable domestic or international law. 2. Exceptions A corollary to the principle of pacta sunt servanda is that a contract may be modified or terminated whenever the parties so agree. Modification or termination, unless agreed upon by the parties, constitutes an exception which may only be admitted in accordance with the terms of the contract or the provisions of these Principles (see Articles 3.2.7(2), 3.2.7(3), 3.2.10, 5.1.8, 6.1.16, 6.2.3, 7.1.7, 7.3.1 and 7.3.3). 3. Effects on third parties In establishing the principle of the binding force of the contract between the parties, this article does not intend to prejudge any effect that the contract might have with respect to third parties under the applicable law. Thus, the seller in some jurisdictions may be obligated, under national law, to ensure not only the physical integrity of the buyer and his property, but also that of third-party companions who are present within the seller's establishment. Moreover, the Principles do not address the effects that avoidance and termination of the contract may have on the rights of third parties. With respect to cases where the contract between the parties by its very nature and intention affects the legal relations of other persons, see Section 2 of Chapter 2 on "Agency", Section 2 of Chapter 5 on "Stipulation in Favor of Third Parties", Chapter 9 on "Assignment of Contractual Rights, Transfer of Contractual Obligations and Assignment of Contracts" and Chapter 11 on "Plurality of Obligors and of Obligees".

ARTICLE 1: 4 (Mandatory Rules) These Principles do not restrict the application of mandatory rules, whether of national, international or supranational origin, that under the rules of private international law are applicable to the parties. COMMENT 1. Primacy of mandatory rules Given the special nature of the Principles, which lack the characteristics of a law, neither the Principles as such nor contracts concluded on the basis of them are intended to prevail over mandatory rules of domestic law, whether of national, international or supranational origin, that are applicable under the rules of private international law. Mandatory rules of national origin are those that are adopted by States autonomously (such as certain formal requirements for certain types of contracts, the invalidity of penalty clauses, requirements for obtaining permits, environmental regulations, etc.). Mandatory rules of international or supranational origin are, conversely, those derived from international conventions or public international law in general (for example, the Brussels Convention (Hague-Visby Rules), the UNIDROIT Convention on Stolen or Illegally Exported Cultural Property, the United Nations Convention Against Corruption, the United Nations Universal Declaration of Human Rights, etc.) or those adopted by supranational bodies (for example, European Union Competition Law, etc.). 2. Broad notion of "mandatory rules" The mandatory rules referred to in this article are principally those incorporated in specific laws and their mandatory character may be expressly established or inferred from their interpretation. However, in various national legal systems restrictions on freedom of contract may also derive from general principles of public order, whether of national, international or supranational origin (for example the prohibition of committing or inducing the commission of crimes, the prohibition of corruption and collusive offers, the protection of human dignity, the prohibition of discrimination based on gender, ethnicity or religion, the prohibition of abusive restrictions on trade, etc.). For the purposes of this article, the notion of "mandatory rules" should be understood in a broad sense, so as to encompass both specific legislative provisions and general principles of public order. 3. Mandatory rules applicable where the Principles have been incorporated in the contract In cases where the parties' reference to the Principles is considered as a mere agreement to incorporate them into the contract (see Comment 4, lit. a), third paragraph of the Preamble), according to the traditional approach which still prevails in national courts with respect to non-binding instruments ("soft law"), the Principles and contracts concluded in accordance with them must respect, first, the principles and rules of domestic law that regulate the contract and which the parties cannot contractually derogate (called ordinary "mandatory rules" or domestic law). Furthermore, the mandatory rules of the forum State, and probably those of other countries, will equally apply when they carry their application regardless of the law applicable to the contract and, in the case of mandatory rules of other countries, provided there exists a sufficiently close connection between such States and the contract in question (called "police laws" or international mandatory rules). 4. Mandatory rules applicable when the Principles are the law applicable to the contract In the event that the dispute is submitted to the decision of an arbitral tribunal and the Principles constitute the law applicable to the contract (see Comment 4 lit. a) fourth paragraph, of the Preamble), these will no longer be limited by ordinary mandatory rules of any national law. As for the police laws of the forum State or of other countries, their application will depend basically on the circumstances of the case. Since in international arbitration the arbitral tribunal lacks in principle a predetermined "lex fori", the arbitral tribunal may apply the police laws of the country in whose territory the award is to be rendered, although it is not obligated to do so. In order to determine whether it should take into account the police laws of the forum State or those of any other country with which the case in question has a significant connection, it is to be expected that the arbitral tribunal will pay particular attention to the police laws of those States where the award is likely to be enforced, bearing in mind that its duty is to "always strive to ensure that the award is capable of legal enforcement" (as expressly provided, for example, by Article 35 of the ICC Arbitration Rules of 1998). Furthermore, the arbitral tribunal may consider itself obligated to apply in all cases the police laws that reflect principles widely accepted as fundamental in the legal systems throughout the world (the so-called transnational public order or ordre public transnational). 5. Rules of private international law applicable to each case Because of the considerable differences between judicial and arbitral tribunals with respect to the manner in which mandatory rules applicable to international commercial contracts are determined, this article deliberately refrains from establishing which rules should apply and instead refers to the rules of private international law to resolve each case individually (see for example EC Regulation No. 593/2008 (Rome I), Article 9 (replacing Article 7 of the Rome Convention on the Law Applicable to Contractual Obligations of 1980); Inter-American Convention on the Law Applicable to International Contracts of 1994, Article 11; Principles on the Choice of Law Applicable to International Commercial Contracts of 2015, adopted by the Hague Conference on Private International Law, Article 11; UNCITRAL Model Law on International Commercial Arbitration, Articles 28, 34 and 36; New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article V).

ARTICLE 1: 5 (Exclusion or Modification of the Principles) The parties may exclude the application of these Principles, as well as derogate from or modify the effect of any of their provisions, except where the Principles provide otherwise. COMMENT 1. Dispositional nature of the Principles The rules set forth in the Principles are not, in general terms, of a mandatory character. In each specific case, the parties may simply exclude the application of the Principles in whole or in part, or modify their content to adapt them to the specific needs of the legal transaction in question (see the Model Clause in the footnote of the second paragraph of the Preamble). 2. Exclusion or modification of the Principles may be express or tacit Exclusion or modification of the Principles by the contracting parties may be express or tacit. There is a tacit exclusion or modification when the parties expressly agree upon clauses that are incompatible with the provisions of the Principles. It is irrelevant in this context whether such clauses have been individually negotiated or are part of standard clauses incorporated in the contract. If the parties expressly agree to apply only some of the Chapters of the Principles, it is presumed that such Chapters will apply together with the general provisions of Chapter 1 (e.g. "For all matters relating to performance and non-performance of this contract, the UNIDROIT Principles shall apply"). 3. Mandatory provisions of the Principles Some provisions of the Principles are of a mandatory character, that is, their importance is such that the parties cannot exclude or derogate from them at their discretion. It is true that, given the special nature of the Principles, failure to observe this requirement may have no consequences. On the other hand, it should be noted that these provisions reflect standards of common conduct and principles that are also of a mandatory character in most positive legal systems. The mandatory provisions of the Principles are usually identified as such. This is the case of Article 1.7 on good faith and fair dealing and the provisions of Chapter 3 on validity of the contract, except with respect to mistake and initial impossibility (see Article 3.19), price determination (Article 5.1.7(2)), payment for non-performance (Article 7.4.13(2)) and Article 10.3(2) on prescription. Exceptionally, the mandatory character of a provision may arise implicitly, according to the content and purpose of the rule (see, for example, Articles 1.8 and 7.1.6).

ARTICLE 1: 6 (Interpretation and Supplementation of the Principles) (

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  In the interpretation of these Principles, regard shall be had to their international character and their purposes, including the need to promote uniformity in their application. (

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  Issues within the scope of these Principles but not expressly settled by them shall be settled in accordance with their general principles underlying them. COMMENT 1. Interpretation of the Principles as opposed to interpretation of the contract Like any text of a legal or contractual nature, the text of the Principles may present uncertainties as to the precise meaning of its content. However, a distinction should be drawn between the interpretation of the Principles and that of the contract to which the Principles are applicable. Although the Principles only bind the parties in the sense that their application will depend on their incorporation into the contract, they constitute a set of autonomous rules that have been developed with a view to their uniform application to an indefinite number of contracts of different types and concluded in various parts of the world. Therefore, the Principles must be interpreted differently from the clauses of each contract. The rules for the interpretation of the contract (as well as of declarations or the conduct of the parties) have been incorporated in Chapter 4, while this article refers to the manner in which the Principles are to be interpreted. 2. Need to take into account their international character The first criterion established in this article for interpreting the Principles is the need to take into account their "international character". This means that its provisions and concepts should be interpreted autonomously, in the context of the Principles themselves, and not according to the meaning that would traditionally be assigned to them under the legal system of a particular country. This hermeneutic approach is necessary taking into account that the Principles are the result of serious comparative law studies conducted by jurists of the most varied cultural and legal backgrounds. In elaborating each of the provisions of the Principles, these jurists had to find legal language sufficiently neutral to be able to reach a common understanding. Even in exceptional cases where it was necessary to resort to terms or concepts originating in a particular legal system, they were never intended to be used in the sense traditionally accepted in that legal system. 3. Purpose of the Principles By establishing that in interpreting the Principles regard shall be had to their purpose, this article makes clear that the strict and literal meaning of the words should not be considered, but rather their meaning in light of the purposes that inspire each provision and the Principles as a whole. The purpose of each provision may be ascertained by reference both to the meaning of its text and to the comments that accompany it. As for the purpose of the Principles as a whole, and insofar as their fundamental purpose is to provide a uniform framework for international commercial contracts, this article expressly refers to the need to promote uniformity in their application, that is, to ensure that in practice and to the extent possible, they are interpreted and applied in the same manner in different countries. As for the other purposes, see what has already been mentioned in the introduction. Furthermore, see what is provided in Article 1.7, which, although directed at the parties to the contract, may also be interpreted as reflecting the purpose that inspires these Principles, such as promoting the prevalence of the principle of good faith and fair dealing in contractual relations. 4. Supplementation of the Principles Certain issues that could be included within the field of application of the Principles are not expressly mentioned. In order to determine whether an issue falls or does not fall within the scope of the Principles, one must have regard, in the first place, to what is expressly stated in the text of the article or in its Comments (see, for example, Comment 3 to Article 1.3; Comment 4 to Article 1.4; Article 2.2.1(2) and (

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  as well as Comment 5 of Article 2.2.1; Comment 5 to Article 2.2.7; Comment 5 to Article 2.2.9; Comment 1 to Article 2.2.10; Article 3.1; Comment 1 to Article 6.1.14; Article 9.1.2; Article 9.2.2; Article 9.3.2). An additional and useful guide in this respect is found in the subject matter index of these Principles. The need to promote uniformity in the application of the Principles implies that when a gap arises, the solution should be sought, whenever possible, within the body of rules of the Principles, rather than resorting to national legislation. The first step is to attempt to resolve the problem by applying by analogy another specific provision. Thus, Article 6.1.6 dealing with the place of performance of a contract is also applicable to the restitution of what is due under that contract. Similarly, the rules established in Article 6.1.9 dealing with the currency of payment of a monetary obligation, in the event that such obligation is expressed in a currency different from that of the place of payment, may also be applied when the monetary obligation is expressed in "units of account", such as special drawing rights ("SDR"). If the problem is not resolved by resorting to a provision applicable to analogous cases, one should resort to the "ideas underlying the Principles", that is, those general principles potentially applicable to various factual situations. Some of these ideas and fundamental principles are expressly mentioned in the Principles. See, for example, Articles 1.1, 1.3, 1.5, 1.7 and 1.8. Other fundamental principles are apparent from specific provisions. The specific rules expressed in such provisions should be analyzed for the purpose of verifying whether they reflect a general principle of broad application, and therefore apt to be applied also to situations different from those specifically regulated in that provision. Of course, the parties always have freedom to submit to a particular national law in order that it supplement the rules of the Principles. Such a stipulation could read: "This contract is governed by the UNIDROIT Principles and shall be supplemented by the law of country X", or "This contract shall be interpreted and performed in accordance with the UNIDROIT Principles. For matters not regulated by the Principles, the law of country X shall apply" (see the Model Clause in the footnote of the second paragraph of the Preamble).

ARTICLE 1: 7 (Good Faith and Fair Dealing) (

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  The parties must act with good faith and fair dealing in international commerce. (

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  The parties may not exclude or limit this duty. COMMENT 1. "Good faith and fair dealing" as a fundamental idea inspiring the Principles There are many provisions throughout the various Chapters of the Principles that make reference, directly or indirectly, to the application of the principle of good faith and fair dealing in business. See above all Article 1.8, but also see for example, Articles 1.9(2); 2.1.4(2)(b), 2.1.15, 2.1.16, 2.1.18 and 2.1.20; 2.2.4(2), 2.2.5(2), 2.2.7 and 2.2.10; 3.2.2, 3.2.5 and 3.2.7; 4.1(2), 4.2(2), 4.6 and 4.8; 5.1.2 and 5.1.3; 5.2.5; 5.3.3 and 5.3.4; 6.1.3, 6.1.5, 6.1.16(2) and 6.1.17(1); 6.2.3(

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  and (4); 7.1.2, 7.1.6 and 7.1.7; 7.2.2(b) and (c); 7.4.8 and 7.4.13; 9.1.3, 9.1.4 and 9.1.10(1). This reflects that good faith and fair dealing is considered as one of the fundamental ideas on which the Principles are based. By establishing in general terms that each party must conduct itself with good faith and fair dealing, paragraph (1) of this article makes clear that, even in the absence of a specific provision in the Principles, the parties must conduct themselves in accordance with good faith and observe fair dealing throughout the life of the contract, even during the process of its formation. Examples 1. "A" grants "B" a period of forty-eight hours to accept his offer. "B" decides to accept it shortly before the deadline expires, but cannot communicate the acceptance to "A": that weekend, "A"'s fax is disconnected and there is no answering machine to leave the message. The following Monday, "A" rejects "B"'s acceptance. In this instance, "A" has acted contrary to the principle of good faith, because when setting the time for acceptance he should have ensured that he was in a position to effectively receive B's acceptance within the forty-eight hour period. 2. In a contract in which "A" undertakes to supply and install a special production line in favor of "B", a clause is incorporated whereby "A", the seller, is also obligated to inform "B", the buyer, of any improvements made by "A" in the technology of such production line. A year later, "B" learns that significant technological improvements have been made of which he has not been informed. "A" is not relieved of his obligation to inform by the fact that production of that particular type of line is no longer in his charge, claiming that such responsibility now falls to "C", a subsidiary and wholly controlled by "A". It would be contrary to good faith for "A" to rely on the separation and autonomy of "C", a company established for the specific purpose of absorbing such production in order to avoid contractual responsibility to "B". 3. "A" is a commercial agent acting on behalf of "B" in promoting the sale of "B"'s goods in a certain territory. Under the contract, "A"'s right to collect his commission has been conditioned on "B"'s approval of each of the contracts negotiated by "A". Although "B" has the freedom to decide whether or not to approve the contracts negotiated by "A", it would act contrary to the principle of good faith if it systematically and without justification refused to approve every contract negotiated by "A". 4. Pursuant to a credit facility agreement concluded between bank "A" and its customer "B", "A" suddenly and inexplicably demands immediate payment of the loans granted and refuses to grant further credit to "B", whose business suffers serious losses as a result of "A"'s conduct. Although the contract includes a clause that allows "A" to demand full repayment "at its discretion", proceeding with such a request, without prior notice and without justification, would be contrary to the principle of good faith. 2. Abuse of right A typical example of conduct contrary to the principle of good faith and fair dealing is what in some legal systems is known as "abuse of right". It is characterized by the malicious conduct of a party that occurs, for example, when a right is exercised solely to harm the other party or with a purpose different from that for which it was granted, or when the exercise of the right is disproportionate to the original intention of the expected result. Examples 5. "A" rents a premises to "B" for the purpose of starting a retail business. The lease has a term of five years, but three years after the contract is concluded, "A" realizes that the business is going poorly and decides to close it and so informs "B" saying that he is not interested in continuing to rent the premises. Non-performance of the contract by "A" would normally entitle "B" to choose between terminating the contract or demanding payment of damages, or specific performance. However, given the circumstances, "B" would be abusing its right if it demanded that "A" pay the rent for the remaining two years of the contract instead of terminating the contract and demanding "A" pay damages for the rent for the time it takes until "B" finds another tenant. 6. "A" leases a property from "B" for the purpose of opening a restaurant. During the summer months "A" places some tables outdoors in an area that is also property of "B". Given the noise caused by customers during late night hours, "B" has difficulty finding tenants for the apartments in the rest of the building. "B" would be abusing its right if, instead of asking "A" not to serve customers until late night hours, it prohibited "A" from serving customers at all times in the outdoor area. 3. Good faith and fair dealing in international commerce The duty to "act with good faith and fair dealing in international commerce" is intended to clarify, in the first place, that in the context of the Principles, these two concepts are not applied according to the ordinary parameters adopted by each of the different national legal systems. Such parameters adopted under the domestic law of each country will be taken into consideration only and exclusively when it is demonstrated that they have been generally accepted by the various legal systems. Another consequence of the formula used is that good faith and fair dealing must be interpreted in light of the special circumstances of international commerce. Models of commercial practices may in fact vary substantially between different branches of commerce, and even within the same branch such practices may be observed with different regularity and intensity, depending on the social and economic context in which a particular business operates, or according to its size, technological development, etc. It should be noted that when the text and comments of the Principles make reference only to "good faith" or to "fair dealing", these concepts should always be understood in the sense of "good faith and fair dealing in international commerce" referred to in this article. Examples 7. Under a contract for the sale of high-technology equipment, the buyer loses the right to claim for any defect in the products unless he communicates it to the seller, specifying the nature of the defects and without undue delay from the moment he discovered or should have discovered the defect. "A", a buyer located in a country where such equipment is regularly used, discovers a defect in the equipment at the moment of putting it into operation. However, when communicating the problem to "B", the seller of the equipment, "A" provides misleading or incorrect information about the nature of the defect. "A" loses his right to claim on account of such defect, since his careful examination would have allowed him to provide "B" with the required specifications. 8. The facts are identical to those in Example 7, but here "A" is located in a country where this type of equipment is practically unknown. In this instance, "A" does not lose his right to claim to "B" on account of the equipment defect, because it is reasonable that "A", lacking the necessary technical knowledge, cannot precisely identify the nature of the defect. 4. Mandatory character of the principle of good faith and fair dealing The duty of the parties to conduct themselves in accordance with good faith and fair dealing is of fundamental importance; so much so that the parties cannot exclude or limit it (paragraph (2)). As to the concrete applications of the general prohibition on limiting or excluding the principle of good faith and fair dealing, see Articles 3.1.4, 7.1.6 and 7.4.13. On the other hand, nothing prevents the parties from establishing in their contract more rigid standards of conduct (see, for example, Article 5.3.3).

ARTICLE 1: 8 (Inconsistent Conduct) A party cannot act in a manner inconsistent with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment. COMMENT 1. Inconsistent conduct and "good faith and fair dealing" This article constitutes an application of the general principle of good faith and fair dealing (Article 1.7) that is reflected in other more specific provisions of the Principles (see, for example, Articles 2.1.4(2)(b), 2.1.18, 2.1.20, 2.2.5(2) and Comment 3 to Article 10.4). This provision imposes upon a party the obligation not to cause detriment or disadvantage to the other party by acting in a manner inconsistent with the understanding of the parties regarding their contractual relationship, on the basis of which the other party has reasonably acted in reliance on that understanding. The prohibition contained in this article may result in the creation of rights and in the loss, suspension or modification of rights by means other than agreement of the parties. This is so because the understanding upon which the parties relied may itself be inconsistent with what the parties agreed or with their rights. This article does not establish the sole means by which a right may be lost or suspended as a result of the conduct of a party (see, for example, Articles 3.2.9 and 7.1.4(3)). 2. An understanding on the basis of which a party has reasonably relied There are different ways by which one party may cause a certain understanding in the other with respect to the contract that unites them, its performance or execution. Such understanding may result, for example, from statements, certain conduct or the silence of one of the parties, who may reasonably be expected to express himself in order to correct the error or dispel the erroneous belief in which the other party knew the other party was incurring. For purposes of this article the understanding is not limited to any particular matter, provided that it refers in some way to the contractual relationship maintained by the parties. It may refer to matters of fact or law, or to a matter of intention or to the manner in which one or the other party may or should conduct itself. The only restriction is that the understanding must be such that the other party, according to the circumstances, could have reasonably relied on it. Whether that reliance is reasonable or not depends on the circumstances, taking into consideration, in particular, the communications and conduct of the parties, the nature and context of the transaction, and the expectations that each party could have reasonably generated in the other. Examples 1. "A" has been negotiating with "B" for a long time a lease agreement for a property owned by "B" and pursuant to which the latter must demolish the existing construction in order to build a building in accordance with "A"'s specifications. "A" communicates with "B" in terms that reasonably lead "B" to understand that negotiations have been concluded and that "B" can begin to perform the contract. "B" then demolishes the building and proceeds with the necessary contracts to initiate construction of the new building. "A" realizes this and does nothing to prevent it. Subsequently "A" informs "B" that there are still additional contract terms that require negotiation. "A" is prevented from modifying the understanding of "B". 2. "B" mistakenly believes that his contract with "A" can be executed in a particular manner. "A" realizes this and says nothing, while "B" begins to perform the contract. "B" and "A" meet regularly and "B"'s manner of performance is the subject of discussion during the meetings, but "A" makes no reference to the error in which "B" has incurred. "A" cannot subsequently maintain that the manner of performance was different from that which was agreed in the contract. 3. Company "A" regularly subcontracts with "B" to carry out construction work on buildings. This activity of "A" and its employees are transferred to company "A.1", which is related to company "A". Nothing has changed in the course of business with respect to the work that "B" must perform. "B" continues to provide the subcontracted services and sends its invoices to "A" for work performed, in the belief that the work continues to be performed for the benefit of "A", who does not inform "B" that he has made an error. "A" cannot maintain that "B"'s contract for work performed was not concluded with him but with company "A.1", and is therefore obligated to pay "B". 4. Due to certain difficulties it experiences with its own suppliers, "A" cannot timely perform the contractual obligations it has with "B". The contract imposes penalties for late delivery of materials by "A". After "B" is made aware of "A"'s difficulties, "B" informs him that it will not insist on timely performance of the delivery schedule. A year later "B"'s business begins to suffer as a result of "A"'s delayed deliveries. "B" attempts to recover payment of the penalties due because of "A"'s late performance and demands that in the future "B" deliver the materials timely, in accordance with the agreed schedule. "B" will not be able to collect the agreed penalties, but will be able to insist on performance within the schedule if it gives "A" reasonable notice so that its performance is timely in the future. 5. "B" owes "A" a sum of 10,000 Australian dollars. Although the debt is due, "A" does nothing to collect it. Consequently "B" deduces that "A" has forgiven the debt. "A" has done nothing to indicate that he has indeed forgiven such debt and subsequently demands payment. "B" cannot rely on "A"'s inaction to oppose payment. 3. Detriment and estoppel The responsibility imposed by this article serves to prevent harm caused by reasonably relying. This does not necessarily require that the party that has engaged in inconsistent conduct cannot act as it wishes. Estoppel is only one of the possible means to be used to prevent harm. There may be other reasonable means, depending on the circumstances of the case, to prevent the detriment that the other party may suffer as a result of allowing the inconsistent action to proceed, such as issuing a notice within a reasonable period to the other party before acting inconsistently (see Example 4), or paying a certain amount for the costs or loss suffered because of reliance placed. Examples 6. "A" and "B" conclude a construction contract in which they agree that all additional work must be documented in writing and certified by the construction architect. The director of "A" verbally requests "B" to perform additional work, specifying the time and materials to be used, assuring "B" that such additional work will be documented in a timely and appropriate manner. After "B" commissions the work for the additional project, "A" informs him that such project is not necessary. The costs incurred by the project manager are considerably less than the cost involved in the projected additional work. If "A" pays "B" for the costs incurred by the designer, "B" cannot complain of the inconsistent conduct of "A". 7. "A" fails to timely achieve one of the fundamental objectives stipulated in a software development contract concluded with "B". According to the contract, such non-performance by "A" gives "B" the right to terminate the contract. However, "B" continues to request changes to the software and pays for such modifications, in addition to cooperating with "A" in the continuation of the software development program. The fact that "A", with "B"'s consent, continues to perform the contract after the non-performance prevents "B" from rescinding the contract due to "A"'s failure to achieve the objective stipulated in the contract. However, according to the Principles, "B" may grant "A" an additional period (see Article 7.1.5) and exercise its right to termination if the objective is not achieved within such period.

ARTICLE 1: 9 (Usages) (1) The parties are bound by any usage to which they have agreed and by any practice which they have established between themselves. (2) The parties are bound by any usage that is widely known and regularly observed in international commerce by parties in the particular trade concerned, unless the application of such usage would be unreasonable. COMMENT 1. Commercial practices and usages in the context of the Principles This article establishes the principle according to which the parties are generally bound by commercial practices and usages that meet the requirements established in this article. Moreover, these same requirements must be met by practices and usages in order for them to be applicable to the instances and purposes expressly indicated in the Principles (see, for example, Articles 2.1.6(3), 4.3, and 5.1.2). 2. Practices established between the parties The practices established between the parties bound by a particular contract are automatically binding, unless the parties have expressly excluded their application. The question of when a commercial practice has indeed been "established" between them will naturally depend on the circumstances of the case. However, conduct based on a single previous transaction would not normally be considered sufficient. Example 1. "A", a supplier of goods, has repeatedly accepted complaints from "B", a customer, regarding defects in the quantity or quality of goods, made up to two weeks after their delivery. On an occasion when "B" communicates defects a fortnight after such delivery, "A" cannot object that it was made too late, because the practice of communicating defects within "two weeks" had become an established practice between the parties, by which "A" is bound. 3. Agreed usages Since the parties are bound by usages whose application they have agreed upon, paragraph (1) of this article simply applies the general principle of contractual freedom contemplated in Article 1.1. Furthermore, the parties may negotiate all the clauses of their contract, or for certain matters simply make reference to other sources that include commercial usages. The parties may stipulate the application of any usage, including a usage developed within a certain branch of commerce to which neither party belongs, or usages relating to different types of contracts. It is also conceivable that the parties agree to the application of what is inappropriately usually called usages, that is, a set of rules published by a commercial association under the title of "Usages" that only partially reflect the lines of conduct generally established. 4. Other applicable usages Paragraph (2) establishes the criteria for identifying applicable usages in the absence of a specific agreement of the parties. The fact that usages must be "widely known and regularly observed [...] by the parties in the trade concerned" constitutes a condition for the application of any usage, whether international or only national or local. The additional qualifier of "international trade" is intended to prevent those usages developed and limited to domestic or national business from being invoked in business conducted with foreigners. Example 2. A real estate broker, "A", invokes before "B," a foreign client, a particular usage of his profession accepted in the country of "A". "B" is not bound by such usage if it is of a local nature and refers to business that is of a predominantly local character. Only exceptionally can a usage of merely local or national origin be applied without the parties having made a reference to it. Thus, usages existing in the field of some "commodity exchanges" (commodity exchanges), trade shows or ports could be applied provided they are also regularly observed in negotiations with foreigners. Another exception is found in the case of a merchant who has concluded a certain number of contracts of the same type in a foreign country and should therefore be bound by the usages established in that country for such contracts. Examples 3. "A", a port operator, invokes before "B", a foreign shipper, the application of a certain usage regularly observed in the port where "A" works. "B" is bound by this local usage if the port is normally used by foreigners and the usage in question has been regularly observed by all customers, regardless of their place of establishment or nationality. 4. "A" a sales agent from country "X", receives an order from "B", one of his customers from country "Y", requesting the customary 10% discount applicable to purchases paid in cash. Provided that "A" has conducted sales in "Y" for a certain period, "A" cannot object to the application of such usage on the grounds that the discount is a usage restricted to country "Y". 5. Application of a usage that is unreasonable A usage may be regularly observed by the generality of merchants in a certain branch of commerce, yet its application in certain instances may not be reasonable. The lack of reasonableness of a usage may be due to the particular circumstances in which one or both parties operate and/or the atypical nature of the transaction. In such instances, the usage will not be applicable. Example 5. In accordance with a usage regularly observed in a certain commercial sector of commodity trade, the buyer cannot claim for defects in the goods unless they are corroborated by a recognized international inspection agency. When buyer "A" takes possession of the goods at the port of destination, the only recognized international inspection agency operating at that port is on strike, and requesting the services of another agency at the nearest port would be excessively costly. In this instance the application of the usage in question would not be reasonable, so "A" has the right to claim the defects he has discovered in the goods even though they have not been corroborated by a certificate issued by a recognized international inspection agency. 6. Usages prevail over the Principles Both what results from the course of dealings and usages, once their applicability in a given instance has been determined, prevail over incompatible provisions of the Principles. The reason is that the course of dealings and usages bind the parties as if they were implied clauses of the contract as a whole or of a particular clause or of the conduct of one of the parties. Just as the express provisions of the contract prevail over what results from the course of dealings and usages, these prevail over the Principles, with the sole exception of the provisions that have been specifically identified as being of a mandatory character (see Comment 3 to Article 1.5).

ARTICLE 1: 10 (Notification) (

• 1)

  When notification is required, it shall be made by any means appropriate in the circumstances. (

• 2)

  Notification becomes effective when it reaches the addressee. (

• 3)

  For purposes of paragraph (2), notification is considered to "reach" the addressee when it is orally communicated or delivered at its place of business or mailing address. (

• 4)

  For purposes of this article, the word "notification" includes any statement, demand, request or other communication of intention. COMMENT 1. Form of notification First, this article establishes the principle that any class of notification of intentions (declarations, demands, requests, etc.) required by a particular provision of the Principles is not subject to any special formal requirement, but may be made by any appropriate means under the circumstances. The meaning of "appropriate" will depend on the concrete circumstances of each case and, in particular, on the availability or security of the various means of communication, as well as on the importance and/or urgency of the message to be sent. With respect to a notification "appropriate according to the circumstances" the addressee must expressly or implicitly have accepted to receive electronic communications in the form in which the notification was sent by the sender, that is, of the same type, with the same format and to the same address. The addressee's consent may be inferred from affirmations, declarations, or conduct or from practices established between the parties, or from the application of usages. Examples 1. Seller "A" and buyer "B" maintain a long-term business relationship and throughout that time have always negotiated and concluded contracts by telephone. Upon discovering a defect in the goods received on one occasion, "B" immediately sends "A" a notification by electronic mail. "A", who usually does not open his electronic mail and has no reason to expect a message from "B", does not learn of "B"'s notification until three weeks after it was sent, and rejects it claiming that it is too late. 2. Seller "A" and buyer "B" maintain a long business relationship and generally communicate electronically. Upon discovering defects in the goods supplied on one occasion, "B" immediately sends "A" an electronic message but does so to an electronic address that they do not usually use. "A", who has no reason to expect a message from "B" at that address, does not open his mail, and when three weeks later he discovers "B"'s notification, he objects that it is too late. "B" cannot argue that it has made a timely notification, because it was not made by appropriate means according to the circumstances. 2. Principle of receipt With respect to all types of notification, the Principles adopt the so-called principle of "receipt". This means that the notification will not be effective until it reaches its addressee. Some provisions of the Principles expressly refer to this requirement: See Articles 2.1.3(1), 2.1.3(2), 2.1.5, 2.1.6(2), 2.1.8(

  • 1)

    and 2.1.10; 9.1.10 and 9.1.11. The purpose of paragraph (

  • 2)

    of this article is to indicate that the same rule will apply in the absence of an express provision to that effect: see Articles 2.1.9, 2.1.11; 2.2.9; 3.2.10, 3.2.11; 6.1.16, 6.2.3; 7.1.5, 7.1.7; 7.2.1, 7.2.2; 7.3.2, 7.3.4; and 8.3. 3. The principle of dispatch may be expressly stipulated The parties have the freedom to expressly stipulate the application of the principle of "dispatch". This may be particularly convenient in those cases where one of the parties must issue a notification in order to preserve its rights in the event that the other has not performed or if non-performance is anticipated, in which case it would not be fair to impute to the performing party the risk of loss, error or delay in transmission of the message. This is justified all the more if one takes into consideration the difficulties that may arise at the international level in proving the actual receipt of a message. 4. When a notification "reaches" its addressee With respect to the principle of receipt, it is important to determine precisely when the notification in question "reaches" the addressee. Paragraph (

  • 3)

    of this article is intended to determine that moment by establishing a distinction between oral and non-oral notifications. An oral notification "reaches" its addressee when it is personally communicated to the addressee or to another person authorized by him to receive it. Any other type of notification "reaches" its addressee when it is personally delivered, or at its place of business or mailing address (or electronic). It is sufficient that it be placed in the hands of an employee of the addressee who is authorized to accept it, or that it be placed in the addressee's mailbox, or be received by his fax, telex machine, or in the case of electronic communications, at the moment it can be retrieved by the addressee at an electronic address that he has designated (See, Article 10(2) of the United Nations Convention on the Use of Electronic Communications in International Contracts).

ARTICLE 1: 11 (Definitions) For the purposes of these Principles: – "court" includes an arbitral tribunal; – if one of the parties has more than one "place of business", its "place of business" is that which has the closest relationship to the contract and its performance, having regard to the circumstances known or contemplated by the parties at any time before or at the time of conclusion of the contract; – "long-term contract" is a contract whose performance extends over a period of time and which typically involves, to a greater or lesser extent, a complex operation and an ongoing relationship between the parties; – "obligor" or "obligee" means respectively the party which is to perform an obligation and the party which is entitled to require performance of an obligation; – "writing" includes any mode of communication that preserves the information contained therein and is capable of being reproduced in tangible form. COMMENT 1. Judicial and arbitral tribunals The importance of the Principles for settling disputes through arbitration has already been emphasized (see above, Comments to the Preamble). In order not to overburden the language, in the text of the Principles the word "court" is used in the sense of including both a judicial court and an arbitral tribunal. 2. Party with several places of business The location of the place of business of the parties is determinative for the application of the Principles in numerous contexts, such as the place for delivery of notifications (see Article 1.10(3): the possible extension of the period for acceptance of an offer in the event that the last day coincides with a non-business day (Article 1.12); the place of performance (Article 6.1.6); and the determination of the party that must request public authorization (Article 6.1.14(a)). In the event that a party has several places of business (generally a head office and several branches), this article establishes the rule that the relevant place of business is that which has the closest links with the contract and its performance. Nothing is said with respect to the case where the place of conclusion of the contract is different from the place of performance. In such an instance, the latter would appear to be more relevant. In order to determine the place of business that has the closest link with a particular contract and its performance, the circumstances known or contemplated by both parties before the conclusion of the contract should be taken into account. Facts known only by one of the parties, or of which the parties take knowledge after the conclusion of the contract, cannot be considered. 3. Long-term contracts The Principles make reference to "long-term contracts" both in the articles and in the comments, distinguishing them from ordinary exchange contracts such as sale of goods, whose performance is of instant execution. Three are the elements that usually distinguish long-term contracts from other types of contracts that usually involve an ordinary exchange of goods and services: the duration of the contract, an ongoing relationship between the parties and the complexity of the operation. For the purposes of these Principles, the essential element is the duration of the contract, while the other two remaining elements, although they are usually present to a greater or lesser degree, are not necessary. The extent to which one or the other of these elements should be present to apply some of these provisions or whether some comment referring to long-term contracts is relevant, depends on the reason for such provision or comment. For example, Comment 2 to Article 5.1.3 presupposes an ongoing relationship between the parties and an operation involving complex performance. Examples of long-term contracts can be found in the field of commercial agency, distribution contracts, subcontracting, franchising, leases (for example, equipment leases), framework agreements, investment or concession agreements, contracts for professional services, operation and maintenance agreements, supply agreements (for example, of raw materials), construction or civil works contracts, industrial cooperation, partnership (joint venture) contracts, etc. The provisions and comments of the Principles that expressly refer to long-term contracts are found in Comment 2 to the Preamble, Article 1.11 and Comment 3; Comments 1, 3 and 4 to Article 2.1.14; Comment 3 to Article 2.1.15; Comments 3 and 4 to Article 4.3; Comments 1, 2 and 3 to Article 4.8; Comment 2 to Article 5.1.3; Comment 3 to Article 5.1.4; Comment 2 to Article 5.1.8; Comment 5 to Article 6.2.2; Comment 5 to Article 7.1.7; Comment 4 to Article 7.3.5; Comment 1 to Article 7.3.6; Comment 1 to Article 7.3.7. Various other provisions and comments are also of special relevance in the context of long-term contracts. See Articles 1.7; 1.8; Comment 2 to Article 2.1.1; Comments 1 and 2 to Article 2.1.2; Articles 2.1.6; 2.1.13 to 2.1.18; 3.3.1; 3.3.2; 5.1.2; Comment 3 to Article 5.1.7; Articles 5.1.8; Comment 5 to Article 5.3.1; and Articles 5.3.4; 6.1.1; 6.1.4; 6.1.5; 6.1.11; 6.1.14 to 6.1.17; 6.2.1 to 6.2.3; 7.1.3 to 7.1.7; 7.3.5. 4. "Obligor – Obligee" In those cases where necessary, the words "obligor" and "obligee" are used in order to better identify the party that performs and the party that receives the performance of an obligation, regardless of whether they are monetary or non-monetary obligations. 5. "Writing" In some instances, the Principles make reference to a writing or to a "contract in writing" (see Articles 2.1.12, 2.1.17 and 2.1.18). The Principles define this word in functional terms. Thus, a writing includes not only a telegram and a telex, but also any other mode of communication suitable for preserving a document and being reproduced in tangible form. This formal requirement should be compared with the more flexible form criterion required for a "notification" (see Article 1.10(1)).

ARTICLE 1: 12 (Computation of Time Periods) (

• 1)

  Official holidays and non-working days that fall within a period fixed by the parties for performance of an act are to be counted as days of that period. (

• 2)

  In any case, if the period expires on an official holiday or non-working day at the place of business of the party to perform, the period is extended until the first subsequent business day, unless circumstances indicate otherwise. (

• 3)

  The time zone is that of the place of business of the party setting the time period, unless circumstances indicate otherwise. COMMENT The parties may, either unilaterally, or by agreement, set a period within which certain acts must be performed (see, for example, Articles 2.1.7, 2.2.9(2) and 10.3). In setting the time limit the parties may simply indicate the period (for example, "Notification of defects in the goods must be made within ten days after delivery") or by stipulating a specific date (for example "The offer remains firm until March 1"). In the first case the problem arises with respect to whether official holidays or non-working days that fall within that period are counted in computing the period. According to paragraph (1) of this article, the answer is in the affirmative. In both instances mentioned above, the question may arise about the way to compute the period when that period expires on an official holiday or non-working day at the place of business of the party to whom performance of the act is owed. Paragraph (2) establishes that in such an instance the period is extended until the next business day, unless circumstances indicate otherwise. Finally, when the parties are located in different time zones, the problem arises as to what time zone is relevant. According to paragraph (3), it is the time zone of the place of business of the party setting the period, unless circumstances indicate otherwise. Examples 1. A sales contract establishes that buyer "A" must notify seller "B" of defects in the goods within 10 days following delivery. The goods are delivered on Friday, December 16. "A" notifies defects on Monday, January 2, and seller "B" rejects the notification as untimely. "A" cannot argue that official holidays and non-working days between December 16 and January 2 are not counted within the period to compute the ten days. 2. "A" makes an offer and indicates that it is firm until March 1. Recipient "B" accepts the offer on March 2 because March 1 is an official holiday at the place of his business. "A" cannot argue that the period expired on March 1. 3. On a Saturday "A" sends an offer to recipient "B" via electronic mail on Saturday indicating that the offer is firm for 24 hours. If "B" intends to accept such offer, he must do so within 24 hours, even though Sundays are non-working days at the place of "B", since according to the circumstances the period set by "A" should be understood as absolute. 4. The facts are identical to those in Example 2, but here "A" is located in Frankfurt and "B" in New York, and the period set for acceptance is "by tomorrow, at the latest at 5:00 p.m." "A" must accept at 5:00 p.m., according to Frankfurt time. 5. A charter party is concluded between "A" the owner of a vessel located in Tokyo, and shipper "B", located in Kuwait. The contract provides that payment of freight by "B" must be made at "A"'s bank located in Zurich, Switzerland, on a specific day, at 5:00 p.m. at the latest. The applicable time zone is not that of "A" or "B" but that of the Zurich bank, where payment must be made.

ARTICLE 2: 1.1 (Formation of Contracts) A contract is concluded through the acceptance of an offer or by the conduct of the parties that is sufficient to manifest an agreement. COMMENT 1. Offer and acceptance A fundamental idea in the Principles is that agreement of the parties is in itself sufficient to conclude the contract (see Article 3.1.2). The concepts of offer and acceptance have traditionally been used to determine whether the parties have reached an agreement and also to determine the moment at which such agreement has been reached. This article and Chapter make clear that the Principles retain these concepts as essential tools for the analysis of contract formation. 2. The conduct of the parties is sufficient to demonstrate agreement In the practice of commercial contracting, especially when it comes to complex transactions, contracts are usually concluded after prolonged negotiations, making it often impossible to identify the sequence of offer and acceptance. It is not easy in these instances to determine whether an agreement has been reached and, in the event that it has, when such agreement was concluded. According to this article, a contract could be considered concluded despite the inability to determine the moment of its conclusion, provided that the conduct of the parties demonstrates the existence of an agreement. In order to determine whether there is sufficient evidence of the intent of the parties to be bound, their conduct should be interpreted in accordance with the criteria established in Articles 4.1 et seq. Example 1. "A" and "B" begin negotiations with a view to establishing a joint venture for the development of a new product. After prolonged negotiations without any formal offer or acceptance and with some minor points remaining to be agreed, both parties begin to perform their obligations. When subsequently the parties fail to reach an agreement on those minor points, a court or arbitral tribunal may reach the conclusion that a contract has been concluded, since the parties had begun to perform their obligations, thereby demonstrating their intent to be bound by a contract. 3. Automated contracting The text of this article is broad enough to include also cases of so-called automated contracting, that is, when the parties agree to use a system that allows them to conduct automated electronic transactions in accordance with which no intervention of a natural person is required to conclude a contract. Example 2. "A", an automotive plant, and "B", a spare parts supplier, set up a system of electronic data interchange through which, at the moment when "A"'s inventory falls below a certain level, the program automatically generates the order for the missing part and sends the request to the supplier. The fact that "A" and "B" have agreed to implement such system means that the parties are bound by the orders and automated performances, despite being generated without personal intervention of "A" and "B".

ARTICLE 2: 1.2 (Definition of Offer) A proposal to conclude a contract is an offer if it is sufficiently precise and indicates the intention of the offeror to be bound in case of acceptance. COMMENT In order to define the offer and distinguish it from other communications that the parties could make with a view to concluding a contract, this article requires two criteria: the proposal must (i) be sufficiently precise to permit the conclusion of the contract by its mere acceptance, (ii) indicate the intention of the offeror to be bound in case of acceptance. 1. Precision of the offer Since a contract is concluded by the mere acceptance of an offer, the clauses of the future contract must be indicated in the offer with sufficient precision. It is not possible to determine in the abstract whether a proposal meets these requirements. Even essential terms, such as the description of the goods or services to be delivered or rendered, the price to be paid for them, the time and place of performance, could be left undetermined in the offer, without necessarily implying that the offer has not been sufficiently precise. Everything depends on whether the offeror in proposing the offer and the offeree in accepting it intend to be bound by the contract, as well as on whether the undetermined terms cease to be undetermined by an interpretation of the meaning of the terms used in the contract in accordance with Articles 4.1 et seq., or by supplementation in accordance with Article 4.8 or 5.1.2. The imprecision can also be covered by commercial practices established between the parties or by usages (see Article 1.9), or on the basis of specific provisions found in the Principles (e.g. Articles 5.1.6 (determination of quality of performance), 5.1.7 (determination of price), 6.1.1 (time of performance), 6.1.6 (place of performance) and 6.1.10 (currency not specified)). Example 1. For years, "A" renews annually a contract with "B" for technical assistance that the latter regularly provides for the use of "A"'s computers. "A" opens a second office with the same type of computers and requests from "B" the same type of technical assistance for the new computers. "B" accepts the proposal despite the fact that it does not specify all the terms of the contract. The contract may be considered concluded, because the missing terms can be supplemented by those incorporated in prior contracts, which constitute an established practice between the parties. 2. Intention to be bound The second criterion for determining whether a party has made an offer for purposes of concluding a contract, or simply for the purpose of initiating negotiations, is to determine whether such party intended to be bound in case of acceptance. Since such intention is rarely declared expressly, it frequently must be inferred from the circumstances of the concrete case. The manner in which the proponent presents his proposal (for example, by expressly defining it as an "offer" or simply as a "declaration of will"), provides a first, although not conclusive, indication of possible intention. The content and the identification of the recipients of the proposal are of greater importance. In general terms, it could be said that the more detailed and precise the proposal, the more likely it is to be considered an offer. If the proposal is directed to one or more specific persons, it is more likely to be considered an offer than if such proposal is directed to the general public. Examples 2. Following prolonged negotiations, the executive directors of two companies, "A" and "B", reach agreement on the bases by which "B" will acquire 51% of the shares of company "C", the full and exclusive ownership of which belongs to "A". The "memorandum" of the agreement (memorandum of agreement), signed by the negotiating parties, includes a final clause establishing that the agreement shall not be binding until approved by "A"'s Board of Directors. In this instance there is no contract until such approval is granted. 3. "A", a State agency, announces a public tender for the placement of a new telephone network. Such announcement is merely an invitation to receive offers, which may or may not be accepted by "A". However, if the announcement included details of the technical specifications of the project, establishing that the contract will be concluded with whoever offers the lowest bid in accordance with the specifications, such announcement could be considered an offer, with the contract being concluded upon identification of the best bidder. A proposal may include all the essential terms of the contract and nevertheless not bind the proponent in case of acceptance, if its conclusion has been conditioned on reaching agreement on minor matters that have been left pending in the proposal (see Article 2.1.13).

ARTICLE 2: 1.3 (Withdrawal of Offer) (1) An offer becomes effective when it reaches the offeree. (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer. COMMENT 1. When the offer becomes effective Paragraph (1) of this article, which has been literally adopted from Article 15 of CISG, provides that an offer becomes effective when it reaches the offeree (see Article 1.10(2)). As to the definition of "reaches", see Article 1.10(3). The moment at which an offer becomes effective is of paramount importance, as it indicates the exact moment from which the offeree can accept the offer, thereby definitively binding the offeror to perform the proposed contract. 2. Withdrawal of offer There are other reasons why, in practice, it is important to determine the moment at which an offer becomes effective. Until that moment, the offeror is free to change his mind and decide not to conclude the contract, or to replace his original offer with a new offer, regardless of whether the original offer was extended with the intention of being irrevocable. The only condition is that the offeree becomes aware of the change in the offeror's intention before or at the same time as becoming aware of the original offer. In establishing this mechanism expressly, paragraph (2) of this article makes clear the distinction between "withdrawal" and "revocation" of an offer: An offer may always be withdrawn before it becomes effective, while the question of whether it may be revoked (see Article 2.1.4) only arises after the offer has become effective.

ARTICLE 2: 1.4 (Revocation of the Offer) (1) The offer may be revoked until the contract is concluded, if the revocation reaches the offeree before the offeree has sent the acceptance. (2) However, the offer may not be revoked: (a) if it indicates, by fixing a time period for acceptance or otherwise, that it is irrevocable, or (b) if the offeree could reasonably consider that the offer was irrevocable and has acted in reliance on that offer. COMMENTARY The question of whether an offer is revocable has traditionally been one of the most controversial points in the subject of contract formation. Since it is not possible to reconcile the positions of various legal systems (that is, the position maintained by common law countries, according to which an offer is always revocable, and the opposite position of almost all systems of Romanistic legal tradition), the only alternative is to choose one of the two positions as the rule and introduce the other by way of exception.

Art. 2.1.4 UNIDROIT Principles 1. The offer, in principle, may be revoked Paragraph (1) of this article, which has been taken literally from Article 16 of CISG, establishes that, in principle, an offer may be revoked until the contract is concluded. The same paragraph, however, limits the revocation of the offer to the condition that it reaches the offeree before the offeree has sent the offeree's acceptance. Therefore, the offeror's right to revoke the offer until the conclusion of the contract is only effective in the case where the offeree accepts the offer orally, or when the offeree manifests consent by performing an act without communicating it to the offeror (see Article 2.1.6(3)). However, when the offer is accepted in writing, in which case the contract is concluded when the acceptance reaches the offeror (see Article 2.1.6(2)), the offeror's right to revoke the offer ends earlier, that is, when the offeree sends the acceptance. This solution may cause some inconvenience to the offeror, since the offeror will not always be in a position to know whether there is still a possibility to revoke the offer. However, this solution is justified when the legitimate interest of the offeree in reducing the period during which revocation is possible is considered. With respect to the determination of the date of dispatch, see Article 2.1.8 and the pertinent Commentary. 2. Irrevocable offers Paragraph (2) provides for two important exceptions to the general rule of the revocability of the offer: (i) When the offer indicates that it is irrevocable and (ii) when the offeree, having other justified reasons to consider the offer as irrevocable, acts in reliance on that offer. a. The indication of irrevocability contained in the offer The indication that the offer is irrevocable may be made in various ways. The clearest and most direct manner is when the offeror expressly manifests it (for example "This is a firm offer"; "We will maintain our offer until we receive your response"). However, the irrevocable character of the offer may be inferred simply from other statements or conduct of the offeror. The fixing of a time period for acceptance may, although not necessarily, be considered in itself as an implicit indication that the offer is irrevocable. The answer to this question must be found in each case through proper interpretation of the terms of the offer, in accordance with the various criteria

Formation Art. 2.1.4 established in Chapter 4 on interpretation of the contract. Generally, if the offeror operates within a legal system where the fixing of a time period is considered an indication of irrevocability, it is presumed that in fixing a time period the offeror intends to maintain the offer irrevocable during that period. If, on the other hand, the offeror operates in a legal system where the fixing of a time period for acceptance does not constitute sufficient indication of irrevocability, it will generally not be attributed to the offeror the intention to maintain the offer irrevocable during that period. Examples 1. "A", a travel agency, informs its customers through a brochure about a cruise for the upcoming New Year holidays. In said brochure customers are urged to make their reservations within the next three days, adding that probably after that time there will no longer be available places. This announcement, by itself, does not indicate that "A" has made an irrevocable offer during the first three days. 2. "A" proposes to "B" to draw up an offer in writing with the terms under which "A" would be willing to construct a building. "B" submits a precise offer expressing the following: "The price and other conditions will not be valid after September 10". If "A" and "B" operate within a legal system where such statement is considered an irrevocable offer until that date, "B" can expect that the offer will be considered as an irrevocable offer. This expectation could not arise if "A" operates within a legal system where "B"'s statement is not considered sufficient to indicate that the offer is irrevocable. b. The offeree's confidence that the offer was irrevocable The second exception to the general rule concerning the revocability of the offer contemplates the case where "the offeree could reasonably consider that the offer was irrevocable and has acted in reliance on that offer". This is an application of the general principle of Article 1.8 which prohibits inconsistent conduct. The offeree's reasonable confidence may have been induced by the conduct of the offeror, or by the nature of the offer itself. This would be the case of an offer whose acceptance requires extensive and costly investigation by the offeree or an offer made for the purpose of permitting the offeree to transmit the offer to third parties. The acts that the offeree must perform in reliance on the

Art. 2.1.5 UNIDROIT Principles offer may consist of preparation of production, purchase or lease of material or equipment, including the costs involved, etc., provided that such activity may be considered a regular activity for the type of transaction in question, or consist of acts that should have been foreseen or known by the offeror. Examples 3. "A", an antique dealer, requests "B" to restore ten paintings, under the condition that such work be completed in three months and that the price does not exceed a certain amount. "B" informs "A" that, in order to know whether "B" accepts the offer, "B" needs to begin work on one of the paintings and will give "A" the answer within five days. "A" accepts such proposal. Based on "A"'s offer, "B" must begin work immediately. "A" cannot revoke the offer within those five days. 4. "A" requests an offer from "B" so that "A" can complete some information for a bidding request to be awarded within a certain period. "B" makes an offer to "A", on which the latter relies to calculate the price to be submitted in the bidding request. Before the expiration of the period, but after "A" has submitted the proposal in the bidding, "B" informs "A" that "B" does not wish to maintain the offer. In this case, "B" cannot revoke the offer, which is irrevocable until the deadline for awarding the bidding, since "A"'s proposal in such bidding is based on the information provided by "B".

ARTICLE 2: 1.5 (Rejection of the Offer) The offer is terminated when the notification of its rejection reaches the offeror. COMMENTARY 1. Rejection may be express or tacit An offer may be rejected expressly or tacitly. A frequent case of tacit rejection consists of responding to the offer by means of a response that appears to be an acceptance but with additions, limitations or other modifications (see Article 2.1.11(1)).

Formation Art. 2.1.6 In the absence of an express rejection, the manifestation or conduct of the offeree must be such as to justify the offeror's belief that the offeree does not intend to accept the offer. A response by the offeree that simply inquires whether there is another possible alternative (for example "Is there any possibility that the price could be reduced?" or "Could you deliver the goods a couple of days earlier?") would not be sufficient to conclude that the offeree has rejected the offer. It should be emphasized that rejection has the effect of terminating any type of offer, regardless of its revocable or irrevocable character under Article 2.1.4. Example "A" receives an offer from "B" in which "B" establishes that the offer will remain firm for two weeks. "A" replies by return mail, including conditions in part different from those established in "B"'s offer, conditions that are not accepted by "B". "A" cannot accept the original offer after such reply, even though several days still remain for the two-week period to expire. By making a counteroffer, "A" has implicitly rejected the original offer. 2. Rejection as one of the causes that terminate an offer Rejection by the offeree is only one of the causes that terminate an offer. Other causes are dealt with in Articles 2.1.4(1) and 2.1.7.

ARTICLE 2: 1.6 (Mode of Acceptance) (

• 1)

  Acceptance is constituted by any declaration or any other act of the offeree that indicates assent to an offer. Silence or inaction, by themselves, do not constitute acceptance.

  Art. 2.1.6 UNIDROIT Principles (

• 2)

  The acceptance of the offer takes effect when the indication of assent reaches the offeror. (

• 3)

  However, if by virtue of the offer, or of practices that the parties have established between them or of usages, the offeree may indicate assent by performing an act without notification to the offeror, the acceptance takes effect when such act is performed. COMMENTARY 1. Indication of assent to an offer For acceptance to exist, the offeree must indicate "assent" in one way or another. Mere acknowledgment of receipt of the offer, or a manifestation of being interested in it, is not sufficient. Moreover, the assent must be unqualified, not being able to be conditioned on another act of the offeror (for example "Our acceptance is subject to your approval") nor on an act of the offeree itself (for example "We hereby accept the terms of the contract set forth in your memorandum and will send it to our Board of Directors for approval within the next two weeks"). Finally, the acceptance must not contain modifications to the terms of the offer, or at least must not include modifications that substantially alter the terms of the offer (see Article 2.1.11). 2. Acceptance through the conduct of the offeree Unless the offer imposes a special mode of acceptance, assent may be indicated expressly or inferred from the conduct of the offeree. Paragraph (1) of this article does not specify the form in which such conduct must be verified. Generally, such acts are related to the performance of the contract, such as payment of a down payment on the price, shipment of goods, commencement of work at the establishment, etc. 3. Silence or omissive conduct By establishing that neither "silence nor omissive conduct, by themselves, imply acceptance", paragraph (

  • 1)

    makes clear that from mere silence or inaction of the offeree the assent to the offer cannot be inferred. The situation would be different if the parties agreed that silence would be considered acceptance, or in the case where there are prior negotiations or usages. However, in no case may the offeror unilaterally establish that the offer will be considered accepted in the absence of the offeree's response. Since the offeror is the one who takes the initiative of proposing the conclusion of the contract, the offeree is free not only to accept the offer, but also to simply disregard it. Examples 1. "A" asks "B" to establish the conditions for the renewal of a previous contract for the supply of wine, a contract that expires on December 31. In the offer, "B" includes a provision that expresses: "If we do not hear from you by the end of November at the latest, we will understand that you have consented to renew the contract under the conditions established in the preceding clauses". "A" considers "B"'s proposal completely unacceptable and does not reply. In this case, the previous contract expires within the fixed period without being renewed, in view of the lack of agreement between the parties. 2. In a long-term contract for the supply of wine, "B" usually provides "A" with orders without confirming acceptance of the orders made by "A". On November 15, "A" requests a large quantity of wine for the New Year. "B" does not reply nor deliver the merchandise requested in a timely manner. In this case, "B" has failed to fulfill the obligation, since according to the practices established between the parties, "B"'s silence to "A"'s orders is considered acceptance of the offer. 4. Moment when acceptance takes effect According to paragraph (2), the acceptance of the offer shall take effect at the moment when the indication of assent reaches the offeror (see Article 1.10(2)). As to the definition of "reaches", see Article 1.10(3). The reason for adopting the principle of "receipt" rather than "dispatch" is that it is more sensible to place the risk of transmission of the acceptance notification on the offeree rather than on the offeror, since the offeree is the one who chooses the means of communication, who best knows which means of communication are especially risky or slow, and who, consequently, is better positioned to take the necessary measures to ensure that the acceptance reaches its destination. In principle, acceptance arising from the conduct of the offeree will also take effect only when notification of such acceptance reaches the offeror. It should be noted, however, that it will be necessary for the offeree or acceptor to communicate acceptance only in those cases where the conduct of the offeree does not itself communicate acceptance within a reasonable time. In the other cases (for example when the conduct consists of payment of the price or shipment of goods by air or by other rapid means of transport) the same effect could well be achieved if the bank or the carrier inform the offeror of the transfer of funds or the shipment of the goods. In the cases provided for in paragraph (3) there is an exception to the general rule established in paragraph (2). That is, "if by virtue of the offer, of the practices that the parties have established between them or of usages, the offeree may indicate assent by performing an act without communicating it to the offeror". In this case the acceptance takes effect at the moment when the act is performed, regardless of whether the offeror is promptly informed thereof. Examples 3. "A" requests "B" to design a special program to establish a database. Without communicating acceptance, "B" begins to design the program and, once completed, claims payment in accordance with what is established in "A"'s offer. "B" is not entitled to claim payment, since the supposed acceptance of "A"'s offer never took effect because "B" never notified it to "A". 4. The facts are identical to those of Example 3, but here in the offer "A" expresses that "A" will be absent during the next two weeks, asking "B" to, if "B" wishes to accept the offer, begin to design the program immediately to save time. In this case the contract is concluded as soon as "B" begins to perform, even though "B" does not communicate acceptance immediately or later. This article corresponds with paragraphs (1), (

  • 2)

    first part and (

  • 3)

    of Article 18 of CISG.

    Formation Art. 2.1.7

ARTICLE 2: 1.7 (Time Period for Acceptance) The offer must be accepted within the time period fixed by the offeror or, if no time period has been fixed, within what is reasonable, taking into account the circumstances, including the speed of the means of communication used by the offeror. An oral offer must be accepted immediately, unless the circumstances indicate otherwise. COMMENTARY With respect to the moment when acceptance must be accepted, this article, which corresponds with the second part of paragraph (2) of Article 18 of CISG, distinguishes between oral and written offers. With respect to written offers, everything depends on whether the offeror has indicated a certain time period for acceptance: in the first case, the offer must be accepted within this time period, while in all other cases the indication of acceptance must reach the offeror within a "reasonable" time period, "taking into account the circumstances, including the speed of the means of communication used by the offeror." Examples 1. "A" sends "B" an offer on Monday indicating that if "B" intends to accept it must do so by Friday at the latest. "B"'s acceptance reaches "A" on the following Monday. "A" may reject "B"'s acceptance as late. 2. "A" sends "B" an offer on Monday morning via e-mail, requesting "B" to respond "as soon as possible". Although on previous occasions "A" and "B" had communicated via e-mail, "B" accepts "A"'s offer by letter, which reaches "A" on Thursday. "B"'s acceptance is late because, under the circumstances, acceptance made by letter that reaches "A" three days after the e-mail has not been made "as soon as possible". Oral offers must be accepted immediately, unless the circumstances indicate otherwise. An offer is considered oral not only when made in the presence of the offeree, but in cases where the offeree can respond immediately. This is the case of an offer made by telephone or communicated electronically in real time. It should be noted that the rules established in this article also apply to situations where, in accordance with Article 2.1.6(3), the offeree may indicate assent by performing an act without communicating it to the offeror. In these cases the act of performance must take place within the respective time period. For the determination of the precise moment when the time period granted by the offeror begins to run and from which the established time period begins to elapse, see Article 2.1.8. For the calculation of holidays included in this period, see Article 1.12; for the case of late acceptance and delay in transmission, see Article 2.1.9.

ARTICLE 2: 1.8 (Acceptance within a Fixed Time Period) The time period for acceptance fixed by the offeror begins to run from the moment of dispatch of the offer. Unless the circumstances indicate otherwise, it is presumed that the date indicated in the offer is the date of dispatch. COMMENTARY Each time the offeror fixes a time period within which the offeree must accept the offer, the problem arises of when such time period begins to run. According to this article, the time period begins to run from the moment when the offer is dispatched, that is, when the offer is no longer within the sphere of control of the offeror. With respect to when the offer has been sent, there is a presumption that it was on the date indicated in the offer. For example, in the case of a letter, the date of dispatch will be the one expressed in the letter; in the case of an e-mail message, it will be the moment indicated as the moment of dispatch by the offeror's server; etc. However, the presumption admits proof to the contrary if in a given case the circumstances indicate otherwise. Therefore, if the date shown in the letter is earlier than that shown by the fax machine, the latter will prevail. In the same manner, if the date shown in the letter is later than the delivery of the letter, it will be clear that the date of the letter was written by error and therefore should not be taken into account.

ARTICLE 2: 1.9 (Late Acceptance. Delay in Transmission) (1) Nevertheless, a late acceptance will take effect as an acceptance if the offeror, without undue delay, notifies the offeree thereof or informs the offeree accordingly. (2) If the communication containing a late acceptance indicates that it has been sent in circumstances such that if its transmission had been normal it would have reached the offeror in a timely manner, such acceptance shall take effect unless, without undue delay, the offeror notifies the offeree that the offer has already expired. COMMENTARY 1. Late acceptance normally does not take effect According to the principle established in Article 2.1.7, for acceptance to take effect it must reach the offeror within the time period fixed by the offeror, or, if no time period has been fixed, within a reasonable time period. This means that, in principle, an acceptance that reaches the offeror after such time will not take effect, and may be disregarded by the offeror. 2. However, the offeror may "accept" a late acceptance Paragraph (1) of this article, which corresponds with Article 21 of CISG, establishes that the offeror may consider a late acceptance as if it had been received on time and thus take effect, provided that the offeror, without undue delay, "notifies" the offeree thereof or sends a notification to that effect. If the offeror takes advantage of this possibility, the contract is considered concluded at the moment when the late acceptance reaches the offeror and not when the offeror notifies the offeree of the intention to consider the late acceptance valid. Example 1. "A" fixes March 31 as the deadline for the offer to be accepted. "B"'s acceptance arrives on April 3. "A", who remains interested in the contract, wishes to "accept" "B"'s late acceptance and immediately notifies "B" thereof. Although the notification reaches "B" on April 5, the contract is concluded on April 3. 3. Late acceptance due to delay in transmission If the acceptance arrives late even though the offeree did not send it on time, it is natural to consider that it does not take effect unless the offeror expressly indicates otherwise. The situation is different when the offeree has sent the acceptance on time, but it arrives late to the offeror due to an unexpected delay in transmission. In such a case, the reliance placed by the offeree on the fact that the acceptance has arrived on time deserves protection, so in this case the late acceptance shall take effect unless the offeror notifies the offeree without undue delay that the offeror considers the offer to have expired. The only condition that paragraph (2) requires is that the communication containing the late acceptance indicates that it has been sent in circumstances such that, if its transmission had been normal, it would have reached the offeror within the due time period. Examples 2. The facts are identical to those of Example 1, but here "B", knowing that the normal time for transmission of letters to "A"'s country is three days, sends the acceptance letter on March 25. Due to a strike of the postal service in "A"'s country, the letter whose date of dispatch appears on the envelope, only arrives on April 3. "B"'s acceptance, despite being late, is considered effective, unless "A" objects without undue delay. 3. The facts are identical to those of Example 1, but here "B", after receiving "A"'s offer, accepts it on March 30 via e-mail. Due to technical problems in "A"'s server, the e-mail reaches "A" only on April 1. "B"'s acceptance, although late, is nevertheless effective unless "A" objects without undue delay.

Formation Art. 2.1.11

ARTICLE 2: 1.10 (Withdrawal of Acceptance) The acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance takes effect. COMMENTARY With respect to the withdrawal of acceptance, this article establishes the same principle as that provided in Article 2.1.3, which deals with withdrawal of the offer: The offeree may change its mind and withdraw the acceptance, provided that such withdrawal reaches the offeror before or at the same time as the acceptance. It should be noted that the offeror becomes bound by the offer and can no longer change the offeror's mind once the offeree has sent the acceptance (see Article 2.1.4(1)), while the offeree does not lose the freedom to change the offeree's mind until a later stage, that is, when the notification of acceptance reaches the offeror. This article corresponds with Article 22 of CISG.

ARTICLE 2: 1.11 (Modified Acceptance) (1) A response to an offer that purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer. (2) Nevertheless, a response to an offer that purports to be an acceptance but contains additional or different terms that do not substantially alter the terms of the offer constitutes an acceptance unless the offeror, without undue delay, objects to such discrepancy. If the offeror does not do so, the terms of the contract shall be those of the offer with the modifications contained in the acceptance.

Art. 2.1.11 UNIDROIT Principles COMMENTARY 1. An acceptance with modifications is normally considered a counteroffer It is frequent in commercial negotiations that the offeree, while manifesting to the offeror the intention to accept the offer ("acknowledgment of receipt of a purchase order"), includes in the response additional or different terms from those of the offer. Paragraph (1) of this article provides that, in principle, such response is considered a rejection of the offer and constitutes a counteroffer, which the offeror may or may not accept, either expressly or tacitly (such as by performing an act that indicates performance). 2. Modifications that do not alter the nature of the acceptance The principle that acceptance must be a precise reflection of the offer implies that even insignificant differences between offer and acceptance would permit each party to question the existence of the contract later. In order to eliminate this result, which a party might pursue simply because of an unfavorable change in market conditions, paragraph (2) incorporates an exception to the general principle established in paragraph (1). In accordance with this exception, if the additional or different terms included in the acceptance do not "substantially" alter the terms of the offer, the contract is considered concluded with such modifications, unless the offeror objects without undue delay. It cannot be determined in the abstract what is considered a "substantial" modification, which will depend on the circumstances of the case. Normally, although not necessarily, modifications that substantially alter the offer are those additional or different terms that refer to the price or mode of payment, the place and time of performance of a non-monetary obligation, the scope of liability of one party to the other or to the settlement of disputes. An important factor to be taken into account is whether the additional or different terms are regularly used in the commercial branch in question and therefore could not cause surprise to the offeror. Examples 1. "A" requests from "B" a machine and asks that it be previously tested. In acknowledging receipt of the order, "B" declares that accepts the terms of "A"'s offer, but adds that "B" wishes to be present when the machine is tested. This additional term does not constitute a "substantial" modification to the offer and therefore will be part of the contract unless "A", without undue delay, objects to it. 2. The facts are identical to those of Example 1, but here in acknowledging receipt of the purchase order "B" adds an arbitration clause. Unless the circumstances indicate otherwise, such clause is considered a "substantial" modification to the terms of the offer, so "B"'s supposed acceptance constitutes a counteroffer. 3. "A" requests a certain quantity of wheat from "B", who adds an arbitration clause in acknowledging receipt of the order, which is a common practice in that commercial branch. Since such clause is not unexpected to "A", such modification is not considered "substantial", so it will be part of the contract unless "A" objects to it without undue delay.

ARTICLE 2: 1.12 (Confirmation in Writing) If within a reasonable period after the conclusion of the contract a writing is sent that purports to be a confirmation thereof and contains additional or different terms, these shall become part of the contract unless they substantially alter it or the recipient, without undue delay, objects to the discrepancy. COMMENTARY 1. Confirmation in writing This article addresses the situation in which a contract has already been concluded, either orally or by exchange of written communications that are limited to specifying the essential terms of the contract, and subsequently one party sends a document to the other with the mere purpose of confirming what has already been agreed, although in fact it contains additional or different terms from those previously agreed. In theory, this situation clearly differs from that provided in Article 2.1.11 in that the contract has not yet been concluded and the terms being modified are found in the offeree's purported acceptance. However, since in practice it can be very difficult, if not impossible, to distinguish between these two situations, this article adopts with respect to the modified terms included in a confirmation in writing the same criteria as that adopted in Article 2.1.11. In other words, in the same way as if the modifications had been included in an acknowledgment of a purchase order, it is provided that the additional or different terms from those previously agreed upon that are included in a confirmation in writing shall be considered as part of the contract, unless they "substantially" alter the contract or the recipient objects to the discrepancy without undue delay. Needless to say, in the context of written confirmations the question also arises of which of the new terms "substantially" alters the previously agreed terms, to which a satisfactory answer can only be given in light of the circumstances of each specific case. On the other hand, this article certainly does not apply when the party sending the confirmation in writing expressly invites the other party to return the document duly countersigned as a sign of acceptance. In this case it is irrelevant whether the writing contains modifications and whether such modifications are "substantial", since for a contract to exist the document must be expressly accepted by the recipient in each case. Examples 1. "A" requests a machine from "B" by telephone. "B" accepts the order. The next day "A" receives a letter from "B" confirming the terms of the verbal agreement, but "B" adds that "B" wishes to be present at the test of the machine, which will take place at "A"'s establishment. This additional term does not constitute a "substantial" modification of those previously agreed between the parties, so it is considered part of the contract, unless "A" objects to it without undue delay. 2. The facts are identical to those of Example 1, but here the modification contained in "B"'s confirmation letter consists of the inclusion of an arbitration agreement. Unless the circumstances indicate otherwise, such agreement is considered a "substantial" modification of the terms previously agreed between the parties, so it does not constitute part of the contract. 3. "A" sends a purchase order by e-mail to "B" requesting a certain quantity of wheat, an offer which "B" accepts immediately also by e-mail. That same day "B" sends a letter to "A" confirming the terms of the contract, but adding an arbitration agreement, which is a usual practice in that branch of commerce. Since "A" cannot be surprised by the inclusion of such clause, it is not considered a "substantial" modification of the terms previously agreed upon and, unless "A" objects to it without undue delay, the arbitration clause becomes part of the contract. 2. The confirmation in writing must be sent within a reasonable period after the conclusion of the contract The rule that the silence of the party receiving a confirmation letter is equated to the party's acceptance of what is contained in the letter, including any non-substantial modification of the previously agreed terms, presupposes that such confirmation letter is sent "within a reasonable period after" the conclusion of the contract. Any such document sent after the period that, according to the circumstances, is not reasonable, lacks value and the silence of the party that receives it cannot be interpreted in the future as acceptance of its content. 3. Invoices For the purposes of this article, the concept of "confirmation in writing" must be understood in a broad sense, including all cases where a party uses invoices or other similar documents related to performance that detail the characteristics of a contract that has been concluded orally or through informal exchange of correspondence, provided that such practice is customary in a given commercial branch and/or in the country in question.

ARTICLE 2: 1.13 (Conclusion of Contract Conditioned on Agreement on Specific Matters or a Particular Form) When in the course of negotiations one party insists that the contract shall not be deemed to be concluded until agreement is reached on specific matters or a particular form, the contract shall not be considered concluded until such agreement is reached.

Art. 2.1.13 UNIDROIT Principles COMMENTARY 1. Conclusion of contract conditioned on agreement on specific matters In principle, a contract is concluded when the parties reach agreement on the essential terms for the type of transaction in question, while those aspects of lesser importance on which the parties did not reach agreement may be later integrated implicitly, either on the basis of factual or legal elements (see Commentary 1 to Article 2.1.2 and also Articles 4.8 and 5.1.2). Example 1. "A" agrees with "B" on all the essential terms of a distribution contract for "A"'s merchandise. Subsequently the question arises as to who should bear the costs of advertising. Neither of the parties can allege the non-existence of the contract because of the contract's silence on this point, since such omission is not essential to the type of transaction in question and can be integrated on the basis of facts or applicable law. However, in a given case the parties may consider that certain specific matters are of such importance that there is no intention to conclude a contract unless such matters are satisfactorily resolved. If the parties, or only one of them, expressly manifests such intention, there will be no contract unless there is agreement on such matters. By using the verb "insists", this article makes clear that it is not sufficient for one of the parties to manifest such intention through a simple mention, but it is necessary that such intention be unequivocal. Example 2. The facts are identical to those of Example 1, but here during the course of negotiations "B" repeatedly manifests that the question of who should bear the costs of the advertising campaign must be expressly agreed upon. Despite reaching agreement on all the essential terms of the contract, there will be no contract between "A" and "B" in this case, since "B" has insisted that the conclusion of the contract be conditioned on reaching agreement on a particular aspect.

Formation Art. 2.1.13 2. Conclusion of contract conditioned on agreement about the adoption of a particular form It is quite frequent in commercial practice, especially when it comes to transactions of considerable complexity, that after prolonged negotiations the parties sign an informal document that they call a "preliminary contract", "memorandum of understanding", "letter of intent" or similar expressions, which contain the terms of the desired contract but at the same time there is an intention to sign another formal document in the future (for example "subject to contract", "formal contract to follow"). In some cases, the parties consider that their contract has already been concluded and that the signing of the formal document is only a confirmation of what has been fully agreed. However, if one or both parties make clear that they do not intend to be bound unless the formal document has been signed, there will be no contract until such time, even though the parties have agreed on all relevant aspects of the transaction. Examples 3. After prolonged negotiations, "A" and "B" sign a "memorandum of understanding" that includes all the terms of a joint venture contract for the exploration and exploitation of the continental shelf of country "X". The parties agree that they will subsequently draft the contract in formal documents, to be signed and exchanged at an official ceremony. If the "memorandum" already contains all the terms pertinent to the contract and the following documents have only the purpose of presenting it to the public in proper form, it could be considered that the contract was concluded when the first document was signed. 4. The facts are identical to those of Example 3, but here the "memorandum of understanding" contains the clause: "Not binding until the definitive contract is signed", or some other similar clause. The contract shall be binding from the moment the formal documents are signed and exchanged.

Art. 2.1.14 UNIDROIT Principles

ARTICLE 2: 1.14 (Contract with "Open" Terms) (1) If the parties have intended to conclude a contract, the fact that they have intentionally left some term to be settled by further negotiation or determined by a third person shall not prevent the contract from being concluded. (2) The existence of the contract is not affected by the fact that subsequently: (

• a)

  the parties do not agree on such term, or (

• b)

  the party responsible for determining it fails to determine it, or (

• c)

  the third person fails to determine it, provided there is some reasonable way to determine it, having regard to the circumstances and the common intention of the parties. COMMENTARY 1. A contract with terms that the parties have deliberately left "open" A contract may omit one or more matters because the parties simply did not think about them during negotiations. If the parties have reached agreement on the essential terms for the type of transaction in question, the contract is concluded and the omitted matters could be considered as implicitly integrated into the contract based on Articles 4.8 or 5.1.2 (see Commentary 1 to Article 2.1.2). The situation contemplated in this article is very different, since it deals with one or more terms on which the parties have deliberately not reached agreement, either because they are not able or do not wish to determine them at the moment of concluding the contract, preferring to leave their determination to a later time or alternatively delegating such determination to one of the parties or to a third person. This last situation, which is quite frequent (though not exclusively) in long-term contracts, gives rise fundamentally to two problems: first, determining whether the fact that the parties intended to leave some terms unresolved affects the existence of the contract and, second, if that is not the case, what happens if the parties subsequently do not reach agreement or the party or third person responsible for determining it fails to do so. 2. Terms that have been deliberately left open do not, by themselves, prevent the valid conclusion of the contract Paragraph (1) establishes that if the parties intended to conclude a contract, the fact that they have intentionally left some term subject to further negotiations or to the determination of one of the parties or a third person shall not prevent the validity of the contract. When the intention to conclude the contract has not been expressly manifested, such intention could be inferred, despite the existence of terms that have been left open, from other circumstances, such as the non-essential character of the terms in question, the degree of precision of the contract as a whole, the fact that the terms left open refer to matters which, given their nature, can only be determined later, the fact that the contract has already been performed in part, etc. Example 1. "A", a shipping company, concludes a detailed agreement with "B", a terminal operator for the use of a container terminal. The contract determines the minimum annual volume of containers for loading and unloading and the tariffs to be paid, leaving pending the determination of the tariff to be paid for additional containers once the minimum stipulated volume is reached. Two months later, "A" learns that a competitor of "B" offers better conditions and refuses to perform, alleging that the agreement with "B" never became binding because the tariff to be paid for additional containers had not been determined. "A" is liable for breach of contract, because its detailed character and the fact that both "A" and "B" began performing immediately their obligations reflect clearly that their intention was to conclude a binding contract.

  Art. 2.1.14 UNIDROIT Principles 3. Failure of the mechanisms provided for determining terms left open If the parties are unable to reach agreement on the terms that have been left open, or if the party or third person responsible for determining them fails to do so, the question arises of whether the contract is terminated. According to paragraph (2) of this article, the existence of the contract is not affected "provided there is some reasonable way to determine it, having regard to the circumstances and the common intention of the parties". The way to supply the omitted term will, in general, be by resorting to the provisions for "gap-filling" of Section 1 of Chapter 5 and Section 1 of Chapter 6, for example, by determining the price in accordance with what is established in Article 5.1.7(1) or by fixing the time of performance in accordance with Article 6.1.1, provided that these provisions can properly supply the respective term. Situations may arise, especially in long-term contracts, where these provisions are not appropriate, even when they address the question of the omitted term. In these situations, the term shall be supplied in accordance with what is established by Article 4.8 or Article 5.1.2. When the parties have deferred the determination of a matter to the decision of a third person whose designation is left in the hands of an institution or person, such as the president of a court or the Chamber of Commerce, etc., if the third person designated fails to determine the term, a new third person may be designated. The need to designate a new third person probably will not arise frequently in practice. The problems would be of lesser significance to the extent that the indeterminacy refers to terms of little importance. On the contrary, if it is a matter of terms that are essential to a particular transaction, there must be clear evidence of the intention of the parties to validate the contract. Among other factors to be taken into account in this regard, consideration should be given to whether the terms or clauses left open cover points which, by their nature, can only be defined later, or whether the contract has already been performed in part, etc. Example 2. The facts are identical to those of Example 1, but here when the minimum volume of containers to be loaded and unloaded is reached, the parties do not reach agreement on the tariff to be charged for the remaining containers. "A" fails to perform, alleging that the contract has come to an end. In this case, "A" is liable for breach of contract. The fact that the parties had already begun performing their obligations without conditioning the continuation of their commercial relations on agreement regarding the tariff to be received for the additional containers constitutes sufficient evidence of their intention to validate the contract even in the absence of such agreement. The tariffs to be charged for additional containers shall generally be determined in accordance with Article 5.1.7.

  Formation Art. 2.1.14 4. Open terms in long-term contracts As mentioned, particularly in the case of long-term contracts, the parties may leave a term to be agreed later provided that such term applies to obligations to be performed at an advanced stage of the contract. For example, the parties may agree on a price that will only apply during the first year of the contract, leaving open the price that will apply in the second year or in subsequent years. Similarly, the parties may leave open the date of delivery because, for example, the delivery of a machine whose delivery date depends on the completion of a building. In such circumstances neither the term relating to price could be properly supplied through Article 5.1.7, nor could the time of performance be determined through Article 6.1.1. In these cases, the appropriate term would be supplied in accordance with Article 4.8 or Article 5.1.2. Examples 3. The facts are identical to those of Example 1, but here the tariff to be paid for additional containers has been fixed for the first year, while there is no provision about the tariff to be paid during the second year or subsequent years. In this case, it would not be appropriate to determine the tariff in accordance with Article 5.1.7, which refers to the price "at the time the contract is concluded". Instead, it may be appropriate to fix a tariff with reference to the date at the end of the first year. In this case a term may be established in accordance with Article 4.8 or Article 5.1.2. 4. "X" is an electric company that decides to build a new electrical generating plant, for which it contracts the purchase of a generator from "Y". The generator will be installed on the foundation of the building to which the generator has been allocated, once the construction of the building is completed. Such electrical generator cannot be delivered except 3 years after having been ordered. "X" has not yet concluded the contract for the construction of the power plant, but the generator building will only take 6 months to be completed once the construction contract begins. "X" concludes today a contract for the purchase of the generator in such a way that it will be ready in time, but cannot yet set the moment of delivery. The parties leave the delivery date "to be agreed". If they fail to reach agreement on a delivery date, it would not be appropriate to determine it, as provided in Article 6.1.1, "within a reasonable time after the conclusion of the contract" concluded between "X" and "Y". In this case it would be appropriate to fix the date of delivery of the generator in relation to the completion of the building to which it is intended, a date which could be fixed in accordance with Article 4.8 or Article 5.1.2.

