Contractual Liabilities under the instruments of CISG, UNIDROIT and PECL Essay
The rising volumes of international trade and the globalisation trends contributing to it have made it necessary for increased regulations in international sales. The UN Convention of Contracts for the International sale of Goods (CISG) was put into effect as early as 1980. CISG was the culmination of efforts originating from the 1964 Hague Conventions of Uniform Law on the International Sale of Goods (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF) involving twenty eights states. The regulation of international trade was further facilitated when in 1994, the International Institute for the Unification of Private Law (UNIDROIT) put forth its Principles of International Commercial Contracts or the UNIDROIT Principles. In the same year the European Contract Law Commission brought out its first part of the Principles of European Contract Law (PECL), followed by its complete version in 1998. Many people who participated in the creation of the CISG were also instrumental in drafting the UNIDROIT and the PECL.
The internationally drafted instruments CISG, UNIDROIT and the PECL have in them elements from civil and common law. The CISG reflected the interests and ideas prevailing in the legal systems of both, the developing and the developed economies. When parties are based at different contracting states, which come under the jurisdiction of the CISG, their contract is automatically subject to the provisions of the CISG unless stated otherwise. While the UNIDROIT Principles do not apply for domestic contracts, they are more detailed and specific with a broader application scope with regard to international contracts. UNIDROIT Principles are directed at providing an elaborate governing system applicable universally. In fact, the purpose or preamble to UNIDROIT emphasizes that it may be used to supplement or interpret international law instruments. The relevance of UNIDROIT on CISG is evident to a larger extent, where UNIDROIT covers issues also covered by the CISG; its solutions are similar to that of CISG. UNIDROIT Principles literally borrow or at least pick the substance of CISG provisions, while addressing similar issues 1. The PECL also has its objectives similar to the UNIDROIT Principles, except that the scope of application is different. The PECL articles are directed at providing contract laws in the EU, applicable when the parties agree to be governed by them. The UNIDROIT and PECL are in many ways ‘Restatements’ of the provisions of the CISG, deriving their insights from the CISG texts and scholarly views of CISG. Also with regards to identical provisions with CISG, PECL sub-classification texts go deeper to make the implicit more explicit 2. However it needs to be emphasized here that it is not easy to identify and indicate precisely in which way the regimes converge or diverge. It is also impossible to point out through direct article-to-article comparison because regimes may have a single article to cover a particular issue or several articles to cover the same issue. Vice Versa, regimes may also have a single article to address several issues or several articles to cover them.
Features of the instruments
Unlike the governmental bargaining and compromises associated with the formation of the CISG, the UNIDROIT Principles and the PECL emerged from the need for uniform laws in contracts. Divergent legal perspectives and doctrines were considered in the formation of the CISG leading to the adoption of consensus and solutions, bearing ambiguous terms and gaps in its interpretation. On the contrary the PECL and UNIDROIT were not obliged to consider all local regimes or laws of all countries3. Conflicting rules were incorporated by modifying them based on the effectiveness of the rule in the entire regime. These Principles can therefore be considered as better organised, unified and more consistent than the CISG. The magnitude of similarities between the PECL and UNIDROIT regimes, indicate the role as representing the main intentions of the international contract law.
However PECL has a broader scope of application compare to UNIDROIT, as it encompasses contracts involving domestic dealings, consumers and merchants. Although PECL has a smaller geographic focus compared to UNIDROIT Principles, it presents a wider coverage of law. Yet the two principles are similar substantially since both strive towards being the general principles of contract governance. The growth in international transactions governed by the regulations of CISG, UNIDROIT and PECL, establish the need for fairness and harmony in international trade. These three instruments may be rightly said to supplement and leverage each other as in becoming more common than compete with each other. The two principles broadly support and promote the crux of CISG, while filling the gaps in it. Therefore the principles can be said to interpret the CISG while answering and resolving issues not addressed by CISG 4.
