| Principles of International Commercial Contracts
Rome 1994
International Institute for the Unification of Private Law(UNIDROIT)
INTRODUCTION
Efforts towards the international unification of law have hitherto essentially taken the form of binding instruments, such as supranational legislation or international conventions, or of model laws. Since these instruments often risk remaining little more than a dead letter and tend to be rather fragmentary in character, calls are increasingly being made for recourse to non-legislative means of unification or harmonization of law.
Some of those calls are for the further development of what is termed "international commercial custom", for example through model clauses and contracts formulated by the interested business circles on the basis of current trade practices and relating to specific types of transactions or particular aspects thereof.
Others go even further and advocate the elaboration of an international restatement of general principles of contract law.
UNIDROIT's initiative for the elaboration of "Principles of International Commercial Contracts" goes in that direction.
It was as long ago as 1971 that the Governing Council decided to include this subject in the Work Programme of the Institute. A small Steering Committee, composed of Professors Rene David, Clive M. Schmitthoff and Tudor Popescu, representing the civil law, the common law and the socialist systems, was set up with the task of conducting preliminary inquiries into the feasibility of such a project.
It was not until 1980, however, that a special Working Group was constituted for the purpose of preparing the various draft chapters of the Principles. The Group, which included representatives of all the major legal systems of the world, was composed of leading experts in the field of contract law and international trade law. Most of them were academics, some high ranking judges or civil servants, who all sat in a personal capacity.
The Group appointed from among its members Rapporteurs for the different chapters of the Principles, who were entrusted with the task of submitting successive drafts together with Comments. These were then discussed by the Group and circulated to a wide range of experts, including UNIDROIT's extensive network of correspondents. In addition, the Governing Council offered its advice on the policy to be followed, especially in those cases where the Group had found it difficult to reach a consensus. The necessary editorial work was entrusted to an Editorial Committee, assisted by the Secretariat.
For the most part the UNIDROIT Principles reflect concepts to be found in many, if not all, legal systems. Since however the Principles are intended to provide a system of rules especially tailored to the needs of international commercial transactions, they also embody what are perceived to be the best solutions, even if still not yet generally adopted.
The objective of the UNIDROIT Principles is to establish a balanced set of rules designed for use throughout the world irrespective of the legal traditions and the economic and political conditions of the countries in which they are to be applied. This goal is reflected both in their formal presentation and in the general policy underlying them.
As to their formal presentation, the UNIDROIT Principles deliberately seek to avoid the use of terminology peculiar to any given legal system. The international character of the Principles is also stressed by the fact that the comments accompanying each single provision systematically refrain from referring to national laws in order to explain the origin and rationale of the solution retained. Only where the rule has been taken over more or less literally from the world wide accepted United Nations Convention on Contracts for the International Sale of Goods (CISG) is explicit reference made to its source.
With regard to substance, the UNIDROIT Principles are sufficiently flexible to take account of the constantly changing circumstances brought about by the technological and economic developments affecting cross-border trade practice. At the same time they attempt to ensure fairness in international commercial relations by expressly stating the general duty of the parties to act in accordance with good faith and fair dealing and, in a number of specific instances, imposing standards of reasonable behaviour.
Naturally, to the extent that the UNIDROIT Principles address issues also covered by CISG, they follow the solutions found in thatConvention, with such adaptations as were considered appropriate to reflect the particular nature and scope of the Principles(*).
Note: (*) See especially Arts. 1.8, 1.9, 2.2, in conjunction with 5.7 and 7.2.2.
In offering the UNIDROIT Principles to the international legal and business communities, the Governing Council is fully conscious of the fact that the Principles, which do not involve the endorsement of Governments, are not a binding instrument and that in consequence their acceptance will depend upon their persuasive authority. There are a number of significant ways in which the UNIDROIT Principles may find practical application, the most important of which are amply explained in the Preamble.
The Governing Council is confident that those to whom the UNIDROIT Principles are addressed will appreciate their intrinsic merits and derive full advantage from their use.
THE GOVERNING COUNCIL OF UNIDROIT
Rome, May 1994
PREAMBLE
(Purpose of the Principles)
These Principles set forth general rules for international commercial contracts.
They shall be applied when the parties have agreed that their contract be governed by them.
They may be applied when the parties have agreed that their contract be governed by "general principles of law", the "lex mercatoria" or the like.
They may provide a solution to an issue raised when it proves impossible to establish the relevant rule of the applicable law.
They may be used to interpret or supplement international uniform law instruments.