ARTICLE 2: 1.15 (Negotiations in Bad Faith) (

• 1)

  The parties have full freedom to negotiate the terms of a contract and are not liable for failure to reach an agreement. (

• 2)

  However, a party that negotiates or breaks off negotiations in bad faith is liable for damages caused to the other party. (

• 3)

  In particular, it is considered bad faith for a party to engage in or continue negotiations when at the same time it has the intention not to reach an agreement. COMMENTARY 1. Freedom of negotiation As a general rule, parties not only have ample freedom to decide when and with whom to begin negotiations with a view to concluding a contract, but also to decide how and for how long to continue efforts to reach an agreement. This is derived from the basic principle of freedom of contract stated in Article 1.1. This is an essential principle to ensure fair competition between merchants engaged in international commerce. 2. Liability for negotiating in bad faith Nevertheless, the right to engage in negotiations freely and to decide on the terms to be negotiated is not unlimited, since it must not contravene the principle of good faith and fair dealing established in Article 1.7. A special instance of bad faith negotiations is expressly stated in paragraph (3) of this article, in which the party that begins or continues negotiations has no intention of reaching an agreement with the other party. Other examples are those in which a party, either deliberately or through negligence, has deceived the other party about the nature or component elements of the proposed contract, either by actually misrepresenting facts or by refraining from disclosing certain facts which, given the nature of the parties and/or the contract, should have been disclosed. With respect to the duty of confidentiality, see Article 2.1.16. The liability of a party for negotiations in bad faith is limited to damages caused to the other party (paragraph (2)). In other words, the aggrieved party may recover the expenses incurred in the negotiations and may also be compensated for the loss of opportunity to conclude another contract with a third party (the so-called "reliance interest" or negative interest), but cannot, in principle, recover the profits that would have been obtained if the original contract had been concluded (the so-called expectation or positive interest). Examples 1. "A" learns of "B"'s intention to sell the restaurant. "A" has no intention of purchasing such restaurant, but enters into lengthy negotiations with the sole purpose of preventing "B" from selling the restaurant to "C", a competitor of "A". "A" withdraws from the negotiations as soon as "C" has purchased another restaurant, and is liable to "B" for the damages suffered by "B". Such damages may include the price difference and any other damages that can be established. 2. "A", who is negotiating with "B" the acquisition of military equipment whose sale is promoted by the armed forces of "B"'s country, learns that the authorities of that country will not grant the import license necessary for "B" to collect the commission. "A" does not disclose this fact to "B" and finally the parties conclude a contract, which cannot be executed due to lack of license. "A" is liable to "B" for the costs that "B" has incurred after "A" learned of the impossibility of obtaining the required license. 3. "A" engages in lengthy negotiations with a branch of bank "B" to arrange a loan. At the last moment the branch discloses that it has no authority to sign and that the head office has decided not to approve the preliminary contract. "A", who could have obtained the loan from any other bank, has the right to recover the expenses incurred in the negotiations and the profits that would have been obtained during the delay caused by obtaining the loan from another bank. 4. The contractor "A" and the supplier "B" conclude a preliminary agreement in which they commit themselves to negotiate in good faith the supply of material in the event that "A" becomes the main contractor in an important construction project. "A" obtains the construction contract but, after some preliminary contacts with "B", "A" refuses to continue negotiations. "B" can request the performance of the duty to negotiate in good faith. 3. Agreement to negotiate in good faith On the other hand, if the duty to negotiate in good faith is expressly agreed, the parties will be able to avail themselves of all legal remedies with respect to contractual breach, including the right to specific performance (for example, directing the parties to engage in negotiations) and other remedies that reflect the expectation interest or positive interest (to the extent that it is demonstrated that the requirements provided for such remedies are met). A commitment to negotiate in good faith implies, at least, a duty to negotiate (or renegotiate) seriously with the intention to conclude a contract, but not that such contract must be concluded. Of course, this duty does not replace other duties provided in the Principles (for example, in Articles 1.8 and 2.1.16). In the case of long-term contracts, the parties that have expressly agreed to a duty to negotiate in good faith might consider defining this duty in greater detail in view of the nature of the contract and its commercial context. For example, they could establish standards of confidentiality, agree on a schedule for negotiations, etc. 4. Liability for breaking off negotiations in bad faith The right to break off negotiations is also subject to the principle of good faith and fair dealing in negotiations. Once an offer has been made, it can be revoked only within the limits provided in Article 2.1.4. Even before this stage is reached, or within a negotiation process that lacks an identified sequence of "offer" and "acceptance", a party may lose the right to break off negotiations abruptly and without justification. At what point it is no longer possible to turn back depends on the circumstances of the case, especially on the degree of reliance that one party may obtain, as a result of the conduct of the other party, regarding achieving a positive result in the negotiations, and also depends on the number of points related to the future contract on which the parties have already reached agreement. Example 5. "A" assures "B" of granting a franchise if "B" adopts suitable measures to gain experience and is willing to invest USD 150,000. During the following two years, "B" carries out important preparations with a view to concluding the contract, always with "A"'s guarantee that it will grant the franchise. When everything is ready for the signing of the contract, "A" informs "B" that a substantially larger amount must be invested, which "B" refuses. "B" has the right to recover from "A" the expenses in which "B" has incurred with a view to the conclusion of the contract.

ARTICLE 2: 1.16 (Duty of Confidentiality) If one of the parties provides information as confidential during the course of negotiations, the other party has the duty not to disclose it or to use it unjustifiably for its own benefit, regardless of whether the contract is subsequently concluded or not. Where appropriate, liability resulting from breach of this obligation may include compensation based on the benefit received by the other party.

Art. 2.1.16 UNIDROIT Principles COMMENTARY 1. Parties are generally not obligated to maintain confidentiality Precisely because there is no general duty to disclose information, when negotiations for the conclusion of a contract begin, the parties are also not obligated in principle to maintain the confidentiality of the information they have exchanged. Since a party is normally free to decide which facts are relevant in a transaction and what to disclose during negotiation, such information is generally to be considered as non-confidential, that is, as information that the other party can disclose to third parties or use for its own purposes if the contract is not concluded. Example 1. "A" invites "B" and "C", manufacturers of air conditioning systems, to provide bids for the installation of their systems. In their bids, "B" and "C" may provide some technical data concerning the operation of their respective systems in order to highlight their merits. "A" decides to reject "B"'s bid and continues negotiations only with "C". "A" has full freedom to use the information provided in "B"'s bid for the purpose of persuading "C" to propose more favorable conditions. 2. Confidential information A party may have an interest in certain information not being disclosed or used for purposes different from those for which it was provided. To the extent that it is expressly declared that such information should be considered confidential, it is clear that the other party tacitly obligates itself to treat it as such. The only problem that may arise is that if the period in which the information must not be disclosed is too long, the prohibition on disclosing it could contravene laws that prohibit restrictions on commercial practices. Even in the absence of an express manifestation to this effect, the party that receives the information may be subject to a duty of confidentiality. This situation could arise when, in view of the special nature of the information or the professional qualifications of the parties, it would be contrary to the duty of good faith and fair dealing to disclose or use such information for the benefit of the party that receives it after breaking off negotiations. Examples 2. The facts are identical to those of Example 1, but here "B" expressly requests "A" not to disclose certain technical specifications contained in the bid. "A" cannot use such information in the negotiations with "C". 3. "A" has an interest in concluding a joint venture contract with "B" or "C", two leaders in the automotive industry of country "X". During negotiations with "B", "A" receives detailed information about "B"'s projects regarding a new design. Although "B" has not expressly requested that "A" treat such information as confidential, "A" is obligated not to disclose it to "C", taking into account that it is a new design. In the event that the negotiations do not result in the conclusion of a contract, "A" also cannot use "B"'s projects in the own production process. 3. Compensation for damages and losses The violation of the duty of confidentiality entails, in the first place, liability for damages. The amount of compensation may vary, depending on whether the parties expressly agreed not to disclose the information to third parties. Even if the aggrieved party has suffered no damage, it could claim from the other party the benefits that the latter obtained by disclosing the information to third parties or by using it for its own benefit. If necessary, for example, the injured party could request an injunction if the information has not yet been disclosed or has only been partially disclosed.

ARTICLE 2: 1.17 (Integration Clauses) A written contract that contains a clause stating that the writing embodies the complete agreement cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing.

Art. 2.1.18 UNIDROIT Principles COMMENTARY If the conclusion of the contract is preceded by relatively prolonged negotiations, the parties may wish their agreement to be in writing and to declare that such document constitutes their definitive agreement. This can be achieved by drafting a "merger" or "integration" clause (for example "This contract completely incorporates what has been agreed by the parties"). However, the effect of such clause is not to deprive all significance from all prior statements and agreements, which could be used to interpret the writing (see also Article 4.3(a)). A merger clause obviously includes the prior statements and agreements, and does not affect any eventual informal agreements that the parties may conclude after the contract is concluded. The parties, however, are free to agree that the formula accepted also extends to future modifications of the contract (see Article 2.1.18). This article indirectly confirms the principle established in Article 1.2 in the sense that, in the absence of a merger clause, any kind of evidence that supplements or contradicts the written contract may be accepted.

ARTICLE 2: 1.18 (Modification in a Particular Form) A written contract that requires that any modification or termination by mutual agreement be in a particular form cannot be modified or terminated otherwise. However, a party shall be bound by its own conduct and may not rely on such clause to the extent that the other party has reasonably acted in reliance on such conduct. COMMENTARY When concluding a written contract, the parties may manifest their desire that any modification or termination of the contract also be in writing, or in some other particular form, by incorporating a special clause to that effect (for example "any modification to this contract can only be made in writing and by the signature of the contracting parties"; "any alteration to the schedule indicated in the above section must be confirmed in writing by the representative of the engineer on site"). This article establishes the rule that such clause renders ineffective any modification or termination of the contract that is not made in the particular form required. Example 1. A builder, "A", concludes a contract with the buyer "B" for the construction of a building. The contract states that any modification to the work schedule must be made in writing and that the document must be signed by both parties. During the course of construction, "A" sends "B" an e-mail requesting "B"'s consent to extend a particular deadline. "B" accepts by returning the e-mail. This modification is not valid since it is not contained in any document signed by both parties. There is, however, an exception to the general rule. By applying the general principle concerning the prohibition of inconsistent conduct (see Article 1.8), in accordance with this provision, any of the parties shall be bound by its own conduct and may not rely on the clause requiring written form to modify or terminate the contract when the other party has reasonably relied on such conduct. Example 2. A builder, "A", concludes a contract with the board of directors of a school, "B", for the construction of a new school building. The contract provides that the second floor of the building must have sufficient load-bearing capacity to house the library. Notwithstanding that the contract incorporates a clause prohibiting verbal modification, the parties subsequently agree verbally that the second floor should not have the load-bearing capacity originally agreed. "A" completes the construction of the building in accordance with the verbal modification, and "B", who has observed all construction without any objection, at the time of delivery opposes the manner in which the second floor has been constructed. A court could decide that "B" has no right to rely on the clause prohibiting verbal modification, since "A" could reasonably rely on the verbal modification and therefore is not in breach.

ARTICLE 2.1.19 (Contracting on the basis of standard terms) (1) The general rules on the formation of a contract apply when one or both parties use standard terms, subject to what is provided in Articles 2.1.20 to 2.1.22. (2) Standard terms are those prepared in advance by one of the parties for general and repeated use and which are in fact used without negotiation with the other party. COMMENT 1. Contracting on the basis of standard terms This is the first of four articles (Articles 2.1.19–2.1.22) that deal with the special situation where one or both parties use standard terms. 2. Notion of "standard" terms Standard terms are understood to be those contractual provisions prepared in advance by one of the parties for general and repeated use without being negotiated with the other party (paragraph (2)). What is decisive is not their formal presentation (for example whether they are incorporated in a separate document or form part of the contract itself, used in printed forms or simply incorporated in electronic files, etc.), nor who has prepared them (the party itself, a professional or trade association, etc.), nor their extent (whether they consist of a set of provisions that include almost all relevant aspects of the type of contract in question, or whether they concern only one or two provisions, for example the exclusion of liability and arbitration). What is decisive is that they have been prepared for the general and repeated use of one of the parties and are used in the particular case without being negotiated by the other party. This last requirement refers only to the standard terms which the other party must accept as a whole, and thus does not include other terms of the same contract that may be negotiated. 3. Applicability of the general rules on contract formation The general rules on contract formation are usually applicable regardless of whether one or both parties use standard terms (paragraph (1)). It follows that standard terms proposed by one party bind the other party only in the case of acceptance, and that it depends on the circumstances of the case whether it is necessary for both parties to refer to the standard terms expressly or tacitly. Therefore, standard terms incorporated in the written contract bind the parties by simple signature of the contractual document as a whole, at least whenever such standard terms are reproduced at the top of the signature and not, for example, if they are found on the back of the document. On the other hand, if one party wishes to use standard terms incorporated in another document or electronic file, it must make express reference to it. The tacit incorporation of standard terms may be accepted only on the basis of established practices between the parties or usages to that effect (see Article 1.9). Examples 1. "A" wishes to conclude an insurance contract with "B" to cover the risks of liability for accidents suffered at work by the employees of "A". The parties sign a contractual form presented by "B", in which blank spaces must be completed that refer, among other points, to the premium and to the maximum insured coverage. By virtue of the signature, "A" is bound not only by the clauses that "A" has negotiated personally with "B", but also under the General Conditions of Contracting of the National Association of Insurers, which are printed on the form. 2. "A" usually concludes contracts with its customers based on its own standard terms printed in a separate document. When making an offer to "B", a new customer, "A" omits to make express reference to the standard terms. "B" accepts the offer. The standard terms are not considered incorporated in the contract unless "A" can prove that "B" knew or should have known of "A"'s intention to conclude the contract only on the basis of its own standard terms (for example, by proving that such standard terms were regularly adopted in previous transactions). 3. "A" intends to buy grain in the London market. In a contract concluded with "B", a broker in that market, no reference is made to the standard terms that normally regulate the broker's activity in contracts concluded in that market. However, the standard terms are considered incorporated in the contract because their application to this type of contract is equivalent to a commercial usage.

ARTICLE 2.1.20 (Surprising terms) (1) A standard term does not have effect if it is of such a character that the other party could not have reasonably foreseen it, unless that party had expressly accepted it. (2) In determining whether a standard term is of such a character, regard shall be had to its content, language and presentation. COMMENT 1. Invalidity of surprising clauses in standard terms The party that accepts the standard terms of the other party is, in principle, bound by such terms, regardless of whether it actually knew their content in detail or understood all their implications. An important exception to this general rule established in this article is that, notwithstanding the acceptance of such terms as a whole, the adherent party is not bound by those clauses that, by their content, terminology or presentation, could not reasonably be foreseen by that party. The reason for this exception is to prevent the party using standard terms from obtaining an unfair advantage by imposing hidden clauses that the other party would hardly accept if it were aware of them. With respect to other articles of the Principles that are intended to protect a party by reason of its economic weakness or lack of experience, see Articles 3.2.7 and 4.6. 2. Surprising or unexpected clauses by virtue of their content The surprising or unexpected nature of a particular clause incorporated in standard terms can result, in the first place, from the content of that clause itself. This would be the case when a reasonable person in the same position as the adherent party could not have expected such a provision within the type of standard clauses in question. To determine whether a provision is unusual, account must be taken, on the one hand, of the provisions regularly used within the commercial sector in question and, on the other hand, of the individual negotiations conducted between the parties. For example, to determine whether a provision intended to exclude or limit the contractual liability of the proponent is or is not "surprising", and therefore lacks effect in a given situation, will depend on whether this type of provision is common in the commercial sector in question and whether it is consistent with the negotiations conducted by the parties. Examples 1. "A", a travel agent, offers travel plans for business purposes. The provisions incorporated in the advertisements give the impression that "A" acts as a travel agent that assumes full responsibility for the various services included in the travel plan. "B" reserves a tour based on "A"'s standard clauses. Although "A" accepted the clauses as a whole, "A" could not enforce a clause that expresses, with respect to accommodation facilities, that it acts simply as an agent of the hotel and therefore assumes no responsibility for such service. 3. Surprising or unexpected clauses by virtue of their terminology or presentation Another reason for a provision contained in standard terms to be surprising to the adherent party can be the terminology used to express it, which may be obscure, or the manner in which it is presented typographically, for example with very small characters. To determine whether this is the case, consideration must be given not so much to the formulation and presentation commonly used in this type of standard clauses, but above all to the professional practice and experience of those in the same conditions as the adherent party. Thus, the same expression may be at once obscure or clear, depending on whether the adherent party belongs to the same professional category as the one that used the standard clauses. Terminology is also a factor that can play an important role in the context of international transactions. If the standard clauses are drafted in a foreign language, it is reasonable to contemplate that some of such clauses, although clear in themselves, may be surprising to the adherent party, from whom it could not reasonably be expected that it appreciate all their implications. Examples 2. "A", an insurance company operating in country "X", is a subsidiary of "B", a company from country "Y". "A"'s standard clauses include 50 clauses printed in small character. One of such clauses designates the law of country "Y" as the applicable law. Such clause lacks effect unless it has been printed in characters of greater prominence or is presented in a manner suited to attract the attention of the adherent party, since customers in country "X" could not reasonably expect in the standard clauses of an enterprise operating in their own country that a provision would subject the contract to a foreign law. 3. "A", a merchant of goods operating in Hamburg, uses for contracts with its clients standard clauses that establish, among other provisions, the following: "Hamburg – Freundschaftliche Arbitrage". In the business environment of the place, such clause is understood to mean that any eventual dispute shall be submitted to a special arbitration governed by rules of procedure of local origin. This clause could lack effect in contracts with foreign clients, notwithstanding the acceptance of the standard clauses as a whole, given that a foreign client could not reasonably be expected to understand all its implications regardless of whether such clause has been translated into the language of the foreign client. 4. Express acceptance of surprising clauses The risk that a party be taken by surprise by certain clauses does not arise if they have been previously clarified and discussed with the other party. Nor does such risk exist if, in the particular case, the party that drafted such clauses draws the attention of the adherent party to a certain point and the latter accepts it. This article, therefore, expresses that a party may not avail itself of the "surprising" nature of a clause when it has expressly accepted it.

ARTICLE 2.1.21 (Conflict between standard terms and non-standard terms) In case of conflict between a standard term and one that is not standard, the latter shall prevail. COMMENT Generally, standard terms are prepared in advance by one of the parties and incorporated into the contract without their content being subject to discussion between the parties (see Article 2.1.19(2)). It is therefore logical that when the parties specifically negotiate certain contractual provisions, such provisions shall prevail over those standard terms that provide otherwise, since it is more likely that the former reflect the parties' intention on the matter in question. Those provisions that have been individually negotiated may appear in the same document as the standard terms, but could also be found in another document. In the former case they would be easy to recognize when printed differently from the standard terms. In the latter case it may be more difficult to distinguish between standard and non-standard clauses, nor would it be easy to determine their precise position within the hierarchy of the various documents. To this end, the parties usually include a provision in the contract in which they expressly specify the documents that form part of the contract and their relative value. Other problems could arise when modifications to the standard terms have been agreed verbally, without the conflicting provisions incorporated in the standard terms having been deleted, and such clauses include a provision indicating the exclusive nature of the document signed by the parties, or that any addition or modification to the content of such clauses must be made in writing. For this type of situation, see Articles 2.1.17 and 2.1.18.

ARTICLE 2.1.22 (Conflicting standard terms) When both parties use standard terms and reach an agreement except in regard to such terms, the contract shall be formed on the basis of the terms agreed upon and of any standard terms that are substantially common to both parties, unless one of the parties clearly indicates in advance, or without undue delay informs the other party, that it is unwilling to be bound by such a contract. COMMENT 1. Parties using different standard terms It is quite frequent in commercial transactions, both when the offeror makes the offer and when the offeree accepts it, that each one refers to its own standard terms. In the absence of express acceptance by the offeror of the standard terms incorporated by the offeree, it must be determined whether a contract has been formed and, if so, which of the two sets of standard terms should prevail. 2. "Battle of the forms" and the general rules on offer and acceptance If the general rules on offer and acceptance were applied, there would be no contract since the supposed acceptance by the offeree would be subject to the exception provided in Article 2.1.11(2). In this case, such supposed acceptance would be equivalent to a counter-offer, or if the two parties have begun to perform their obligations, without refuting each other's standard terms, it could be considered that the contract has been formed in accordance with the clauses sent last or referred to last (the "last shot" rule). 3. The "knock-out" doctrine The "last shot" doctrine may be appropriate if the parties clearly indicate that the adoption of their standard terms is an essential condition for the formation of the contract. However, if the parties, as is quite frequent in practice, refer to their standard terms in a relatively mechanical manner, such as when they exchange printed purchase orders and acknowledgments of receipt that include their respective standard terms on the back, without even noticing the conflict that exists between such clauses, there is no reason to allow the parties to subsequently question the existence of the contract, or, if they have begun to perform their obligations, to allow them to insist on the application of the clauses that were sent or referred to last. It is for this reason that, notwithstanding the general rules on offer and acceptance, this article provides that if the parties reach an agreement except with respect to their standard terms, the contract is considered formed on the basis of those terms that have been agreed upon and in accordance with any clause that is substantially common to both parties ("knock-out" doctrine). Examples 1. "A" requests a machine from "B" indicating the model, price and other payment conditions, as well as the date and place of delivery. "A" uses a form with its "General Conditions of Purchase" printed on the back. "B" accepts by sending a form in which it acknowledges receipt of the order, on whose back appear its own "General Conditions of Sale". Subsequently, "A" attempts to withdraw from the transaction alleging that no contract has been formed, since no agreement was reached regarding the standard clauses that should apply. However, since the parties had already agreed on the essential terms of the contract, the contract is considered formed on the basis of such terms and on the basis of the standard clauses that are substantially common to both parties. A party can always prevent the application of the "knock-out" doctrine if it clearly indicates this in advance, or if it informs the other party subsequently and without undue delay, that it is unwilling to be bound by a contract that has not been formed in accordance with its own standard clauses. It is not possible to anticipate with absolute certainty what should be considered in practice as indicating "clearly" that it does not intend to be bound. However, it will generally not be sufficient to include this type of clause within the same standard clauses, since what is needed is a specific manifestation by the party to whom the offer or acceptance belongs. Examples 2. The facts are identical to those of Example 1, but here "A" argues that the contract was formed on the basis of its own standard clauses, since they include a provision that expresses: "Any deviation in the standard clauses of the accepting party lacks validity unless confirmed in writing by us". The result is the same as in Example 1, since simply by including this type of provision in its standard clauses, "A" does not indicate with sufficient clarity its determination to conclude the contract only on the condition that it be under its own standard clauses. 3. The facts are identical to those of Example 1, but here the non-standard clauses of "A"'s offer contain a provision to the effect that "A" intends to conclude the contract solely in accordance with its own standard clauses. The mere fact that "B" attaches its own standard clauses to its acceptance does not prevent the contract from being considered formed in accordance with the standard clauses provided by "A".

ARTICLE 2.2.1 (Scope of this Section) (

• 1)

  This Section regulates the authority of a person ("the agent") to affect the legal relations of another person ("the principal") through or with respect to a contract with a third party, whether the agent acts in its own name or in the name of the principal. (

• 2)

  This Section regulates only the relations between the principal or the agent, on the one hand, and the third party on the other. (

• 3)

  This Section does not regulate the authority of an agent conferred by law nor the authority of an agent appointed by a public or judicial authority. COMMENT 1. Scope of the Section The present Section regulates the power of an agent to affect the legal relations between its principal and a third party. In other words, it deals only with regulating the so-called "external relations" between the principal or agent on one hand, and the third party on the other, without dealing with the so-called "internal relations" between principal and agent. Those provisions that refer to matters that link both internal and external relations (see, for example, Articles 2.2.2 and 2.2.10 on the constitution and termination of the agent's authority, Article 2.2.7 on conflicts of interest and Article 2.2.8 on substitution of the agent) address such matters with the sole objective of regulating their effects in relation to third parties. The rights and obligations between principal and agent are regulated by the contract and by applicable law, which may incorporate mandatory rules intended to protect the agent in those specific types of representation known as "commercial agency". 2. Authority to conclude a contract The present Section deals only with agents that have authority to conclude contracts on behalf of their principal, and thus the following are excluded from this Section: intermediaries whose task is simply to bring two parties together so that they can conclude the contract between themselves (for example, real estate agents) or to promote contracts on behalf of a principal, but without having the authority to conclude them (as might be the case with some commercial agents). Moreover, the phrase "the authority... to affect the legal relations of the... principal through or with respect to a contract with a third party" used in paragraph (1) should be understood in a broad sense in order to include all acts performed by the agent that are related to the perfection or performance of the contract, including notifications sent to third parties or received from them. 3. It is irrelevant whether the agent acts in its own name or in the name of the principal Contrary to what happens in many legal systems, this Section does not distinguish between "direct representation" and "indirect representation" depending on whether the agent acts in the name of the principal or in its own name. With respect to representation that has been disclosed or not to the other contracting party ("disclosed" or "undisclosed"), see Articles 2.2.3 and 2.2.4. 4. Voluntary nature of the agency relationship This Section applies only to cases in which the agency relationship is voluntary. Excluded from the scope of this Section are those cases in which the law confers authority on the agent (for example, in matters of family law, marital property and successions), or in which authority results from an authorization by a judicial court (for example the authority to act on behalf of an incapacitated person). 5. Representatives of legal entities The powers of representation of the organs, managers or partners of a legal entity or of another juridical person, with or without legal personality, are habitually regulated by special rules, some of them of a mandatory nature which, by virtue of their specific purpose, necessarily prevail over the general rules regarding the power of agents as established in this Section. Thus, for example, if by virtue of special rules that regulate the powers of managers or organs of a legal entity, such entity cannot invoke a limitation of such powers against third parties, such enterprise cannot avail itself of what is established in Article 2.2.5(1) to claim, by not having the respective authority, that it is not bound by the acts of its organs or managers. Moreover, and so long as the general rules established in this Section do not conflict with the special rules mentioned above on the power of the organs, managers or partners, such general rules may be applied in place of the special rules. Thus, for example, a third party that attempts to demonstrate that a contract concluded with a manager of the legal entity binds the entity, may invoke either the special rules relative to the power of the organs or managers of such enterprise or, where appropriate, the general rules relative to apparent authority provided in Article 2.2.5(2). Examples 1. "A", general manager of the legal entity "B" constituted in country "X", enjoys, in accordance with the articles of association of the entity, authority to carry out all operations relating to the ordinary management of the business of the entity. "A" concludes a contract with "C" that is clearly not the object of the business to which the entity "B" normally devotes itself. By virtue of Article 35A of the law on legal entities, "in favor of a person who conducts business with a legal entity in good faith, the authority of the Board of Directors to bind the entity, or to grant to others such authority, shall be considered unlimited by virtue of the articles of association of the entity" and "... a person shall not be considered to have acted in bad faith merely because it acted knowingly that the act was outside the authority of the managers by virtue of the articles of association of the entity" [...]. "B" is bound by the contract between "A" and "C", even though "C" knew or should have known of the limits on "A"'s authority. "B" may not avail itself of what is provided in paragraph (1) of Article 2.2.5 in order to argue otherwise. 2. "A", general manager of the legal entity "B" constituted in country "X", has received from the Board of Directors of such entity the authority to carry out all operations relating to the ordinary conduct of the business of the entity, with the exception of hiring and termination of the employment relationship with employees. "A" hires "C" for the position of accountant in the branch of "B" in a foreign country "Y". "B" opposes being bound by the acts of "A" since "A" did not have authority to hire employees. "C" may invoke against "B" Article 35A of the law on legal entities of country "X". Likewise, "C", who is a foreign citizen in "Y", and who might not be familiar with the special provision of the law on legal entities of country "X", may invoke the general rule on apparent authority provided in Article 2.2.5(2) and claim that, given the position of "A" as general manager of "B", it was reasonable for "C" to believe that "A" had authority to hire personnel.

ARTICLE 2.2.2 (Constitution and scope of the agent's authority) (1) The conferment of authority by the principal to the agent may be express or tacit. (2) The agent has authority to perform all acts necessary, in the circumstances, to achieve the objectives for which the authority was conferred. COMMENT 1. Express or tacit authority The paragraph (1) clearly establishes that the authority granted in the power of representation does not require that particular formal requirements be satisfied and that authority may be express or tacit. The most usual case where express authority is granted is the mandate, but the principal may also confer authority to be represented by means of an oral declaration or written communication, or in the case of a legal entity, by a resolution of the board of directors. The granting in writing of express authority has the advantage of constituting clear evidence of its existence and of the scope of the representational authority for all interested parties (principal, agent and third parties). Tacit or implicit authority exists whenever the intention of the principal to confer authority on the agent can be inferred from the conduct of the principal (for example, the attribution of representation for a particular task) or from other circumstances of the same kind (for example, the terms of the express authorization, a particular manner of acting between the two parties or a general commercial usage). Examples 1. "B" appoints "A" as administrator of a property of "B". "A" has the implicit authority to conclude short-term lease contracts relating to each of the departments of the building. 2. Scope of authority The broader the mandate conferred on the agent, the broader will be the scope of authority granted. Thus, paragraph (2) clearly establishes that the authority of the agent is not limited to what is expressly provided, but is understood to be granted to perform all acts necessary to fulfill the mission for which such authority was granted, taking into account the circumstances, unless the scope of authority has been expressly limited when it was granted. Examples 2. The owner "B" consigns to the captain of the vessel "A" a cargo to be transported in 10 days to country "X". After three of the ten days have elapsed, the ship suffers damage and must stop at the nearest port for repairs. "A" has implicit authority to unload the merchandise and deliver it to another captain so that the merchandise can reach its destination on another vessel.

ARTICLE 2.2.3 (Disclosed agency) (1) When an agent acts within the scope of its authority and the third party knew or should have known that the agent was acting as such, the acts of the agent directly affect the legal relations between the principal and the third party, without creating any legal relation between the agent and the third party. (2) However, the acts of the agent only affect the relations between the agent and the third party, when with the consent of the principal, the agent assumes the position of contracting party. COMMENT 1. "Disclosed" agency With respect to the effects of the acts of the agent, this Section distinguishes two different situations: in the first, the agent acts on behalf of the principal within the limits of its authority and the third parties know, or should know, that the agent is acting in such capacity. In the second, the agent acts on behalf of the principal within its authority, but the third parties do not know, nor could they know, that the agent is acting in such capacity. The first situation, which is the most normal, shall be referred to as disclosed or "apparent" agency ("disclosed" agency), and it is with this that this article deals. 2. The acts of the agent directly bind the principal and the third parties In the case of "disclosed" agency, the rule is that the acts of the agent directly affect the legal sphere of the principal vis-à-vis third parties (paragraph (1)). Thus, a contract concluded by the agent directly binds the principal with third parties. Similarly, any communication of intent made by the agent to third parties or received by it from them, affects the legal situation of the principal as if the principal itself had made or received it. Examples 1. "A", head of sales of a computer manufacturer "B", accepts the order placed by the University "C" for the purchase of a certain number of computers. The sale contract directly binds "B" and "C", so "B" and not "A" is the one obligated to deliver the goods to "C" and the one entitled to payment from "C". 2. The facts are identical to those of Example 1, but here one of the computers delivered was delivered with defects. The notification of such defects that "C" makes to "A" directly binds "B". 3. It is not necessary to act in the name of the principal To establish a direct relation between the principal and the third party, it is sufficient that the agent act within the scope of its authority and that third parties know or should know that the latter is acting in representation of another person. However, the agent generally need not necessarily act in the name of the principal (see also Article 2.2.1(1)). In practice, however, there may be cases where it is in the interest of the agent itself to expressly indicate the identity of the person on whose behalf it acts. Thus, whenever the contract requires the signature of the parties, it is advisable that the agent not simply sign in its own name, but add text such as "by authority of" (and add the name of the principal) in order that it not be considered personally responsible for performance of the contract. Examples 3. The facts are identical to those of Example 1. In the sale contract, "B" is bound with "C" and it is irrelevant whether "A", when accepting the order from "C" by telephone, expressly stated that it was acting on behalf of "B". 4. The research center "C" establishes contact with a computer specialist, "A", with a view to creating a computer program for a database of jurisprudence in topics of international law. "A", when signing the contract in its capacity as employee of the computer society "B", must expressly mention that it acts on behalf of "B". If "A" signs the contract without mentioning "B", "C" may consider "A" personally responsible under the contract. 4. The agent as a party to the contract An agent, although acting openly on behalf of a principal, may exceptionally become a party to the contract with the third party (paragraph (2)). This is the case, in particular, when a principal that wishes to remain anonymous instructs its agent to act as what is usually called a "commission merchant", that is, to negotiate with third parties in its own name without establishing any direct relation between the principal and the third parties. This is also the case when third parties make clear that they do not intend to contract with anyone other than the agent and the latter, with the consent of the principal, accepts that only it, and not the principal, will be bound by the contract. In both cases it should be concluded from the terms of the agreement between agent and principal that, once the agent has acquired rights under the contract concluded with the third party, these shall be transferred to the principal. Entirely different would be the case when the agent intervenes and, in violation of the agreement with the principal, decides to conclude the contract with the third party. By acting in this manner, the agent would not be acting as an agent and therefore this Section would not apply to such situation. Examples 5. The merchant "B", expecting a significant increase in the price of wheat, decides to buy a large quantity. "B", wishing to remain anonymous, entrusts "A" with the purchase. Even though the supplier "C" knows that "A" is buying in representation of its principal, the purchase contract binds "A" and "C", and does not affect the legal situation of "B". 6. "A", acting on behalf of a foreign seller "B", places an order with "C" to buy certain merchandise. Since "C", not knowing "B", insists that "A" confirm the order of "B", "A" accepts to be responsible itself vis-à-vis "C". Even though "C" knew that "A" was buying the merchandise in representation of "B", the purchase contract binds "A" and "C" and does not directly affect the legal situation of "B". 7. The merchant "B" instructs its agent "A" to acquire in its name a certain quantity of petroleum. When "A" is about to conclude the contract with supplier "C", it is announced that the petroleum-producing countries intend to substantially reduce production. "A", expecting an increase in petroleum prices, decides to buy the petroleum in its own name and to conclude directly with "C" the contract. By acting in this manner, "A" has ceased to be the agent of its principal and the consequences of its acts are not regulated by this Section.

ARTICLE 2.2.4 (Undisclosed agency) (1) When an agent acts within the scope of its authority and the third party did not know and should not have known that the agent was acting as such, the acts of the agent affect only the relations between the agent and the third party. (2) However, when such an agent, when contracting with a third party on behalf of an enterprise, conducts itself as the owner thereof, the third party, upon discovering the identity of the true owner of the same, may also exercise against the latter the actions that it may have against the agent. COMMENT 1. "Undisclosed" agency The present article deals with what might be called undisclosed or "hidden" representation, that is, the situation in which an agent acts within the limits of its authority on behalf of a principal but third parties did not know nor should they have known that the agent was acting in such capacity. 2. The acts of the agent directly bind only the agent and third parties Paragraph (1) establishes that in case of "undisclosed" agency, the acts performed by the agent only bind the agent with the third party and not directly the principal with the third party. Examples 1. The art merchant "A" purchases a painting from the artist "C". Upon concluding the contract, "A" does not disclose the fact that it is acting on behalf of the client "B" and "C" has no reason to believe that "A" is not acting in its own behalf. The contract binds "A" and "C" only, and does not create any direct relation between "B" and "C". 3. The right of the third party to act against the principal Notwithstanding the rule established in paragraph (1), third parties may exceptionally have a direct right of action against the principal. More precisely, in accordance with paragraph (2), if the third party believed it was dealing with the owner of a business, when in fact it was dealing with the agent of the owner, such third party may, upon discovering the true owner, also exercise against it the rights that it may have against the agent. Examples 2. The manufacturer "A", after transferring its assets to a company "C", recently constituted, continues to conclude contracts in its own name and without disclosing to supplier "B" that it is in fact acting only as general manager of company "C". When "B" discovers the existence of "C", "B" has the right to act also against the company.

ARTICLE 2.2.5 (Agent acting without authority or exceeding it) (1) When an agent acts without authority or exceeds it, its acts do not affect the legal relations between the principal and the third party. (2) However, when the principal causes the third party to have a reasonable conviction that the agent has authority to act on behalf of the principal and that the agent is acting within the scope of that authority, the principal may not invoke against the third party the agent's lack of authority. COMMENT 1. Absence of authority Paragraph (1) specifies that when an agent acts without authority, its acts shall not bind the principal vis-à-vis the third party. The same applies when the agent has received limited authority and acts exceeding it. With respect to the liability of an agent without authority vis-à-vis third parties, see Article 2.2.6. Examples 1. "B" authorizes "A" to acquire on its behalf a precise quantity of grain but within a determined price. "A" concludes a contract with seller "C" for a larger quantity of grain and at a higher price than that authorized by "B". By reason of "A"'s lack of authority, the contract between "A" and "C" does not bind "B" nor can it be enforced between "A" and "C". 2. Apparent authority There are two situations in which an agent, although acting without authority or exceeding the authority granted, can bind the principal vis-à-vis the third party. The first situation would be that of the principal that ratifies the act of the agent and this case is dealt with in Article 2.2.9. The second situation would be that of the so-called "apparent authority" and it is dealt with in paragraph (2) of this article. In accordance with this provision, the principal whose conduct leads the third party to reasonably believe that the agent has authority to act in its representation, may not subsequently invoke against the third party the agent's lack of authority and therefore shall be bound by the acts of the latter. Apparent authority, which constitutes an application of the general principle of good faith (see Article 1.7) and of the prohibition of contradictory conduct (see Article 1.8) is particularly important when the principal is not a natural person but a legal entity. When dealing with a company or any other juridical person, a third party may have difficulty in determining whether the persons acting in the organization have real authority to act, so it might prefer, when possible, to rely on apparent authority. In such cases, the third party only has to demonstrate that it was reasonable for it to believe that the person claiming to represent the organization had authority to do so, and that this reasonable belief was formed as a result of the conduct of those who actually had the authority to represent the organization (board of directors, managers, partners, etc.). The question of whether this belief was reasonable or not for the third party will depend on the circumstances of the case (the position within the hierarchy of the organization that the person making the apparent representation held, the type of transaction, the consent of the managers of the organization in the past, etc.). Examples 2. "A", manager of one of the branches of company "B", without having the respective authority, concludes with company "C", a specialist in construction, a contract for the decoration of the branch installations. By virtue of the fact that a branch manager normally has authority to conclude such contracts, "B" is bound with the contract with "C" since it was reasonable that "C" believed that "A" had real authority to conclude such contract. 3. "A", Director of Finance of company "B", although without authority to do so but with the approval of the board of directors, concluded, on behalf of "B", numerous financial transactions with bank "C". On the occasion of a new transaction that proves to be disadvantageous for "B", the Board of Directors of "B" presents the objection to "C" that "A" did not have authority to carry out such transaction. "C" may reject this objection by invoking that "B" is bound by the acts of "A" by virtue of apparent authority to conclude financial transactions on behalf and in representation of "B".

ARTICLE 2.2.6 (Liability of agent acting without authority or exceeding it) (1) An agent that acts without authority or exceeds it is liable, in the absence of ratification by the principal, for the indemnification that places the third party in the same situation in which it would have found itself if the agent had acted with authority and without exceeding it. (2) However, the agent is not liable if the third party knew or should have known that the agent did not have authority or was exceeding it. COMMENT 1. Liability of the false agent It is generally recognized that an agent that acts without authority or exceeds its authority, in the absence of ratification by the principal, is liable for damages and losses caused to third parties. Paragraph (1), by establishing that the false agent shall be liable for the damages and losses that arise to third parties and that such compensation shall be such as to place the third party in the same position as if the agent had acted with authority, makes clear that the liability of the false agent is not limited to the so-called "interest of confidence" or "negative interest", but extends to what is known as "expectation" or "positive interest". In other words, the third party can recover the profit that it would have obtained if the contract concluded with the false agent had been valid. Examples 1. "A", without being authorized by "B", concludes with "C" a contract for the sale of a cargo of petroleum belonging to "B". "B" does not ratify the contract. "C" can recover from "A" the difference between the contract price and the current market price. 2. Knowledge by the third party of the agent's lack of authority The false agent is liable vis-à-vis the third party only to the extent that the third party, when concluding the contract with the false agent, did not know or should not have known that the latter was acting without authority or exceeding its authority. Examples 2. "A", a young employee of company "B", without having the authority to bind company "B", concludes a contract with construction company "C" to redecorate the installations of "B". "B" refuses to ratify the contract. However, "C" cannot demand payment of damages and losses from "A" since "C" should have known that an employee of "A"'s rank normally does not have authority to conclude this type of contract.

ARTICLE 2.2.7 (Conflict of interest) (1) If a contract concluded by an agent involves it in a conflict of interest with the principal, of which the third party knew or should have known, the principal may avoid the contract. The right to avoidance is subject to Articles 3.2.9 and 3.2.11 to 3.2.15. (2) However, the principal may not avoid the contract (a) if it has consented that the agent engage in the conflict of interest, or knew or should have known of it; or (b) if the agent has disclosed the conflict of interest to the principal and the principal has raised no objection within a reasonable time. COMMENT 1. Conflict of interest between the agent and principal It is inherent in the agency relationship that the agent execute its mandate in the interest of its principal and not in its own interest or in that of another person if it conflicts with the interests of the principal. The most frequent cases of potential conflicts of interest are those where the agent acts for two principals and those in which the agent concludes the contract with itself or with a company in which it has an interest. However, in practice, even in those cases, a conflict of interest may not exist. For example, the fact that the agent acts for two principals may be in conformity with usages in a relevant trade sector or the principal could have given the agent a mandate so special and limited that it leaves no margin for discretion. 2. Conflict of interest as a reason to avoid the contract Paragraph (1) of this article establishes the rule that a contract concluded by an agent acting in situations of real conflict of interest may be avoided by the principal, on the condition that the third party had knowledge or should have had knowledge of the conflict of interest. The requirement of actual or presumed knowledge of the third party aims to protect the interests of the innocent third party in preserving the contract. This requirement is obviously not relevant for cases in which the agent concludes the contract with itself and therefore is at the same time agent and third party. Examples 1. The foreign client "B" requests the notary "A" to buy on its behalf an apartment in "A"'s city. "A" buys the apartment that the client "C" has asked "A" to sell on "C"'s behalf. "B" may avoid the contract if it can prove that "C" knew or should have known that "A" was in a conflict of interest. Similarly, "C" may avoid the contract if it can prove that "B" knew or should have known that "A" was in a conflict of interest. 2. The retail merchant "B" requests the sales agent "A" to buy for it certain merchandise from company "C" in which "A" is the majority shareholder. "B" may avoid the contract if it can prove that "C" knew or should have known of "A"'s conflict of interest. 3. The client "B" instructs bank "A" to buy on its behalf one thousand shares of company "C" at the closing price of day M on the stock exchange of city "Y". Even though "A" sells to "B" the requested shares from its own portfolio, there will be no conflict of interest because the mandate of "B" leaves "A" no room for maneuvering. 4. "A", president and general manager of company "B", has authority to appoint the company's lawyer in case of litigation for or against "B". "A" appoints itself as lawyer for "B". "B" may avoid the contract. 3. Procedure for avoidance With respect to the procedure for avoidance, the provisions of Articles 3.2.9 (Confirmation), 3.2.11 (Notice of avoidance), 3.2.12 (Time limits), 3.2.13 (Partial avoidance), 3.2.14 (Retroactive effect) and 3.2.15 (Restitution) apply. 4. Avoidance excluded The principal loses the right to avoid the contract in accordance with paragraph (2) if it has consented that the agent act in a situation of conflict of interest, or if for some reason it knew or should have known that the agent would do so. The right to avoid is excluded in the same manner if the principal had been informed by the agent of the contract concluded in a situation of conflict of interest and raised no objection. Examples 5. The facts are identical to those of Example 1, but here before concluding the contract "A" duly informed "B" that it was also acting as representative of "C". If "B" raises no objection, it loses the right to avoid the contract. Similarly, if "A" duly informs "C" that it is also acting as representative of "B" and "C" raises no objection, "C" loses the right to avoid the contract. 5. Questions not covered by this article In accordance with the purpose of this Section as indicated in Article 2.2.1, this article deals only with the impact on external relations of the conflict of interest by the intervention of the agent. Questions such as the agent's liability to the principal for the disclosure of information, and the principal's right to demand payment of damages and losses from the agent may be addressed on the basis of other provisions of these Principles (see Articles 1.7, 3.2.16, 7.4.1 and following) or are regulated by the law applicable to the internal relationship between principal and agent.

ARTICLE 2.2.8 (Sub-agency) A representative has implicit authority to appoint a sub-agent to perform acts that cannot reasonably be expected to be performed by the agent personally. The provisions of this Section apply to sub-agency. COMMENT 1. Role of the substitute agent In carrying out the mandate conferred by the principal, the agent may deem it not only appropriate, but necessary, to use the services of other persons. This is the case, for example, when certain tasks must be carried out in a location different from that of the agent's place of business or if more efficient performance of the mandate requires a division of work. 2. Implicit authority to appoint substitute agents The question of whether the agent is or is not authorized to appoint one or more substitute agents depends on the terms of the authority granted to it. Thus, the principal may expressly exclude the appointment of substitute agents or subject it to the condition of its prior authorization. If nothing is said regarding the possibility of appointing substitute agents and if the terms of the authority granted do not seem incompatible with such possibility, the agent has the right, by virtue of this article, to appoint substitute agents. The only limitation is that the agent cannot entrust to the substitute agent(s) tasks that are reasonably understood should be executed by the agent itself. This is the case in particular of acts that require the personal experience of the agent. Examples 1. The Chinese museum "B" instructs an art merchant located in London "A" to buy a particular piece of Greek ceramics that will be sold at a public auction in Germany. "A" has the implicit authority to appoint a substitute agent "S" to buy such piece of ceramics at the auction in Germany and send it to "B". 2. The facts are identical to those of Example 1, but here "B" does not specify a particular piece of Greek ceramics to be acquired at the auction in Germany and trusts in the experience of "A" to choose the most appropriate one during the auction. It is expected that "A" carry out the purchase itself, but as soon as it has purchased it, it can entrust substitute agent "S" with sending it to "B". 3. Effect of acts performed by the substitute agent This article expressly establishes that the rules of this Section apply to substitute agency. In other words, the acts carried out by a substitute agent legitimately appointed by an agent bind the principal and third parties to each other, provided that such acts are carried out within the limits of the authority of the agent and the authority conferred on the substitute agent by the agent, which may be more limited. Examples 3. The facts are identical to those of Example 1. The purchase of the piece of Greek ceramics by "S" directly binds "B" if it was performed within the authority of the power granted to "A" and the authority that "A" granted to "S".

ARTICLE 2.2.9 (Ratification) (

• 1)

  An act by an agent that acts without authority or exceeds it may be ratified by the principal. With ratification the act produces the same effects as if it had been carried out from the beginning with authority. (

• 2)

  The third party may, by notification to the principal, grant it a reasonable time period for ratification. If the principal does not ratify the act within that time period, it may not do so thereafter. (

• 3)

  If, at the time the agent acted, the third party did not know nor should have known of the lack of authority, the third party may, at any time prior to ratification, notify the principal of its rejection of being bound by a ratification. COMMENT 1. Notion of ratification This article establishes the generally accepted principle that an act which would have no effect vis-à-vis the principal because it was carried out by someone without authority, or by someone exceeding their authority, may be binding on the principal if the principal ratifies it subsequently. The subsequent authorization is known by the name of "ratification". Like the original authorization, ratification is not subject to particular formal requirements. As a unilateral manifestation of intent, it may be express or implicit as a result of declarations or conduct. Although ratification is usually communicated to the agent or to the third party, or to both, it is not required that it be communicated to anyone in particular, so long as it is manifested in some manner and can be proven. Examples The agent "A" purchases on behalf of principal "B" merchandise from third party "C" at a higher price than that which "A" is authorized to pay. Upon receiving the invoice from "C", "B" does not object to it and pays it by bank transfer. The payment constitutes ratification of "A"'s act even if "B" does not expressly declare its intention to ratify nor inform "A" and "C" of the payment and only subsequently "C" is informed of the payment by its bank. 2. Effects of ratification Once ratified, the act of the agent produces the same effects as if it had been carried out with authority from the beginning (paragraph (1)). It follows that the third party may refuse partial ratification of the agent's acts by the principal, because it would be equivalent to the principal's proposal to modify the contract that the third party concluded with the agent. Moreover, ratification cannot be revoked once carried out and communicated to the third party. Otherwise, the principal would be in a position to unilaterally withdraw from the contract concluded with the third party. 3. Time of ratification The principal may, in principle, ratify at any time. The reason is that normally the third party does not know that it was contracting with an agent that did not have authority or was exceeding its authority. However, even if the third party became aware from the beginning, or later, that the agent was a false agent, the third party would have a legitimate interest in not remaining uncertain indefinitely about the fate of the contract concluded with the false agent. Thus, paragraph (2) grants the third party the right to determine a reasonable time period within which the principal must ratify if that is its intention. It goes without saying that in case of ratification it must be notified to the third party. 4. Ratification excluded by the third party A third party that, at the time of dealing with the agent, did not know nor should have known that the latter did not have authority, may exclude ratification by notification to the principal to that effect at any time before ratification by the principal. The reason for granting the third party in good faith such a right is to prevent the principal from improperly speculating and deciding whether or not to ratify the act depending on market developments. 5. Rights of third parties are not affected This article deals only with the effects of ratification on the subjects directly involved in the agency relationship, namely the principal, the agent and the third party. In accordance with the purpose of this Section as defined in Article 2.2.1, the rights of other third parties are not affected. For example, if the same goods are sold by a false agent to "C" and subsequently the principal sells them to another person "D", the conflict between "C" and "D" that results from the successive ratification of the first sale by the principal must be resolved by applicable law.

ARTICLE 2.2.10 (Termination of authority) (1) Termination of authority is not effective in relation to a third party unless the third party knows of it or should have known of it. (2) Notwithstanding the termination of its authority, an agent continues to have authority to perform those acts that are necessary to prevent damage to the interests of the principal. COMMENT 1. Reasons for termination not covered by this article There are several reasons for terminating the authority of the agent: revocation by the principal, renunciation by the agent, completion of the act or acts for which the authority was granted, loss of capacity, bankruptcy, death or cessation of existence of the agent or the principal, etc. What may constitute grounds for termination of authority and the manner in which such termination operates between the agent and the principal do not fall within the scope of this article and must be determined in accordance with applicable law (for example, the law regulating internal relations between principal and agent, the law regulating legal status or legal capacity, the law regulating bankruptcy, etc.) which may vary considerably from one country to another. 2. Effects of termination against third parties Whatever the reason for termination of the agent's authority, such termination shall have no effect against a third party unless the third party knew or should have known of it (paragraph (1)). In other words, even though the agent's authority has been terminated for one reason or another, the acts of the agent continue to affect the legal relation between the principal and third parties for as long as the third party does not know or should not have known that the agent no longer has authority. The situation is clearly evident when the principal or the agent notify the third party of the termination of authority. In the absence of such notification, it will depend on the circumstances of the case to determine whether the third party should have known of the termination. Examples 1. Company "B" opens a branch in city "X". An advertisement published in the local newspaper indicates that general manager "A" has all authority to act on behalf of "B". Subsequently, when "B" revokes the authority of "A", a similar notification in the same newspaper is sufficient for the termination of authority to have effect among "B"'s clients in city "X". 2. The retail merchant "C" on several occasions has purchased merchandise sold by wholesaler "B" through its agent "A". "A" continues accepting orders from "C" even after termination of its authority as a consequence of "B"'s bankruptcy. The mere fact that there is a bankruptcy proceeding and it has had the publicity required by applicable law is not sufficient for the termination of authority to have effect against "C". 3. Authority by necessity Even after termination of the agent's authority, the circumstances of the case may make it necessary for the agent to perform other acts to prevent the principal's interests from being adversely affected. Examples 3. Agent "A" has authority to buy a certain quantity of perishable merchandise on behalf of principal "B". After the purchase of the merchandise, "A" is informed of "B"'s death. Notwithstanding the termination of "A"'s authority, "A" continues to be authorized to resell the merchandise or store it in an appropriate warehouse. 4. Restrictions on authority are also covered The rules of this article apply not only to termination but also, with the necessary modifications, to successive restrictions on the agent's authority.

ARTICLE 3.1.1 (Questions excluded) This Chapter does not deal with the lack of capacity of the parties. COMMENT This article makes clear that not all the subject matter of contract invalidity contemplated in national legal systems is included within the scope of the Principles. Such is the case of the lack of capacity of the parties. The complexity inherent in questions relating to the legal status of persons, as well as the diverse treatment that these questions receive in national legal systems, counsel their exclusion from the scope of application of the Principles. Consequently, matters such as the validity of "ultra vires" acts will continue to be matters regulated by applicable law. With respect to the authority of the organs, managers or partners of an enterprise, company or any other juridical person to bind their respective entities, see Comment 5 to Article 2.2.1.

ARTICLE 3: 1.2 (Validity of mere agreement) A contract is concluded, modified or terminated by the mere agreement of the parties, without any additional requirement.

Art. 3.1.2 UNIDROIT Principles COMMENTARY The purpose of this article is to make clear that the mere agreement of the parties is sufficient for a contract to be validly concluded, modified or terminated, without the need for other requirements that are usually required under domestic law. 1. Unnecessary "consideration" In countries with an Anglo-Saxon legal tradition, the so-called "consideration" is an indispensable requirement for the validity and performance of a contract, as well as for the modification or termination of the contract by the parties. In commercial traffic, this requirement has minimal importance, since in this context the obligations are almost always undertaken by both parties. This is the reason why Article 29(1) of CISG relieves the modification and termination of the international sales contract for goods from the requirement of "consideration". The extension of this principle to the conclusion, modification and termination, by agreement of the parties, of all international commercial contracts provides greater certainty and reduces disputes. 2. Unnecessary "cause" This article also excludes the requirement of cause, which exists in some countries with a Romanistic legal tradition and which for practical purposes functions in a very similar way to "consideration" under the Anglo-Saxon system. Example 1. "A", a French customer of the Paris bank "B", requests a guarantee on first demand (guarantee on first demand) in favor of "C", a partner of "A" in England. Neither "B" nor "A" can allege the possible absence of "consideration" or cause in this guarantee. However, it should be noted that this article does not deal with the effects arising from other aspects of cause, such as illegality (see Commentary 2 to Article 3.3.1).

General Provisions Art. 3.1.3 3. All contracts are consensual Some Romanistic legal systems maintain certain types of "real" contracts, that is, contracts that are only concluded as such at the moment the thing has been delivered. This type of legal approach is not easily compatible with a modern conception of business and with the agility required by commercial traffic, which is why it is excluded in this article. Example 2. Two French merchants, "A" and "B," agree to grant "C", a merchant who is engaged in the business of real property, a loan of EUR 300,000 that will be made effective on July 2. On June 25, "A" and "B" inform "C" that, unexpectedly, they need the money for their own businesses. "C" is entitled to receive the loan, even though under French law the loan contract is generally considered a "real" contract.

ARTICLE 3: 1.3 (Initial impossibility) (1) The validity of a contract shall not be affected by the mere fact that performance of the obligation undertaken was impossible at the time of its conclusion. (2) Nor shall the validity of a contract be affected by the mere fact that at the time of its conclusion one of the parties was not authorized to dispose of the goods that are the subject matter of the contract. COMMENTARY 1. Performance impossible from the outset Contrary to what is established in numerous legal systems, which consider a sales contract void if the goods that are the subject matter of the contract have perished at the time of its conclusion, paragraph (1) of this article, in accordance with the most modern tendencies, establishes in general terms that the validity of the contract is not affected by the fact that at the time the obligation undertaken is concluded it is impossible to perform.

Art. 3.1.3 UNIDROIT Principles A contract is valid even when the goods referred to have perished at the time of contracting, with the consequence that the original impossibility of performance is treated the same as impossibility that arises after the conclusion of the contract. The rights and obligations arising from the impossibility of performance by one or both parties shall be determined in accordance with the rules on non-performance. In accordance with these provisions, for example, the fact that the debtor or creditor knew of the impossibility of performance at the time the contract was concluded could be taken into account. The rule established in paragraph (1) also clarifies doubts concerning, for example, the validity of contracts in the case of delivery of future things. If the initial impossibility of performance is due to a legal prohibition (such as a prohibition on export or import), the validity of the contract will depend on whether, in accordance with the law under which the prohibition was issued, it is intended to invalidate or merely to prevent performance of the contract. Paragraph (1) also departs from some Romanistic legal systems that require that the subject matter of the contract be possible. This paragraph also differs from the requirement of cause established by these legal systems, since in the case of initial impossibility of performance the cause of the counter-performance is lacking (see Article 3.2). 2. Lack of authority The second paragraph of this article deals with cases where the party obliged to transfer ownership or deliver the goods is not authorized or does not have the right to dispose of the same at the time the contract is concluded. Some legal systems establish the nullity of a sales contract concluded under such circumstances. As in the case of initial impossibility, and for more compelling reasons, paragraph (2) of this article considers that such contract is valid. Furthermore, the contracting party may, and in fact frequently does, acquire the authority or power to dispose of such goods after the conclusion of the contract. If this does not happen, the provisions on non-performance will apply.

General Provisions Art. 3.1.4 The lack of authority or absence of power to dispose must be distinguished from lack of capacity. In the latter case it is the incapacity of a person that may affect all or at least certain types of contracts concluded by him, a matter which is outside the scope of the Principles (see Article 3.1.1).

ARTICLE 3: 1.4 (Mandatory nature of these provisions) The provisions of this Chapter relating to fraud, threat, excessive imbalance and illegality are mandatory. COMMENTARY This article establishes that the rules of this Chapter relating to fraud, threat, excessive imbalance and illegality are mandatory in nature. It would be contrary to the principle of good faith for the parties to exclude or modify these provisions when concluding the contract, although nothing prevents the party authorized to avoid the contract due to fraud, threat or excessive imbalance from voluntarily renouncing this right, once it has knowledge of the reality of the facts or when it can act freely. In contrast, the provisions of this Chapter that refer to the binding force of mere agreement, the case of initial impossibility of performance or error do not have a mandatory character. Therefore, the parties may include other special requirements established in a given domestic law, such as those relating to the necessity of "consideration" or cause. They may also agree that the contract shall not be valid in case of initial impossibility of performance, or that error into which one or both parties may fall cannot be alleged as a ground for avoidance.

SECTION 2: GROUNDS FOR AVOIDANCE

ARTICLE 3: 2.1 (Definition of error) Error consists of an erroneous conception concerning the facts or the law existing at the time the contract was concluded. COMMENTARY 1. Error of fact and error of law This article treats error of fact the same as error of law. The legal assimilation of both types of error is justified by the growing complexity of contemporary legal systems. The difficulties caused by this complexity are exacerbated in cross-border traffic, because individual transactions may be affected by a foreign legal system with which one of the parties is not familiar. 2. Time at which the error must have existed This article refers to an error that consists of an erroneous conception of the facts or the legal circumstances existing at the time the contract was concluded. The setting of this temporal element is due to the need to distinguish cases where the rules on error apply from those where remedies for non-performance must be exercised. In fact, a typical case of error can often be considered as an obstacle that prevents or hinders performance of the contract. The rules on error apply if a party has concluded a contract under a false conception of the facts or of the legal context, and therefore is mistaken about the effects of the contract. If, on the other hand, a party had a correct conception of the factual and legal circumstances in which the contract was concluded, but makes an erroneous judgment about its effects and later refuses to perform it, in this case it is a matter of non-performance rather than error.

Grounds for Avoidance Art. 3.2.2

ARTICLE 3: 2.2 (Determining error) (1) A party may avoid a contract on the ground of error if at the time of conclusion the error was of such importance that a reasonable person in the same situation as the person making the error would not have concluded the contract or would have done so in substantially different terms if it had known the reality of the situation, and: (a) the other party incurred in the same error, or caused it, or knew or ought to have known of it and to leave the other party in error would be inconsistent with reasonable commercial standards of fair dealing; or (b) at the time of avoidance the other party had not yet acted reasonably in reliance on the contract. (2) However, a party may not avoid a contract if: (a) it committed a gross negligence in making the error; or (b) the error concerns a matter as to which the party in error has assumed the risk of error or, having regard to the circumstances, is deemed to have assumed that risk. COMMENTARY This article establishes the requirements necessary for error to constitute a ground for avoidance of the contract. The introductory part of paragraph (1) sets out the requirements that error must meet in order to be considered grave and therefore be taken into account. Paragraphs (1)(a) and (1)(b) add the requirements relating to the counterparty of the person seeking to avoid the contract. Paragraph (2) refers to requirements that concern the party that made the error.

Art. 3.2.2 UNIDROIT Principles 1. Grave error For error to be a ground for avoidance, it must be grave. The weight and importance of the error must be assessed by combining objective/subjective criteria, that is, it must be determined what "a reasonable person, placed in the same situation as the person making the error" would have done had it known the true circumstances at the time the contract was concluded. If that person would not have concluded any contract, or, if it had done so, would have stipulated substantially different clauses, then, and only then, will the error be considered grave. In this context, the introductory part of paragraph (1) uses an open formula rather than pointing to essential elements of the contract on which the error must bear. This flexible criterion makes a direct reference to the intention of the parties and the circumstances of the case. To ascertain the parties' intention, the rules of contract interpretation established in Chapter 4 must be applied. Commercial standards and relevant usages will be of special importance. Normally, certain errors, such as those concerning the value of the goods or services or the mere expectations or purposes of the party that has made the error, are not considered relevant in commercial transactions. The same can be said of error concerning the identity of the person with whom one is contracting or his personal qualities, although in some cases, special circumstances may make the error determining (for example, when the services to be provided require a certain personal quality, or when the loan is granted based on the creditworthiness of the borrower). The fact that a reasonable person would have made an error is a necessary but not sufficient element, since for the error to be determining, other requirements relating to the party in error and the other party must also be satisfied. 2. Conditions relating to the counterparty of the person who made the error The party that made the error may only avoid the contract if one of the four requirements set out in paragraph (1) is satisfied. The first three requirements indicated in paragraph (1)(a) have in common the fact that the counterparty of the person making the error does not deserve protection, because in one way or another it has contributed to the error of the person in error.

Grounds for Avoidance Art. 3.2.2 The first condition is that both parties make the same error. Example 1. When concluding a sales contract for a sports car, "A" and "B" were unaware—and could not have been aware—that at that time the car had been stolen. In this case, avoidance of the contract is permissible. However, if the parties mistakenly believed that the subject matter of the contract would exist at the time the contract was concluded, when in fact it had already been destroyed, Article 3.1.3 must be taken into account. The second condition is that the error of the party in error is caused by the other party. This situation usually arises when the error originates from concrete manifestations—express or implied, culpable or non-culpable—or in behavior that in certain circumstances may be considered as a manifestation. Even silence may give rise to error. Generally, simple exaggeration in advertising or in the course of negotiations would be tolerated. If the error was caused intentionally, the provisions of Article 3.2.5 shall apply. The third condition is that the counterparty of the person making the error knew or ought to have known of the error in which that person was in error and it would be inconsistent with reasonable standards of commercial fairness to keep the other party in error. What the counterparty of the person in error "knew or ought to have known" is what a reasonable person in similar circumstances knew or ought to have known. In order to avoid the contract, the party in error must further demonstrate that the other party had the obligation to inform it of its error. The fourth condition, established in paragraph (1)(b), is that the counterparty of the person making the error had not yet acted reasonably in reliance on the contract at the time of avoidance. As to the time of avoidance, see Articles 3.2.12 and 1.10. 3. Conditions relating to the party that made the error Paragraph (2) of this article sets out two cases in which the party that made the error cannot avoid the contract. The first of these is dealt with in paragraph (2)(a) and refers to error due to gross negligence on the part of the party alleging it. In this case, it would be unfair to the other party to allow the party who made the error through its own fault to avoid the contract. Paragraph (2)(b) contemplates the situation where the party alleging the existence of error had assumed the risk of its occurrence or, taking into account the circumstances, that party must bear the risk. The assumption of the risk of error is a frequent practice that characterizes speculative contracts. A party may conclude a contract with the expectation that the facts it has presumed to be true will be confirmed, yet it may assume the risk that those facts will not occur. In such a case, it cannot avoid the contract by invoking that error. Example 2. "A" sells to "B" a painting "attributed" to "C", a relatively unknown painter, at a fair price for such paintings. Later it is discovered that the work was painted by the famous painter "D". "A" cannot avoid the contract with "B" based on a supposed error, given that the fact that the painting was only "attributed" to "C" nonetheless implied the risk that it had been painted by a more famous painter. Sometimes both parties assume a risk. However, speculative contracts that involve conflicting expectations about what will happen in the future (such as those relating to prices and exchange rates) cannot be avoided by alleging error, since at the time the contract was concluded there was no such error.

ARTICLE 3: 2.3 (Error in expression or transmission) An error in the expression or transmission of a statement is attributable to the person from whom the statement emanated. COMMENTARY This article treats an error in the expression or transmission of a statement the same as the ordinary error made by a person when making or sending a statement. In both cases, the rules of Article 3.1.4, Article 3.2.2 and Articles 3.2.9 to 3.2.16 shall apply.

Grounds for Avoidance Art. 3.2.3 1. Determining error If the error in expression or transmission has sufficient importance (especially if it results in an incorrect expression of figures), the recipient of that transmission will be—or should be—aware of the error. Since the Principles do not prevent the recipient/addressee from accepting an offer that is transmitted or expressed erroneously, it is for the sender/offeror to allege the error and avoid the contract, in accordance with the provisions of Article 3.2.2 when the required conditions are met. This measure will be particularly appropriate when it would be inconsistent with reasonable commercial standards of fair dealing for the recipient/addressee not to inform the sender/offeror of the error. In certain cases, the risk of error may be assumed, or must be attributed to the sender, if it resorts to a method of transmission that it knew, or ought to have known, was not reliable in general or in the concrete circumstances of the case. 2. "Errors" on the part of the addressee Transmission is completed as soon as the message reaches the addressee (see Article 1.10). If the message has been correctly transmitted, but the addressee misinterprets its content, the case falls outside the scope of this article. If the message has been correctly transmitted to the addressee's machine, but the latter, due to technical failures, prints only part of the text, the case also falls outside the scope of this article. This article also does not apply to cases where a messenger of the addressee receives, at the request of the addressee, an oral message, a message that is not fully understood by the messenger or that is transmitted erroneously. In the two situations mentioned above, the addressee may allege its own error in accordance with Article 3.2.2, in the case that it responds to the sender on the basis of its understanding of the message received and provided that the conditions of Article 3.2.2 are met.

Art. 3.2.4 UNIDROIT Principles

ARTICLE 3: 2.4 (Remedies for non-performance) A party may not avoid a contract on the ground of error if the facts on which it bases its claim would have given it or could have given it remedies for non-performance. COMMENTARY 1. Preference for remedies for non-performance This article is intended to resolve the conflict that may arise between asserting rights and remedies relating to avoidance of the contract on the ground of error or asserting rights and remedies for non-performance. In case of conflict, the latter should be preferred, since it offers a better solution and is more flexible than the outright solution of nullity. 2. Real and potential conflicts A real conflict is that which arises between rights and remedies for error and those arising from non-performance, provided that both sets of rights and remedies are asserted on the basis of what are, in essence, the same facts. Example "A", a farmer, finds a moldy cup in the ground and sells it to "B", an art merchant, for EUR 100,000. The high price is due to the belief shared by both parties that it is a silver cup (other silver objects had been found previously on the same land). The object is later thoroughly polished and it turns out to be an iron cup whose value is only EUR 1,000. "B" refuses to accept the cup and pay the price, because the subject matter of the contract lacks the properties assumed by both parties. "B" decides to avoid the contract on the ground of error in the quality of the cup. "B" is only authorized to exercise the rights and remedies arising from non-performance. It may happen that the conflict between both sets of rights and remedies appears only in potential form, because the party that made the error could claim the remedy of non-performance and damages, but is prevented from doing so by some circumstance, such as the statute of limitations on the action. In this case too, this article applies, with the consequence that the action for avoidance based on error cannot be exercised.

Grounds for Avoidance Art. 3.2.5

ARTICLE 3: 2.5 (Fraud) A party may avoid a contract if it was induced to conclude it through fraudulent conduct of the other party, including words or practices, or when that party fraudulently failed to disclose circumstances that ought to have been disclosed in accordance with reasonable commercial standards of fair dealing. COMMENTARY 1. Fraud and error The avoidance of a contract on the ground of fraud has some resemblance to nullity on the ground of a certain class of error. Fraud can be considered a case of error caused by the other party. Fraud, like error, can include manifestations, express or implied, of false facts or concealment of true facts. 2. Concept of fraud The most important distinction between fraud and error lies in the nature and purpose of the machinations or concealment by the party committing fraud. The victim of fraud is authorized to avoid the contract on the basis of "fraudulent" manifestations or concealment of relevant facts. Such conduct is fraudulent when it is intended to induce the other party into error in order to obtain thereby a certain advantage to the detriment of that party. The reprehensible nature of fraudulent conduct is sufficient reason to avoid the contract, without the need to meet the additional requirements established in Article 3.2.2 for error to be considered determining. Mere exaggerations typical of advertising or negotiations are not sufficient to constitute fraud.

Art. 3.2.6 UNIDROIT Principles

ARTICLE 3: 2.6 (Threat) A party may avoid a contract if it was induced to conclude it through an unjustified threat made by the other party, which, having regard to the circumstances of the case, was so imminent and serious as to leave the other party with no other reasonable alternative. In particular, a threat is unjustified if the action or omission with which the person threatened was threatened is intrinsically wrongful, or it was wrongful to resort to that threat in order to obtain the conclusion of the contract. COMMENTARY This article permits the avoidance of a contract on the ground of threat. 1. The threat must be imminent and serious A threat by itself is not enough. It must be so imminent and serious as to leave the person suffering from it with no other reasonable alternative but to conclude the contract with the clauses proposed by the other party. The imminence and seriousness of the threat must be assessed by objective criteria, taking into account the concrete circumstances of each case. 2. Unjustified threat The threat must also be unjustified. The second part of this article indicates, by way of example, two cases of unjustified threat: the first refers to the case where the action or omission with which the person threatened has been threatened is intrinsically wrongful (such as physical assault). The second refers, in contrast, to a situation where the fact or omission with which the person threatened has been threatened is intrinsically lawful, but the purpose with which it is carried out is wrongful (such as bringing a legal action solely for the purpose of inducing the other party to conclude the contract with the proposed clauses).

Grounds for Avoidance Art. 3.2.7 Example 1. "A", who has defaulted on a loan contract, is threatened by "B", the lender, with litigation to collect the money. The sole purpose pursued by "B" in making the threat is to conclude, on noticeably advantageous terms, a warehouse lease contract with "A". "A" signs the lease contract, but has the power to avoid it. 3. Threat affecting commercial reputation or economic interests For the purposes of this article, the threat does not necessarily have to be directed against a person or his property; it can also affect commercial reputation or purely economic interests. Example 2. When threatened by the players of a basketball team with a strike if they are not offered greater compensation for winning the remaining four games of the season, the owner of the team agrees to pay the requested compensation. The owner is authorized to avoid the new agreement with the players, since if the strike had occurred, the team would have automatically dropped to a lower category. In this case, the threat was directed at seriously and imminently affecting both the reputation and the economic position of the club.

ARTICLE 3: 2.7 (Excessive imbalance) (

• 1)

  A party may avoid a contract or any of its clauses if at the time of conclusion the contract or any of its clauses gives the other party an excessive advantage. In doing so, the following factors must be taken into account, among others: (a) that the other party has taken unjustified advantage of the dependence, economic hardship or pressing needs of the other party, or of its lack of foresight, ignorance, lack of experience or lack of negotiating skill; and (b) the nature and purpose of the contract. (

• 2)

  At the request of the party authorized to avoid the contract, the court may adapt the contract or the clause in question, in order to adjust them to reasonable commercial standards of fair dealing. (

• 3)

  The court may also adapt the contract or the clause in question, at the request of the party that received notice of avoidance, provided that such party makes its decision known to the other party immediately, and in any case, before the latter acts reasonably in reliance on the notice of avoidance. Paragraph (2) of Article 3.10 shall apply accordingly. COMMENTARY 1. Excessive advantage This provision allows one of the parties to avoid the contract in cases of excessive imbalance of the benefits resulting in an unjustified and excessive advantage for the other. The excessive advantage must be present at the time the contract is concluded, since if it arises later, the contract could be modified or terminated in accordance with the provisions of Chapter 6, Section 2. The expression "excessive" advantage denotes that, in order to permit avoidance or adaptation of the contract under this article, a substantial disproportion between the value and the price or some other element that breaks the balance of the benefits is not sufficient. What is required is that the imbalance of the benefits be of such magnitude, according to the circumstances, that it is shocking to a reasonable person. 2. Unjustified advantage It is not enough that the advantage is excessive; it must also be unjustified. In order to affirm that an advantage is unjustified, all the circumstances of the case must be considered. Paragraph (1) of this article refers to two concrete aspects that merit special attention. a. Unequal bargaining position The first factor is that one of the parties has taken unjustified advantage of the dependence, economic hardship, pressing needs, lack of foresight, ignorance, recklessness, lack of experience or lack of negotiating ability of the other party (paragraph (1)(a)). With regard to the dependence of one party on the other, it is not sufficient by itself that one of the parties maintains a dominant bargaining position by reason of market conditions. Example "A", owner of an automobile plant, sells an outdated production line to "B", a government entity of a country eager to set up its own automobile industry. Without resorting to any manipulation regarding the efficiency of the production line, "A" manages to set a noticeably excessive price. "B" could avoid the contract upon discovering that it has paid a sum consistent with the acquisition of a much more modern production line. b. Nature and purpose of the contract The second factor that must receive special attention is the type and purpose of the contract (paragraph (1)(b)). There are situations in which an excessive advantage is unjustified, even when the beneficiary of that advantage has not abused the weaker bargaining position of the other party. The determination of this case will depend on the nature of the contract and its purpose. Thus, a clause in the contract that establishes an overly short period for reporting defects in the goods or services may be considered an excessive advantage for the seller or service provider depending on the kind of goods or services involved. Similarly, the commission charged by a commercial agent, established on the basis of a percentage of the price of the goods sold or services provided, could be justified by the substantial contribution made by that agent in concluding the transactions, or because the value of the goods or services is not very high, but could constitute an excessive advantage in favor of that agent if its participation in those transactions has been insignificant, or if the value of the goods or services were to become extremely high. c. Other factors It may be necessary to take other factors into consideration, such as the ethical standards that prevail in a particular branch of commerce.

  Art. 3.2.8 UNIDROIT Principles 3. Avoidance or adaptation Avoidance of the contract or any of its clauses in accordance with this article is governed by the general rules established in Articles 3.2.11 to 3.2.16. However, in accordance with paragraph (2) of this article, the court, at the request of the party authorized to avoid the contract, may adapt the contract or any of its clauses in order to adjust the benefits to reasonable commercial standards of fair dealing. In the same way, in accordance with paragraph (3), the party that received notice of avoidance may also request the adjustment of the benefits, provided that it immediately informs the impugning party of such decision after receiving the notice and the latter has not acted reasonably in reliance on the notice of avoidance of the contract. In the event that the parties do not reach an agreement on the procedure to be followed, the court must decide whether to avoid or adapt the contract, and, in the latter case, on what terms the adaptation is to be made. Once the other party makes the request for adjustment, the party authorized to avoid the contract loses its right to request such avoidance, and any notice of avoidance made previously is of no effect.

ARTICLE 3: 2.8 (Third parties) (1) When fraud, threat, excessive imbalance or error are attributable or known or ought to be known by a third party whose acts the other party is responsible for, the contract may be avoided under the same conditions as if such defects had been caused by the other party itself. (2) When fraud, threat or excessive imbalance are attributable to a third party whose acts the other party is not responsible for, the contract may be avoided if that party knew or ought to have known of the fraud, threat or excessive imbalance, or if at the time of avoidance that party had not yet acted reasonably in reliance on the contract. COMMENTARY This article addresses situations that are quite frequent in practice, in which a third party has participated in or interfered with the negotiations and the grounds for avoidance are attributable, in one way or another, to that third party. 1. Third party for whom a party is responsible The first paragraph deals with cases where fraud, threat, excessive imbalance or error on the part of one of the parties are attributable to a third party, for whose acts the other party must be responsible. This paragraph also addresses cases where the third party, without having caused the error, knew or ought to have known of that error. There is a wide variety of situations in which a party must be responsible for the acts of a third party, including those in which that third party is an agent of the party in question, and those in which the third party acts on its own initiative for the benefit of that party. In all these cases it seems justified to impute to that party the conduct or knowledge, actual or constructive, of the third party, regardless of whether the party in question actually knew what the third party had done. 2. Acts of third party for whom there is no responsibility Paragraph (2) addresses cases where the party that has suffered fraud, threats, or has been otherwise improperly influenced by a third party for whose acts the other party is not responsible. Such acts could be imputed to the latter only if it had knowledge of them or ought to have had knowledge of them. However, there is an exception to this rule: the party that has suffered fraud, threat or any other improper influence has the right to avoid the contract, even when the other party did not have knowledge of the third party's conduct, provided that at the time of avoidance that party had not yet acted reasonably in reliance on the contract. This exception is justified, since in such a case the other party does not need protection.

Art. 3.2.10 UNIDROIT Principles

ARTICLE 3: 2.9 (Confirmation) Avoidance of a contract is precluded if the party authorized to avoid it confirms it in an express or implied manner once the period for notice of avoidance has begun to run. COMMENTARY In accordance with this provision, the party authorized to avoid the contract may confirm it expressly or impliedly. For an implied confirmation to be present, it is not sufficient, for example, that the party authorized to avoid the contract brings an action for non-performance against the other party. Confirmation of the contract may only be presumed when the other party has had knowledge of the action or when the action has been successful. There will also be confirmation if the party authorized to avoid the contract continues to perform it without reserving the right to avoid it.

ARTICLE 3: 2.10 (Loss of the right to avoid the contract) (1) If one of the parties is authorized to avoid a contract on the ground of error, but the other declares its willingness to perform it or performs the contract in the terms in which the party authorized to avoid it understood it, the contract shall be considered concluded in those terms. In such a case, the party interested in performing it must make such declaration or perform the contract immediately upon being informed of the way in which the party authorized to avoid it has understood it and before the latter reasonably acts in reliance on the notice of avoidance. (2) The power to avoid the contract is extinguished as a result of such declaration or performance, and any other notice of avoidance made previously shall have no effect. COMMENTARY 1. Performance of the contract as understood by the party in error In accordance with this article, the party that made the error may be prevented from avoiding the contract if the other party expresses its willingness to perform or performs the contract in the way the party in error understood it. The interest of the other party in acting in this manner lies in its preference for the benefits of the contract, even under the modified version. This concern for safeguarding the interest of the other party is only justified in the case of error, not in other cases of vitiating consent (threats or fraud), in which it is rarely to be expected that the parties will wish to validate the contract. 2. The decision must be immediate The other party must express its willingness to perform, or perform the obligations arising from the modified version of the contract, as soon as it is informed of the way in which the party that made the error understood the terms of the contract. The manner in which the other party learns of the erroneous understanding of the contract terms will depend on the circumstances of the case. 3. Loss of the right to avoidance Paragraph (2) expressly establishes that the power to avoid the contract is extinguished after the party that wishes to perform the contract has expressed its willingness to perform or has carried out performance of its obligations, and any notice of avoidance given previously is of no effect. Conversely, the other party is not authorized to adapt the contract if the party in error has not only communicated its intention to avoid it, but has also acted reasonably in consequence.

Art. 3.2.11 UNIDROIT Principles 4. Damages The adaptation of the contract does not exclude the right of the party that made the error to claim damages in accordance with Article 3.2.16, if it has suffered a loss that is not compensated for by the adaptation of the contract.

ARTICLE 3: 2.11 (Notice of avoidance) The right to avoid a contract is exercised by notice to the other party. COMMENTARY 1. Necessity of a notice This article establishes that the avoidance of a contract must be effected by notice to the other party, without the need for judicial intervention. 2. Form and content of the notice There are no specific requirements mentioned as to the form or content of the notice of avoidance. Therefore, in accordance with Article 1.10(1), the notice may be made by any means adequate to the circumstances. As to the content of the notice, it is not necessary to use the word "avoidance", nor is it necessary to expressly state the grounds for avoidance. However, for reasons of clarity, it is advisable to state some grounds for the avoidance, although in cases of fraud or excessive imbalance, the party that decides to avoid the contract can assume that the other party already knows the grounds. Example "A", the employer of "B", threatens to dismiss "B" if the latter refuses to sell "A" a Louis XVI style dresser. Finally, "B" agrees to sell it to him. Two days later, "A" receives a letter from "B" in which "B" notifies "A" of his resignation from employment and the sale of the dresser to "C". "B"'s letter is a sufficient notice to notify the avoidance of the sales contract with "A".

Grounds for Avoidance Art. 3.2.12 3. The notice must be received The notice becomes effective when it reaches the addressee (see Article 1.10(2)).

ARTICLE 3: 2.12 (Time periods) (1) Notice of avoidance of the contract must be given within a reasonable time, having regard to the circumstances, after the party seeking avoidance knew or could not have been unaware of the facts or could act freely. (2) When a clause of the contract may be avoided pursuant to Article 3.2.7, the period for giving notice of avoidance shall begin to run from the time such clause is invoked by the other party. COMMENTARY In accordance with paragraph (1) of this article, notice of avoidance of the contract must be given within a reasonable time, after the party authorized to avoid the contract had knowledge or could not have been unaware of the relevant facts or was able to act freely. That is, the party that has suffered error or fraud must notify its intention to avoid the contract within a reasonable period, beginning from the time it knew or could not have been unaware of the error or fraud. The same applies in cases of excessive imbalance, when it occurs by taking advantage of ignorance, recklessness or lack of experience of the innocent party. In cases of threat or abuse of dependence, economic hardship or extreme necessity in which the victim found itself, the period shall begin to run from the time the party authorized to avoid the contract could act freely. In the case of avoidance of a clause of the contract, paragraph (2) of this article establishes, in accordance with Article 3.2.7, that the period for giving notice begins to run from the time such clause is invoked by the other party.