Though PECL and UNIDROIT have a more common approach, there are divergences between the two instruments. Provisions of UNIDROIT and that of PECL have differing content. Certain issues that are addressed in one are not considered in the other or vice versa. While some divergencies may appear technical in nature, some others have policy implications. Notable among the technical divergencies are the ‘receipt rule’ in the UNIDROIT relating to all types of notices exchanged by the parties as specified by Art. 1.9(2) while the PECL ‘dispatch rule’ Art. 1.303(4) relates to notices arising from non-compliance by a party. Similarly Art. 3.18 of UNIDROIT provide reliance damages when a party avoids contract, not considering whether the party has avoided the contract or not. But the PECL Art. 4.17 grants recovery of damages only when the contract has actually been avoided. Among divergencies not having relevance to policy considerations are that while in the UNIDROIT Art. 5.7, when a third person cannot or would not fix the price, the price need to be reasonable, while the PECL Art. 6.106 (1) assume the parties have agreed to have the court appoint someone to determine the price. With regard to permanent impediments, Art. 71.7 (4) associates terminations to the actions and initiations of the parties while the PECL Art. 9.303 (4) provides for automatic termination in such cases.
When CISG is briefly compared to the UNIDROIT, it would be observed that many rules under CISG Part II concerning sales contract formation are similar to Chapter 2 of the UNIDROIT. Part III of the CISG pertaining to performance and non-performance or breach are considered in Chapter 5, 6 and 7 in UNIDROIT. It must be noted here that most of the provisions of UNIDROIT, which are not dealt with in the CISG, may still be applicable to it, without disturbing any of its other rules. CISG Art. 11 emphasizes that a contract for sale need not be concluded in writing nor do it have any other requirement pertaining to its form 5. Contracts can even be proved with witnesses and other means. Similarly Art. 1.2 of UNIDROIT too provides for the same. With regard to irrevocable offer, CISG Art. 16 and the UNIDROIT Art. 2.4 indicate that offers cannot be revoked unless indicated that it is revocable.
While remedies are made available to a party when it is affected by the performance or non-performance of the other party, it is obviously an area where diverse legal systems focus on 6. In recent years there is a growing demand for increased inclusion of specific performance in contracts. This fact is well reflected in UNIDROIT and PECL, which have introduced a more organised and coherent structure with regard to specific performances. While establishing the right to specific performances through UNIDROIT Articles 7.2.1 through 7.2.5 and PECL Articles 9.101 to 9.103, these ensure that remedial specific performances are beyond the discretion of the court.
The term ‘breach of contract’ in CISG is similar in functionality to the term ‘non-performance’ used in PECL and UNIDROIT. Article 7.1.1 of UNIDROIT perceives non-performance by a party as a failure to perform its contractual obligations including late or defective performance. PECL similarly sees non-performance as a failure to perform at the intended due time, be it early, late or never. Its article 1.301(4) describes non-performance holistically as a failure to cooperate to provide full effect to the contract. The CISG concept of ‘breach of contract’ encompasses all failures by a party in fulfilling any of its obligations. Article 25 of CISG even sees breach of contract being fundamental, under certain conditions 7. The breach of contract doesn’t take into consideration the grounds for exemption. The term ‘failure to perform’ provided in article 79 and 80 related to exemption, also relate to any breach of contract. The harmonisation process in contract laws has taken a step ahead by defining non-performance in terms of performance failures and defects, along with exclusions.
Remedial approach in CISG
The remedial clauses of CISG largely correspond with all major legal regimes. The remedial clauses here are directed at providing remedies against specific performance, damages and contract avoidance. The remedies are provided under Part III for both, the buyer and seller under Arts. 45 and 61. The remedies available to the buyer are different from that available to the seller in two aspects. The seller cannot claim a reduction in price as a remedy and also there can be no substitute performance requiring the buyer to cure defective performance. Specific performance is made available to both the buyer (Art. 62) and the seller (Art. 46). Breaches by seller may give rise to buyer’s delivery, repair and substitute delivery. A breeching buyer may give rise to seller’s right requiring the buyer to pay the price or take delivery or other obligations.