They may serve as a model for national and international legislators.
COMMENT
The Principles set forth general rules which are basically conceived for "international commercial contracts".
1. "International" contracts
The international character of a contract may be defined in a great variety of ways. The solutions adopted in both national and international legislation range from a reference to the place of business or habitual residence of the parties in different countries to the adoption of more general criteria such as the contract having "significant connections with more than one State", "involving a choice between the laws of different States", or "affecting the interests of international trade".
The Principles do not expressly lay down any of these criteria. The assumption, however, is that the concept of "international" contracts should be given the broadest possible interpretation, so as ultimately to exclude only those situations where no international element at allies involved, i.e. where all the relevant elements of the contract in question are connected with one country only.
2. "Commercial" contracts
The restriction to "commercial" contracts is in no way intended to take over the distinction traditionally made in some legal systems between "civil" and "commercial" parties and/or transactions, i.e. to make the application of the Principles dependent on whether the parties have the formal status of "merchants" (commercants, Kaufleute) and/or the transaction is commercial in nature. The idea is rather that of excluding from the scope of the Principles so-called "consumer transactions" which are within the various legal systems being increasingly subjected to special rules, mostly of a mandatory character, aimed at protecting the consumer, i.e. a party who enters into the contract otherwise than in the course of its trade or profession.
The criteria adopted at both national and international level also vary with respect to the distinction between consumer and non-consumer contracts. The Principles do not provide any express definition, but the assumption is that the concept of "commercial" contracts should be understood in the broadest possible sense, so as to include not only trade transactions for the supply or exchange of goods or services, but also other types of economic transactions, such as investment and/or concession agreements, contracts for professional services, etc.
3. The Principles and domestic contracts between private persons
Notwithstanding the fact that the Principles are conceived for international commercial contracts, there is nothing to prevent private persons from agreeing to apply the Principles to a purely domestic contract. Any such agreement would however be subject to the mandatory rules of the domestic law governing the contract.
4. The Principles as rules of law governing the contract
a. Express choice by the parties
As the Principles represent a system of rules of contract law which are common to existing national legal systems or best adapted to the special requirements of international commercial transactions, there might be good reasons for the parties to choose them expressly as the rules applicable to their contract, in the place of one or another particular domestic law.
Parties who wish to adopt the Principles as the rules applicable to their contract would however be well advised to combine the reference to the Principles with an arbitration agreement.
The reason for this is that the freedom of choice of the parties in designating the law governing their contract is traditionally limited to national laws. Therefore, a reference by the parties to the Principles will normally be considered to be a mere agreement to incorporate them in the contract, while the law governing the contract will still have to be determined on the basis of the private international law rules of the forum. As a result, the Principles will bind the parties only to the extent that they do not affect the rules of the applicable law from which the parties may not derogate.
The situation may be different if the parties agree to submit disputes arising from their contract to arbitration. Arbitrators are not necessarily bound by a particular domestic law. This is self-evident if they are authorised by the parties to act as amiable compositeurs or ex aequo et bono. But even in the absence of such an authorisation there is a growing tendency to permit the parties to choose "rules of law" other than national laws on which the arbitrators are to base their decisions. See in particular Art. 28(1) of the 1985 UNCITRAL Model Law on International Commercial Arbitration; see also Art. 42(1) of the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention).
In line with this approach, the parties would be free to choose the Principles as the "rules of law" according to which the arbitrators would decide the dispute, with the result that the Principles would apply to the exclusion of any particular national law, subject only to the application of those rules of domestic law which are mandatory irrespective of which law governs the contract (see Art. 1.4).
In disputes falling under the ICSID Convention, the Principles might even be applicable to the exclusion of any domestic rule of law.
B. The Principles applied as lex mercatoria
Parties to international commercial contracts who cannot agree on the choice of a particular domestic law as the law applicable to their contract sometimes provide that it shall be governed by the "general principles of law", by the "usages and customs of international trade", by the lex mercatoria, etc.
Hitherto, such reference by the parties to not better identified principles and rules of a supranational or transnational character has been criticized, among other grounds, because of the extreme vagueness of such concepts. In order to avoid, or at least considerably to reduce, the uncertainty accompanying the use of such vague concepts for the determination of their content, it might be advisable to have recourse to a systematic and well-defined set of rules such as the Principles.
5. The Principles as a substitute for the domestic law otherwise applicable
The Principles may however become relevant even where the contract is governed by a particular domestic law. This is the case whenever it proves extremely difficult if not impossible to establish the relevant rule of that particular domestic law with respect to a specific issue and a solution can be found in the Principles. The reasons for such a difficulty generally lie in the special character of the legal sources and/or the cost of access to them.