Art. 3.2.13 UNIDROIT Principles

(Partial Avoidance) If the cause of avoidance affects only some clauses of the contract, the effects of avoidance shall be limited to those clauses unless, having regard to the circumstances, it is not reasonable to uphold the remainder of the contract. COMMENTARY This article addresses cases in which the cause of avoidance affects only some provisions of the contract. In such cases the effects of avoidance shall be limited to the affected provisions, unless, having regard to the circumstances, it is not reasonable to uphold the validity of the remainder of the contract. This will generally depend on whether the party would have concluded the contract had it foreseen that such provisions might be affected by invalidity. EXAMPLES 1. "A", a contractor, undertakes to build two houses for "B" on land "X" and "Y". "B" intends to occupy the house to be built on land "Y" and to rent the house to be built on land "X". "B" makes an error in assuming that he is authorized to build on both pieces of land, because in fact the license he holds only authorizes him to build on land "X". Unless the circumstances indicate otherwise, despite the invalidity of the contract as to the house to be built on land "Y", it is reasonable to uphold the validity of the remainder of the contract as to the house to be built on land "X". 2. The situation is the same as in Example 1, except that a school is to be built on land "X" and a hostel for the school's students on land "Y". Unless the circumstances indicate otherwise, it is not reasonable, after avoiding the part of the contract concerning the construction of the hostel on land "Y", to uphold the validity of the remainder of the contract that authorizes "B" to build the school on land "X".

(Retroactive Effect) Avoidance has retroactive effect. COMMENTARY Paragraph (1) of this article establishes that avoidance has retroactive effect. In other words, the contract is considered never to have existed. In case of partial avoidance as contemplated in Article 3.2.13, this rule shall apply only to the part of the contract that has been avoided. There are, however, some provisions of the contract that may survive even in case of avoidance of the entire contract. Arbitration clauses, forum selection clauses and clauses concerning the applicable law are considered different from the other provisions of the contract, so that they may remain valid despite total or partial avoidance of the contract. The applicable domestic law rule shall determine whether such clauses continue to be valid despite avoidance of the rest of the contract.

(Restitution) (

• 1)

  In case of avoidance, either party may claim restitution of what it has supplied under the contract or the part of the contract that has been avoided, provided that party simultaneously returns what it received under the contract or the part of the contract that was avoided. (

• 2)

  If restitution in kind is not possible or appropriate, an allowance by way of a monetary sum shall be made, provided this is reasonable. (

• 3)

  The party which receives the benefit of performance is not obliged to pay a monetary allowance if the impossibility of restitution in kind is attributable to the other party. (

• 4)

  A monetary allowance may be demanded for expenses reasonably necessary to preserve or maintain what has been received. COMMENTARY 1. Right to restitution in case of avoidance In accordance with paragraph (1) of this article, avoidance of the contract entitles the parties to claim restitution of what has been supplied under the contract or the part of the contract that has been avoided. The only requirement for restitution to be granted is that each party return everything that it has received under the contract or the part of the contract that has been avoided. EXAMPLE 1. In a share acquisition transaction, majority shareholder "A" agrees to sell and deliver shares to "B" for GBP 100,000. "B" avoids the contract after discovering that "A", acting with fraud, had made incorrect statements concerning the profits earned by the company. "B" may claim restitution of the purchase price of GBP 100,000. "B" must also return the shares delivered by "A". As to the expenses involved in restitution, Article 6.1.11 applies. 2. Restitution in kind impossible or inappropriate Normally restitution must be made in kind. However, there are situations in which monetary compensation instead of restitution in kind is appropriate. This is the case, first, when restitution in kind is impossible. The allowance will normally be the value of the performance received. EXAMPLE 2. "A" engages "B" to paint "A's" factory. "B" had fraudulently induced "A" to conclude the contract at a price much higher than the market price. "A" avoids the contract after discovering the fraud. "A" may recover the payment of the price from "B", but "A" is obliged to pay "B" the value for the factory having been painted. Paragraph (2) of this article also provides for compensation when restitution in kind is not appropriate. This occurs especially in cases where restitution of the performance in kind would involve effort or costs that would not be reasonable. The criterion in this case is the same as that set forth in Article 7.2.2(b). EXAMPLE 3. Antiques dealer "A" fraudulently induces antiques dealer "B" to purchase a collection of gold coins. The gold coins are shipped aboard one of "B's" vessels. During a severe storm the vessel sinks. "B" subsequently discovers the fraud and avoids the contract. "B" may recover the price that was paid, but at the same time "B" is obliged to make the corresponding allowance for the value of the gold coins. This is because recovery of the gold coins from the sunken vessel would involve costs vastly exceeding their value. By specifying that compensation is due "provided this is reasonable", the provision clarifies that compensation is granted only to the extent that the performance conferred a benefit on the receiving party. EXAMPLE 4. "A" begins to decorate the entrance hall of "B's" business center. After "A" has completed approximately half of the decorations, "B" discovers that "A" is not the famous decorator "A" had claimed to be. "B" avoids the contract. Because the decorations cannot be returned and have no value to "B", "A" has no right to compensation for the work performed. 3. Distribution of risk The rule in paragraph (2) involves a distribution of risk: it places on the party receiving the performance, who cannot make restitution in kind, the responsibility of paying for the value of that performance. The rule of paragraph (2) applies irrespective of whether the recipient of the performance is responsible for deterioration or destruction of what has been received. This distribution of risk for deterioration or destruction is justified because the party bearing the risk is the one maintaining control of the performance. On the other hand, there is no obligation to pay the value if the deterioration or destruction is attributable to the other party, whether through fault or an inherent defect in the performance. Hence the rule in paragraph (3). EXAMPLE 5. Art dealer "A" purchases from art dealer "B" a painting, both believing it to be an authentic Constable. Subsequently the authenticity of the painting is questioned. "B" agrees to obtain an expert opinion from the renowned expert "C". "C" confirms that the painting actually belongs to a much less well-known painter who lived in the same period as Constable. Due to "B's" negligence, the painting is destroyed when it is transported from "C" to "A". "A" avoids the contract based on a fundamental error in accordance with Article 3.2.2. "A" may claim restitution of the price but is not obliged to pay "B" for the value of the painting. The obligation to pay the value of the performance received resting on the receiving party cannot be disregarded when the deterioration or destruction would have occurred even if the contract had not been performed. EXAMPLE 6. Company "A" sells and delivers an earth-moving crane to company "B". Subsequently the equipment is destroyed by a hurricane that floods the properties of both "A" and "B". "B" avoids the contract due to a fundamental error in accordance with Article 3.2.2. "B" may claim restitution of the price, but at the same time must pay "A" for the value of the crane. The obligation to pay the value of the performance received also does not disappear when the receiving party was induced to conclude the contract through fraudulent conduct by the other party. EXAMPLE 7. Antiques dealer "A" induced through fraudulent conduct "B", owner of a workshop, to exchange "A's" automobile in very poor condition for a valuable ancient Greek vase belonging to "B". The automobile was accidentally destroyed while in "B's" workshop. If "B" avoids the contract in accordance with Article 3.2.5, "B" may claim restitution of the vase, but must compensate "A" for the value of the automobile. Article 3.2.5 is designed to ensure that "B" is not bound to a contract that has been concluded (hence the right of avoidance), without having to bear the consequences of a bad bargain into which "B" was induced by "A" (hence the right to restitution), but this provision does not protect "B" against accidents. The question of the obligation of the recipient to pay the value of the performance arises only where deterioration or destruction occurs before avoidance of the contract. If the performance deteriorates or is destroyed after avoidance of the contract, the recipient has the duty to return what has been received. Any breach of that duty gives the other party the right to claim damages in accordance with Article 7.4.1, unless the breach is excusable in accordance with Article 7.1.7. EXAMPLE 8. Art dealer "A" purchases from art dealer "B" a painting, both believing it to be an authentic Constable. After it becomes apparent that the painting actually belongs to a much less well-known painter who lived in Constable's time, "A" avoids the contract on the basis of a relevant error in accordance with Article 3.2.2. As a result of avoidance, "A" may claim restitution of the price, but must return the painting. Before "A" could return it, the painting is stolen by thieves. "B's" right to claim damages depends on whether the theft can be considered a case of force majeure (see Article 7.1.7). 4. Compensation for expenses If the recipient of the performance has incurred expenses for the preservation or maintenance of the performance received, it is reasonable to grant it the right to compensation for such expenses where the contract has been avoided and the parties must return what they have received. EXAMPLE 9. Company "A" sells and delivers a racehorse to company "B". After some time "B" discovers that "A" has fraudulently concealed the pedigree of the horse. "B" avoids the contract. "B" may claim compensation for the costs incurred for feeding and caring for the horse. This rule applies only to reasonable expenses. What is to be considered reasonable depends on the circumstances of the case. In Example 9 it would be relevant, for instance, whether the horse was sold as a racehorse or as an ordinary farm horse. No compensation can be claimed for expenses that are not necessary to preserve or maintain the performance received, even if they are reasonable. EXAMPLE 10. Company "A" sells and delivers a software package to company "B", both parties believing the software can perform a certain function. When "B" discovers this is not the case, "B" asks "C" to verify whether it is still possible to implement that function. Since this is not possible, "B" avoids the contract for a fundamental error in accordance with Article 3.2.2. In accordance with paragraph (4), "B" cannot ask "A" to reimburse the fees paid to "C" as expenses. 5. Benefits The UNIDROIT Principles do not take a position regarding benefits derived from performance or interest received. In commercial practice, it will often be difficult to determine the value of benefits received by the parties as a result of performance. It often happens that both parties receive such benefits.

(Damages) Regardless of whether or not the contract is avoided, the party which knew or ought to have known of the ground for avoidance is liable for damages, including the loss of the benefit which the other party would have obtained from the performance of the contract. COMMENTARY 1. Compensation in case the other party knew of the ground for avoidance This article provides that the party which knew or ought to have known of the ground for avoidance is liable for damages to the other party. The right to compensation arises independently of whether the contract has been avoided. 2. Quantification of damages Unlike damages resulting from non-performance, regulated in Chapter 7, Section 4, the compensation contemplated in this article has only the purpose of placing the other party in the same situation as if the contract had not been concluded. EXAMPLE "A" sells software to "B" despite the fact that "A" could not ignore that the software was unsuitable for the use "B" intended. Regardless of whether "B" chooses to avoid the contract, "A" must compensate "B" for the expenses incurred in training "B's" staff to use the software. However, "A" is not liable for the losses suffered by "B" as a consequence of the impossibility of using the software for the intended purposes.

(Unilateral Statements) The provisions of this Chapter apply, with appropriate modifications, to any expression of intention that one party makes to the other. COMMENTARY This article takes into account the fact that, in addition to the contract itself, the parties usually exchange statements prior to or after the conclusion of the contract, which may also suffer from invalidity. In commercial practice, the most important instances of external statements, though preparatory to the conclusion of a contract, consist of offers for investment, works, delivery of goods or provision of services. Expressions of intention made after the contract has been concluded take on a great variety of forms, such as communications, notices, statements, claims and requests. Waivers and statements by which one party assumes an obligation may be particularly affected by defects of consent.

(Contracts that Violate Mandatory Rules) (

• 1)

  The violation of a mandatory rule applicable under Article 1.4 of the UNIDROIT Principles, whether of national, international or supranational origin, has the effects, if any, that such mandatory rule specifies. (

• 2)

  If the mandatory rule does not expressly specify the effects of its violation on the contract, the parties may exercise such contractual remedies as are reasonable in the circumstances. (

• 3)

  In determining what is reasonable in the circumstances, regard is to be had, in particular, to: (

  • a)

    the purpose of the mandatory rule which has been violated; (

  • b)

    the category of persons for whose protection the rule exists; (

  • c)

    any sanction that may be imposed under the mandatory rule violated; (

  • d)

    the seriousness of the violation; (

  • e)

    whether the violation was intentional or inadvertent; (

  • f)

    whether the performance under the contract necessarily involves a violation of the mandatory rule; and (

  • g)

    the reasonable expectations of the parties. COMMENTARY 1. Scope of this Section Despite its fundamental importance (see Article 1.1), freedom of contract as established in the UNIDROIT Principles is not unlimited. The parties must not only conclude the contract free from error and duress, but the contract must also not violate the mandatory rules that are applicable. While defects of consent are addressed in Section 2 of this Chapter, this Section concerns contracts that violate mandatory rules, whether through their clauses, their performance, their purpose or otherwise. More precisely, this Section addresses the effects which such violation produces on the contract, establishing the criteria to be applied in determining whether despite the violation the parties continue to enjoy the available remedies, and if so, whether they are contractual remedies (Article 3.3.

    • 1)

      or restitution remedies (Article 3.3.2). 2. Only mandatory rules mentioned in Article 1.4 are relevant For purposes of this Section, only mandatory rules that are applicable in accordance with Article 1.4, whether of national, international or supranational origin, are relevant (see Comments 1 and 2 to Article 1.4). In other words, this Section is concerned only with contracts that violate mandatory rules, whether they consist of specific statutory provisions or general unwritten public policy principles, which are applicable in accordance with the relevant rules of private international law. Which mandatory rules are applicable in any given case depends basically on whether the dispute has been brought before a court or arbitral tribunal, and whether the parties' reference to the UNIDROIT Principles constitutes merely an agreement to incorporate them in the contract or whether the Principles constitute the applicable law to the contract (see Comments 3, 4 and 5 to Article 1.4). It should be noted that the examples given below do not address these questions and proceed on the assumption that the mandatory rules are applicable to the examples given. 3. Ways in which a contract may violate mandatory rules A contract may violate mandatory rules, first of all, through its own clauses. As demonstrated in the following examples concerning acts of corruption and fraud, mandatory rules may be specific statutory provisions or general unwritten public policy principles. EXAMPLES 1. Contractor "A" from country "X" concludes a contract with representative "B" ("the Commission Agreement") under which "B", in exchange for a fee of USD 1,000,000, will pay USD 10,000,000 to "C", a high-ranking procurement consultant for "D", the Minister of Economy and Development of country "Y", in order to induce "D" to award "A" the contract for construction of a new power plant in country "Y" ("the Contract"). In both countries "X" and "Y", bribery of public officials is prohibited by law. The clauses of the Commission Agreement themselves violate the mentioned legal prohibitions. 2. Contractor "A" from country "X" concludes a contract with representative "B" ("the Commission Agreement") to pay EUR 100,000 to "C", a high-ranking executive of company "D" from country "Y". This payment to "C" is made in order to induce "D" to award "A" the contract for installation of a sophisticated computer system. Bribery in the private sector is not prohibited by law in either country "X" or country "Y", but in both countries it is considered contrary to public policy. The clauses of the Commission Agreement violate these public policy principles. 3. Bidders "A" and "B" from countries "X" and "Y", respectively, conclude a contract ("the Bidding Agreement") under which, through a series of public bidding processes aimed at awarding construction contracts in country "Z", "A" and "B" collude so that "A" obtains some contracts and "B" obtains others. The legal provisions in country "Z" prohibit this type of bid-rigging in public tenders. The clauses of the Bidding Agreement themselves violate the mentioned legal prohibition. 4. Bidders "A" and "B" from countries "X" and "Y", respectively, conclude a contract ("the Bidding Agreement") under which, through a series of public bidding processes aimed at awarding construction contracts in country "Z", "A" and "B" collude so that "A" obtains some contracts and "B" obtains others. In country "X" there is no legal provision prohibiting public bidding agreements, but such collusion is considered contrary to public policy. The clauses of the Bidding Agreement themselves violate the mentioned public policy principle. On the other hand, a contract may also violate mandatory rules during the performance process. 5. "A", a major retail merchant in country "X", concludes a contract with "B", a manufacturer in country "Y", for the manufacture of toys in accordance with "A's" specifications ("the Manufacturing Contract"). "A" knew or ought to have known that the toys ordered would be manufactured by children. In both countries "X" and "Y", child labor is considered contrary to public policy. The performance of the Manufacturing Contract violates these public policy principles. 6. Importer "A" in country "X" concludes a contract with exporter "B" from country "Y" for the supply of equipment. After conclusion of the contract, the United Nations imposes an embargo on the import of such equipment by country "X". However, "B" delivers the equipment in violation of the embargo. The performance of the contract between "A" and "B" violates the embargo. A contract may also violate mandatory rules in other ways, both during its formation and as to its purpose. 7. The facts are the same as in Example 1. "B" pays to "C" the bribe of USD 10,000,000 and "D" awards the Contract to "A". By the manner in which it was formed, the Contract violates the law prohibiting corruption. 8. "A", a manufacturer of explosives established in country "X", concludes a contract with "B", a company located in country "Y", for the supply of large quantities of semtex, a product used both for peaceful purposes and for the manufacture of bombs ("the Supply Contract"). "A" knew or ought to have known that "B" concluded the contract for the purpose of delivering the goods to a terrorist organization. The purpose of the Supply Contract violates the fundamental public policy principle prohibiting support of terrorist activities. 4. Effects of violation expressly provided for by the mandatory rule violated Sometimes the mandatory rule itself expressly determines the contractual remedies or restitution rights that the parties may exercise in case of its violation. For example, Article 101(

    • 2)

      of the Treaty on the Functioning of the European Union (formerly Article 85(2) of the Treaty of Rome) expressly provides that agreements between undertakings which may affect trade between Member States of the European Union, prohibited by Article 101(1), "shall be automatically void". Similarly, the UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects provides that "[a] Contracting State may request the return of a cultural object exported illegally from the territory of that State" (Article 5) and that "[t]he possessor of a cultural object which has been stolen or illegally exported, who acquired the object [...] stolen or illegally exported shall be entitled [...] to payment by the requesting State of fair compensation, provided that the possessor did not know and could not reasonably have known at the time of acquisition that the object had been stolen or illegally exported" (Article 6). 5. Effects of violation determined in accordance with what is reasonable in the circumstances If the mandatory rule does not expressly specify the effects which its violation produces on the contract, paragraph (2) provides that the parties may exercise "such contractual remedies as are reasonable in the circumstances". This formula is sufficiently broad to permit the greatest possible flexibility. Thus, despite the violation of a mandatory rule, one or both parties may exercise the ordinary remedies available in the case of a valid contract (including the right to performance), or other remedies such as the right to treat the contract as having no effect, its adaptation or termination on terms to be determined. This latter type of remedy may be especially appropriate when, as a result of the violation, only part of the contract becomes ineffective. As to restitution of performances rendered under a contract that violates a mandatory rule, see Article 3.3.2. 6. Criteria for determining what is reasonable in the circumstances Given the great variety of mandatory rules that may be relevant under this article, including rules of a merely technical nature such as prohibitions aimed at preventing serious social harm, paragraph (

    • 3)

      contains a list of criteria for determining the contractual remedies which the parties might eventually exercise in the circumstances. The list is not exhaustive. In many cases there will be more than one relevant criterion and the decision will involve a balancing of the criteria. a. The purpose of the mandatory rule violated One of the most important factors to be taken into account is the purpose of the mandatory rule and whether that purpose would or would not be affected in the case of granting, at least to one of the parties, a remedy for non-performance of the contract. EXAMPLES 9. The facts are the same as in Example 1 except that, in this case, although "B" pays to "C" the bribe for "A", "D" does not award the Commission Agreement to "A". "B" cannot demand payment of the fee of USD 1,000,000 from "A", nor can "A" obtain reimbursement from "B" of the USD 10,000,000 paid to "C". 10. "A", an aircraft manufacturer in country "X", knowing that "C", the Defense Minister of country "Y", intends to purchase a certain number of military aircraft, concludes a contract with "B", a consultancy located in country "Y". Under the contract, "B" shall negotiate the possible acquisition by "C" of aircraft manufactured by "A" ("the Representation Contract"). A legal provision of country "Y" prohibits the use of intermediaries in the negotiation and conclusion of contracts with government entities. Neither "A" nor "B" may exercise remedies for non-performance of the Representation Contract because the purpose of the prohibition on the use of intermediaries is to prevent corruption. 11. The facts are the same as in Example 6. To the extent that the purpose of the embargo is to impose sanctions on country "X" as a consequence of "X's" violation of international law, achieving the purpose of the embargo requires that no contract concluded or performed in violation of the embargo have effects and that the parties may not exercise remedies for non-performance of such contracts. b. The category of persons for whose protection the rule exists Another important factor to be taken into account is whether the mandatory rule which is violated is designed to protect the interests of the public in general, or those of a particular category of persons. Licensing requirements are often of the latter type, that is, they are imposed by law on those engaged in certain activities in order to protect their users or clients. If a contract is concluded by a party lacking the required license, it would be reasonable to grant the user or client at least some contractual remedies, such as the right to claim damages. EXAMPLE 12. Company "A" in country "X" concludes a contract with engineer "B" in country "Y" for the preparation of plans for the restructuring of "A's" factory ("the Engineering Contract"). A legal provision in country "X" provides that only licensed engineers may practice the profession. "B", who does not have the required license, delivers the plans which are partly based on incorrect calculations, causing a delay in the restructuring work. When "A" demands compensation for damages resulting from the delay, "B" refuses to pay, arguing that the Engineering Contract was invalid because "B" did not have the required license. "A" may invoke its right to claim damages since the purpose of the licensing requirement is to protect clients. c. Any sanction that may be imposed under the mandatory rule violated Legal provisions which prohibit certain activities or impose restrictions on them are usually accompanied by criminal or administrative penalties. As indicated in Comment 4, such provisions shall apply when they expressly establish what effect violation has on contractual rights or remedies. On the other hand, when such rule is silent on the effect that violation produces on the contract, the existence and nature of criminal or administrative penalties may provide relevant indications as to the purpose of the violated provision, the category of persons the rule is designed to protect, and the seriousness of the violation. Consequently, the existence and nature of these sanctions should be taken into account in determining the effect of a violation on contractual rights and remedies. EXAMPLE 13. "A", an exporter from country "X", concludes a transportation contract with "B", the owner of a vessel in country "Y", to transport goods by sea from country "X" to country "Y" ("the Contract"). A legal provision in country "X" limits the cargo that vessels may carry. The legal provision imposes a fine for violation, while remaining silent on the effects of violation on the transportation contract. "B" exceeds the authorized cargo limit and "A", invoking the invalidity of the Contract, refuses to pay the freight, even though the goods have arrived at their destination. Because the purpose of the legal provision is not to prohibit the conclusion of transportation contracts but to prevent overloading of the vessel in the interest of its safety and that of its crew, and this purpose is fully achieved by the fine imposed on "B", "B" retains the right to receive the agreed freight for transporting the goods. d. The seriousness of the violation Another factor to be taken into account is the seriousness of the violation. Thus, contractual remedies may be exercised if the nature of the mandatory rule is merely technical and if its violation does not affect the other party. EXAMPLES 14. Rancher "A" from country "X" sells cattle to rancher "B" from country "Y". Legislation in country "Y" requires that imported cattle be properly marked and that the information on the marking also be reflected in the attached documents. The cattle delivered have been properly marked but the attached documents are incomplete. Despite this, "A" retains the right to payment of the price. 15. "A", exporter from country "X", concludes a contract with "B", a carrier from country "Y", for the transportation of dangerous goods from country "X" to country "Y" ("the Contract"). The legislation of country "X" requires that goods of this type be transported in a vehicle with special safety conditions. The legislation provides for criminal sanctions in case of violation, but remains silent on the effects which such violation might have on the Contract. "B" transports the goods in a vehicle that does not meet the prescribed safety conditions. "A", invoking the invalidity of the Contract, refuses to pay the freight despite the goods having reached their destination. Because the purpose of the legal provisions is the prevention of damage to third parties or the environment, "B", independently of the criminal sanction, has no right to receive the agreed freight. e. Whether the violation was intentional or inadvertent The exercise of contractual remedies may also depend on whether one or both parties knew or ought to have known of the mandatory rule or its violation. EXAMPLES 16. The facts are the same as in Example 1 except that here "B" has paid the bribe to "C", and "D", who did not know and ought not to have known of the bribe to "C", awards the Contract to "A". If "D" later learns of the payment of the bribe, "D" may choose whether or not to treat the Contract as valid. If "D" decides that the Contract is valid, "A" shall be bound to perform and "D" must pay the price, with appropriate adjustment taking into account the payment of the bribe. If, on the other hand, "D" decides that the Contract should not have effect, neither party may exercise contractual remedies, without prejudice to any restitution remedies that may exist. 17. Contractor "A" from country "X" enters into negotiations with "D", the Minister of Economy and Development of country "Y", with a view to concluding a contract concerning a major infrastructure project ("the Contract"). To conclude the contract, "D" demands payment of a "commission" of 7.5% of the contract price. "A" pays the demanded "commission" and the Contract is concluded. When "A" has already completed half of the obligations under the Contract, a new government comes to power in country "Y" and the new Minister of Economy and Development, invoking the payment of the "commission", cancels the project and refuses to pay for the work already performed. "A" may not exercise any remedy for non-performance of the contract, without prejudice to any restitution remedies that may exist. f. Whether the performance under the contract necessarily involves a violation Another factor to be considered is whether the performance under the contract necessarily involves a violation. Thus, if the clauses of the contract itself provide for the violation of a legal provision, or even implicitly presuppose it, it might be reasonable not to grant the parties any remedy for non-performance of the contract. EXAMPLE 18. Company "A" from country "X" concludes a contract with company "B" from country "Y" for the construction of a chemical fertilizer factory in country "Y" ("the Contract"). The Contract does not provide for the installation of safety devices required by environmental protection laws of country "Y" and the parties deliberately agreed on a price insufficient to cover the costs of installing such devices. Neither "A" nor "B" may exercise contractual remedies. g. The reasonable expectations of the parties If due to differences in legal or commercial culture, one party could not reasonably have had knowledge of the violation, or, as more often occurs, one party has created in the other a legitimate expectation regarding the validity of the contract or its clauses and later invokes a legal prohibition contained in its own legal system to oppose that expectation, it might be reasonable to grant the other party remedies for non-performance of the contract or its clauses. EXAMPLE 19. Company "A" from country "X" concludes a contract with "D", Minister of Economy and Development of country "Y", concerning an investment project in country "Y" ("the Contract"). The Contract contains a clause providing that all disputes arising from the contract shall be resolved by arbitration in country "X" in accordance with the UNCITRAL Arbitration Rules. If a dispute later arises and "A" initiates arbitral proceedings, "D", in order to avoid arbitration, cannot invoke a mandatory rule of country "Y" providing that, in the case of disputes arising from contracts such as the one in this example, national courts have exclusive jurisdiction that cannot be excluded by contract through an arbitration clause. h. Other criteria In addition to the criteria expressly mentioned in paragraph (3) of this article, there are other criteria that may be taken into account in determining the remedies that may eventually be exercised in the circumstances. One such criterion is the extent to which the contract violates the mandatory rule. If the contract violates the mandatory rule only partially, it may be reasonable to adapt the contract and allow the parties to exercise the ordinary remedies. EXAMPLE 20. The facts are the same as in Example 5, except that only one specific type of toy ordered by "A" is manufactured by minors in their homes, while the other types of toys are manufactured by workers lawfully employed by "B" in the factory. Having regard to the circumstances, it may be reasonable to adapt the contract and grant the parties the ordinary remedies under the Manufacturing Contract. Another factor is the timely withdrawal from the wrongful transaction. Thus, if a party who violates a mandatory rule repents of its conduct before the unlawful purpose of the contract is carried out, that party may retain the right to recover what it has performed. EXAMPLE 21. The facts are the same as in Example 1, except that here "A", after having paid "B" the agreed fee of USD 1,000,000, and before "B" pays to "C" the bribe of USD 10,000,000, abandons pursuit of the unlawful purpose and withdraws from the contract. "A" retains the right to obtain reimbursement from "B" of the agreed fee.

(Restitution) (

• 1)

  Where a contract is performed that violates a mandatory rule referred to in Article 3.3.1, restitution of what has been rendered may be granted insofar as this is reasonable in the circumstances. (

• 2)

  In determining what is reasonable in the circumstances, the criteria set out in Article 3.3.1(

• 3)

  shall apply, with appropriate modifications. (3) If restitution is granted, the rules set out in Article 3.2.15 shall apply, with appropriate modifications. COMMENTARY 1. Restitution in case of contracts that violate mandatory rules when reasonable in the circumstances Even where the parties cannot exercise contractual remedies due to a violation of a mandatory rule, the question arises whether the parties may claim at least restitution of performances rendered under the contract. In accordance with Article 3.3.1(1), the answer will depend, first, on the mandatory rule itself, depending on whether it expressly addresses the question (see also Comment 4 to Article 3.3.1). If the mandatory rule is silent on this point, this article, following modern trends, adopts a flexible approach and provides that where a contract that violates a mandatory rule has been performed, restitution may be granted provided it is reasonable in the circumstances (paragraph 1). In other words, contrary to the traditional view under which the parties - at least when both were aware or ought to have been aware of the violation of the mandatory rule - should be left in the situation in which they found themselves, that is, should not have the right to recover the performances rendered, under the UNIDROIT Principles restitution may be granted depending on what is most appropriate in the particular case: either allowing the recipient to retain the performance received, or allowing the party rendering performance to claim it back. 2. Criteria for determining whether restitution is reasonable To determine whether it is reasonable to grant restitution in accordance with paragraph (1) of this article, regarding the possibility of exercising contractual remedies in the circumstances, the same criteria established in paragraph (3) of Article 3.3.1 apply. However, because contractual remedies and the right to restitution are different, the same criteria may lead to different results in identical factual situations. EXAMPLES 1. The facts are the same as in Example 1 of the Commentary to Article 3.3.1, except that here "A", to whom the Contract is awarded, has nearly completed the construction of the power plant. When country "Y" comes under a new government that alleges the Contract is invalid due to the act of corruption, "D" refuses to pay the remaining 50% of the contract price. Under these circumstances, it would be unjust to allow "D" to retain the nearly completed power plant at half the agreed price. "A" could claim monetary compensation for the work performed, proportionate to the value of the nearly completed power plant to "D", who could in turn obtain restitution of any payment made exceeding this value. 2. Contractor "A" from country "X" enters into negotiations with "D", the Minister of Economy and Development of country "Y", with a view to concluding a contract concerning a major infrastructure project ("the Contract"). To conclude the contract, "D" demands payment of a "commission" of 7.5% of the contract value. "A" pays the demanded "commission" and the Contract is concluded. After "A" has fully performed its obligations under the contract, a new government comes to power in country "Y" and the new Minister of Economy and Development, alleging the payment of the "commission", refuses to pay the remaining contract price. "A" is entitled to monetary compensation for the work performed, proportionate to the value of the infrastructure project. 3. The facts are the same as in Example 15 of the Commentary to Article 3.3.1, except that here "B", taking into account that the goods have arrived at their destination, requests at least payment for its services. "B" likewise has no right to payment for its services under these circumstances, in view of the seriousness of the violation and the necessity to prevent by all means the transportation of dangerous goods in vehicles lacking the required safety conditions. 3. Rules governing restitution when granted If restitution is granted under this article, it shall be governed by the rules set out in Article 3.2.15 on restitution in the context of avoidance. However, these rules require certain adaptations, in that in paragraph (1) of Article 3.2.15 the reference to avoidance must be understood as a reference to the case where the contract has no effect as a result of violation of a mandatory rule. The reference to avoidance of part of the contract must be understood as the case where only part of the contract has no effect as a result of violation of a mandatory rule. For further explanation of the rules on restitution referred to in this article, see the Commentary to Article 3.2.15.

(Intentions of the Parties) (1) A contract shall be interpreted according to the common intention of the parties. (2) If such intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances. COMMENTARY 1. The common intention of the parties shall prevail Paragraph (1) of this article establishes the principle that in determining the meaning of any element of a contract, the common intention of the parties shall prevail. Accordingly, the meaning which the parties intended to give to a contract clause may be different from the literal meaning of the words used and from the meaning which a reasonable person would give to it, provided that it can be established that such was the meaning which the parties intended to give to the clause at the time the contract was concluded. The importance of this principle should not be overstated in practice because, first, it is highly unlikely that parties in commercial transactions will use language totally different from its meaning, and, secondly, even if they do, it would be very difficult to prove when a dispute arises what was the precise meaning which one party claims was the common intention actually shared by the other party at the time of conclusion of the contract. 2. Reference to what reasonable persons would understand When the common intention of the parties cannot be established, paragraph (2) provides that the contract shall be interpreted according to the meaning which reasonable persons of the same kind as the parties would give to it in the same circumstances. The test of "reasonableness" is not general and abstract, but is relative to the understanding which may reasonably be expected of a person, for example, with the same language skills, technical expertise or business experience as the parties. 3. How to establish the common intention of the parties or to determine the meaning that reasonable persons would give When establishing whether the parties had a common intention and, if so, what that intention was, all relevant circumstances of the case should be considered; the most important are set out in Article 4.3. The same applies to determining the meaning which reasonable persons would give when the common intention of the parties cannot be established. 4. Interpretation of standard terms Neither the "subjective" criterion set out in paragraph (1) nor the reference to "reasonableness" in paragraph (2) may be adequate for interpreting standard terms. Given their special nature and purpose, standard terms should be interpreted, in the first place, according to what could be expected from the majority of the users of such terms, regardless of the common intention of the parties in a particular contract or of the meaning which reasonable persons of the same kind as the parties would give to it. For the definition of standard terms, see Article 2.1.19(2).

(Interpretation of Statements and Other Conduct) (1) The statements and conduct of a party shall be interpreted according to the intention of that party if the other party knew or could not have been unaware of that intention. (2) If the preceding paragraph does not apply, the statements and conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances. COMMENTARY 1. Interpretation of unilateral acts By analogy with the criterion established in Article 4.1 concerning the interpretation of the contract as a whole, this article provides that in interpreting the statements or conduct of one of the parties, regard should be had to the intention with which that party acted, provided that the other party knew or could not have been unaware of such intention. In all other cases, such statements and conduct shall be interpreted according to the meaning that a reasonable person placed in the same circumstances would give to it. The principal field of application of this article, which corresponds almost literally to Articles 8(1) and 8(2) of the CISG, is primarily found in practice in the process of contract formation. At this stage, the parties make statements and undertake to perform acts whose precise meaning must be established in order to determine whether a contract has been definitively concluded. However, there are unilateral acts that are performed after the conclusion of the contract and which may give rise to interpretation problems, such as a communication concerning defects in goods, or notice that a contract is to be avoided or terminated, etc. 2. How to determine the intention of the party performing an act or determine the meaning a reasonable person would give In applying the "subjective" criterion established in paragraph (1), as well as the criterion of "reasonableness" in paragraph (2), all relevant circumstances may be referred to, of which the most important are enumerated in Article 4.3.

(Relevant Circumstances) For the purposes of Articles 4.1 and 4.2, regard shall be had to all circumstances, including: (

• a)

  preliminary negotiations between the parties; (

• b)

  practices which the parties have established between themselves; (

• c)

  the conduct of the parties subsequent to the conclusion of the contract; (

• d)

  the nature and purpose of the contract; (

• e)

  the meaning commonly given to terms and expressions in the trade concerned; and (

• f)

  usages. COMMENTARY 1. Relevant circumstances This article sets out the circumstances which shall be taken into account in applying the "subjective" criterion as well as the criterion of "reasonableness" in Articles 4.1 and 4.2. The list sets out the circumstances which are the most important, without purporting to be exhaustive. 2. Comparison of "particular" and "general" circumstances Some of the circumstances enumerated in this article refer to relationships between the parties in a contract; others have a more general character. Although in principle all the enumerated circumstances may be important, the first three usually have greater weight when applying the "subjective" criterion. 3. Practices established between the parties and conduct subsequent to contract formation of particular importance for interpreting long-term contracts The conduct of the parties subsequent to the conclusion of the contract may serve to determine their intention. This may be especially the case in the context of long-term contracts involving complex performance and having an "evolutionary" character, that is, which may require adjustments in the course of their performance. Such contracts may involve periodic performance by one party which the other might consider not to be in accordance with the contract. As a general rule conduct subsequent to formation can only be a tool of interpretation, that is, it can only be used to explain or supplement the terms originally agreed by the parties, not to contradict them. EXAMPLES 1. "A" and "B" conclude a contract for publication of a book. "B", the publisher, indicates that the book should consist of "approximately 300 pages". During negotiations "B" has assured "A", the author, that the need to indicate an approximate number of pages is only for administrative reasons, and that "A" is not obliged to limit itself to that number of pages but, if necessary, may substantially exceed it. "A" delivers a manuscript of 500 pages. To interpret the meaning of "approximately 300 pages" the preliminary negotiations (see Article 4.3(a)) must be taken into account. 2. "A", a Canadian manufacturer, and "B", a retailer in the United States, conclude several contracts for delivery of optical lenses. The price is always expressed in Canadian dollars. "A" makes a new offer, this time indicating the price in "dollars" without further specification, but with the intention of again referring to Canadian dollars. In the absence of an indication to the contrary, "A's" intention will prevail (see Article 4.3(b)). The other circumstances enumerated in this article (such as the nature and purpose of the contract, the meaning commonly given to terms and expressions in the context of trade and usages) although not the only ones to be considered, are of primary importance in assessing the "reasonable person" standard. The criteria in subparagraphs (e) and (f) might seem confused at first glance. However, they are not, because while "usages" apply only where the requirements set out in Article 1.9 are met, "the meaning commonly given to terms and expressions in the trade concerned" may be relevant even when such terms and expressions are common only in a trade to which one of the parties belongs, or to which neither party belongs, provided the term or expression is typical of that trade. EXAMPLES 3. "A" and "B" conclude a contract for the sale of a cargo of oil at USD 80 per barrel. The parties later differ on the measure of the barrel they referred to. "A" understands a barrel as equivalent to 42 gallons common measure, while "B" intended to refer to a barrel of 36 imperial gallons. In the absence of an indication showing otherwise, "A's" meaning will prevail, as in international oil commerce common gallons are usually used as a reference (see Article 4.3(f)). 4. "A", a ship-owner, concludes a charterparty with "B" for the carriage of grain. The contract contains the standard clause: "whether in berth or not", which refers to the commencement of the lay time of the ship after arrival at the port of discharge. When the meaning of that clause is later questioned, the meaning commonly given to that expression in maritime trade should be preferred, since the term is typical of that sector (see Article 4.3(e)). 5. Supplier "A" concludes a five-year contract with shopping center "B" for the supply of the 'salt' which "B" needs for removing ice from its parking area and loading docks. During the first two winters "A" supplies a substance for melting ice which is not 'salt', without objection from "B". At the beginning of the next winter "B" objects that the substance is not 'salt' as provided in the contract. The fact that during two winters both "A" and "B" performed as if the substance supplied complied with the contract allows the conclusion that the parties intended the reference to 'salt' to include that ice-melting substance. 6. Contractor "A" agrees with customer "B" to provide concrete slabs of a certain thickness in a building at a unit price of X, without specifying whether the price referred to the square meter of slabs or to cubic meters of concrete. The parties perform the contract over several months without objection by applying the unit price to square meters of slabs. A dispute later arises concerning the correct unit of measurement. The fact that during several months "A" and "B" performed the contract as if the correct unit of measurement was square meters of slabs allows the conclusion that the parties intended that to be the unit of measurement. To avoid any doubt concerning the effects of subsequent conduct on the content of the contract, the parties might consider adoption of special mechanisms for any eventual contract modifications and adjustments during performance. For example, they might provide that one party issue "change orders" for acceptance by the other (e.g. in construction contracts the "employer's representative" and the "contractor's representative", respectively), or establish special bodies composed of representatives of both parties or by independent experts (the so-called "contract management committees", "audit bodies" or similar) responsible for inspecting performance by both parties and perhaps also suggesting adjustments to the contract to adapt it to circumstances. Obviously, the greater the precision with which the parties regulate the procedure for adjusting the contract, the lesser the relevance subsequent informal conduct of the parties will have in interpreting the contract. EXAMPLES 7. A construction contract between employer "A" and contractor "B" provides that "A's" representative has authority to give instructions regarding additions, omissions or other changes in the work to be performed by "B". Whenever those additions, omissions or other changes are within the general scope of work according to the contract, "B" shall be obliged to comply with them and they shall have the effect of modifying the respective work contemplated in the original contract. 8. Contractor "A" concludes a design, build and operate (DBO) contract with company "B" to design and construct a factory and operate it for twenty years. The contract provides that the parties jointly appoint an independent and impartial audit body whose purpose is to audit and inspect the observance by both parties of the management and operation requirements established in the contract. The contract may also provide that if the audit body determines that one party has failed to comply, that party must take the necessary corrective measures. Accordingly, if in this case the audit body determines that "A" has failed to perform its obligations under the contract, "A" must take the necessary measures. 4. Merger and non-oral modification clauses In many international transactions in general, and in complex long-term contracts in particular, the parties commonly include a provision indicating that the contract document incorporates completely and exclusively the terms on which the parties have agreed (the so-called "merger" or "integration" clauses) and that any modification of the contract or of a specific term must be made in writing (the so-called "non-oral modification" clauses). Concerning the effects of the first type of clauses, in particular the extent to which such clauses exclude the relevance of preliminary negotiations, albeit solely for purposes of interpreting the contract, see Article 2.1.17. Concerning the second type of clauses, see Article 2.1.18 and the limitation of the rule contained therein pursuant to the principle against contradictory conduct established in Article 1.8. EXAMPLE 9. Manufacturer "A" concludes a contract with distributor "B" for distribution of "A's" products in country X. The contract expressly states that the distribution is not exclusive and in fact in country X "A's" products are also distributed by distributor "C". The agreement between "A" and "B" also contains a "non-oral modification" clause providing that any modification of its terms must be made in writing and approved by the parent company of "A". Subsequently "C" ceases its activities and, with "A's" knowledge, "B" acts as if "A's" exclusive distributor in country X. Among other things, "B" represents itself to "C's" customers as "A's" exclusive distributor without any reaction from "A". When "A" replaces "C" with a new distributor, "B" cannot claim that through its conduct "A" and "B" have modified their original agreement, transforming it into an exclusive distribution agreement.

(Systematic Interpretation of the Contract) Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear. COMMENTARY 1. Interpretation of the contract as a whole Terms and expressions used by one or both parties obviously do not operate in isolation, but as integral parts of a whole. They shall therefore be interpreted in the light of the overall context of the contract or statements in which they appear. EXAMPLE "A", a licensee, learns that despite what is stipulated in the contract in which "B", the licensor, has granted "A" an exclusive license, "B" has concluded a similar contract with "C", a competitor of "A". "A" sends "B" a letter complaining of the breach and terminating the contractual relationship with the following words: "Your behavior clearly demonstrates the mistake we made in trusting your professional conduct. We therefore consider the contract with you to be cancelled." Although the verb "cancel" was used, "A's" words, in the light of the context provided by the entire text of the letter, must be interpreted as notice of termination of the contract. 2. In principle, there is no hierarchy among the terms of the contract In principle, there is no hierarchy among the terms of the contract, in the sense that the importance of each is the same for interpreting the rest of the contract, without regard to the order in which they appear. However, there are some exceptions to this rule. First, recitals included in the preamble of the contract may or may not have consequences for the interpretation of its operative provisions. Secondly, it is obvious that in case of conflict, specific clauses prevail over general provisions. Finally, the parties themselves may express a certain hierarchy among the different provisions or terms of the contract. This is common in the case of complex contracts concluded in different documents relating to the legal, economic and technical aspects of the transaction.

(Interpretation Giving Effect to All Terms) The terms of a contract shall be interpreted in a way that gives effect to all the terms, rather than to deprive any of them of effect. COMMENTARY It may be assumed that when the parties drafted their contract they incorporated their words for some purpose. Accordingly, this article provides as a rule that where the provisions of a contract are unclear, they shall be interpreted in such a way that all the provisions have effect rather than some being deprived of effect. This rule applies only when the provisions in question remain unclear. In other words, this criterion for interpretation will apply only if the provisions in question remain unclear despite the application of the basic rules of interpretation established in Articles 4.1 to 4.3. EXAMPLE "A", a major television network, concludes a contract with "B", a film distributor, for periodic supply of films to be broadcast by "A" during afternoon hours, since only at that time can films suitable for all audiences be shown. According to the contract, the films must "have passed the admission test" of the censorship board. A difference arises between "A" and "B" concerning the meaning of this phrase. While "B" claims that "passing the admission test" means that the censorship board must approve the film's release, even if the film has been rated "not suitable for minors", "A" insists that the meaning of "passing the admission test" is that the film's rating is "suitable for all audiences". If there is no other way to establish the meaning of this phrase, "A's" interpretation must prevail, since "B's" interpretation would deprive the provision of effect.

(Contra Proferentem Rule) Where terms supplied by one party are ambiguous, an interpretation against that party is preferred. COMMENTARY A party may be responsible for the formulation of a particular term of the contract, either because that party drafted it or because it supplied it, for example by using standard terms prepared by others. Since one party should bear the risks of any possible obscurity or ambiguity in the formulation chosen, this article provides that ambiguous or obscure clauses in a contract shall preferably be interpreted against the party that drafted them. The scope of application of this rule will depend on the circumstances of the case. The less the terms of the contract in question have been the subject of negotiation between the parties, the greater the justification for interpreting them against the party that included them in the contract. EXAMPLE A contract between "A", a contractor, and "B", the owner of the work, for construction of an industrial plant, contains the following provision drafted by "A" and not discussed between the parties: "The Contractor shall be responsible, and accordingly shall indemnify the Owner, for all losses, costs and claims in respect of any loss or damage to property (except the work), death or personal injury caused by the negligence of the Contractor, its employees and agents". Outside working hours, one of "A's" employees damages "B's" facilities and equipment. "A" refuses to accept responsibility, arguing that the clause covers only acts of employees in the course of their employment. In the absence of any provision to the contrary, the provision shall be interpreted in the way least favorable to "A", that is, including "A's" responsibility for acts of its employees even when such acts are not performed in the course of their employment.

(Linguistic Discrepancies) Where a contract is drawn up in two or more language versions which are all equally authoritative, there is a preference for the interpretation according to a version in which the contract was originally drawn up. COMMENTARY Contracts in international commerce are often drawn up in two or more language versions which may differ on specific points. Sometimes the parties expressly indicate which version is to prevail. Where all versions are given equal authenticity and standing, the problem arises of determining which of them is most appropriate. This article does not establish an immutable and rigid rule but simply indicates that the version in which the contract was originally drawn up should be preferred, or, in the case where more than one original version was drawn up, one of those versions. EXAMPLE 1. "A" and "B" negotiate and draw up a contract in English, although English is not the native language of either of them. Before translating it into their respective languages, the parties agree that all three versions shall be equally authentic and have the same standing. In case of discrepancy between the texts, the English version should be preferred, unless the circumstances indicate otherwise. A different solution may apply where the parties have relied on widely known international instruments such as INCOTERMS and the Uniform Customs and Practice for Documentary Credits. In case of discrepancy between the different versions used by the parties, it is preferable to refer to the language version which is the clearest, even if it is not one of the versions used by the parties. EXAMPLE 2. A contract between a company from country "X" and a company from country "Y" is drawn up in three versions equally authentic and of the same standing: in the language of country "X", in the language of country "Y" and in English, including a reference to INCOTERMS 2000. In this case, recourse could be had to the French version of INCOTERMS if it is more precise than the other three concerning the point in dispute.

(Supplying an Omitted Term) (1) Where the parties to a contract have not agreed with respect to a term which is important for a determination of their rights and obligations, a term which is appropriate in the circumstances shall be supplied. (2) In determining what term is appropriate, regard shall be had to, among other factors: (

• a)

  the intention of the parties; (

• b)

  the nature and purpose of the contract; (

• c)

  good faith and fair dealing; (

• d)

  reasonableness. COMMENTARY 1. Supplying omitted terms and their interpretation Articles 4.1 to 4.7 address the interpretation of contracts in the strict sense, that is, determining the meaning to be given to those terms of the contract which are unclear. This article addresses another aspect of the same subject-matter, the so-called gaps in the contract. Omissions or gaps occur when after the contract is concluded a matter arises which the parties did not regulate in the contract, either because they did not wish to discuss it or because they did not foresee it. However, in other cases the parties may deliberately leave terms open, subject to future negotiations or determination by one of the parties or by a third party. This will be very frequent in long-term contracts. In this case Article 2.1.14 applies where the parties fail to reach agreement or if the party or third party responsible for completing the agreement fails to do so. 2. When omitted terms should be supplied In many cases where there are gaps, the UNIDROIT Principles themselves provide a solution (see, for example, Articles 5.1.6 (Determination of the quality of performance), 5.1.7 (Determination of price), 6.1.1 (Time of performance), 6.1.4 (Order of performance), 6.1.6 (Place of performance) and 6.1.10 (Unspecified currency). See also in general Article 5.1.2 on implicit obligations). However, even where there are suppletory rules designed to "fill the gaps" of general application, they may not be applicable to certain cases and in particular to long-term contracts, either because such general principles do not provide a solution appropriate to the specific circumstances in light of the parties' expectations or because of the special nature of the contract. In such case, this article applies, without prejudice to the application of Article 5.1.2 where applicable. 3. Criteria for supplying omitted terms The terms to be incorporated under this article should be appropriate to the circumstances of the case, particularly where long-term contracts are concerned. In determining what is appropriate, first regard should be had to the intention of the parties as it may be inferred from, among other factors, the express terms of the contract, any preamble to the contract, preliminary negotiations or the conduct of the parties subsequent to the conclusion of the contract. EXAMPLE 1. The parties in a construction contract agree on a certain rate of interest to be paid by the buyer in case of default in payment of the price. However, the parties decide to terminate the contract before work begins. When the contractor delays in returning the advance payment, the problem arises of determining the rate of interest applicable to that sum. In the absence of any reference in the contract on this matter, the circumstances indicate that it is appropriate to apply to this case of default in returning money owed to the contractor the same rate of interest agreed for the case of default in payment of the price by the buyer. If the intention of the parties cannot be determined, the term to be supplied may be determined on the basis of the nature and purpose of the contract and the principles of good faith, fair dealing and reasonableness. EXAMPLE 2. A franchise distribution contract provides that the franchisee cannot engage in a similar business within the year following termination of the contract. However, the contract says nothing about the territory to which this restriction applies. In accordance with the nature and purpose of the franchise contract, it is understood that the restriction is limited exclusively to the territory where the franchisee operated the franchise.

ARTICLE 5: 1.1 (Express and Implied Obligations) The contractual obligations of the parties may be express or implied. COMMENT This article confirms the widely accepted principle whereby the obligations of the parties are not necessarily limited to what is expressly stipulated in the contract. Other obligations may be implied (see Article 5.1.2, the Comments and Examples). This rule is closely related to other provisions of the Principles. Thus, this article is a direct corollary of the rule according to which parties must act in good faith and fair dealing in international commerce (Article 1.7). Just as the rules of contract interpretation (Chapter 4) provide criteria for filling gaps (in addition to criteria for resolving ambiguities), these rules can help determine the precise content of the contract and, therefore, establish the contractual terms that should be considered implicit.

ARTICLE 5: 1.2 (Implied Obligations) Implied obligations may be derived from: (

• a)

  the nature and purpose of the contract; (

• b)

  established practices between the parties and usages; (

• c)

  good faith and fair dealing; (

• d)

  reasonableness. COMMENT This article describes the sources of implied obligations. Various reasons may influence why an obligation has not been expressly stipulated, either because given the nature and purpose of the obligation the parties have considered them so obvious that they are understood to be included as a matter of course. Implied obligations may be derived, for example, from established business practices between them, or from usages of international commerce in accordance with Article 1.9. Likewise, implied obligations may result from the principle of good faith and fair dealing, and from reasonableness in contractual relations. Examples 1. "A" leases to "B" a complete computer network and proceeds to install it. The contract makes no reference to any possible obligation of "A" to provide "B" at least basic information regarding the operation of the system. This duty could be considered an implied obligation on the part of "A", since it is obvious and essential that in order to fulfill the purpose of the contract, the provider of sophisticated goods must provide its counterparty with a minimum of information (see Article 5.1.2(a)). 2. "A", a broker who has negotiated a charter party, claims commissions that have accrued to him. Although the brokerage contract does not express when the commission is due, usages in brokerage matters could establish an implied obligation, by virtue of which the commission is due, for example, when the freight is earned, or when the charter party has been signed (see Article 5.1.2(b)). 3. "A" and "B", who are negotiating a cooperation contract, agree to carry out a complex feasibility study that involves considerable investment of time on the part of "A". Well before such study is completed, "B" decides not to proceed with the negotiations. Although this situation has not been provided for, the principle of good faith requires that "B" communicate this decision to "A" without delay (see Article 5.1.2(c)).

ARTICLE 5: 1.3 (Cooperation Between the Parties) Each party must cooperate with the other party when such cooperation may reasonably be expected to enable the other party to perform its obligations. COMMENT 1. The obligation of cooperation as an application of the general principle of good faith and fair dealing A contract should not be viewed merely as the meeting point of opposed interests, but to some extent as a common project in which each party must cooperate. This approach is intimately connected with the principle of good faith and fair dealing (Article 1.7) that inspires contract law, as well as with the obligation to mitigate harm in case of non-performance (Article 7.4.8). This article expresses the duty of mutual cooperation between the parties, to the extent that such duty may reasonably be expected to enable the parties to perform their obligations. These Principles prescribe this duty expressly or implicitly either in the provisions themselves (see Articles 5.3.3, 7.1.2, and 7.4.8) or in their comments (see Comment 3 to Article 6.1.6, Comment 3(a) to Article 6.1.14, and Comment 10 to Article 7.1.4). However, in many other circumstances the parties are obliged to cooperate with each other either during the formation or performance of the contract. The obligation of cooperation between the parties, of course, must be circumscribed to certain limits, that is, the obligation to cooperate only exists to the extent that it may reasonably be expected to enable the other party to perform, without altering the distribution of the contract's obligations. Within these limits, each party must not only refrain from obstructing performance, but also take measures to enable the other party to perform its obligations. Examples 1. "A", an art gallery from country "X", purchases a sixteenth-century painting from "B", a private collector from country "Y". The painting cannot be exported from "Y" without special authorization, and the contract stipulates that it is "B's" obligation to request such authorization. However, "B" lacks experience in these procedures and encounters serious difficulties with the export authorization request, while "A" has extensive experience with such requests. In these circumstances, and notwithstanding the contractual provision, it is reasonable to expect that "A" provide at least some cooperation to "B". 2. Companies "A" and "B" enter into a contract for the sale of electricity by "A" to "B". The latter fails to perform, so "A" sues "B" for breach of contract and damages. "B" raises a defense of nullity alleging that the contract was not registered in the Public Registry. According to applicable law, registration is a joint obligation of the parties, and the registration could not take place because "B" did not do what it should have done for the registration to have taken place. "B" has no right to invoke the lack of registration as a defense against "A's" claim. 3. Seller "A", from country "X", enters into a contract for the sale of merchandise with "B", from country "Y", stipulating that delivery shall be made in installments. After "B" discovers that some of the merchandise was defective, "A" consents to reduce the price and extend the payment period. To avoid severe penalties, "A" asks "B" to promptly send a formal notification indicating the defects in the merchandise and attaching some documents that "A" needs to explain to his country's import and export control authorities the reasons for the price reduction and extension of the delivery period. "B" can only partially and gradually comply with this request. "A" informs "B" that subsequent deliveries will be conditioned on "B" delivering the requested documentation and having paid the price of the delivered merchandise. "B" cannot object to the conditions imposed by "A" nor allege that he is in breach of contract (nor of the subsequent agreement extending the payment period), since it has been "B" who, through his obstructionist conduct, failed to perform his obligation to cooperate with "A". 2. Cooperation between parties in long-term contracts Although this provision establishes a duty to cooperate in general terms and for all types of contracts, this duty of cooperation is particularly relevant in the context of long-term contracts. In particular, contracts involving performance of a complex nature are those that may require cooperation during the life of the contract for the operation to function, although always within the limits of reasonable expectations. This would be the case, for example, of an industrial works contract in which the project owner must prevent other contractors employed at the same site to perform other work from interfering with the work that the other party must perform. Similarly, the supplier in a distribution contract may find itself obligated to refrain from any conduct that could obstruct the distributor from meeting the minimum quantity of orders, or a franchisor in a franchise contract may be prevented from establishing a business in the vicinity of the franchisee's business, even though the franchise has not been granted with exclusivity. It is clear that in long-term contracts the duty of the parties to cooperate mutually only exists within the limits of reasonable expectations. Examples 4. Contractor "A" wins a public bidding conducted by "B", a government agency from country "X", to build a complex of 3,000 housing units in that country. Since this is a completely new project, it is necessary to establish electricity and water connections, work that must be executed in a certain sequence so that they do not interfere with each other. "B" contracts the installation of electricity with local contractors without coordinating with the work that "A" was to undertake, so that the latter must interrupt its work repeatedly, with resulting losses. "B" is responsible for the damages caused to "A", since under those circumstances, "B" should have coordinated the work to be performed by local contractors without interrupting "A's" work in that manner. 5. Company "A", from country "X", enters into a joint venture contract with company "B", from country "Y", in order to participate in a public bidding in country "X". The bidding is finally awarded to a third party under a manifestly inappropriate procedure. However, "B" refuses to provide "A" with the information it needs in order to appeal the award before the competent authority. This refusal by "B" constitutes a violation of its duty to cooperate with "A" under the joint venture contract they have entered into.

ARTICLE 5: 1.4 (Obligation of Result and Obligation to Use Best Efforts) (1) To the extent that the obligation of one of the parties involves a duty to achieve a specific result, that party is obligated to achieve such result. (2) To the extent that the obligation of one of the parties involves a duty to use best efforts in the performance of the obligation, that party is obligated to use the diligence that a reasonable person of the same kind would exercise in similar circumstances. COMMENT 1. Distinction between obligations of result and obligations to use best efforts The degree of diligence required of a party in the performance of a particular obligation varies considerably depending on the nature of the obligation. Sometimes one of the parties is obligated only to use its best efforts. In that case, such party must use the diligence of a reasonable person of the same kind placed in similar circumstances, without guaranteeing the achievement of a specific result. In other cases, however, the obligation is more onerous since it guarantees the achievement of a specific result. The distinction between "obligations of result" and "obligations to use best efforts" corresponds to the various degrees of severity outlined in practice for assessing the performance of a contractual obligation, although it does not contemplate all situations that may arise. In a single contract both types of obligations may coexist. For example, a company that repairs broken machines could be considered to assume an obligation to use best efforts with respect to the quality of the repair in general and an obligation of result with respect to the replacement of certain parts. 2. Criteria provided by this distinction for determining whether a party has performed its obligations The two paragraphs of this article, taken together, provide judges and arbitrators with criteria for evaluating the correct performance of an obligation. In the case of an obligation of result, a party simply binds itself to achieve the promised result. If the result is not achieved, it constitutes non-performance, unless the provision concerning force majeure applies (Article 7.1.7). By contrast, the criterion for determining non-performance of an obligation to use best efforts is less strict, since it is based on comparison with the diligence that a reasonable person of the same kind would have exercised in similar circumstances. This distinction leads to a greater expectation as to the degree of performance of a highly specialized company that has been chosen for its experience than of a less specialized competing company. Examples 1. "A", a distributor, binds itself to achieve the goal of 15,000 sales per year in a given area. If at the end of such period "A" manages to sell only 13,000 items, there is no doubt that it has failed to perform its obligation (see Article 5.1.4(1)). 2. "B", another distributor, binds itself to "use all necessary means to promote the sale of the product" within the contracted area, without any term imposing the duty to achieve a minimum quantity. This provision creates an obligation to use best efforts, which obligates "B" to take all measures that a reasonable person would take in similar circumstances (nature of the product, market characteristics, importance and experience of the company, presence of competitors, etc.) to promote sales (advertising, customer visits, proper service, etc.). "B" is not obligated to achieve the specific result of selling a certain number of items per year, but commits to doing everything that a reasonable person in his situation would do (see Article 5.1.4(2)). 3. Long-term contracts In the practice of international contracting, especially in the context of long-term contracts, when the parties agree to work together to resolve problems that may arise, they usually commit to "use best efforts" to resolve such problems, rather than referring to an obligation to "negotiate in good faith". When parties in a long-term contract have agreed to use their best efforts, such duty could be equivalent, for all practical purposes, to an obligation to negotiate in good faith (see Comment 3 to Article 2.1.15).

ARTICLE 5: 1.5 (Determination of the Type of Obligation) In order to determine the extent to which the obligation of one of the parties involves an obligation to use best efforts or to achieve a specific result, account shall be taken of, inter alia: (

• a)

  the way in which the obligation is expressed in the contract; (

• b)

  the price and other terms of the contract; (

• c)

  the degree of risk usually involved in achieving the expected result; (

• d)

  the ability of the other party to influence the performance of the obligation. COMMENT 1. Criteria for determining the nature of the obligation It is important to determine whether an obligation involves the duty to achieve a specific result or only the duty to use best efforts to achieve it, because the obligation is more onerous in the former case. Sometimes this determination can be difficult. This article establishes criteria that can serve as a guide for the parties, judges, or arbitrators. This enumeration is not exhaustive. Frequently, the determination of the nature of the obligation involves problems of interpretation. 2. Nature of the obligation as expressed in the contract The way in which an obligation has been described in a contract can be of great help in determining whether the parties intended to create an obligation to use best efforts or to achieve a specific result. Example 1. "A", a contractor, agrees to build a storage building for "B", who wishes the work to be completed within an unusually brief period. If "A" commits that "the work will be finished before December 31", the obligation to achieve such result on the stipulated date is presumed. If it is merely stipulated that "A" "will try to complete the work before December 31", he only commits to using all means at his disposal to deliver the building on that date, without guaranteeing that it will actually be done (see Article 5.1.5(a)). 3. The price and other terms of the contract The price and other terms of the contract can also provide clues about the nature of an obligation. An unusually high price or another reciprocal obligation of a non-monetary nature may indicate an obligation to achieve a specific result in cases where, generally, only an obligation to use best efforts is usually assumed. Other examples of stipulations that can facilitate the determination of the nature of the obligation are clauses linking payment of the price to the success of an operation, penalty clauses in case a specific result is not obtained, and clauses allowing one party to adapt the contract in the event that unforeseen circumstances alter the balance of performance in a fundamental way (see Article 5.1.5(b)). 4. Degree of risk regarding the performance of an obligation When the performance of the obligation involves a very high risk, it may be presumed that the obligor did not intend to guarantee a result and that the creditor does not expect such guarantee. The opposite conclusion will be drawn when the expected result can, in principle, be achieved without any special difficulty (see Article 5.1.5(c)). Examples 2. A space agency commits to placing a telecommunications satellite in orbit. The average failure rate in previous launches has been 22%. It cannot be expected that such space agency guarantee a successful launch under these circumstances. Its obligation consists merely of observing all the diligence required for this type of launches, taking into account the level reached at that moment by technology. 3. "A" promises to deliver 20 tons of steel to "B" on June 30. Since this is a relatively simple operation that does not involve special risk, "A" is obligated to achieve the specific result of delivering the required quantity of steel on the stipulated date, and not merely to attempt it. 5. Influence of the creditor on the performance of the obligation In some cases, the creditor may be in a position capable of influencing the performance of the obligor's obligation. This circumstance can convert an obligation that would otherwise be considered an obligation of result into an obligation to use best efforts. Example 4. "A" is in a position to provide "B" with the technical assistance necessary to apply it to new discoveries in chemical processes. "A" agrees with "B" that the latter will send some of its engineers to attend a training course organized by "A". "A" cannot guarantee that "B" will gain an in-depth understanding of new chemical processes, since such result will depend, in part, on whether "B" actually sends its engineers to the training course, on the ability of these engineers, and on their attention during the course (see Article 5.1.5(d)).

ARTICLE 5: 1.6 (Determination of the Quality of Performance) Where the quality of the performance has not been specified in the contract or cannot be determined on the basis of the contract, the obligor must provide performance of a reasonable quality and not inferior to average quality, having regard to the circumstances. COMMENT The parameters established in Article 5.1.4 refer to obligations to use best efforts. The determination of the quality of performance is a broader problem addressed in this article. If goods are to be delivered or services are to be provided, it is not enough to supply such goods or services, but they must be of a certain quality. Frequently the contract usually specifies the quality owed (for example, oil of a certain grade), or at least provides some criterion for determining such quality. For other cases, Article 5.1.6 provides that the quality of performance must be "reasonable and in no case inferior to average quality, having regard to the circumstances." Thus, both criteria are combined. Example 1. "A" commits to building a hotel near a busy railway station. The contract provides that an appropriate soundproofing system must be provided, about whose quality no further details are given. However, it can be determined on the basis of the contract itself that the capacity of the soundproofing system must be in accordance with high levels due to the hotel's proximity to the railway station. 1. Performance must be of average quality The minimum requirement for the delivery of goods is that they be of average quality. The supplier is not obligated to deliver goods of superior quality unless so established in the contract, but neither can it deliver goods or services of inferior quality. Average quality is determined according to the circumstances, which normally means the quality available in a given market at the time of performance of the obligation (for example, with respect to the level of technological innovation). Other important factors include the specific qualities that led to choosing the obligor. Example 2. "A" purchases 500 kg of oranges from "B". If the contract determines nothing more specific and the circumstances do not lead to another solution, such oranges cannot be of inferior quality to average quality. Average quality is considered sufficient, unless such quality is unreasonably defective. 2. Performance must be reasonable The additional reference that the quality must be reasonable is intended to prevent the obligor from claiming to have complied with the average quality of a market where the average quality is very deficient by providing this provision to the judge or arbitrator the opportunity to raise such unsatisfactory quality levels. Example 3. "A", a company located in country "X", organizes a banquet on the occasion of its 50th anniversary. Given that the culinary level of country "X" is mediocre, "A" hires a renowned Parisian restaurant for the food service. In these circumstances, the quality of the food that such restaurant must serve cannot be less than the average quality of a Paris restaurant. It will not be sufficient to achieve the average level of such service in country "X".

ARTICLE 5: 1.7 (Determination of Price) (

• 1)

  Where the contract does not fix the price or contain terms for its determination, it is presumed that the parties intend, unless otherwise indicated, to refer to the price generally charged at the time of conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price can be established, to a reasonable price. (

• 2)

  Where the determination of the price is left to one of the parties and the price fixed is manifestly unreasonable then, notwithstanding any clause to the contrary, a reasonable price shall be substituted. (

• 3)

  Where the determination of the price is left to one of the parties or to a third person and that party or third person cannot or will not fix the price, it shall be a reasonable price. (

• 4)

  Where the price is to be fixed by reference to factors which do not exist or have ceased to exist or to be accessible, a reasonable substitute reference shall be used. COMMENT 1. General rule for determining price A contract generally fixes the price that should be paid, or establishes elements on the basis of which such price can be determined. When this is not the case, paragraph (

  • 1)

    of this article establishes the presumption that the parties intend to refer to the price generally charged at the time of conclusion of the contract for such performance in comparable circumstances in the trade concerned. All of these requirements are of course important. This provision also allows refutation of this presumption if any indication to the contrary is presented. This article is inspired by Article 55 of CISG. The rule is flexible enough to meet the needs of international commerce. It is true that in some cases the price generally charged in the market does not satisfy the test of the reasonable criterion that prevails throughout this article. In this case, recourse should be made to the general provision of good faith and fair dealing (Article 1.7) or possibly to some of the provisions on error, fraud, or excessive disproportion of performance (see Chapter 3, Section 2). Some international contracts involve operations that are unique in kind, or at least are very specific, for which it is not possible to refer to the price charged for similar performance in comparable circumstances. According to paragraph (1), it is considered in such cases that the parties have referred to a reasonable price and the party in question shall fix a price in accordance with a reasonable level, subject to possible control by judges or arbitrators. Examples 1. "A", a company specializing in international express mail, receives from "B" a package to be sent as quickly as possible from country "X" to country "Y". Nothing is said regarding the price. "A" should charge "B" the price commonly fixed in the trade for this type of service. 2. The following assignment that "A" receives from "B" is the shipment of another package that must also be sent as quickly as possible to a remote and difficult-to-access country "Y", where a group of explorers need provisions urgently. Again, nothing is said regarding the price, but in view of the fact that there is no comparable parameter in the market, "A" should act with reasonable judgment in fixing the price. 2. Determination of price by one of the parties In some cases the contract expressly establishes that the price will be determined by one of the parties. This frequently happens in various sectors of commerce, such as in the provision of services. The price cannot be easily fixed in advance and the party providing the services is in a better position to assess its cost. In these cases, the parties' intention to leave one party to determine the price will be respected. To prevent possible abuses, paragraph (

  • 2)

    allows judges or arbitrators to modify a manifestly unreasonable price, fixing a reasonable price. This provision is mandatory. If that party does not determine the price, paragraph (

  • 3)

    establishes that such price, possibly to be determined by a judge or arbitrator, should be a reasonable price. 3. Determination of price by a third party The clause whereby the price should be determined by a third party can give rise to serious difficulties when it is not qualified to do so (for example, when it proves not to be as expert as thought) or when it refuses to do so. Paragraph (3) establishes that the price, eventually determined by judges or arbitrators, must be reasonable. If the third party fixes the price in circumstances that may imply fraud, threats, excessive disproportion of performance or error, Article 3.2.8(2) may apply. The parties are free to establish the standards or procedure that the third party must follow in determining the price. The parties may object to such determination if it does not comply with such standards or procedure. The parties can also determine the grounds on which the determination of price made by a third party may be challenged, which may vary depending on the price to be determined. For example, if the agreed standard is "market price", the parties may agree that the price fixed by an expert may be challenged when it is "manifestly unreasonable". In another case, if the standard concerns verification of a fact, such as an "average index", the parties may agree that the price may be challenged as "erroneous". 4. Determination of price by reference to external factors In some cases the price is determined in relation to external factors, generally a published index or a quotation in a given market. In cases where that factor ceases to exist or to be accessible, paragraph (

  • 4)

    establishes that a reasonable substitute reference shall be used. Example 3. The determination of the price of a works contract is linked to several indices, including the "official price index in the construction trade" published periodically by the government of a certain country. Such index ceases to be published when several installments of the price remain pending payment. The Construction Federation, a private trade association, decides to begin publishing a similar index to replace the former one, in which case this new index shall serve as a substitute.

ARTICLE 5: 1.8 (Termination of an Indefinite-Term Contract) Either party may terminate an indefinite-term contract by notice of reasonable notice period. With regard to the effects of termination generally, as well as the obligation of restitution, Articles 7.3.5 and 7.3.7 shall apply. COMMENT 1. Indefinite-term contract Frequently, contracts expressly establish their term of duration, or this can be inferred from the nature and purpose of the contract (for example, technical assistance provided to help fulfill certain specialized work). However, there are cases where the duration of the contract is not determined or determinable. The parties may also stipulate that their contract has an indefinite duration. In such cases, according to what is established in this article, either party may terminate the contractual relationship, by notice to the other with reasonable notice period. What is to be understood by "reasonable notice period" will depend on circumstances, such as the time the parties have been collaborating with each other, the extent of their respective investments in relation to the contract, the time necessary to find new partners, etc. This rule can be interpreted as intended to "fill gaps" in those cases where the parties have not stipulated the duration of their contract. However, it is related to the widely recognized principle that contracts do not bind the parties forever and that a contractual relationship for an indefinite term can always be terminated by notifying such intention with sufficient advance notice. This situation must be distinguished from the case of termination or adaptation of the contract due to unexpected and excessive hardship that Articles 6.2.1 through 6.2.3 contemplate. In the case of excessive hardship, a fundamental change in the balance of the contract's performance is required, which may give rise, at least initially, to renegotiation of the performance. The rule of this article does not require the presentation of special circumstances, except the indefinite nature of the contract's duration and that it allow its unilateral termination. Example 1. "A" agrees to distribute the products of "B" in country "X" for an indefinite period. Either party may terminate this contract unilaterally by sending notice to the other party with reasonable notice period. Either party may terminate this contract by sending notice to the other party with reasonable notice period. 2. Consequences of termination The effects of termination in general are those established by Article 7.3.5. Both parties are released from their obligations to effect and receive future performance. The fact that the contract has come to an end by having been terminated does not deprive a party of its right to claim compensation for any breach by the other party. Example 2. The facts are the same as in Example 1. "B" communicates its intention to terminate the contract after it has been in effect for five years. Subsequently it is determined that "A" had failed to perform its obligations during the six months preceding "B's" notice of termination of the contract, for which reason the latter suffered a loss of income. Although the contract has been terminated, "B" may claim compensation in accordance with the rules of Section 4 of Chapter 7. Termination also does not affect any term of the contract related to termination of disputes or any other clause intended to govern even after termination (see Comments 3 and 4 to Article 7.3.5). Performance of an indefinite-term contract could have developed for a prolonged time before termination, so it may not be advisable to undo such performance. Furthermore, termination only has effects for the future. Therefore, the obligation of restitution can only be claimed for the period following termination. This is what Article 7.3.7(1) provides, so Article 7.3.6 becomes applicable to the extent that the obligation of restitution arises, in accordance with Article 7.3.7(2).

ARTICLE 5: 1.9 (Waiver by Agreement) (1) A creditor may waive its right by agreement with the debtor. (2) An offer to waive a right gratuitously is presumed to be accepted if the debtor does not reject it without undue delay after becoming aware of it. COMMENT A creditor may release its debtor from its obligation (or, if the debtor has more than one obligation, from more than one obligation). The waiver by the creditor may be made by a separate act, or constitute part of a more complex transaction between the parties, for example a settlement that resolves a dispute between them. This article establishes that the waiver of a creditor's right (or rights) requires an agreement between the parties, regardless of whether the creditor waives its right (or rights) gratuitously or for consideration. In the latter case, although the debtor should not be obligated to accept a benefit against his will, he will usually consent to accept the benefit. This is why paragraph (2) provides that an offer made gratuitously is presumed to be accepted if the debtor does not reject it without undue delay upon becoming aware of it. Examples 1. Company "A" is in financial difficulties and needs the cooperation of its creditors to survive. Bank "B" is willing to waive 50% of its credit against "A" and the accrued interest, provided that "A" pays interest of 9% (instead of the 5% previously agreed) on outstanding balances. "B" sends a notice to that effect on January 15. On January 22, "A" has still not responded to the notice. The waiver by "B" will be effective only after "A" has accepted "B's" offer in accordance with Articles 2.1.6 et seq. 2. Company "A" is in financial difficulties and needs the cooperation of its creditors in order to survive. Bank "B" is willing to waive 50% of its credit against "A" and to reduce accrued interest and sends "A" a communication to that effect on January 15. On January 22, "A" has not responded to the communication. The offer by "B" is presumed to be accepted by "A".

ARTICLE 5: 2.1 (Stipulation in Favour of Third Parties) (1) The parties (the "promisor" and the "stipulator") may confer by express or implied agreement a right on a third party (the "beneficiary"). (2) The existence and content of the beneficiary's right against the promisor are determined by the agreement of the parties and are subject to any conditions or limitations stipulated in that agreement. COMMENT Parties ordinarily enter into contracts with the intention of creating rights and obligations between themselves. In these cases, only the parties acquire the rights and obligations provided for in the contract. The mere fact that a third party obtains a benefit from the performance of the contract does not give such third party rights under the contract. Example 1. Professor "A" enters into a contract with the University of country "X", by which he undertakes to teach forty-one hours of classes in which he will compare contract law of countries "X" and "Y". "A" only teaches twenty hours of class and does not mention the law of country "Y" in his classes. "T", a student, does not acquire rights under the contract entered into between "A" and the University. Third parties, however, are not always left without any rights. The fundamental principle is that of the autonomy of the parties who, if they wish, may confer a right on a third party, and should be free to do so. The parties may expressly stipulate that this is their intention, but this is not indispensable, since the intention to benefit a third party may be implicit in the contract. In cases where the implicit intention is invoked, the decision will depend on all the provisions of the contract and the circumstances of the case. The following are examples of implicit intention. Examples 2. "A" subscribes to an insurance policy for his fleet of trucks usually driven by his employees. The contract provides that the insurance company will cover any person who drives a truck with "A's" consent. Employee "T" suffers an accident while driving the truck. "T" is covered with respect to his liability for the accident. 3. "A" sells his business to "B" on the condition that "B" pay "A" GBP 1,000 monthly for the rest of his life and GBP 500 to "A's" wife, "T", if he dies before her. "A" dies. "B" refuses to pay "T". "T" is entitled to GBP 500 monthly. 4. "A", the International World University, wishes to build a new law library on one of its properties. For legitimate tax reasons, the contract for the construction of the library is entered into with "B", a company wholly owned by the University. The constructor knows perfectly well that when the library is completed it will be occupied and used by "A". The building has been poorly constructed and it will cost USD 5,000,000 to complete it satisfactorily. "A" can recover the cost of the repair work. 5. "A", a constructor of a shopping mall, enters into a contract with "B", a security company, to ensure the security of the shopping mall. "A" and "B" know that the shops will be operated by tenants of "A". These tenants have been told that one of the main attractions of the shopping mall will be its high level of security guaranteed by "B". One of the clauses of the contract between "A" and "B" provides that all employees of "B" who work in the shopping mall will be former police officers personally selected by the responsible director of "B". In fact, the selection is delegated to a consulting firm that recruits several unqualified persons. Several thefts occur in the businesses. The tenants who have suffered losses have a contractual right to take action against "B". The following are examples where no such implicit intention exists unless the circumstances clearly indicate otherwise. Examples 6. "A" goes to a luxurious fur store and selects and buys a coat. "A" comments (truthfully) to the employee that he is buying the coat for "T", the wife of a visiting Head of State. The coat is attached with a very visible tag that reads "Looks like mink, feels like mink but is guaranteed to be synthetic". "A" gives the coat to "T". In fact, due to an error by the store, the coat is genuine mink and "T" is subject to violent and hostile criticism by animal rights activists in that country. "T" cannot exercise any contractual rights. 7. "A", a company that owns a large industrial complex, enters into a contract with a company in charge of the local sewerage system. Under the contract, "A" has the right to discharge all waste into the collector, but undertakes not to discharge certain types of waste. In violation of this obligation, "A" discharges waste into the collector and causes damage to "T", another user of the collector. "T" has no contractual rights. 8. "A", a company from country "X", sells materials to "B", a company from country "Y". "A" knows that "B's" plans are to resell the materials to "T", a pharmaceutical company from country "Z" that will use them to manufacture a new medicine, based on a contract that limits "B's" liability to USD 1,000,000. The materials prove defective and "T" suffers losses in excess of USD 1,000,000. "T" cannot enforce any contractual rights against "A". The application of this article will frequently be linked with tort liability actions. This eventuality is outside the scope of the Principles. It follows from the scheme of this article that an explicit statement that the parties do not intend to confer rights on third parties is effective. It also follows that the promisor and the stipulator have broad powers to limit the rights created in favor of the beneficiary. In this context, the term "rights" must be interpreted flexibly. In the context of the Principles, a third party beneficiary has a wide range of contractual remedies available, including the right to performance and damages.

ARTICLE 5: 2.2 (Identification of the Beneficiary) The beneficiary must be identified in the contract with sufficient certainty, but need not exist when the contract is concluded. COMMENT The parties may enter into a contract in which the identity of the third party is not known at the time the contract is concluded, provided that a mechanism is established to determine its identity at the time of performance of the contract. Such mechanism may provide that the parties, or one of them, may identify the beneficiary at a later point, or choose a definition of beneficiary such that its identity will be determined by subsequent circumstances. Examples 1. A married man with children but no grandchildren enters into a contract with insurance company XYZ whereby "A" pays GBP 10 per month as insurance premium and they promise to pay GBP 10,000 to each of his grandchildren when "A" dies. Grandchildren born after the contract is concluded but before "A's" death are entitled to GBP 10,000. 2. Company "A" launches a tender offer for the shares of company "B", listed on one of the most important stock exchanges. Company "B" hires "C", a prestigious audit firm, to prepare a report on "B" for distribution to shareholders. The contract between "B" and "C" requires that "C" prepare a truthful, professional and complete report. Due to "C's" incompetence, a report is produced that is too favorable to "B". As a result, the majority of shareholders vote against "A's" offer. Some shareholders show copies of the report to friends who buy shares in "B". Former shareholders may acquire rights under the contract between "B" and "C" but new shareholders may not.

ARTICLE 5: 2.3 (Exclusion and Limitation of Liability Clauses) The conferment of a right on the beneficiary includes the right to invoke a clause in the contract that excludes or limits the liability of the beneficiary. COMMENT Contractual provisions that limit or exclude the liability of someone who is not a party to the contract are very frequent, particularly in transport contracts, where they frequently form part of a pre-established insurance model. Probably the most common example is the so-called "Himalaya Clause", which is a clause frequently included in bills of lading. In general, the autonomy of the parties must be respected in this area as well. Example "A", an owner of merchandise, enters into a contract with a maritime carrier to transport merchandise from country "X" to country "Y". The bill of lading is governed by the Hague-Visby Rules and excludes the liability of: (

• a)

  the captain and crew; (

• b)

  the stevedores employed in loading and unloading; and (

• c)

  the owners of the vessels in which the merchandise is transshipped. These exclusions shall have effect. Another situation regulated by this article arises when the promisor and the stipulator agree that the beneficiary shall be relieved of any obligation toward the promisor.