Apart from specific performance remedies, the right to claim damages is an important aspect of the CISG. Damages may at times be the only remedy to an affected party when providing relief for specific performance or avoiding of contract is not relevant. Damages or monetary compensation to an aggrieved party puts the party to a comfortable position as if the contract had been performed as agreed. The affected or aggrieved party therefore always has the right to seek damages apart from claiming specific performance or contract avoidance. These damages are directed not only at providing for the expenses but also compensating the loss of profit. The damages to be provided are regulated by Art. 74, which stipulates that the damages cannot exceed the loss as foresaw or should have by the breaching party 8. Article 77 requires the aggrieved to ensure mitigation of loss, while Art. 78 emphasize the right to receive interest in addition to damages.
Avoidance of contract can be claimed under Articles 49 and 64 of the CISG. Contract avoidance brings an end to the performance obligations of the parties to each other. However, apart from the remedy of damages, avoidance can only be available when the breach is a fundamental one. The CISG has taken into consideration the environment of international goods sale, involving long distances, transportation costs and contract duration. The CISG intends to preserve contracts despite breaches. Thus the Articles 47 and 63 relevant to the popular Nachfrist Principle, provides options to the aggrieved party to give additional time for the breaching party to fulfil his commitments.
Remedial approach in UNIDROIT
The remedial measures provided by UNIDROIT Principles can be said to be the major feature of the entire UNIDROIT Principles. The content of Chapter 7 reflects how the Principles works and their role in the emerging context of harmony in international trade law. Chapter 7 is closely associated with the decisions of the arbitral tribunals, court rulings and those of different legal institutions, emphasizing the fact that harmonisation of relevant international laws can contribute to implementation of improved laws. Like the Part III of the CISG, Chapter 7 is also systematically structured to facilitate performance and continuance of contract 9. The Section I is directed at contract continuance and termination continuance. Article 7.1.4 ensures cure by the non-performing party while Art. 7.1.5 provides for additional time for performing. These two articles are very instrumental to bring performance when the contract is faced with difficulties and headed to failure and termination. The Section 2 of Chapter 7 deals with the right to performance, commonly called as specific performance, which is a preferred remedy of many legal systems. For instance the articles 7.2.1 and 7.2.2 directed at monetary obligation performance and non-monetary obligation performance respectively seek to ensure performance, although Art. 7.2.2 has exceptions. Here specific performance is excluded when a party having a right to performance could obtain the performance from another source, comparatively. The party can now terminate the contract and finalize a replacement transaction. Defective performances are dealt with Art. 7.2.3, which provides for repair and replacement.
The last resort or the right to termination is provided by Section 3 of Chapter 7, which is similar to the avoidance provisions of CISG. These provisions facilitate the aggrieved party to terminate the contract when the delivered performance is either too defective or too late that the aggrieved party cannot continue to use it to achieve its results.
Remedial approach in PECL
The remedial measures of PECL revolve around Chapters 8 and 9 and are available for non-performance depending on whether the non- performance is excused under Art. 8.108. This article excuses non-performance if it is proved to be due to reasons or impediments beyond its control, which was not anticipated at the time of contract. If the impediment is temporary, the excuse is provided only until such time. The non-performing party is bound to intimate the other party, the anticipated impediment and consequences at the earliest possible, it itself comes to know. The other party can claim damages for loss arising from non-receipt of such notice. When the non-performance is not excused under Art.8.108, the affected party may seek remedies as set out in Chapter 9. The aggrieved party can seek recovery of money due, claim specific performance, claim damages or even seek to suspend its own performance, through various provisions of Chapter Nine 10. It must be noted here that although Art. 8.108 provides exemptions, the aggrieved party may still seek remedies under Chapter 9, except claim performance or damages. However a party cannot avail remedies if it is responsible for the non-performance by the other party. Also remedies for non-performance is perceived to be excluded or restricted, unless doing do is unfair and against justice. A party is entitled to a termination of contract under Art. 9.301 when non-performance by the other party is fundamental. The aggrieved party may also terminate the contract due to delay under Art. 8.106.