Recourse to the Principles as a substitute for the domestic law otherwise applicable is of course to be seen as a last resort; on the other hand it may be justified not only in the event of the absolute impossibility of establishing the relevant rule of the applicable law, but also whenever the research involved would entail disproportionate efforts and/or costs. The current practice of courts in such situations is that of applying the lex fori. Recourse to the Principles would have the advantage of avoiding the application of a law which will in most cases be more familiar to one of the parties.
6. The Principles as a means of interpreting and supplementing existing international instruments
Any legislation, whether of international or national origin, raises questions concerning the precise meaning of its individual provisions. Moreover, such legislation is by its very nature unable to anticipate all the problems to which it will be applied. When applying domestic statutes it is possible to rely on long established principles and criteria of interpretation to be found within each legal system. The situation is far more uncertain with respect to instruments which, although formally incorporated into the various national legal systems, have been prepared and agreed upon at international level.
According to the traditional view recourse should, even in such cases, be had to the principles and criteria provided in domestic law, be it the law of the forum or that which would, according to the relevant rules of private international law, be applicable in the absence of the uniform law.
At present, both courts and arbitral tribunals tend more and more to abandon such a "conflictual" method and seek instead to interpret and supplement international instruments by reference to autonomous and internationally uniform principles. This approach, which has indeed been expressly sanctioned in the most recent conventions (see, e.g., Art. 7 of the 1980 UN Convention on Contracts for the International Sale of Goods (CISG)), is based on the assumption that uniform law, even after its incorporation into the various national legal systems, only formally becomes an integrated part of the latter, whereas from a substantive point of view it does not lose its original character of a special body of law autonomously developed at international level and intended to be applied in a uniform manner throughout the world.
Until now, such autonomous principles and criteria for the interpretation and supplementing of international instruments have had to be found in each single case by the judges and arbitrators themselves on the basis of a comparative survey of the solutions adopted in the different national legal systems. The Principles could considerably facilitate their task in this respect.
7. The Principles as a model for national and international legislators
In view of their intrinsic merits the Principles may in addition serve as a model to national and international law-makers for the drafting of legislation in the field of general contract law or with respect to special types of transactions. At a national level, the Principles may be particularly useful to those countries which lack a developed body of legal rules relating to contracts and which intend to update their law, at least with respect to foreign economic relationships, to current international standards. Not too different is the situation of those countries with a well-defined legal system, but which after the recent dramatic changes in their socio-political structure have an urgent need to rewrite their laws, in particular those relating to economic and business activities
At an international level the Principles could become an important term of reference for the drafting of conventions and model laws.
So far the terminology used to express the same concept differs considerably from one instrument to another, with the obvious risk of misunderstandings and misinterpretations. Such inconsistencies could be avoided if the terminology of the Principles were to be adopted as an international uniform glossary.
CHAPTER 1 - GENERAL PROVISIONS
ARTICLE 1.1 (Freedom of contract)
The parties are free to enter into a contract and to determine its content.
ARTICLE 1.2 (No form required)
Nothing in these Principles requires a contract to be concluded in or evidenced by writing. It may be proved by any means, including witnesses.
ARTICLE 1.3 (Binding character of contract)
A contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in these Principles.
ARTICLE 1.4(Mandatory rules)
Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law.
ARTICLE 1.5(Exclusion or modification by the parties)
The parties may exclude the application of these Principles or derogate from or vary the effect of any of their provisions, except as otherwise provided in the Principles.
ARTICLE 1.6(Interpretation and supplementation of the Principles)
(1) In the interpretation of these Principles, regard is to be had to their international character and to their purposes including the need to promote uniformity in their application.
(2) Issues within the scope of these Principles but not expressly settled by them are as far as possible to be settled in accordance with their underlying general principles.
ARTICLE 1.7(Good faith and fair dealing)
(1) Each party must 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(Usages and practices)
(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.
(2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable.
ARTICLE 1.9(Notice)
(1) Where notice is required it may be given by any means appropriate to the circumstances.
(2) A notice is effective when it reaches the person to whom it is given.
(3) For the purpose of paragraph (2) a notice "reaches" a person when given to that person orally or delivered at that person's place of business or mailing address.
(4) For the purpose of this article "notice" includes a declaration, demand, request or any other communication of intention.