ARTICLE 5: 2.4 (Exceptions) The promisor may raise against the beneficiary any exception that the promisor could raise against the stipulator. COMMENT By virtue of Article 5.2.1, the content of the beneficiary's right may be subject to any condition or limitation provided by the parties. The promisor and the stipulator may provide in the contract that the position of the beneficiary will be considerably different from that of the stipulator. The autonomy of the parties is in principle unlimited but they may not expressly provide for all possibilities. This article will therefore constitute the default rule in case of omission. Examples 1. "A" subscribes to a life insurance policy with insurance company "B" in favor of "C". The contract provides for the payment of premiums for 25 years, but after 5 years "A" stops paying the premiums. "C's" position will be shaped as if the insurance policy had been in "A's" favor. These policies normally do not deny the return of premiums paid. However, if the policy had been cancelled by the insurance company, for example because "A" did not disclose certain important information in a timely manner, then normally "B" could raise the corresponding defenses to "C". 2. Company "A" subscribes to an insurance policy with insurance company "B", the purpose of which is to cover "A" for acts of dishonest employees. The insurance policy provides that "B" shall fully indemnify customers who suffer damage from "A's" employees and shall indemnify "A" only if "A" has not been negligent in the selection or supervision of its employees. Clearly, under the terms of this contract, "B" has defenses against "A" that it could not raise against customers.

ARTICLE 5: 2.5 (Revocation) The parties may modify or revoke the rights granted by the contract to the beneficiary as long as the beneficiary has not accepted them or has not acted in reliance on them. COMMENT It might be prescribed that the promisor and the stipulator are free to revoke the third party's rights at any time, or conversely, it might be established that once the contract is concluded, the third party's rights are immutable. Few systems adopt one of these extreme positions. The solution adopted provides that the third party's rights become irrevocable once the third party has accepted them or has acted in reliance on them. The parties, of course, may agree to something different in their contract, either by providing that the beneficiary's rights become irrevocable before that point, or by reserving the right to revoke them even after the third party has acted in reliance on the rights. There may be situations where the right to revocation is granted only to one party. For example, in a life insurance contract it may be provided that the insured may change the beneficiary. There may be relevant usages that limit the possibility of revocation. Example "A", the principal contractor of an important construction contract, subscribes to an insurance policy with company "B" to cover damage that could arise during the progress of the work. The policy is drafted in such a way that it covers the interests of all subcontractors involved in the contract and the subcontractors were informed of this policy. "C", a subcontractor, has not subscribed to a policy on his own account and has not informed either "A" or "B" of this. Unless otherwise agreed, the fact that "C" has acted in reliance on it makes the contract between "A" and "B" irrevocable.

ARTICLE 5: 2.6 (Waiver) The beneficiary may waive a right conferred upon it. COMMENT The scheme of this Section presupposes that, unless otherwise agreed, the beneficiary acquires the right provided for in the contract between promisor and stipulator immediately, without any need of acceptance. Although the third party will generally be grateful to receive the right that the parties have conferred on it, it cannot be forced to accept it. Consequently, the third party may waive this right, either expressly or implicitly. However, once the beneficiary has taken action corresponding to acceptance, it will normally not be allowed to waive. Example From the facts stated in the Example to Article 5.2.5, "C", a subcontractor, may not wish to be covered by the main contractor's insurance because he already has insurance (and knows he would have difficulties if two insurers were covering the same risk). "C" has the right to waive.

ARTICLE 5: 3.1 (Types of Conditions) A contract or a contractual obligation may be conditional if it depends on a future and uncertain event, such that the contract or the contractual obligation produces effects only (suspensive condition) or ceases to produce them (resolutory condition) if the event occurs. COMMENT 1. Scope of the Section The parties may subject the contract, or one or more contractual obligations, to the occurrence or non-occurrence of a future and uncertain event. A clause in this sense is denominated a "condition". The conditions governed by the Principles encompass both those that bear on the very existence of a contract and those that determine the obligations arising from it. Consequently, the application of the Principles in some cases may impose duties even in the absence of a contract (see, for example, Articles 5.3.3 and 5.3.4). A condition may refer to a set of events, including natural events or acts of a third party. This Section is concerned solely with conditions that have their origin in an agreement of the parties. Conditions imposed by law are not the subject of this Section unless the parties have incorporated them into the contract. Thus, the requirement of public authorization imposed by law exceeds the scope of this Section, but may be governed by Article 6.1.14. However, if the parties introduce a clause subjecting the contract, or the contractual obligations arising from it, to the granting of public authorization, such clause is a condition. 2. Concept of Condition The word "condition" may have several meanings. For example, in some countries, a condition means an essential clause of the contract. This is not the meaning of the word "condition" in this Section. Some contracts may provide that the performance of one party depends on the performance of the other. These clauses are not conditions, but rather they simply specify the obligations of the parties arising from the contract. Example 1. In a stock purchase contract concluded between seller "A" from country "X" and buyer "B" from country "Y", the obligation of "B" to pay the price is subjected to "A" having performed all his obligations arising from the contract within a determined date. This performance is not a condition, but rather a contractual obligation and, as such, is not an uncertain event. The parties may also fix a specific date on which the contract, or one or more of the obligations arising from it, produces effects or ceases to produce them. In many countries these clauses are denominated "time periods". Such clauses are not considered "conditions" under this Section. The same is true when the parties include a clause subjecting their contract, or one or more of the obligations arising from it, to the occurrence of a future event that will inevitably occur. Examples 2. A purchase and sale contract is concluded on October 2, with delivery of the merchandise provided for on October 10. The obligation to deliver is not conditional because it is not subject to a future and uncertain event. 3. Architect "A", who wishes to renovate his offices, borrows money from a bank and the loan contract provides that property owned by "A" will become property of the bank at the moment of "A"'s death. This is not a condition, since "A"'s death will occur inevitably. The parties may provide in their contract a moment when the condition must be satisfied. Example 4. A contract for the acquisition of shares is concluded between "A" and "B". This contract will produce effects if all necessary authorizations are received before January 30. The contract is conditional and includes a date on which the condition must be satisfied for the obligations of the parties to produce effects. If the contract does not establish a specific moment for satisfaction of the condition, in certain circumstances this moment may result as implicit based on an interpretation of the intention of the parties, in accordance with Chapter 4. 3. Suspensive and Resolutory Conditions A contract or a contractual obligation may be subordinated to the occurrence of a future and uncertain event, such that the contract or the contractual obligation will produce effects only if the event occurs. For the Principles, this condition is denominated a "suspensive condition". In some countries, it is known as a "condition precedent". Example 5. A corporate merger contract, concluded between "A" and "B", is subjected to the condition that "A" has obtained, before a specific date, the necessary authorization from the respective competition authorities. It may be provided that a contract or a contractual obligation will cease to produce effects if a future and uncertain event occurs. For the Principles, this condition is denominated a "resolutory condition". In some countries it is known as a "condition subsequent". Example 6. A contract designating "B" as administrator of funds for the management of investments of a company provides that the contract will cease to have effects if "B" loses his license to administer funds. Instead of agreeing to a resolutory condition, the contractors may agree that, under certain circumstances, one or both have the right to resolve the contract. 4. Condition That Depends Completely on the Debtor's Will Sometimes the contract or the contractual obligation is subjected to an event that depends completely on the will of the debtor. In this case, the problem consists in determining whether the debtor really intended to be bound. This is a matter of interpretation. If there is no intention to be bound, there is no contract nor any contractual obligation. Example 7. A document drafted between "A" and "B" contains a list of clauses. One of them provides that the purchase and sale contract will produce effects if "A" decides to sell certain merchandise. "A" has no obligation, not even conditional, since "A" has absolute discretion to decide whether or not to sell the merchandise. In this case, it is irrelevant that "A" has the precontractual obligation not to act in bad faith. In some cases a conditional obligation exists despite one party having the option of concluding or not concluding the contract. This is the case when the freedom of choice actually depends on external factors. Example 8. An international corporate merger agreement provides for the merger of two subsidiaries of a company within an established term, subject to approval by the Board of Directors of one of the companies. Under applicable law, approval cannot be rejected without a reasonable reason. This is a conditional obligation, since the condition does not depend completely on the will of one of the parties. 5. Closing Parties involved in complex and high-value commercial transactions, which involve lengthy negotiations, often provide for a procedure denominated "closing", that is the formal recognition of closing on a determined date ("closing date"), on which date or before, all agreed conditions (the conditions precedent or "conditions precedent") have been satisfied. Normally, but not always, on the closing date the parties sign a document confirming that no condition precedent continues in suspension or, if some conditions have not been satisfied, that they have been waived. Despite the terminology used by the parties, not all events described as "conditions precedent" are "conditions", as defined in this article. In practice, mixed clauses exist. Thus, for example, events such as the obtaining of all necessary antitrust authorizations, admission to the stock exchange, the granting of an export license and the obtaining of a bank loan may be true suspensive conditions because they are events regarding which there is no certainty of occurrence. Other clauses such as those referring to the accuracy of the representations or warranties given by a party, the commitment to perform or not to perform certain concrete acts, or the delivery of a certificate proving that the party has complied with all its tax obligations, are in reality obligations that the parties have agreed to perform before the transaction has been formally concluded (and perfected). These are not events regarding which occurrence is uncertain and, therefore, these clauses are not conditions in accordance with the Principles. Similarly, with respect to the effects of closing, there is no precise rule that permits establishing whether a clause is or is not a condition. In practice it is difficult to give a logical answer based on the clauses themselves. In particular, clauses denominated "conditions precedent" tend to mix true conditions and specific matters that have not yet been agreed upon by the parties, or true obligations that the parties must satisfy in the course of negotiations (see Article 2.1.13). Example 9. A contract providing for a capital increase, negotiated between issuer "A" and principal underwriter "B" under the title "Conditions Precedent", provides as follows: "The obligations of the principal underwriter to subscribe for shares on the closing date are subject to satisfaction, no later than the closing date, of the following suspensive conditions:

• a)

  The accuracy of the representations and warranties given;

• b)

  The performance of commitments: the issuer must have performed, no later than the closing date, all its obligations under this contract;

• c)

  Admission to the stock exchange;

• d)

  The delivery of any document pertinent to closing: the principal underwriter must have received the following documents, no later than the closing date [...]. If any of the stated conditions has not been satisfied by the date provided in this article, the principal underwriter may resolve the contract. In this example, the contract is composed of a mixture of obligations and suspensive conditions: point (c) is a suspensive condition, since it is outside the control of the parties; points (a) and (b) incorporate contractual obligations; point (d) incorporates a contractual obligation as to documents that one party is obligated to prepare, but is a suspensive condition with respect to other documents.

ARTICLE 5: 3.2 (Effects of Conditions) Unless the parties agree otherwise:

• a)

  The contract or the contractual obligation will produce effects upon satisfaction of the suspensive condition;

• b)

  The contract or the contractual obligation will cease to produce effects upon satisfaction of the resolutory condition. COMMENT 1. General Supplementary Rule In accordance with the Principles, unless the parties agree otherwise, satisfaction of a condition produces effects only prospectively. It does not have retroactive effect. It is suggested to the parties that they specify whether a condition produces retroactive effects or only prospective effects. 2. No Retroactive Effect In the case of the suspensive condition, the contract or the contractual obligation produces effects automatically from the moment the future and uncertain event occurs. Example 1. The facts are identical to those of Example 5 of the Comments to Article 5.3.1. The contract produces effects when the authorization of the respective competition control authorities has been obtained. In the case of the resolutory condition, the contract or the contractual obligation ceases to produce effects from the moment the future and uncertain event is verified. Example 2. The facts are identical to those of Example 6 of the Comments to Article 5.3.1. The contract ceases to produce effects when "B" loses his license.

ARTICLE 5: 3.3 (Interference with Satisfaction of Condition) 1) If satisfaction of a condition is prevented by a party in violation of the duty of good faith and fair dealing or of cooperation, that party may not invoke non-satisfaction of the condition. 2) If satisfaction of a condition is caused by a party in violation of the duty of good faith and fair dealing or of cooperation, that party may not invoke satisfaction of the condition. COMMENT This article on interference with satisfaction of the condition is a particular application of general rules regarding good faith and fair dealing (see Article 1.7), contradictory conduct (see Article 1.8) and cooperation between the parties (see Article 5.1. 3). This article does not oblige a party to use all reasonable efforts to bring about satisfaction of the condition. It merely affirms that a party that prevents satisfaction of the condition in violation of the duties of good faith and fair dealing and cooperation may not invoke non-satisfaction of the condition. On the other hand, if a party causes satisfaction of the condition in violation of the duties of good faith and fair dealing and cooperation, that party may not invoke satisfaction of the condition. The question whether a party has the obligation to use all reasonable efforts for satisfaction of a condition is a matter of interpretation. In commercial practice, the parties themselves may expressly provide that observance of the principle of good faith involves all events upon which the success of the transaction depends, or they may go beyond this minimum criterion and impose the obligation to make "its best efforts to satisfy the conditions insofar as possible". These clauses may also be imposed on only one party (see Article 5.1. 4). The corresponding remedies (right to performance or damages) shall be determined in accordance with the contractual provisions and general rules on remedies, as well as the circumstances of the specific case. In order to illustrate the manner of application of this article, it is necessary to distinguish between four factual situations. a) When a party prevents satisfaction of a suspensive condition in violation of the duty of good faith and fair dealing or of the duty of cooperation, that party may not invoke non-satisfaction of the condition. Example 1. "B" grants a software license to "A" under the condition that such software is approved by "C", an independent computer engineer appointed by "B". "B" has second thoughts about the transaction and bribes "C" to withhold his approval. "C" does not approve the software because of the bribe. "B" may not invoke non-satisfaction of the condition, that is, when "A" demands its performance, "B" may not refuse to perform his obligation to grant the license. b) When a party prevents satisfaction of a resolutory condition in violation of the duty of good faith and fair dealing or of the duty of cooperation, that party may not invoke non-satisfaction of the condition. Example 2. "B" leases excavation machinery to "A" for the time needed for "A" to acquire his own machinery. As a matter of commercial courtesy toward "A", the rental price is below market price. "B"'s obligation to lease the excavation machinery is subject to a resolutory condition whereby it ceases to produce effects if "A" acquires his own machinery. "A" rejects very favorable offers in order to continue benefiting from the favorable rental price. "A" may not invoke non-satisfaction of the condition. c) When a party causes satisfaction of a suspensive condition in violation of the duty of good faith and fair dealing or of the duty of cooperation, that party may not invoke satisfaction of the condition. Example 3. The facts are identical to those of Example 1, but in this case "B" bribes "C" to approve the software despite "C"'s technical reservations regarding it. "B" may not invoke satisfaction of the condition, that is, "B" may not demand that "A" grant the license. d) When a party causes satisfaction of a resolutory condition in violation of the duty of good faith and fair dealing or of the duty of cooperation, that party may not invoke satisfaction of the condition. Example 4. "A" concludes with "B" a mandate contract for the promotion and sale of "A"'s products. It is provided that the contract will be resolved if the gross value of sales made by "B" does not reach 1,000,000 EUR by December 31 of the second year. "A", who has found another person willing to represent him on terms more favorable to "A" than those agreed with "B", ceases to supply "B" with his products, so that by the provided date the gross value of "B"'s sales falls far short of 1,000,000 EUR. "A" may not invoke this fact to resolve the contract with "B".

ARTICLE 5: 3.4 (Obligation to Preserve Rights) Before satisfaction of the condition, a party may not in violation of the duty to act in good faith and fair dealing behave in such a manner as to prejudice the rights of the other party in the event the condition is satisfied. COMMENT This article refers only to acts executed during the period preceding satisfaction of the condition. It does not refer to acts that constitute interference with its satisfaction. Those latter acts are the subject of Article 5.3.3. The situation preceding satisfaction of the condition is particular and requires special regulation in application of the general principle of good faith and fair dealing (see Article 1.7). Indeed, a person having an interest in satisfaction of the condition has a conditional right that merits protection (especially in the case of the suspensive condition). During the period prior to satisfaction of the condition, the actions of a party may impair the situation of the other party. This article is founded on the idea that, generally speaking, it is better to prevent such actions than to remedy their effects. This article is also important in reminding the parties to bear this aspect in mind, by expressly providing those measures that the person interested in satisfaction of a condition may take in order to protect his rights. In commercial practice, the parties may draft a specific clause (sometimes known as a "covenant of ordinary course of business") that applies between the date of execution and the closing date, and that aims to limit the rights of the parties to dispose of assets only to operations that belong to the ordinary course of business. Example A stock purchase contract concluded between seller "A" and buyer "B" provides that the transaction will be perfected only if, on the closing date all conditions have been satisfied, including the condition that "B" has obtained from his banks the necessary credit. "A" is obligated to limit his activity to the management of ordinary business and "B" assumes an obligation of confidentiality with respect to all information related to the company to which he has had access in the course of negotiations.

ARTICLE 5: 3.5 (Restitution in Case of Satisfaction of a Resolutory Condition) 1) In the event of satisfaction of a resolutory condition, the rules on restitution of Articles 7.3.6 and 7.3.7 shall apply, with the necessary adaptations. 2) If the parties have agreed that a resolutory condition will have retroactive effect, the rules on restitution of Article 3.2.15 shall apply, with the necessary adaptations. COMMENT When a contract subject to a resolutory condition ceases to produce effects as a result of satisfaction of the resolutory condition, the parties will often have already fully or partially performed their obligations arising from the contract. The question that then arises is whether the parties must restore what they have received, and if so, what are the rules that will apply. In accordance with the Principles, satisfaction of a resolutory condition normally produces only prospective effects. For this reason, restitution must follow the rules established in Articles 7.3.6 and 7.3.7 regarding restitution in case of resolution of the contract, which also produces effects only prospectively. The specificity of these rules on restitution, in relation to the regime established in Article 3.2.15, lies in the fact that, for contracts whose performance extends over time, restitution cannot be demanded for the period prior to the resolution of the contract. However, in accordance with the Principles, the parties have the freedom to agree that the resolutory condition has retroactive effect. In this case, it is appropriate to apply the rules on restitution provided for in Article 3.2.15 (restitution in case of avoidance), since avoidance also has retroactive effect. There is no special rule for restitution in the case of contracts whose performance extends over time.

ARTICLE 6: 1.1 (Time of Performance) A party must perform its obligations: (

• a)

  if the time is fixed or determinable by the contract, at that time; (

• b)

  if a period of time is fixed or determinable by the contract, at any time within such period, unless the circumstances indicate that the other party is to choose the time of performance; (

• c)

  in any other case, within a reasonable time after the conclusion of the contract. COMMENT To determine when an obligation must be performed, this article, inspired by Article 33 of CISG, contemplates three hypotheses: the first is when the contract has fixed the time of performance or when it is determinable according to the contract. If the contract does not specify a precise moment, but rather a period during which the obligation must be performed, any moment selected by the debtor within such period is acceptable, unless the circumstances indicate that the other party is to choose the time of performance. In all other cases, performance must be carried out within a reasonable time. Examples 1. "A" offers to advise "B" on projects that the latter develops to acquire computer equipment and software. Both parties agree that the experts of "A" will visit "B" "in May". In principle, it is for "A" to communicate the exact date in May on which it will make the visit. However, the circumstances may leave such choice to "B". This would be the case if the contract expressly granted "B" the option to choose the date; or when, for example, it has been understood that "B"'s employees, who frequently take business trips, must be present at the time of the visit of "A"'s experts (see Article 6.1.1(b)). 2. "A", a building contractor, in excavating to prepare the foundations, encounters unusual difficulties in continuing his work and urgently needs specialized equipment that he lacks. "A" calls "B", another contractor who has such equipment and the latter agrees to loan it to "A". However, nothing is stated about when "B" must deliver such equipment. Performance must be carried out "within a reasonable time" taking into account the circumstances of the case. Since the work has been interrupted for the aforementioned reasons, and due to the urgency in receiving this equipment, the expression "within a reasonable time" must be understood to mean that the equipment must be delivered almost immediately (see Article 6.1.1(c)).

ARTICLE 6: 1.2 (Performance at One Time or in Installments) In the cases provided for in Article 6.1.1(b) or (c), the debtor must perform its obligations at one time, provided that the performance can be rendered at once and that the circumstances do not indicate another mode of performance. COMMENT Sometimes the performance must be rendered at one time (for example, when it concerns the delivery of a particular object); in other cases it must be rendered within a certain period of time (e.g., a construction). However, in other instances the obligation is susceptible to instantaneous and staged performance (e.g., the delivery of merchandise). This article regulates this latter situation, in circumstances where there is no contractual provision on the manner in which an obligation must be performed, or when this cannot be determined from the contract. The principle established is that performance must be at one time, unless the circumstances indicate another form of performance. Examples 1. "A" promises to "B" to deliver 100 tons of coal "in March". It might be materially possible and probably more convenient for "A" to deliver the 100 tons in stages, for example, 25 tons per month. However, in accordance with Article 6.1.2, "A" must deliver the 100 tons at one time. 2. The facts are identical to the previous example, but here "B" needs the coal gradually in order to meet his needs. "B" also has space limitations and cannot store the 100 tons at one time. In turn, "A" is aware of the specific needs of "B". In this case, the circumstances suggest that "A" must perform his obligation in stages during the month of March.

ARTICLE 6: 1.3 (Partial Performance) (1) The creditor may reject an offer of partial performance made at the time performance is due, whether or not such offer is accompanied by an assurance as to performance of the remainder of the obligation, unless the creditor has no legitimate interest in the rejection. (2) Any additional expenses caused to the creditor by partial performance are to be borne by the debtor, without prejudice to any other remedy that may be available to the creditor. COMMENT 1. Distinction Between Partial Performance and Performance at One Time or in Installments The hypothesis contemplated by this article must be distinguished from that contemplated in the preceding Article 6.1.2. Article 6.1.2 is intended to resolve a preliminary question in special cases. If the contract does not specify, nor does it provide the basis for determining, whether performance may be effected at one time or in installments, it must be effected at one time. This article has a broader scope of application. It expresses that at the time when performance must be carried out, the creditor may reject an offer of partial performance. This rule is applicable at the due time of the obligation, regardless of whether the performance to be rendered at that time may be rendered globally or as one stage of the total performance (in some cases, this determination must be made on the basis of Article 6.1.2). Example 1. "A" owes USD 1,000,000 to a bank, it having been agreed that "A" will pay USD 100,000 on the first day of each month, commencing in January. On April 1, "A" offers to pay only USD 50,000, with the remainder two weeks later. In principle, the bank is entitled to reject "A"'s proposal. 2. Right of the Creditor to Reject, in Principle, Partial Performance When the performance (whether global or in installments) becomes due at the maturity of the obligation, it must be rendered in full. In principle, the creditor may reject the offer of partial payment, even if such offer is accompanied by some assurance regarding the remainder of the performance, since the creditor is entitled to the full amount stipulated. As stated below, partial performance generally constitutes a breach of contract. A party that does not receive full performance at its due date may exercise the corresponding remedies. As a general rule, the creditor has a legitimate interest in claiming full performance of what was promised and at the time promised. The creditor may, of course, refrain from rejecting the offer of partial performance, reserving his breach rights, or may accept it without any reservation, in which case the partial performance cannot later be considered as a breach. Example 2. "A" wishes to open a branch in country "X", for which it decides to rent a space in a building under construction, where such offices will be located. The building must be completed in time for "A" to move in on September 1. On that date, only four of the ten offices are available to "A", who is assured that the remaining six offices will be ready within a month. In principle, "A" can refuse to settle in the four offices. 3. Right of the Creditor to Reject Partial Performance, Provided There is a Legitimate Interest in Doing So There may be situations in which the creditor's legitimate interest in receiving full performance is not evident, and where the temporary acceptance of partial performance would cause no harm to the creditor. If the debtor proves this circumstance, the creditor cannot reject the partial performance (subject to the provisions of paragraph (2)), in which case there is no breach of the obligation. This result may be considered a consequence of the general principle of good faith and fair dealing stated in Article 1.7. Example 3. An airline promises to transport ten automobiles from Italy to Brazil and deliver them all together on a determined date. When the obligation must be performed, certain circumstances make it difficult, although not impossible, for the airline to find sufficient space on a single flight. The airline suggests fulfilling its obligation in two successive deliveries during the same week. It is ascertained that this procedure would cause no inconvenience to the automobile buyer, who actually does not need them until the following month. In this case the creditor lacks a legitimate interest in refusing partial performance. 4. The Debtor Must Bear the Additional Expenses Caused by Partial Performance Accepting partial performance may cause additional expenses to the creditor, which in any case must be covered by the debtor. If the partial performance becomes a breach (and it frequently does), these expenses will form part of the damages, without prejudice to any other remedy that may be available to the creditor. If the partial performance does not become a breach, the debtor must only pay the additional expenses. This circumstance might arise, for example, if it has been demonstrated that the creditor lacks a legitimate interest in refusing an offer of partial performance, or if the creditor has found the offer of partial performance acceptable and has made no reservation of his rights. Example 4. The facts are identical to those of Example 3. If the buyer had to bear other expenses to collect the automobiles at the airport on two occasions, such expenses will be covered by the airline.

ARTICLE 6: 1.4 (Sequence of Performance) (1) To the extent that the performances of the parties can be rendered simultaneously, the parties must render them simultaneously, unless the circumstances indicate otherwise. (2) To the extent that the performance of only one party requires a period of time, that party must perform first, unless the circumstances indicate otherwise. COMMENT In bilateral contracts, where each of the parties has obligations toward the other, an elementary but complex question arises regarding which of the performances must be performed first. If the parties have not stipulated regarding this, in practice the solution will depend on usage, although in many cases the performances of the parties may be rendered at different times. This article establishes two broad principles, recognizing in both instances that the circumstances may indicate another form of performance. The principal purpose of this article is to draw the attention of the parties to the order in which they must render their performances, in addition to encouraging them to include, when necessary, an appropriate clause for the case. This article distinguishes between the case in which the parties must render their performances simultaneously and that in which only the performance of one party requires a period of time. 1. Whenever Possible, Performance Must Be Simultaneous In the first situation, the parties are obligated to perform simultaneously (paragraph (1)). A seller is entitled to receive payment when making the delivery, but the circumstances may indicate another form of performance. This would be the case of some exception by virtue of the clauses of the contract, or when usage allows one party to perform a little after the other. Example 1. "A" and "B" agree to exchange a certain quantity of petroleum for a certain quantity of cotton. Unless the circumstances indicate another form of performance, both must be exchanged simultaneously. 2. Exception When Performance Requires a Period of Time To the extent that the performance of only one of the parties has an established period, as in the case of construction contracts or in the majority of cases of rendering services, the rule established in paragraph (2) is that such party is obligated to perform first. Many times the circumstances indicate another form of performance. This is the case of insurance policies that are usually paid before the insured receives the counter-performance, as well as payment of rent and transport. In construction contracts, payments are usually made in stages as the work is constructed. Example 2. "A" promises to send a written legal opinion in order to advise "B" in an arbitration. Unless there is a clause regarding when "A" must receive payment for such service, "A" must prepare the opinion before requesting payment. 3. Relationship Between the Order of Performance of the Obligations and the Right to Suspend Performance This article establishes norms that condition the application of Article 7.1.3, which refers to the right to suspend performance.

ARTICLE 6: 1.5 (Early Performance) (

• 1)

  The creditor may reject early performance of the obligation unless the creditor has no legitimate interest in doing so. (

• 2)

  The acceptance by a party of early performance does not affect the period for performance of its own obligations if that period was fixed without regard to the time of performance of the other party's obligations. (

• 3)

  Any additional expenses caused to the creditor by early performance are to be borne by the debtor, without prejudice to any other remedy that may be available to the creditor. COMMENT 1. In Principle, the Creditor May Reject Early Performance When the time for performance has been determined (in accordance with Article 6.1.1), the performance must be rendered at that time. In principle, the creditor may reject early performance. The time established for performance generally tends to accommodate the activities of the creditor, which creates a presumption that early performance will cause him inconvenience. Therefore, the creditor has a legitimate interest in rejecting it, and early performance generally constitutes a breach of contract. The creditor may, of course, refrain from rejecting early performance and reserve his breach rights. He may also accept early performance without making any reservation, in which case early performance cannot be considered as a breach. Example 1. "A" agrees to perform on October 15 the annual service of all elevators in the building where "B"'s offices are located. "A"'s employees arrive on October 14, when an important meeting is being held in that building with many visitors. "B" may reject the early performance offered by "A" on October 14, due to the obvious inconvenience it would cause. 2. The Creditor's Right to Reject Early Performance is Conditioned on His Legitimate Interest in Doing So The creditor's legitimate interest in having the performance rendered at the indicated time may not be so clear, and accepting early performance may not cause significant harm to the creditor. If the debtor demonstrates that this is the case, the creditor will not be able to reject such early performance. Example 2. The facts are identical to those of Example 1, but there is no difference between October 14 and 15. In this case, "A" might prove that "B" has no legitimate interest in rejecting early performance. 3. Acceptance of Early Performance and Its Impact on Performance If the creditor accepts early performance offered by the other party, it must be determined to what extent this affects the performance of the creditor's own obligations. Paragraph (2) contemplates the case in which obligations subject to a certain period are not related to the performance of the other party's obligations, in which case the performance period suffers no modification. This paragraph (2), however, does not contemplate whether the performance of one of the parties is related to the time of performance of the other party. Various situations may arise in this case. The circumstances may indicate a creditor's legitimate interest in rejecting early performance, in which case the creditor's period for performance is not affected. If early performance is accepted with all necessary reservations implying such breach, the creditor may also reserve his right to the performance period. If early performance is acceptable to the creditor, he may at the same time decide whether or not to accept the consequences that such early performance projects on his own obligations. Examples 3. "B" is obligated to deliver merchandise to "A" on May 15 and "A" to pay for it on June 30. "B" wishes to deliver the merchandise on May 10 and "A" has no legitimate interest in rejecting this early performance. However, acceptance of this early performance does not affect the agreed period for "A"'s payment of the price, which was determined independently of the date of delivery of the merchandise. 4. "B" is obligated to deliver merchandise to "A" on May 15 and "A" to pay for it when "it receives" them. If "B" offers the merchandise on May 10, depending on the circumstances, "A" may: a) reject the early performance arguing that it can pay on that date, b) accept the merchandise and condition its payment on the originally agreed period, or c) accept the merchandise and pay immediately. 4. Additional Expenses Caused by Early Performance are the Responsibility of the Party That Performs Early The acceptance of early performance may cause additional expenses to the creditor, which in any case must be covered by the other party. If early performance constitutes a breach (which is the most common case), such expenses constitute part of the damages, without prejudice to other rights and actions that may be available. If early performance does not constitute a breach, the creditor is only entitled to be reimbursed for those expenses. This would be the case in which the creditor has no legitimate interest in rejecting the offer of early performance, or has accepted such early performance without making any reservation. Example 5. "A" has no legitimate interest in rejecting the delivery of merchandise on May 10 instead of May 15, but "B" must pay the rent of the facilities where the merchandise will be stored for the five additional days.

ARTICLE 6: 1.6 (Place of Performance) (1) If the place of performance is not fixed in the contract nor is it determinable on the basis thereof, a party must perform: (a) at the creditor's place of business when it concerns a monetary obligation; (b) at its own place of business when it concerns any other obligation. (2) A party must bear any increase in the expenses of performance that is caused by a change in its place of business occurring after the conclusion of the contract. COMMENT 1. Place of Performance When It Has Been Determined or Can Be Determined on the Basis of the Contract The place of performance of an obligation is generally determined by virtue of an express clause of the contract or, when possible, on the basis of the contract as a whole. It is evident, for example, that the obligation to construct a building must be performed on the land destined for the construction, and that the obligation to transport merchandise must be performed in accordance with the route agreed upon. 2. Need for Supplementary Rules However, it is necessary to establish rules that regulate cases in which the contract is silent or when the circumstances do not permit determination of the place of performance. Paragraph (

• 1)

  provides two solutions. The general rule is that a party must perform its obligations at its own place of business. The second rule, specific to monetary obligations, designates as the place of payment that where the counter-performance is rendered, that is, where the creditor's place of business is located (a norm subject to the application of Article 6.1.8, which refers to payment by transfer of funds). These may not be the most satisfactory solutions for all situations that may arise, but it is necessary to regulate the case in which the parties have agreed on nothing in this regard or in which the circumstances do not indicate another place of performance. Examples 1. "A" wishes for some of his engineers to learn the language of country "X", in which they will work for some time. For this purpose, "A" concludes a contract with "B", a language school, to teach an intensive course to the engineers. If nothing is stipulated regarding the place of performance, the lessons must be taught at "B"'s place of business (see Article 6.1.6(1)(b)). 2. The facts are identical to those of Example 1. "B" sends the invoice to "A". The cost of the lessons must, in principle, be paid at "B"'s place of business (see Article 6.1.6(1)(a)). 3. Consequences of a Change in the Place of Business of a Party After Conclusion of the Contract Since the place of business of each of the parties is important for the purposes of paragraph (1), situations must be contemplated that may arise when one of the parties changes its domicile after the contract is concluded. This move may cause additional expenses to the party that must perform an obligation. The rule established in paragraph (

• 2)

  is that each party must pay the expenses of performance caused by a change in its place of business after the conclusion of the contract. The change of place of business may cause other inconveniences to the other party, in which case the obligation of good faith and fair dealing (Article 1.7) and the duty of cooperation between the parties (Article 5.1.

• 3)

  frequently impose on the party that changes its domicile the obligation to timely notify such change to the other party, so that the latter can make the necessary changes. Examples 3. "A" contracts to provide technical assistance to "B", it being stipulated that "A" must train ten of "B"'s engineers during a two-month period at "A"'s place of business. The engineers will be lodged in a local hotel that charges reasonable rates, because "A"'s place of business is in a rural area. After the contract is concluded and before the engineers arrive, "A" informs "B" that it has moved to the capital, where hotel rates are much higher. Regardless of whether the cost of lodging should be paid by "A" or "B", the increase in hotel cost must be borne by "A". 4. On May 3 of each year, "A" must pay royalties to "B" at "B"'s place of business. "B" moves to another country, so "A"'s payments require a certain time to reach "B" (e.g., two months). Prior to "B"'s move, "A" would submit a fund transfer order to his bank around April 15, but if "A" now wishes to avoid delay in payment, the transfer order must be given at least by the end of March. "B" has the duty to inform "A" of the address of his new place of business with sufficient advance notice, so as to allow "A" to make the necessary changes for payment, and moreover, "B" must bear the additional expenses.

ARTICLE 6: 1.7 (Payment by Check or Other Instrument) (1) Payment may be made in any form used in the ordinary course of business at the place of payment. (2) However, a creditor who accepts a check or any other order of payment or promise of payment, whether in virtue of the preceding paragraph or voluntarily, is presumed to accept it only on the condition that it is honored. COMMENT To discharge a monetary obligation, the debtor usually resorts to a check or other payment instruments, or to a transfer of funds between financial institutions. With the exception of the "UNCITRAL Model Law on International Credit Transfers", the problems that arise in this matter are rarely governed by legislation. Without the purpose of regulating in detail a matter subject to rapid technological changes, Articles 6.1.7 and 6.1.8 establish some basic principles that may be useful in the matter of international payments. 1. General Rule Regarding the Form of Payment Paragraph (1) establishes that payment may be made in any form normally used in the course of business at the place of payment. Except for the reservation made in paragraph (2), the debtor may pay, for example in cash, by check, by bank transfer, by bill of exchange, by credit card or by any other form of payment that new electronic means allow, provided that the means chosen is usual at the place of payment, generally the place where the creditor has his place of business. In principle, the creditor must accept payment made in the form customary at the place where his place of business is located. Example 1. "A", an importer from Luxembourg, receives an invoice for merchandise purchased from "B", a company located in Central America, to whom he pays by sending a euro check. "B" may reject this form of payment on the assumption that banks in his country are not familiar with euro checks. 2. It Is Presumed That Payment Is Accepted on the Condition That the Payment Instrument Is Actually Paid Paragraph (2) establishes the generally recognized principle that the creditor's acceptance of instruments that are to be paid by a financial institution or by another person (a third party or the debtor himself) is subject to the condition that such instrument is actually paid. Usages may occasionally contradict this presumption. For example, in some countries the delivery of a payment instrument, such as a certified check, a negotiable document issued by a bank in favor of another and checks that the bank certifies will be paid is considered equivalent to payment made by the debtor, thereby transmitting to the creditor the risk of the bank's insolvency. In these countries, the rule of Article 6.1.7(2) applies only to so-called personal checks. Example 2. "A", a contractor, must pay "B", a subcontractor, for work performed. "A" suffers a liquidity crisis caused by his client "C", who has defaulted on the first payment owed to "A". However, "C" has issued in favor of "A" a series of promissory notes that cover the amount of his debt. "A" offers to pay "B" by assigning to him such promissory notes. Since this is not a usual mode of payment, probably "B" is not obligated to accept such payment, but if he accepts it, such acceptance is conditioned on payment of the promissory notes by "C" upon maturity.

ARTICLE 6: 1.8 (Payment by Transfer of Funds) (1) Payment may be made by transfer to any of the financial institutions in which the creditor has indicated that he has an account, unless he has indicated a particular account. (2) In the case of payment by transfer of funds, the obligation is performed when the transfer is made effective to the creditor's financial institution. COMMENT 1. Admissibility of Transfers of Funds The principle stated in Article 6.1.6 refers to the payment of monetary obligations to be made at the creditor's place of business, while paragraph (1) of this article establishes that payment may also be made by transfer to any of the financial institutions in which the creditor has indicated that he has an account. However, if the creditor has indicated a particular account, payment must be made to such account. Naturally, the creditor may also request that payment not be made by a transfer of funds. Example 1. "A", a shipyard established in country "X", repairs a vessel owned by "B", a Swedish company in country "Y". "A" sends its invoice on whose letterhead appears a bank account in country "X" and another in country "Y". Unless "A" indicates that payment must be made to the account in country "X", or states that the transfer of funds must be made in another manner, "B" may pay by transfer of funds to the account in country "Y". 2. When Payment Is Made Effective by Transfer of Funds Paragraph (2) addresses the difficult question of determining the moment at which a transfer of funds is considered executed, that is, the moment when the debtor is discharged of his obligation. The matter is of great importance, for example, to determine whether a payment has been made within the period, or in the case where one of the banks does not transfer the payment it has received from the debtor. The determination of an appropriate solution has prompted significant controversy in several countries and international forums. Various solutions have been suggested, namely: the moment the debit operates on the account of the issuer, the moment the payment is credited to the account of the bank that transfers the funds, the reporting of the credit in such account, the moment the receiving bank decides to accept the credit, the moment of entry of the credit in the receiving bank, the report that this transaction has been accomplished, etc. The problem is aggravated by changes in the methods of transfer of funds that are made possible by new mechanisms for electronic data transfer and because banking practices differ from bank to bank. This uncertainty complicates the adoption of a fixed rule that resolves the problem of when payment by transfer of funds has been made. Paragraph (2) of this article, however, provides some utility by establishing a basic principle that will permit finding a precise solution for each case. A payment will be effective when the transfer of funds to the creditor's financial institution is made effective. This solution is based on the premise that the institution acts as agent of the creditor. This means that payment will not be effective simply because an order has been given to the debtor's financial institution and it has proceeded to debit the funds from the debtor's account. However, payment is effective before the creditor is notified or before such payment is credited to his account by his financial institution, although the precise moment when payment to the creditor's financial institution is made effective depends on the banking practices applicable in each case. Example 2. "A", a licensee, delivers to his bank "C" a fund transfer order for USD 5,000, the amount to which the royalty payment owed to "B", the licensor, amounts. "B" has an account with bank "D". "C" debits such sum from "A"'s account, but does not transmit the funds to "D", and shortly thereafter "C" is declared bankrupt. "A" has not made the payment to "B".

ARTICLE 6: 1.9 (Currency of Payment) (

• 1)

  If a monetary obligation is expressed in a currency different from that of the place of payment, payment may be made in the currency of that place, unless: (a) such currency is not freely convertible; or (b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed. (

• 2)

  If it is impossible for the debtor to make payment in the currency in which the monetary obligation is expressed, the creditor may claim payment in the currency of the place of payment, even in the case referred to in paragraph (1)(b). (

• 3)

  Payment in the currency of the place of payment must be made according to the applicable rate of exchange that prevails in that place at the time payment is due. (

• 4)

  However, if the debtor has not paid when due, the creditor may claim payment according to the applicable rate of exchange and prevailing, either at the maturity of the obligation or at the time of actual payment. COMMENT Monetary obligations are usually expressed in a certain currency (unit of account) and generally payment must be made in the same currency. However, when the currency of the place of payment is different from the unit of account currency, paragraphs (

  • 1)

    and (

  • 2)

    of this article establish rules for cases in which the debtor may or must make payment in the currency of the place of payment. 1. Monetary Obligation in a Currency Different from That of the Place of Payment Generally, the debtor may make payment in the currency of the place of payment. This may offer practical advantages and, if such currency is freely convertible, will not cause problems for the creditor. This rule does not apply if the currency of the place of payment is not freely convertible. Additionally, the parties may exclude the application of this rule by agreeing that payment may only be made in the currency in which the monetary obligation is expressed (currency of account clause). If the creditor wishes payment to be made only in the unit of account currency, he must express this in the contract. Examples 1. "A", a company in country "X", receives an order for machinery from a buyer in country "Y". The price has been stipulated in US dollars. In accordance with Article 6.1.6, payment of a monetary obligation must be made, in principle, at the creditor's place of business, that is, in country "X". If the company of country "Y" finds it more convenient, it may make payment in euros which is the currency of country "X" (see Article 6.1.9(1)). 2. The same company in country "X" must frequently acquire from foreign suppliers certain parts of the machinery, it being stipulated that payment by the buyer in country "Y" must be made only in US dollars. In this case, payment may only be made in dollars (see Article 6.1.9(1)(b)). 3. The same company in country "X" has a factory in country "W", where the machinery is assembled. The contract provides that the buyer in country "Y" must pay the price to the subsidiary in country "W". Since the currency of country "W" is not convertible, payment may only be made in dollars (see Article 6.1.9(1)(a)). 2. Impossibility for the Debtor to Make Payment in a Currency Different from That Agreed It may become impossible for the debtor to make payment in the stipulated currency, either due to foreign exchange control rules or other mandatory rules, or for other reasons that make it impossible for the debtor to obtain a sufficient quantity of foreign currency. Paragraph (2) allows the creditor to claim payment in the currency of the place of payment, despite the contract including a "currency of account clause". This is an additional option for the creditor, who may consider it not only acceptable but even advantageous under certain circumstances. This option does not prevent the exercise of other remedies (e.g., damages) in the case that the debtor is unable to pay in the unit of account currency the equivalent to the breach of contract (e.g., damages). Example 4. "A", a Swiss bank, grants a loan to "B" of USD 1,000,000 to "B", which must be repaid in Geneva. At maturity of the obligation, "B" cannot obtain the necessary dollars. "A", aware of "B"'s deposits in Swiss francs in another local bank, may claim payment in Swiss francs, despite the fact that the contract provides that payment may be made only in US dollars (see Article 6.1.9(2)). 3. Determination of the Applicable Rate of Exchange Paragraphs (

  • 3)

    and (

  • 4)

    address the problem of determining the rate of exchange that must govern when payment is made in the currency of the place of payment, instead of the currency stipulated in the contract. This situation may arise when the debtor resorts to what is provided for in paragraph (1) or when the creditor resorts to the provisions of paragraph (2). This article offers two widely accepted solutions. In the generality of cases, the rate of exchange is that in effect at the time payment is made. However, if the debtor is in default, the creditor may choose between the rate of exchange in effect at the time when payment was due, or the rate in effect at the time when payment is actually made. The double reference to the applicable rate of exchange is justified by the fact that different rates of exchange exist depending on the nature of the transaction. Example 5. The facts are identical to those of Example 4. "A" chooses to be paid in Swiss francs (CHF) and payment that was due on April 10 is only made effective on September 15. The exchange rate on April 10 was CHF 2 per one US dollar, while on September 15 it was CHF 2.15 per USD 1. "A" is entitled to apply the latest exchange rate. If the dollar has been devalued instead of increased in value, "A" may choose the exchange rate in effect on April 10.

ARTICLE 6: 1.10 (Currency Not Specified) If the contract does not specify a particular currency, payment must be made in the currency of the place where payment is to be made. COMMENT Determining the currency of payment of an obligation becomes problematic when such determination has not been expressed in the contract. Although infrequent, there is no doubt that this circumstance may arise. A contract, for example, may stipulate that the "prevailing price" will be paid or as to be determined by a third party, or payment of certain costs may be stipulated to be reimbursed by one party to another, without specifying the currency in which payment is to be made. The rule established in Article 6.1.10 is that in such cases payment must be made in the currency in legal circulation at the place of payment. Article 6.1.10 does not refer to the monetary unit in which damages are to be paid, a matter regulated by Article 7.4.12 within the chapter referring to breach. Example "A", a Japanese client, instructs his stockbroker "B" to purchase shares on the Shanghai stock exchange. If "B" pays for the shares in Chinese renminbi yuan (CNY), must the invoice sent to "A" be paid in renminbi yuan or in Japanese yen? If "A" makes payment to "B" in Japan, payment must be made in yen.

ARTICLE 6: 1.11 (Expenses of Performance) Each party must bear the expenses of performance of its obligations. COMMENTARY The performance of obligations usually entails expenses that may take different forms: transportation expenses for the delivery of goods, banking commissions for the transfer of funds, tariffs to be paid when requesting an authorization, etc. In principle, these expenses must be covered by the party that performs the obligation. Of course, the parties may agree otherwise, and nothing prevents the performing party from including such costs in the price. The rule established in Article 6.1.11 applies in the absence of such an agreement. This article determines who must bear the expenses derived from performance, not who must pay them. Although it is usually the same person, other situations may arise, such as when the tax legislation of a country imposes the duty to pay on a particular person. If the person obligated to pay is different from the one who must bear the expenses in accordance with Article 6.1.11, the latter may request reimbursement of the expenses from the former. Example "A", an advisor, agrees to send five experts to conduct an audit of "B"'s company. Nothing is agreed upon regarding the experts' living expenses, which have not been taken into account by "A" in setting his fees. "A" cannot add the living expenses to the invoice.

ARTICLE 6: 1.12 (Imputation of Payments) (

• 1)

  A debtor of several monetary obligations to the same creditor may specify at the time of payment to which of them the payment is intended to be applied. In any case, the payment must be imputed first to any expenses, then to accrued interest, and finally to the principal. (

• 2)

  If the debtor does not make such specification, the creditor may, within a reasonable time after payment, indicate to the debtor to which of the obligations it imputes the payment, provided that such obligation is due and undisputed. (

• 3)

  In the absence of imputation in accordance with paragraphs (1) or (2), the payment is imputed, in the order indicated, to the obligation that satisfies one of the following criteria: (

  • a)

    the obligation that is due, or the first to become due; (

  • b)

    the obligation that has the least security for the creditor; (

  • c)

    the obligation that is more onerous for the debtor; (

  • d)

    the obligation that arose first. If none of the preceding criteria applies, the payment is imputed to all obligations proportionally. COMMENTARY Articles 6.1.12 and 6.1.13 address the problem of imputation of payment. If a debtor has several monetary obligations with the same creditor and makes a payment whose amount is less than the total of his debts, the problem arises of determining to which of those debts the amount paid should be imputed. Article 6.1.12 offers the debtor the possibility of making the imputation of his payment to the debt that is most convenient for him, providing that any expense and interest must be deducted before the principal. In the absence of an imputation by the debtor, this provision empowers the creditor to impute the payment received, although it cannot do so with respect to a disputed debt. Paragraph (3) establishes the criteria that will be applied in the absence of an imputation by the parties. Example Under several contracts, "A" receives three loans from bank "B", of USD 100,000 each. Payment is to be made on December 31. On January 2, "B" receives USD 100,000 from "A", together with a vague note expressing: "In reimbursement of the loan." At that time, "B" pays little attention to the matter, but three months later brings an action against "A" for collection of the remaining USD 200,000. The parties do not agree as to which of the three loans the payment made in January should be imputed to. "B" had similar security for the three loans, but the interest rate was different in each case: 8% interest on the first loan; 8.50% for the second and 9% interest for the third. The payment made in January must be imputed in this case to the third loan.

ARTICLE 6: 1.13 (Imputation of Payments of Non-Monetary Obligations) Article 6.1.12 applies, with the necessary adaptations, to the imputation of payment of non-monetary obligations. COMMENTARY The problem of imputation of payment is usually linked with the payment of monetary obligations, but similar difficulties may arise with obligations of another nature. Article 6.1.13 expresses that the rules on imputation of payment applicable to monetary obligations shall apply, with the pertinent modifications, to non-monetary obligations. Example "A" must construct works in various localities of an African country. To perform his work, he enters into five separate and successive contracts with "B", under which "B" undertakes to deliver to "A" various quantities of cement in Antwerp, on the same date and transported on the same ship. The five contracts are similar, with the exception of the third and fifth contracts, which include penalty clauses of very high amounts in case of delay in cement delivery. Due to certain complications, "B" can only deliver part of the cement. At the time of delivery, "B" can indicate that the cement delivered is to be imputed in payment of the third and fifth contracts.

ARTICLE 6: 1.14 (Request for Public Authorization) When the law of a State requires a public authorization that affects the validity of the contract or its performance and neither the law nor the circumstances of the case indicate otherwise: (a) if only one party has its place of business in such State, that party must take the necessary measures to obtain the authorization; and (b) in all other cases, the party whose performance requires the authorization must take the necessary measures to obtain it. COMMENTARY If the validity or performance of a contract is conditioned on the granting of a public authorization, it must be determined to whom it falls to process that request (see Article 6.1.14), the time at which it must be requested (see Article 6.1.15), the legal consequences of failure to respond in a timely manner (see Article 6.1.16) and its denial (see Article 6.1.17). 1. Scope of application of the request These Principles do not address the legal relevance of the requirement to obtain a public authorization. What type of authorization is necessary to obtain, if necessary, shall be determined in accordance with the applicable law, including the rules of private international law. Judicial courts tend to recognize the requirements of public authorization imposed by the lex fori, and sometimes those prescribed by the lex contractus. Arbitral tribunals may enjoy greater discretion than judicial courts in deciding which authorizations must be obtained for purposes of the validity or execution of the contract. Pursuant to the pertinent rules of conflict of laws, the requirements of obtaining a public authorization according to the law of other countries where the contract has contact points may also play a relevant role (see Article 9(3) of Regulation (EC) No. 593/2008 ("Rome I"); Article 11(2) of the 1994 Inter-American Convention on the Law Applicable to International Contracts). The rules of some legal systems that are of extraterritorial application ("long-arm statutes") may also establish the need to obtain a public authorization by licensees or subsidiary companies located abroad. This article establishes the presumption that such requests must be processed in accordance with the applicable law. The rules of some legal systems that are of extraterritorial application ("long-arm statutes") may also establish the need to obtain a public authorization by licensees or subsidiary companies located abroad. This article establishes the presumption that such requests must be processed in accordance with the applicable law. a. Broad meaning of "public authorization" The expression "public authorization" must be interpreted in its broadest sense. It may include all requirements established for obtaining a permit or authorization in the public interest, such as health, safety and social welfare, or under specific commercial policies. It does not matter to determine the nature of the license or permit requested, nor whether it must be granted by a governmental institution or not, or whether it is an institution to which the government has delegated the power to grant such authorizations for certain purposes. Therefore, the authorization of a private bank to make payments in accordance with the exchange control rules in force is considered a "public authorization" for purposes of this article. b. Time to require a public authorization The requirements of public authorization to which this article refers are those determined by the applicable law or regulations in force at the time the contract is concluded. However, these provisions may also apply to public authorizations that may be required after the contract is concluded. c. Public authorization may affect the validity of the contract in whole or in part The provisions on the requirement to obtain a public authorization apply both to those that affect the contract in its entirety and those that only affect some of its dispositions. However, different rules will apply depending on the legal consequences of not obtaining such authorization that affect the contract as a whole or only in part (see Articles 6.1.16(2) and 6.1.17). d. Public authorization may affect the validity or performance of a contract The absence of the required authorization may nullify the contract or make its performance impossible. Although the legal consequences of not obtaining the required authorization may be different, the same problems arise regarding the processing or obtaining of such authorization. As to other consequences, Article 6.1.17(2) establishes that the rules applicable to non-performance also apply to situations in which the rejection of a request makes performance impossible, in whole or in part, of the contract. 2. Duty to inform of the requirement of public authorization There is no rule that imposes the duty to inform of the requirement of public authorization. However, when the rules that require a public authorization are not accessible, the party obligated to obtain the authorization must disclose such requirement. Therefore, the fundamental principle of good faith and fair dealing (see Article 1.7) may impose on the party whose place of business is in the State where the authorization must be requested that it inform the other party of the existence of such requirement. In case of failure to do so, the court may dispense with the authorization, or it may conclude that the party that failed to inform of the existence of this request implicitly guaranteed that the authorization would be granted. 3. Party obligated to take the necessary measures to obtain public authorization a. The party whose place of business is in the State that requires the public authorization The rule established in subsection (a) of this article, by imposing the duty to process the authorization on the party whose place of business is in the State that requires it, reflects a current practice in international commerce. This party is likely to be more familiar with this type of authorization, both as to the manner of requesting it and its processing, so it is better positioned to diligently process an administrative authorization. If one of the parties needs more information from the other party to complete the authorization request (e.g., with respect to the final destination of the goods or the purpose of the contract), the other party must provide it in accordance with its duty of cooperation (see Article 5.1.3). If such party refuses to provide the information, it cannot then rely on the other party being able to fulfill its obligation. The duty to cooperate with the other party also applies in the case where the contract stipulates that one of the parties bears the burden of processing a request for public authorization. Therefore, if the parties have incorporated the expression "ex works" into their contract, which imposes on the buyer substantially all obligations from the time the goods are received at the seller's factory, the seller must provide to the buyer "at the latter's request, risk and expense, the assistance necessary to obtain [...] any export license or other official authorization necessary to export the goods" (INCOTERMS 2000, A2. See also B2). b. Party whose performance requires public authorization Subsection (b) of this article contemplates cases in which none of the parties has its place of business in the State that requires the authorization. It also provides for the case of an international contract in which both parties have their place of business in the same State. In both cases, the party whose performance requires an administrative authorization must employ all necessary means to obtain it. Example 1. "A", a constructor whose place of business is in country "X", sells a "turn-key" plant to "B", whose place of business is in country "Y". The approval of the work must be obtained in country "Y", after the necessary operational verifications are made. On the one hand, "A" must process a public authorization required in country "X", as well as obtain authorizations from third countries (in transit, or those where sub-deliveries are made). In turn, "B" must take care to obtain import licenses, as well as all other authorizations relating to the land, the use of local services and the technology to be imported into country "Y". "A" is also obligated to provide the information and documentation necessary for "B" to obtain import licenses and the authorizations required for "B"'s performance. "A" is not responsible for requesting the administrative authorization required in country "Y", unless otherwise agreed or required, expressly or implicitly, by the applicable law or by the circumstances of the case (e.g., the applicable law may require that certain technical licenses in country "Y" be requested by the licensor). c. Supplementary nature of the rules on administrative authorizations The purpose of this article is to identify the party that must request a public authorization when it does not clearly appear who should take on this task. This is a supplementary criterion to be applied only in the case where neither the contract, nor the law that requires the authorization, nor the circumstances of the case, determine who should request the authorization. Example 2. The law of country "X" conditions the granting of a license for the export of computers on the submission of an affidavit stating the final destination of the computers. However, neither the contract nor the law of country "X" indicates who should process the license. Since it is to be presumed that only the buyer knows the destination of the computers, under this article it falls to the buyer to process the authorization request. 4. Nature of the obligation to take the "necessary measures" The party that must request the authorization "must take all necessary measures" to obtain it, but is not responsible or obligated to obtain such authorization. That party is obligated to exhaust all available resources in accordance with local law, provided it has sufficient possibilities of success and that the exercise of such resources is reasonable according to the circumstances of the case (e.g., the value of the transaction, the time spent). The specific measures that must be taken will depend on the pertinent regulations and the procedural resources available in the State where the authorization must be granted. This is an obligation to use best efforts (see Art. 5.1.4(2)). Example 3. "A", a company whose place of business is in country "X", enters into a contract with "B", an independent agent from country "Y". "B" has been entrusted with representing "A" in countries "Y" and "Z", but lacks authority to contract on behalf of "A". Among other obligations, "B" must display "A"'s goods at a fair to be held in country "Z", as well as request the corresponding authorizations to carry out such activities in countries "Y" and "Z". "B" must take "all necessary measures", including processing the administrative authorization required for the temporary importation of "A"'s goods into countries "Y" and "Z", as well as all other administrative authorizations necessary for "B" to participate in the fair. However, unless otherwise agreed, "B" is not obligated to process the administrative authorizations required for the importation, through "B", of products purchased by customers located in countries "Y" and "Z".

ARTICLE 6: 1.15 (Processing of the Authorization) (1) The party obligated to take the necessary measures to obtain the authorization must do so without undue delay and shall bear all expenses incurred. (2) That party shall, when pertinent, notify the other party, without undue delay, of the grant or denial of the authorization. COMMENTARY 1. Time at which the authorization must be requested The party on whom the obligation to obtain a public authorization falls must request it immediately after the contract is concluded and continue with the necessary processing in accordance with the circumstances. 2. Expenses Pursuant to Article 6.1.11, each party must bear the expenses derived from the performance of its obligations. This rule is confirmed in paragraph (1) of this article in order to provide greater clarity. 3. Duty to notify immediately of the grant or denial of the authorization The parties need to know, as soon as possible, whether the authorization has been obtained. Pursuant to paragraph (2) of this article, the party that requests the authorization must notify the other of the result of its request. The duty to notify extends to other facts pertinent to the request and its result, such as the time of commencement of processing, the response obtained and, if applicable, whether the denial of the authorization is subject to appeal and whether, in fact, it will be appealed. 4. Duty to notify "when pertinent" The obligation to notify "when pertinent" refers to the necessity to notify and the manner of doing so. The necessity to notify arises obviously when the law so provides, but it can also be inferred from the simple fact that the contract expresses the need to obtain an authorization. The necessity to issue a notice "when pertinent" also relates to the importance of the information to be notified. The party that processes the request is not obligated to inform its counterpart of the result of such request if that counterpart obtains the information directly from the one who must grant it, or when authorizations are usually granted automatically. The fact that the authorization has been denied, contrary to what usually occurred, imposes a greater obligation to notify such result. This article does not establish special formalities for notification (see Article 1.10). 5. Consequences of failure to notify Failure to notify the grant or denial of an authorization is equivalent to non-performance of an obligation, so the rules relating to non-performance established in Chapter 7 will apply. The duty to notify the grant of public authorization is a contractual obligation that arises at the time the contract is concluded. The duty to notify the rejection of the notification is part of the duty to take "necessary measures" to obtain the authorization in accordance with Article 6.1.14 (see Commentary 4). Examples 1. "A", whose place of business is in country X, and "B", a contractor, contract for the construction of an industrial plant in "X". Both parties agree that "B" is not obligated to begin construction and that "A" is not obligated to pay an advance payment, until a public authorization is obtained that must be issued by the authorities of "X". "A" requests and obtains the authorization, but fails to inform "B". Two months later, "B" finds out through a consultation with the authorities of country "X", that the authorization has been granted, and begins work on the construction of the plant. Although the parties agreed that performance was required from the moment the authorization was granted, "A"'s omission to inform "B" that the authorization had been granted prevents "A" from demanding "B"'s performance at the moment the authorization was granted (see Article 7.1.2). Therefore, the contractual period will begin to run for "B" from the moment it learns that the authorization has been granted. Furthermore, "B" may demand compensation for damages caused by keeping its production capacity idle, or for the additional costs incurred by storage of construction materials for the two months, etc (see Article 7.4.1 et seq.). On the other hand, "A", who had timely knowledge that the authorization had been granted, must perform on the date originally agreed in the contract. "A" must pay interest from that date if it fails to pay the advances accrued during the four weeks following the grant of the authorization. 2. The facts are identical to those in Example 1, but here the competent authority informs both "A" and "B", at the same time, that the authorization was granted. "B" cannot allege "A"'s failure to notify in order to postpone its performance, and also has no right to compensation because "A" omitted to notify the grant of the authorization.

ARTICLE 6: 1.16 (Authorization Neither Granted nor Denied) (1) Either party may terminate the contract if, although the party responsible for obtaining the authorization has taken all the measures required to obtain it, the authorization is neither granted nor denied within the agreed time or, when no time has been agreed, within a reasonable time from the conclusion of the contract. (2) The provisions of paragraph (1) shall not apply when the authorization affects only some clauses of the contract, provided that, taking into account the circumstances, it is reasonable to maintain the rest of the contract despite the authorization having been denied. COMMENTARY While Articles 6.1.14 and 6.1.15 address the obligations of the contracting parties, Articles 6.1.16 and 6.1.17 contemplate the cases, respectively, where no decision is made on the authorization request, or where the authorization has been denied. 1. Lack of decision on the authorization Paragraph (1) of this article addresses the case where "nothing happens", that is, the situation that arises when the request has been neither granted nor denied within the agreed time or, when no time has been agreed, within a reasonable time from the conclusion of the contract. The reasons for the absence of a decision may be various, such as the slowness of the proceeding, a pending appeal, etc. In any case, there is no reason for the parties to continue waiting and therefore either of them may terminate the contract. 2. Termination of the contract The rights and actions of the parties other than termination will depend on the role the authorization plays in the creation or perfecting of the contractual relationship. This is the case, in particular, when the validity of the contract depends on the granting of the authorization, without which either party can simply disregard the contract. This article also provides for termination of the contract when the parties are bound by different obligations whose validity cannot be prolonged indefinitely while the grant of the authorization is pending. The right of the party responsible for obtaining the authorization to terminate the contract based on this provision is subject to that party having taken "the measures required" to obtain the authorization. Example 1. "A", from country "X", sells rifles to "B" so that the latter can resell them during the next hunting season. The validity of the sale is conditioned upon its authorization by the authorities of "X". Notwithstanding that "A" takes all necessary measures to obtain such authorization, three months later the request has still not been resolved. In this case, either party may terminate the contract. The termination of the contract contemplated by this article does not address expenses incurred for the purpose of obtaining the authorization. The expenses shall be borne by the party that assumed the risk that the authorization would not be granted. 3. Authorization affecting only some clauses When the authorization affects only some clauses of the contract, paragraph (2) of this article excludes the right to terminate the contract when it is reasonable to maintain the validity of the rest of the contract under Article 6.1.17, even though the authorization is denied. Example 2. "A", from country "X", enters into a contract with "B" that includes a penalty clause for the event of delay. The validity of the contract is subordinated to the grant of public authorization to be granted by the authorities of country "X". Notwithstanding that "A" takes all necessary measures to obtain the authorization, time passes without any response. Under these circumstances, it may be reasonable to preserve the validity of the contract. Neither party may terminate the contract even though the authorization is denied.

ARTICLE 6: 1.17 (Authorization Denied) (1) The denial of an authorization that affects the validity of the contract results in its nullity. If the denial affects the validity of only some clauses, only such clauses shall be null if, taking into account the circumstances, it is reasonable to maintain the rest of the contract. (2) The rules of non-performance apply when the denial of an authorization makes performance of the contract impossible, in whole or in part. COMMENTARY 1. Authorization that has been denied This article addresses the case where a request for authorization is expressly denied. The nature of the obligation imposed on the party that must request the authorization is such that the denial contemplated by this article should not be subject to an appeal that has a reasonable chance of succeeding (see Commentary 4 to Article 6.1.14). Moreover, it is not necessary to exhaust available remedies against the denial when the authorization cannot be granted except after the performance of the contract has lost all value. 2. Consequences of the denial of authorization The denial of an authorization has various consequences, depending on whether the authorization affects the validity or the performance of the contract. a. Denial affecting the validity of the contract When the authorization affects the validity of the entire contract, rejection will nullify it completely, that is, the contract is considered never to have been concluded. Example 1. "A", from country "X", concludes a contract with "B", whose validity is conditioned upon a public authorization that must be granted by the authorities of country "X". Although "A" takes all necessary measures to obtain the authorization, its request is rejected. In this case, the contract is considered never to have been concluded. When the rejection affects the validity of only some of its clauses, only such clauses shall be null. The validity of the rest of the contract may be maintained, provided it is reasonable according to the concrete circumstances of the case. Example 2. "A", from country "X", concludes a contract with "B" that includes a penalty clause for the case of delay. The validity of the contract is conditioned upon the grant of public authorization by the authorities of country "X". Although "A" takes all necessary measures to obtain the authorization, its request is rejected. With the exception of the penalty clause, the contract shall remain in force provided it is reasonable to maintain its validity. b. Denial of an authorization that makes performance of the contract impossible If the rejection of an authorization makes performance of the contract impossible, in whole or in part, paragraph (2) of this article refers to the rules of Chapter 7 relating to non-performance of the contract. Example 3. "A" owes USD 100,000 to "B", in accordance with a contract concluded between them. The transfer of this sum from country "X", where "A" is located, to "B"'s bank account in country "Y", is conditioned upon an authorization to be granted by the Central Bank of country "X". Notwithstanding that "A" makes all efforts to obtain it, the request is rejected. The rejection of the authorization makes payment to "B" impossible, so the consequences of "A"'s non-performance will be determined in accordance with the provisions of Chapter 7. The rejection of the authorization may make the performance of the obligation of only one of the parties impossible and only in the State that imposes the requirement of such authorization, without preventing that party from performing its obligation anywhere else. In this case, the general principle of good faith and fair dealing (see Article 1.7) prevents excusing the performance of that party's obligation based on the rejection of the authorization. Example 4. The facts are identical to those in Example 3, but here "A" has sufficient funds to pay "B" in country "Z", where no authorization is necessary. "A" cannot invoke the rejection of the authorization by the authorities of country "X" in order to fail to pay "B".

ARTICLE 6: 2.1 (Binding Nature of the Contract) When the performance of a contract becomes more onerous for one of the parties, that party remains obligated, nevertheless, to perform its obligations except as provided in the following provisions on "excessive onerousness" (hardship). COMMENTARY 1. The binding nature of the contract as a general rule The purpose of this article is to clarify that, in accordance with the general principle that contracts are concluded to be performed (see Article 1.3), the contract must be performed whenever possible and regardless of the burden this represents for the party obligated. That is, the terms of the contract must be respected, even if one party suffers serious losses instead of the expected gains or even in the event that the performance of the contract no longer makes sense for that party. Example "A", a freight agent, contracts with "B", a carrier, for the shipment of goods over two years. Under the contract, "B" is obligated to transport goods from country "X" to country "Y" for a fixed price, established monthly throughout the two years. After two years, alleging a significant increase in fuel prices, caused by political crisis, "B" requests a five percent increase in the tariff. "B" is not entitled to such an increase, because he has assumed the risk that his performance may become more onerous. 2. Change of circumstances is relevant only in exceptional cases The binding nature of the contract is not, however, absolute. If the supervening circumstances are of such importance that they fundamentally alter the balance of the performances, an exceptional situation arises which in these Principles is known as "excessive onerousness" (hardship), which is addressed in the following articles of this Section. The phenomenon of supervening excessive onerousness has been contemplated in various legal systems under various figures such as "frustration of purpose", Wegfall der Geschäftsgrundlage, imprévision, eccessiva onerositá sopravvenuta, etc. However, the expression "excessive onerousness" (hardship) has been chosen because it is widely recognized as an integral part of the usages of international commerce, which is confirmed by the frequency with which the so-called "hardship clauses" are included in international contracts.

ARTICLE 6: 2.2 (Definition of "Excessive Onerousness" (Hardship)) There is "excessive onerousness" (hardship) when the balance of the contract is altered fundamentally by the occurrence of certain events, either because the cost of the performance of one of the parties has increased, or because the value of the performance that one party receives has diminished, and: (

• a)

  such events occur or become known to the disadvantaged party after the conclusion of the contract; (

• b)

  the events could not have been reasonably foreseen by the disadvantaged party at the time the contract was concluded; (

• c)

  the events are beyond the control of the disadvantaged party; and (

• d)

  the risk of such events was not assumed by the disadvantaged party. COMMENTARY 1. On "excessive onerousness" (hardship) This article defines excessive onerousness (hardship) as the situation that arises when the balance of the performances is altered in a fundamental way, provided that the events that cause such alteration meet the requirements established in subsections (a) through (d). 2. Fundamental alteration in the balance of the contract Since the general principle is that a change in circumstances does not affect the obligation to perform (see Article 6.2.1), excessive onerousness cannot be invoked unless the alteration of the balance of the performances is fundamental. The circumstances of the specific case will determine when an alteration is "fundamental". Example 1. In September 1989, "A", a seller of electronic devices from the former German Democratic Republic, purchases this type of goods from "B", from country "X", which also belonged to the socialist sphere. "B" is to deliver the goods in December 1990. In November 1990, "A" notifies "B" that the goods have become obsolete, because after the unification of East Germany with West Germany and the opening of the former German Democratic Republic to international markets, there is no longer a market for goods imported from country "X". Unless the circumstances indicate otherwise, "A" is entitled to invoke excessive onerousness (hardship). a. Increase in the cost of performance In practice, a fundamental alteration of the balance of the performances may manifest itself in two different but related ways. The first is characterized by a substantial increase in the cost of performance for one party, who generally must perform a non-monetary obligation. The fundamental increase in cost may be caused, for example, by a drastic increase in the price of raw materials needed for the production of goods or for the provision of services, or due to new safety regulations that make production procedures more costly. b. Decrease in the value of the performance received by one party The second manifestation of excessive onerousness (hardship) is characterized by a significant reduction in the value of the performance received by one party, including the case where the performance has lost all value for the party receiving it. The performance may or may not consist of monetary obligations. Naturally, a substantial diminution of the value of the performance, or the total loss of its value, may be due to a drastic change in market conditions (e.g., a drastic increase due to inflation of the price agreed in the contract), or to the frustration of the purpose for which the performance is intended (e.g., a prohibition on building on a plot of land acquired solely for that purpose, or a prohibition on exporting goods acquired solely for that purpose). Obviously, the diminution of the value of the performance must be objectively quantifiable. A mere change of opinion by one party regarding the value of the performance is of no importance. The frustration of the purpose of the performance will only be taken into account when such purpose is known, or at least should have been known, by both parties. 3. Additional requirements for excessive onerousness (hardship) to arise a. Events take place or become known after the conclusion of the contract Pursuant to subsection (

  • a)

    of this article, the events that cause excessive onerousness (hardship) must occur or become known to the disadvantaged party after the conclusion of the contract. If it already knew the facts when concluding the contract, that party could have taken the appropriate and necessary measures. In this case, that party could not invoke excessive onerousness (hardship). b. Events could not have been reasonably foreseen by the disadvantaged party Although the change in circumstances has occurred after the conclusion of the contract, subsection (

  • b)

    of this article clarifies that such circumstances cannot be the cause of excessive onerousness (hardship) if they could have been reasonably known to the disadvantaged party at the time the contract was concluded. Example 2. Despite political tensions in the region, "A" agrees to supply "B" with crude oil from country "X" at a stipulated price for the next five years. Two years after the contract is concluded, a war breaks out between neighboring countries. The war causes an energy crisis throughout the world and crude oil prices increase drastically. "A" is not entitled to invoke excessive onerousness (hardship), because the increase in crude oil prices was not unforeseeable. Although the change in circumstances may have been gradual, such changes may result in a situation of excessive onerousness (hardship). If extraordinary events began to occur before the conclusion of the contract, excessive onerousness (hardship) cannot be invoked, except that the pace of such events has increased dramatically during the term of the contract. Example 3. The price of a sales contract between "A" and "B" is expressed in the currency of country X. The value of this currency had been slowly depreciating against others before the contract was concluded. One month later, a political crisis in country "X" causes a serious devaluation of its currency close to 80% of its value. Unless the circumstances indicate otherwise, this devaluation constitutes a case of excessive onerousness (hardship), because such a dramatic acceleration of devaluation could not be foreseen. c. Events are beyond the control of the disadvantaged party According to subsection (

  • c)

    of this article, excessive onerousness (hardship) can only arise if the facts that cause it are beyond the control of the disadvantaged party. d. The disadvantaged party has not assumed the risk of such events occurring According to subsection (d), there will be no excessive onerousness (hardship) if the disadvantaged party has assumed the risk of a change in circumstances. The verb "assume" clearly signals the necessity of an express declaration in assuming the risk, although it can also be a direct consequence of the nature of the contract. The party that enters into a contract to carry out a speculative transaction must accept the risk of certain risks, even if at the time of concluding the contract he did not have a full notion of the risk he was assuming. Example 4. "A", a marine risk insurance company, requests an additional premium from those customers whose policies include coverage for the risk of war and civil unrest, in order to cover the substantially greater risk to which such ships are exposed after a war and civil unrest simultaneously break out in three countries in the region. "A" is not entitled to adapt the insurance contract, because the clauses had been precisely intended so that insurance companies assume this type of risk also in the case of simultaneous involvement of three countries. 4. Excessive onerousness (hardship) is only relevant to pending performances Due to its nature, excessive onerousness (hardship) will only be relevant to performances that have not yet been performed. Once one party has performed, it no longer has the right to allege a fundamental increase in the cost of its performance, or a substantial diminution in the value of the performance, caused by a change in circumstances subsequent to performance. If the fundamental alteration of the balance of the performances occurs after only part of the performance has been completed, excessive onerousness (hardship) may only be applied to the remainder of the performance. Example 5. "A" contracts with "B", a company that recycles garbage in country "X", to take charge of the collection and storage of garbage collected by "A". The contract provides for a duration of four years and a fixed price for each ton of garbage. Two years after the contract is concluded, the ecological movement in country "X" gains ground against the government, which sets prices for garbage storage that are ten times higher than the previous prices. "B" could invoke excessive onerousness (hardship) only with respect to the two years remaining in the term of the contract. 5. Excessive onerousness (hardship) usually matters in long-term contracts Although this article does not expressly exclude the possibility that excessive onerousness (hardship) applies to other types of contracts, it generally tends to matter in long-term contracts. 6. Excessive onerousness (hardship) and force majeure According to these Principles, the concepts of excessive onerousness (hardship) and force majeure (see Article 7.1.7) may occur together. In this case, it falls to the party injured by the extraordinary events to decide which remedy to invoke. If it alleges force majeure it could be excused from performing, while if it invokes excessive onerousness (hardship), in principle it will do so for the purpose of renegotiating the terms of the contract and keeping it in force, although adapting the contract clauses to the circumstances. 7. Excessive onerousness (hardship) and contractual practice The definition of excessive onerousness (hardship) in this article inevitably has a very general scope. International commercial contracts frequently incorporate much more precise and detailed clauses in this regard. The parties will find the most appropriate way to adapt the content of this article to the specific circumstances of a particular transaction.

ARTICLE 6: 2.3 (Effects of "Excessive Onerousness" (Hardship)) (

• 1)

  In case of "excessive onerousness" (hardship), the disadvantaged party may claim renegotiation of the contract. Such claim must be made without undue delay, with an indication of the grounds on which it is based. (

• 2)

  The claim for renegotiation does not by itself authorize the disadvantaged party to suspend performance. (

• 3)

  In the event that no agreement is reached within a reasonable time, either party may resort to a court. (

• 4)

  If the court determines that there is a situation of "excessive onerousness" (hardship), and provided it considers it reasonable, it may: (a) terminate the contract on a date and under conditions to be determined; or (b) adapt the contract with a view to restoring its balance. COMMENTARY 1. The disadvantaged party may claim renegotiation Given that excessive onerousness (hardship) consists of a fundamental alteration in the balance of the performances, paragraph (1) of this article empowers the disadvantaged party, first of all, to claim renegotiation of the contract with a view to adapting it to the new circumstances. Example 1. "A", a construction company from country "X", concludes a contract with "B", a government agency, to build a plant in country "Y" for a lump sum payment in the currency of that country. Most of the sophisticated machinery required for construction must be imported from abroad. Due to a devaluation of the currency of country "Y", the cost of machinery increases considerably. "A" is entitled to require "B" to renegotiate the original contract, in order to adapt it to the new circumstances. A claim for renegotiation is not admissible when the contract itself already contains clauses that provide for automatic adaptation of the contract (e.g., a price indexation clause in the event that certain events occur). Example 2. The facts are identical to those in Example 1, but here the contract contains an indexation clause that contemplates modifications in the cost of materials and labor. "A" is not entitled to claim renegotiation of the price. However, renegotiation may proceed in this case if the adaptation clause incorporated in the contract does not contemplate the facts that cause excessive onerousness (hardship). Example 3. The facts are identical to those in Example 2, but here the substantial increase in "A"'s costs is due to the adoption of new safety measures in country "Y". "A" is entitled to require "B" to renegotiate the price of the original contract, in order to adapt it to the new circumstances. 2. Renegotiation must be claimed without undue delay The claim for renegotiation must be presented as soon as possible after the occurrence of the fact generating excessive onerousness (hardship) (paragraph (1)). The period for claiming renegotiation will depend on each particular case. If the circumstances have arisen progressively, the period will be longer (see Commentary 3(b) of Article 6.2.2). Consequently, the affected party does not lose its right to claim renegotiation by the fact of having acted with undue delay. However, the period for claiming the review of the contract may affect the proof of excessive onerousness (hardship), and thus determine whether it actually existed. 3. Grounds for claiming renegotiation Paragraph (

  • 1)

    of this article also imposes on the disadvantaged party the duty to indicate the reasons on which the claim for renegotiation is based, in order to allow the other party to determine whether or not renegotiation of the contract is justified. An incomplete claim will be considered as presented out of time, unless the causes giving rise to excessive onerousness (hardship) are so obvious that it is not necessary to state them in detail in the claim. A claim for renegotiation that is not properly grounded will have effects similar to a claim presented with delay (see Commentary 2 of this article). 4. Claim for renegotiation and suspension of performance Paragraph (

  • 2)

    of this article provides that the requirement for renegotiation does not authorize the disadvantaged party to suspend performance of its obligations. This is due to the exceptional nature of excessive onerousness (hardship) and the risk of possible abuses of this remedy. Suspension of performance will be justified only in extraordinary circumstances. Example 4. "A" contracts with "B" for the construction of an industrial plant. The plant will be constructed in country X, which decides to adopt new safety rules after the contract is concluded. The new rules require the installation of additional machinery, fundamentally altering the balance of the performances and making "A"'s performance substantially more onerous. "A" is entitled to claim renegotiation of the contract, to suspend performance of its obligation due to the time it will take to implement the new safety measures, as well as to suspend the delivery of the new machinery until such time as the readaptation of its price is agreed upon. 5. Good faith renegotiations Although this article does not expressly establish it, both the requirement for renegotiation by the disadvantaged party, and the conduct of both parties during the renegotiation process, must be conducted in accordance with the principle of good faith and fair dealing (see Article 1.7) and the duty of cooperation (see Article 5.1.3). This implies that the disadvantaged party must honestly believe that there is a situation of excessive onerousness (hardship), rather than claiming renegotiation simply as a strategic measure. Furthermore, once the claim has been presented, both parties must conduct the renegotiations in a constructive manner, refraining in particular from any kind of obstruction and providing all necessary information. 6. Possibility of resorting to a court in case of failure to agree If the parties do not reach an agreement on the adaptation of the contract within a reasonable time, paragraph (

  • 3)

    of this article authorizes both parties to resort to a court. This situation may arise either because the party not prejudiced by the change in situation decides to ignore the claim for renegotiation, or because the renegotiations did not succeed despite the good faith of both parties. The complexity of the matter and the concrete circumstances of each case will determine how long the disadvantaged party must wait before resorting to the court. 7. Judicial measures in the event of excessive onerousness (hardship) In the event of a situation of excessive onerousness (hardship), paragraph (

  • 4)

    of this article grants several alternatives to the court. One first possibility is to terminate the contract. However, given that the termination of the contract in this case does not depend on non-performance by one of the parties, the effect of such termination on the performances made up to that point differs from that which is regulated by the pertinent chapter (see Articles 7.3.1 et seq.). Paragraph (4)(a) provides that the court may terminate the contract "on a date and under conditions to be determined" and provided it considers it reasonable. The court may also decide to adapt the contract in order to restore the balance of the performances (paragraph (4)(b)). In this case, the court will attempt to establish a more fair distribution of the detriment suffered by the parties. This readjustment may or may not include an adaptation of the price, depending on the type of excessive onerousness (hardship) that is presented. The readaptation of the price may not reflect all the detriment suffered by the disadvantaged party, since the court may, for example, take into account the extent to which one of the parties has assumed the risks and to what extent the other party could benefit from the performance received. Paragraph (4) of this article expressly establishes that the court may terminate or adapt the contract provided it considers it reasonable. The circumstances may be such that neither the termination nor the adaptation of the contract are appropriate, so the only feasible solution would be either to order the parties to resume negotiations in order to reach an agreement on the adaptation of the contract, or to validate the terms of the contract originally agreed upon. Example 5. "A", an exporter, undertakes to supply beer to "B", an importer from country "X", for the next three years. Two years after the conclusion of the contract, "X" enacts a new law that prohibits the sale and consumption of alcoholic beverages. "B" immediately invokes excessive onerousness (hardship) and requests "A" to renegotiate the contract. "A" recognizes that there is a situation of excessive onerousness (hardship), but does not accept the modifications to the contract that have been proposed by "B". After a month of fruitless discussions, "B" goes to court. If "B" has the possibility of selling the beer to another neighboring country, even at a lower price, the court could decide to keep the contract in force with a reduction of the agreed price. If, on the other hand, "B" does not have such a possibility, it would be reasonable for the court to order the termination of the contract, being able to demand that "B" pay "A" for the last shipment of beer that is in transit.