While the concept of Nachfrist providing for automatic time extension for fulfilling the obligations, reflects the CISG approach, it should be noted here that neither CISG Art. 47 or 63 provide for mandatory extension. Similarly UNIDROIT Principles Art. 71.5 and PECL Art. 8.106 too don’t provide for automatic application of Nachfrist, which is evident from the use of the term ‘may’ within the articles. Two important policy aspects with relevance to Nachfrist procedure as approached by CISG, PECL and UNIDROIT are:
i) While the aggrieved party can claim specific performance, it is not obliged to provide additional time to the non-performing party to perform.
ii) Termination is considered an act of the aggrieved party and not that of the court or mediator. When there is a fundamental non-performance, the aggrieved party is entitled to terminate the contract by giving a termination notice. Here too the aggrieved party is not obliged to grant additional time for performance
Nachfrist Principles as contemplated by the three regimes recognizes late performance as being very different from defective performance 11. Although late performance cannot be set right as lapsed time cannot be recalled, sometimes late performance may be preferred to non performance. Articles 47 (1) of CISG, Art. 7.1.5 (1) of UNIDROIT and PECL Art. 8.106(1) enables the aggrieved party to provide additional time to the non-performing party to perform. Within this additional time, the aggrieved party may not seek any other remedy for non-performance as ruled by CISG Art. 47(2) and 63(2), Art. 7.1.5 (2) of UNIDROIT and PECL Art. 8.106 (2). Upon expiry of the permitted time and if performance has not been rendered, UNIDROIT Art. 7.1.5(2) specifies that the aggrieved party may seek any remedy available. Similarly PECL Art. 8.106 (2) makes available any remedy under Chapter 9 when the extended period has expired.
The Nachfrist concept as reflected by the three instruments is that basically a contract cannot be avoided just because a performance is not delivered on time. Nachfrist is not projected as a remedy or a standalone cure in the three instruments but designed to fit well with the other remedies.
Force majeure is generally considered an excuse for non-performance in contracts based on situations and circumstances. Force majeure can render a contract suspended partially or even completely. CISG, UNIDROIT and PECL define force majeure in terms of ‘impediment’ although they may be categorised differently. The three instruments exonerates a party when its failure to perform its obligations, is due to conditions beyond its control. The CISG Art. 79, PECL Art. 8.108 and UNIDROIT Art. 7.1.7 is similar in reflecting flexibility in that it requires only relative impossibility to make it applicable. However it should be noted here that neither PECL nor UNIDROIT contain provisions on third persons like that provided by CISG Art. 79(2), although the term ‘impediment’ is used similarly in PECL and UNIDROIT 12. The term ‘impediment’ encompasses every event like natural occurrences, third party acts etc. PECL and CISG provide excuse for non-performance only for as long as the performance is impossible, while the UNIDROIT Principles makes available the excuse for a ‘reasonable period’. Notification of the force majeure is to be done to the aggrieved party in accordance with PECL Art. 8.108(3), CISG Art. 79(4) and UNIDROIT Art. 7.1.7(3) and all three fix the risk of late receipt or non-receipt of this communication on the sender. The non-performing party becomes responsible for damages arising from non-receipt of force majeure communication.