ARTICLE 1.10(Definitions)
In these Principles
- "court" includes an arbitral tribunal;
- where a party has more than one place of business the relevant "place of business" is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract;
- "obligor" refers to the party who is to perform an obligation and "obligee" refers to the party who is entitled to performance of that obligation.
- "writing" means any mode of communication that preserves a record of the information contained therein and is capable of being reproduced in tangible form.
CHAPTER 2 – FORMATION
ARTICLE 2.1(Manner of formation)
A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement.
ARTICLE 2.2(Definition of 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 2.3(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.
ARTICLE 2.4(Revocation of offer)
(1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before it has dispatched an acceptance.
(2) However, an offer cannot be revoked
(a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or
(b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.
ARTICLE 2.5(Rejection of offer)
An offer is terminated when a rejection reaches the offeror.
ARTICLE 2.6(Mode of acceptance)
(1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.
(2) An acceptance of an offer becomes effective when the indication of assent reaches the offeror.
(3) However, if, by virtue of the offer or as a result 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, the acceptance is effective when the act is performed.
ARTICLE 2.7(Time of acceptance)
An offer must be accepted within the time the offeror has fixed or, if no time is fixed, within a reasonable time having regard to the circumstances, 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 2.8(Acceptance within a fixed period of time)
(1) A period of time for acceptance fixed by the offeror in a telegram or a letter begins to run from the moment the telegram is handed in for dispatch or from the date shown on the letter or, if no such date is shown, from the date shown on the envelope. A period of time for acceptance fixed by the offeror by means of instantaneous communication begins to run from the moment that the offer reaches the offeree.
(2) Official holidays or non-business days occurring during the period for acceptance are included in calculating the period. However, if a notice of acceptance cannot be delivered at the address of the offeror on the last day of the period because that day falls on an official holiday or a non-business day at the place of business of the offeror, the period is extended until the first business day which follows.
ARTICLE 2.9(Late acceptance. Delay in transmission)
(1) A late acceptance is nevertheless effective as an acceptance if without undue delay the offeror so informs the offeree or gives notice to that effect.
(2) If a letter or other writing 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, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that it considers the offer as having lapsed.
ARTICLE 2.10(Withdrawal of acceptance)
An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective.
ARTICLE 2.11(Modified acceptance)
(1) A reply 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 reply 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 2.12(Writings in confirmation)
If a writing which is sent within a reasonable time after the 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 contract or the recipient, without undue delay, objects to the discrepancy.
ARTICLE 2.13(Conclusion of contract dependent on agreement on specific matters or in a specific 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 specific form, no contract is concluded before agreement is reached on those matters or in that form.
ARTICLE 2.14(Contract with terms deliberately left open)
(1) If the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence.
(2) The existence of the contract is not affected by the fact that subsequently
(a) the parties reach no agreement on the term; or
(b) the third person does not determine the term, provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties.
ARTICLE 2.15(Negotiations in bad faith)
(1) A party is free to negotiate and is not liable for failure to reach an 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) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.
ARTICLE 2.16(Duty of confidentiality)
Where information is given as confidential by one party in the course of negotiations, the other party is under a duty not a disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party.
ARTICLE 2.17(Merger clauses)
A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing.
ARTICLE 2.18(Written modification clauses)
A contract in writing which contains a clause requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has acted in reliance on that conduct.
ARTICLE 2.19(Contracting under standard terms)
(1) Where one party or both parties use standard terms in concluding a contract, the general rules on formation apply, subject to Articles 2.20 -2.22.
(2) Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party.
ARTICLE 2.20(Surprising terms)
(1) No term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party.
(2) In determining whether a term is of such a character regard is to be had to its content, language and presentation.
ARTICLE 2.21(Conflict between standard terms and non-standard terms)
In case of conflict between a standard term and a term which is not a standard term the latter prevails.
ARTICLE 2.22(Battle of forms)
Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.
CHAPTER 3 – VALIDITY
ARTICLE 3.1(Matters not covered)
These Principles do not deal with invalidity arising from
(a) lack of capacity;
(b) lack of authority;
(c) immorality or illegality.
ARTICLE 3.2(Validity of mere agreement)
A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement.
ARTICLE 3.3(Initial impossibility)
(1) The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract.
(2) The mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract.
ARTICLE 3.4(Definition of mistake)
Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded.
ARTICLE 3.5(Relevant mistake)
(1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and
(a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistakenparty in error; or
(b) the other party had not at the time of avoidance acted in reliance on the contract.
(2) However, a party may not avoid the contract if
(a) it was grossly negligent in committing the mistake; or
(b) the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party.