ARTICLE 7: 1.1 (Definition of Non-Performance) Non-performance consists of the failure by a party to perform any of its contractual obligations, including defective performance or delayed performance. COMMENTARY This article defines "non-performance" for purposes of the Principles. Special attention must be paid to two characteristics of the definition. The first is that the definition of "non-performance" includes both defective or delayed forms of performance and total non-performance. Therefore, the builder of a building incurs non-performance if he has performed partially in accordance with the contract and partially in a defective manner, just as if he finishes building it with delay. The second characteristic is that, for purposes of the Principles, the concept of non-performance includes both inexcusable and excusable non-performance. Non-performance may be excusable due to the conduct of the other party (see Articles 7.1.2 (Interference by the Other Party) and 7.1.3 (Suspension of Performance) and their Commentaries or due to unforeseeable events beyond its control (see Article 7.1.7 (Force Majeure) and its Commentary). A party is not entitled to claim compensation or specific performance for excusable non-performance by the other party, but the party that did not receive performance has the right, in principle, to terminate the contract regardless of whether the performance was or was not excusable (see Articles 7.3.1 et seq., and their Commentaries). There is no general provision dealing with the accumulation of remedies. The presumption established in the Principles is that all remedies that are not inconsistent with each other by their very nature can accumulate. Thus, in general, a party that successfully insists on performance is not entitled to compensation, but this does not exclude that a party cannot terminate a contract for inexcusable non-performance and at the same time request compensation for damages suffered (see Articles 7.2.5 (Change of Remedy), 7.3.5 (General Effects of Termination) and 7.4.1 (Right to Compensation)).

ARTICLE 7: 1.2 (Interference by the Other Party) A party cannot rely on the non-performance of the other party to the extent that such non-performance has been caused by an act or omission of the first party or by any other event for which it has assumed the risk. COMMENTARY 1. Non-performance caused by act or omission of the party alleging non-performance This article may be considered to address two hypotheses that excuse non-performance. However, conceptually, it goes further. When this article applies, the pertinent conduct does not become excusable non-performance, but rather ceases to be non-performance. It follows, for example, that the other party will not be entitled to terminate the contract for non-performance. Two different cases are contemplated. In the first, one party is unable to perform all or part of the contract because the conduct of the other party has made performance impossible, in whole or in part. Example 1. "A" agrees to perform construction work on "B"'s land starting from February 1. If "B" locks the entrance to the land and does not allow "A" to enter, "B" cannot complain that "A" has not begun the work. "B"'s conduct is usually equated to inexcusable non-performance, either because there is an express provision allowing "A" to access the land, or because "B"'s conduct violates the duties of good faith and cooperation. This result, however, does not depend on whether "B"'s non-performance is excusable. The result will be the same, regardless of the excusability of "B"'s non-performance, for example, if access to the land were obstructed by strikers. The Principles contemplate the possibility that the interference of one of the parties in the performance of the other is only partial. In such cases, it will be necessary to determine the extent to which the non-performance is due to the interference of the other party and the extent to which other causes can be recognized. 2. Non-performance caused by an event for which the party alleging non-performance assumes the risk Another possibility is that the non-performance is the result of an event whose risk has been allocated in the contract, expressly or implicitly, to the party alleging the non-performance. Example 2. "A", a builder, concludes a construction contract to be performed on "B"'s land, where other buildings have already been constructed covered by an all-risk insurance policy contracted by "B". If the parties agree that the risk of accidental damage falls on "B", as the insured person, there is generally no reason preventing the parties from distributing the risk, since this type of risk is generally covered by insurance. Even if a fire were caused by "A"'s negligence, the risk may be allocated to "B", without prejudice to the fact that a more express provision would be required in this case than would be necessary if neither party had contributed to the loss.

ARTICLE 7: 1.3 (Suspension of Performance) (1) When the parties are to perform simultaneously, each party may suspend the performance of its obligation until the other offers its performance. (2) When the parties are to perform successively, the party that is to perform later may suspend its performance until the party that is to perform first has performed. COMMENTARY This article must be read in accordance with the provisions of Article 6.1.4 (Sequence in Performance). This article addresses the remedies of the injured party and corresponds functionally with the concept of exceptio non adimpleti contractus proper to countries of Roman legal tradition. Example "A" agrees to sell to "B" 1,000 tons of white wheat. Payment must be made by means of a confirmed and opened documentary credit by a bank of country "X". "A" is not obligated to ship the goods unless and until the documentary credit is opened in accordance with its contractual obligations. The text of the article does not expressly address the problem that arises when one party performs partially with its obligation but does not complete it, in which case the party entitled to receive such performance may suspend its own, but only in cases where under normal circumstances such conduct would be in accordance with the principle of good faith and fair dealing (see Article 1.7).

ARTICLE 7: 1.4 (Cure of Non-Performance) (

• 1)

  The non-performing party may cure any non-performance at its own expense, provided that: (

  • a)

    it notifies the injured party without undue delay of the form and proposed time of cure; (

  • b)

    the cure is appropriate to the circumstances; (

  • c)

    the injured party has no legitimate interest in refusing it; and (

  • d)

    such cure is carried out without delay. (

• 2)

  The notification that the contract has been terminated does not exclude the right to cure the non-performance. (

• 3)

  The rights of the injured party that are incompatible with the performance by the non-performing party are suspended from the effective notification of cure until the expiration of the time to cure. (

• 4)

  The injured party may suspend its own performance while cure is pending. (

• 5)

  Despite the cure, the injured party retains the right to claim compensation for the delay and for any damage caused or that could not be avoided by the cure. COMMENTARY 1. General principle Paragraph (1) of this article expresses that, if certain requirements are met, the non-performing party may cure its non-performance. Meeting such requirements, the non-performing party may briefly extend the period it had to perform under the contract, unless timely performance was required by the contract or by its circumstances. This article, therefore, favors preservation of the contract. It also reflects the legal policy principle of minimizing costs, equally pointed out in Article 7.4.8 (Mitigation of Harm) and the basic principle of good faith and fair dealing of Article 1.7. This provision is related to those provisions regarding cure of non-performance contained in Articles 37 and 48 of the CISG and in some national rules that regulate contracts in general and sales. Even in those legal systems that do not include express provisions on cure, a reasonable offer to cure is usually taken into account in fixing the amount of compensation. 2. Notification of cure Cure can only be effected after the non-performing party notifies the other of its intention to cure the non-performance. This notification must be reasonable with respect to the opportunity of its sending, its content and the means of notification employed. The notification of cure must be sent without undue delay after the non-performing party becomes aware of the non-performance. To the extent that information is available, the notification must indicate how and when the cure will be effected. Furthermore, the notification must be transmitted to the injured party in a manner that is reasonable under the circumstances. The notification of cure is "effective" when the requirements established in paragraph (1), subsections (a) through (c) are met. 3. Appropriateness of cure The cure will be appropriate under the circumstances if, given the nature of the contract, it is reasonable to allow the non-performing party to attempt again to perform. As noted in paragraph (2), cure is not prevented merely because the non-performance is considered essential. The factors to be considered in determining the appropriateness of cure include determining whether it can solve the problem and whether the delay necessary or likely to entail such cure does not itself constitute essential non-performance. However, the right to cure is not impaired because the injured party changes position thereafter. The right of the injured party to change position is suspended from the time the non-performing party effectively notifies its intention to cure the non-performance. Otherwise would be the case if the injured party changed position before receiving the notification of cure. 4. Interest of the injured party The non-performing party cannot proceed with cure if the injured party demonstrates a legitimate interest in refusing it. However, if an appropriate notification of cure is sent under the circumstances, it is presumed that the non-performing party has the right to cure its non-performance. A legitimate interest in opposing cure may arise, for example, if the attempt to cure will cause damage to persons or property. On the other hand, there will be no legitimate interest if, based on the non-performance, the injured party simply decides that it does not wish to continue the contractual relationship. Example 1. "A" agrees to build a road on "B"'s property. When the work is finished, "B" discovers that the surface of the road has a greater incline than permitted in the contract. "B" also discovers that during construction, "A"'s trucks damaged his trees. "A" notifies "B" of its intention to cure by leveling the road as required by the contract. Even if the cure is appropriate under these circumstances, "B" could be justified in refusing it in order to prevent the trees from continuing to be damaged. 5. Time of cure Cure must be effected immediately after notification of cure. The time for exercising the right to cure is essential. The non-performing party cannot enclose the injured party in a prolonged waiting period. Lack of prejudice to the injured party does not justify delay by the non-performing party in curing. 6. Appropriate means of cure Cure may include repair and replacement, as well as any other activity intended to cure the non-performance and provide to the injured party everything it is entitled to expect under the contract. Repair of non-performance is suitable as cure only when it leaves no trace of the previous non-performance and does not threaten to impair the value or quality of the product as a whole. It is within the discretion of the court to determine the number of times the non-performing party may attempt a cure. Example 2. "A" agrees to install in "B"'s factory a high-temperature equipment for enamel painting. The motors were put into operation without sufficient lubricant and jammed a few hours after starting to operate. "A" promptly replaces the motors, but refuses to examine and verify the operation of the rest of the equipment to ensure that other parts have not been damaged. "A" has not carried out an effective cure. 7. Suspension of other remedies of the injured party When the non-performing party has given effective notification of cure under paragraph (3), the injured party may, according to paragraph (4) suspend its own performance, but cannot exercise any action that is incompatible with the right of the non-performing party to cure, unless it becomes clear that timely and adequate cure has not been effective or will not be. Incompatible remedies include a notification of termination, making replacement transactions and claiming compensation or restitution. 8. Effects of notification of termination If the injured party has correctly terminated the contract under Articles 7.3.1(1) and 7.3.2(1), the effects of termination (see Articles 7.3.5, 7.3.6 and 7.3.7) will also be suspended by an effective notification of cure. If the failure to perform is cured, the notification of cure will have no effect. On the other hand, the effects of termination deploy if the period of termination has expired and some essential non-performance has not been cured. 9. Right to compensation of the injured party Under paragraph (5) of this article, the non-performing party is responsible for damage derived from the non-performance even if that party is successful in curing. It is also responsible for any additional damage caused by the cure itself, or by the delay in performance, or by any type of damage that could not have been avoided through cure. The principle of full compensation established in Article 7.4.2 acquires special importance in this matter. 10. Obligations of the injured party It is incumbent on the non-performing party to invoke this provision. Once the injured party receives an effective notification of cure, it must permit it and, in accordance with Article 5.1.3, cooperate with the non-performing party. For example, the injured party must permit any inspection that is reasonably necessary for the non-performing party to carry out the cure. A notification of termination has no effect if the injured party refuses to allow the cure when required. Furthermore, in this case the injured party cannot pursue compensation for damage that could have been avoided through cure. Example 3. "A" agrees to build a roof on "B"'s land in order to protect machinery from the weather. The roof is built defectively. During a storm, water leaks through the roof and "B"'s machinery is damaged. "B" notifies its decision to terminate the contract. "A", in turn, notifies its intention to cure untimely. "B" rejects the cure because it does not want to continue its relationship with "A". If the cure is appropriate to the circumstances of the case and the other conditions it must fulfill, "B" cannot exercise any remedy arising from the defective construction of the roof, but can recover the amount of damage suffered by the machinery before the cure was effected. If the cure is not appropriate under the circumstances of the case, or if the proposed cure would not have been able to resolve the problem, the contract will be terminated by virtue of the notification sent by "B".

ARTICLE 7: 1.5 (Additional Period for Performance) (

• 1)

  In case of non-performance, the injured party may grant, by notification to the other party, an additional period for it to perform. (

• 2)

  During the additional period, the injured party may suspend performance of its own correlative obligations and claim compensation, but may not exercise any other remedy. The injured party may exercise any of the remedies provided in this Chapter if the other party notifies it that it will not perform within the additional period or if the latter expires without the due performance having been rendered. (

• 3)

  In case the delay in performance is not essential, the injured party that has notified the other of the grant of an additional period of reasonable duration may terminate the contract at the end of such period. The additional period that is not of reasonable duration may be extended in accordance with such duration. The injured party may establish in its notification that the contract will automatically terminate if the other party does not perform. (

• 4)

  Paragraph (3) shall not apply when the performance in default is only a minimal part of the contractual obligation assumed by the non-performing party. COMMENTARY This article addresses the case where one of the parties incurs in delay and the other wishes to grant an additional period for performance. The provision is inspired by the German concept of Nachfrist, although similar results are usually obtained in other legal systems with different conceptual means. 1. Special characteristics of delayed performance The article recognizes that delayed performance is substantially different from partial or defective performance. Delayed performance cannot be cured, because once the date of performance has passed, it will not come again. However, in many cases the creditor may prefer delayed performance to no performance at all. Second, it is not easy to anticipate, at the time one party incurs in delay, how prolonged the delay in performance will be. The creditor's commercial interest permits the presumption that a reasonable delay may be acceptable, but not a non-performance that is delayed too much. The procedure established in this article authorizes the creditor to give a second opportunity to the debtor, without prejudice to the other remedies that may be available. 2. Effects of the grant of an additional period for performance The party providing an additional period cannot terminate the contract or demand specific performance during the grace period. Nor is the right to obtain compensation for damages caused by the delay affected. The situation at the end of the period granted will depend on whether the delay in performance was already essential at the time the additional period was granted. In this case, if the contract is not performed during the extension, the right to terminate the contract for essential non-performance simply revives at the expiration of the period granted. On the other hand, if the delay in performance was not then essential, termination will only be possible at the end of the grace period, provided it had been reasonably extended. Examples 1. "A" agrees to build a special armored body for "B"'s Mercedes. The contract provides that the work is to be completed on February 1 so that the car can be shipped to "B"'s country of residence. The car is needed by January 31, but has not been finished by that date. "A" assures "B" that it will complete the work in a week and "B" grants it such period. "B" has the obligation to accept the car if the work is completed within that week, without prejudice to claiming compensation for damages caused, such as extra shipping expenses. If the work is not completed within the week, "B" may refuse delivery and terminate the contract. 2. "A", a company located in country "X", concludes a contract with "B", a company in country "Y", to build 100 km. of road in "Y". The contract establishes a period of two years from the start of work. After two years "A" has completed 85 km. of the road, but it is clear that finishing the work will take it at least three more months. "B" notifies "A" that it must complete the work within the following month. "B" is not entitled to terminate the contract at the end of the month. Since this additional period is not reasonable under the circumstances of the case, the additional period should be extended for a reasonable period of three months.

ARTICLE 7: 1.6 (Exemption Clauses) A clause that limits or excludes the liability of a party for non-performance or that permits it to execute a performance substantially different from what the other party may reasonably expect, may not be invoked if it would be manifestly unreasonable to do so, having regard to the purpose of the contract. COMMENT 1. Need for a Special Rule on Exemption Clauses The Principles do not establish a general rule that permits a judge to nullify or set aside abusive or one-sided clauses. With the exception of the principle of good faith and fair dealing (see Article 1.7), which can only be invoked exceptionally in this context, there is only one provision that allows avoidance of the contract at any time, either as a whole or only some of its provisions, when one party unjustifiably grants the other an excessive advantage (see Article 3.2.7). The reason for the inclusion of a specific rule on exemption clauses is that these are particularly common in international contracts, where they tend to give rise to thorny conflicts between the parties. This article opts for granting the judge broad discretion based on the principle of contractual fairness. The provisions of the contract regulating the consequences of non-performance are valid in principle, but the judge may disregard one-sided clauses. 2. Definition of "Exemption Clauses" For purposes of this provision, exemption clauses are understood to be those that, in the first place, directly limit or exclude the liability of the non-performing party for its non-performance. These clauses may be expressed in various forms (e.g., by establishing a fixed amount that limits compensation, or a percentage of the performance in question, or by imposing the retention of a deposit). A clause is also considered an exemption clause if it permits a party to execute a performance substantially different from what the other party could reasonably expect. In practice, this type of clause is intended to permit the debtor to unilaterally alter the character of the performance owed, to the point of transforming the contract. These clauses must be distinguished from those that merely define the performances to which the debtor is bound. Examples 1. A tourism company offers at a considerably high price an excursion that includes accommodation in luxury hotels. A clause of the contract contemplates the possibility that the company may modify the accommodation conditions if circumstances so require. If the company accommodates its clients in second-class hotels, it shall be liable for non-performance despite the existence of the clause, because the clients reasonably expect to be accommodated in hotels of a category similar to that promised. 2. The owner of a hotel displays a sign in which it assumes responsibility for automobiles deposited in the garage, but not for objects left inside them. This provision does not constitute an exemption clause for purposes of this article, because its purpose is simply to define the scope of the hotel owner's obligation. 3. Distinction Between Exemption Clauses and Cancellation Clauses Exemption clauses must be distinguished from cancellation clauses, which authorize the parties to free themselves from their obligations by payment of an indemnity. In practice, however, there may be cancellation clauses that are designed by the parties to operate, in reality, as disguised exemption clauses. 4. Exemption Clauses and Contractually Stipulated Payment A clause that provides that a party that fails to perform its obligation shall pay a determined sum to the creditor on account of its non-performance (see Article 7.4.13) may likewise have the effect of limiting compensation due to the creditor. In this case, the debtor may not avail itself of the clause in question if the conditions established in the present article are applicable. Example 3. "A" agrees to construct a factory for "B". The contract includes a penalty clause of 10,000 Australian dollars (AUD) for each week of delay. The construction is not completed within the stipulated period because "A" deliberately suspends its work to devote itself to another more lucrative project, the penalty for failure of which to comply in due time is much higher. The damages suffered by "B" amount to 20,000 AUD per week. In this case, "A" is not entitled to invoke the penalty clause and "B" may be indemnified for all damages suffered, because "A's" malicious non-performance creates a set of circumstances that makes the execution of the agreed penalty clause manifestly unjust. 5. Cases in Which an Exemption Clause Cannot Be Invoked In accordance with the criterion adopted by the majority of legal systems, this article is based on the premise that, by virtue of the principle of freedom of contract (see Article 1.1), exemption clauses are in principle valid. However, a party may not invoke such a clause if it would be manifestly unreasonable to do so. This situation would occur when the provision in question is intrinsically unreasonable, and when its application leads to a manifest imbalance between the performances of the parties. It may also be the case that an exemption clause may not be invoked even though it is not manifestly unreasonable in itself. This would be the case, for example, in which the non-performance results from gross negligence, or when the party entitled to receive the performance could not have avoided, by contracting insurance, the consequences of the limitation or exclusion of liability. In any case, regard must be had to the purpose of the contract and, in particular, to what the other party could have reasonably expected from performance of the contract. Examples 4. "A", an accountant, undertakes the obligation to prepare the accounts of "B". The contract includes a clause that exempts "A" from all liability arising from any inaccuracy. As a result of a gross error by "A", "B" pays 100% more than the taxes owed. "A" may not invoke this manifestly unreasonable exemption clause. 5. "A", owner of a storage warehouse, enters into a contract with "B" for the latter to guard the installation. The contract includes a clause that limits "B's" liability. A theft is committed and the loss suffered by "A" exceeds the cap of liability agreed upon. Despite the fact that the clause was agreed between two professionals, "B" may not invoke the limitation if the theft was committed by its own people during the performance of their functions. 6. Consequence of Inability to Rely on an Exemption Clause If a party is not authorized to rely on an exemption clause, the injured party may obtain full compensation for the damage suffered due to non-performance. In contrast with the moderating power of the court granted by Article 7.4.13, the judge may not modify the terms of an exemption clause.

ARTICLE 7: 1.7 (Force Majeure) (

• 1)

  Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that, at the time the contract was concluded, it could not reasonably have been expected to have taken it into account, or to have avoided or overcome its consequences. (

• 2)

  When the impediment is only temporary, the excuse has effect for a period of time that is reasonable having regard to the impact of the impediment on performance of the contract. (

• 3)

  The non-performing party must notify the other party about the impediment and its impact on its ability to perform. If the notification is not received by the other party within a reasonable time after the non-performing party knew or ought to have known of the impediment, that party shall be liable for damages caused by the failure to notify. (

• 4)

  Nothing in this article prevents a party from exercising the right to terminate the contract, suspend its performance, or claim interest on money due. COMMENT 1. Notion of Force Majeure The present article covers the matter known in the common law tradition as the doctrine of "frustration and impossibility of performance" and in the continental legal tradition as force majeure, Unmöglichkeit, etc. However, the concept of force majeure is not identified with any of these doctrines. The expression force majeure has been chosen because it is widely known in international commercial practice, as confirmed by the inclusion of so-called force majeure clauses in countless international contracts. Example 1. "A", a manufacturer from country "X", sells a nuclear power plant to an electric company of country "Y". By virtue of the clauses of the contract, "A" undertakes to supply all uranium needs for ten years, at a fixed price in US dollars to be paid in New York. The following events take place separately: (

  • 1)

    Five years later, the currency of country "Y" depreciates by 1% in relation to the dollar at the time the contract was concluded. "B" is not released from its obligations, because this risk has been allocated in accordance with the provisions of the contract relating to payment. (

  • 2)

    Five years later the government of "Y" imposes a foreign exchange control regime that prevents "B" from paying in a currency other than that of "Y". "B's" obligation to pay in US dollars is excusable. "A" is entitled to terminate the uranium supply contract. (

  • 3)

    Five years later, the uranium market is drastically altered as a result of maneuvering by speculators. The world price of uranium increases tenfold in relation to the price fixed in the contract. "A's" obligation to deliver uranium is not excusable, because the risk of this event was foreseeable at the time the contract was concluded. 2. Effects of Force Majeure on the Rights and Obligations of the Parties The present article does not limit the right of the party that has not received the performance to terminate the contract, provided that such non-performance is essential. What this provision establishes, if applicable, is the exemption of the non-performing party from paying compensation for damages. In some cases the impediment will prevent any kind of performance; in many others it will simply delay performance, in which case the effect of this article will be to grant more time to perform. In this case, the extra time to perform may be greater or less than the duration of the temporary impediment, because what matters is determining the impact of the impediment on performance of the contract. Example 2. "A" enters into a contract undertaking to lay a natural gas pipeline along country X. The climatic conditions are such that it is practically impossible to work from November 1 to March 31. The contract fixes the deadline for completion of the works on October 31. However, work begins with a one-month delay because a civil war, which has broken out in a neighboring country, prevents timely transport of all the piping. The consequence of this event is to prevent continuation of the work until the next spring. "A" is entitled to a five-month extension to complete its work, despite the fact that the duration of the impediment was limited to one month. 3. Force Majeure and Hardship This article must be interpreted together with Chapter 6, Section 2 of the Principles, which address hardship (see Comment 6 of Article 6.2.2). 4. Force Majeure and Contractual Practice The definition of force majeure in paragraph (1) of this article necessarily has a broad character. International commercial contracts frequently establish more complex and precise provisions. The parties may therefore adapt the most appropriate terminology to adapt the content of this article to the transaction. 5. Long-Term Contracts Force majeure, like hardship, usually has importance in long-term contracts (see Comment 5 to Article 6.2.2), and the same facts may be present in both a force majeure and a hardship situation (see Comment 6 to Article 6.2.2). In the case of hardship, the Principles promote negotiation between the parties to continue the relationship, rather than terminate it (Article 6.2.3). Similarly, parties bound by long-term contracts whose performance has been affected by force majeure might contemplate that their best interest lies in continuing their commercial relationship rather than terminating it, given the duration and nature of the relationship and the magnitude of the initial investment, whose value could only be recovered over time. Therefore, the parties might continue with their commercial relationship even in the case of force majeure provided it is feasible, contemplating its termination only as a last resort. Provisions of this kind could take many different forms. Example 3. A clause incorporated in a long-term contract provides that in the event that performance of the obligations of one of the parties is affected by some impediment, the obligations of that party shall be provisionally suspended, but not for more than 30 days, unless such impediment is of a permanent nature, and the ability of the parties to terminate the contract shall also be suspended. The clause also provides that if the impediment persists upon expiration of the suspension period, the parties agree to enter into negotiations in order to extend the suspension on the terms they may agree. It also provides that disputes that cannot be resolved by agreement of the parties shall be submitted to an ICC Dispute Board of the International Chamber of Commerce ("ICC Dispute Board"). The parties are obliged to follow this procedure. SECTION 2: RIGHT TO CLAIM PERFORMANCE

ARTICLE 7: 2.1 (Performance of Monetary Obligations) If a party that is obligated to pay money fails to do so, the other party may claim payment. COMMENT This article adopts the generally accepted principle that payment of a monetary obligation under a contractual or quasi-contractual obligation can always be claimed and, if such claim is not satisfied, its performance may be ordered by a court. The verb "claim" is used in this article to cover both the request directed to the counterparty and, if necessary, to the court for its enforcement. This article applies regardless of the monetary unit in which payment should or should have been made. In other words, the creditor's right to claim payment extends also to cases in which payment should be made in a foreign currency. As for the determination of the currency in which a monetary obligation is owed, or in which it should be paid, see Articles 6.1.9, 6.1.10, and 7.4.12. Exceptionally, the right to claim payment of the price of goods to be delivered or services to be rendered may be excluded. This is the case, in particular, when commercial usages require the seller to effect a resale of those goods that have not been accepted or paid by the buyer. As for the application of usages, see Article 1.9.

ARTICLE 7: 2.2 (Performance of Non-Monetary Obligations) If a party does not perform an obligation other than the obligation to pay a sum of money, the other party may claim performance, unless: (

• a)

  such performance is legally or physically impossible; (

• b)

  performance or, as the case may be, forced performance, is excessively burdensome or onerous; (

• c)

  the party entitled to receive performance may reasonably obtain it from another source; (

• d)

  the performance is exclusively personal in nature; or (

• e)

  the party entitled to receive performance does not claim it within a reasonable period after it knew or ought to have become aware of the non-performance. COMMENT 1. Right to Claim Performance of Non-Monetary Obligations In accordance with the principle of the binding nature of the contract (see Article 1.3), each party should, in principle, be authorized to claim the performances of the other party; not only monetary ones, but also non-monetary ones. While this is not controversial in countries of the romanistic tradition, in legal systems belonging to the common law sphere specific performance of a non-monetary obligation is permitted only in special circumstances. Like Article 46 of CISG, this provision adopts the principle of specific performance, subject to some exceptions. The principle is particularly important with respect to contracts other than sales. Unlike obligations to give, obligations to do or to refrain from doing frequently can only be performed by the contracting party itself. In these cases, the only way to obtain performance from the party that does not wish to perform is through forced performance. 2. Specific Performance is a Non-Discretionary Remedy of the Court While Article 28 of CISG establishes that "the court is not obliged to order specific performance unless it would do so under its own law in respect of similar contracts of sale not governed by this Convention," in the Principles specific performance is not a remedy whose grant depends on the discretion of the court. This means that a court is obliged to order specific performance, unless one of the exceptions established in this article applies. 3. Exceptions to the Right to Claim Specific Performance a. Impossibility One cannot claim performance that is impossible in fact or in law (subsection (a)). However, impossibility does not annul the contract; the injured party has other remedies available (see Articles 3.3 and 7.1.7(4)). Denial of an administrative authorization required by applicable national law, which affects the validity of the contract, determines its invalidity (see Article 6.1.17(1)). In this case, the problem of forced performance does not arise. When, however, denial of such authorization simply makes performance impossible, without affecting the validity of the contract (see Article 6.1.17(2)), subsection (a) of this article shall apply, in which case performance cannot be claimed. b. Excessively Burdensome Performance In exceptional cases, particularly when there has been a drastic change of circumstances after the conclusion of the contract, performance might still be possible, but so burdensome that claiming it in specific form would violate the general principle of good faith and fair dealing (see Article 1.7). Example 1. An oil tanker is wrecked in coastal waters during a severe storm. Although it would be possible to recover the ship from the sea bed, the shipper could not claim performance of the transport contract if it were to cause the shipowner expenses far exceeding the value of the oil (see Article 7.2.2(b)). The words "or, as the case may be, forced performance" take into account the fact that in common law legal systems it is the court and not the creditors who supervises the performance of an order to specifically perform an obligation. Consequently, in certain cases, especially those involving durable performances, courts in such countries refuse to order specific performance of an obligation when it implies an unjustifiably burdensome task for the judges. As for other possible consequences arising from a drastic change of circumstances that constitute a situation of hardship, see Articles 6.2.1 et seq. c. Replacement Transaction Many standard goods and services are offered by various suppliers. If a contract for such standard goods or services is not performed, most customers would not be willing to waste time and effort claiming specific performance from the other party. They would prefer to go to the market to obtain the same types of goods or services, and claim compensation for non-performance. In view of this economic reality, subsection (c) excludes specific performance when the party entitled to claim it may reasonably obtain it from another source. That party may terminate the contract and effect a replacement transaction (see Article 7.4.5). The word "reasonably" indicates that the mere fact that the same performance can be obtained from another source is not in itself sufficient, since in certain circumstances the injured party could not resort to a substitute supplier. Example 2. "A", who resides in a developing country, where foreign exchange is very scarce, buys a standard machine from "B", a manufacturer in country "X", a developed country. Under the contract, "A" pays USD 100,000 before delivery. "B" fails to perform its delivery obligation. Although "A" could obtain another similar machine in country "X", this would not be reasonably exigible due to the scarcity and cost of foreign exchange in "A's" country. In this case, "A" is entitled to claim from "B" the delivery of the promised machine. d. Exclusively Personal Performance In cases where performance is exclusively personal in character, forced performance could interfere with the personal freedom of the debtor. Furthermore, such a form of performance could affect the quality of the performance. Supervision of a personal performance could also give rise to insurmountable practical difficulties, as demonstrated by the experience of those countries where this responsibility has been imposed on courts. For these reasons, subsection (d) excludes forced performance when it is exclusively personal in nature. The determination of the scope of this exception depends essentially on the meaning given to the phrase "exclusively personal in nature." The modern tendency is to attribute to it the meaning of performance of services whose characteristics are unique. This exception does not apply to performances that must be performed by legal persons. Neither does it include within this phrase the ordinary activities of a lawyer, doctor, engineer, or other persons, whose services can be rendered by others with the same training and experience. Performance shall be exclusively personal if it is not delegable and requires particular skill of an artistic or scientific nature, or if it implies a confidential and personal relationship. Examples 3. The obligation of an architectural firm to design a set of ten buildings may be subject to specific performance insofar as the firm can delegate the task to one of its partners, or hire an external architect to perform it. 4. On the other hand, if a famous architect is commissioned to design a new residential complex based on the idea of a city for the twenty-first century, its forced performance could not be ordered, since the performance is unique and requires the use of very special expertise. Performance of an obligation to refrain from doing is not included in the case raised by subsection (d). e. Claiming Performance Within a Reasonable Period Performance of a contract frequently requires special preparation and effort from the debtor. If the time for performance arrives but the creditor does not claim it within a reasonable period, the debtor is entitled to presume that the creditor will no longer insist on specific performance. If the creditor were permitted to leave the debtor in a state of uncertainty about when specific performance might be claimed, there is a risk that the creditor would speculate unfairly, to the detriment of the debtor and sound market development. For these reasons, subsection (e) excludes the right to specific performance, unless claimed within a reasonable time after the creditor knew or ought to have become aware of the non-performance. For a similar rule regarding the right to terminate the contract, see Article 7.3.2(2).

ARTICLE 7: 2.3 (Repair and Replacement of Defective Performance) The right to claim performance includes, where appropriate, the right to claim repair, replacement, or other remedying of the defective performance. The provisions of Articles 7.2.1 and 7.2.2 shall apply as appropriate. COMMENT 1. Right to Claim Performance in Case of Defective Performance This article applies the general principles of Articles 7.2.1 and 7.2.2 to a specific, but very frequent, case of non-performance: defective performance. For greater clarity, this article affirms that the right to claim specific performance includes the right of the party that has received the defective performance to claim remedying of the defect. 2. Remedying of Defective Performance In the Principles, remedying of non-performance denotes the right of the non-performing party to correct its performance (see Article 7.1.4), as well as the right of the injured party to claim such correction from the non-performing party. The article addresses this latter right. This article expressly mentions two cases of remedying called repair and replacement. Repair of defective goods (or adequate rendering of a service that was insufficient) is the most common case, and replacement of a defective performance is also frequent. The right to claim repair or replacement may also exist with respect to payment of money, for example, in the case of insufficient payment, or payment in a currency different from or in an account other than that agreed by the parties. In addition to repair and replacement, there are other forms of remedying, such as obtaining removal of the rights of a third party that affect the goods, or obtaining an administrative authorization. 3. Restrictions Remedying of a defective performance is subject to the same limitations as the right to claim performance in general. Many of the exceptions to the right to claim performance found in Article 7.2.2 may be applicable to the various forms of remedying. Only the application of subsection (b) requires particular comment. In many cases involving small and insignificant defects, the necessity of claiming a replacement or repair that could involve "unreasonable effort or expense" is excluded. Example A vehicle is sold with a small paint defect that depreciates its value by 0.01% of the purchase price. Repainting would cost an amount equivalent to 0.5% of its purchase price. In this case, repair of the defective performance cannot be claimed, that is, the seller cannot be required to repaint the automobile, but the buyer is entitled to claim a reduction in the purchase price.

ARTICLE 7: 2.4 (Judicial Penalty) (1) When a court orders a party to perform, it may also order that it pay a penalty if it fails to comply with the order. (2) The penalty shall be paid to the injured party, unless mandatory rules of the law of the forum provide otherwise. Payment of the penalty to the injured party does not exclude the right of that party to damages. COMMENT 1. Judicially Imposed Penalties The experience of some legal systems has shown that threats of judicially imposed penalties constitute the most effective means to guarantee compliance with a judgment ordering performance of an obligation (precautionary measures). Other legal systems, on the contrary, do not contemplate such sanctions because they are considered as an inadmissible invasion of personal freedom. This article adopts a middle position by providing for monetary penalties but not other types, applicable to all kinds of judgments ordering a performance, including those ordering payment of money. 2. Discretion to Impose a Penalty The use of the word "may" in paragraph (1) of this article clarifies that the imposition of a penalty is within the discretion of the court. Its exercise depends on the type of obligation to be performed. In the case of a judgment ordering payment of a sum of money, it will only be necessary to resort to a judicial penalty in exceptional situations, especially when celerity in payment is essential to the injured party. The same may be said with respect to the obligation to deliver goods. Obligations to pay money or to deliver goods are usually made effective by ordinary means of enforcement. By contrast, in the case of obligations to do or to refrain from doing, especially in those cases where such obligations cannot be easily performed by a third party, compelling performance by means of a judicial penalty usually constitutes the most appropriate solution. 3. Beneficiary Legal systems differ as to whether the judicial penalty should be paid to the injured party, to the State, or to both. In some systems the payment of the penalty to the injured party is considered an unjustified gift contrary to public order. This article rejects this latter point of view and points to the injured party as the beneficiary of the penalty, but the first sentence of paragraph (2) states that public policy provisions of the law of the forum could prevent such a solution, also indicating other possible beneficiaries of judicial penalties. 4. Distinction Between Judicial Penalties, Damages, and Contractually Stipulated Payment for Non-Performance The second sentence of paragraph (2) makes clear that the judicial penalty paid to the injured party does not affect the claim for damages. The payment of the penalty refers to compensation to the injured party for losses that ordinarily are not susceptible of compensation under the rules on damages. Moreover, while payment of damages is verified after payment of the judicial penalty, courts could, to some extent, credit payment of the judicial penalty when quantifying damages. A distinction may also be made between judicial penalties and contractually stipulated payment for non-performance, which is dealt with in Article 7.4.13, although both serve similar functions. A court could refuse to impose a judicial penalty if it deemed that the contractual stipulation relating to payment for non-performance already constitutes sufficient incentive for performance. 5. Form and Procedure A judicial penalty may be imposed in the form of a lump sum or in installments. The procedure for imposing a judicial penalty is governed by the lex fori. 6. Penalties Imposed by Arbitrators Since Article 1.11 establishes that the word "court" also includes arbitral tribunals, the question arises whether arbitrators also have the power to impose penalties. While the majority of legal systems seem to deny such attribution to arbitrators, some modern legislation and recent judicial practice have recognized it. This solution finds support in the Principles, and is related to the growing importance of arbitration as an alternative means for settlement of disputes, especially in international commerce. Since execution of a penalty imposed by arbitrators can only be carried out by judges or with their cooperation, this appropriate judicial supervision functions as a safeguard against any kind of abuse that arbitrators might commit. 7. Recognition and Enforcement of Awards and Judgments Imposing Penalties Special attention must be given to the problems arising from recognition and enforcement of arbitral awards and foreign judgments that impose a penalty. Special rules on this matter can occasionally be found in some internal legal systems and, to some extent, in international treaties.

ARTICLE 7: 2.5 (Change of Remedy) (1) The injured party that has claimed performance of a non-monetary obligation and has not obtained it within the period fixed or, failing that, within a reasonable period, may resort to any other remedy. (2) In the event that execution of a court order requiring performance of a non-monetary obligation is not feasible, the injured party may resort to any other remedy. COMMENT 1. The Injured Party Has the Right to Change Remedies This article addresses a problem peculiar to the right to claim performance. The injured party may abandon the remedy of requiring non-monetary performance and instead opt for other rights or actions. The choice is permitted because of the difficulties usually involved in enforcement of non-monetary obligations. Even if the injured party decides first to invoke its right to claim performance, it would not be fair to limit it to this sole option. The non-performing party may be unable to perform, or its inability to perform may manifest itself only during the course of performance. 2. Voluntary Change of Remedy Two situations must be distinguished. In the first case, the injured party has claimed performance but changes its mind before execution of the judgment in its favor, perhaps because it has discovered the inability of the other party to perform. The injured party then wishes to invoke another remedy. Such voluntary change of remedy may be permitted if the interests of the non-performing party are adequately protected, since that party could have been preparing to perform or have incurred expenses for that purpose. For this reason, paragraph (1) of this article clarifies that the injured party is entitled to invoke another remedy only if it has not received performance within the period fixed for it or, failing that, within a reasonable period. How much additional time must be granted to the non-performing party to perform depends on the difficulty that performance entails. The non-performing party has the right to perform so long as it does so before the supplementary period granted expires. For similar reasons restricting the injured party's right to terminate the contract in the event of delay in performance, see Article 7.3.2(2). 3. Court Order Not Feasible of Enforcement Paragraph (2) addresses the second and no less difficult problem that arises when the injured party has attempted unsuccessfully to enforce the court judgment or arbitral award imposing the duty to perform. In this case, it is obvious that the injured party may immediately resort to other remedies. 4. Time Limits In the event of a change of remedy, the time limitation provided in Article 7.3.2(2) for notifying such decision to terminate the contract must be appropriately extended. The reasonable period for giving such notification begins to run, in the case of a voluntary change of remedy, from the moment the injured party knew or ought to have become aware of the non-performance, once the supplementary period available to the non-performing party to perform has expired. In the case of paragraph (2) of this article, such period begins to run from the moment the injured party knew or ought to have become aware that the award or judgment ordering performance was not susceptible of enforcement.

ARTICLE 7: 3.1 (Right to Terminate the Contract) (

• 1)

  A party may terminate the contract if the failure to perform one of the obligations of the other party constitutes an essential non-performance. (

• 2)

  In determining whether the failure to perform an obligation constitutes an essential non-performance, regard shall be had in particular to whether: (

  • a)

    the non-performance substantially deprives the injured party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; (

  • b)

    strict performance of the obligation in question was essential under the contract; (

  • c)

    the non-performance was intentional or reckless; (

  • d)

    the non-performance gives the injured party reason to believe that the other party will not perform in the future; (

  • e)

    termination of the contract will cause the non-performing party a loss disproportionate to the loss which the injured party would suffer by non-performance. (

• 3)

  In case of delay, the injured party may also terminate the contract if the other party does not perform before the expiration of the supplementary period granted to it according to Article 7.1.5. COMMENT 1. Termination of Contract If Non-Performance is Excusable The rules established in this Section apply both to cases where the non-performing party is responsible and to those where the non-performance is excusable, and in these cases the injured party cannot claim either specific performance or damages. Example 1. "A", a company from country "X", purchases wine from "B" from country "Y". Later, the government of country "X" imposes an embargo on imports of agricultural products from country "Y". Although the impediment is not attributable to "A", "B" may terminate the contract. 2. Right to Terminate the Contract When Non-Performance is Essential In cases of non-performance by one of the parties, the determination of whether the other may terminate the contract depends on a weighing of the circumstances. On the one hand, the performance may be so delayed or defective that the injured party can no longer use it for the intended purposes, or the conduct of the non-performing party has been such that the injured party should be allowed the right to terminate the contract. On the other hand, termination of the contract will cause serious harm to the non-performing party, whose expenses in preparing to provide the performance might not be recovered. Therefore, paragraph (

  • 1)

    of this article provides that the injured party may terminate the contract only if the non-performance of the other party is "essential," that is, substantial and not of minor importance. See also Articles 7.3.3 and 7.3.4. 3. Significant Circumstances for Determining If Non-Performance is Essential Paragraph (

  • 2)

    of this article presents a list of circumstances relevant to determining whether, in a given case, the failure to perform a contractual obligation constitutes essential non-performance. a. Whether Non-Performance Substantially Deprives the Other Party of Its Expectations The first factor referenced in paragraph (2)(

    • a)

      is that the non-performance is so essential that it deprives the injured party of something fundamental that it was entitled to expect at the time of conclusion of the contract. Example 2. On May 1, "A" contracts for delivery to "B" of standard software before May 15. "B" has requested that delivery be effected quickly. If "A" offers delivery on June 15, "B" may reject it and terminate the contract. The injured party may not terminate the contract if the non-performing party can demonstrate that it could not have foreseen, and reasonably could not have foreseen, that the non-performance would be essential to the other party. Example 3. "A" undertakes to remove garbage from "B's" land within thirty days without specifying the exact date the period begins. "B" fails to inform "A" that "B" has contracted excavators at a high cost to begin work on the same land as of January 2. "B" cannot terminate the contract due to the fact that "A" has not cleaned the land by January 2. b. Essential Character of Strict Performance of the Obligation Paragraph (2)(

    • b)

      does not address the actual gravity of the non-performance but the nature of the contractual obligation whose performance might be essential. Such obligations requiring strict performance are not infrequent in commercial contracts. For example, in contracts for the sale of consumer goods, the time of delivery is usually considered essential, and in a documentary credit transaction the documents offered must strictly conform to the credit clauses. c. Intentional Non-Performance Paragraph (2)(

    • c)

      addresses the situation in which the non-performance is intentional or reckless. It could, however, be contrary to good faith and fair dealing (see Article 1.7) to terminate the contract in a case of insignificant non-performance, even if intentional. d. Lack of Confidence in Future Performance Paragraph (2)(

    • d)

      gives importance to the fact that the non-performance gives the injured party reason to distrust future performance by the other party. If a party owes one of the first performances and this permits anticipating that these will be repeated in all subsequent performances, the injured party may terminate the contract, even if the defects evidenced in the first deliveries do not themselves justify termination of the contract. Sometimes intentional non-performance can demonstrate that the other party cannot be relied upon. Example 4. "A", who is an agent for "B", presents false receipts to "B" to request reimbursement of alleged expenses. Although the sum requested by "A" for reimbursement is insignificant, "B" may consider "A's" conduct as essential non-performance and terminate the agency contract. e. Disproportionate Loss Paragraph (2)(

    • e)

      addresses cases where the non-performing party has relied on the contract and was preparing to perform it or has undertaken to perform it. In these cases, attention must be paid to whether such party would suffer disproportionate harm if its non-performance is considered essential. It is less likely that non-performance will be considered essential in the case of late performance, after preparation of the performance, than if the non-performance occurs long before such preparation. Consideration should also be given to whether the part of the performance that has been offered or actually delivered can be of any benefit to the non-performing party if that part of the performance is rejected or returned. Example 5. On May 1, "A" undertakes to deliver software specially manufactured for "B". The contract provides that delivery shall be made before December 31. "A" offers to deliver it on January 31, when "B" still needs the software and "A" cannot sell it to other users. "B" may claim damages, but cannot terminate the contract. 4. Termination of Contract After Supplementary Period (Nachfrist) Paragraph (

  • 3)

    is linked with Article 7.1.5(3), which provides that the injured party may grant the non-performing party a supplementary period (Nachfrist) to terminate a contract that it could not otherwise terminate due to delay (see Comment 2 to Article 7.1.5).

ARTICLE 7: 3.2 (Notice of Termination) (1) The right of a party to terminate the contract is exercised by notice to the other party. (2) If the performance has been offered late or otherwise not in conformity with the contract, the injured party will lose the right to terminate the contract unless it gives notice of its decision to the other party within a reasonable period after it knew or ought to have known of the offer or of the defective performance. COMMENT 1. The Requirement of Notice Paragraph (1) of this article confirms the principle that the right of a party to terminate the contract is exercised by notice to the other party. The requirement of notice will permit the non-performing party to avoid losses arising from uncertainty as to whether the injured party will accept performance. It is also intended to prevent the injured party from speculating on the rise or fall in the value of the performance to the detriment of the non-performing party. 2. Late Performance If the performance is owed but has not been rendered, the conduct of the injured party will depend on its information and its aspirations. It may be that the injured party does not know whether the other party intends to perform, or whether it has already decided not to perform, or whether it is still undecided. In this case, the injured party may wait and see if the performance is eventually offered and make a decision in that case and at the moment it occurs. See paragraph (2). The injured party, on the other hand, may wish to obtain performance and request it within a reasonable period after it knew or ought to have known of the non-performance (see Article 7.2.2(e)). This article does not contemplate the case in which the non-performing party requests of the injured party a decision as to whether the latter will accept late performance. Neither does it address the case in which the injured party learns from other sources that the non-performing party intends to perform the contract. In this case, the principle of good faith and fair dealing (see Article 1.7) may require the injured party to inform the other party that it does not wish to accept late performance, under penalty of liability for damages. 3. "Reasonable Time" The injured party that intends to terminate the contract must give notice to the other party within a reasonable period after it knew or should have known of the non-performance situation (paragraph (2)). What should be considered "reasonable" depends on the circumstances. In those situations in which the injured party may easily obtain substitute performance, and may then speculate on the rise and fall of prices, notification must be given without undue delay. When certain inquiries are required to determine whether substitute performance can be obtained, the reasonable period must necessarily be longer. 4. Notice Must Be Received The notice given by the injured party produces effects when received by the non-performing party (see Article 1.10)

ARTICLE 7: 3.3 (Anticipatory Non-Performance) If before the date of performance of one of the parties it is clear that one of the parties will commit an essential non-performance, the other party may terminate the contract. COMMENT This article establishes the principle that expected non-performance is equated with non-performance that took place at the time the performance was owed. A requirement that must be clear is that there must be non-performance; a suspicion, even if well-founded, will not be sufficient. Moreover, it is necessary that the non-performance be essential and that the party entitled to receive the performance notify its decision to terminate the contract. An illustration of anticipatory non-performance is presented when a party declares that it will not perform the contract. The circumstances may also indicate that it is to be essential non-performance. Example "A" promises "B" to deliver oil transported by the ship M/S Paul at the terminal of country "X" on February 3. On January 25 the M/S Paul is 2,000 km from the terminal. At the speed it is going, it will not arrive by February 3; at the earliest it would arrive on February 8. Since the time of delivery is essential and a significant delay is to be expected, "B" may terminate the contract before February 3.

ARTICLE 7: 3.4 (Adequate Assurance of Performance) A party that reasonably believes there will be essential non-performance by the other party may demand adequate assurance of performance and, in the meantime, may suspend its own performance. If this assurance is not provided within a reasonable period, the party demanding it may terminate the contract. COMMENT 1. Reasonable Expectation of Essential Non-Performance This article protects the interest of a party that has reason to believe that the other will be unable or unwilling to perform the contract on the stipulated date, but that cannot resort to Article 7.3.3 because there is still a possibility that the other party wants to or can perform. The first party, absent this provision, would frequently find itself in a dilemma. On the one hand, it will suffer a loss if it waits for the date of performance and the other party does not perform. On the other hand, if it decides to terminate the contract and it then becomes evident that the contract would have been performed by the other party, its conduct would amount to breach of contract, entailing its liability for damages caused. 2. The Right to Suspend Performance Depends on Adequate Assurance of Performance Consequently, this article empowers the party that reasonably believes there will be essential non-performance by the other to demand adequate assurance of performance and to suspend in the meantime performance of its own obligations. What constitutes adequate assurance depends on the circumstances. In some cases the declaration of the other party that it will perform will be sufficient, while in others the requirement of a bond or guarantee from a third party could be justified. Example "A", a ship builder with only one shipyard, promises to build a yacht for "B" to be delivered no later than May 1. Shortly thereafter "B" learns from "C" that "A" has also undertaken to build a yacht for "C" during the same period. "B" is entitled to demand from "A" adequate assurance that the yacht will be delivered on time. Furthermore, "A" will have to give "B" a satisfactory explanation of how it will fulfill the contract. 3. Termination of Contract If adequate assurance of performance is not provided, the other party may terminate the contract.

ARTICLE 7: 3.5 (General Effects of Termination) (

• 1)

  Termination of the contract relieves both parties of the obligation to effect and receive future performances. (

• 2)

  Termination does not exclude the right to claim damages caused by the non-performance. (

• 3)

  Termination does not affect any term of the contract relating to the settlement of disputes or any other clause of the contract intended to operate even after the contract has been terminated. COMMENT 1. Termination Extinguishes Future Obligations Paragraph (1) of this article establishes the general rule that termination of the contract has effects for the future, so that the parties are freed from their duty to effect and receive future performances. 2. The Right to Damages Is Not Altered The fact that by virtue of its termination the contract comes to an end does not deprive the injured party of its right to claim compensation for non-performance, in accordance with the rules established in Section 4 of this Chapter. Example 1. "A" sells to "B" a specialized production machine. The machine presents serious defects after "B" begins to use it and its serious defects cause a stoppage of "B's" plant. "B" terminates the contract but retains the right to damages (see Article 7.3.5(2)). 3. Contractual Provisions Not Affected by Termination Notwithstanding the general rule established in paragraph (1), there may be obligations that survive termination. This is the case, in particular, of provisions or obligations relating to settlement of disputes and applicable law, but there may be other provisions or obligations that by their very nature are intended to continue to have effect even after termination of the contract, or to have effect only after termination of the contract. Such provisions may relate to confidentiality, prohibition of competition, payment of interest, or termination of a contractual relationship (for example, return of inventory, documents or advertising materials; return of means or documents with confidential information; indemnifications, treatment of intellectual property rights or databases, costs related to business exit, etc.). Examples 2. The facts are the same as in Example 1, except that in this case "A" discloses confidential information to "B", which "B" undertakes not to disclose unless it becomes public knowledge. The contract also contains a clause submitting disputes to the courts of "A's" country. "B" continues to be subject to the obligation not to disclose the confidential information even after terminating the contract, and any dispute relating to the contract and its effects must be heard before the courts of "A's" country (see Article 7.3.5(3)). 3. "A", a financial leasing company established in country "X", leases a commercial aircraft to "B", an airline operating regional flights in country "Z". For purposes of its nationality, the aircraft was registered in country "Z" in the name of "B", as the aircraft operator. Since international air regulations do not permit reuse of an aircraft without first canceling its registration in "Z's" records, "B" has undertaken by contract to obtain cancellation of its registration upon termination of the relationship. "B" decides to standardize its fleet of aircraft and terminates the financial lease. "A" does not have a power of attorney previously granted to cancel the registration and export the aircraft. "B" is obligated to cooperate with "A" to cancel the registration and obtain the administrative permission required to permit "A" to relocate its aircraft to another country. 4. Obligations After Termination of Long-Term Contracts The question of obligations arising after termination of the contract is particularly important in long-term contracts. The parties should consider the treatment of the following issues related to clauses intended to survive termination: which are the clauses that will survive termination; whether such clauses bind one or both parties after termination; how long they are to subsist; who will bear the costs; what remedies will be available in case of non-performance; etc. Clauses that survive termination may be drafted in different ways: through a general clause prescribing that all clauses intended to operate despite termination remain in effect; by including a list of those specific clauses intended to survive termination; or by indicating in the relevant clause that it will remain in force despite termination. Drafters of the contract must pay special attention to the eventual compatibility of obligations surviving termination with mandatory rules of domestic law (such as limitations on non-compete covenants). Examples 4. The facts are the same as in Example 3. The contract between "A" and "B" includes an indemnification clause in favor of "A" for losses suffered as a result of delay in canceling the aircraft's registration, a clause expressly intended to survive termination of the contract. Such clause is fully effective and may be enforced independently of any other claim arising from the terminated contract, although payment of such indemnification will have an impact on the calculation of damages for breach of contract. 5. The consultant "A" agrees to provide consulting services to its client "B", for an indefinite period, regarding a new product. The intellectual property rights arising from the services rendered by "A" belong at all times to "B", which is obligated to pay royalties for a period of fifteen years from the date of first sale. Just five years after "B's" duty to pay royalties to "A" arises, the contract is terminated pursuant to Article 5.1.8. "B's" obligation to pay royalties subsists for 10 years after termination of the contract. 6. The supplier "B" agrees to supply "A" a telecommunications system. Under the terms of this agreement, "B" undertakes to assist "A" in migrating services to another supplier upon termination of the contract, with "A" bearing the costs of exit from the contract. The contract is terminated. "B" remains obligated to assist "A" with migration of telecommunications services and "A" remains obligated to pay the costs related to such migration.

ARTICLE 7: 3.6 (Restitution in the Case of Contracts of Instantaneous Performance) (

• 1)

  Upon termination of a contract whose performance takes place in a single moment, each party may claim from the other restitution of what it has delivered under the contract, provided that such party restores at the same time what it has received. (

• 2)

  If restitution in kind is not possible or appropriate, compensation in money shall be due, provided that it is reasonable. (

• 3)

  The party that has benefited from performance is not obligated to pay monetary compensation if the impossibility of restitution in kind is attributable to the other party. (

• 4)

  Compensation may be required for those expenses reasonably necessary to protect or preserve what has been received. COMMENT 1. Contracts of Instantaneous Performance Paragraph (1) of this article applies only to contracts whose performance takes place in a single moment, or under which at least performance of the characteristic obligation takes place in a single moment, while long-term contracts are subject to a different rule (see Article 7.3.7(1)). The most common example of a contract whose performance takes place instantaneously is the ordinary contract of sale, in which the object of the sale must be transferred at a specific moment. However, this article also refers to contracts such as construction, in which the contractor is obligated to perform the work in its entirety, which must be accepted by the client at a specific moment. A turnkey contract is an important example of this type. Ordinarily in a commercial contract one party must pay a sum of money for the performance received. This is not the characteristic obligation of the contract. Thus, a contract of sale in which the purchase price is to be paid in installments will be governed by this article provided that the seller's performance must be made in a single moment. 2. Right of Parties to Restitution As a Consequence of Termination Paragraph (1) of this article grants to each party the right to claim restitution of everything that has been delivered under the contract, provided that it restores at the same time what it has received. Example 1. In the process of acquiring a company, the majority shareholder "A" agrees to sell and transfer to "B" shares with a value of 1,000,000 GBP. Once the transfer of the shares is made, "B" pays only 600,000 GBP, for which reason A terminates the contract. "A" may claim restitution of the shares. In turn, "A" must restore the 600,000 received from "B". The rule also applies when the injured party has made a bad bargain. If in the case presented in Example 1 the actual market value of the shares were 1,200,000 GBP, "A" may request restitution of the shares. This article also applies when the injured party has delivered money as consideration for goods, services, or other performances that the other party has not delivered or that are defective. Example 2. The entrepreneur "A" sells a Constable painting to entrepreneur "B" for 600,000 EUR. "B" pays only 200,000 EUR for the painting, for which reason "A" decides to terminate the contract. Subsequently it is discovered that the painting is not a Constable, but a copy. Upon termination of the contract, "B" may claim return of the money and must restore the painting to "A". With respect to expenses involved in restitution, Article 6.1.11 applies. 3. Restitution in Kind Impossible or Inappropriate Ordinarily, restitution must be made in kind. However, there are cases in which monetary compensation must be made instead of restitution in kind. This is the case, above all, when restitution in kind is not possible. The compensation will ordinarily be equal to the value of the performance received. Examples 3. The company "A", hired to excavate the land of company "B", abandons the work after performing only a part. "B", which terminates the contract, must pay to "A" a sum as compensation for the work performed, determined taking into account the value that the work has for "B". At the same time, "B" may claim damages from "A" for any damage "B" may have suffered as a consequence of "A's" non-performance (see Article 7.3.5(2)). 4. The company "A" charters a ship for a business cruise organized for its employees, to be held on the Australian coral reef. Halfway through the cruise breaks down and cannot continue. "A" terminates the contract with "B", the owner of the company that organized the cruise, and brings its employees back by air. If "A" has already paid the price, it may claim its return. At the same time, "A" must give "B" compensation corresponding to the value of the part of the cruise performed. Additionally, "A" may claim damages for losses suffered as a consequence of "B's" non-performance (see Article 7.3.5(2)). Compensation is also provided in paragraph 2 of this article by way of a sum of money whenever restitution in kind is not appropriate. This is the case, in particular, when restitution of what was performed in kind would imply efforts or expenses that are not reasonable. The criterion in this context is the same as that provided in Article 7.2.2(b). Example 5. "A", an artist, sells 200 silver-plated rings to the merchant "B". "B" does not pay for the rings and "A" terminates the contract. It turns out that "B" had meanwhile sent the rings to its commercial establishment, but the ship in which they had been sent sank. Although it would be possible to recover the rings from the sunken ship, incurring in great expense, one cannot expect "B" to do so. "B" must pay a reasonable sum to "A", determined in light of the value of the rings. The purpose of specifying that monetary compensation must be made "provided that it is reasonable" is to clarify that compensation is only appropriate when performance has conferred a benefit on the party receiving it, and to the extent of that benefit. This is not the case, for example, when the defect in the performance that gives the recipient the right to terminate the contract is only discovered upon commencement of performance. Example 6. The company "A" contracts with the company "B" to develop specialized software to improve its internal communication system. After "B" develops and installs the software, it turns out that it does not fulfill the required functions. "A" may terminate the contract and claim return of the price paid, but since the installed system has no value to "A", it would not be reasonable to expect "A" to pay "B" compensation for the installed software. 4. Distribution of Risk The rule provided in paragraph (2) entails a distribution of risk: it imposes on the beneficiary of performance the obligation to compensate the value of such performance if it is not in a position to restore the performance in kind. This rule of paragraph (2) applies even if the beneficiary of performance is responsible for the deterioration or destruction of what was received. This distribution of the risk of deterioration or destruction is justified, in particular, because the risk should be borne by the party that has control of the performance. On the other hand, there is no obligation to compensate the value of the performance when its deterioration or destruction is attributable to the other party, either because it results from the fault of the other party or is a consequence of a defect inherent in the performance. Hence the rule contemplated in paragraph (3). Example 7. The manufacturer "A" sells and delivers a luxury automobile to company "B". The automobile has defective brakes. Because of this defect, the automobile crashes into another, destroying itself completely. Since the automobile was not fit for its purpose, "B" may terminate the contract and claim return of the purchase price. "B" does not have to provide monetary compensation by reason of its inability to restore the automobile. The obligation of the beneficiary to compensate the value of the performance received is not excluded in cases in which the deterioration or destruction would also have occurred if the contract had not been performed. Example 8. The manufacturer "A" sells and delivers an automobile to company B. After delivery, the automobile is completely destroyed as a result of a hurricane that floods the properties of "A" and "B". "B" terminates the contract because of a defect in the automobile. "B" may claim return of the sales price, but at the same time must compensate the value the automobile had before its destruction. The problem of the beneficiary's obligation to pay the value of performance received arises only in those cases in which the deterioration or destruction takes place before termination of the contract. If the performed delivery deteriorates or is destroyed after termination of the contract, the general rules on non-performance apply, since the beneficiary is obligated to restore what it has received after termination of the contract. Any non-performance of such obligation gives the right to the other party to claim damages in accordance with Article 7.4.1, unless it is excused by non-performance pursuant to Article 7.1.7. Example 9. The company "A" sells and delivers to company "B" a limousine with a defective roof. Since the limousine is not fit for its purpose, "B" may terminate the contract. As a result, "B" may claim return of the purchase price but has the obligation to restore the limousine. Before "B" could restore it, the limousine is completely destroyed as a result of a storm. "A" cannot claim damages because "B" is excused pursuant to Article 7.1.7. 5. Compensation for Expenses The beneficiary of performance may have incurred expenses to protect or preserve the performed obligation. It is reasonable to permit the beneficiary to require compensation for these expenses when the contract is terminated and the parties must restore what they have received. Example 10. The company "A" sells and delivers a race horse to company "B". Some time later it is discovered that the horse does not come from a certain sire, as "A" had promised. "B" terminates the contract and may require compensation for the expenses in which it incurred to feed and care for the horse. This rule applies only to reasonable expenses. What is reasonable depends on the circumstances of the case. In Example 10 it would be decisive whether the horse had been sold as a race horse or as an ordinary horse. Compensation cannot be required for other expenses linked to the performance received, even if they are reasonable. Example 11. The company "A" sells and delivers a software package to company "B". "B" later discovers that the software lacks a certain functionality that it was supposed to have. "B" then requests software expert "C" to determine whether such functionality can still be implemented. As it turns out that this is not possible, "B" terminates the contract. "B" cannot recover from "A" the fees paid to "C" as expenses, in accordance with paragraph (4). 6. Benefits The Principles adopt no position regarding benefits that have been derived from performance, or accrued interest. In commercial practice it will often be difficult to establish the value of the benefits received by the parties as a consequence of performance. Moreover, often both parties will receive such benefits. 7. Rights of Third Parties Are Not Affected Like other articles of the Principles, this article addresses the relations between the parties and not the rights that third parties may have acquired over the goods in question. It must be determined in accordance with applicable law whether, for example, a creditor of the buyer, a bankruptcy trustee, or a bona fide acquirer may oppose restitution of the goods sold.

ARTICLE 7: 3.7 (Restitution in Long-Term Contracts) (1) Upon termination of a long-term contract, restitution can be claimed only for the period after termination, provided the contract is divisible. (2) Insofar as restitution is appropriate, the provisions of Article 7.3.6 shall apply. COMMENT 1. Long-Term Contracts Unlike the rule in paragraph (1) of Article 7.3.6 regarding contracts of instantaneous performance, paragraph (1) of this article provides, regarding long-term contracts, that restitution is only appropriate for the period after termination, provided the contract is divisible. In reality, it could be inappropriate to undo the performance of a contract whose effects were carried out over a long period of time before termination. Moreover, restitution is a remedy that only has effects for the future (see Article 7.3.5). Therefore, restitution can only be claimed for the period after termination. Example 1. "A" contracts to provide IT services for the computers of company "B" – both hardware and software – for a period of five years. After three years of regularly providing the service, "A" is forced to suspend the services due to illness, and the contract is terminated. "B", who has paid "A" for the fourth year, may claim restitution of the advance payment for that fourth year, but not the money paid for the three years of regular service. Since contracts are only terminated for the future, any outstanding payment for performances rendered in the past may be claimed. This article does not prevent claiming damages. Examples 2. The company "A" leases equipment to company "B" for three years, with a monthly fee of 10,000 EUR. "B" pays promptly for the first two months, but then suspends subsequent payments, despite repeated demands by "A". After five months, "A" terminates the lease. "A" is entitled to retain the 20,000 EUR already received (see Article 7.3.7(1)) and to obtain payment of the 50,000 EUR owed and due (on the basis of the lease that is only terminated for the future), together with any damages suffered as a result of the breach (see Article 7.3.5(2)). 3. The hospital "A" contracts with "B" for cleaning services, stipulating a three-year contract duration. After one year, "B" informs "A" that it cannot continue with the cleaning services unless the price is doubled. "A" rejects this condition and "B" suspends the service. Upon termination of the contract, "A" may claim damages resulting from any additional expenses in which it incurs in hiring another cleaning company (see Article 7.4.1 together with Article 7.3.5(2)); "B" is entitled to retain the payments received for services already rendered (see Article 7.3.7(1)). The rule whereby restitution may only be claimed for the period after termination does not apply if the performances are indivisible. Example 4. "A" undertakes to paint ten paintings with the same historical motif for the ballroom of "B". After having delivered and been paid for painting five paintings, "A" abandons the work. Since the decoration of the ballroom was intended to have ten paintings painted by the same painter and showing different aspects of the same historical event, "B" may claim return of all the money given in advance to "A" and must return the five paintings to "A". 2. Restitution This article contains a special rule in the sense that, in the case of long-term contracts, restitution of performances rendered in the past is excluded. If there is to be a right to restitution pursuant to this article, restitution shall be subject to the provisions of Article 7.3.6.

ARTICLE 7: 4.1 (Right to Damages) Any non-performance gives the injured party the right to damages, either exclusively or together with other remedies, unless the non-performance is excusable under these Principles. COMMENT 1. General Right to Damages This article establishes the principle of a general right to damages in case of non-performance, except when the non-performance is excusable under these Principles, such as in the case of force majeure (see Article 7.1.7) or an exemption clause (see Article 7.1.6). Hardship (see Article 6.2.1 et seq.), in principle, does not give rise to compensation for damage suffered. The article insists that the right to damages, like other remedies, arises from the mere fact of non-performance. The injured party need only prove the non-performance, that is, that it has not received what was promised to it. It is not necessary to additionally prove that the non-performance is due to the fault of the non-performing party. The degree of difficulty in proving non-performance will depend on the content of the obligation and, in particular, whether the obligation is one of best efforts or of result (see Article 5.1.4). The right to damages exists in the case of failure to perform any of the obligations arising from the contract, so it is not necessary to distinguish between principal and ancillary obligations. 2. Damages Compensation Is Compatible With Other Remedies This article also establishes that the injured party may seek compensation for damage suffered, either as the sole remedy (e.g., compensation for delay in performance, or for defective performance accepted by the injured party, or for impossible performance for which the non-performing party is responsible), or together with other remedies. Therefore, in case of termination of the contract, damages may be sought to compensate for the harm caused by such termination, or, in the case of specific performance, to compensate for the delay with which the injured party receives the performance and for any expenses it may have incurred. Damages compensation may also be accompanied by other remedies (e.g., remedying of non-performance, admission of error, publication in newspapers, etc.). 3. Damages and Precontractual Responsibility The right to damages may arise not only in the context of breach of contract, but also during the precontractual phase (see, for example, Article 2.1.15 regarding damages for bad faith negotiation, Article 2.1.16 for violation of the duty of confidentiality, or Article 3.2.16 for error, fraud, intimidation, or gross disparity of performances). These situations are subject to the application by analogy of the rules governing damages.

ARTICLE 7: 4.2 (Full Reparation) (1) The aggrieved party has the right to full reparation of the harm caused by non-performance. This harm comprises any loss suffered and any gain of which it was deprived, taking into account any gain that the aggrieved party may have obtained by avoiding expense or harm. (2) Such harm may be non-pecuniary and includes, for example, physical suffering and emotional distress. COMMENTARY 1. The aggrieved party has the right to full reparation Paragraph (1) of this article establishes the principle that the aggrieved party has the right to full reparation for harm suffered as a consequence of non-performance of the contract. This paragraph further reaffirms the necessity of a causal relationship between non-performance and harm (see also Commentary 3 to Article 7.4.3). Non-performance should not be a source of loss or gain for the aggrieved party.

Damages Art. 7.4.2 The solution favored in some legal systems has not been adopted, which would allow the court to reduce the amount of reparation taking into account the circumstances of the case, since in an international context this moderating power could cause considerable uncertainty, varying widely in its application from one court to another. 2. Reparation for harm covers losses suffered, including lost profits In specifying the harm to be repaired, paragraph (1) of this article, following the rule established in Article 74 of CISG, provides that the aggrieved party is entitled to compensation not only for the loss suffered but also for all gain of which it has been deprived as a consequence of non-performance. The notion of losses suffered must be understood in a broad sense. It can include a reduction in the assets of the aggrieved party or an increase in its liabilities when the creditor, upon not receiving payment from the debtor, is forced to borrow money to meet its obligations. Lost profits or, as it is sometimes called, consequential loss, consists of the benefit that the aggrieved party could have received in the ordinary course of events if the contract had been properly performed. Often this benefit will be uncertain, so that it frequently takes the form of the loss of an expectation (see Article 7.4.3(2)). Examples 1. A national library sends a valuable manuscript by specialized courier abroad for an exhibition. The manuscript is irreparably damaged during transport. Its loss is estimated at 100,000 EUR. This is the sum that the courier company must pay. 2. "A", who has not received payment from "B" as required by the contract, must resort to a bank to request a loan at a high interest rate. "B" must compensate "A" for the interest paid to the bank. 3. "A", a construction company, rents a crane from company "B". Upon not receiving proper maintenance, the crane's arm breaks and falls on the architect's car, crushing it. The accident causes an interruption of the work for eight days, as a result of which "A" must pay the property owner a penalty for delay of 50,000 EUR. "B" must reimburse "A" the expenses incurred as a consequence of the

Art. 7.4.2 UNIDROIT Principles interruption of work, plus the sum of the penalty for delay and the repair of the architect's car that "A" had to pay. 4. "A", a singer, cancels an engagement with "B", a promoter. "A" must pay the damages caused to "B" not only because of the expenses incurred by "B" for the preparation of the concert, but also the loss of the profits that would have been obtained if the show had not been cancelled. 3. Damages should not enrich the aggrieved party The aggrieved party should not be enriched by compensation for non-performance. This is why paragraph (1) also provides that compensation must take into consideration any gain that the aggrieved party may have obtained from the non-performance, either from expenses that it has avoided (e.g., by not having to pay the cost of accommodation for the artist who does not appear on stage), or losses that it avoided thanks to the non-performance (e.g., in the case of non-performance of a transaction that would have caused losses to the aggrieved party). Example 5. "A" rents an excavating machine from "B" for two years, at a monthly rent of 10,000 EUR. The contract is terminated after six months due to failure to pay the rent. Six months later, "A" manages to rent the same machinery for 11,000 EUR per month. The gain of 12,000 EUR obtained by "A" as a result of the new rental for the time remaining of the contract with "B", that is, one year, shall be deducted from the amount of compensation owed by "B". 4. Reparation in case of modifications of harm In application of the principle of full reparation, any modification of harm, including its expression in pecuniary terms, that may occur between non-performance and judgment must be taken into account. This rule has exceptions. For example, if the aggrieved party has repaired the harm at its own expense, the amount should correspond to the sums disbursed. 5. Compensation for non-pecuniary harm Paragraph (2) of this article expressly provides for the reparation of non-pecuniary damages. These may be physical pain and emotional suffering, loss of certain pleasures, aesthetic harm, etc., as well as harm caused by attacks on honor or reputation.

Damages Art. 7.4.3 This rule could be applied in international commerce in matters of contracts entered into by artists, famous athletes or consultants contracted by a company or organization. In these cases too the requirement must be satisfied that the harm be certain (see Article 7.4.3), in addition to the other conditions for being entitled to compensation. Example 6. "A", a young architect who has begun to acquire a certain prestige, signs a contract for the modernization of a municipal fine arts museum. The appointment receives wide coverage in the press. The municipal authorities subsequently decide to hire a more experienced architect and terminate the contract with "A". "A" can obtain compensation, but not only for material losses but also for harm to reputation and the loss of the opportunity for "A" to achieve the greater fame that would have been afforded by carrying out the assignment. The reparation of non-pecuniary harm may take different forms and it is for the courts to determine which of them, either alone or accompanied by reparation of material harm, best ensures the effects of full reparation. The courts may not only require payment of monetary compensation, but also other forms of reparation, such as the publication of a notice or article in a particular newspaper (e.g., in the case of violation of a clause prohibiting competition or the reopening of a business, defamation, etc.).

ARTICLE 7: 4.3 (Certainty of Harm) (

• 1)

  Compensation is due only for harm, including future harm, that can be established with a reasonable degree of certainty. (

• 2)

  Compensation may be due for the loss of an expectation in proportion to the probability of its occurrence. (

• 3)

  When the amount of damages cannot be established with a sufficient degree of certainty, it is at the discretion of the court to fix the amount of compensation.

  Art. 7.4.3 UNIDROIT Principles COMMENTARY 1. Harm must be capable of being determined with a reasonable degree of certainty This article confirms the well-known principle of certainty of harm, since it is not possible to require the non-performing party to repair an injury that has not occurred and that may never occur. Paragraph (1) also authorizes compensation for future harm, that is, when the harm has not yet occurred but is very likely to occur. Paragraph (2) further includes the loss of an expectation or "chance", obviously only in proportion to the probability of its occurrence. Therefore, the owner of a horse that arrives too late to run in a race as a result of delay in its transport cannot claim compensation equivalent to the first prize, even if the horse were the favorite. 2. Determination of the extent of harm The requirement of certainty of harm concerns not only its existence but also its extent. There may be harm whose existence is not disputed but is difficult to quantify. This is the frequent case of harm caused by the loss of an expectation (which does not always involve speculation, as in the case of a horse race, but also cases such as that of an engineering company that is preparing to submit an offer) or the reparation of non-material harm (e.g., the detriment to a person's reputation, their pain or suffering). Example "A" delivers an envelope with a bid to "B", an express courier company, in which "A" responds to an invitation to submit bids in a public call for proposals for the construction of an airport. "B" assumes responsibility for delivering the envelope before the deadline for receipt of bids, but delivers it after that date and for that reason "A"'s application is rejected. The amount of compensation owed to "A" will depend on the degree of possibility that "A"'s bid would have won the public call, for whose determination it is required that it be compared with the other proposals submitted for consideration. The extent of the amount of compensation in this case shall be calculated in proportion to the profits that "A" could have obtained.

  Damages Art. 7.4.4 By virtue of paragraph (3), when the amount of compensation cannot be established with a certain degree of certainty, the court is empowered to quantify it equitably, instead of rejecting it or awarding a symbolic sum. 3. Harm, in addition to being certain, must be a direct consequence of non-performance There is a clear connection between certainty and the direct nature of harm. Although this direct nature of the injury caused is not expressly regulated in the Principles, it is implicit in Article 7.4.2(1), which refers to reparable harm as that "resulting from non-performance", which presupposes a sufficient causal nexus between non-performance and the harm suffered. If the harm is too indirect, it is very likely that it is also uncertain and unforeseeable.

ARTICLE 7: 4.4 (Foreseeability of Harm) The non-performing party is responsible only for harm that was foreseeable, or that could reasonably have been foreseen, as a probable consequence of its non-performance, at the time the contract was concluded. COMMENTARY The principle that reparable harm is limited to that which could have been foreseen corresponds to the solution adopted by Article 74 of CISG. This limitation refers to the very nature of the contract: not all losses that the aggrieved party may fail to receive are directly related to the contract. The non-performing party should not bear the cost of repairing losses that it could not foresee at the time of entering into the contract, nor the risks that, for that reason, it could not contemplate covering with insurance. The requirements of foreseeability must be analyzed simultaneously with the requirements of certainty of harm established in Article 7.4.3. It is necessary to clarify what is meant by the requirement of foreseeability of harm in the Principles, since it may not correspond to some legal systems, in accordance with which, in the case of willful or grossly negligent non-performance, compensation for harm extends to losses that could not have been foreseen. As this rule does not provide for such an exception, the concept of foreseeability must be interpreted in a restrictive manner. The foreseeability of harm refers to the nature of the harm and not to its extent, unless the latter is such that it transforms one type of loss into another of a different nature. In any event, the notion of foreseeability is sufficiently flexible as to leave the judge with a broad margin of discretion. What was foreseeable shall be determined with reference to the time of the conclusion of the contract and with respect to the non-performing party itself (including its agents or representatives). The determining criterion consists of identifying what a normally diligent person could reasonably foresee as consequences of non-performance in the ordinary course of events and in accordance with the peculiar circumstances of the contract, such as the information disclosed by the parties or prior transactions that they may have entered into. Examples 1. A cleaning company requests a machine that is delivered five months late. The manufacturer of the machine must compensate the cleaning company for the lost profits caused by the delay in its delivery, since the manufacturer could have foreseen that the machine was to be put into operation immediately. On the other hand, the reparable harm does not include the loss by the cleaning company of a valuable contract with the government, which would have been concluded if the machine had been delivered on time, since this type of loss was not foreseeable. 2. "A", a bank, regularly uses the security services of a company for the transport of sacks of coins to be distributed through its branches. Without informing the security company, "A" sends sacks with coins for collectors, of value fifty times higher than that of the coins transported in previous deliveries. The sacks are stolen in a robbery. "A" is only entitled to be compensated for the loss suffered that corresponds to the value of the sacks of coins regularly transported, since this is the only type of harm that could have been foreseen. The value of the loss of the sacks of new coins has transformed the foreseeable loss into one of a different nature. Unlike certain international conventions, especially those in the area of transport, the Principles follow the CISG criterion in that they do not include in the concept of full reparation unforeseeable harm caused by willful non-performance.

Damages Art. 7.4.5

ARTICLE 7: 4.5 (Proof of Harm in Case of a Substitute Transaction) When the aggrieved party has terminated the contract and has effected a substitute transaction at a reasonable time and in a reasonable manner, it may recover the difference between the price of the contract and the price of the substitute transaction, as well as compensation for any additional harm. COMMENTARY 1. Amount of presumed harm in case of a substitute transaction Along with the general rules applicable to proof of the existence and amount of harm, it is advisable to establish a series of presumptions that may facilitate the task of the aggrieved party. The first of the presumptions established in this article substantially corresponds to Article 75 of CISG. It refers to the situation in which the aggrieved party has carried out a substitute transaction, either because it is required by the duty to mitigate harm or by commercial practice. In such a case, the harm suffered is considered to be the difference between the price of the contract and the price of the substitute transaction. The presumption is applicable only if a substitute transaction has been carried out and not if the aggrieved party has itself performed the obligation that should have been performed by the other party (for example, when a shipowner proceeds to repair a vessel that should have been repaired by the shipyard to which the work had been entrusted). Nor is there a substitute transaction, and therefore the general rules apply, when a company, after terminating the contract, uses its equipment to perform other contracts that it could have performed at the same time as the first one ("volume loss"). The substitute transaction must be carried out within a reasonable time and in a reasonable manner, in order to prevent the non-performing party from being harmed by hasty or malicious conduct. 2. Further compensation covers additional harm The rule that the aggrieved party may recover the difference between the two contract prices establishes a minimum right to compensation. The aggrieved party may also obtain compensation for additional harm that it may have suffered.

Art. 7.4.6 UNIDROIT Principles Example "A", a shipyard, undertakes to overhaul a vessel belonging to "B", a shipowner, for which it is agreed that the repairs will be carried out starting on July 1 at "A"'s dock, at a cost of USD 500,000. On June 1, "B" learns that the dock will only be available starting on August 1. "B" terminates the contract and after lengthy and costly negotiations enters into a contract with "C", another shipyard with characteristics identical to those of "A", at a cost of USD 700,000. "B" is entitled to be compensated by "A" not only for the price difference of USD 200,000, but also for the expenses incurred and compensation for the longer period during which it will not be able to use the vessel.

ARTICLE 7: 4.6 (Proof of Harm by Current Price) (1) If the aggrieved party has terminated the contract and has not effected a substitute transaction, but there is a current price for the performance contracted, it may recover the difference between the price of the contract and the current price at the time of termination of the contract, as well as compensation for any additional harm. (2) Current price is the price generally charged for goods delivered or services rendered in similar circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at another place that seems reasonable to use as a reference. COMMENTARY 1. Amount of presumed harm without substitute transaction The purpose of this article, which substantially corresponds to Article 76 of CISG, is to facilitate proof of harm when there has been no substitute transaction, but there is a current price for the contracted performance. In such cases, it is presumed that the reparable harm equals the difference between the contract price and the current price at the time of termination of the contract.

Damages Art. 7.4.7 2. Determination of "current price" In accordance with paragraph (2), "current price" is that generally charged for similar goods or services. The price shall be determined by comparison with the price paid for similar goods or services. Professional organizations, chambers of commerce, etc., may be consulted to prove the current price. For the purposes of this article, the relevant place for determining the current price is that of the place where the contract should have been performed or, if there is no current price at that place, the current price at another market that may reasonably be used as a reference. 3. Further compensation covers additional harm The rule that the aggrieved party may recover the difference between the contract price and the current price at the time of termination only establishes a minimum right to compensation. The aggrieved party may also obtain compensation for any additional harm that it may have suffered as a consequence of the termination.

ARTICLE 7: 4.7 (Harm Partially Attributable to the Aggrieved Party) When harm is due in part to an act or omission of the aggrieved party or to another event by which that party assumes the risk, the amount of compensation shall be reduced to the extent that such factors have contributed to the harm, taking into consideration the conduct of each of the parties. COMMENTARY 1. Contribution to harm of the aggrieved party In accordance with the general principle established in Article 7.1.2, which limits the remedies of the aggrieved party when non-performance is due in part to its own conduct, this article limits the right to compensation to the extent that the aggrieved party has partially contributed to the harm, since it would be unjust for that party to receive full compensation for harm for which it is itself partially responsible.