ARTICLE 3.6(Error in expression or transmission)
An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated.
ARTICLE 3.7(Remedies for non-performance)
A party is not entitled to avoid the contract on the ground of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance.
ARTICLE 3.8(Fraud)
A party may avoid the contract when it has been led to conclude the contract by the other party's fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed.
ARTICLE 3.9(Threat)
A party may avoid the contract when it has been led to conclude the contract by the other party's unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract.
ARTICLE 3.10(Gross disparity)
(1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to
(a) the fact that the other party has taken unfair advantage of the first party's dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and
(b) the nature and purpose of the contract.
(2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing.
(3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has acted in reliance on it. The provisions of Article 3.13(2) apply accordingly.
ARTICLE 3.11(Third persons)
(1) Where fraud, threat, gross disparity or a party's mistake is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behaviour or knowledge had been that of the party itself.
(2) Where fraud, threat or gross disparity is imputable to a third person for whose acts the other party is not responsible, the contract may be avoided if that party knew or ought to have known of the fraud, threat or disparity, or has not at the time of avoidance acted in reliance on the contract.
ARTICLE 3.12(Confirmation)
If the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded.
ARTICLE 3.13(Loss of right to avoid)
(1) If a party is entitled to avoid the contract for mistake but the other party declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance, the contract is considered to have been concluded as the latter party understood it. The other party must make such a declaration or render such performance promptly after having been informed of the manner in which the party entitled to avoidance had understood the contract and before that party has acted in reliance on a notice of avoidance.
(2) After such a declaration or performance the right to avoidance is lost and any earlier notice of avoidance is ineffective.
ARTICLE 3.14(Notice of avoidance)
The right of a party to avoid the contract is exercised by notice to the other party
ARTICLE 3.15(Time limits)
(1) Notice of avoidance shall be given within a reasonable time, having regard to the circumstances, after the avoiding party knew or could not have been unaware of the relevant facts or became capable of acting freely.
(2) Where an individual term of the contract may be avoided by a party under Article 3.10, the period of time for giving notice of avoidance begins to run when that term is asserted by the other party.
ARTICLE 3.16(Partial avoidance)
Where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract.
ARTICLE 3.17(Retroactive effect of avoidance)
(1) Avoidance takes effect retroactively.
(2) On avoidance either party may claim restitution of whatever it has supplied under the contract or the part of it avoided, provided that it concurrently makes restitution of whatever it has received under the contract or the part of it avoided or, if it cannot make restitution in kind, it makes an allowance for what it has received.
ARTICLE 3.18(Damages)
Irrespective of whether or not the contract has been avoided, the party who knew or ought to have known of the ground for avoidance is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract.
ARTICLE 3.19(Mandatory character of the provisions)
The provisions of this Chapter are mandatory, except insofar as they relate to the binding force of mere agreement, initial impossibility or mistake.
ARTICLE 3.20(Unilateral declarations)
The provisions of this Chapter apply with appropriate adaptations to any communication of intention addressed by one party to the other. CHAPTER 4 – INTERPRETATION
ARTICLE 4.1(Intention of the parties)
(1) A contract shall be interpreted according to the common intention of the parties.
(2) If such an 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.
ARTICLE 4.2(Interpretation of statements and other conduct)
(1) The statements and other 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 is not applicable, such statements and other 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.
ARTICLE 4.3(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;
(f) usages.
ARTICLE 4.4(Reference to contract or statement as a whole)
Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.
ARTICLE 4.5(All terms to be given effect)
Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect.
ARTICLE 4.6(Contra proferentem rule)
If contract terms supplied by one party are unclear, an interpretation against that party is preferred.
ARTICLE 4.7(Linguistic discrepancies)
Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up.
ARTICLE 4.8(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 an appropriate term 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.
CHAPTER 5 – CONTENT
ARTICLE 5.1(Express and implied obligations)
The contractual obligations of the parties may be express or implied.
ARTICLE 5.2(Implied obligations)
Implied obligations stem from
(a) the nature and purpose of the contract;
(b) practices established between the parties and usages;
(c) good faith and fair dealing;
(d) reasonableness.
ARTICLE 5.3(Co-operation between the parties)
Each party shall co-operate with the other party when such co-operation may reasonably be expected for the performance of that party's obligations.
ARTICLE 5.4(Duty to achieve a specific result Duty of best efforts)
(1) To the extent that an obligation of a party involves a duty to achieve a specific result, that party is bound to achieve that result.