Art. 7.4.7 UNIDROIT Principles 2. Modes of contributing to the harm caused Contribution of the aggrieved party to the harm may consist of its own conduct or an event whose risk it has assumed. The conduct may take the form of an act (e.g., giving the carrier a wrong address) or an omission (e.g., failing to give the machinery manufacturer, which turned out to be defective, all necessary instructions). Often such acts or omissions result from the aggrieved party's failure to perform its own contractual obligations or performances. However, it could also arise from its negligent conduct or failure to perform other contracts. External events for which the aggrieved party assumes the risk may consist, among other events, of acts or omissions of persons for whom the aggrieved party is responsible, such as agents or representatives. Examples 1. "A", the beneficiary of a franchise granted by "B", which was obtained "exclusively" in accordance with the contract, purchases merchandise from "C" because "B" has requested immediate payment, overlooking the fact that the franchise contract grants "A" a period of 90 days for payment. "B" claims payment of the penalty stipulated for violation of the "exclusivity" clause. "B" can only obtain partial compensation, because it was "B" itself who caused the non-performance by "A". 2. During a voyage on a luxurious cruise ship, "A", a passenger, is injured because one of the elevators did not stop at the requested floor. "B", the shipowner, is found responsible for the consequences of the harm suffered by "A". In turn, "B" sues "C", the company responsible for inspecting the operation of the elevators before the ship sailed. In the course of litigation, it is proven that the accident would not have occurred if the floor had been better illuminated. As this was "B"'s responsibility, "B" cannot obtain full compensation from "C". 3. Distribution of contribution to harm The conduct of the aggrieved party or external events for which the risk has been assumed by that party could have made performance absolutely impossible. In the case where the requirements of Article 7.1.7 (force majeure) have been satisfied, the non-performing party is completely exonerated from liability.

Damages Art. 7.4.8 Otherwise, the exoneration will be partial, depending on the extent to which the aggrieved party has contributed to the harm. It may be very difficult to provide evidence to determine each party's contribution to the harm suffered. In some cases this will depend on a sound exercise of judicial discretion. In order to provide guidance to the courts, this article provides that the judge should take into account the conduct of the parties. The greater the fault of one party, the greater its share of contribution to the harm caused. Examples 3. The facts are the same as in example 1. Since "B" was the first to fail to comply with the terms of the contract, "B" is held responsible for "A"'s failure to comply with the "exclusivity" clause. "B" can only recover 25% of the amount provided in the penalty clause. 4. The facts are the same as in example 2. Since the non-performance of "B" and "C" appear to be equivalent, "B" can only recover from "C" 50% of what it has paid as compensation to "A". 4. Contribution to harm and its mitigation This article must be interpreted together with the following article, which deals with mitigation of harm (Article 7.4.8). While this article deals with conduct attributable to the aggrieved party in relation to the cause that gave rise to the harm initially suffered, Article 7.4.8 refers to subsequent conduct that the aggrieved party observes or could observe.

ARTICLE 7: 4.8 (Mitigation of Harm) (1) The non-performing party is not responsible for harm suffered by the aggrieved party to the extent that the harm could have been reduced if that party had taken reasonable measures. (2) The aggrieved party has the right to recover any expenses reasonably incurred in an attempt to reduce the harm.

Art. 7.4.8 UNIDROIT Principles COMMENTARY 5. Duty of the aggrieved party to mitigate harm The purpose of this article is to prevent the aggrieved party from remaining inactive and passively awaiting compensation for harm that it could have avoided or whose consequences it could have mitigated. Thus, it is established that no harm will be compensated that the aggrieved party could have avoided by taking reasonable measures. It is clear that while a party that has suffered the consequences of non-performance cannot be required to, in addition, spend time and money, it is not sensible from an economic point of view to allow the increase of an injury that could have been reduced by taking appropriate measures. The measures that the aggrieved party must take may be directed at limiting the extent of the harm, especially when it may continue for a long time if no appropriate measure is adopted, such as a substitute transaction in accordance with Article 7.4.5, or to avoid the increase of an initial loss. Examples 1. On May 2, "A" requests "B", a travel agency, to reserve a room in a hotel in city "X" for June 1 and at a cost of 200 EUR. On May 15, "A" learns that "B" has made no reservation. "A" waits until May 25, when it makes a new reservation and can only find a room at a cost of 300 EUR. If the reservation had been made on May 15, the price of the room would have been 250 EUR. "A" can only recover 50 euros from "B". 2. "A" is a company to which "B" has entrusted the construction of a factory. When construction was about to be completed, "A" suddenly suspends the work. "B" looks for another company to complete the building, but does not take the precaution of protecting the construction that has been completed, which deteriorates due to bad weather. "B" cannot claim compensation for damage to the construction caused by bad weather and lack of protection.

Damages Art. 7.4.9 6. Reimbursement of expenses The reduction of compensation in proportion to the omission by the aggrieved party of the measures necessary to avoid damages should not, however, cause greater losses to the aggrieved party. It may recover from the non-performing party the expenses incurred to mitigate harm, provided that such expenses are reasonable in view of the circumstances (paragraph (2)). Examples 3. The facts are the same as in Example 2, but here "B" adopts measures to protect the completed work. The cost of such measures shall be added to the amount of restitution owed by "A" for non-performance of the contract, provided that such expenses are reasonable. If they are not, they shall be reduced. 4. The facts are the same as in Example 1, but here "A" obtains a room in a luxury hotel for 500 EUR. "A" can only recover the 50 euro difference with respect to the room that "A" could have obtained for 250 EUR.

ARTICLE 7: 4.9 (Interest for Non-Payment of Money) (

• 1)

  If a party does not pay a sum of money when due, the aggrieved party has the right to interest on that sum from the time of maturity of the obligation until the time of payment, whether or not the non-payment is excusable. (

• 2)

  The interest rate shall be the average rate of short-term bank loans to qualified customers and predominant for the currency of payment at the place where payment is to be made. Where no such rate exists at that place, then the same rate in the State of the currency of payment shall apply. In the absence of such rate in either of these places, the interest rate shall be that which is appropriate in accordance with the law of the State of the currency of payment. (

• 3)

  The aggrieved party has the right to additional compensation if non-payment causes greater harm.

  Art. 7.4.9 UNIDROIT Principles COMMENTARY 1. Lump sum compensation for failure to pay a sum of money This article confirms the widely accepted rule that the harm resulting from delay in payment of a sum of money is subject to a special regime, calculated as a lump sum corresponding to the interest accrued between the time when payment became due and the time of actual payment. Interest must be paid whenever the delay in payment is attributable to the non-performing party and from the time when the debt becomes due, without any necessity that the aggrieved party notify the failure to pay. If the delay is a consequence of force majeure (e.g., if the non-performing party is unable to obtain the sum owed due to the entry into force of new foreign exchange regulations), interest is accrued anyway and must be paid not as compensation but as restitution for the enrichment of the debtor that results from non-payment, since the debtor continues to receive interest on the sum whose payment it is unable to effect. The harm is calculated as a lump sum. In other words, subject to the provisions of paragraph (3) of this article, the aggrieved party need not prove that it could have obtained greater interest, nor can the non-performing party prove that the aggrieved party would have obtained interest lower than the average bank rate referred to in paragraph (2). The parties may, of course, agree in advance on a different interest rate, which will be subject to the provisions of Article 7.4.13. 2. Interest rate Paragraph (2) of this article sets as the applicable interest rate, in the first place, the average bank rate for short-term loan operations in favor of qualified customers. This solution appears to be the one that best responds to the needs of international commerce and also the most appropriate to ensure adequate compensation for harm suffered. The rate in question is that at which the aggrieved party would normally place the money it has failed to receive. That rate is the average that a bank would pay on a short-term loan to qualified customers and that predominates for the currency of payment at the place of payment.

  Damages Art. 7.4.10 If no such rate exists for the currency of payment at the place of payment, the average interest rate in force in the State of the currency of payment shall apply first. For example, if a loan is made in pounds sterling payable in country "X", and there is no interest rate for loans in pounds in the financial market of country "X", the interest rate in force in the United Kingdom shall apply. In the absence of such a rate in either of these places, the interest rate shall be that which is considered "appropriate" in accordance with the law of the State of the currency of payment. In most cases this will be the legal interest rate, and if there is more than one, the interest rate most appropriate for international transactions shall apply. If there is no legal interest rate, the most appropriate banking rate shall apply. 3. Other reparable harm The purpose of paying interest is to repair the harm normally caused by delay in payment of a sum of money. Such delay may, however, cause additional harm to the aggrieved party, for which that party may claim compensation, provided it can prove such additional harm and it meets the requirements of certainty and foreseeability (paragraph (3)). Example "A" enters into a contract with "B", a specialized financial company, to obtain a loan that would allow it to renovate its factory in country "X". The loan expressly mentions the purpose of the funds. The borrowed money is transferred three months later than agreed. During this time, the cost of the work has increased by 10%. "A" has the right to recover this additional sum from "B".

ARTICLE 7: 4.10 (Interest on Compensation) Unless otherwise agreed, interest on compensation for non-performance of non-monetary obligations shall begin to accrue from the time of non-performance.

Art. 7.4.11 UNIDROIT Principles COMMENTARY This article determines the time from which interest on compensation shall accrue in the case of non-performance of non-monetary obligations. In such cases, the amount of compensation will not have been determined in money at the time of non-performance. The liquidation will only take place after the harm has occurred, either by agreement of the parties or by a court. This article fixes the time when the harm occurs as the starting point for interest to begin accruing. This solution is the one that best adapts to the needs of international commerce, whose participants do not usually allow their money to remain idle. In effect, the assets of the aggrieved party are diminished from the moment it suffers harm, while the non-performing party, during the time the compensation is not paid, continues to enjoy the benefits of the interest on the sum it will have to pay. It is just, therefore, that this gain be transferred to the aggrieved party. However, when the final assessment of harm is made, attention should be paid to the fact that compensation is granted from the date on which it occurs, in order to avoid double compensation that could occur, for example, in the case that the value of the currency depreciates. This article does not address the question of compound interest, which in accordance with the domestic law of some countries is subject to public order rules designed to protect the non-performing party.

ARTICLE 7: 4.11 (Form of Monetary Compensation) (1) Compensation shall be paid in a lump sum. However, it may be paid in installments when the nature of the harm makes it appropriate. (2) Compensation payable in installments may be indexed.

Damages Art. 7.4.11 COMMENTARY 1. Lump sum or installment payment Although this article does not impose a particular form for compensation, it is considered that payment of compensation in a single instance is the one that best suits the needs of international commerce. However, there may be circumstances in which payment in installments is more appropriate to the nature of the harm, for example, when it is a matter of ongoing harm. Examples 1. "A", a former international soccer player from country "X", is hired by "B" for a period of three years to train the players of a soccer team from country "Y", with a monthly remuneration of 10,000 AUD. The contract provides that in case of unjustified dismissal, "A" shall receive 200,000 AUD. "A" is dismissed without cause after six months. "A" is entitled to claim the agreed sum, even in the case that it has been immediately hired by another team, receiving double the salary received from "B". 2. "A", a security consultant, is hired by "B" for a period of three years. His remuneration is set at 0.5% of production. "A" is dismissed six months later without just cause. It would be appropriate for "B" to be required to pay "A" a monthly sum corresponding to the agreed salary until "A" finds new employment, or for a maximum period of thirty months. 2. Indexation Paragraph (2) of this article contemplates the possibility of indexation of compensation payable in installments, in order to eliminate the complex mechanism involved in revising a judgment to compute the effects of inflation. However, indexation may be prohibited by the law of the forum. Example 3. The facts are the same as in example 1. The monthly amounts can be adjusted in accordance with the index of increase in the cost of living where "A"'s children live.

ARTICLE 7: 4.12 (Currency in Which Compensation is Fixed) Compensation shall be fixed, as is most appropriate, either in the currency in which the monetary obligation was expressed or in that in which the harm was suffered. COMMENTARY Since the harm resulting from non-performance of an international contract may appear in different places, the problem arises of determining the currency in which compensation shall be fixed. The matter dealt with by this article must be distinguished from the question of the currency in which compensation for damages is to be paid, referred to in Article 6.1.9. This article offers a choice between the currency unit in which the monetary obligation is expressed and that in which the harm has been suffered, with the choice being that which is most appropriate in view of the circumstances of the case. While the first alternative requires no particular comment, in the second case it must be taken into account that the aggrieved party may incur expenses in a particular currency to repair the harm it has suffered. In such a case, it should have the right to claim that payment of compensation be made in the same currency, even if it is not the currency expressed in the contract. Another currency that could be considered appropriate is that in which profits would have been realized. The choice is left to the aggrieved party, provided that the principle of full reparation is respected. Finally, in the absence of an indication to the contrary, a party has the right to receive payment of interest, liquidated damages, and penalties in the same currency as that expressed for payment of the principal obligation.

ARTICLE 7: 4.13 (Payment Stipulated for Non-Performance) (1) Where the contract provides that the non-performing party shall pay a specified sum to the aggrieved party for such non-performance, the aggrieved party has the right to receive that sum without regard to the actual harm suffered. (2) However, notwithstanding any agreement to the contrary, the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm caused by the non-performance and to the other circumstances. COMMENTARY 1. Definition of payment stipulated for non-performance This article gives an intentionally broad definition of stipulations to pay a specific sum in case of non-performance, whether such a clause is intended to facilitate the recovery of compensation (which in the common law tradition is known as "liquidated damages") or to deter non-performance (penalty clause proper), or both purposes. 2. Payment stipulated for non-performance is valid in principle There are considerable variations among domestic legal systems with respect to the validity of this type of clause. This variety includes those countries of the civil law tradition, which validate them with the possibility of revising them judicially if they are particularly onerous, to those countries of the common law tradition, which reject the validity of clauses specifically intended to deter non-performance (penalty clauses). Given their frequency in international contractual practice, paragraph (1) of this article recognizes in principle the validity of any clause that provides for the obligation of the non-performing party to pay a certain sum of money to the aggrieved party for such non-performance, with the latter being entitled to claim that sum, independently of the harm that it has actually suffered. The non-performing party cannot

Art. 7.4.13 UNIDROIT Principles allege that the aggrieved party has suffered lesser harm or that it has suffered no harm at all. Example 1. "A", a former international soccer player from country "X", is hired for three years to coach the players of "B", a soccer team from country "Y", with a monthly remuneration of 10,000 AUD. The contract provides that in case of unjustified dismissal, "A" shall receive 200,000 AUD. "A" is dismissed without cause after six months. "A" is entitled to claim the agreed sum, even in the case that it has been immediately hired by another team, receiving double the salary received from "B". Generally, non-performance must be attributable to the non-performing party, since it is inconceivable that the agreed sum in a penalty clause should be paid when non-performance is the result of a situation of force majeure. Exceptionally, however, the parties may have provided for such a clause with the intention of covering cases where the non-performing party is not responsible for non-performance. In case of partial non-performance, the sum may be reduced proportionally, unless the parties have agreed otherwise. 3. The stipulated sum may be reduced In order to prevent the possibility of abuses that may arise with this type of clause, paragraph (2) of this article permits the reduction of the stipulated sum if it is manifestly excessive "in relation to the harm resulting from non-performance and to the other circumstances of the case". The same paragraph (2) expressly provides that the parties cannot exclude the possibility of reducing the amount of the clause for any reason. The stipulated sum may only be reduced but not eliminated entirely, as would be the case if the courts, despite what the parties agreed, decided to fix the amount of damages in precise relation to the harm suffered. Nor can it be increased, at least in accordance with this article, when the stipulated sum is less than the harm actually suffered (see, however, Commentary 4 to Article 7.1.6). Moreover, it is necessary that the stipulated sum be "manifestly excessive", that is, clearly perceived as such by any reasonable person. The relationship between the stipulated sum and the harm actually suffered must be given special attention.

Damages Art. 7.4.13 Example 2. "A" enters into a contract with "B" for the purchase of machinery, for which payment is provided in five installments of 50,000 EUR each. A clause in the contract empowers "B" to terminate the contract immediately if "A" fails to pay an installment, authorizing "B" to retain the sums paid and claim future payments as compensation. "A" fails to pay the third installment. "B" retains the 100,000 EUR already paid and claims payment of 150,000 EUR, representing three remaining installments, in addition to the return of the machinery. The court will reduce the stipulated sum, since otherwise "B" would receive an unreasonable profit as a consequence of "A"'s non-performance. 4. Payment stipulated for non-performance must be distinguished from fines, penalties and other similar clauses The type of clauses referred to in this article must be distinguished from fines, penalties and other similar clauses that permit one of the parties to withdraw from the contract, either by paying a sum or by forfeiting deposits made. On the other hand, included within the scope of application of this article is a clause by virtue of which one of the parties may retain sums already paid as part of the price. Examples 3. "A" undertakes to sell immovable property to "B" for 450,000 EUR. "B" must exercise the purchase option within three months and must pay a deposit of 25,000 EUR, which "A" has the right to retain if "B" does not exercise its right of option. As this is not payment stipulated for the case of non-performance of the contract, this clause does not fall within the scope of application of this article, and the sum cannot be reduced even if it is manifestly disproportionate in such circumstances. 4. "A" contracts with "B" the rental of machinery that belongs to "B". The contract provides that if "A" fails to pay a single monthly rental, the contract will be terminated and the sum already paid will be retained by "B" as compensation for the harm suffered. This clause is included within the scope of application of this article and the agreed sum could be subject to reduction.

ARTICLE 8: 1 (Conditions of Set-Off) (1) When two parties owe each other reciprocal debts of money or other performances of the same nature, any one of them ("the first party") may set off its obligation against that of its creditor ("the other party") if at the time of set-off: (a) the first party is entitled to perform its obligation; (b) the obligation of the other party is determined as to its existence and amount and its performance is due. (2) If the obligations of both parties arise from the same contract, the first party may also set off its obligation against an obligation of the other party whose existence or amount is not determined. COMMENTARY 1. Use of set-off Under the Principles, when two parties are reciprocal debtors in virtue of a contract or other source of obligations, each party may set off its debt against the debt of the other party. By mutual deduction, the two debts cancel out to the extent of the smaller debt (see Article 8.5). Set-off avoids the necessity of each party performing its obligations separately. The debtor required to pay and who has also exercised the right of set-off is called "the first party". The creditor who demands payment from his debtor, against whom the right of set-off is exercised, is called "the other party".

Set-Off Art. 8.1 Examples 1. "A", a maritime carrier, has transported merchandise belonging to "B" from country "X" to country "Y". "A" requests 5,000 EUR from "B" for this transport. "B", who was previously a creditor of "A" for an amount of 5,000 EUR as compensation for damage caused to other merchandise transported previously, may set off its own debt against "A"'s debt of 5,000 EUR. If it does so, "A" and "B" will no longer be debtors to each other. 2. "A" sells a parcel of land to "B" for the price of 100,000 AUD. Subsequently, "B", who is a contractor, builds a house for "A". The price of the construction is 200,000 AUD. When "A" demands payment of the land, "B" may set off its debt against the price of the construction. "B"'s debt to pay 100,000 AUD to "A" is completely extinguished, but "A" remains indebted to "B" for 100,000 AUD. The conditions established in this article must be satisfied in order for a party to set off its own debt against the debt of the other party. 2. Reciprocal debts A first condition is that each party be at the same time a debtor and a creditor to the other (paragraph (1), introductory phrase). It is to be noted that the parties must be so in the same capacity. Thus, set-off is not possible if the first party is a debtor to the other party in its own name, but is a creditor of the other party in another capacity, for example as a fiduciary or shareholder of a corporation. Example 3. A company "A" sells a machine to corporation "B" for 600,000 Japanese yen (JPY). "B", who also maintains business relations with company "C", a subsidiary of "A", sells to "C" some products for 500,000 JPY. When "A" requests "B" to pay the price of the sale of the machine, "B" cannot set off its debt against the amount of the sale of products to "C", even though the capital of "C" is completely controlled by "A", since "C" is an independent entity. "A" and "B" are not reciprocal debtors and creditors. The condition that the debts must be reciprocal may present problems when the other party has assigned to a third party the credit that it has against the first party. The first party could, however, set off its own debt against the debt of the other party if the right of set-off existed against the debt of the assignor before the assignment was notified to the debtor (see Article 9.1.13).

Art. 8.1 UNIDROIT Principles 3. Debts of the same nature The two debts must be of the same nature (paragraph (1), introductory phrase). In some legal systems debts must be "fungible". A monetary obligation can be set off only against another monetary obligation. A delivery of grain cannot be set off except by the delivery of grain of the same kind. The concept of "performances of the same nature" is broader than that of "fungible debts". The performance of non-monetary obligations can be of the same nature without being fungible. Two obligations to deliver wine from the same vineyard but from different harvests can be obligations of the same nature, but are not considered fungible. Cash and negotiable instruments are not performances of the same nature within the meaning of this article. However, as is the case with payment obligations in different currencies, set-off may be exercised if the instruments are readily convertible and if there is no agreement that payment must be effected only in a specific currency or by a third party. Whether debts are or are not of the same nature will depend on commercial practices or the branch of commerce in question. A personal obligation cannot be of the same nature as other categories of debts. Set-off is not possible if one of the debts is of a personal nature. Examples 4. "A", a crude oil producer, undertakes to deliver each month to "B", located in country "X", 1,500 tons of crude via a pipeline. "B", as consideration, must deliver to "A" each week 1,000 tons of crude by road. The crude oil produced by "A" and the crude to be delivered by "B" do not have the same origin and are not of identical quality, but since the use of crude oil could be identical, both obligations involving crude can be considered of the same nature, and if "A" and "B" are reciprocal debtors of deliveries of a certain quantity of crude, set-off will be possible. 5. "A" owns 100 ordinary shares of corporation "C". Shareholder "B" of the same corporation owns 120 preferred redeemable shares. "A" and "B" are reciprocal debtors in virtue of a previous contract and it was provided that payment would be possible by shares of equivalent value. Set-off cannot be effected because the shares held by "A" and the shares held by "B" are not of the same nature.

Set-Off Art. 8.1 4. The first party has the authority to perform its obligation The first party must have the right to perform its obligation (paragraph (1)(a)). It cannot impose on the other party a performance that is not yet certain or due. Examples 6. "A" has sold ten trucks to "B" for USD 1,000,000. "B" must pay for the trucks before September 30. "B" wishes to set off the debt that it has to "A" arising from a loan that "A" must pay on November 30. "B" cannot set off its obligation to "A" before that date, since "A" is not obligated to pay "B" before November 30. The debt that "A" has to "B" is not yet due. 7. "A" owes 200,000 EUR to "B" by virtue of a loan. "A" must make the payment before January 30. "B" has been ordered to pay 140,000 EUR to "A" for the reparation of damage in virtue of a judgment handed down on January 25. On February 9, "A" demands payment from "B". "B", who is entitled to perform its obligation, is authorized to set off its debt against "A"'s debt. 8. "A" has sold 10,000 bottles of wine to "B", who must pay the price by October 30 at the latest. "B" is equally a creditor of "A" and "A"'s debt is already due. On October 10, "B" may set off its own debt against "A"'s debt even though the maturity date of its debt is October 30. "A" is obligated to accept payment before that date. 5. The debt of the other party must be certain Set-off may be effected only when the debt of the other party is certain as to its existence and amount (paragraph (1)(b)). The existence of a debt is certain when it cannot be questioned, for example, when it arises from a valid contract that has been executed or from a judgment or award that are not subject to revision. By contrast, a debt consisting of payment of damages is not certain when the debt can be put in question by the other party. Even though the existence of the other party's debt is not disputed, set-off will not be possible if the debt is not certain in its amount. Set-off will not be possible if the existence of the damage is not disputed, but the amount of compensation has not been fixed.

Art. 8.1 UNIDROIT Principles Examples 9. By virtue of a judgment, "A" must pay 200,000 Chinese renminbi yuan (CNY) to "B" for the rescission of a contract. "B" is equally a debtor of "A" for a loan of 240,000 CNY, the reimbursement of which is already due. "A" demands payment from "B" of those 240,000 CNY. "B" may set off its debt against the debt that "A" has in virtue of the judgment. 10. "A" sells a yacht to "B" for 300,000 EUR. "A" has an extra-contractual liability to "B". The harm is not disputed, but the amount of compensation for damages has not yet been fixed. "A" will not be authorized to set off its own debt since "A"'s debt is not certain. The Principles do not address the impact of insolvency proceedings on the right to exercise set-off, which will be determined by the applicable law. Most domestic legal systems grant the first party the right to exercise set-off even after the other party has been involved in an insolvency proceeding, thus derogating from the principle of equal treatment of creditors in an insolvency proceeding. 6. The debt of the other party must be due The debt of the other party must also be due (paragraph (1)(b)). A debt is due when the creditor has the right to demand performance from the debtor and the debtor lacks exceptions or defenses that it may raise against this demand. A defense would be available if, for example, the payment period has not been fulfilled. A natural or moral obligation is also not due; the first party cannot set off its debts against debts of this kind when they are owed by the other party. The entitlement or non-entitlement of a debt may also depend on the applicable law. Consequently, in certain cases, the possibility of exercising the right of set-off will depend on the applicable law. Example 11. By virtue of a final judgment pronounced on April 10, "A" must pay USD 20,000 to "B" for a sale of cotton. "A", who is a creditor of "B" for a loan of USD 12,000 due as of January 10, may set off its own debt against "B"'s debt. "B", whose debt is certain and due, cannot oppose the set-off exercised by "A". Since the expiration of the statute of limitations prevents the enforcement of the debt but does not extinguish the right itself, the first party, who is not authorized to enforce the debt during this period, may, however, set off this debt (see Article 10.10). 7. Set-off of debts arising from the same contract Set-off is a practical means of extinguishing debts at the same time. Thus, if the two debts arise from the same contract, the conditions for set-off are modified. If the obligations of the two parties arise from the same contract, the first party is authorized to set off its own debt against the debt of the other party even though the latter debt is not certain as to its existence or amount (paragraph (2)). For example, an obligation to pay damages may be certain as to its existence but not as to its amount. If the minimum amount to be paid cannot be questioned, the first party may set off its own debt up to that minimum amount, although the total amount of the other party's debt is unknown. Even though one of the debts were disputed, the right to set-off may be exercised since all debts susceptible to set-off arise from the same contract and can be easily identified. This could prove useful to the parties involved in a transaction to resolve their disputes in a quick and easy manner. However, court intervention may be necessary to determine whether the requirements for set-off are met. In international commerce, the obligations of two parties frequently arise from the same contract.

Set-Off Art. 8.1 Examples 12. "A" transports turkeys for "B" from country "X" to country "Y". The freight is 35,000 Russian rubles (RUR). During the journey, a hundred turkeys die due to the negligence of the carrier, who acknowledges his liability. "A" requests payment from "B" for the transport. "B" may set off its debt arising from the loss of the turkeys against "A"'s debt. Although it is true that the amount of compensation is not certain, since both debts arise from the same contract, it would be easy to evaluate the damages and determine whether the conditions for set-off are met. 13. "A", a carrier, agrees to transport a piano for pianist "B", from country "X" to country "Y". A provision of the contract expressly provides that there will be penalties if the piano is not delivered to the concert hall five days before the date of the concert. The piano is delivered to the place of destination only two days before the date of the concert. "A" demands payment for the transport. "B" may set off its claim against the penalties for the delay that were conventionally determined, even if "A" opposes the amount of the penalty owed for the delay. 8. Conventional set-off Although the conditions of this article are not met, the parties may subject themselves to the effects of set-off by conventional agreement. Likewise, the parties may decide that their reciprocal debts are set off automatically on a specific date or periodically. Also, two or more parties may agree that their respective debts are extinguished, for example, by virtue of so-called "netting".

ARTICLE 8: 2 (Set-Off of Debts in Foreign Currency) When the obligations are to pay money in different currencies, the right to set off may be exercised provided that both currencies are freely convertible and the parties have not agreed that the first party may only pay in a particular currency. COMMENTARY 1. Convertible currencies Payments made in different currencies are not performances of the same nature within the meaning of Article 8.1. However, set-off may be carried out if the payments are made in freely convertible currencies. In accordance with Article 6.1.9, to the extent that the parties have not agreed otherwise, payment may be effected by the debtor in the currency of the place of payment, subject to its free convertibility. By contrast, since the relative value of a currency that is not freely convertible is not certain for purposes of set-off, set-off cannot be used to impose on the other party payment in this currency.

Set-Off Art. 8.3 Example 1. "A", a wine producer in country "X", sells 5,000 bottles of wine to "B", a cork producer, for USD 200,000. "B" sells 100,000 corks to "A" for the price of 100,000 pounds, which is the non-convertible currency of the country where these corks are produced. "A" demands payment from "B" of the USD 200,000. "B" cannot set off the 100,000 pounds against the USD 200,000. 2. Currency stipulated in the contract If a contract expressly provides that a party must perform its payment obligation in a particular currency, that party will not be in a position to set off its debt against the debt of the other party if the latter must perform its own debt in a currency different from that indicated in the contract.

Set-Off Art. 8.4 Example 2. "A" sells products to "B" for USD 100,000. The contract for sale expressly provides that the price must be paid by the buyer in US dollars. "B", an Asian carrier, is the creditor of "A" for an unpaid invoice for transport expenses that must be settled in Seoul in Korean won. "A" demands payment from "B" of the USD 100,000. "B", who is contractually obligated to pay the price of the products in US dollars, is not authorized to set off its debt against "A"'s debt for transport expenses.

ARTICLE 8: 3 (Notice of Set-Off) The right of set-off is exercised by notice to the other party. COMMENTARY The right of set-off is exercised by way of notice given to the other party. It does not occur automatically or by court decision. The first party must inform the other party that it will extinguish its own debt by set-off. The notice must not be conditional.

Art. 8.4 UNIDROIT Principles In order to produce its effects, the notice must not be sent after the conditions for set-off to be effected have been met. The notice may be made by any means appropriate to the circumstances. It produces its effects when it arrives at the person to whom it is addressed (see Article 1.10).

(1) The notification must specify the obligations to which it refers. (2) If the notification does not specify the obligation with respect to which set-off is exercised, the other party may, within a reasonable time, declare to the other party the obligation to which the set-off refers. If such declaration is not made, the set-off shall apply to all obligations proportionately. COMMENTARY In accordance with paragraph (1), the notification must indicate the debts of the two parties that are to be the subject of the set-off. The other party, upon receiving the notification, must be informed about the reason for the set-off and the amount of the debts in question. 1. Declaration by the other party If the first party has two or more debts owed to the other party and the first party did not indicate the debts it wishes to discharge through set-off, the other party may freely choose from among the debts of the first party those it wishes to extinguish through set-off (paragraph (2), first part). Example 1. "A" regularly sells clothing items to "B". On December 30, "B" demands from "A" payment of USD 50,000 to discharge a credit. On the same date, "B" owes "A" payment for the price of merchandise corresponding to three successive contracts, respectively USD 40,000, USD 35,000, and USD 45,000. If "A" wishes to set off its debt against B's debts, it must indicate which debt—among the three owed by "B"—it desires the set-off to apply to. If "A" does not indicate in the notification the debt with respect to which it wishes to effect the set-off, "B" may, within a reasonable time, indicate to "A" that its debt of USD 45,000 shall be completely extinguished by set-off and that the debt of USD 35,000 shall be extinguished in the amount of USD 5,000. Once the set-off has been effected, "B" continues to be indebted to "A" for an amount of USD 70,000. 2. Absence of declaration If the notification does not indicate the debts that the first party proposes to set off, and if the other party does not make any declaration regarding the debt affected by the set-off within a reasonable time, all debts of the other party shall be extinguished individually up to a total equal to the value of the first party's debt (paragraph (2), second part). Example 2. The facts are the same as in Example 1, but here "B" does not declare with respect to which debt the set-off operates. In the absence of such declaration, the set-off shall extinguish the debt of USD 40,000 from the first contract up to the amount of USD 16,670; the debt of USD 35,000 from the second contract up to the amount of USD 14,580; and the debt of USD 45,000 from the third contract up to the amount of USD 18,750.

(

• 1)

  Set-off extinguishes the obligations. (

• 2)

  If the obligations differ in amount, set-off extinguishes the obligations up to the amount of the obligation of lesser value. (

• 3)

  Set-off takes effect from the moment of notification. COMMENTARY 1. Extinguishment by set-off If the conditions for set-off indicated in Article 8.1 are satisfied, the debts of the two parties are extinguished to the extent of the set-off, as if two reciprocal payments had been made. Example 1. "A" owes USD 100,000 to "B" and "B" owes USD 100,000 to "A". "B" demands payment of its credit. "A", through notification, declares to "B" that it sets off its own debt. After the set-off has taken effect, the two obligations are extinguished. If the two debts differ in amount, the set-off shall extinguish the debts only up to the amount of the lesser one. Example 2. "B" owes USD 100,000 to "A", who in turn owes USD 70,000 to "B". "A" demands payment of USD 100,000 from "B" and "B" declares that it wishes to set off its debt against that of "A". If the conditions for set-off are satisfied, "A" is no longer a debtor of "B" since its debt has been completely extinguished, but "A" remains a creditor of "B" for USD 30,000, which is the amount of the debt not covered by the set-off. 2. Set-off takes effect at the moment of notification The debts are extinguished at the moment of notification if at that moment the conditions required for set-off are satisfied. Set-off does not have retroactive effect. It has effect only for the future. The moment from which set-off produces its effects is linked to the necessity of notifying the set-off. Moreover, from a practical standpoint, it will be easy to determine the date on which the set-off took effect. The situation must be viewed as if the two debts were discharged on the date of notification. Two consequences follow from this rule. First, interest on the debt accrues until the date of notification. A party that is in a position and wishes to effect a set-off of its debt must declare the set-off as soon as possible if it wishes to stop the accrual of interest. Second, if an improper payment was made after the declaration of set-off, restitution of the sum may be demanded since the payment has no legal basis. By contrast, if payment was made before notification, the payment is valid and restitution of the sum cannot be demanded. Example 3. "A" owes USD 100,000 to "B" for the purchase of merchandise. A's debt is certain and payment is due on November 20. By a court judgment dated November 30, "B" is ordered to pay USD 80,000 to "A" for damages. The obligation to pay USD 80,000 is certain and due from the judgment, that is, from November 30. The set-off is effected by "A" by notification on December 10. The set-off shall take place on the date of notification since all required conditions have been satisfied before that date. The two debts are extinguished up to the amount of the lesser debt. "A" shall remain a creditor of "B" for USD 20,000. From December 10 onwards, no interest shall accrue, except on those USD 20,000. At the moment when the conditions for set-off are met and notification is made, not only are the principal debts extinguished but the ancillary rights are also extinguished, in particular the rights that guarantee performance of the obligation. Example 4. "A", a banker, made a loan of 100,000 EUR to architect "B" and obtained the personal guarantee of B's spouse. "B" is a creditor of "A" for a sum of 120,000 EUR, which "B" holds in an account opened at A's bank. "A" demands from "B" payment of 100,000 EUR. "B" declares its intention to set off and notifies it on December 12. The conditions required for set-off of B's debt against A's debt were satisfied on December 10. On the date of notification, December 12, the debts of "A" and "B" are extinguished, as is the guarantee granted by B's spouse.

"Assignment of receivables" is the transfer by agreement of a person (the "assignor") to another (the "assignee") of a right to payment of a sum of money or other performance owed by a third party (the "debtor"), including a transfer by way of security. COMMENTARY In numerous circumstances, a creditor entitled to payment of a sum of money or another type of performance may find it useful to assign its right to another person. For example, assignment to a bank is the traditional means of financing credit granted to a customer. The rules of this Section deal with the assignment of receivables as defined in this article. 1. Conventional transfer This Section covers only conventional transfers and not situations in which the applicable law provides for the transfer of certain receivables (for example, in certain legal systems, the transfer of the seller's rights against an insurer to the buyer of an insured building, or the automatic transfer of receivables in the case of a merger of companies (see Article 9.1.2(b)). The definition also does not apply to unilateral transfers, which in certain legal orders may be carried out without the participation of the assignee. 2. Receivable relating to payment of a sum of money or performance of another service Moreover, the definition is not limited solely to the assignment of receivables relating to payment of a sum of money. It also includes receivables of other categories of performance, such as the provision of services. Assignments referred to in this Section are also not limited to rights of a contractual nature. Actions arising from claims that have not arisen from a contract or were originated by a court decision may, for example, be regulated by this Section, subject to the provisions of Article 1.4. Future receivables may also be assigned in accordance with the conditions established by Article 9.1.5. 3. Notion of "transfer" The "transfer" of the receivable means that the right passes from the assets of the assignor to the assets of the assignee. The definition applies equally to assignments for purposes of security. 4. Rights of third parties The transfer of assets from the assignor to the assignee is made subject to the rights of third parties. Different third parties may be affected by the assignment of a receivable between the assignor and the assignee. First and foremost, the debtor, but also the creditors of the assignor and successive assignees would be affected by such assignment. The rights of third parties are in part dealt with by other articles of this Section (see Articles 9.1.10 and 9.1.11 as far as they concern the debtor and successive assignees). The rights of third parties may also, in certain cases, be subject to the mandatory rules of the applicable law (for example, bankruptcy law).

This Section does not apply to transfers subject to the special rules that govern transfers: (a) of instruments such as negotiable instruments, documents of title, financial instruments, or (b) of rights included in the transfer of an enterprise. COMMENTARY Certain categories of assignment of receivables are normally subject to special rules of the applicable law and are therefore not regulated by this Section. 1. Transfer of instruments governed by special rules The transfer of certain categories of instruments governed by special rules are not part of the scope of application of this Section. This exclusion applies, for example, to negotiable instruments such as bills of exchange, generally transferred by endorsement or delivery of the document and governed by other rules, for example those concerning exceptions that the assignor could have raised. This exclusion applies equally to documents of title, such as bills of lading or warehouse receipts, and to financial instruments such as shares and bonds. The transfer of such instruments is normally subject to specific rules. This does not preclude the possibility that such receivables may, in some legal systems, also be assigned through an ordinary assignment of receivables, in which case this Section would be applicable. 2. Transfer of enterprise Another exclusion applies to assignments made pursuant to a transfer of enterprise to which special rules for such transactions apply, such as in the case of a merger of enterprises. The applicable law frequently provides a mechanism that requires all rights and obligations to be, under certain conditions, transferred in their entirety in accordance with the provisions of law. Article 9.1.2(b) does not prevent the application of this Section when certain rights belonging to the transferred enterprise are assigned individually. By contrast, the mere transfer of shares of a company may fall under the application of Article 9.1.2(a) and consequently not be covered by this Section. Examples 1. Enterprise "A" is transferred to enterprise "B". These Principles do not apply if the applicable law provides that all receivables belonging to enterprise "A" are automatically transferred to enterprise "B". 2. The parties are identical to those in Example 1; however, here enterprise "B" is not interested in acquiring the rights with respect to customer X and prefers that the corresponding receivables be assigned to company "C". This latter assignment would be governed by the Principles.

A receivable relating to non-monetary performance may be assigned only if the assignment does not make the performance substantially more onerous. COMMENTARY The assignment of receivables does not, in principle, affect the rights and obligations of the debtor. However, to some extent, the mere fact that performance is due to another creditor may alter the conditions under which the obligation must be performed. For example, the place of performance may be different. The change of creditor may, by itself, make the obligation more onerous. Article 9.1.8 permits the debtor to be indemnified by the assignor or by the assignee for the additional expenses occasioned by the assignment. This provision should resolve the problem in the case of an assignment of obligations to pay sums of money. However, when the assigned receivable concerns the performance of a non-monetary obligation, this measure may be considered insufficient. This article excludes the possibility of assigning such receivables when the transfer results in substantially greater burden for the debtor. Examples 1. In order to prevent thefts in its wood storage warehouses, enterprise "A" contracts for security services from enterprise "X". The warehouses are sold to enterprise "B", which wishes to use them for the same purposes. Nothing prevents under this provision that "A" assign to "B" the right to receive the security services provided by "X". 2. The parties and facts are identical to those in Example 1, but enterprise "B" wishes to use the warehouses for the storage of electronic equipment. The rights of enterprise "A" with respect to the security services provided by "X" cannot be assigned to "B", since the provision of such service would be substantially more onerous: the risk of safeguarding electronic equipment is obviously much higher than that of guarding wood storage.

(1) A receivable relating to payment of a sum of money may be partially assigned. (2) A receivable relating to non-monetary performance may be partially assigned only if it is divisible and if the assignment does not make the performance substantially more onerous. COMMENTARY 1. Economic interest Partial assignment of a receivable may have different economic justifications. One of the contracting parties may, for example, wish to assign part of its receivables to a financial institution and retain the remainder for itself. It may also wish to assign the other part to a supplier of raw materials. Permitting partial assignment, however, may undermine the principle that assignment should not worsen the debtor's situation. If the receivable is divided, the debtor will have to perform it on several occasions, which could cause it additional costs. 2. Monetary and non-monetary receivables The burden on the debtor of having to make two or more payments of sums of money instead of one is not considered, by itself, as excessive, and partial assignments of monetary receivables are, in principle, permitted (paragraph (1)). A different rule applies to the assignment of non-monetary receivables. Here, the validity of partial assignment depends on two cumulative conditions: the divisibility of the performance owed and the degree of additional burden that partial assignment may entail for the debtor. Article 9.1.3 already indicates that non-monetary receivables cannot be assigned in their entirety if the assignment makes the obligation substantially more onerous for the debtor. Paragraph (2) applies the same rule to partial assignments of such receivables. In any case, the additional costs incurred by the debtor, arising from the various performances, must be compensated in accordance with Article 9.1.8. Examples 1. Buyer "X" owes payment of the price of USD 1,000,000 to seller "A" on October 31. "A" urgently needs USD 600,000 and assigns a corresponding part of its receivables to Bank "B". Notification of the partial assignment is made to "X". On October 31, "A" and "B" demand payment of their respective portions. "X" must pay USD 400,000 to "A" and USD 600,000 to "B". 2. Metallurgical enterprise "X" must deliver 1,000 tons of steel to an automotive plant "A" on October 31. Due to a decline in sales, "A" estimates that it will not require such quantity of steel on that date and partially assigns its right to 300 tons to another automotive plant "B". Notification of the partial assignment is made to "X". On October 31, "A" and "B" demand delivery of their respective quantities. "X" must deliver 700 tons to "A" and 300 tons to "B". 3. Tax advisor "X" undertook to examine during 30 days the accounts of enterprise "A" in order to determine the policy to be followed in the context of new tax regulations. Due to the high fees agreed upon, "A" regrets this agreement later and proposes to assign 15 days of this advisory service to enterprise "B". "X" may object to such partial assignment by arguing that services of this nature are not divisible. It may also argue that the accounts of "B" are of a substantially more complex character than those of "A".

A future receivable is considered assigned at the moment the agreement is concluded, provided that when the receivable comes into existence it can be identified as the one to which the assignment refers. COMMENTARY 1. Economic interest For purposes of this Section, a future receivable is a receivable that will arise or could arise in the future (as opposed to an existing receivable whose performance is due in the future). Examples of future receivables are receivables that a bank may have against a customer to whom it could in the future grant a new line of credit, or receivables that an enterprise would have against another enterprise based on a contract that could be concluded in the future. The assignment of these future receivables may have great economic importance. 2. Identifiable receivable In accordance with this article, a future receivable may be assigned under the condition that it can be identified as the receivable for which the assignment was made. This is intended to avoid the difficulties that may arise from a transfer of future receivables described in excessively vague or general terms. 3. Retroactive effect This article also provides that between the assignor and the assignee, the assignment of future receivables is effective retroactively. Once the receivable comes into existence, the transfer is deemed to have taken place at the moment of the conclusion of the assignment agreement. As far as third parties are concerned, it should be recalled that their receivables may in some cases be regulated by mandatory rules of the applicable law (especially bankruptcy law). The rights of third parties, however, are regulated by other provisions of this Section, including those concerning the consequences of notification indicated in Articles 9.1.10 and 9.1.11. Example In order to finance new investments, enterprise "A" assigns to financial institution "B" the royalties that could derive from future licenses relating to a certain technology. Six months later, "A" transfers this technology to "X". The royalties are considered to have been assigned to "B" from the date of the assignment agreement, provided that such royalties derive from such agreement.

Multiple receivables may be assigned without being individually identified, provided that such receivables, at the moment of assignment or when they come into existence, can be identified as those to which the assignment refers. COMMENTARY Receivables are often assigned together or in packages. An enterprise may, for example, assign all its accounts receivable to a factoring company. In practice, it would be excessively burdensome to require the individual identification of each assigned receivable, but the global identification of receivables assigned as a package must be such that it permits recognition of each assigned receivable as part of the assignment. In the case of existing receivables, such recognition must be possible at the moment of the conclusion of the assignment agreement. If future receivables are included in the package of receivables, identification must be possible when the receivables come into existence, in accordance with the provisions of Article 9.1.5. Example A retail merchant, "A", assigns all its accounts receivable to a factoring company called "B". This transfer refers to thousands of existing or future transactions. The assignment does not require that each receivable be individually identified. Later, "B" notifies the assignment to the debtor of a specific receivable. "B" must be in a position to demonstrate the inclusion of this receivable within the entirety of the accounts receivable transferred, either at the moment of assignment or, in the case of a receivable that did not yet exist at that time, when the receivable comes into existence.

(1) A receivable is assigned by mere agreement between the assignor and the assignee, without notification to the debtor. (2) The consent of the debtor is not required unless the obligation, according to the circumstances, is of an essentially personal character. COMMENTARY In the definition of Article 9.1.1, the assignment of a receivable has already been described as a transfer made by an "agreement". Articles 9.1.7 to 9.1.15 address the respective legal situation of the assignor, assignee, and debtor. 1. Simple agreement between assignor and assignee In accordance with paragraph (1) of this article, the assignment of a receivable is effective, that is, the receivable is transferred from the assets of the assignor to those of the assignee, by mere agreement between these two parties. This provision is an application to assignment of receivables of the general principle established in Article 1.2 by virtue of which the Principles do not impose that the contract be concluded in any particular form. This does not affect the eventual application of the mandatory rules of the applicable law in accordance with Article 1.4: thus, for example, an assignment by way of security may be subject to certain special form requirements. As established earlier in Commentary 4 of Article 9.1.1, the rule established in paragraph (1) is subject to the rights of third parties, which are in part covered by other provisions of this Section (see Articles 9.1.10 and 9.1.11 which address the debtor and successive assignees), and may in certain cases be regulated by the mandatory rules of the applicable law (especially bankruptcy law) in accordance with Article 1.4. Nevertheless, it is emphasized that notification to the debtor as provided in Article 9.1.10 is not a condition of validity for the transfer of receivables between the assignor and the assignee. 2. Consent of the debtor is not in principle required Paragraph (2) establishes explicitly what was already implicit in paragraph (1), that is, the consent of the debtor is not required for the assignment to be valid between the assignor and the assignee. 3. An exception: when the obligation is of an essentially personal character An exception is made for the case in which the receivable to be assigned corresponds to an obligation that has an essentially personal character, that is, a receivable that is granted by the debtor with special consideration to the person of the creditor. Such a characteristic makes the assignment of receivables impossible without the consent of the debtor since it would not be appropriate to obligate him to perform the obligation in favor of another person. Examples 1. Enterprise "X" promises to sponsor the activities of "A", an organization dedicated to the defense of human rights. "A" wishes to assign this receivable to organization "B" that is dedicated to the protection of the environment. The assignment cannot take place unless "X" consents. 2. A famous soprano has concluded a contract with agent "A" to sing in the concerts that he organizes for her. "A" sells its rights with the soprano to agent "B". This transfer will require the consent of the soprano if the circumstances reveal that she desired to perform only in concerts that "A" would schedule for her. 4. Effect of other provisions The possibility of assigning a receivable without the consent of the debtor may be affected by the presence of a "non-transfer" clause inserted in the body of the contract concluded between assignor and debtor (see Article 9.1.9), although such a clause does not necessarily imply the essentially personal character of the obligation. This article does not address the question of whether the assignment must be notified to the debtor in order to prevent the debtor from paying the assignor after the assignment has taken place. On these matters, see Articles 9.1.10 and 9.1.11.

The debtor has the right to be indemnified by the assignor or the assignee for all additional costs caused by the assignment. COMMENTARY 1. Indemnification for additional expenses The assignment of a receivable does not necessarily affect the rights and obligations of the debtor. However, if the debtor bears the additional expenses entailed in the performance of its obligation owed to the assignee instead of the original creditor, this provision authorizes it to demand the appropriate compensation. Example 1. Enterprise "X" is obligated to reimburse a loan of 1,000,000 EUR to enterprise "A". The two enterprises are located in country "M". "A" assigns its receivable to enterprise "B" located in country "N". "X" has the right to be indemnified for the additional expenses occasioned by the fact that this has become an international transfer. The rule established in this article is in harmony with Article 6.1.6 which provides a similar solution when in a contract one party changes its place of establishment after the conclusion of the contract. 2. Indemnification by the assignor or by the assignee The debtor may demand indemnification for additional expenses from the assignor or from the assignee. In the case of a monetary obligation, frequently the debtor will find itself in a position to set off its right to indemnification against the performance of its obligation toward the assignee. 3. Partial assignment Additional costs may arise, in particular, in cases of partial assignments (see Article 9.1.4). This article shall apply, as applicable. Example 2. In Example 2 of Article 9.1.4, "A" has assigned to "B" part of its rights to steel supply by "X". Instead of having to supply 1,000 tons to "A", "X" is then obligated to supply 700 tons to "A" and 300 tons to "B". "X" has the right to be indemnified for the additional expenses that arise from the obligation to supply to two different recipients. 4. Obligation that becomes substantially more onerous In two cases, indemnification for additional expenses is not considered as an altogether sufficient measure. First, pursuant to Article 9.1.3, the assignment of a right to performance of a non-monetary obligation is not permitted when the assignment would make the obligation more onerous. Second, pursuant to Article 9.1.4, partial assignment of a right to performance of a non-monetary obligation is likewise not permitted in similar circumstances.

(1) Assignment of a right to payment of a sum of money takes effect notwithstanding an agreement between assignor and debtor limiting or prohibiting such assignment. However, the assignor may be liable to the debtor for breach of contract. (2) Assignment of a right to another performance does not take effect if it violates an agreement between the assignor and the debtor that limits or prohibits assignment. Nonetheless, the assignment takes effect if the assignee, at the time of assignment, neither knew nor ought to have known of such agreement. In this case, the assignor may be liable to the debtor for breach of contract. COMMENTARY 1. Balance of interests In accordance with Article 9.1.7(2), the consent of the debtor is not required for the assignment to be valid between the assignor and the assignee unless the obligation has an essentially personal character. However, in practice it is common for the contract between the original creditor and the debtor to contain a clause limiting or prohibiting the assignment of the creditor's rights since the debtor may not wish the creditor to change. In the event that the original creditor (assignor) assigns such rights despite the existence of a clause prohibiting the assignment (non-assignment clause), the respective interests of the debtor and the assignee must be weighed against each other. The debtor suffers a violation of its contractual rights, but the assignee must also be protected. At a more general level, it is also important to promote the assignment of receivables as an efficient means of financing. In this respect, this article makes a distinction between the assignment of monetary receivables and the assignment of the right to receive other types of performance. 2. Monetary receivables In the case of assignment of monetary receivables, paragraph (1) gives preference to the need for receivable transfer. The assignee of a monetary receivable is protected against a non-assignment clause and the assignment is fully effective. However, if the assignor acts in violation of its contractual obligations, it will be liable to the debtor for breach of its commitments pursuant to Section 4 of Chapter 7. Examples 1. Contractor "A" has the right to receive payment of USD 100,000 from its customer "X" once a certain phase of the construction work is completed. The contract contains a clause prohibiting "A" from assigning its receivable. Contractor "A" nevertheless assigns its receivable to Bank "B". Bank "B" may enforce the assignment and demand payment when it becomes due. On the other hand, "X" retains its right to demand that "A" be liable for breach of the agreed clause. "X" may, for example, demand damages if it demonstrates that it has suffered a certain loss. 2. Enterprise "X" must reimburse 500,000 EUR to enterprise "A" on a date on which it could partially set off this obligation with a receivable of 200,000 EUR that "X" holds against "A". The contract between "X" and "A" contains a non-assignment clause. Despite this clause, "A" assigns its reimbursement receivable to enterprise "B". "X" may demand damages from "A" for the expenses it incurs due to the separate proceeding it must undertake to collect the sum of 200,000 EUR. 3. Non-monetary receivables The assignment of non-monetary receivables does not involve the same relationship with the need for receivable transfer, which justifies the different solution found in paragraph (2). To achieve a fair balance between the conflicting interests of the three parties involved, the rule this time is that the non-assignment clause is effective against the assignee and that the assignment is consequently considered invalid. The solution is different provided it can be established that at the moment of assignment the assignee neither knew nor ought to have known of the existence of the non-assignment clause. In this case, the assignment is valid but the assignor may claim damages against the debtor for breach of contract pursuant to Section 4 of Chapter 7. Example 3. Enterprise "X" has agreed to communicate to enterprise "A" all improvements it develops for a technical procedure during a certain period. Its contract stipulates that the receivables of "A" against "X" cannot be assigned. "A" no longer needs the technology in question and attempts to assign its rights to enterprise "B". This assignment is not valid. "X" does not become a debtor of "B". In this case, "B" holds a receivable against "A" pursuant to Article 9.1.15(b).

(1) The debtor is discharged by paying the assignor so long as it has not received from the assignor or the assignee a notification of the assignment. (2) After the debtor receives such notification, it is discharged only by paying the assignee. COMMENTARY 1. Effect of notification on the debtor Whereas the effectiveness of the assignment between the assignor and the assignee results from their agreement alone (see Article 9.1.7), the debtor will be discharged by paying the assignor unless and until it receives notification of the assignment. If the debtor pays the assignor, the assignee may recover this payment from the assignor (see Article 9.1.15(f)). The assignment can be set up against the debtor only after notification has taken place. Unless it pays the assignee, the debtor cannot in this case be discharged. Examples 1. Seller "A" assigns to bank "B" his receivable against buyer "X". Neither "A" nor "B" carries out notification to "X". When payment is due, "X" pays "A". This payment is fully valid and "X" is discharged. It shall be up to "B" to recover the payment from "A", pursuant to Article 9.1.15(f). 2. Seller "A" assigns to bank "B" his receivable against buyer "X". "B" immediately notifies the assignment to "X". When payment is due, "X" pays "A". "X" is not discharged and "B" has the right to compel "X" to pay a second time. Before the debtor receives notification of the assignment, it is discharged by paying the assignor, regardless of whether it knew or ought to have known of the assignment. This is intended to impose on the parties in the assignment, the assignor and the assignee, the obligation to inform the debtor. This solution is considered justified in the context of international commercial contracts. However, this does not necessarily exclude that in certain circumstances the debtor may be liable for damages if it acted in bad faith in paying the assignor. Occasionally the parties may make use of the so-called "silent assignment", according to which the assignor and the assignee decide not to inform the debtor of the assignment. Such an arrangement is valid between the parties, but the debtor will be discharged by paying the assignor, as established in Article 9.1.10(1), as no notification of the assignment has been received. 2. Meaning of "notification" The "notification" is to be understood in the broad sense of Article 1.10. Although this article does not make reference to the content of the notification, it must indicate not only the fact of the assignment, but also the identity of the assignee and the characteristics of the assigned receivable (in accordance with Article 9.1.6) and, in the case of a partial assignment, the amount of the assignment. 3. Who must notify Article 9.1.10(1) leaves open the question of who, between the assignor and the assignee, must carry out the notification. In practice, it is likely that in most cases the assignee will take the initiative since it has a greater interest in preventing the debtor from paying the assignor after the assignment has been made. Notification given by the assignor has the same effect, however. When notification is carried out by the assignee, the debtor may ask it for sufficient proof of the assignment (see Article 9.1.12). 4. Moment at which notification must be made This article does not expressly require that notification be made only after the conclusion of the assignment agreement. Sometimes the contract between a future assignor and the debtor establishes that the corresponding receivables will be assigned to a financial institution. The question of whether this can be considered as sufficient notification, with the consequences provided in this article, is a matter of interpretation and may depend on the precision of the clause as far as the identity of the future assignee is concerned. 5. Revocation of notification The notification made to the debtor may be revoked in certain circumstances, especially if the assignment agreement is invalid or if a security assignment is no longer necessary. This does not concern payments made before revocation to the person who was then the assignee, but if the debtor pays this person after revocation, it will not be discharged.

If the same receivable has been assigned by the assignor to two or more successive assignees, the debtor is discharged by paying in accordance with the order in which the notifications were received. COMMENTARY 1. Priority of first notification This article addresses the case of successive assignments of the same receivable, made by the same assignor to different assignees. Normally this should not happen, but it can occur in practice without necessarily the assignor having knowledge of it. Priority is given to the assignee that has made the first notification. The other assignees may only have recourse against the assignor pursuant to Article 9.1.15(c). Example On February 5, seller "A" assigns the receivable he has against buyer "X" to Bank "B" and on February 20 to Bank "C". "C" notifies the assignment on February 21 and "B" does not do so until February 25. "X" is discharged by paying "C", although the receivable was assigned to "B" before "C". Unlike the solution provided in some legal systems, this article does not take into account the knowledge that the debtor had or could have had of the assignment in the absence of notification. This position is due to the desire of the Principles to promote notification, thereby guaranteeing the degree of certainty particularly recommended in the context of international contracts. 2. Absence of notification If no notification has been made by any of the successive assignees, the debtor is discharged when it pays the assignor (see Article 9.1.10(1)). 3. Notification without sufficient proof Notification by an assignee that an assignment took place without sufficient proof thereof may have no effect in accordance with what is established in Article 9.1.12.

(

• 1)

  If notification of the assignment is given by the assignee, the debtor may request that the assignee supply, within a reasonable time, adequate proof that the assignment has taken place. (

• 2)

  The debtor may suspend payment until adequate proof is supplied. (

• 3)

  The notification does not take effect unless adequate proof of the assignment is supplied. (

• 4)

  Adequate proof of the assignment includes, but is not limited to, any writing from the assignor indicating that the assignment has taken place. COMMENTARY Because notification of an assignment of a receivable produces the important effects provided in Articles 9.1.10 and 9.1.11, this article seeks to protect the debtor against the risk of receiving notification from a false assignee, by requiring sufficient proof that the assignment has been properly made. The debtor may suspend payment demanded by the purported assignee until sufficient proof of the assignment is supplied. If such proof is supplied, the notification produces its effects from the date on which it has been properly made. Example On December 1, buyer "X" owes payment of USD 200,000 to contractor "A", on account of the construction of a factory. In October, "A" assigns its receivable to Bank "B". "A" or "B" may notify the assignment to "X". If "B" takes the initiative and writes to "X" that it has become the assignee of the sum of money, "X" may request that "B" provide adequate proof. Without prejudice to other modes of proof, "B" will probably present the assignment agreement or another writing from "A" confirming that the receivable has been assigned. "X" may suspend payment until such proof is supplied.

(1) The debtor may set up against the assignee all exceptions that it could set up against the assignor. (2) The debtor may exercise against the assignee any right of set-off it has against the assignor up to the time when it has received notification of the assignment. COMMENTARY 1. Means of defense A receivable may in principle be assigned without the consent of the debtor (see Article 9.1.7(2)). This solution is based on the assumption that the assignment will not be prejudicial to the legal situation of the debtor. It may happen that the debtor has the possibility of suspending or refusing payment to the original creditor by having a means of defense, such as in the case of defective performance of the creditor's obligations. In order to determine whether such means of defense are set up against the assignee, the interests of the various parties must be weighed. The assignment should not worsen the debtor's situation, while the assignee has an interest in the integrity of the receivable it has acquired. In accordance with paragraph (1) of this article, the debtor may set up against the assignee all means of defense that it could have set up if the demand had been made by the assignor. However, in this case, the assignee will have the possibility of acting against the assignor as established in Article 9.1.15(d). Example 1. Computer enterprise "A" promises customer "X" to install a new accounting program before the end of the year. The main payment is to be made one month after delivery. "A" immediately assigns this receivable to bank "B". When payment is due, "B" demands it from "X", but the latter explains that the new accounting program does not work and that its accounting department is in chaos. "X" refuses to make payment until this situation has been remedied. "X" is authorized to set up this defense against "B", who may then act against "A" pursuant to Article 9.1.15(d). The same solution applies to means of defense of a procedural nature. Example 2. Enterprise "X" sells a gas turbine to contractor "A" for it to be incorporated into a factory that he will build for customer "B". When the work has been completed, "A" assigns the warranty of proper performance of the contract to "B". Since the turbine does not function correctly, "B" sues "X" before the court of the place of his establishment. "X" may successfully invoke the arbitration clause included in its contract with "A". 2. Set-off In accordance with paragraph (2), the debtor may exercise against the assignee any right of set-off it has, provided that the debtor has such right of set-off pursuant to Article 8.1 before notification of the assignment is received. This solution conforms with the principle that the debtor's situation must not be affected by the assignment. The assignee's rights are protected by the actions the assignee can exercise against the assignor pursuant to Article 9.1.15(e). Example 3. Enterprise "A" assigns to enterprise "B" the right to payment of 100,000 EUR that it has against enterprise "X". However, enterprise "X" has a receivable against "A" for 60,000 EUR. The two receivables have not been set off through notification for set-off pursuant to Article 8.3 of the Principles, but the conditions required for set-off were already satisfied before notification of the assignment. "X" may still exercise its right to set-off by notifying the assignee. "B" may then only demand 40,000 EUR from "X". "B" may recover the difference from "A", which has obligated itself under Article 9.1.15(e) that the debtor will not notify set-off with respect to the assigned receivables.

ARTICLE 9: 1.14 (Rights relating to the assigned credit) The assignment of a credit transfers to the assignee: (a) all rights of the assignor to payment or other performance provided for in the contract in relation to the assigned credit, and (b) all rights that guarantee the performance of the assigned credit. COMMENTARY 1. Scope of the assignment This provision is inspired by the same principle as Article 9.1.13. The assignment transfers the credit of the assignor as it is found, not only with the means of defense that the debtor may raise, but also with all rights to payment of a sum of money or other performance provided for in the contract in relation to the assigned credit, and all rights that guarantee the performance of the assigned credit. Examples 1. Bank "A" has the right to reimbursement of a loan of 1,000,000 EUR made to client "X" at an interest rate of 3%. "A" assigns to bank "B" its right to reimbursement of the principal. The assignment also operates as a transfer of the right to collect interest and of the guarantees incorporated into the credit. 2. The facts are identical to those in Example 1, but here the loan contract allows "A" to demand early payment in the event that "X" fails to pay the interest due. This right is equally transferred to "B". 3. The facts are identical to those in Example 1, but here "X" has deposited certain securities as collateral for the benefit of "A". This benefit is transferred to "B", except for the possible application of mandatory rules of applicable law under Article 1.4. 2. Partial assignment In the case of partial assignment of a credit, if the rights covered by Article 9.1.14 are divisible, these shall be transferred in the same proportion. If they are not, the parties must decide whether they are transferred to the assignee or remain with the assignor. 3. Contractual arrangements The rule established in paragraph (1) may, however, be modified by an agreement between the assignor and the assignee who may agree, for example, to the autonomous assignment of interest. 4. Cooperation of the assignor It follows from the general duty of cooperation established in Article 5.1.3 that the assignor is obliged to take all necessary measures to enable the assignee to enjoy the benefit of the accessory rights and guarantees.

ARTICLE 9: 1.15 (Obligations of the assignor) The assignor guarantees to the assignee, unless otherwise manifested to the assignee, that: (

• a)

  the assigned credit exists at the time of assignment, unless the credit is a future right; (

• b)

  the assignor is authorized to assign the credit; (

• c)

  the credit has not been previously assigned to another assignee and is free from any right or claim of a third party; (

• d)

  the debtor has no exception; (

• e)

  neither the debtor nor the assignor has notified the existence of any set-off with respect to the assigned credit and will not give such notice; (

• f)

  the assignor will reimburse the assignee any payment received from the debtor before notification of the assignment is given. COMMENTARY Upon assigning a credit by agreement to the assignee, the assignor assumes several obligations. 1. Existence of the credit The assigned credit must exist at the time of assignment. This would not be the case, for example, if payment had already been made or if the credit had been previously canceled. Example 1. Company "A" assigns a set of credits to factoring company "B". At the time the latter demands payment, client "X" establishes that the requested amount was paid to "A" before the assignment. "B" may pursue a claim against "A" because the credit no longer existed at the time of assignment. As authorized by Article 9.1.5, if a future credit is assigned, such commitment does not exist. Example 2. Company "A" assigns to bank "B" royalties derived from a technology license that is to be granted in the near future to company "X". This license has never materialized. "B" has no recourse against "A". 2. The assignor has the right to assign the credit The assignor has the right to assign its credit. This is not the case when, for example, there exists a contractual or legal prohibition on assignment of the credit. Example 3. Company "X" has decided to communicate to company "A" all improvements it will develop for a technical process during a certain period. Its contract stipulates that the credits that "A" holds against "X" cannot be assigned. "A" no longer needs the technology and attempts to assign its rights to "B". This example has already been presented above with respect to Article 9.1.9, to give an example of an invalid assignment. In the present case, "B" has a remedy against "A" under Article 9.1.15(b). It is recalled that the solution would be inverse if "B" demonstrated that it did not know or could not have known of the non-assignment clause. 3. The credit has not been previously assigned to another assignee and is free from encumbrance or third-party rights If the assignor has already assigned a credit to another assignee, it will generally not be able to assign this same credit a second time. This prohibition can be considered as already covered by the guarantee provided in subsection (b), but the practical importance of this situation is such that an explicit and autonomous provision is justified. It will be recalled, however, that under Article 9.1.11 the second assignee may prevail over the first if it gives notice of the assignment to the debtor before the first assignee has complied with this formality. However, a prior assignment may have been made only as a guarantee. In this case, the credit can be assigned, provided that appropriate information is provided to the second assignee. 4. Absence of means of defense of the debtor In accordance with Article 9.1.13(1), the debtor may raise against the assignee all means of defense that it could raise against the assignor. In this case, the assignee has the right to pursue a claim against the assignor on the basis of this guarantee. Example 4. Bank "B" is the assignee of the credit that contractor "A" had with respect to a certain sum owed to it by client "X". When payment is due, "X" refuses to pay arguing that "A" has not properly performed its obligations. This means of defense may be successfully invoked against "B" according to Article 9.1.13(1). "B" could then pursue a claim against "A". 5. No set-off has been notified The right of set-off may be exercised by the debtor against the assignee if such set-off would have been possible before receiving notice of the assignment (see Article 9.1.13(2)). The assignor is obliged to the assignee that neither the assignor nor the debtor has notified the set-off affecting the assigned credits. The assignor is equally obliged that such notification will not be given in the future. If, for example, the debtor were to notify a set-off to the assignee after the assignment, as authorized by Article 9.1.13(2), the assignee could pursue a claim against the assignor under Article 9.1.15(e). 6. Reimbursement to the assignee of payment made by the debtor to the assignor Article 9.1.10(1) provides that the debtor is discharged by paying the assignor so long as the assignment has not been notified to the debtor. This is the correct solution if one wishes to protect the debtor, but the assignor and assignee have agreed between themselves to transfer the credit. The assignor, consequently, is obliged to reimburse the assignee any payment received from the debtor before the assignment has been notified. Example 5. Seller "A" assigns to bank "B" its right to payment with respect to buyer "X". Neither "A" nor "B" notifies the assignment to "X". When payment is due, "X" pays "A". As explained in the Commentary to Article 9.1.10, this payment is fully valid and "B" is discharged. However, Article 9.1.15(f) empowers "B" to recover the sum paid to "A". 7. No commitment concerning performance or solvency of the debtor The parties to the assignment may certainly establish a guarantee by the assignor regarding the present or future solvency of the debtor, or, more generally, regarding the performance of the debtor's obligations. However, if no such agreement existed, there would be no such guarantee under this article. Example 6. Company "B" is the assignee of the payment credit that company "A" has with respect to its client "X". When payment is due, company "B" discovers that client "X" has become insolvent. "B" must bear the consequences. The solution would be the same if "B" discovered that "X" was already insolvent at the time the assignment was made. The breach of one of the assignor's guarantees gives rise to the remedies and measures provided for in Chapter 7. The assignee may, for example, claim damages from the assignor, or terminate the contract if the conditions provided for in Article 7.3.1 and following are satisfied. 8. Effect of information on the guarantees Some of the assignor's guarantees may be affected by information provided at the time of transfer. The assignor may, for example, inform the assignee of the existence of a claim by a third party, and in this case the assignee may accept the transfer of the credit at its own risk, without any guarantee from the assignor in this respect.

ARTICLE 9: 2.1 (Modalities of transfer) An obligation to pay money or to perform other obligations may be transferred from one person (the "original debtor") to another (the "new debtor") either: (a) by an agreement between the original debtor and the new debtor, in accordance with Article 9.2.3, or (b) by an agreement between the creditor and the new debtor, by which the new debtor assumes the obligation. COMMENTARY Like the assignment of credits covered by Section 1 of this Chapter, the transfer of obligations may have economic utility. For example, if company "A" may require payment from its client "B", but it owes a similar amount to its supplier "X", it may be practical to arrange matters so that the client becomes the debtor of the supplier. Such transfer of obligations may be accomplished in two different ways. 1. Assignment by agreement between the original debtor and the new debtor In practice, the most frequent way to transfer an obligation is to use the conventional route between the original debtor and the new debtor, with the consent of the creditor, in accordance with Article 9.2.3. Example 1. Company "A" owes 50,000 EUR to its supplier "X" and client "B" owes the same sum to "A". "A" and "B" decide that the latter will assume the debts of the former toward "X". The debt is assigned if "X" gives its consent for this operation to be carried out. 2. Assignment by agreement between the creditor and the new debtor Another possibility consists in concluding an agreement between the creditor and the new debtor where the new debtor accepts to assume the obligation. Example 2. Distributor "A" sells the products of company "X" in a certain market. The contract concluded between the parties is about to expire. Distributor "B" begins negotiations with "X" proposing to assume the obligation of distribution. For "X" to accept, "B" promises that it will assume a debt of 50,000 EUR that "A" has with respect to "X". "X" accepts. "B" becomes the debtor of "X". 3. Necessary consent of the creditor In both cases, the creditor must give its consent for the assignment. This is evident when the assignment is carried out by agreement between the creditor and the new debtor. If the assignment takes place by agreement between the original debtor and the new debtor, the requirement is established in Article 9.2.3. Consent may be given in advance in accordance with Article 9.2.4. Without the creditor's consent, the debtor may decide with another person that the latter will undertake to perform the obligation in accordance with what is established in Article 9.2.6. 4. Applies only to assignments by agreement Only assignments by agreement are governed by this Section, in contrast to situations in which applicable law may provide for assignments by operation of law (as occurs in certain jurisdictions where automatic assignment of obligations operates in company merger transactions – see Article 9.2.2). 5. Obligations relating to payment of a sum of money or performance of other obligations This Section is not limited to the transfer of obligations to pay sums of money. It equally covers the transfer of other types of obligations, such as the provision of services. Transferable debts are also not limited to obligations of a contractual nature. For example, obligations arising from non-contractual liability or from a court decision may be governed by this Section, except as provided in Article 1.4. 6. Meaning of the expression "transfer" The transfer of an obligation means that the said debt leaves the estate of the original debtor to enter the estate of the new debtor. However, in some cases, although the new debtor becomes obligated to the creditor, the original debtor is not discharged (see Article 9.2.5).

ARTICLE 9: 2.2 (Exclusion) This Section does not apply to transfers of obligations subject to special rules that regulate transfers of obligations in the course of transfer of a business. COMMENTARY The articles contained within this Section do not apply to transfers of obligations carried out in the course of a business transfer that is effected in accordance with the special rules governing such assignments, such as may be presented in the case of a company merger. Frequently, applicable law establishes mechanisms by which, under certain conditions, rights and obligations are transferred as a whole by operation of law. Article 9.2.2 does not prevent the application of this Section when certain obligations that are part of the transfer of a business are individually transferred. Examples 1. Company "A" is assigned to company "B". The Principles do not apply if applicable law provides that all obligations belonging to the first company are automatically transferred to the second. 2. The facts are identical to those in Example 1, but here "B" has reasons to prefer not to become the debtor of company "X", one of "A"'s suppliers. "A" may assign the corresponding obligations to company "C", with the consent of "X". This particular assignment is subject to the Principles.

ARTICLE 9: 2.3 (Requirement of creditor's consent for transfer) The transfer of obligations by an agreement between the original debtor and the new debtor requires the consent of the creditor. COMMENTARY 1. Agreement between the original debtor and the new debtor As established by Article 9.2.1(a), the transfer of an obligation may occur by virtue of an agreement between the original debtor and the person who will become the new debtor. 2. Creditor's consent is required The agreement alone is not sufficient for the obligation to be assigned thereby. The consent of the creditor is required. This differs from the rule that applies to assignments of credits where the transmission is valid, in principle, without the consent of the debtor (see Article 9.1.7). The assignment of a credit does not affect the situation of the debtor, except that the debtor will have to perform its obligation toward another person. By contrast, a change of debtor may considerably put at risk the situation of the creditor, as the new debtor could be less reliable than the original debtor. The change therefore cannot be imposed on the creditor, which is why the creditor must give its consent. Example Company "A" owes USD 150,000 to company "X", located in Asia, for the provision of certain services. Because of the reorganization of the group, the activities of company "A" in Asia are assumed by subsidiary "B". "A" and "B" decide that "B" will take charge of the debts of "A" toward "X". The obligation is assigned only if "X" grants its consent. 3. The original debtor is not necessarily discharged With the consent of the creditor, the new debtor becomes obligated to pay the debt. This does not imply that the original debtor is necessarily discharged (see Article 9.2.5). 4. Absence of creditor's consent If the creditor refuses to give its consent to the assignment or if its consent was not requested, an agreement for performance by a third party is possible under Article 9.2.6.

ARTICLE 9: 2.4 (Creditor's advance consent) (1) The creditor may give its consent in advance. (2) If the creditor has given its consent in advance, the transfer of the obligation takes effect when notice of the transfer is given to the creditor or when the creditor acknowledges it. COMMENTARY 1. Creditor's advance consent Paragraph (1) of this article provides that the consent of the creditor, required under Article 9.2.3, may be given in advance. Example 1. The holder of a license "X" concludes an agreement for transfer of technology with licensee "A". The term is ten years, during which "A" must pay royalties to "X". At the time the contract is concluded, "A" expresses that, at a certain time, it will prefer that the royalties be paid by its subsidiary "B". "X" may consent in advance to the transfer of the obligation to pay royalties from "A" to "B". 2. Time at which the assignment becomes effective against the creditor In accordance with paragraph (2), if the creditor has given its consent in advance, the assignment of the obligation takes effect when notice of the assignment is given to the creditor or when the creditor acknowledges it. This means that it is sufficient for the original debtor or the new debtor to notify the creditor of the assignment when it occurs. Notification is not necessary if it appears that the creditor has acknowledged the assignment to which it has given its advance consent. "Acknowledgment" implies that the creditor gives a manifest signal of knowledge of the assignment. Examples 2. The facts are identical to those in Example 1, but the time comes when "A" actually agrees with "B" that from that time forward "B" will take charge of the obligation to pay royalties. This decision takes effect at the time it is notified to "X". 3. The facts identical to those in Example 1. No notification is made, but on the first occasion that "B" pays the annual royalties, "X" acknowledges receipt of the payment and confirms that from that date it expects "B" to pay the royalties. The assignment takes effect with this acknowledgment.

ARTICLE 9: 2.5 (Discharge of the original debtor) (

• 1)

  The creditor may discharge the original debtor. (

• 2)

  The creditor may also retain the original debtor as a debtor in the event that the new debtor does not perform adequately. (

• 3)

  In any other case, the original debtor and the new debtor are jointly and severally liable. COMMENTARY 1. Scope of discharge of the original debtor The consent of the creditor, whether granted under Article 9.2.1(b) or under Article 9.2.3, has the effect that the new debtor becomes the obligor for the obligation. It remains to be determined whether the original debtor is discharged. It belongs first to the creditor to choose between different options. Only in the case of Article 9.2.1(b) will the choice also depend on the original debtor. 2. Creditor's choice: completely discharge the original debtor The creditor may first completely discharge the original debtor. Example 1. Supplier "X" accepts that its debtor, company "A", transfer its obligation to pay the price to client "B". Fully confident in the solvency and reliability of the new debtor, "X" discharges "A". If "B" does not perform its obligation, the loss will be suffered by "X", who will have no recourse against "A". 3. Creditor's choice: retain the original debtor as a subsidiary debtor Another possibility for the creditor consists in accepting the assignment of the obligation from the original debtor to the new debtor on the condition that it retains its right of action against the original debtor. There are two options. The first option is that the original debtor remains as debtor in the event that the new debtor does not properly perform the obligation. In this case, the creditor must necessarily demand performance first from the new debtor. But if the new debtor does not perform the obligation properly, then the creditor may require performance from the original debtor. Example 2. Supplier "X" accepts that its debtor, company "A", assign its obligation to pay the price to client "B", but stipulates this time that "A" will remain obligated in the event that "B"'s performance is not adequate. "X" no longer has a direct remedy against "A" and must demand performance first from "B". If "B" does not perform, then "X" may exercise an action against "A". 4. Creditor's choice: retain the original debtor and the new debtor as joint and several debtors The second option, which is more favorable for the creditor, is to retain the original debtor and the new debtor as joint and several debtors. This means that when the performance of the obligation becomes due, the creditor may pursue either the original debtor or the new debtor (see Articles 11.1.3 et seq.). If the creditor obtains performance from the original debtor, the latter may then exercise its right of action against the new debtor (see Articles 11.1.10 et seq.). Example 3. Supplier "X" accepts that its debtor, company "A", transfer its payment obligation to client "B" but stipulates that "A" and "B" are joint and several obligors. In this case, "X" may demand performance indifferently from "A" or "B". If "B" performs its obligation properly, "A" and "B" are completely discharged. If "A" pays the debt to "X", "A" may pursue a claim against "B". 5. Absence of choice by the creditor The formulation of this provision clearly expresses that the last option is the applicable rule in case of absence of choice by the creditor. In other words, if the creditor has not indicated its intention to discharge the original debtor nor to retain the original debtor as a subsidiary debtor, the original debtor and the new debtor shall be jointly and severally liable for the obligation. Example 4. Supplier "X" accepts that its debtor, company "A", transfer its debt to client "B", but says nothing about the obligation of "A". Here too, "X" may demand payment from "A" or "B". If "B" performs properly, both the original debtor and the new debtor are completely discharged. By contrast, if "A" were to perform the debt toward "X", "A" could pursue a claim against "B". 6. Original debtor that refuses to be discharged When the obligation is assumed by an agreement between the creditor and the new debtor, as established by Article 9.2.1(b), and the agreement provides that the original debtor is discharged, the agreement has the nature of a stipulation for the benefit of a third party. Under Article 5.2.6, this benefit cannot be imposed on the beneficiary who may have reasons for not accepting it. The original debtor may therefore refuse to be discharged by the agreement concluded between the creditor and the new debtor. If this refusal is carried out, the new debtor is obligated to the creditor, but the original debtor and the new debtor shall be jointly and severally liable for the debt in accordance with the rule established in Article 9.2.5(3). Example 5. The facts are identical to those in Example 1, but here the obligation is assumed by an agreement made between "X" and "B" where "X" discharges "A". If "A" is no longer interested in a business relationship with "B", "A" may accept its discharge. By contrast, if "A" wishes to maintain the possibilities it has of benefiting from a renewal of its contract with "X", it could wish to maintain the relationship and then refuse its discharge.

ARTICLE 9: 2.6 (Performance by a third party) (1) Without the consent of the creditor, the debtor may agree with another person that the latter will perform the obligation in place of the debtor, unless the obligation, according to the circumstances, has an essentially personal character. (2) The creditor retains its recourse against the debtor. COMMENTARY 1. Agreement on performance by a third party Obligations may be assigned either by agreement between the original debtor and the new debtor, with the consent of the creditor (see Article 9.2.1(a)), or by agreement between the creditor and the new debtor (see Article 9.2.1(b)). There may be situations in which the creditor does not grant its consent, either because it has not been requested or because it has refused. In such cases, the debtor may agree with another person that the latter will perform the obligation in place of the debtor. When the performance of the obligation becomes due, the other person will take charge of it for the benefit of the creditor. While a creditor may refuse to accept a new debtor before the obligation becomes due, in principle the creditor cannot refuse to accept the performance itself when it is carried out by a third party. Example 1. Companies "A" and "B" conclude a cooperation agreement with respect to their activities in a certain market. They decide at a certain point to redistribute certain functions. "B" will take charge of all operations concerning telecommunications that were previously the responsibility of "A". By October 30 following, "A" would have had to pay USD 100,000 to company "X", local operator. The two partners decide that "B" will pay this amount when due. On October 30, "X" cannot refuse the payment made by "B". 2. Obligation of essentially personal character Performance by a third party cannot be refused by the creditor in cases where the third party performs the obligation as if it were the debtor itself performing it. The situation is different when the performance owed has an essentially personal character, linked to the specific qualities of the debtor. The creditor may then insist on receiving performance from the debtor itself. Example 2. In Example 1, "B" is also obliged to provide maintenance on certain sophisticated technological equipment that has been developed by "A" and sold to company "Y". The partners decide that the next annual maintenance will be done by "B". When the technicians of "B" arrive at the premises of "Y", "Y" may refuse their intervention, invoking the highly technological nature of the checks involved, and be entitled to require that the maintenance be performed by the specialized personnel of "A".