(2) To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances.
ARTICLE 5.5(Determination of kind of duty involved)
In determining the extent to which an obligation of a party involves a duty of best efforts in the performance of an activity or a duty to achieve a specific result, regard shall be had, among other factors, to
(a) the way in which the obligation is expressed in the contract;
(b) the contractual price and other terms of the contract;
(c) the degree of risk normally involved in achieving the expected result;
(d) the ability of the other party to influence the performance of the obligation.
ARTICLE 5.6(Determination of quality of performance)
Where the quality of performance is neither fixed by, nor determinable from, the contract a party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances.
ARTICLE 5.7(Price determination)
(1) Where a contract does not fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, to a reasonable price.
(2) Where the price is to be determined by one party and that determination is manifestly unreasonable, a reasonable price shall be substituted notwithstanding any contract term to the contrary.
(3) Where the price is to be fixed by a third person, and that person cannot or will not do so, the price 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, the nearest equivalent factor shall be treated as a substitute.
ARTICLE 5.8(Contract for an indefinite period)
A contract for an indefinite period may be ended by either party by giving notice a reasonable time in advance.
CHAPTER 6 - PERFORMANCE
SECTION 1: PERFORMANCE IN GENERAL
ARTICLE 6.1.1(Time of performance)
A party must perform its obligations:
(a) if a time is fixed by or determinable from the contract, at that time;
(b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the other party is to choose a time;
(c) in any other case, within a reasonable time after the conclusion of the contract.
ARTICLE 6.1.2(Performance at one time or in instalments)
In cases under Article 6.1.1(b) or (c), a party must perform its obligations at one time if that performance can be rendered at one time and the circumstances do not indicate otherwise.
ARTICLE 6.1.3(Partial performance)
(1) The obligee may reject an offer to perform in part at the time performance is due, whether or not such offer is coupled with an assurance as to the balance of the performance, unless the obligee has no legitimate interest in so doing.
(2) Additional expenses caused to the obligee by partial performance are to be borne by the obligor without prejudice to any other remedy.
ARTICLE 6.1.4(Order of performance)
(1) To the extent that the performances of the parties can be rendered simultaneously, the parties are bound to 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 is bound to render its performance first, unless the circumstances indicate otherwise.
ARTICLE 6.1.5(Earlier performance)
(1) The obligee may reject an earlier performance unless it has no legitimate interest in so doing.
(2) Acceptance by a party of an earlier performance does not affect the time for the performance of its own obligations if that time has been fixed irrespective of the performance of the other party's obligations.
(3) Additional expenses caused to the obligee by earlier performance are to be borne by the obligor, without prejudice to any other remedy.
ARTICLE 6.1.6(Place of performance)
(1) If the place of performance is neither fixed by, nor determinable from, the contract, a party is to perform:
(a) a monetary obligation, at the obligee's place of business;
(b) any other obligation, at its own place of business.
(2) A party must bear any increase in the expenses incidental to performance which is caused by a change in its place of business subsequent to the conclusion of the contract.
ARTICLE 6.1.7(Payment by cheque or other instrument)
(1) Payment may be made in any form used in the ordinary course of business at the place for payment.
(2) However, an obligee who accepts, either by virtue of paragraph (1) or voluntarily, a cheque, any other order to pay or a promise to pay, is presumed to do so only on condition that it will be honoured.
ARTICLE 6.1.8(Payment by funds transfer)
(1) Unless the obligee has indicated a particular account, payment may be made by a transfer to any of the financial institutions in which the obligee has made it known that it has an account.
(2) In case of payment by a transfer the obligation of the obligor is discharged when the transfer to the obligee's financial institution becomes effective.
ARTICLE 6.1.9(Currency of payment)
(1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment 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 make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).
(3) Payment in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due.
(4) However, if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment.
ARTICLE 6.1.10(Currency not expressed)
Where a monetary obligation is not expressed in a particular currency, payment must be made in the currency of the place where payment is to be made.
ARTICLE 6.1.11(Costs of performance)
Each party shall bear the costs of performance of its obligations.
ARTICLE 6.1.12(Imputation of payments)
(1) An obligor owing several monetary obligations to the same obligee may specify at the time of payment the debt to which it intends the payment to be applied. However, the payment discharges first any expenses, then interest due and finally the principal.
(2) If the obligor makes no such specification, the obligee may, within a reasonable time after payment, declare to the obligor the obligation to which it imputes the payment, provided that the obligation is due and undisputed.