ARTICLE 9: 2.7 (Exceptions and rights of set-off) (1) The new debtor may raise against the creditor all exceptions that the original debtor could raise against the creditor. (2) The new debtor may not exercise against the creditor any right of set-off available to the original debtor against the creditor. COMMENTARY 1. Assertion of means of defense The obligations assigned to the new debtor are the same ones that obligated the original debtor (and, in certain cases, continue to obligate it (see Article 9.2.5)). In the same way that the original debtor may be entitled to suspend or refuse payment to the creditor as a means of defense, as might be the case with improper performance of the creditor's own obligations, the new debtor will be able to rely on the same means of defense against the creditor. Example 1. Company "A" owes company "X" 200,000 EUR that it must pay at the end of the year for management services. With the consent of "X", "A" assigns this debt to company "B". The services that "X" provides to "A" are extremely deficient, thus giving "A" the right to refuse payment. When payment is due, "B" may raise the same means of defense to "X". 2. Means of defense of a procedural nature The same solution applies to means of defense of a procedural nature. Example 2. The facts are identical to those in Example 1 but "X" sues "B" before the court of the place of its establishment. "B" may successfully invoke the arbitration clause inserted in the contract concluded between "A" and "X". 3. Set-off The right of set-off that refers to the obligation of the creditor to the original debtor cannot be exercised by the new debtor. The requirement of reciprocity is not required between the creditor and the new debtor. The original debtor may still exercise its right of set-off if it has not been discharged.

ARTICLE 9: 2.8 (Rights relating to the transferred obligation) (

• 1)

  The creditor may assert against the new debtor, with respect to the transferred obligation, all its rights to payment or other performance under the contract. (

• 2)

  If the original debtor is discharged under Article 9.2.5(1), any guarantee given for the performance of the obligation by any other person than the new debtor is also discharged, unless that other person agrees that the guarantee shall remain available to the creditor. (

• 3)

  The discharge of the original debtor also extends to any guarantee of the original debtor given to the creditor to guarantee the performance of the obligation, unless the guarantee is on a thing that is transferred as part of a transaction between the original debtor and the new debtor. COMMENTARY 1. Scope of the assignment The rules established in this article are inspired by the same principle as Article 9.2.7. The obligation is transferred to the new debtor as it was in the hands of the original debtor, not only with the means of defense that the original debtor could raise, but equally with all rights to payment or other performance provided for in the contract that the creditor had with respect to the transferred obligation. The following examples illustrate such rights. Examples 1. Company "A" must reimburse bank "X" a loan of 1,000,000 EUR plus interest at a rate of 3%. Company "A" assigns its obligation to reimburse the principal to company "B". The assignment equally encompasses the obligation to pay interest at the rate of 3%. 2. The facts are identical to those in Example 1, but here the bank's loan contract "X" empowers it to require early reimbursement if "A" defaults on payment of the interest due. "X" may also assert this right against "B". 2. Contractual adaptations The autonomy of the parties permits deviations from the rule established in this article, such as the separate transfer of the obligation to pay interest. 3. Comparison of guarantees in the case of credit assignment and obligation transfer In the case of a credit assignment, all rights that guarantee performance are automatically transferred to the assignee (see Article 9.1.14(b)). This solution is justified by the fact that the assignment of a credit does not alter the situation of the debtor, that is, guarantees may continue to serve the same purposes under unchanged circumstances. The transfer of an obligation to a new debtor, by contrast, modifies the context within which the guarantee was granted. If the original debtor has been discharged from its obligation and if the guarantee were to be transferred with the obligation, the risk of non-performance or insolvency to be covered would be that of another person, completely modifying the object of the guarantee. 4. Personal guarantees If the debt of the original debtor is guaranteed by a surety provided by another person, this guarantee may be maintained if the original debtor remains obligated. If, by contrast, the original debtor is discharged, the personal guarantee cannot be transferred to guarantee the performance of the new debtor, unless the person who provides such guarantee decides to extend its commitment for the benefit of the creditor. Example 3. Company "A" owes USD 1,000,000 to company "X". Bank "S" has guaranteed the proper performance of this debt. With the agreement of company "X", "A" assigns the debt to company "B" and "X" accepts to discharge "A". "S" does not guarantee the obligations of "B", unless it agrees to continue guaranteeing the debt. A special case occurs when the personal guarantee is provided by the person who becomes the new debtor. In this case, the guarantee necessarily disappears, since a person cannot be a guarantor of its own obligations. 5. Guarantees secured on assets The original debtor may have pledged one of its assets as security. In this case, if the obligation has been transferred and the original debtor is discharged, the security interest ceases to secure the debt that obligates the new debtor. Example 4. Bank "X" has granted a loan of 100,000 EUR to company "A", loan guaranteed by the debtor with a deposit of securities. With the agreement of "X", "A" transfers the obligation to reimburse the loan to company "B", and "X" accepts to discharge "A". The securities cease to serve as guarantees. The solution is different if the asset given as security is transferred as an element of the transaction between the original debtor and the new debtor. Example 5. The facts are identical to those in Example 4, but here the transfer of the obligation between "A" and "B" occurs as part of a broader transaction within which the ownership of the securities is also transferred to "B". In such a situation, the securities will continue to guarantee the obligation of "B" to reimburse the loan.

ARTICLE 9: 3.1 (Definitions) "Assignment of a contract" is the transfer by agreement of a person (the "assigning party") to another (the "assignee") of the rights and obligations of the assigning party that arise from a contract with another person (the "other party"). COMMENTARY In accordance with the rules of Sections 1 and 2 of this Chapter, credits and obligations may be transferred separately. However, in certain cases, a contract may be transferred in its entirety. Precisely, a person assigns to another person all the credits and obligations arising from its status as a party to a contract. A contracting party, for example, may wish to be replaced by another contracting party as a party to a construction contract. The articles of this Section cover assignments of contracts as defined in this article. Only assignments by agreement concern this Section, in contraposition to different situations within which applicable law may provide for assignments by operation of law (as in certain jurisdictions, automatic assignment of contracts in company merger transactions – see Article 9.3.2).

ARTICLE 9: 3.2 (Exclusion) This Section does not apply to assignments of contracts subject to special rules that regulate assignments of contracts in the course of transfer of a business. COMMENTARY The assignment of contracts may be subject to specific rules of applicable law when it is carried out in the context of a business transfer. Such special rules frequently provide mechanisms by which all contracts of the business, under certain conditions, shall be assigned by operation of law. This article does not prevent the application of the Principles when certain contracts belonging to the transferred business are assigned individually. Examples 1. Company "A" has been assigned to company "B". If applicable law provides that all contracts in which the first company was a party are automatically transferred to company "B", then the Principles do not apply. 2. The facts are identical to those in Example 1, but here company "B" is not interested in taking charge of a contract with company "X" and prefers that this contract be assigned to company "C". This particular assignment is subject to the Principles.

ARTICLE 9: 3.3 (Requirement of consent of the other party) Assignment of a contract requires the consent of the other party. COMMENTARY 1. Agreement between the assigning party and the assignee The first requirement to assign a contract is that the assigning party and the assignee have agreed on the transaction. 2. Consent of the other party is required However, this agreement is not sufficient to assign the contract. It is equally necessary that the other party grant its consent. If it were only a matter of assigning credits, such consent would not in principle be necessary (see Article 9.1.7). However, assignment of a contract also involves assignment of obligations, which cannot be valid without the consent of the creditor (see Article 9.2.3). Therefore, assignment of a contract can only occur if there is consent of the other party. Example An office space is leased by owner "X" to company "A". The contract has a term of six years. Due to the growth of the company, "A" wishes to move to larger premises. Company "B" would be interested in assuming this lease. The contract can be assigned by agreement between "A" and "B", but the transaction equally requires the consent of "X". 3. The assigning party is not necessarily discharged from its obligations With the consent of the other party, the assignee is bound by the obligations of the assigning party arising from the assigned contract. This does not necessarily imply that the assigning party is discharged from its obligations (see Article 9.3.5).

ARTICLE 9: 3.4 (Advance consent of the other party) (1) The other party may give its consent in advance. (2) If the other party has given its consent in advance, the assignment of the contract takes effect when notice of the assignment is given to the other party or when the other party acknowledges it. COMMENTARY 1. Advance consent by the other party Paragraph (1) of this article provides that the consent of the other party, required under Article 9.3.3, may be given in advance. This rule, with respect to assignment of contracts, corresponds to the rule of Article 9.2.4 pursuant to which the creditor, who must consent to assignment of the obligation, may express its consent in advance. In the same way, the other party that must consent to assignment of the contract may equally give its consent in advance. Example 1. Company "X" has concluded with agency "A" a contract whereby the latter will be responsible for the advertising of company "X"'s products for the next five years in country "M". However, "A" is already considering ceasing its activities in country "M" in the not-too-distant future, and obtains advance consent from "X" so that the contract may be assigned later to agency "B" located in the capital of country "M". This advance consent is valid under Article 9.3.4. 2. Time at which assignment of the contract takes effect against the other party In accordance with paragraph (2), if the other party gives its advance consent, the assignment of the contract shall take effect when the other party is notified of the assignment or when the other party acknowledges it. This means that it is sufficient for the assigning party or the assignee to notify the assignment when it occurs. Notification is not necessary if it appears that the other party has acknowledged the assignment of the contract, which the other party had already given its advance consent to. There is an "acknowledgment" when the other party gives a manifest signal of its knowledge of the existence of the assignment. Examples 2. The facts are identical to those in Example 1. When "A" effectively assigns its contract to "B", the assignment takes effect against the other party when "A" or "B" notifies it to "X". 3. The facts are identical to those in Example 1. No notification has been carried out, but "B" sends "X" a proposal for a new advertising campaign. "X" understands that the assignment has taken place and sends its comments on "B"'s proposal. The assignment of the contract takes effect with this acknowledgment of the assignment.

ARTICLE 9: 3.5 (Discharge of the assigning party) (

• 1)

  The other party may discharge the assigning party. (

• 2)

  The other party may also retain the assigning party as a debtor in the event that the assignee does not perform adequately. (

• 3)

  In any other case, the assigning party and the assignee are jointly and severally liable. COMMENTARY 1. Scope of discharge of the assigning party This article, which refers to assignment of contracts, corresponds to the rule established in Article 9.2.5. Insofar as assignment of a contract brings with it assignment of the assigning party's obligations to the assignee, the other party, as creditor, may decide the effects that acceptance of the assignee as new debtor will have on the obligations of the assigning party. This article gives the other party numerous options and provides a rule by default. 2. Choice of the other party: completely discharge the assigning party The other party may, first, completely discharge the assigning party from its obligations. Example 1. Pursuant to a contract with company "X", company "A" is responsible for cleaning waste originating from an industrial process. "X" accepts at a given time that the contract be assigned by "A" to company "B". Assured by the fact that "B" is solvent and reliable, "X" discharges "A". If "B" does not perform properly, "X" will have no recourse against "A". 3. Choice of the other party: retain the assigning party as subsidiary debtor Another possibility for the other party is to accept the contract assignment under the condition that it reserves the right to act against the assigning party. There are two options. In accordance with a first option, the assigning party remains as debtor in the event that the assignee does not perform properly. In this case, the other party must first demand performance from the assignee. But if the assignee does not perform properly, the other party may require performance from the assigning party. Example 2. The facts are identical to those in Example 1, but this time, "X", at the moment of consenting to the assignment, has indicated that "A" will remain obligated if "B" does not properly execute the obligation. "X" no longer has direct credits against "A" and must demand performance from "B" first. If "B" fails to perform properly its obligations, "X" will have a right to pursue a claim against "A". 4. Choice of the other party: retain the assigning party and the assignee as joint and several debtors The second option, the most favorable for the other party, consists in retaining the assigning party and the assignee as joint and several debtors. This means that when performance becomes due, the other party may exercise its credit against the assigning party as well as against the assignee (see Articles 11.1.13 et seq.). If the other party obtains performance from the assigning party, the latter will then have a remedy against the assignee (see Articles 11.1.10 et seq.). Example 3. Company "X" accepts that company "A" assign the contract to company "B" but stipulates that "A" will remain jointly and severally obligated together with "B". In this case, "X" may demand performance from "A" or "B". If "B" performs properly, both the assigning party and the assignee are completely discharged. If "A" performs the contract for the benefit of "X", it will then have a remedy against "B". 5. Default rule The formulation of this provision makes this option the default rule. In other words, unless the other party has indicated its intention to discharge the assigning party or to maintain only the assigning party as a subsidiary debtor, the assigning party and the assignee remain jointly and severally obligated. Example 4. Company "X" accepts that company "A" assign the contract to company "B" but expresses nothing regarding the responsibility of "A". In this case too, "X" may demand performance of the obligations from "A" or "B". If "B" performs them properly, "A" and "B" are completely discharged. If "A" performs them, it will then have a remedy against "B". 6. Ability to make different choices When a party concludes a contract, it is frequently subject to a set of obligations. When the contract is assigned, the other party may exercise different choices regarding the different obligations. The other party may, for example, accept discharge of the assigning party from a determined obligation, but retain it as subsidiary debtor or consider it jointly and severally obligated with the assignee for other obligations. Example 5. Company "A" has concluded a know-how license contract with company "X". In return for the transfer of technology, "A" is obliged to pay royalties and to cooperate with "X" for the development of a new product. When later "X" accepts that "A" assign the contract to company "B", "X" discharges "A" from the obligation to participate in the joint research that it will now conduct alone with the assignee, but will retain "A" as subsidiary debtor or jointly and severally obligated with "B" regarding payment of royalties.

ARTICLE 9: 3.6 (Exceptions and Set-Off Rights) (1) Insofar as the assignment of a contract involves an assignment of receivables, Article 9.1.13 shall apply. (2) Insofar as the assignment of a contract involves a transfer of obligations, Article 9.2.7 shall apply. COMMENTARY The assignment of a contract involves both an assignment of the original receivables and a transfer of the original obligations of the assignor to the assignee. The operation should not adversely affect the situation of the other party in its capacity as obligor and should place the assignee in the same situation as the assignor in its capacity as obligor. Consequently, the provisions concerning means of defence in Sections 1 and 2 of this Chapter are applicable. When the assignee exercises its rights, the other party may set up all the means of defence that it could have set up as obligor if the action had been brought by the assignor (see Article 9.1.13). Similarly, when the other party exercises its rights, the assignee may set up all the means of defence that the assignor could have set up as obligor if the action had been brought against it (see Article 9.2.7). Examples 1. Company "X" has engaged an external consulting firm "A" for risk management. With the consent of "X", the contract is assigned to consultant "B". "X" suffers a loss against which it was not insured due to the incompetence of "A". While the claim for damages is pending, "X" may suspend payment of the fees agreed with "B". 2. Airline "A" has a contract with company "X" for the supply of prepared food. "A" assigns the operation of its flights to certain destinations to airline "B". With the consent of "X", the prepared food supply contract is assigned by "A" to "B". Problems arise. "X" sues "B" before the competent court at the seat of its business establishment. As a procedural defence, "B" may successfully invoke that the assigned contract includes an arbitration clause.

ARTICLE 9: 3.7 (Rights Assigned with the Contract) (

• 1)

  Insofar as the assignment of a contract involves an assignment of receivables, Article 9.1.14 shall apply. (

• 2)

  Insofar as the assignment of a contract involves a transfer of obligations, Article 9.2.8 shall apply. COMMENTARY The assignment of a contract involves both the assignment of the original receivables and the transfer of the original obligations of the assignor to the assignee. In a manner parallel to what has been said with respect to means of defence according to Article 9.3.6, the operation should not adversely affect the situation of the other party in its capacity as creditor and should place the assignee in the same situation as the assignor in its capacity as obligor. Consequently, the provisions of Sections 1 and 2 of this Chapter concerning rights relating to assigned receivables and to the transfer of obligations apply correspondingly. When the assignee acts against the other party, it may invoke all the rights to payment of sums of money or to other performances resulting from the assigned contract in relation to the assigned receivables, as well as all rights that secure such performance (see Article 9.1.14). When the other party exercises its rights, it may set up against the assignee all its rights to payment of sums of money or to other performances resulting from the contract in relation to the assigned debts (see Article 9.2.8(1)). The securities granted for the performance of the assignor's debts are maintained or cancelled in accordance with the rules established in paragraphs (2) and (

• 3)

  of Article 9.2.8. Examples 1. A service contract provides that late payment of annual fees owed by client "X" to service provider "A" shall give rise to interest at a rate of 10%. With the consent of "X", "A" assigns the contract to service provider "B". When "X" is unable to pay the annual fees on time, "B" enjoys the right to claim such interest (see Article 9.1.14(a)). 2. The facts are identical to those of Example 1, but here "X" has granted "A" a bank guarantee covering payment of its fees. "B" may enforce this guarantee if "X" does not pay the fees (see Article 9.1.14(b)). 3. Company "X" has commissioned company "A" with the construction and installation of industrial equipment. Quality levels have been agreed upon, and the contract provides for the possibility of payment of damages in the event of failure to meet the agreed quality level. With the consent of "X", "A" assigns the contract to company "B". The assignee supplies equipment that does not meet the required quality level. "X" may claim from "B" the agreed damages (see Article 9.2.8(1)). 4. The facts are identical to those of Example 3, but "A" has established in favor of "X" a bank guarantee covering the satisfactory performance of the obligation. The bank guarantee may not be enforced for the obligations of "B" by virtue of the assignment, unless the bank agrees to extend its guarantee to cover the assignee's debts (see Article 9.2.8(2)).

ARTICLE 10: 1 (Scope of Application of this Chapter) (1) The exercise of the rights regulated by these Principles is limited by the expiration of a period of time, called the "period of limitation", in accordance with the rules of this Chapter. (2) This Chapter does not regulate the time within which, in accordance with these Principles, a party is required, as a condition for the acquisition or exercise of its right, to give notice to the other party or to perform an act other than the initiation of judicial proceedings. COMMENTARY 1. Notion of Limitation All legal systems recognize the effect of the passage of time on rights. There are two basic systems. Under one system, the passage of time extinguishes rights and claims. Under the other system, the passage of time is merely a defence which may be raised as an exception to legal proceedings. Under these Principles, the expiration of a period does not extinguish rights but operates only as a defence (see Article 10.9). This article refers in general terms to "rights regulated by these Principles", indicating that not only the right to claim performance or another remedy for breach will be subject to limitation periods, but also the exercise of rights which directly affect a contract, such as the right to terminate it or to claim a contractually agreed price reduction. Examples "A" sells a ship to "B". Upon delivery, the ship is not in conformity with the specifications in the contract. After three and a half years, "B" brings an action against "A" to obtain repair of the defects. "A" may raise the defence of expiration of the period of limitation of "B"'s claim, in accordance with Article 10.2. The facts are identical to those of Example 1, but here the contract between "A" and "B" contains a clause allowing "B" to claim a price reduction of up to 30% in the event that parts of the equipment or spare material are missing. "B" can no longer exercise its right to claim a price reduction. 2. Obligations to Give Notice and Other Prerequisites for Exercising Rights In accordance with these Principles, rights may be lost if the party entitled to acquire or exercise a right does not give notice or perform an act within a reasonable period, without undue delay, or within another fixed period (see Articles 2.1.1 – 2.1.22 (communications in the formation of contracts), Article 3.2.12 (notice of avoidance of contract), Article 6.2.3 (request to renegotiate), Article 7.3.2(e) (right to claim performance), Article 7.3.2(2) (notice of termination)). While these articles perform a function similar to that of periods of limitation, their special periods and effects are not affected by the periods of limitation set forth in this Chapter, as these periods respond to particular needs. In general, these special periods are much shorter and have their effects regardless of the periods of limitation provided for in this Chapter. In the exceptional case where "a reasonable period" proves to be longer than the applicable period of limitation, the former shall prevail. Example The facts are identical to those of Example 1, but here "B" grants "A" a supplementary period of 60 days to remedy the defects. "A" does not remedy them, but two months after the expiration of the supplementary period, "B" sends "A" a notice of termination in accordance with Article 7.3.2. Although "B"'s claim is not time-barred according to Article 10.2, "B" has lost the right to terminate the contract because it has not given notice of termination within a reasonable period as determined by Article 7.3.2(2). 3. Mandatory Rules of Domestic Law In cases where the parties' reference to the Principles is considered only as an agreement to incorporate them into the contract, the mandatory rules of a national, international or supranational character relating to the duration, suspension or renewal of periods of limitation, as well as the parties' right to modify them, prevail over what is established in this Chapter (see the Commentary to Article 1.4, paragraph 2). Even in cases where the Principles are applied as the law governing the contract, the mandatory rules of a national character relating to duration prevail over the rules contained in this Chapter, provided, however, that they require their application regardless of the law governing the contract (see the Commentary to Article 1.4, paragraph 3). Example A seller "A" in country "X" sells and delivers spare parts to an automotive plant in country "Y". Some parts are defective, and in the same year of delivery, the defects cause accidents, obliging "B" to be liable for damages. Four years later, "B" claims from "A" to be compensated for the expenses incurred. "A" refuses to pay. The contract provides for arbitration in country "Z" with the UNIDROIT Principles as the applicable law. In the arbitration initiated at the request of "B", "A" defends itself by invoking the expiration of the three-year limitation period specified in Article 10.2. "B" responds that under the law of country "X", the action for damages is time-barred after five years, and that this is the applicable rule regardless of any law that may govern the contract. The rule of country "X" prevails.

ARTICLE 10: 2 (Periods of Limitation) (1) The ordinary period of limitation is three years, commencing on the day following the day when the creditor knew or ought to have known the facts as a result of which the creditor's right can be exercised. (2) In any case, the maximum period of limitation is ten years, commencing on the day following the day when the right could be exercised. COMMENTARY 1. Absence of a Common Solution Although periods of limitation of rights and claims are common to all legal systems, they differ as to their duration. They range from six months or one year for claims on breaches of warranties, to 15, 20 or even 30 years for other claims. At the international level, the United Nations Convention on the Limitation Period in the International Sale of Goods of 1974 (as amended by the Protocol of 1980) (the "UN Limitation Convention") establishes uniform rules on limitation periods, but its application is limited to the international sale of goods. 2. Relevant Factors The fixed duration of a limitation period does not always determine by itself the time after which rights can no longer be exercised. The requirements determining when a period commences, or the circumstances affecting its course (see Articles 10.4 – 10.9), may affect this moment, as may an agreement between the parties (see Article 10.3). The autonomy of the parties with respect to periods of limitation is of great practical importance, since periods that are too long or too short could be made acceptable if they can be freely modified by the parties according to their needs. 3. Balancing the Interests of Creditor and Debtor The Principles strike a balance between the conflicting interests of the creditor and the debtor who has not yet paid the debt. The creditor must have a reasonable opportunity to exercise its right and should not be prevented by the passage of time from doing so. Moreover, the creditor must know or at least have had the opportunity to know what is owed to it and who the obligor is. On the other hand, the creditor must be able to close the case after a time, regardless of the knowledge which the debtor possesses, so that an absolute maximum period must also be established. In contrast to the UN Limitation Convention, which establishes a single and absolute period of four years from the date when the claim can be exercised (see Articles 8 and 9.1), the Principles adopt a dual-track system. 4. Basic Structure of the Limitation System The dual-track system is based on the principle that the creditor cannot be barred by limitation before having had an effective opportunity to exercise a right of which it has certain or possible knowledge. Thus, paragraph (1) provides for a relatively short period of limitation – of three years, commencing from the moment when the creditor knew or ought to have known the facts which form the basis of its right and enable it to exercise it. Paragraph (2) provides for a maximum period of limitation of ten years, commencing from when the right could be exercised, regardless of whether the creditor has actual or presumed knowledge of that right. 5. Possibility of Exercising the Right The creditor has a real possibility of exercising its right only when that right is certain and enforceable. For this reason, paragraph (2) provides that the maximum period of limitation commences only from the date when the right can be exercised. 6. Knowledge of Facts and its Distinction from Knowledge of the Law The general period of limitation of three years commences on the day following the day when "the creditor knew or ought to have known the facts as a result of which the creditor's right can be exercised". The "facts", as referred to in this provision, are the facts which form the basis of the right, such as the formation of a contract, the delivery of goods, the performance of services and the breach. The facts indicating that a right or a claim is enforceable must be known, or at least be knowable, by the creditor before the general period of limitation begins to run. It may also occur that the creditor has doubts about the identity of the debtor, for instance in cases of representation, assignment of obligations or contracts, dissolution of partnerships or contracts in favour of unknown third parties. In such cases, the creditor must know or have reason to know to whom it should make its claim before it can be faulted for not exercising its right or claim. Knowledge, certain or possible, of the "facts", however, does not mean that the creditor must know the legal implications of those facts. Even if the creditor has complete knowledge of the facts, but is mistaken as to its rights, the three-year period of limitation will still commence. Examples "A" designs and builds a bridge pursuant to a contract with municipality "B". The engineers of "A" make an error in calculating the strength of some steel girders. Four years later, the bridge collapses due to a storm and the weight of several loaded trucks. "B"'s action for damages is not time-barred because the general period of limitation could only commence at the time of the collapse, when "B" was in a position to discover "A"'s breach. The facts are identical to those of Example 1, but here the bridge collapses eleven years after it was built. "B"'s action is time-barred by virtue of the maximum period of limitation provided for in Article 10.2(2). It would be advisable for the parties entering into this type of contract to make the maximum period of limitation as long as possible, always within the limits permitted by Article 10.3. "A" sends to "B" a notice in accordance with Article 7.3.2, terminating a sales contract between them because "B" refuses to take delivery of the goods offered by "A". Thirty-seven months after receipt of the notice of termination, "B" brings a claim for restitution of a pre-payment of the purchase price made before the termination. "B" argues that, due to an error in its accounting, it overlooked the advance payment, with the result that only recently has it become aware that it has a right to claim restitution in accordance with Article 7.3.6(1). "B"'s action for restitution is time-barred by the expiration of three years, as "B" ought to have known of the existence of its payment when the contract was terminated and ought to have known that it could exercise the aforementioned action. The facts are identical to those of Example 1, but here "B" claims not to have realized the legal effects of the notice of termination. In any case, "B"'s action for restitution is time-barred. A mistake of law with respect to a notice of termination does not excuse the creditor, as the phrase "ought to have known" presupposes the seeking of legal advice if the party is unaware of the legal effects of the factual circumstances. 7. Commencement of the Period of Limitation In the absence of an agreement to the contrary, the debtor may perform its obligation at any time until the last day of the period. Therefore, the period of limitation will not commence to run until the day following the expiration of the period. Example "A" is required to pay a sum of money on 24 November. If "A" does not pay on that date, the period of limitation will commence to run from 25 November. 8. The Right Must Be Capable of Being Exercised An obligation may exist even if its performance is not immediately enforceable. See, for example, Article 6.1.1(a). If a creditor's claim for reimbursement of a loan is based on a contract, it can then arise either at the time of the conclusion of the contract or at the time of the payment of the loan to the debtor, the action for reimbursement will generally expire much later. Furthermore, a right cannot be exercised if the debtor raises an exception. Examples A loan contract obligates the debtor to return the borrowed money on 15 November. The creditor grants the debtor an extension for the return until 15 December. The period of limitation will commence to run from 16 December. "A" is engaged for the construction of a fertilizer plant which "B" needs. The price is to be paid in three installments, the last due four weeks after certification by engineers that the work is finished. Despite obtaining the final certificate of completion, defects in the plant are found. "B" is entitled to suspend the last payment in accordance with Articles 7.1.3(2) and 7.1.4(4). The period of limitation for the action to claim the payment does not commence to run until the defects are remedied, thereby extinguishing the right to suspend payment. 9. Maximum Period In accordance with paragraph (2), the creditor may not exercise its right after ten years counted from the date when it could have been exercised, regardless of whether the creditor knew or ought to have known the facts giving rise to it. The purposes of this ten-year maximum period of limitation are the restoration of peace and the prevention of speculative litigation when evidence becomes more difficult to obtain. Example "B" borrows money from "A" and orders his accountant to return the loan on its due date, in January. Fifteen years later, a dispute arises as to whether the loan was fully returned or only partially, as "A" claims. "A"'s claim is time-barred in accordance with Article 10.2(2) because the maximum period of limitation has expired. 10. Accessory Obligations This article applies to all rights, and includes the so-called "accessory obligations". Examples In a loan contract, the debtor agrees to pay interest of 0.7% per month in case of late return. The debtor returns the principal thirty-five months after the due date for return of the loan. The creditor is not required to claim payment of all monthly interest at once, and may wait up to thirty-six months for each accrued interest before it becomes time-barred. By a contract between builder "A" and owner "B", "A" agrees to complete a construction by 1 October and to pay 50,000 EUR for each month of delay up to a maximum amount of 2,500,000 EUR. Construction is delayed 40 months. Actions for damages for breach or delay are time-barred 36 months after 2 October. Actions claiming payment of each monthly penalty are time-barred 36 months after the penalty accrues. 11. "Year" This article does not provide a definition of "year", because at the international level a reference to year is generally understood with reference to the Gregorian calendar (see Article 1(3)(h) of the UN Limitation Convention). In any case, calendars other than the Gregorian calendar will in most cases have the same number of days per year, and therefore this will not affect the duration of periods of limitation. The parties may agree on a different meaning of the term "year" under Article 1.5. Such an agreement may be express or derive implicitly from an interpretation of the contract.

ARTICLE 10: 3 (Modification of Periods of Limitation by the Parties) (1) The parties may modify the periods of limitation. (2) However, they may not: (

• a)

  shorten the ordinary period of limitation to less than one year; (

• b)

  shorten the maximum period of limitation to less than four years; (

• c)

  extend the maximum period of limitation to more than fifteen years. COMMENTARY 1. Fundamental Decision: Possibility of Modifications In some legal systems, the parties' power to modify the periods of limitation and their effects is limited in order to protect the weaker party, in particular consumers. Sometimes a distinction is made between very short periods of limitation, which may be extended, and other periods of limitation which may not be modified or which may only be shortened. Given that the Principles apply in general to international contracts between business persons, who generally possess the requisite knowledge and experience and who therefore do not require protection, the parties are permitted to adapt to the needs of each case the periods of limitation applicable to rights arising from contracts. The autonomy of the parties' will in this respect may be limited when the applicable law contains mandatory rules (see Article 1.4). 2. Limits on Modifications However, it is possible that a party with superior bargaining power, or with better information, could attempt to obtain an advantage over the other party by either shortening or excessively lengthening the period of limitation. For this reason, this article restricts the possibility of shortening the period of limitation by providing that it may not be reduced to less than one year from the moment of actual or presumed knowledge. Similarly, the maximum period of limitation may be shortened to less than four years. The maximum period of limitation, and logically the general period of limitation, may not exceed fifteen years. Examples The facts are identical to those of Example 2 of Article 10.2, but here in their contract the parties have provided that the maximum period of limitation for any claim for hidden defects is fifteen years. "B"'s action for damages has not yet been time-barred. The facts are identical to those of Example 2 of Article 10.2, but here in their contract the parties have provided that the maximum period of limitation for any claim for hidden defects is twenty-five years and the bridge collapses after 16 years. "B"'s action for damages is time-barred because the maximum period of limitation can only be as long as fifteen years. The facts are identical to those of Example 2 of Article 10.2, but here in their contract the parties determine that the general period of limitation in the case of damage resulting from the inadequacy of the bridge will commence to run only after the preparation of a written report by a group of experts from an engineering consulting company. Following the collapse of the bridge, the causes are not certainly known and it takes the experts two years to prepare the report. The general period of limitation commences to run only from the day following the day the report was delivered. 3. Time of Modification It is possible to agree on a modification before or after the commencement of a period of limitation. An agreement to modify made before or after the commencement of the course of a period of limitation is different from an agreement made after the period of limitation has expired. An agreement of the latter kind is too late to modify the period of limitation, but may have legal effects either as a waiver of the right to raise the expiration of the period of limitation as a defence or as a new promise by the debtor.

ARTICLE 10: 4 (Recommencement of the Limitation Period by Acknowledgement) (1) When the debtor acknowledges the creditor's right before the expiration of the ordinary period of limitation, a new ordinary period of limitation commences on the day following the acknowledgement. (2) The maximum period of limitation does not recommence, but may be exceeded by the recommencement of an ordinary period of limitation in accordance with Article 10.2(1). COMMENTARY 1. Acknowledgement of Rights Most legal systems allow the acts of the parties or other circumstances to modify the course of limitation. Sometimes certain acts of the parties or other circumstances "interrupt" the course of limitation, so that after the interrupting act, a new period of limitation begins to run. At other times, certain acts or other circumstances cause a "suspension" of the course of limitation, so that the time period during which the suspension occurred is not computed for the purposes of calculating the period of limitation. In accordance with this article, acknowledgement of a right by the debtor causes an interruption of the period of limitation (see also Article 20 of the UN Limitation Convention). 2. Commencement of a New Ordinary Period of Limitation The new period of limitation that begins to run after acknowledgement of the creditor's right is the ordinary period of limitation, since by virtue of that acknowledgement, the creditor will necessarily have the knowledge required by Article 10.2(1) for the commencement of the course of the general period of limitation. Consequently, there will be no need to protect it by granting it another maximum period of limitation. Example "A" performs defectively a construction contract with "B", and in October "B" notifies "A" of the defects without receiving any response. Two years later, "B" contacts "A" again, threatening it with bringing an action for damages. This time "A" responds and acknowledges the defects in the performance and promises to remedy them. On the following day, a new ordinary period of limitation commences to run for "B"'s action for damages. The commencement of a new ordinary period of limitation as a result of acknowledgement may take place either during the ordinary period of limitation stated in Article 10.2(1) or during the maximum period of limitation of Article 10.2(2). If the debtor acknowledges the creditor's right after seven years, but before the maximum period of limitation has expired, the new ordinary period of limitation may extend beyond the maximum period by up to three years, although the maximum period of limitation does not recommence after acknowledgement. Example "B" discovers defects in "A"'s construction work only when nine years have passed since completion of the work. Such defects could not have been discovered earlier. "B" threatens to bring a legal action and "A" acknowledges the defects. A new ordinary period of limitation commences to run from that acknowledgement, and therefore the total duration of the limitation period will be twelve years. 3. Novation and Other Acts Creating a New Obligation Acknowledgement does not create a new obligation, but merely interrupts the course of the period of limitation. Accessory obligations therefore do not become extinct. Consequently, if the period of limitation has already expired, a mere acknowledgement under this article cannot retroactively invalidate or annul the use of the expiration of the period of limitation as a defence. Example The facts are identical to those of Example 2, but here "B" knew or ought to have known of "A"'s defects at the time of completion of the work. "B" contacts "A" only seven years later, and "A" acknowledges the defects. In any case, "B"'s action is already time-barred in accordance with Article 10.2(1) and is not revived by "A"'s acknowledgement. If the parties wish to annul the effects of the expiration of a period of limitation, they can create a new obligation through "novation" or through a unilateral act of the debtor, or the debtor can waive the right to raise the expiration as a defence. The parties may also extend the duration of the creditor's rights beyond the maximum period of limitation in accordance with Article 10.2(2). Examples The facts are identical to those of Example 3, but here "A", in order to maintain a fruitful business relationship, not only acknowledges the defects but also promises to remedy them regardless of any question of its liability. This agreement creates a new obligation for "A", which will be time-barred only three years later. Nine years after completion of the work, "B" discovers defects in "A"'s construction work, which could not have been discovered earlier. Upon notifying "A", the latter responds that it will investigate the causes of the defects and therefore will not raise the expiration of the limitation period as a defence until six months have passed since the time when the experts commissioned to investigate have delivered their report. This report is delivered twelve months later, confirming "B"'s notification about the defects. When "B" claims from "A" that it remedy the defects, "A" raises the expiration of the maximum limitation period of Article 10.2(2) with the result that "B" can no longer bring any action for damages. "A"'s argument is incorrect, as "B" refrained from initiating judicial proceedings because of "A"'s waiver. 4. Interruption of Limitation Periods Modified by the Parties Insofar as the parties have modified the ordinary period of limitation under Article 10.1(1), acknowledgement and the commencement of a new period of limitation affect the ordinary period as modified. If, for example, the parties have shortened the general period of limitation to one year, acknowledgement will mean that a new period of one year commences. Example "A" and "B" have agreed to shorten the period of limitation to two years for actions arising from "A"'s defective performance. After nine and a half years, "B" discovers defects in "A"'s performance and "A" acknowledges its obligation to remedy them. "B" has another two years in which to bring an action before it becomes time-barred in accordance with Article 10.2(1). Since the debtor can acknowledge a right more than once, the limited effect of an acknowledgement, which causes only the ordinary period of limitation to recommence, may be overcome by a subsequent acknowledgement. Example In November, "A" delivers goods that do not conform to the contract with "B". "B" suffers losses due to the non-conformity because its customers complain and return the goods. After two years, the total amount of damage is not determined, "B" pressures "A" to acknowledge its responsibility and in December of that year "A" acknowledges it. Two years later, uncertainty persists as to the extent of "B"'s obligations to its customers, some of whom have sued it demanding compensation for indirect damages allegedly caused by the goods. "B" therefore turns to "A" again, who acknowledges its obligation to compensate "B" if the customers' claims prove to be well-founded. "B" has three more years before its actions against "A" become time-barred.

ARTICLE 10: 5 (Suspension by Judicial Proceedings) (1) The running of the period of limitation is suspended: (

• a)

  when the creditor initiates judicial proceedings or, in already initiated judicial proceedings, takes any action which is recognized by the law of the forum as an exercise of the creditor's right against the debtor; (

• b)

  in the event of insolvency of the debtor, when the creditor exercises its rights in insolvency proceedings; or (

• c)

  in the case of proceedings to dissolve the debtor entity, when the creditor exercises its rights in dissolution proceedings. (2) The suspension lasts until a final judgment has been rendered or until the proceedings have otherwise concluded. COMMENTARY 1. Judicial Proceedings In all legal systems, judicial proceedings affect the course of periods of limitation in two different ways. Interruption of a period of limitation may be caused by judicial proceedings, so that after the conclusion of such proceedings, a new period of limitation begins to run. Alternatively, judicial proceedings may merely cause a suspension of the limitation period, so that the time elapsed before the initiation of the judicial proceedings will be deducted from the total applicable period, with the remainder of the period recommencing to run at the end of the proceedings. This article adopts the latter solution (see also Article 13 of the UN Limitation Convention). 2. Initiation of Proceedings The requirements for the initiation of judicial proceedings are determined in accordance with the procedural law of the courts in which the proceedings are initiated. The procedural law of the forum also determines whether the filing of a counterclaim is equivalent to initiating judicial proceedings: where a counterclaim raised as a defence is considered as a separate proceeding, the filing of a counterclaim has the same effect on the period of limitation as would have resulted if it had been raised independently. Examples "A" purchases from "B" a truck which proves to have defects. "A" notifies "B" of such defects, but because of other pending contracts between these parties, "A" does not press the matter for 24 months. When the negotiations between "A" and "B" on the other contracts break down, "B" rejects "A"'s claim for repair of the defects, asserting that they were caused by "A"'s misuse of the truck. "A" brings proceedings against "B" with a summons to the registry of the competent court, which is sufficient to initiate proceedings according to the procedural law applicable in that jurisdiction. The running of the period of limitation is suspended until a final decision is obtained. The finality of this decision may involve not only a decision of the court of first instance but also the decision of any higher court reached by way of appeal. The proceedings may also reach a final conclusion if the parties reach an agreement or if the claim is withdrawn, provided the applicable domestic procedural law so provides. "B" initiates a proceeding for the purchase price of goods, filing a claim in accordance with what is required by the procedural law of the competent court. "A" claims to be a creditor of "B", either by way of counterclaim or by a compensation proceeding. The period of limitation for "A"'s receivables is suspended until a final decision is reached, whether with respect to the counterclaim, or by way of an agreement or because the counterclaim was withdrawn. 3. Conclusion of Proceedings The "conclusion" of the proceedings by a final decision or in another manner will be determined by the procedural law of the forum. These laws decide when a decision is final and therefore concludes the litigation. This law also determines whether and when litigation comes to an end without a decision on the merits, for instance by withdrawal of the claim or by a settlement agreement between the parties. 4. Suspension by Insolvency or Dissolution Proceedings For the purposes of this article, proceedings in case of insolvency and dissolution are considered as judicial proceedings (Article 10.5.1(b) and (c)). The dates of initiation and conclusion of these proceedings are determined by the applicable law.

ARTICLE 10: 6 (Suspension by Arbitral Proceedings) (1) The running of the period of limitation is suspended when the creditor initiates an arbitral proceeding or, in already initiated arbitral proceedings, takes any action which is recognized by the law of the arbitral tribunal as an exercise of the creditor's right against the debtor. In the absence of provisions in the arbitration rules or of other rules determining the exact date of the commencement of the arbitral proceeding, such proceeding is considered to have commenced on the day the debtor receives a request that the disputed right be determined. (2) The suspension lasts until a binding decision has been rendered or until the proceeding has otherwise concluded. COMMENTARY 1. Arbitral Proceedings Arbitral proceedings have the same effect as judicial proceedings. Therefore, the initiation of an arbitral proceeding has the same suspensory effect as the initiation of a judicial proceeding. In general, the date of initiation of an arbitral proceeding is determined by the applicable arbitration rules, and this is also the moment when suspension of the limitation period commences. In cases where the arbitration rules do not determine exactly the date of initiation of the proceedings, the second sentence of paragraph (1) of this article provides a gap-filling rule. Example "A" terminates a distribution contract with "B", invoking that "B" breached by failing to make payments for goods already delivered. "B" in turn files a counterclaim for damages, but upon changing law firms allows almost 30 months to pass since the contract came to an end. The contract contains an arbitration clause providing that all disputes "shall be resolved under the Reconciliation and Arbitration Rules of the International Chamber of Commerce (ICC)", and "B" files a request for arbitration. The Rules provide that the date of receipt of the request shall be considered "for all purposes" as the date of initiation of the arbitral proceedings. The running of the limitation period is suspended until the arbitral tribunal renders a final decision on the parties or until the dispute is otherwise resolved. 2. Termination of Arbitration Arbitral proceedings, like judicial proceedings, conclude with a decision on the merits, although arbitration may terminate in some other way, such as by withdrawal of the claim, settlement, order or other proceeding of the competent tribunal. The arbitration rules and the applicable rules of civil procedure must determine whether such events conclude the arbitration and, as a corollary, the suspension of the limitation period.

ARTICLE 10: 7 (Alternative Means of Dispute Resolution) The provisions of Articles 10.5 and 10.6 apply, with appropriate modifications, to other proceedings in which the parties request a third person to assist them in attempting to reach an amicable settlement of their disputes. COMMENTARY 1. Alternative Dispute Resolution Before initiating an arbitral or judicial proceeding, the parties may start negotiations or agree to conciliation or other alternative methods of dispute resolution. In accordance with the Principles, negotiations do not automatically suspend the running of the period of limitation. Parties who wish to suspend the running of the period of limitation must agree to this expressly. However, this article provides that conciliation or other forms of alternative dispute resolution cause a suspension of the running of the period of limitation. The definition of "alternative dispute resolution", conceived as proceedings in which the parties request a third person to assist them in attempting to reach an amicable settlement of their disputes, is inspired by Article 1(3) of the UNCITRAL Model Law on International Commercial Conciliation (2002). 2. Absence of Regulation Since few countries have enacted legislation on alternative dispute resolution, and few regulations for such proceedings exist, this article makes reference to the provisions on arbitral or judicial proceedings, which shall be applied with "appropriate modifications". This means that, in the absence of specific applicable legislation, the commencement of alternative dispute resolution proceedings is governed by the gap-filling provision in the second sentence of Article 10.6(1), which provides that proceedings commence on the day when a party receives an invitation from the other party to engage in such proceedings. Since the conclusion of an alternative dispute resolution proceeding is in most cases uncertain, Articles 10.5 and 10.6 (and in particular the part of paragraph (2): "or until the proceeding has otherwise concluded"), must also be applied with appropriate modifications. Therefore, unilateral termination of the alternative dispute resolution proceeding by one of the parties will end the suspension. Unilateral withdrawal made in bad faith is subject to the provisions of Article 1.7. Example The parties, a hospital and a supplier of hospital equipment, agree to submit their disputes relating to prices to a mediation panel. In accordance with the applicable rules, the commencement of the mediation proceeding takes place on the date when one party receives the complaint from the other and submits the case for consideration to the panel in accordance with the applicable rules. The mediation terminates either when the panel decides on the complaint, or when the parties reach an agreement, or when whoever presented a complaint withdraws it.

ARTICLE 10: 8 (Suspension in Case of Impediment, Death or Incapacity) (1) When the creditor has been unable to stop the running of the period of limitation in accordance with the preceding articles owing to an impediment beyond its control and that could neither be avoided nor overcome, the ordinary period of limitation is suspended so that it does not expire before one year after the impediment has ceased to exist. (2) When the impediment consists of the incapacity or death of the creditor or debtor, the suspension ceases when a representative of the incapacitated person, the deceased person or its estate, or a successor has inherited the share to which the deceased was entitled. In this case the supplementary period of one year provided for in paragraph (1) applies. COMMENTARY 1. Effects of Impediments Most legal systems take into account events which prevent the creditor from pursuing its rights judicially (see Articles 15 and 21 of the UN Limitation Convention). It is a fundamental principle that the creditor should have an opportunity to exercise its rights before being prevented from doing so as a result of the passage of time. As practical examples of impediments, one can mention war and natural disasters which prevent the creditor from having access to the competent court. Other cases of force majeure may also prevent the exercise of a right and at least cause suspension of the running of the period of limitation. The event preventing the creditor from exercising its right must be beyond its control. Imprisonment, therefore, does not suspend the running of the period of limitation, except when it could not have been avoided, as in the case of a prisoner of war, but not in the case of a criminal. In any case, only the ordinary period of limitation is suspended. The expiration of the maximum period of limitation can be raised if such period has expired before the creditor could exercise its right. Example The lawyer of "A" wishes to bring a claim against "B", an engineering consulting company, for professional negligence by its employees. The period of limitation will expire on 1 December. The lawyer of "A" has finished preparing the claim by 25 November and intends to deliver it by express mail or personally to the registry of the competent court. On 24 November, a terrorist attack in the country of "A" using weapons of mass destruction causes a blockade of traffic, a complete cessation of mail and other social services, thus preventing proper delivery of "A"'s claim. The period of limitation stops running and will not expire until one year has passed from the moment when some communication systems return to normal in the country of "A". However, if the interruption of communication systems in the country of "A" lasted ten years, "A"'s right would have been time-barred due to the expiration of the maximum limitation period. 2. Supplementary Period for Taking Action Since impediments beyond the creditor's control may arise and disappear near the end of the limitation period, it is possible that after the cessation of the impediment, very little or no time remains for the creditor to decide what to do. Therefore, this article provides for a supplementary period of one year from the moment the impediment ceases, with the aim of allowing the creditor to decide the best course of action. 3. Incapacity and Death Incapacity and death of the creditor or debtor are but specific examples of impediments to effective exercise of the creditor's right. Paragraph (2) provides the same solution for the case of impediments more generally. Example "A" lends money to "B", who is to return it on 1 January. "A" does not claim the return for a long time, dying 35 months after the due date of the loan. The succession law applicable to "A"'s estate requires that a representative chosen by the court administer the assets of the deceased and recover the money owed on outstanding debts. Given the case load of the competent court, it takes two and a half years before a representative is appointed. The representative has only one month in which to exercise the deceased's right against "B" before the expiration of the full three years of the ordinary period of limitation plus the supplementary one year period.

ARTICLE 10: 9 (Effects of Expiration of the Period of Limitation) (

• 1)

  Expiration of the period of limitation does not extinguish the right. (

• 2)

  In order for expiration of the period of limitation to have effect, the debtor must raise it as an exception. (

• 3)

  The existence of a right may always be invoked as an exception notwithstanding that expiration of the period of limitation has been pleaded for the exercise of such right. COMMENTARY 1. Non-Extinction of the Right Expiration of the period of limitation does not extinguish the creditor's right; it merely prevents its enforceability. 2. Expiration of the Period of Limitation Must Be Raised as an Exception The effects of expiration of the period of limitation are not automatic. They arise only if the debtor raises expiration as an exception or defence. The debtor may do so in any of the proceedings available under applicable law, or may also raise expiration outside of such proceedings. The declaration of expiration may furthermore be the subject matter of a declaratory action. Example "A" purchases goods from "B". Part of the purchase price was due on 1 April, but was not paid. Thirty-eight months later, "B" initiates a proceeding against "A". "A" does not raise expiration as a defence or exception, nor does it appear in response to the court's notice, and "B" requests judgment by default. The judgment will be in favor of "B", since "A" did not raise the expiration of the period of limitation as a defence or exception. 3. Use of an Expired Right as a Means of Defence Since, under the Principles, expiration of a period of limitation does not extinguish the right but only provides a defence that must be raised by the debtor (paragraphs (1) and (2) of this article), it follows that the creditor's right continues to exist even though a claim for its performance may be rejected when the debtor raises that the period of limitation has expired. Expiration of the period of limitation may therefore be used as a defence or exception, for instance, as a ground for the creditor to suspend performance (paragraph (3)). Example "A" rents a printing press to "B" for ten years. Under the contract, "A" is obligated to keep the printing press in working order and is responsible for repairs, unless the defect is caused by "B"'s negligent use of the equipment. The equipment breaks down, but "A" refuses to make the necessary repairs. After futile requests without response and negotiations with "A", "B" engages another company to make the repairs and claims from "A" the cost of the repairs. "A" does not respond, and "B" does not insist. Five years later, at the end of the lease, "B" claims again for payment of the repair cost. "A" refuses to pay and invokes Article 10.2(1), claiming return of the printing press. "B" is entitled to claim damages for breach of contract and may retain the equipment.

ARTICLE 10: 10 (Right of Set-Off) The creditor may exercise the right of set-off as long as the debtor has not raised the expiration of the period of limitation. COMMENTARY Since the creditor's right continues to exist even after the period of limitation has expired, such right may be used to set off if the requirements of Article 8.1 for set-off are met. Example The facts are identical to those of Example 2 of Article 10.9, but here "A" claims not only return of the printing press but also payment of unpaid rent. "B" is entitled to set off its claim for damages against this monetary claim notwithstanding the expiration of the period of limitation. Although the expiration of the period of limitation does not extinguish the creditor's right by itself, the situation changes when the debtor raises the limitation as a defence against the creditor. In this manner the period of limitation produces its effects with the consequence that the right can no longer be claimed. Since set-off may be considered as a measure of self-help, it will not be possible to resort to it once the expiration of the period of limitation has been raised as a defence. Example The facts are identical to those of Example 1, but here "B" claims payment of damages and threatens to sue four years after the repairs were made. "A" rejects the claim, asserting that the equipment broke down due to "B"'s fault. Due to the difficulty of proving this, "A" sends a letter to "B" invoking the limitation period in accordance with Article 10.2(1). "B" can no longer set off its credit.

ARTICLE 10: 11 (Restitution) When a party has rendered performance in fulfillment of an obligation, there is no right to restitution by the mere fact that the period of limitation has expired. COMMENTARY 1. Valid Performance of an Expired Obligation Another consequence of the fact that under the Principles expiration of the period of limitation can only be used as a means of defence but does not extinguish the creditor's right consists in the fact that if the debtor performs despite having raised the defence of expiration of the period of limitation, the performance rendered constitutes legal grounds which support the creditor's claim and may validly be relied upon as such. Mere expiration of the period of limitation cannot be invoked as a basis for an action for restitution based on principles such as unjust enrichment. 2. Restitution Claims Based on Other Grounds Despite the expiration of the period of limitation, an action for restitution may be based on different grounds, for instance, when the person who paid claims to have paid by mistake a debt that does not exist. Examples Bank "B" lends money to debtor "A", who does not return it on the date indicated in the loan contract. The debt of "A" is overlooked and forgotten due to an accounting error of "B". Four years later, "B" discovers its error and sends a notice to "A" claiming repayment. "A" complies with this demand, but later a lawyer informs it that it could have refused on the ground that the period of limitation had expired. "A" cannot bring an action against "B" for unjust enrichment. The facts are identical to those of Example 1, but here "A" has returned the loan money, although neither party knows it. Four years later, by mistake, "B" claims from "A" the repayment, and "A" pays again. "A" can seek recovery of the second payment, because it has already paid the obligation, discharging it.

ARTICLE 11: 1.1 (Definitions) When several debtors are bound towards a creditor for the same obligation: (a) the obligations are joint and several if each debtor is liable for the entirety; (b) The obligations are separate if each debtor is liable only for its share. COMMENTARY This Chapter addresses situations in which an obligation binds several debtors, or grants rights to several creditors. Section 1 deals with a plurality of debtors. 1. Several Debtors It is a frequent occurrence that an obligation binds several debtors. Examples 1. Companies "A", "B" and "C" decide to join forces to penetrate a new foreign market. They need financing and jointly obtain a loan from bank "X". "A", "B" and "C" are co-debtors of the obligation to repay the loan. 2. Contractors "A" and "B" are awarded a contract for the construction of a bridge based on a joint bid. "A" and "B" are co-debtors of the obligation to construct the bridge. 3. A large industrial plant must be insured against fire and other hazards. The risk is too great for the capacity of a single insurer. Several insurers co-insure the risk. The insurers are co-debtors of the obligation to cover the risk. 4. Bank "X" grants a loan to company "A" but requires security. The subsidiary company "B" agrees to be bound together with "A" for the repayment of the loan. "A" and "B" are co-debtors of the obligation to repay the loan. 2. The Same Obligation This Section applies only if the different debtors are bound by the same obligation. It also frequently happens that several debtors are bound in the same transaction, but with different obligations. They are not co-debtors within the meaning of the articles of this Section. Example 5. A new airplane is built in which several subcontractors are involved to manufacture different parts. For example, subcontractor A is responsible for shaping the wings and subcontractor B for installation of the electronic system. Their respective obligations are different. Therefore, they are not "co-debtors". The "same obligation" usually arises from a single contract, although not necessarily so. In Examples 1 and 2, there will normally be a single loan contract or a single construction contract binding the different debtors. However, in the case of co-insurance (Example 3), it frequently happens that each insurer, although committing to cover the same risk, has its own contract with the insured. The guarantee provided in Example 4 is often granted by means of a separate contract. Other examples of obligations assumed in a separate contract are cases in which obligations are contractually transferred (see Article 9.2.1 et seq.). However, the obligations in question must be of a contractual nature, regardless of whether they arise from one or several contracts. Non-contractual obligations of multiple debtors are not regulated by this Chapter, since the Principles regulate international commercial contracts. Claims for damages derived from a contract may fall within the scope of this Chapter. 3. Two Main Types of Obligations Article 11.1.1 defines the two main types of obligations that arise in practice when several debtors are bound by the same obligation towards a creditor. In the first type, each debtor is bound for the entirety of the obligation, which means that the creditor may demand performance from any one of them (see Article 11.1.3), without prejudice to actions for recourse that the debtors may bring against each other at a later stage (see Article 11.1.10). In the second type, each debtor is bound only for its share, so that the creditor may only demand the share corresponding to each one. In the first situation, which applies as a default rule (see Article 11.1.2), the obligations are called "joint and several". In the second situation, the obligations are called "separate". Article 11.1.2 determines whether co-debtors are bound jointly and severally or separately, is determined in accordance with (see Examples 1 to 4). 4. Other Possible Situations The two main types of obligations just described are the most common, but this Section is not intended to cover all possible situations. Other situations that may arise are the so-called "joint" obligations, in which the debtors are bound to perform jointly and the creditor may only demand performance from all debtors together. A classic example is that of a group of musicians that undertakes to perform a string quartet. This type of situation is of less practical importance.

ARTICLE 11: 1.2 (Presumption of Joint and Several Liability) It is presumed that the obligations are joint and several when several debtors are bound towards a creditor for the same obligation, unless the circumstances indicate otherwise. COMMENTARY 1. Default Rule In commercial practice, it is normal for several debtors who have assumed the same obligation to be bound jointly and severally towards the creditor. This justifies the default rule in Article 11.1.2. Example 1. Companies "A", "B" and "C" jointly obtain a loan from bank "X" (as in Example 1 of the Commentary to Article 11.1.1). The loan contract does not indicate the manner in which each of the parties is bound, but they are presumed to be joint and several debtors, so that, towards the bank, each of them is liable for the entirety of the loan. 2. Circumstances Indicating Otherwise The presumption of joint and several liability disappears when circumstances indicate otherwise. This will often result from an express contractual clause to that effect. Example 2. Insurers "A", "B" and "C" agree to insure an industrial plant (as in Example 3 of the Commentary to Article 11.1.1). The agreement provides that each co-insurer is bound only for a percentage of the risk. Other circumstances may also rebut the presumption that several debtors are bound jointly and severally. Example 3. The facts are identical to those of Example 2, but here insurers "A", "B" and "C" fail to agree that they are not responsible. However, the very object of co-insurance is to cover large risks without exposing insurers beyond the limits of their own capacity. This may be considered a circumstance indicating that "A", "B" and "C" are bound only for their respective shares. 3. Suretyship and Joint and Several Obligations A different situation is that of suretyship, an ancillary contract by which one person is personally bound in favor of another already bound, in case the principal debtor fails to perform its obligation. The surety is not bound in the same manner as the principal debtor, but will have to perform if the principal debtor does not. The principal debtor and the surety are bound separately and in succession. Example 4. Company "A" may obtain a loan of 1,000,000 EUR from bank "X". The loan is granted on the condition that subsidiary "B" acts as surety for the repayment of the loan. "A" is the principal debtor of "X". "B" will only have to pay in the event that "A" fails to perform. It may occur that the technique of joint and several obligations is used to obtain the economic benefit of suretyship. The creditor requires the company that wishes to guarantee the obligation of the principal debtor to intervene alongside the latter as a joint and several debtor, instead of concluding a separate suretyship contract. The advantage for the creditor is that in this case it can demand payment directly from the company that has provided the guarantee. This does not necessarily deprive the latter of the special rights granted to the surety under the suretyship regime. Example 5. The facts are identical to those of Example 4, but "X" requires, for the repayment of the loan, that "B" bind itself as a joint and several debtor alongside "A". In this case, "X" can demand repayment directly from both "B" and "A". This particular use of the technique of joint and several obligations has some specific consequences: see Commentary 3 to Article 11.1.9, regarding contribution among joint and several debtors. Of course, the suretyship regime may provide for further consequences.

ARTICLE 11: 1.3 (Rights of the creditor against joint debtors) When debtors are jointly and severally obligated, the creditor may claim performance from any of them until obtaining full performance. COMMENT The principal effect of joint and several obligations, from the point of view of the debtors, has already been indicated in the definition of Article 11.1.1, that is, each debtor is obligated for the entirety. Article 11.1.3 establishes the principal effect for the creditor: the creditor may demand performance from any debtor until obtaining full performance. Examples 1. The farmers "A", "B" and "C" purchased a tractor jointly for shared use on their respective farms. They are jointly and severally obligated to pay the price of USD 45,000. The seller "X" may demand payment of the total sum from "A", "B" or "C". The credit of "X" is extinguished when the creditor has received full performance from one or several of its debtors. 2. The facts are identical to those of Example 1. "A" only pays USD 30,000 (despite being obligated to pay USD 45,000). Although "X" retains its action against "A" for the unpaid amount, it may demand said amount of USD 15,000 from "B" or "C". If "X" at that moment only receives USD 10,000 from "B" (despite "B" being obligated for USD 15,000), "X" may claim USD 5,000 from "C", as well as from "A" and "B".

ARTICLE 11: 1.4 (Exceptions and set-off) The joint and several debtor against whom the creditor exercises an action may raise all exceptions and set-off rights that are personal to the debtor or are common to all co-debtors, but may not raise exceptions or set-off rights that belong personally to one or several of the other co-debtors. COMMENT This article grants to the joint and several debtor the possibility of exercising different exceptions and set-off rights. It distinguishes, on one hand, exceptions and set-off rights that are personal to one of the debtors or common to all of them and, on the other hand, exceptions and set-off rights that belong personally to one or several of the other co-debtors. Examples 1. The companies "A", "B" and "C" jointly acquire machinery from manufacturer "X", which will be used in their respective plants for the implementation of a common project. Part of the purchase price must be paid at a future date, while the remaining amount is due jointly and severally. "A" obtains a separate commitment from "X" to the effect that the machinery would meet certain performance levels. If "X" demands payment of the outstanding amount of the price from "A", "A" may raise the fact that the machinery does not meet the guaranteed performance level. On the contrary, if "X" demands payment from "B" and "C", they will not be able to raise that the performance level is insufficient, given that this exception belongs personally to "A". 2. Companies A and B are jointly and severally obligated to purchase a certain quantity of steel from seller "X". The governmental authorities of the country of the buyers declare an embargo on all commercial traffic with the seller's country, making performance of the contract unlawful. This is a common exception that any co-debtor may raise against X. 3. Bank "X" has granted a loan of 2,000,000 EUR to joint and several debtors "A" and "B". As a consequence of the sale of shares belonging to "A" on the securities market, "X" becomes a debtor of "A" for an amount of 500,000 EUR. "A" may exercise its right of set-off against "X", with the effects provided for in Article 11.1.5. On the contrary, "B" may not raise this right, which belongs personally to "A".

ARTICLE 11: 1.5 (Effects of performance or set-off) If a joint and several debtor performs or sets off the obligation, or if the creditor exercises set-off against a joint and several debtor, the other co-debtors are released from the creditor to the extent of the performance or set-off. COMMENT 1. Performance by a joint and several debtor If one of the co-debtors has performed the obligation in whole or in part, this fact may be raised as an exception by the other debtors, against whom the creditor attempts to obtain performance. Examples 1. Companies "A", "B" and "C" are jointly and severally obligated to reimburse a loan of 100,000 EUR. Upon being required by lender "X", "A" reimburses the loan in its entirety. "B" and "C" may raise the performance of "A", in the event that "X" continues to demand reimbursement from them. 2. The facts are identical to those of Example 1, but in this case "A" only reimburses 30,000 EUR. "B" and "C" remain jointly and severally obligated for 70,000 EUR (see Article 11.1.3), but may raise the partial payment of "A", in the event that "X" continues to demand the total amount from them. 2. Set-off The rule set forth in this article in relation to performance by one of the co-debtors also applies, with necessary adaptations, in the case of set-off between the creditor and one of the debtors. Set-off rights have already been mentioned in Article 11.1.4, which determines which of the co-debtors may exercise set-off rights. Article 11.1.5 addresses the further question of the effects of set-off once it has been exercised. On the rules governing set-off itself, see Articles 8.1 through 8.5. Example 3. The facts are identical to those of the previous examples: "A", "B" and "C" are jointly and severally obligated to reimburse a loan of 100,000 EUR to "X". However, on the basis of a different transaction, "A" becomes a creditor of "X" for an amount of 60,000 EUR. If "A" exercises its right of set-off against "X" by making the corresponding notice (as provided in Article 8.3), the set-off will produce the same effects that a partial performance by "A" of its joint and several obligation would have, thereby releasing "B" and "C" from the corresponding amount. The same rule applies if the right of set-off has been exercised by the creditor against one of the joint and several debtors. Example 4. The facts are identical to those of Example 3, but in this case it is "X" who takes the initiative to notify set-off to "A". The effects are identical. "A" is released with respect to the amount of the set-off (60,000 EUR), as are the other co-debtors "B" and "C", by this same amount.

ARTICLE 11: 1.6 (Effects of release or settlement) (1) The release of the debt with respect to a joint and several debtor, or a settlement with a joint and several debtor, releases the other debtors from the portion of that debtor, unless circumstances indicate otherwise. (2) Once the other debtors are released from the portion of that debtor, they may not exercise against that debtor the recourse action provided for in Article 11.1.10. COMMENT 1. Release of debt with respect to a joint and several debtor If the creditor releases the debt with respect to one of the joint and several debtors without further specification, Article 11.1.6 supplies the supplementary rule according to which release of the debt only affects the portion of the benefited debtor, determined in accordance with Article 11.1.9. Consequently, the other joint and several debtors are released only by the portion of the debtor with respect to whom release was made, remaining obligated for the difference. Example 1. Bank "X" grants a loan of 300,000 EUR to companies "A", "B" and "C". The debtors are jointly and severally obligated; the portions for which they are obligated between themselves are equal, that is 100,000 EUR each. "X" releases the debt with respect to "A", without further indication. The consequence for "B" and "C" is that they are released by the amount corresponding to the portion of "A", which is 100,000 EUR. "B" and "C" remain jointly and severally obligated to "X" for an amount of 200,000 EUR. 2. Settlement with a joint and several debtor It may occur that the creditor receives a payment from one of the joint and several co-debtors for an amount less than the portion that would correspond to that debtor – in accordance with Article 11.1.9 – on the basis of a settlement entered into separately with that debtor, and that by virtue of that settlement the payment received releases the debtor with respect to the entirety of its portion. Consequently, the joint and several obligations of the other debtors are reduced not only by the amount paid, but also by the total initial amount of the debtor with whom the settlement was made. Example 2. The investors "A", "B" and "C" are jointly and severally obligated to pay USD 3,000,000 in exchange for shares. "A" and "X" effect a settlement with respect to different disputes between them. One of the clauses of the settlement provides that "A" will be released from its obligations to "X" arising from the share purchase contract, by payment of a sum of USD 600,000, that is USD 400,000 less than the portion that would correspond to "A" among the other co-debtors. In these circumstances, "X" may not demand from "B" and "C" the total remaining sum of USD 2,400,000. Their joint and several obligations are reduced by the total initial amount of "A"'s portion, that is USD 1,000,000. They remain jointly and severally obligated to pay only USD 2,000,000. 3. Circumstances indicating otherwise There may be circumstances in which the other debtors are released by a sum different from the portion of the debtor with respect to whom the debt is released or with whom settlement is made. For example, the creditor may release the debt with respect to one of its debtors only for a fraction of the portion that would correspond to that debtor, as determined in Article 11.1.9. The other debtors are released only by the amount of the portion that has been released. All debtors will remain jointly and severally obligated for the total sum thus reduced. Example 3. The facts are identical to those of Example 1, but in this case "X" releases "A"'s debt by an amount of 60,000 EUR. The consequence for "B" and "C" is that they are released by the same amount of 60,000 EUR. "A", "B" and "C" remain obligated jointly and severally to "X" for an amount of 240,000 EUR. Moreover, the creditor may also wish to release all its debtors. Article 11.1.6 does not apply if the creditor expresses its intention in this regard. With respect to settlement, this is not usually effected separately but will involve all joint and several debtors. The consequences with respect to the obligations of the different debtors in these cases will be determined according to the clauses of the settlement agreed by all parties, with recourse actions adjusted accordingly. 4. Extinction of recourse action If the creditor has released the debt with respect to one of the co-debtors or effected a settlement with that debtor, and the other debtors have been released from the portion of that debtor, the other co-debtors no longer have a recourse action against the debtor whose debt was released or with whom settlement was effected. Examples 4. The facts are identical to those of Example 1: "A" has obtained release of the debt from "X", while "B" and "C" remain jointly and severally obligated for an amount of 200,000 EUR. If "B" pays "X" 200,000 EUR, "B" has a recourse action for 100,000 EUR against "C", but has no action against "A". 5. The facts are identical to those of Example 2: "B" and "C" remain jointly and severally obligated for an amount of USD 2,000,000. If "B" pays USD 2,000,000 to "X", "B" has a recourse action for USD 1,000,000 against "C"; but "B" has no action against "A", even though "A" paid only USD 600,000 on the basis of the settlement effected separately with "X".

ARTICLE 11: 1.7 (Effects of expiration of prescription or suspension of the prescription period) (1) The expiration of the period of prescription of the creditor's rights against a joint and several debtor does not affect: (a) The obligations of the other joint and several debtors toward the creditor; nor (b) The recourse actions among joint and several debtors provided for in Article 11.1.10. (2) If the creditor initiates against a joint and several debtor one of the procedures provided for in Articles 10.5, 10.6 or 10.7, the course of prescription is also suspended against the other joint and several debtors. COMMENT 1. Expiration of the prescription period against a joint and several debtor The creditor's rights against one of the joint and several debtors may have become prescribed. This does not prevent the creditor from exercising its rights against the other co-debtors whose obligations have not yet been affected by the expiration of the prescription period. Example 1. Companies "A" and "B" are jointly and severally obligated to pay to advisor "X" fees of USD 500,000 on January 1st. "A" and "B" refuse to pay, claiming that the services provided by "X" were not satisfactory. The parties engage in lengthy discussions. Two years later, in the course of the year "B" acknowledges the rights of "X", but "A" continues to question them. In March of the following year "X" finally sues both clients to demand payment. More than three years after the date on which "X"'s fees were due (see Article 10.2), the action against "A" has become prescribed. The situation is different for "B", who acknowledged the creditor's right before the expiration of the prescription period, giving rise to a new prescription period (see Article 10.4). "X" may continue to demand from "B" the sum of USD 500,000. Co-debtors who have paid the creditor in such circumstances may exercise their recourse rights in accordance with Article 11.1.10, even against the co-debtor who could have invoked the expiration of the prescription period against the creditor, in accordance with Article 10.9. These recourse rights are subject to their own prescription periods. Example 2. In the case described in Example 1, "B", after having paid USD 500,000 to "X", may exercise the recourse action against "A", in accordance with Article 11.1.10. 2. Suspension of the prescription period with respect to a joint and several debtor In accordance with Articles 10.5, 10.6 or 10.7, the initiation of judicial or arbitral proceedings by the creditor, or of alternative dispute resolution proceedings against that debtor. Article 11.1.7(2) extends the effect of suspension to the other co-debtors. Example 3. Buyers "A" and "B" are jointly and severally obligated to pay to seller "X" a sum of 800,000 GBP, which was due on December 31st. Despite several reminders, "A" and "B" remain in default as the expiration of the three-year prescription period approaches. "X" initiates an action against "A" on December 20th of the third year. The prescription period is suspended not only against "A", but also against "B". The rule of Article 11.1.7(2), which creates effects against all co-debtors, adopts a different approach from that of Article 11.1.7(1), which provides for individual effects. In reality, these are two different effects: those of the expiration of the prescription period and those of the initiation of collection procedures. The solution adopted in paragraph (2) avoids the expenses that would be involved in initiating proceedings against all debtors. However, the creditor must keep in mind the rule of Article 11.1.8, relating to the effect of judgments.

ARTICLE 11: 1.8 (Effects of judgments) (1) A decision of a tribunal concerning the liability of a joint and several debtor to the creditor does not affect: (a) The obligations of the other joint and several debtors to the creditor; nor (b) The recourse actions among joint and several debtors provided for in Article 11.1.10. (2) However, the other joint and several debtors may also invoke the decision, unless it is based on personal grounds of that debtor. In that case, the recourse actions among joint and several debtors provided for in Article 11.1.10 are affected accordingly. COMMENT 1. Exclusion of effect on the obligations of the other joint and several debtors If the creditor initiates judicial or arbitral proceedings against one or several of the joint and several debtors only, in principle no decision adopted by a tribunal will affect the obligations of the other co-debtors, who were not summoned before the tribunal. Regardless of what the decision is, the other debtors will continue to be obligated on the original terms. Examples 1. Bank "X" has granted a loan of 1,000,000 EUR to borrowers "A" and "B" jointly and severally. "X" sues "A" to obtain reimbursement and the tribunal orders "A" to pay "X" the sum of 1,000,000 EUR. This decision does not affect the obligation of "B"; "B" remains obligated to pay 1,000,000 EUR to "X". Naturally, if the judgment is executed and "A" pays "X" the sum of 1,000,000 EUR, the obligation of "B" to "X" will have been extinguished in accordance with Article 11.1.5, and "B" will be subject to the recourse action provided for in Article 11.1.10. 2. Company "A" and Company "B" are jointly and severally obligated to provide transportation for deliveries by Company "X" to its clients. The performance is defective and "X" sues "A". The tribunal orders "A" to pay damages caused. "B" is not bound by the tribunal's decision concerning the determination that performance was defective, and its obligations do not increase by the amount of the damages. 2. Exclusion of effect on the recourse right Moreover, a tribunal decision adopted with respect to a joint and several debtor has no effect on the recourse rights among joint and several debtors provided for in Article 11.1.10. Example 3. The facts are identical to those of Example 2. "A" pays "X" the damages determined by the tribunal. "A" cannot claim to recover from "B" a portion of the damages paid. 3. Right of the other joint and several debtors to invoke the decision The principle set forth in paragraph (1) of this article does not apply when the other co-debtors jointly and severally consider it in their interest to invoke the decision. In this case, paragraph (2) grants the other joint and several debtors the right to invoke the decision. However, the rule does not apply when the decision was based on personal grounds of the affected debtor. Examples 4. Collectors "A" and "B" jointly acquire a painting at an auction and are jointly and severally obligated to pay the price of 800,000 GBP. The price is not paid and the auction house sues "A". The tribunal accepts some of "A"'s exceptions relating to the quality of the painting, which appears to have been restored, reducing the price to 600,000 GBP. "B" may invoke this decision in order to benefit, with respect to the auction house, from the same reduction of its obligations. 5. The facts are identical to those of Example 4, but in this case the refusal to pay the auction house is based on the exception that the painting is counterfeit. This is confirmed by an expert opinion ordered by the tribunal. Consequently, the contract is voided. "B" may also invoke this decision to be released from its obligations to the auction house. 6. The facts are identical to those of Example 4, but in this case "A" had obtained from the auction house, separately, a certificate stating that the painting had been exhibited in some major exhibitions. This turns out not to be true and the tribunal orders the auction house to pay damages to "A". "B" cannot invoke this decision, given that it is based on personal grounds of "A". 4. Recourse rights affected accordingly If a joint and several debtor invokes a tribunal decision adopted against its co-debtor, the recourse right of the co-debtor will be affected accordingly. Example 7. The facts are identical to those of Example 4. The obligation of "A" to the auction house has been reduced to 600,000 GBP. In the event that "A" initiates a recourse action against "B" after having paid that sum to the auction house, "B" may invoke the tribunal's decision to have its portion reduced accordingly.

ARTICLE 11: 1.9 (Apportionment among joint and several debtors) The joint and several debtors are obligated between themselves for equal portions, unless circumstances indicate otherwise. COMMENT Articles 11.1.9 through 11.1.13 of this Section address recourse actions. A debtor who has performed the obligation in favor of the creditor has an action against the other joint and several debtors to recover the portions that correspond to them. The first point is to determine the respective portions. The supplementary rule contained in Article 11.1.9 establishes that such portions are equal. Example 1. Companies "A" and "B" borrow 10,000,000 EUR from bank "X" to finance the acquisition of shares in another company. In principle, the portions of "A" and "B" in the final apportionment will be 5,000,000 EUR each. However, circumstances may indicate otherwise, that is, that the portions are not equal. This will often result from contractual agreements between the co-debtors. Example 2. The facts are identical to those of Example 1, but here "A" and "B" agree that their portions in the acquisition would be, respectively, 75% and 25%. There is a presumption that these percentages will also govern the final apportionment. Circumstances may indicate that some debtors ultimately must assume the entirety of the obligation. This is the case when one party agrees to be obligated as a joint and several debtor, not for its own interest in the transaction, but to serve as a guarantor of another debtor (the "principal" debtor) (see Comment 3 to Article 11.1.2). Example 3. Company "A" requests a loan of 10,000,000 EUR from bank "X". The loan is granted on the condition that Company "B" be obligated as a joint and several debtor. Between the two companies it is understood that "B" serves only as a guarantor. Circumstances indicate that the portions in the final apportionment should be 100% for "A" and 0% for "B".

ARTICLE 11: 1.10 (Scope of recourse action) The joint and several debtor who paid more than its portion may claim the difference from any other joint and several debtor up to the unpaid portion of each one. COMMENT When a joint and several debtor has paid the creditor more than its portion, it has a recourse action against the other debtors to recover the excess, based on the amount of the respective portions. Examples 1. Companies "A" and "B" borrow 10,000,000 EUR from bank "X" to finance the acquisition of shares in another company. In principle, the portions of "A" and "B" are equal. If "A" reimburses the entire sum to "X", "A" may demand from "B" the difference with the amount of "A"'s portion of 50%, that is 5,000,000 EUR. 2. The facts are identical to those of Example 1, but in this case "A" and "B" agreed that their portions in the acquisition would be 75% and 25%, respectively. If at the end "A" must assume 75% of the reimbursement, "A" may only recover the difference, that is, "B"'s portion equivalent to 2,500,000 EUR. 3. Company "A" requests a loan of 10,000,000 EUR from bank "X". The loan is granted on the condition that Company "B" be obligated as a joint and several debtor. Between the two companies it is understood that "B" serves only as a guarantor. The portion of "A" is equivalent to 100%. If "B" has reimbursed the loan to "X", "B" may demand from "A" the total reimbursement. The rule of Article 11.1.10 may also apply in more complex circumstances. Example 4. Investors "A", "B" and "C" join forces to purchase an office building. The total price is USD 1,000,000 but the agreed portions are, respectively, 50%, 30% and 20%. The seller may demand payment of USD 1,000,000 from any of the debtors, but only manages to recover USD 650,000 from "A"; the seller then obtains the remaining sum of USD 350,000 from "B". "A" paid USD 150,000 more than its portion of USD 500,000; "B" paid USD 50,000 more than its portion of USD 300,000. In contrast, "C"'s portion remains entirely unpaid. "A" and "B" may claim from "C", respectively, USD 150,000 and USD 50,000. Articles 11.1.6(2), 11.1.7(1)(b) and 11.1.8(b) provide particular rules regarding the exercise of recourse actions under the circumstances governed by each of those provisions.

ARTICLE 11: 1.11 (Rights of the creditor) (1) The joint and several debtor to whom Article 11.1.10 applies may likewise exercise the rights of the creditor, including those securing performance, in order to recover the difference from the other joint and several debtors, up to the unpaid portion of each one. (2) The creditor who has not received full performance retains its rights against the co-debtors, to the extent of the non-performance, with priority over the co-debtors exercising recourse actions. COMMENT 1. Subrogation in the creditor's rights A joint and several debtor who has paid the creditor more than the portion corresponding to it may exercise a recourse action against the other debtors pursuant to Article 11.1.10. Article 11.1.11(1) grants to the co-debtor that has such a recourse action the possibility of availing itself of the creditor's rights, including all rights securing performance. This possibility is of particular importance for the joint and several debtor when the creditor's rights are secured, because the recourse right in accordance with Article 11.1.10 is not secured. Example 1. Bank "X" lends 500,000 EUR to companies "A" and "B", who remain jointly and severally obligated. The loan is secured by a mortgage on a property of "A". "B" reimburses the entire loan. In accordance with Article 11.1.10, "B" has an unsecured claim against "A" for its portion of 250,000 EUR. B may also exercise the rights of "X" against "A" up to the amount of 250,000 EUR, including enforcement of the mortgage on "A"'s property. 2. Reserved and priority rights of the creditor The rule of Article 11.1.11(2) ensures that the benefit granted to the joint and several debtor under Article 11.1.11(1) does not impair the rights of the creditor that have not yet been satisfied, establishing that a creditor who has not received full performance retains its rights against the joint and several debtors, granting a preferential rank to these creditor's rights, above the rights of the debtor who has performed. This preference may be achieved by postponing the right to performance that the joint and several debtor has under Article 11.1.11(1), until such time as the creditor receives full performance. Example 2. The facts are identical to those of Example 1, but in this case "B" only reimburses 400,000 EUR of the loan and the remaining sum of 100,000 EUR remains unpaid. "B" has a recourse action against "A" for the sum that it paid in excess of its own portion, that is 150,000 EUR (400,000 EUR – 250,000 EUR). "B" also has the right to exercise the rights of "X" against "A" up to that amount, including enforcement of the mortgage on "A"'s property. However, the rights of "X" with respect to the sum of 100,000 EUR that have not been paid have priority over the rights of "B"; satisfaction of the rights of "B" against "A" may only be carried out once "X" has received payment of the remaining 100,000 EUR. The preference rule is subject to the mandatory rules regarding insolvency proceedings that may eventually be applicable.

ARTICLE 11: 1.12 (Exceptions in recourse actions) The joint and several debtor against whom a co-debtor that has performed the obligation exercises a recourse action: (

• a)

  may raise all exceptions and set-off rights that could have been invoked or exercised by the co-debtor against the creditor; (

• b)

  may raise all exceptions that are personal to it; (

• c)

  may not raise exceptions or set-off rights that belong personally to one or several of the other co-debtors. COMMENT This provision addresses the exceptions and set-off rights that may be raised between co-debtors when they exercise recourse actions. 1. Common exceptions and set-off rights In accordance with Article 11.1.4, the co-debtor against whom the creditor demands performance may raise all exceptions and set-off rights common to all co-debtors. If that co-debtor did not raise such an exception or set-off right, which would have extinguished or reduced the obligation, any other joint and several debtor may raise that exception or set-off right against the one exercising a recourse action. Example 1. Joint and several debtors "A" and "B" jointly acquire a know-how license. The licensor "X" assured that the technology was suitable for both licensees. If it turns out not to be so, each debtor could raise this common exception against "X". If "A" fails to raise this exception when "X" demands payment, "B" may refuse to pay its portion to "A". 2. Personal exceptions A co-debtor may also raise an exception that is personal to it against a recourse action. Example 2. Companies "A", "B" and "C" are jointly and severally obligated to pay the price of products purchased from seller "X". However, "A" was induced to enter into the contract through fraudulent conduct referred to in Article 3.8. "B" pays the entire price to "X". "A" may raise the fraud of which it has been a victim as a personal exception against the recourse action exercised by "B". In accordance with Article 11.1.12, set-off rights are subject to the same rule as exceptions, as prescribed by the Principles. Set-off rights cannot be treated the same way as exceptions, since it is a matter of asserting a personal set-off right against the creditor in the exercise of a recourse action. Under Article 11.1.5, performance by the other co-debtor releases the first debtor from its obligations toward the creditor, so that the set-off right ceases to exist. The first debtor must pay its portion to the other debtor, although it may exercise its right against the creditor separately. Example 3. Bank "X" grants a loan of 3,000,000 EUR to joint and several debtors "A", "B" and "C". As a consequence of the sale of shares belonging to "A" on the securities market, "X" becomes a debtor of "A" for an amount of 500,000 EUR, giving rise to a set-off right for "A" in that amount. "X" demands reimbursement of the 3,000,000 EUR from "B", who pays the entire sum. If subsequently "B" demands from "A" the payment of its portion, the latter may not raise its set-off right against "B". That right no longer exists because "B"'s payment to "X" has also released "A" from "X". A will have to pay its portion to "B" and may exercise its right for 500,000 EUR against "X". 3. Exceptions and set-off rights belonging personally to the other co-debtors A co-debtor may not raise an exception or a set-off right that belongs personally to one or several of the other co-debtors. Examples 4. The facts are identical to those of Example 2. If "B" exercises a recourse action against "C", the latter may not raise the fraud suffered by "A", given that this is a personal exception of "A". 5. The facts are identical to those of Example 3. If "B" exercises a recourse action against "C", the latter may not raise the set-off right of "A", given that this is a personal right of another debtor and additionally because "A"'s set-off right no longer exists because "B"'s payment to "X" has also released "A" from "X".