(3) In the absence of imputation under paragraphs (1) or (2), payment is imputed to that obligation which satisfies one of the following criteria and in the order indicated:
(a) an obligation which is due or which is the first to fall due;
(b) the obligation for which the obligee has least security;
(c) the obligation which is the most burdensome for the obligor;
(d) the obligation which has arisen first. If none of the preceding cri, teria applies, payment is imputed to all the obligations proportionally.
ARTICLE 6.1.13(Imputation of non-monetary obligations)
Article 6.1.12 applies with appropriate adaptations to the imputation of performance of non-monetary obligations.
ARTICLE 6.1.14(Application for public permission)
Where the law of a State requires a public permission affecting the validity of the contract or its performance and neither that law nor the circumstances indicate otherwise
(a) if only one party has its place of business in that State, that party shall take the measures necessary to obtain the permission;
(b) in any other case the party whose performance requires permission shall take the necessary measures.
ARTICLE 6.1.15(Procedure in applying for permission)
(1) The party required to take the measures necessary to obtain the permission shall do so without undue delay and shall bear any expenses incurred.
(2) That party shall whenever appropriate give the other party notice of the grant or refusal of such permission without undue delay.
ARTICLE 6.1.16(Permission neither granted nor refused)
(1) If, notwithstanding the fact that the party responsible has taken all measures required, permission is neither granted nor refused within an agreed period or, where no period has been agreed, within a reasonable time from the conclusion of the contract, either party is entitled to terminate the contract.
(2) Where the permission affects some terms only, paragraph (1) does not apply if, having regard to the circumstances, it is reasonable to uphold the remaining contract even if the permission is refused.
ARTICLE 6.1.17(Permission refused)
(1) The refusal of a permission affecting the validity of the contract renders the contract void. If the refusal affects the validity of some terms only, only such terms are void if, having regard to the circumstances, it is reasonable to uphold the remaining contract.
(2) Where the refusal of a permission renders the performance of the contract impossible in whole or in part, the rules on non-performance apply.
SECTION 2: HARDSHIP
ARTICLE 6.2.1(Contract to be observed)
Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.
ARTICLE 6.2.2(Definition of hardship)
There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and
(a) the events occur or become known to the disadvantaged party after the conclusion of the contract;
(b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
(c) the events are beyond the control of the disadvantaged party; and
(d) the risk of the events was not assumed by the disadvantaged party.
ARTICLE 6.2.3(Effects of hardship)
(1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.
(2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.
(3) Upon failure to reach agreement within a reasonable time either party may resort to the court.
(4) If the court finds hardship it may, if reasonable,
(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.
CHAPTER 7 - NON-PERFORMANCE
SECTION 1: NON-PERFORMANCE IN GENERAL
ARTICLE 7.1.1(Non-performance defined)
Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance.
ARTICLE 7.1.2(Interference by 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 the first party's act or omission or by another event as to which the first party bears the risk.
ARTICLE 7.1.3(Withholding performance)
(1) Where the parties are to perform simultaneously, either party may withhold performance until the other party tenders its performance.
(2) Where the parties are to perform consecutively, the party that is to perform later may withhold its performance until the first party has performed.
ARTICLE 7.1.4(Cure by non-performing party)
(1) The non-performing party may, at its own expense, cure any non-performance, provided that
(a) without undue delay, it gives notice indicating the proposed manner and timing of the cure;
(b) cure is appropriate in the circumstances;
(c) the aggrieved party has no legitimate interest in refusing cure; and
(d) cure is effected promptly.
(2) The right to cure is not precluded by notice of termination.
(3) Upon effective notice of cure, rights of the aggrieved party that are inconsistent with the non-performing party's performance are suspended until the time for cure has expired.
(4) The aggrieved party may withhold performance pending cure.
(5) Notwithstanding cure, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure.
ARTICLE 7.1.5(Additional period for performance)
(1) In a case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance.
(2) During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages but may not resort to any other remedy. If it receives notice from the other party that the latter will not perform within that period, or if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under this Chapter.
(3) Where in a case of delay in performance which is not fundamental the aggrieved party has given notice allowing an additional period of time of reasonable length, it may terminate the contract at the end of that period. If the additional period allowed is not of reasonable length it shall be extended to a reasonable length. The aggrieved party may in its notice provide that if the other party fails to perform within the period allowed by the notice the contract shall automatically terminate.
(4) Paragraph (3) does not apply where the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party.
ARTICLE 7.1.6(Exemption clauses)
A clause which limits or excludes one party's liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract.
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 it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.
(2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.
(3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.
(4) Nothing in this article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.
SECTION 2: RIGHT TO PERFORMANCE
ARTICLE 7.2.1(Performance of monetary obligation)
Where a party who is obliged to pay money does not do so, the other party may require payment.
ARTICLE 7.2.2(Performance of non-monetary obligation)
Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless
(a) performance is impossible in law or in fact;
(b) performance or, where relevant, enforcement is unreasonably burdensome or expensive;
(c) the party entitled to performance may reasonably obtain performance from another source;
(d) performance is of an exclusively personal character; or
(e) the party entitled to performance does not require performance within a reasonable time after it has, or ought to have, become aware of the non-performance.
ARTICLE 7.2.3(Repair and replacement of defective performance)
The right to performance includes in appropriate cases the right to require repair, replacement, or other cure of defective performance. The provisions of Articles 7.2.1and 7.2.2 apply accordingly.
ARTICLE 7.2.4(Judicial penalty)
(1) Where the court orders a party to perform, it may also direct that this party pay a penalty if it does not comply with the order.
(2) The penalty shall be paid to the aggrieved party unless mandatory provisions of the law of the forum provide otherwise. Payment of the penalty to the aggrieved party does not exclude any claim for damages.
ARTICLE 7.2.5(Change of remedy)
(1) An aggrieved party who has required performance of a non-monetary obligation and who has not received performance within a period fixed or otherwise within a reasonable period of time may invoke any other remedy.
(2) Where the decision of a court for performance of a non-monetary obligation cannot be enforced, the aggrieved party may invoke any other remedy.
SECTION 3: TERMINATION
ARTICLE 7.3.1(Right to terminate the contract)
(1) A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance.
(2) In determining whether a failure to perform an obligation amounts to 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 such result;
(b) strict compliance with the obligation which has not been performed is of essence under the contract;
(c) the non-performance is 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 non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated.
(3) In the case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it 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 to the contract the aggrieved party will lose its right to terminate the contract unless it gives notice to the other party within a reasonable time after it has or ought to have become aware of the offer or of the non-conforming performance.
ARTICLE 7.3.3(Anticipatory non-performance)
Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract.
ARTICLE 7.3.4(Adequate assurance of due performance)
A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and may meanwhile withhold its own performance. Where this assurance is not provided within a reasonable time the party demanding it may terminate the contract.
ARTICLE 7.3.5(Effects of termination in general)
(1) Termination of the contract releases both parties from their obligation to effect and to receive future performance.
(2) Termination does not preclude a claim for damages for non-performance.
(3) Termination does not affect any provision in the contract for the settlement of disputes or any other term of the contract which is to operate even after termination.
ARTICLE 7.3.6(Restitution)
(1) On termination of the contract either party may claim restitution of whatever it has supplied, provided that such party concurrently makes restitution of whatever it has received. If restitution in kind is not possible or appropriate allowance should be made in money whenever reasonable.
(2) However, if performance of the contract has extended over a period of time and the contract is divisible, such restitution can only be claimed for the period after termination has taken effect.
SECTION 4: DAMAGES
ARTICLE 7.4.1(Right to damages)
Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the non-performance is excused under these Principles.
ARTICLE 7.4.2(Full compensation)
(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm.
(2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.
ARTICLE 7.4.3(Certainty of harm)
(1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty.
(2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence.
(3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.
ARTICLE 7.4.4 (Foreseeability of harm)
The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance.
ARTICLE 7.4.5(Proof of harm in case of replacement transaction)
Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm.
ARTICLE 7.4.6(Proof of harm by current price)
(1) Where the aggrieved party has terminated the contract and has not made a replacement transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages 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 such other place that appears reasonable to take as a reference.
ARTICLE 7.4.7(Harm due in part to aggrieved party)
Where the harm is due in part to an act or omission of the aggrieved party or to another event as to which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties.
ARTICLE 7.4.8(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 latter party's taking reasonable steps.
(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.
ARTICLE 7.4.9(Interest for failure to pay money)
(1) If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused.
(2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.
(3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm.
ARTICLE 7.4.10(Interest on damages)
Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance.
ARTICLE 7.4.11(Manner of monetary redress)
(1) Damages are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate.
(2) Damages to be paid in instalments may be indexed.
ARTICLE 7.4.12(Currency in which to assess damages)
Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate.
ARTICLE 7.4.13(Agreed payment for non-performance)
(1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm.
(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 resulting from the non-performance and to the other circumstances.
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