ARTICLE 11: 1.13 (Inability to recover) When a joint and several debtor who paid more than its portion, despite having made all reasonable efforts, is unable to recover the contribution of another joint and several debtor, the portion of the other debtors, including that of the debtor who has paid, will increase proportionally. COMMENT 1. Proportional apportionment of loss A joint and several debtor who exercises a recourse action against another co-debtor may find itself unable to recover the portion of that co-debtor due to its insolvency, the inaccessibility of its assets, or because it has disappeared. In this case, the loss is apportioned among the other co-debtors. Example 1. Companies "A", "B" and "C" borrow 6,000,000 EUR from bank "X", with equal portions. Once "A" reimburses the loan, it demands 2,000,000 EUR from "B" and 2,000,000 EUR from "C". "B" turns out to be insolvent. The loss of 2,000,000 EUR must be assumed proportionally by the other co-debtors, including the one that has paid. Since their portions were equal, both "A" and "C" will assume the loss in equal portions, that is, 1,000,000 EUR each. Consequently, "A" may demand 3,000,000 EUR from "C". 2. All reasonable efforts In accordance with Article 5.1.4(2), before invoking this article, the debtor that has performed must make all reasonable efforts to recover the portion of the joint and several debtor that has not performed, in order to demand the increased portions from the other co-debtors. Example 2. The facts are identical to those of Example 1. "A" does not challenge the assertion of "B", who cannot pay due to financial difficulties, by immediately demanding payment of its increased portion from "C". However, in order to invoke Article 11.1.13, "A" must demonstrate that it has made all reasonable efforts to recover "B"'s portion, such as, as the case may be, sending reminders, constituting notice of default, initiating attachments or judicial proceedings, etc.

ARTICLE 11: 2.1 (Definitions) When several creditors may demand from a debtor the performance of the same obligation: (

• a)

  the credits are separate if each creditor may only demand its portion; (

• b)

  the credits are joint and several if each creditor may demand the entirety of the performance; (

• c)

  the credits are joint if all creditors must demand the performance jointly. COMMENT 1. Several creditors The plurality of creditors occurs in different situations. Example 1. Banks "A", "B" and "C" subscribe to a syndicated loan contract for USD 12,000,000 in favor of company "X". The three banks are co-creditors with respect to "X"'s reimbursement obligation. Other examples of plurality of creditors are presented, among others, with co-insurers, multiple buyers and/or sellers in share purchase agreements and partners in consortium agreements in different sectors, such as the construction sector or the oil industry. 2. The same obligation This Section applies only if the different creditors may demand from a debtor the performance of the same obligation. This is the case in Example 1 (reimbursement of the syndicated loan). Situations in which different creditors of the same debtor have rights deriving from different obligations are not governed by this Section. Example 2. Architect "A" and contractor "B" participate jointly in the construction of a new industrial plant. Their respective rights against the client refer to different obligations (payment of their respective services). Their rights are not subject to the articles of this Section, but to the applicable legal provisions. In contrast, when different agents in a construction project form a consortium and demand a single payment for all their services, they should be considered as a plurality of creditors for that payment. The "same obligation" normally derives from a single contract. In Example 1, the syndicated loan contract is a single contract. However, it may occur that in the same situation, each lender decides to have its own contract with the borrower. Co-insurers who join together to cover the same risk normally have different contractual relationships with the insured. Example 3. Eight insurance companies agree to jointly cover the liability risks of a pharmaceutical group. The co-insurance agreement provides that each co-insurer has a different contractual relationship with the insured, but the obligations of the insured to the co-insurers are the same (payment of the agreed premium, required preventive measures, notification of loss, etc.). These co-insurers constitute a plurality of creditors, subject to the articles of this Section. 3. Three principal types Article 11.2.1 defines the three principal types of credits that exist in practice when several creditors may demand from a debtor the performance of the same obligation. Credits may be separate. In this case, each creditor may only demand its portion. Example 4. The facts are identical to those of Example 1. If the credits of banks "A", "B" and "C" against "X" for a total of USD 12,000,000 are separate and if their portions are equal, each bank may only demand from "X" the reimbursement of USD 4,000,000. Credits may be joint and several, which means that each creditor may demand performance of the entirety of the performance (see Article 11.2.2), without prejudice to the subsequent apportionment among the different creditors (see Article 11.2.4). Example 5. Companies "A" and "B" are co-owners of a warehouse that they rent to transportation company "X". The contract provides that the co-owners have the right to rents jointly and severally. "A" and "B" may each demand from "X" payment of the entirety of the rent. Credits are 'joint' when all creditors must demand the performance jointly; consequently, the debtor may only perform in favor of all of them jointly. Sometimes, this situation is also called "joint credits". Example 6. Companies "A" and "B" rent an office in a foreign capital for shared use. Due to the nature of their right to use the office, "A" and "B" are joint creditors. This would not prevent one of the companies from being designated as an agent to deal with the office owner. 4. Absence of presumption In the case of plurality of debtors, Article 11.1.2 establishes a presumption of joint and several obligation, since this corresponds to the most frequent commercial practice. In contrast, when determining to which of the three types defined in this article the credits of a plurality of creditors belong, the Principles establish no presumption. The reason is that none of these types seems to prevail in practice; the choice varies considerably, primarily depending on the transaction involved. Consequently, in situations involving a plurality of creditors, it is recommended that the parties choose the relevant type by means of an express stipulation. Examples 7. Banks "A", "B" and "C" enter into a syndicated loan contract to grant financing to company "X". The contract provides that "all sums and obligations due to each bank constitute separate and independent obligations. Each bank may enforce its rights separately under this contract". This express clause has the effect that the banks' credits are separate. 8. Collectors "A" and "B", co-owners of a Rothko painting, sell it to a museum for USD 20,000,000. The contract establishes that each seller may demand payment of the entire price. The credits are joint and several. 9. The facts are identical to those of Example 8, but in this case the sales contract with the museum provides that the credits of "A" and "B" are separate. This means that each of them may only demand payment of the price corresponding to its own portion of the credit, which normally will correspond to the portion it held in the ownership. Before making such a contractual choice, the parties must pay attention to the advantages and disadvantages of each of the different types of plurality of credits. In particular, joint and several credits have the advantage of avoiding the multiplication of litigations. This is of particular importance in international commerce. Each of the creditors may demand the entirety of the performance. Joint and several credits also simplify the situation of the debtor, who will not have to divide the performance among the different creditors. From the point of view of the different creditors, the actions will normally be easier if the credits are joint and several. On the other hand, creditors must be aware that if their credits are joint and several, they lose exclusive control of their respective portions. Any joint and several creditor may demand and receive the entirety of the performance, with the risk that the subsequent apportionment, in accordance with Article 11.2.5, may generate difficulties. This explains why separate credits seem to prevail in certain sectors (see Example 1). If the parties do not make their contractual choice expressly, the type to which the credits belong in the case of a plurality of creditors must be determined by means of contract interpretation, in accordance with the rules of Chapter 4. In many cases, circumstances such as the nature or purpose of the contract may acquire particular importance (see Article 4.3(d)). Examples 10. Company "A" from country "X" and Company "B" from country "Y" join together to make a large order of automobiles from a manufacturer. The automobiles for country "X" have right-hand drive; those for country "Y", left-hand drive. These circumstances indicate that, when performance is demanded, "A" and "B" are separate creditors, so each is entitled to demand its own type of automobiles. 11. Tax advisor "X" is obligated to provide tax advisory services to companies "A" and "B" in relation to operations carried out by them within the framework of a "joint venture". Given that the tax advice refers to operations carried out jointly by "A" and "B" and that such advice is hardly divisible, "A" and "B" must be considered joint and several creditors when demanding performance from "X". 5. Possible designation of an agent In practice, when there is a plurality of creditors, an agent is usually designated with the power to deal with the debtor on behalf of all creditors, within the agreed limits. This seems to be particularly frequent, for practical reasons, when the credits are separate. However, in this case, each creditor wants to retain full control over its own rights, often reserving the possibility of revoking the agent's power at any time. Example 12. Banks "A", "B" and "C" enter into a syndicated loan contract to lend USD 12,000,000 to company "X". The credits are separate, USD 4,000,000 for each bank. However, "A" is designated as the agent of the consortium with power to demand reimbursement of the entire sum. The initiative to designate an intermediary may come from a debtor that wants to exercise certain control over the credits that could be demanded separately by its numerous creditors. Example 13. Pursuant to the clauses of a bearer bond issuance, a trustee is designated to represent the interests of the bond holders. The issuer agrees to make payments to each bond holder in accordance with the issuance clauses and recognizes to the trustee a parallel right to payment. In case of issuer non-performance, the trustee may, at its discretion, pursue payment judicially, and has the duty to do so if a certain percentage of bond holders request it. Bond holders may not take measures individually in case of issuer non-performance, unless the trustee fails to comply with its obligation, derived from the power that has been granted to it to pursue payment judicially. The purpose of the trust is simply to supervise the issuer's performance and coordinate actions against it, avoiding hasty individual initiatives by bond holders.

ARTICLE 11: 2.2 (Effects of joint and several credits) Full performance to one of the joint and several creditors releases the debtor against the other creditors. COMMENT 1. Each creditor may demand full performance The principal effect of joint and several credits has already been indicated in the definition of Article 11.2.1(2). When the credits are joint and several, each creditor may demand full performance from the debtor. Example 1. Co-owners "A" and "B" sell their hotel to buyer "X" for a price of 5,000,000 EUR. Their co-ownership portions are equal. The sales contract establishes that the credits of the sellers relating to payment of the price are joint and several. "A" may demand 5,000,000 EUR from "X", without prejudice to the subsequent apportionment in accordance with Article 11.2.4. 2. Choice of the debtor This article determines two other important effects of joint and several credits. First, if the debtor takes the initiative to perform spontaneously its obligation, it is authorized to perform in favor of any of its creditors. Example 2. The facts are identical to those of Example 1. "X" takes the initiative to pay the price before the creditors invite it to do so. "X" may validly pay "A" or "B". 3. Release of the debtor Another important effect of joint and several credits is that the debtor that has performed fully in favor of one of the creditors is released with respect to the others. Example 3. The facts are identical to those of Example 1. "X" pays the entirety of the price of 5,000,000 EUR to "A". "B", who has difficulty recovering its portion from "A", demands payment of 2,500,000 EUR from "X". Under Article 11.2.2(2), the request will be rejected because the full payment made to "A" has released "X" from the other creditor. 4. Practical aspects The right that each of the joint and several creditors has to demand full performance may require some coordination to avoid the duplication of initiatives, as well as unnecessary costs. The creditors could agree beforehand which one will demand performance, or at least agree that the creditor that intends to take the initiative should consult its co-creditors. On the other hand, when the debtor takes the initiative, its choice of which creditor to perform for may be affected if another creditor is already demanding performance. For this reason, some prior consultation may be appropriate. Moreover, a creditor that has received payment should immediately inform the others of the performance. These solutions could usefully be agreed to in advance by all parties involved. Otherwise, the provisions regarding good faith and fair dealing are always applicable (Article 1.7).

ARTICLE 11: 2.3 (Exceptions against joint and several creditors) (1) The debtor may raise against any joint and several creditor all exceptions and set-off rights that are personal to the debtor in its relationship with that creditor or that it may raise against all creditors, but may not raise exceptions or set-off rights that are personal to the debtor in its relationship with one or several of the other creditors. (2) The provisions of Articles 11.1.5, 11.1.6, 11.1.7 and 11.1.8 apply to joint and several creditors, with necessary adaptations. COMMENT 1. Ability to raise exceptions The exceptions that could permit the debtor to refuse performance do not necessarily exist against all creditors. Some of the exceptions may be personal to the relationship the debtor has with one of the creditors. These exceptions may only be raised against the creditor involved. Example 1. Grain producer "X" agrees to supply a certain quantity of wheat seeds to companies "A", "B" and "C", which are linked in a common agricultural project in a developing country. The contract provides that "A", "B" and "C" are joint and several creditors with respect to the deliveries. "X" discovers that the premises where the seeds are to be delivered are not equipped with the appropriate facilities for proper unloading, the availability of which only "A" had guaranteed. "X" may raise this as an exception to "A" when it demands delivery, but not to "B" or "C", who did not guarantee that the premises would be equipped with the appropriate facilities. The debtor may also raise exceptions that are common to all creditors. Example 2. The facts are identical to those of Example 1. "X" learns that the agricultural project involves child labor by "A", "B" and "C", in violation of applicable mandatory norms. This is a common exception that "X" may raise against any of the creditors that demand delivery of the wheat seeds. 2. Effects of some exceptions Section 1 of this Chapter contains particular rules regarding the effects of some types of exceptions (see Articles 11.1.5, 11.1.6, 11.1.7 and 11.1.8) that may be raised by joint and several debtors. Paragraph 2 of this article provides that these rules apply to joint and several creditors, with necessary adaptations. a. Performance and set-off (reference to Article 11.1.5) Article 11.1.5 provides that "If a joint and several debtor performs or sets off the obligation, or if the creditor exercises set-off against a joint and several debtor, the other co-debtors are released from the creditor to the extent of the performance or set-off". In the same manner, the performance received (or set-off exercised) by one of the joint and several creditors releases the debtor from the other creditors, to the extent of the performance or set-off. Examples 3. Companies "A", "B" and "C" jointly and severally grant a loan of 300,000 EUR to "X". "A" receives full payment. If "B" or "C" subsequently continue to demand reimbursement, "X" may raise that it already performed fully by paying "A". 4. The facts are identical to those of Example 3, but here "X" may claim 300,000 EUR from "A" for the sale of office equipment. "X" exercises the right of set-off in accordance with Article 8.3. Its obligation arising from the loan contract is extinguished, not only with respect to "A", but also with respect to "B" and "C". b. Release of debt and settlement (reference to Article 11.1.6) Article 11.1.6 provides that "Release of the debt with respect to a joint and several debtor, or a settlement with a joint and several debtor, releases the other debtors from the portion of that debtor, unless circumstances indicate otherwise". In the same manner, release of the debt granted by one of the creditors to the debtor (or settlement between the debtor and one of the creditors) releases the debtor from the other creditors, to the extent of the release or the settlement. Examples 5. Pamela, a famous racing horse, is sold by its co-owners "A" and "B" to buyer "X". With respect to payment of the price, the contract provides that "A" and "B" are joint and several creditors. If "A" releases the portion of the debt that corresponds to it in "X"'s obligation, the credit of "B" against "X" is reduced by the amount of the release of "A"'s portion. "A" has no recourse action against "B", in accordance with Article 11.2.4 (see Article 11.1.6(2)). 6. The facts are identical to those of Example 3, but here "A", whose portion in the loan is 100,000 EUR, effects a settlement with "X", accepting payment of 60,000 EUR, that is, an amount less than its portion. The joint and several credits of "B" and "C" against "X" are reduced by the total amount of "A"'s portion, that is by 100,000 EUR, and both remain joint and several creditors of "X" for 200,000 EUR. "A", having effected the settlement, has no action against "B" or "C", under Article 11.2.4 (see Article 11.1.6(2)). As in the case of Article 11.1.6, with necessary adaptations, the reference to settlement refers to the particular case where a settlement takes place separately between the debtor and one of the joint and several creditors, with respect to the portion of that creditor. In this case, the problem to be resolved is that of the consequences of that settlement on the credits of the other creditors. In the more frequent situation where settlement involves all joint and several credits, the consequences for the credits of the different creditors are determined according to the clauses of the settlement made by all parties and recourse actions are adjusted accordingly. c. Expiration of the prescription period (reference to Article 11.1.7) Article 11.1.7 provides that the expiration of the prescription period of the creditor's rights against a joint and several debtor does not affect: a) the obligations of the other joint and several debtors to the creditor, nor b) the recourse actions among joint and several debtors provided for in Article 11.1.10. In the same manner, the expiration of the prescription period of the rights of one of the creditors against the debtor does not affect: a) the obligations of the debtor to the other joint and several creditors, nor b) the recourse actions among joint and several creditors provided for in Article 11.2.4. Example 7. Debtor "X" has three joint and several creditors, "A", "B" and "C". The credit of "A" against "X" has become prescribed. This does not affect the credits of "B" and "C" against "X". If "B" or "C" receive performance from "X", "A" may demand its portion from the co-creditors that have received payment. Article 11.1.7 also provides that if the creditor initiates a procedure against a joint and several debtor under Articles 10.5, 10.6 or 10.7, the prescription period will also be suspended against the other joint and several debtors. In the same manner, if one of the creditors initiates a procedure against the debtor, the prescription period will also be suspended in favor of the other joint and several creditors. d. Effect of judgment (reference to Article 11.1.8) Article 11.1.8 provides that a tribunal's decision concerning the liability of a joint and several debtor to the creditor does not affect: a) the obligations of the other joint and several debtors to the creditor, nor b) the recourse actions among joint and several debtors provided for in Article 11.1.10. In the same manner, a tribunal's decision concerning the debtor's liability to one of the joint and several creditors does not affect: a) the obligations of the debtor to the other joint and several creditors, nor b) the recourse actions among joint and several creditors provided for in Article 11.2.4. Example 8. Debtor "X" has three joint and several creditors, "A", "B" and "C". "A" individually files suit against "X" demanding performance. The judgment grants "A" only a portion of its claims. This judgment does not affect the obligations of "X" to "B" or "C", nor the recourse actions among co-creditors provided for in Article 11.2.4. However, Article 11.1.8 (2) also provides that the other joint and several debtors may invoke the decision, unless it is based on personal grounds of the debtor sued. In that case, the recourse actions among joint and several debtors provided for in Article 11.1.10 are affected accordingly. In the same manner, the other joint and several creditors may invoke the decision if they consider it redounds to their benefit, unless it is based on personal grounds of the creditor involved. Example 9. The facts are identical to those of Example 8. However, this time the judgment grants full satisfaction to "A", including compensation for damages. The other creditors may also invoke this favorable decision.

ARTICLE 11: 2.4 (Apportionment among joint and several creditors) (1) Joint and several creditors have between themselves the right to equal portions, unless circumstances indicate otherwise. (2) The creditor that receives more than its portion must transfer the excess to the other creditors, to the extent of their respective portions. COMMENT 1. Presumption of equal portions Each of the joint and several creditors may demand full performance of the entirety of the obligation, in accordance with Article 11.2.2. However, between themselves they have the right only to their respective portions. It is presumed that these portions are equal. Example 1. Co-owners "A" and "B" sell their factory for CHF 10,000,000 and are joint and several creditors for payment of the price. However, once the seller has paid the CHF 10,000,000, each co-owner will be entitled to receive its portion in the final apportionment. In principle, it is considered that the portions are equal. Each co-owner must receive CHF 5,000,000. However, circumstances may indicate otherwise. Example 2. The facts are identical to those of Example 1, but in this case the portions of the co-owners of the factory were not equal, but were 75% for "A" and 25% for "B". This indicates that "A" should receive CHF 7,000,000 and "B" should receive CHF 2,500,000. 2. Transfer of the excess received It will often occur that the co-creditor that demands payment receives more than its portion, since it has the right to demand full performance in accordance with Article 11.2.2. When a creditor has received more than its portion, it must transfer the excess to the other creditors, to the extent of their respective portions. Example 3. The facts are identical to those of Example 1. "A" has received payment of the entirety of the factory price, that is CHF 10,000,000, and its co-ownership portion was 50%. "A" must transfer CHF 5,000,000 to "B". The determination whether the right of the other creditors with respect to the excess sums is a real right, or simply a personal right against the creditor that has received more than its portion, falls outside the scope of the Principles.

ARTICLE 1: 1 (Freedom of Contract) The parties are free to conclude a contract and to determine its contents.

ARTICLE 1: 2 (Freedom of Form) Nothing in these Principles requires that a contract, statement or act be made or proved in any particular form. A contract may be proved by any means, including witnesses.

ARTICLE 1: 3 (Binding Character of Contracts) A contract validly entered into is binding upon the parties. It can be modified or terminated only in accordance with its terms, by agreement of the parties or for any other reason provided for in these Principles.

ARTICLE 1: 4 (Mandatory Rules of Law) These Principles do not restrict the application of mandatory rules of law, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law. (*) Parties wishing to apply the Principles to their contract may use the following clause, with the addition of any exceptions or modifications: "This contract is governed by the UNIDROIT Principles (2010) [except with respect to Articles …]". If the parties also wish to provide that a particular national law is to apply, they may use the following formula: "This contract is governed by the UNIDROIT Principles (2010) [except with respect to Articles …], supplemented where necessary by the law of [State 'X'].

UNIDROIT Principles

ARTICLE 1: 5 (Exclusion or Modification of the Principles by the Parties) The parties may exclude the application of these Principles, and derogate from or modify the effect of any of their provisions, unless provided otherwise in them.

ARTICLE 1: 6 (Interpretation and Supplementation of the Principles) (1) In the interpretation of these Principles, regard shall be had to their international character and to their purposes, including the need to promote uniformity in their application. (2) Questions which fall within the scope of application of these Principles but are not expressly settled by them shall, as far as possible, be resolved in accordance with their underlying general principles.

ARTICLE 1: 7 (Good Faith and Fair Dealing) (1) Each party shall act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty.

ARTICLE 1: 8 (Inconsistent Behaviour. Venire contra factum proprium) A party cannot act in contradiction to an understanding it has created in its counterpart and in reliance on which the counterpart has reasonably acted to its detriment.

ARTICLE 1: 9 (Usages and Practices) (1) The parties are bound by any usage to which they have agreed and by any practice which they have established between themselves. (2) The parties are bound by any usage which is widely known and regularly observed in international trade by parties in the particular trade concerned, unless the application of such a usage would be unreasonable.

ARTICLE 1: 10 (Notice) (

• 1)

  Where notice is required, it shall be given by any means appropriate in the circumstances. (

• 2)

  Notice becomes effective when it reaches the sphere of the person to whom it is given. (

• 3)

  For the purpose of the preceding paragraph, a notice "reaches" the sphere of the person to whom it is given when it is communicated orally or delivered at that person's place of business or mailing address. (

• 4)

  For the purpose of this Article, the word "notice" includes any declaration, demand, request or other communication of intention.

ARTICLE 1: 11 (Definitions) For the purposes of these Principles: – "court" includes an arbitral tribunal; – if a party has more than one "place of business," its "place of business" is that which has the closest relationship to the contract and its performance, having regard

Appendix to the circumstances known or contemplated by the parties at any time before or at the conclusion of the contract; – "long-term contract" is a contract whose performance extends over a period of time and which typically involves, to a greater or lesser extent, a complex operation and an ongoing relationship between the parties; – "obligor" or "obligee" means the party who is to perform an obligation and the party who is entitled to claim performance; – "writing" includes any mode of communication that provides a record of the information contained in it and is capable of being reproduced in tangible form.

ARTICLE 1: 12 (Calculation of Periods Set by the Parties) (

• 1)

  Official holidays or non-working days occurring within a period set by the parties for the performance of an obligation are included in calculating the period. (

• 2)

  In any event, if the period expires on an official holiday or non-working day at the place where performance is to be effected, the period is extended until the first working day that follows, unless the circumstances indicate otherwise. (

• 3)

  The time of day is that of the place where the party required to perform is located, unless the circumstances indicate otherwise. CHAPTER 2 — FORMATION AND AUTHORITY OF AGENTS SECTION 1: FORMATION

ARTICLE 2: 1.1 (Manner of Conclusion) A contract is concluded at the moment when an acceptance of an offer becomes effective or, if no offer has been made, when the conduct of the parties is sufficient to show agreement.

ARTICLE 2: 1.2 (Definition of an Offer) A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance.

ARTICLE 2: 1.3 (Withdrawal of the Offer) (1) An offer becomes effective when it reaches the offeree. (2) An offer may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer, even if the offer is stated to be irrevocable.

ARTICLE 2: 1.4 (Revocation of the Offer) (1) The offer may be revoked until the contract is concluded, if the revocation reaches the offeree before the offeree has sent the acceptance. (2) However, the offer cannot be revoked: (a) if it indicates, by stating a fixed time-limit for acceptance or otherwise, that it is irrevocable, or (b) if the offeree could reasonably consider that the offer was irrevocable and has acted in reliance on that offer.

ARTICLE 2: 1.5 (Rejection of the Offer) The offer is extinguished when notification of its rejection reaches the offeror.

ARTICLE 2: 1.6 (Mode of Acceptance) (

• 1)

  Acceptance is any declaration or other conduct of the offeree indicating assent to an offer. Silence or inactivity does not in itself amount to acceptance. (

• 2)

  Acceptance becomes effective when an indication of assent reaches the offeror. (

• 3)

  However, if by virtue of the offer or of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act without notice to the offeror, acceptance is effective when that act is performed.

ARTICLE 2: 1.7 (Time-Limit for Acceptance) The offer must be accepted within any time-limit fixed by the offeror or, if no time-limit is fixed, within a reasonable time having regard to the circumstances of the case, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise.

ARTICLE 2: 1.8 (Acceptance within a Fixed Time-Limit) The time-limit for acceptance fixed by the offeror begins to run from the moment the offer is dispatched. Unless the circumstances indicate otherwise, the date on which the offer is dispatched is presumed to be the date indicated in the offer.

ARTICLE 2: 1.9 (Late Acceptance. Delay in Transmission) (1) Nevertheless, a late acceptance is effective as an acceptance if without undue delay the offeror informs the offeree that it accepts the late acceptance or notifies the offeree to that effect. (2) If a communication containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, such acceptance is effective unless without undue delay the offeror informs the offeree that its offer has lapsed.

ARTICLE 2: 1.10 (Withdrawal of Acceptance) An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would become effective.

ARTICLE 2: 1.11 (Modified Acceptance) (1) A response to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a response to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance unless the offeror without undue delay objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

ARTICLE 2: 1.12 (Confirmation in Writing) If a writing which is sent within a reasonable time after conclusion of the contract and which purports to be a confirmation of the contract contains additional or different terms, such terms become part of the contract unless they materially alter the terms of the contract or the offeree, without undue delay, objects to the discrepancy.

ARTICLE 2: 1.13 (Conclusion of Contract Conditioned on Agreement on Specific Matters or in a Particular Form) Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, the contract is not concluded until agreement is reached on those matters or in that form.

ARTICLE 2: 1.14 (Contract with Open Terms) (1) If the parties intend to be bound by a contract, the fact that they intentionally leave a term to be settled by further negotiation or to be determined by a third person does not prevent the contract from coming into existence. (2) The existence of the contract is not affected by the fact that subsequently: (

• a)

  the parties fail to reach agreement on that term, or (

• b)

  the party entrusted with its determination does not determine it, or (

• c)

  a third person does not determine it, provided that there is an agreed manner for its determination and the parties have acted in a manner which is consistent with there being a contract.

ARTICLE 2: 1.15 (Negotiation in Bad Faith) (

• 1)

  The parties are free to negotiate and are not liable for failure to reach agreement. (

• 2)

  However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (

• 3)

  In particular, it is bad faith for a party to enter into or continue negotiations when intending not to reach agreement with the other party.

ARTICLE 2: 1.16 (Duty of Confidentiality) If a party provides information as confidential during negotiation, the other party is under a duty not to disclose it or use it improperly for its own purposes, irrespective of whether or not the contract is subsequently concluded. Where appropriate, the remedy for breach of this duty may include compensation based on the benefit received by the other party.

ARTICLE 2: 1.17 (Integration Clauses) A written contract which contains a clause providing that written agreement completely and exclusively states the terms of the contract cannot be contradicted or supplemented by evidence of prior statements or agreements. Nevertheless, such statements or agreements may be used for the purpose of interpreting the contract.

ARTICLE 2: 1.18 (Modification in a Particular Form) A written contract which requires any modification or termination by mutual agreement to be in a particular form cannot be otherwise modified or terminated. Nevertheless, a party may be bound by its own conduct and cannot rely on such a clause to the extent that the other party has reasonably acted in reliance on such conduct.

(1) The general rules on contract formation shall apply when one or both parties use standard clauses, subject to the provisions of Articles 2.1.20 to 2.1.22. (2) Standard clauses are those prepared in advance by one of the parties for its general and repeated use and which are in fact used without negotiation with the other party.

(1) A standard clause has no effect if it is of such a character that the other party could not have reasonably foreseen it, unless that party had expressly accepted it. (2) In determining whether a standard clause is of such a character, regard shall be had to its content, language and presentation.

In the event of conflict between a standard clause and one that is not standard, the latter shall prevail.

When both parties use standard clauses and reach an agreement except with respect to those clauses, the contract shall be considered concluded on the basis of the terms agreed and of the provisions of those standard clauses that are substantially common, unless one of the parties clearly indicates in advance, or subsequently and without unjustified delay informs the other party, that it does not wish to be bound by such contract.

(

• 1)

  This Section regulates the authority of a person ("the agent") to affect the legal relations of another person ("the principal") by or with respect to a contract with a third party, whether the agent acts in its own name or in that of the principal. (

• 2)

  This Section only regulates the relations between the principal or the agent, on one hand, and the third party on the other. (

• 3)

  This Section does not regulate the authority of an agent conferred by law nor the authority of an agent appointed by a public or judicial authority.

(1) The granting of authority by the principal to the agent may be express or implied. (2) The agent has authority to perform all acts necessary, according to the circumstances, to achieve the objectives for which the authority was granted.

(1) When an agent acts within the scope of its representation and the third party knew or ought to have known that the agent was acting as such, the acts of the agent directly affect the legal relations between the principal and the third party, without creating any legal relation between the agent and the third party. (2) However, the acts of the agent only affect the relations between the agent and the third party when, with the consent of the principal, the agent assumes the position of a contracting party.

(1) When an agent acts within the scope of its representation and the third party did not know and ought not to have known that the agent was acting as such, the acts of the agent affect only the relations between the agent and the third party. (2) However, when such an agent, when contracting with a third party on behalf of an enterprise, behaves as its owner, the third party, upon discovering the identity of the true owner thereof, may also exercise against the latter the actions it has against the agent.

(1) When an agent acts without authority or in excess of it, its acts do not affect the legal relations between the principal and the third party. (2) However, when the principal creates in the third party the reasonable conviction that the agent has authority to act on behalf of the principal and that the agent is acting within the scope of that authority, the principal cannot invoke against the third party the lack of authority of the agent.

(1) An agent that acts without authority or in excess of it is liable, in the absence of ratification by the principal, for compensation that places the third party in the same situation in which it would have been if the agent had acted with authority and without exceeding it. (2) However, the agent is not liable if the third party knew or ought to have known that the agent did not have authority or was acting in excess of it.

(1) If a contract concluded by an agent involves it in a conflict of interest with the principal, of which the third party knew or ought to have known, the principal may avoid the contract. The right to avoidance is subject to Articles 3.2.9 and 3.2.11 to 3.2.15. (2) However, the principal may not avoid the contract (a) if it has consented that the agent involve itself in the conflict of interest, or knew or ought to have known; or (b) if the agent has disclosed the conflict of interest to the principal and the latter has not objected within a reasonable period.

An agent has the implied authority to appoint a sub-agent in order to perform acts that cannot reasonably be expected to be performed by the agent personally. The provisions of this Section apply to sub-representation.

(

• 1)

  An act by an agent that acts without authority or in excess of it may be ratified by the principal. With ratification the act produces the same effects as if it had been performed from the outset with authority. (

• 2)

  The third party may, by notifying the principal, grant it a reasonable period for ratification. If the principal does not ratify the act within that period, it may not do so thereafter. (

• 3)

  If, at the moment the agent acted, the third party did not know and ought not to have known of the lack of authority, it may, at any time prior to ratification, notify the principal of its rejection of being bound by a ratification.

(1) The termination of authority is not effective in relation to a third party unless the third party knows or ought to have known of it. (2) Notwithstanding the termination of its authority, an agent continues to have authority to perform those acts that are necessary to prevent damage to the interests of the principal.

This Chapter does not deal with the lack of capacity of the parties.

(Validity of Mere Agreement) Every contract is concluded, modified or extinguished by the mere agreement of the parties, without any further requirement.

(Initial Impossibility) (1) The validity of the contract is not affected by the mere fact that at the time of its conclusion the performance of the obligation undertaken was impossible. (2) The validity of the contract is also not affected by the mere fact that at the time of its conclusion one of the parties was not authorized to dispose of the goods that are the object of the contract.

(Mandatory Character of These Provisions) The provisions of this Chapter relating to fraud, threat, gross disparity and illegality are mandatory. SECTION 2: GROUNDS FOR AVOIDANCE

(Definition of Error) Error consists of an erroneous conception concerning facts or law existing at the time the contract was concluded.

(Error as a Ground for Avoidance) (1) A party may avoid a contract on the ground of error if, at the time the contract was concluded, the error was of such importance that a reasonable person in the same situation as the party in error would not have concluded the contract or would have done so on substantially different terms if the true state of affairs had been known, and: (a) the other party incurred the same error, or caused it, or knew or ought to have known of it and to leave the other party in error would be inconsistent with reasonable commercial standards of fair dealing; or (b) the other party has not yet acted in reliance on the contract in a way which is reasonable under the circumstances. (2) Nevertheless, a party may not avoid the contract if: (a) it bears the risk of the error, or (b) the error relates to a matter in regard to which the risk of error is assumed by the party seeking to avoid the contract or, having regard to the circumstances, is so allocated to that party.

(Error in Expression or Transmission) An error in the expression or transmission of a statement is imputable to the person from whom the statement emanated.

(Remedies for Non-Performance) A party may not avoid a contract on the ground of error if the facts on which it bases its claim would have given it a remedy for non-performance.

(Fraud) A party may avoid a contract if it was induced to conclude it by the other party's fraudulent conduct, including words or conduct, or if the other party fraudulently failed to disclose circumstances which, according to reasonable commercial standards of fair dealing, should have been disclosed.

(Threat) A party may avoid a contract if it was induced to conclude it by an unjustified threat made by the other party, which, having regard to the circumstances, was sufficiently serious to leave the other party without a reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party is threatened is wrongful in itself, or if it would be wrongful to resort to such a threat in order to obtain conclusion of the contract.

(Gross Disparity) (

• 1)

  A party may avoid the contract or any of its clauses if, at the time the contract was concluded, the contract or any of its clauses unjustifiably gave the other party an excessive advantage. Account is to be taken, in particular, of: (a) the fact that the other party exploited the dependence, economic distress or urgent needs of the party seeking to avoid the contract, or its lack of foresight, ignorance, inexperience or lack of negotiating skill; and (b) the nature and purpose of the contract. (

• 2)

  Upon the request of the party entitled to avoid the contract, a court may adapt the contract or any of its clauses in order to bring it into conformity with reasonable commercial standards of fair dealing. (

• 3)

  A court may also adapt the contract or any of its clauses upon the request of the party against whom avoidance is sought, provided that the latter party requests adaptation without unreasonable delay, and before it has acted in reliance on the notification of avoidance in a way which is reasonable having regard to the circumstances. Article 3.2.10(2) applies accordingly.

(Third Persons) (1) Where fraud, threat, gross disparity or error is imputable to, or is known or ought to be known by, an agent or intermediary acting on behalf of the other party, the contract may be avoided under the same conditions as if such fraud, threat, gross disparity or error were attributable to the other party himself. (2) Where fraud, threat or gross disparity is imputable to an agent or intermediary acting on behalf of the other party, but the other party neither knew nor ought to have known of the fraud, threat or gross disparity, the contract may be avoided if the other party knew or ought to have known of it at the time of conclusion and has not acted in reliance on the contract.

(Confirmation) Avoidance of the contract is precluded if the party entitled to avoid it confirms it expressly or by implication after it has become aware of the ground for avoidance and the time-limit for notice of avoidance has begun to run.

(Loss of Right to Avoid the Contract) (1) If a party is entitled to avoid a contract on the ground of error, but the other party declares its willingness to perform, or performs, the contract as understood by the party entitled to avoid it, the contract is considered concluded as so understood, provided that the other party makes such a declaration or performs without unreasonable delay after having been informed of the manner in which the party entitled to avoid it understood the contract, and before the latter party has acted in reliance on a notice of avoidance in a way which is reasonable having regard to the circumstances. (2) After such a declaration or performance the right to avoid is lost and any earlier notice of avoidance is ineffective.

(Notice of Avoidance) The right to avoid a contract is exercised by notice to the other party.

(Time-Limits) (1) Notice of avoidance must be made within a reasonable time, having regard to the circumstances, after the party seeking to avoid the contract knew or could not have been unaware of the ground for avoidance and had the opportunity to act freely. (2) Where the contract may be avoided under Article 3.2.7, the time-limit for notice of avoidance begins to run when the clause is invoked by the other party.

Partial Avoidance. If the ground of avoidance affects only some of the clauses of the contract, the effects of avoidance shall be limited to those clauses unless, having regard to the circumstances, it is not reasonable to retain the remainder of the contract.

Retroactive Effect. Avoidance has retroactive effect.

Restitution. (

• 1)

  In case of avoidance, either party may claim restitution of what it has supplied under the contract or the part of the contract that has been avoided, provided that such party at the same time restores what it has received under the contract or the part of the contract that was avoided. (

• 2)

  If restitution in kind is not possible or appropriate, restitution in an equivalent sum of money may be claimed, provided that such restitution is reasonable. (

• 3)

  The party that received the benefit of performance is not obliged to pay monetary restitution if the impossibility of restitution in kind is attributable to the other party. (

• 4)

  Compensation may be claimed for reasonable expenses incurred in protecting or preserving the received performance.

Damages. Regardless of whether or not the contract is avoided, the party that knew or ought to have known of the ground of avoidance is bound to compensate the other party for loss caused by relying on the validity of the contract, placing the other party in the position in which it would have been had the contract not been concluded.

Unilateral Statements. The provisions of this Chapter shall apply with appropriate modifications to any communication of intention addressed by one party to the other.

Contracts violating mandatory rules of law. (

• 1)

  The violation of a mandatory rule of law, whether of national, international or supranational origin, which is applicable under Article 1.4 of these Principles, shall have the effects, if any, prescribed by that mandatory rule. (

• 2)

  If the mandatory rule does not prescribe the effects of its violation on the contract, the parties may invoke remedies of a contractual nature that are reasonable in the circumstances. (

• 3)

  In determining what is reasonable regard shall be had, among other matters, to: (

  • a)

    the purpose of the mandatory rule that has been violated; (

  • b)

    the category of persons for whose protection the rule exists; (

  • c)

    any sanction that results from violation of the rule; (

  • d)

    the gravity of the violation; (

  • e)

    whether the violation was intentional; (

  • f)

    whether performance of the contract necessarily involves the violation; and (

  • g)

    the reasonable expectations of the parties.

Restitution. (

• 1)

  In the case of a contract the performance of which involves violation of a mandatory rule of law under Article 3.3.1, restitution may be granted, provided that restitution is reasonable in the circumstances. (

• 2)

  In determining what is reasonable regard shall be had to the criteria set out in Article 3.3.1(3), with appropriate adaptations. (

• 3)

  If restitution is granted, the rules set out in Article 3.2.15 shall apply with appropriate adaptations.

Intention of the parties. (1) A contract shall be interpreted according to the common intention of the parties. (2) If such common intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

Interpretation of statements and other conduct. (1) The statements and conduct of a party shall be interpreted according to that party's intention if the other party knew or could not have been unaware of that intention. (2) If the preceding paragraph does not apply, such statements and conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to them in the same circumstances.

Relevant circumstances. In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including: (

• a)

  preliminary negotiations between the parties; (

• b)

  practices which the parties have established between themselves; (

• c)

  the conduct of the parties subsequent to the conclusion of the contract; (

• d)

  the nature and purpose of the contract; (

• e)

  the meaning commonly given to terms and expressions in the trade concerned; and (

• f)

  usages.

Interpretation as a whole. Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.

Interpretation giving effect to all provisions. The terms of a contract shall be interpreted in a way that gives effect to all the terms rather than depriving some of them of effect.

Contra proferentem rule. If contract terms supplied by one party are not clearly expressed, an interpretation against that party is preferred.

Linguistic discrepancies. Where a contract is drawn up in two or more language versions which are all equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up.

Supplying an omitted term. (1) Where the parties to a contract have not agreed with respect to a term which is important for a determination of their rights and duties, a term which is appropriate in the circumstances shall be supplied. (2) In determining what is appropriate regard shall be had, among other factors, to: (

• a)

  the intention of the parties; (

• b)

  the nature and purpose of the contract; (

• c)

  good faith and fair dealing; (

• d)

  reasonableness.

ARTICLE 5: 1.1 (Express and Implied Obligations) The contractual obligations of the parties may be express or implied.

ARTICLE 5: 1.2 (Implied Obligations) Implied obligations may arise from: (

• a)

  the nature and purpose of the contract; (

• b)

  the practices established between the parties and the usages; (

• c)

  good faith and fair dealing; (

• d)

  common sense.

ARTICLE 5: 1.3 (Cooperation between the Parties) Each party must cooperate with the other when such cooperation may be reasonably expected for the performance of the latter's obligations.

ARTICLE 5: 1.4 (Obligation of Result and Obligation to Use Best Efforts) (1) To the extent that the obligation of one of the parties involves a duty to achieve a specific result, that party is obligated to achieve such result. (2) To the extent that the obligation of one of the parties involves a duty to use best efforts in the performance of the obligation, that party is obligated to exercise the diligence that a reasonable person of the same condition would use in similar circumstances.

ARTICLE 5: 1.5 (Determination of the Type of Obligation) In determining to what extent the obligation of a party involves an obligation to use best efforts or to achieve a specific result, the following factors, among others, shall be taken into account: (

• a)

  the terms in which the performance is described in the contract; (

• b)

  the price and other terms of the contract; (

• c)

  the degree of risk that is usually involved in achieving the expected result; (

• d)

  the capacity of the other party to influence the performance of the obligation.

ARTICLE 5: 1.6 (Determination of the Quality of Performance) When the quality of the performance has not been specified in the contract nor can it be determined on the basis thereof, the obligor owes performance of a reasonable quality and not inferior to the average quality, according to the circumstances.

ARTICLE 5: 1.7 (Determination of Price) (

• 1)

  When the contract does not fix the price or lacks terms to determine it, it is considered that the parties, unless otherwise indicated, referred to the price generally charged at the time the contract was concluded in similar circumstances within the respective commercial field or, if the price cannot be established in this manner, it shall be understood that the parties referred to a reasonable price. (

• 2)

  When the determination of the price is left to one of the parties and the amount thus determined is manifestly unreasonable, the price shall be replaced by a reasonable price, and no contrary provision shall be admitted. (

• 3)

  When the determination of the price is left to one of the parties or to a third party and the latter cannot or does not wish to fix it, the price shall be a reasonable one. (

• 4)

  When the price is to be fixed by reference to factors that do not exist or have ceased to exist or to be accessible, the closest equivalent factor shall be used as a substitute.

ARTICLE 5: 1.8 (Termination of a Contract of Indefinite Duration) Either party may terminate a contract of indefinite duration by giving reasonable notice. As to the effects of termination in general, as well as to the obligation to restore, Articles 7.3.5 and 7.3.7 shall apply.

ARTICLE 5: 1.9 (Waiver by Agreement of Parties) (1) A creditor may waive its right by means of an agreement with the debtor. (2) An offer to waive a right gratuitously is presumed to be accepted if the debtor does not reject it immediately after becoming aware of it. SECTION 2: THIRD PARTY BENEFICIARIES

ARTICLE 5: 2.1 (Third Party Beneficiaries) (1) The parties (the "promisor" and the "promisee") may grant by express or implied agreement a right to a third party (the "beneficiary"). (2) The existence and content of the beneficiary's right against the promisor are determined in accordance with the agreement of the parties and are subject to the conditions and limitations provided in such agreement.

ARTICLE 5: 2.2 (Identification of the Beneficiary) The beneficiary must be identified in the contract with sufficient certainty but need not exist when the contract is concluded.

ARTICLE 5: 2.3 (Clauses Excluding or Limiting Liability) The grant of rights to the beneficiary includes the right to invoke a clause in the contract that excludes or limits the liability of the beneficiary.

ARTICLE 5: 2.4 (Exceptions) The promisor may assert against the beneficiary any exception that the promisor could assert against the promisee.

ARTICLE 5: 2.5 (Revocation) The parties may modify or revoke the rights granted by the contract to the beneficiary as long as the beneficiary has not accepted them or acted reasonably in reliance on them.

ARTICLE 5: 2.6 (Waiver) The beneficiary may waive a right granted to it. SECTION 3: CONDITIONAL OBLIGATIONS

(Types of Conditions) A contract or contractual obligation may be conditional if it depends on a future and uncertain event, so that the contract or contractual obligation takes effect (suspensive condition) or ceases to have effect (resolutory condition) if the event occurs.

(Effects of Conditions) Unless the parties agree otherwise:

• a)

  The contract or contractual obligation shall take effect upon fulfillment of the suspensive condition;

• b)

  The contract or contractual obligation shall cease to have effect upon fulfillment of the resolutory condition.

(Interference with Fulfillment of the Condition) 1) If the fulfillment of a condition is prevented by a party in violation of the duty of good faith and fair dealing or cooperation, that party may not invoke the non-fulfillment of the condition. 2) If the fulfillment of a condition is caused by a party in violation of the duty of good faith and fair dealing or cooperation, that party may not invoke the fulfillment of the condition.

(Obligation to Preserve Rights) Before the fulfillment of a condition, a party may not, in violation of the duty to act in good faith and fair dealing, conduct itself in such a manner as to prejudice the rights of the other party in the event the condition is fulfilled.

(Restitution in Case of Fulfillment of a Resolutory Condition) 1) In the case of fulfillment of a resolutory condition, the rules on restitution in Articles 7.3.6 and 7.3.7 shall apply, with the necessary adaptations. 2) If the parties have agreed that a resolutory condition shall have retroactive effect, the rules on restitution in Article 3.2.15 shall apply, with the necessary adaptations. CHAPTER 6: PERFORMANCE SECTION 1: PERFORMANCE IN GENERAL

(Time of Performance) A party shall perform its obligations: (

• a)

  if the time is fixed or determinable by the contract, at that time; (

• b)

  if a period of time is fixed or determinable by the contract, at any time within such period, unless the circumstances indicate that the other party is to choose the time of performance; (

• c)

  in any other case, within a reasonable time after the conclusion of the contract.

(Performance at One Time or in Instalments) In the cases provided for in Article 6.1.1(b) or (c), the obligor shall perform its obligations at one time, provided that the performance can be rendered at once and that the circumstances do not indicate another mode of performance.

(Partial Performance) (1) The creditor may reject an offer of partial performance made at the time the obligation falls due, whether or not such offer is accompanied by a guarantee as to the performance of the remainder of the obligation, unless the creditor has no legitimate interest in rejection. (2) Additional expenses caused to the creditor by partial performance shall be borne by the obligor, without prejudice to any other remedy that may be available to the creditor.

(Sequence of Performance) (1) To the extent that the performances of the parties can be rendered simultaneously, the parties shall render them simultaneously, unless the circumstances indicate otherwise. (2) To the extent that the performance of only one party requires a period of time, that party shall perform first, unless the circumstances indicate otherwise.

(Early Performance) (

• 1)

  The creditor may reject early performance of the obligation unless the creditor has no legitimate interest in doing so. (

• 2)

  Acceptance by a party of early performance does not affect the time for performance of its own obligations if that time was fixed without regard to the time of performance of the obligations of the other party. (

• 3)

  Additional expenses caused to the creditor by early performance shall be borne by the obligor, without prejudice to any other remedy that may be available to the creditor.

(Place of Performance) (1) If the place of performance is not fixed in the contract or is not determinable on the basis thereof, a party shall perform: (a) at the creditor's place of business when the obligation is monetary; (b) at its own place of business when the obligation is any other obligation. (2) A party shall bear any increase in the expenses incidental to performance that is caused by a change in the location of its place of business occurring after the conclusion of the contract.

(Payment by Cheque or Other Instrument) (1) Payment may be made in any form used in the ordinary course of business at the place of payment. (2) However, a creditor who accepts a cheque or any other order of payment or promise of payment, whether pursuant to the preceding paragraph or voluntarily, is presumed to accept it only on condition that it is honored.

(Payment by Transfer of Funds) (1) Payment may be made by a transfer to any of the financial institutions at which the creditor has indicated it has an account, unless a particular account has been indicated. (2) In the case of payment by transfer of funds, the obligation is performed when the transfer to the creditor's financial institution becomes effective.

(Currency of Payment) (

• 1)

  If a monetary obligation is expressed in a currency different from that of the place of payment, payment may be made in the currency of that place, unless: (a) that currency is not freely convertible; or (b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed. (

• 2)

  If it is impossible for the obligor to effect payment in the currency in which the monetary obligation is expressed, the creditor may demand payment in the currency of the place of payment, even in the case referred to in paragraph (1)(b). (

• 3)

  Payment in the currency of the place of payment shall be made according to the applicable exchange rate prevailing at that place at the time when payment is due. (

• 4)

  However, if the obligor has not paid when payment was due, the creditor may demand payment according to the applicable and prevailing exchange rate, either at the time the obligation fell due or at the time of actual payment.

(Currency Not Expressed) If the contract does not express a particular currency, payment shall be made in the currency of the place where payment is to be made.

ARTICLE 6: 1.11 (Expenses of Performance) Each party shall bear the expenses of performance of its obligations.

ARTICLE 6: 1.12 (Imputation of Payments) (

• 1)

  A debtor of several monetary obligations to the same creditor may specify at the time of payment to which of them the payment is intended to be applied. In any case, payment shall first be imputed to any expenses, then to interest due, and finally to the principal. (

• 2)

  If the debtor does not make such specification, the creditor may, within a reasonable time after payment, indicate to the debtor to which of the obligations it imputes the payment, provided that such obligation is due and undisputed. (

• 3)

  Absent imputation in accordance with paragraphs (1) or (2), the payment shall be imputed, in the order indicated, to the obligation that satisfies one of the following criteria: (

  • a)

    the obligation that is due, or the first to become due; (

  • b)

    the obligation that has the least security for the creditor; (

  • c)

    the obligation that is more burdensome for the debtor; (

  • d)

    the obligation that arose first. If none of the preceding criteria apply, the payment shall be imputed to all obligations proportionally.

ARTICLE 6: 1.13 (Imputation of Payment of Non-Monetary Obligations) Article 6.1.12 shall apply, with the necessary adaptations, to the imputation of payment of non-monetary obligations.

ARTICLE 6: 1.14 (Request for Public Authorization) When the law of a State requires a public authorization that affects the validity of the contract or its performance and neither the law nor the circumstances of the case indicate otherwise: (a) if only one party has its place of business in such State, that party shall take the necessary measures to obtain the authorization; and (b) in all other cases, the party whose performance requires the authorization shall take the necessary measures to obtain it.

ARTICLE 6: 1.15 (Handling of Authorization) (1) The party obligated to take the necessary measures to obtain the authorization shall do so without unjustified delay and shall bear all expenses incurred. (2) That party shall, where relevant, notify the other party, without unjustified delay, of the grant or denial of the authorization.

ARTICLE 6: 1.16 (Authorization Neither Granted Nor Denied) (1) Either party may terminate the contract if, notwithstanding the fact that the party responsible for obtaining the authorization has taken all required measures to obtain it, the authorization is neither granted nor refused within the agreed period or, where no period has been agreed, within a reasonable period from the date of conclusion of the contract. (2) The provision in paragraph (1) shall not apply where the authorization affects only some clauses of the contract, provided that, having regard to the circumstances, it is reasonable to maintain the remainder of the contract notwithstanding the denial of the authorization.

ARTICLE 6: 1.17 (Authorization Denied) (1) Denial of an authorization that affects the validity of the contract results in its nullity. If the denial affects only the validity of some clauses, only those clauses shall be null if, having regard to the circumstances, it is reasonable to maintain the remainder of the contract. (2) The rules governing non-performance apply when the denial of an authorization makes performance of the contract impossible, in whole or in part.

ARTICLE 6: 2.1 (Binding Character of Contract) When performance of a contract becomes more burdensome for one of the parties, that party nevertheless remains obligated to perform its obligations except as provided in the following provisions concerning hardship.

ARTICLE 6: 2.2 (Definition of Hardship) There is hardship when the equilibrium of the contract is fundamentally altered by the occurrence of certain events, either because the cost of performance of one party has increased, or because the value of the performance that one party receives has diminished, and: (

• a)

  such events occur or become known to the disadvantaged party after the conclusion of the contract; (

• b)

  the events could not have been reasonably foreseen by the disadvantaged party at the time of conclusion of the contract; (

• c)

  the events are beyond the control of the disadvantaged party; and (

• d)

  the risk of such events was not assumed by the disadvantaged party.

ARTICLE 6: 2.3 (Effects of Hardship) (

• 1)

  In case of hardship, the disadvantaged party may request renegotiation of the contract. Such request shall be made without unjustified delay and shall indicate the reasons upon which it is based. (

• 2)

  A request for renegotiation does not, of itself, authorize the disadvantaged party to suspend performance. (

• 3)

  If the parties fail to reach agreement within a reasonable time, either party may resort to a tribunal. (

• 4)

  If the tribunal determines that hardship exists, and if it deems it reasonable to do so, it may: (a) terminate the contract at a date and on terms to be fixed; or (b) adapt the contract with a view to restoring its equilibrium.

ARTICLE 7: 1.1 (Definition of Non-Performance) Non-performance consists of the failure of a party to perform any of its contractual obligations, including defective performance or performance which is delayed.

ARTICLE 7: 1.2 (Interference of the Other Party) A party may not rely on the non-performance of the other party to the extent that such non-performance was caused by an act or omission of the first party or by any other event for which that party bears the risk.

ARTICLE 7: 1.3 (Suspension of Performance) (1) Where the parties are to perform simultaneously, each party may suspend the performance of its obligations until the other party tenders its performance. (2) Where the parties are to perform successively, the party that is to perform later may suspend its performance until the first party has performed.

ARTICLE 7: 1.4 (Cure of Non-Performance) (

• 1)

  The non-performing party may cure any non-performance, provided that: (

  • a)

    without unjustified delay it gives notice to the aggrieved party of the proposed manner and time of the cure; (

  • b)

    the cure is appropriate in the circumstances; (

  • c)

    the aggrieved party has no legitimate interest in rejecting the cure; and (

  • d)

    the cure is effected without delay. (

• 2)

  The notice that the contract will be terminated does not exclude the right to cure non-performance. (

• 3)

  Rights of the aggrieved party that are incompatible with the performance of the non-performing party are suspended from the time of receipt of the notice of cure until the time the cure is to be effected. (

• 4)

  The aggrieved party may suspend its own performance while the non-performing party is carrying out the cure. (

• 5)

  Notwithstanding the cure, the aggrieved party retains the right to claim damages for delay in performance and for any harm caused by or not prevented by the cure.

ARTICLE 7: 1.5 (Additional Period for Performance) (

• 1)

  In case of non-performance, the aggrieved party may by notice to the other party grant an additional period of time for performance. (

• 2)

  During the additional period the aggrieved party may suspend the performance of its own obligations and claim damages, but may not exercise any other remedy. The aggrieved party may exercise any remedy provided in this Chapter if the other party notifies it that it will not perform within the additional period or if the additional period expires without performance. (

• 3)

  Where non-performance is not essential, the aggrieved party that has given notice granting an additional period of reasonable length may terminate the contract at the end of the period. An additional period that is not of reasonable length may be extended to a reasonable length. The aggrieved party may in its notice specify that the contract will be terminated automatically unless the other party performs within the period so specified. (

• 4)

  Paragraph (3) does not apply where the non-performance is merely a minor breach of an obligation arising under the contract for the non-performing party.

ARTICLE 7: 1.6 (Exemption Clauses) A clause that limits or excludes a party's liability for non-performance or that permits it to perform a service substantially different from what the other party reasonably expects cannot be invoked if it would be manifestly unreasonable to do so, having regard to the purpose of the contract.

ARTICLE 7: 1.7 (Force Majeure) (

• 1)

  A party's non-performance is excused if that party proves that the non-performance was due to an impediment beyond its control and that, at the time of conclusion of the contract, it could not reasonably have been expected to have taken it into account, or to have avoided or overcome its consequences. (

• 2)

  Where the impediment is only temporary, the excuse has effect for a period of time that is reasonable having regard to the effect of the impediment on the performance of the contract. (

• 3)

  The non-performing party shall notify the other party of the impediment and its effect on its ability to perform. If the notification is not received by the other party within a reasonable time after the non-performing party knew or ought to have known of the impediment, the non-performing party is liable for any loss caused by such non-receipt. (

• 4)

  Nothing in this article prevents a party from exercising the right to terminate the contract, suspend performance, or claim interest on money due.

ARTICLE 7: 2.1 (Performance of Monetary Obligations) If a party that is obliged to pay money does not do so, the other party may require payment.

ARTICLE 7: 2.2 (Performance of Non-Monetary Obligations) If a party does not perform an obligation other than the obligation to pay a sum of money, the other party may require performance, unless: (

• a)

  such performance is legally or physically impossible; (

• b)

  the performance or, as the case may be, its enforcement, is unreasonably burdensome or onerous; (

• c)

  the party entitled to receive performance may reasonably obtain it by other means; (

• d)

  the performance is of an exclusive personal character; or (

• e)

  the party entitled to receive performance does not require it within a reasonable period from when it knew or ought to have known of the non-performance.

ARTICLE 7: 2.3 (Repair and Replacement of Defective Performance) The right to performance includes, where appropriate, the right to require the repair, replacement or other remedying of the defective performance. The provisions of Articles 7.2.1 and 7.2.2 shall apply as appropriate.

ARTICLE 7: 2.4 (Judicial Penalty) (1) When a court orders a party to perform, it may also order that party to pay a penalty if the order is not complied with. (2) The penalty shall be paid to the aggrieved party unless mandatory rules of the law of the forum provide otherwise. Payment of the penalty to the aggrieved party does not exclude its right to compensation for loss.

ARTICLE 7: 2.5 (Change of Remedy) (1) An aggrieved party that has required performance of a non-monetary obligation and has not obtained it within an agreed period or, failing such a period, within a reasonable period may resort to any other remedy. (2) Where it is not possible for a court to compel performance of a non-monetary obligation, the aggrieved party may resort to any other remedy.

ARTICLE 7: 3.1 (Right to Terminate the Contract) (

• 1)

  A party may terminate the contract if the failure to perform an obligation of the other party constitutes a fundamental non-performance. (

• 2)

  In determining whether the failure to perform an obligation constitutes a fundamental non-performance, regard shall be had, in particular, to whether: (

  • a)

    the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; (

  • b)

    strict compliance with the obligation that was not performed is essential to the contract; (

  • c)

    the non-performance was intentional or reckless; (

  • d)

    the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party's future performance; (

  • e)

    the termination of the contract will cause the non-performing party disproportionate loss as a result of its preparation or performance. (

• 3)

  In case of delay, the aggrieved party may also terminate the contract if the other party fails to perform before the additional period of time granted under Article 7.1.5 has expired.

ARTICLE 7: 3.2 (Notice of Termination) (1) The right of a party to terminate the contract is exercised by notice to the other party. (2) If performance has been offered late or otherwise does not conform with the contract, the aggrieved party loses the right to terminate the contract unless it gives notice of its decision to the other party within a reasonable period after it knew or ought to have known of the offer or of the non-conforming performance.

ARTICLE 7: 3.3 (Anticipatory Non-Performance) If before the date for performance it is clear that one party will commit a fundamental non-performance, the other party may terminate the contract.

ARTICLE 7: 3.4 (Adequate Assurance of Due Performance) A party that reasonably believes there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and meanwhile may suspend its own performance. If such assurance is not provided within a reasonable period, the demanding party may terminate the contract.

ARTICLE 7: 3.5 (General Effects of Termination) (

• 1)

  Termination of the contract relieves both parties of the obligation to effect and to receive future performances. (

• 2)

  Termination does not exclude any right to claim compensation for loss caused by the non-performance. (

• 3)

  Termination does not affect any provision of the contract for the settlement of disputes or any other term of the contract intended to operate even after the contract has been terminated.

ARTICLE 7: 3.6 (Restitution in Case of Contracts of Instantaneous Performance) (

• 1)

  Upon termination of a contract the performance of which has taken place at one moment, each party may require restitution of what it has supplied under the contract, provided that at the same time it returns what it has received. (

• 2)

  Where restitution in kind is not possible or appropriate, an allowance by way of money may be made, provided that this is reasonable. (

• 3)

  The party that has received performance is not obliged to make an allowance by way of money if the impossibility of restitution in kind is attributable to the other party. (

• 4)

  An allowance by way of money may be demanded for expenses reasonably necessary to preserve or maintain the benefit received.

ARTICLE 7: 3.7 (Restitution in Long-Term Contracts) (1) Upon termination of a long-term contract, restitution can be demanded only with regard to the period after termination, provided that the contract is severable. (2) Insofar as restitution is to be made, the provisions of Article 7.3.6 shall apply.

ARTICLE 7: 4.1 (Right to Compensation for Loss) Any non-performance gives the aggrieved party the right to compensation for loss, either exclusively or in conjunction with any other remedy, except as otherwise provided in these Principles.

(Full Compensation) (1) The aggrieved party has the right to full compensation of the damage caused by the non-performance. This damage comprises any loss suffered and any gain of which the aggrieved party was deprived, taking into account any gain obtained by the aggrieved party by avoiding expense or harm. (2) Such damage may be non-pecuniary and includes, for example, physical suffering and emotional distress.

(Certainty of Harm) (

• 1)

  Compensation is due only for damage, including future damage, that can be established with a reasonable degree of certainty. (

• 2)

  Compensation may be due for the loss of an expectation in proportion to the probability of its occurrence. (

• 3)

  When the amount of compensation for damages cannot be established with a sufficient degree of certainty, it remains within the discretion of the court to fix the amount of the indemnification.

(Foreseeability of Harm) The non-performing party is responsible only for such damage as is foreseeable, or that it could reasonably have foreseen, as a probable consequence of its non-performance, at the time of the conclusion of the contract.

(Proof of Harm by Substitute Transaction) Where the aggrieved party has terminated the contract and has made a substitute transaction within a reasonable time and in a reasonable manner, it may recover the difference between the contract price and the price of the substitute transaction, as well as compensation for any further harm.

(Proof of Harm by Current Price) (1) Where the aggrieved party has terminated the contract and has not made a substitute transaction, but there is a current price for the performance contracted for, it may recover the difference between the contract price and the current price at the time of termination, as well as compensation for any further harm. (2) Current price is the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at another place that appears reasonable to take as a reference.

(Harm Attributable in Part to the Aggrieved Party) Where the harm is due in part to an act or omission of the aggrieved party or to another event for which that party bears the risk, the amount of compensation shall be reduced to the extent that such factors have contributed to the harm, taking into account the conduct of each party.

(Mitigation of Harm) (1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the aggrieved party taking reasonable measures. (2) The aggrieved party is entitled to recover any reasonable expenses incurred in attempting to mitigate the harm.

(Interest for Non-Payment of Money) (

• 1)

  If a party fails to pay a sum of money when due, the aggrieved party is entitled to interest on that sum from the time when payment is due to the time of payment, whether or not the failure to pay is excusable. (

• 2)

  The rate of interest shall be the average short-term lending rate to prime customers prevailing for the currency of payment at the place where payment is to be made. Where such a rate does not exist at that place, the same rate in the State of the currency of payment shall apply. In the absence of such a rate in those places, the rate of interest shall be the rate appropriate under the law of the State of the currency of payment. (

• 3)

  The aggrieved party is entitled to additional compensation if the non-payment causes greater harm.

(Interest on Damages) Unless otherwise agreed, interest on compensation for non-performance of non-monetary obligations accrues from the time of non-performance.

(Manner of Monetary Compensation) (1) Compensation shall be paid in a lump sum. However, it may be paid in installments when the nature of the harm so requires. (2) Compensation payable in installments may be indexed.

(Currency in Which to Fix Compensation) Compensation shall be fixed, as is most appropriate, either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered.

(Stipulated Payment for Non-Performance) (1) Where the contract stipulates that the non-performing party shall pay a fixed sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum without regard to the actual harm sustained. (2) Nevertheless, notwithstanding any agreement to the contrary, the stipulated sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm caused by the non-performance and to the other circumstances.

(Conditions of Set-off) (1) Where two parties owe each other money or other performances of the same kind, either party ("the first party") may set off its obligation against that of its creditor ("the other party") if at the time of set-off: (a) the first party is entitled to perform its obligation; (b) the obligation of the other party is ascertained as to its existence and amount and performance is due. (2) If the obligations of both parties arise from the same contract, the first party may also set off its obligation against an obligation of the other party whose existence or amount is not ascertained.

(Set-off of Obligations in Different Currencies) Where the obligations are to pay money in different currencies, the right of set-off may be exercised provided that both currencies are freely convertible and the parties have not agreed that the first party may pay only in a particular currency.

(Notice of Set-off) The right of set-off is exercised by notice to the other party.

ARTICLE 8:4 (Content of Notification) (1) The notification must specify the obligations to which it refers. (2) If the notification does not specify the obligation with respect to which set-off is exercised, the other party may, within a reasonable time, declare to the other party the obligation to which the set-off refers. If such declaration is not made, the set-off shall refer to all obligations proportionally.

ARTICLE 8:5 (Effects of Set-off) (

• 1)

  Set-off extinguishes the obligations. (

• 2)

  If the obligations differ in amount, set-off extinguishes the obligations up to the amount of the obligation that is less burdensome. (

• 3)

  Set-off takes effect from the time of notification.

ARTICLE 9:1.1 (Definitions) "Assignment of receivables" is the transfer by agreement from one person (the "assignor") to another (the "assignee") of a right to payment of a sum of money or other performance owed by a third party (the "debtor"), including a transfer by way of security.

ARTICLE 9:1.2 (Exclusions) This Section does not apply to transfers subject to the special rules governing transfers: (a) of instruments such as negotiable instruments, documents of title, financial instruments, or (b) of rights included in the transfer of a business.

ARTICLE 9:1.3 (Possibility of Assigning Non-Monetary Receivables) A receivable for a non-monetary performance may be assigned only if the assignment does not make the performance substantially more burdensome.

ARTICLE 9:1.4 (Partial Assignment) (1) A receivable for payment of a sum of money may be assigned in part. (2) A receivable for a non-monetary performance may be assigned in part only if it is divisible and if the assignment does not make the performance substantially more burdensome.

ARTICLE 9:1.5 (Assignment of Future Receivables) A future receivable is considered assigned at the moment the agreement is concluded, provided that when such receivable comes into existence it can be identified as the one to which the assignment refers.

ARTICLE 9:1.6 (Assignment of Receivables Without Individual Specification) Multiple receivables may be assigned without being individually identified, provided that such receivables, at the time of assignment or when they come into existence, can be identified as those to which the assignment refers.

ARTICLE 9:1.7 (Sufficiency of Agreement Between Assignor and Assignee) (1) A receivable is assigned by mere agreement between the assignor and the assignee, without notification to the debtor. (2) The consent of the debtor is not required unless the obligation, according to the circumstances, is of an essentially personal character.

ARTICLE 9:1.8 (Additional Costs for the Debtor) The debtor is entitled to be indemnified by the assignor or the assignee for all additional costs caused by the assignment.

ARTICLE 9:1.9 (Clauses Prohibiting Assignment) (1) The assignment of a right to payment of a sum of money takes effect notwithstanding an agreement between assignor and debtor limiting or prohibiting such assignment. However, the assignor may be liable to the debtor for breach of contract. (2) The assignment of a right to another performance shall not take effect if it violates an agreement between the assignor and the debtor that limits or prohibits the assignment. Nevertheless, the assignment takes effect if the assignee, at the time of assignment, neither knew nor should have known of such agreement. In this case, the assignor may be liable to the debtor for breach of contract.

ARTICLE 9:1.10 (Notification to the Debtor) (1) The debtor is released by paying the assignor so long as the debtor has not received notification of the assignment from the assignor or the assignee. (2) After the debtor receives such notification, the debtor is released only by paying the assignee.

ARTICLE 9:1.11 (Successive Assignments) If the same receivable has been assigned by the assignor to two or more successive assignees, the debtor is released by paying in accordance with the order in which the notifications were received.

ARTICLE 9:1.12 (Adequate Proof of Assignment) (

• 1)

  If notification of the assignment is given by the assignee, the debtor may request the assignee to provide, within a reasonable time, adequate proof that the assignment has taken place. (

• 2)

  The debtor may suspend payment until adequate proof is provided. (

• 3)

  The notification does not take effect unless adequate proof of the assignment is provided. (

• 4)

  Adequate proof of the assignment includes, but is not limited to, any writing emanating from the assignor indicating that the assignment has taken place.

ARTICLE 9:1.13 (Exceptions and Rights of Set-off) (1) The debtor may assert against the assignee all exceptions which the debtor could assert against the assignor. (2) The debtor may exercise against the assignee any right of set-off available against the assignor until the moment the debtor has received notification of the assignment.

(Rights relating to assigned credit) The assignment of a credit transfers to the assignee: (a) all rights of the assignor to payment or other performance provided for by the contract in relation to the assigned credit, and (b) all rights that secure performance of the assigned credit.

(Obligations of the assignor) The assignor warrants to the assignee, except as otherwise disclosed to the assignee, that: (

• a)

  the assigned credit exists at the time of assignment, unless the credit is a future right; (

• b)

  the assignor is authorized to assign the credit; (

• c)

  the credit has not been previously assigned to another assignee and is free from any right or claim of a third party; (

• d)

  the debtor has no defense whatsoever; (

• e)

  neither the debtor nor the assignor have notified the existence of any set-off with respect to the assigned credit and will not give such notice; (

• f)

  the assignor shall reimburse the assignee for any payment received from the debtor before notice of the assignment is given.

(Modes of transfer) An obligation to pay money or to perform another obligation may be transferred from one person (the "original debtor") to another (the "new debtor") either: (a) by an agreement between the original debtor and the new debtor, in accordance with Article 9.2.3, or (b) by an agreement between the creditor and the new debtor, by which the new debtor assumes the obligation.

(Exclusion) This Section does not apply to transfers of obligations subject to special rules that regulate transfers of obligations in the course of the transfer of an enterprise.

(Requirement of creditor's consent for transfer) The transfer of obligations by an agreement between the original debtor and the new debtor requires the consent of the creditor.

(Advance consent of the creditor) (1) The creditor may give its consent in advance. (2) If the creditor has given its consent in advance, the transfer of the obligation becomes effective when notice of the transfer is given to the creditor or when the creditor acknowledges it.

(Release of the original debtor) (

• 1)

  The creditor may release the original debtor. (

• 2)

  The creditor may also retain the original debtor as a debtor in the event that the new debtor does not perform adequately. (

• 3)

  In any other case, the original debtor and the new debtor are liable jointly and severally.

(Performance by a third party) (1) Without the consent of the creditor, the debtor may agree with another person that such person will perform the obligation in place of the debtor, unless the obligation, according to the circumstances, has an essentially personal character. (2) The creditor retains its remedy against the debtor.

(Exceptions and set-off rights) (1) The new debtor may assert against the creditor all exceptions that the original debtor could assert against the creditor. (2) The new debtor may not exercise against the creditor any right of set-off available to the original debtor against the creditor.

(Rights relating to the transferred obligation) (

• 1)

  The creditor may assert against the new debtor, with respect to the transferred obligation, all its rights to payment or other performance under the contract. (

• 2)

  If the original debtor is released pursuant to Article 9.2.5(1), any security provided for performance of the obligation by any other person than the new debtor is also released, unless that other person agrees that the security will remain available to the creditor. (

• 3)

  The release of the original debtor also extends to any security of the original debtor given to the creditor to secure performance of the obligation, unless the security is over an asset that is transferred as part of a transaction between the original debtor and the new debtor.

(Definitions) "Assignment of contract" is the transfer by an agreement of a person (the "assignor") to another (the "assignee") of the rights and obligations of the assignor arising from a contract with another person (the "other party").

(Exclusion) This Section does not apply to assignments of contracts subject to special rules that regulate assignments of contracts in the course of the transfer of an enterprise.

(Requirement of consent of the other party) The assignment of a contract requires the consent of the other party.

(Advance consent of the other party) (1) The other party may give its consent in advance. (2) If the other party has given its consent in advance, the assignment of the contract becomes effective when notice of the assignment is given to the other party or when the other party acknowledges it.

(Release of the assignor) (

• 1)

  The other party may release the assignor. (

• 2)

  The other party may also retain the assignor as a debtor in the event that the assignee does not perform adequately. (

• 3)

  In any other case, the assignor and the assignee are liable jointly and severally.

(1) To the extent that an assignment of a contract involves an assignment of credits, Article 9.1.13 shall apply. (2) To the extent that an assignment of a contract involves a transfer of obligations, Article 9.2.7 shall apply.

(1) To the extent that an assignment of a contract involves an assignment of credits, Article 9.1.14 shall apply. (2) To the extent that an assignment of a contract involves a transfer of obligations, Article 9.2.8 shall apply.

(1) The exercise of rights regulated by these Principles is limited by the expiration of a period of time, called the "prescription period", in accordance with the rules of this Chapter. (2) This Chapter does not regulate the time within which, in accordance with these Principles, a party is required, as a condition for the acquisition or exercise of its right, to effect a notification to the other party or to perform an act other than the initiation of legal proceedings.

(1) The ordinary prescription period is three years, which commences on the day following the day on which the creditor knew or ought to have known the facts as a result of which the creditor's right may be exercised. (2) In any case, the maximum prescription period is ten years, which commences on the day following the day on which the right could be exercised.

(1) The parties may modify the prescription periods. (2) However, they may not: (

• a)

  shorten the ordinary prescription period to less than one year; (

• b)

  shorten the maximum prescription period to less than four years; (

• c)

  extend the maximum prescription period to more than fifteen years.

(1) When the debtor acknowledges the right of the creditor before the expiration of the ordinary prescription period, a new ordinary prescription period commences on the day following the acknowledgement. (2) The maximum prescription period does not recommence, but may be exceeded by the commencement of a new ordinary prescription period in accordance with Article 10.2(1).

(1) The running of the prescription period is suspended: (

• a)

  when, upon the initiation of judicial proceedings, or in judicial proceedings already initiated, the creditor performs any act that is recognized by the law of the forum as exercise of the creditor's right against the debtor; (

• b)

  in case of the debtor's insolvency, when the creditor exercises its rights in insolvency proceedings; or (

• c)

  in case of proceedings to dissolve the debtor entity, when the creditor exercises its rights in dissolution proceedings. (2) The suspension lasts until a final judgment has been rendered or until the proceedings conclude in another manner.

(1) The running of the prescription period is suspended when, upon the initiation of arbitral proceedings, or in arbitral proceedings already initiated, the creditor performs any act that is recognized by the law of the arbitral tribunal as exercise of the creditor's right against the debtor. In the absence of provisions in the arbitration rules or of other rules determining the exact date of commencement of the arbitral proceedings, such proceedings are deemed to have commenced on the day on which the debtor receives a request that the right in dispute be adjudicated. (2) The suspension lasts until a binding decision has been rendered or until the proceedings conclude in another manner.

The provisions of Articles 10.5 and 10.6 apply, with appropriate modifications, to other proceedings by which the parties request that a third party assist them in the attempt to achieve an amicable resolution of their disputes.

(1) When the creditor has been unable to stop the running of the prescription period in accordance with the preceding Articles due to an impediment beyond its control and that it could neither avoid nor overcome, the ordinary prescription period is suspended so that it does not expire before one year after the impediment has ceased to exist. (2) When the impediment consists of the incapacity or death of the creditor or debtor, the suspension ceases when a representative is designated for the incapacitated person, the deceased, or their estate, or when a successor has inherited the share due to such successor. In this case the supplementary period of one year applies, in accordance with paragraph (1).

(

• 1)

  The expiration of the prescription period does not extinguish the right. (

• 2)

  For the expiration of the prescription period to have effect, the debtor must invoke it by way of exception. (

• 3)

  The existence of a right may always be invoked by way of exception notwithstanding the invocation of the expiration of the prescription period for the exercise of that right.

The creditor may exercise the right of set-off so long as the debtor has not objected to the expiration of the prescription period.

When performance has been made in fulfillment of the obligation, there is no right to restitution by the mere fact of the expiration of the prescription period.

When several debtors are bound to one creditor for the same obligation: (a) the obligations are joint and several if each debtor is liable for the whole; (b) the obligations are separate if each debtor is liable only for its part.

Joint and several liability is presumed when several debtors are bound to one creditor for the same obligation, unless the circumstances indicate otherwise.

ARTICLE 11: 1.3 (Rights of the creditor against joint debtors) When debtors are obligated jointly and severally, the creditor may claim performance from any of them until obtaining full performance.

ARTICLE 11: 1.4 (Exceptions and set-off) The joint and several debtor against whom the creditor exercises an action may raise all exceptions and rights of set-off that are personal to him or that are common to all co-debtors, but may not raise exceptions or rights of set-off that are personal to one or several of the other co-debtors.

ARTICLE 11: 1.5 (Effects of performance or set-off) If a joint and several debtor performs or set-offs the obligation, or if the creditor exercises set-off against a joint and several debtor, the other co-debtors are released from the creditor to the extent of the performance or set-off.

ARTICLE 11: 1.6 (Effects of release or settlement) (1) The release of the debt with respect to a joint and several debtor, or settlement with a joint and several debtor, releases the other debtors from the share of that debtor, unless circumstances indicate otherwise. (2) Once the other debtors are released from the share of that debtor, they may not exercise against the latter the right of recourse provided in Article 11.1.10.

ARTICLE 11: 1.7 (Effects of expiration or suspension of the limitation period) (1) The expiration of the limitation period of the creditor's rights against a joint and several debtor does not affect: (a) The obligations of the other joint and several debtors towards the creditor; nor (b) The rights of recourse among the joint and several debtors provided in Article 11.1.10. (2) If the creditor initiates against a joint and several debtor one of the proceedings provided in Articles 10.5, 10.6 or 10.7, the course of the limitation period is also suspended with respect to the other joint and several debtors.

ARTICLE 11: 1.8 (Effects of judgments) (1) A decision of a court regarding the liability of a joint and several debtor towards the creditor does not affect: (a) The obligations of the other joint and several debtors towards the creditor; nor (b) The rights of recourse among the joint and several debtors provided in Article 11.1.10. (2) However, the other joint and several debtors may also invoke such decision, unless it is based on personal grounds of that debtor. In such case, the rights of recourse among the joint and several debtors provided in Article 11.1.10 are affected to the extent relevant.

ARTICLE 11: 1.9 (Apportionment among joint and several debtors) The joint and several debtors are obligated to each other in equal shares, unless circumstances indicate otherwise.

ARTICLE 11: 1.10 (Scope of the right of recourse) The joint and several debtor who paid more than his share may claim the difference from any other joint and several debtor up to the share not performed by each of them.

ARTICLE 11: 1.11 (Rights of the creditor) (1) The joint and several debtor to whom Article 11.1.10 applies may likewise exercise the rights of the creditor, including those securing performance, in order to recover the difference from the other joint and several debtors up to the share not performed by each of them. (2) The creditor who has not received full performance retains his rights against the co-debtors, to the extent of non-performance, with priority over the co-debtors exercising rights of recourse.

ARTICLE 11: 1.12 (Exceptions in actions for recourse) The joint and several debtor against whom a co-debtor who has performed the obligation exercises an action for recourse: (

• a)

  may raise all exceptions and rights of set-off that could have been invoked or exercised by the co-debtor against the creditor; (

• b)

  may raise all exceptions that are personal to him; (

• c)

  may not raise exceptions or rights of set-off that are personal to one or several of the other co-debtors.

ARTICLE 11: 1.13 (Impossibility of recovery) When a joint and several debtor who paid more than his share despite having made all reasonable efforts cannot recover the contribution of another joint and several debtor, the share of the other debtors, including that of the debtor who has paid, shall increase proportionally. SECTION 2: PLURALITY OF CREDITORS

ARTICLE 11: 2.1 (Definitions) When several creditors may demand from a debtor the performance of the same obligation: (

• a)

  the credits are separate if each creditor may demand only his share; (

• b)

  the credits are joint and several if each creditor may demand the whole of the performance; (

• c)

  the credits are joint if all creditors must demand the performance jointly.

ARTICLE 11: 2.2 (Effects of joint and several credits) Full performance in favor of one of the joint and several creditors releases the debtor towards the other creditors.

ARTICLE 11: 2.3 (Exceptions against joint and several creditors) (1) The debtor may raise against any joint and several creditor all exceptions and rights of set-off that are personal to him in his relationship with that creditor or that he may raise against all creditors, but may not raise exceptions or rights of set-off that are personal to him in his relationship with one or several of the other creditors. (2) The provisions of Articles 11.1.5, 11.1.6, 11.1.7 and 11.1.8 apply to joint and several creditors, with the necessary adaptations.