Although the UNIDROIT principles in general permit excuse, it’s Art. 7.1.7 (4) make important exceptions in evaluating claims associated with force majeure. The right to terminate contracts, requesting interest on money or withholding delivery are exempted. In comparison the CISG and PECL allow the aggrieved party any remedy during force majeure except to claim damages as specified by CISG Art. 79(5) or claim performance and damages under PECL Art. 8.102(2). A notable feature of the international commercial contracts is that they contain more specific and elaborate rulings with regard to force majeure, though they are not mandatory. The regulations associated with force majeure are mostly general, facilitating the parties to provide specificities as per their requirements.
Responsibility for third party
A major difficulty sought to be addressed by the legal instruments is determining the responsibility of a party for failure of a third person. . The third party is defined, as party that is legally independent of the party to the contract, not necessarily be economically independent. Most contracts have parties using third person or parties in fulfilling their contractual obligations. On most occasions the non-performance of a party may be attributed to the non-performance by a third party. A similar stand is taken by CISG Art. 79(2) and PECL Art. 8.107 in that the party to the contract is responsible for the performance of the third party, ruling the relationship of the contract party and its third party as being irrelevant. However the CISG Art. 79(2) has conditions, although strict, for the exemption of the party which according to Art. 79(1) requires to be fulfilled even with respect to the third person. Therefore the clauses 1 and 2 of Art. 79 may seem misleading, but these are directed at addressing different situations. CISG may therefore be considered as being lenient with regard to third party non-performance. Nonetheless, being very comprehensive on third parties, the scope of establishing an impediment to seek exceptions is very restricted in CISG 13
Preventing termination of contract is a main intention of the GISG, achieved by preserving the validity of the contract, as long as it is feasible and can avoid economic waste. Offering the aggrieved party a reduction in price appropriate to its loss, delivering goods or providing additional times for performance are among the methods sought by CISG to preserve contracts. This principle is closely followed by both the PECL and UNIDROIT. However the right to termination is provided even when impediments faced by non-performing party are excusable. CISG Art. 79 (5) provides for a party to exercise any right except seeking damages. UNIDROIT extends the right to terminate contract to an aggrieved party when non-performance is excused or when the party is liable for non-performance. PECL too has similar provisions requiring the aggrieved party to provide a termination notice to the other party. The three instruments do not provide for automatic termination of contract. However PECL has a provision through Art. 8.106(4), which provides for automatic termination without notice. This is effective when the party is excused due to a complete and permanent impediment under Art. 8.108. Broadly speaking CISG rules that a party can terminate a contract when there is a fundamental non-performance, which is also reflected in UNIDROIT and PECL through their respective articles 7.3.1 (1) and 9.301(1). The major grounds for terminating a contract as per CISG, UNIDROIT and PECL are:
a) Fundamental non-performance
b) Anticipatory non-performance
c) Fundamental non-performance with regard to partial shipment or a particular instalment.
d) Inability to perform within a reasonably provided Nachfrist.
Given the vast domain covered by the instruments, a comparative analysis can only broadly speculate the similarities or differences, as they are drafted and organised differently. The three instruments in themselves strive to present fairness in complex international economic transactions, intending to offer what’s due, as far as human perception and understanding is concerned. The complexity of the issues these instruments seek to resolve is evident from the fact that official commentaries are provided to UNIDROIT and the PECL. The comments and illustration making up the commentary attempt to explain the rationale behind it so that they are appropriately applied in practice. The PECL commentary too contains comments and illustrations to help explain the text. The three instruments highlight the requirement that they need to be interpreted in such way, its international character is maintained and there is uniformity in its application. The instruments may vary in the ways they perceive performance and the compensation they associate to it, but they all have a same goal; the goal of justice.
1 Bonell Michael, ‘The UNIDROIT Principles of International Contracts and CISG; Alternative or Complementary Instrument?’, Uniform Law Review, 1996, pp. 26-39,.
2 Pace Law School, Observations on the use of Principles of European Contract Law as an aid to CISG Research, (2001) [Electronic Version]. Retrieved on 19th December 2009 from <http://www.cisg.law.pace.edu/cisg/text/peclcomp.html>
3 Bonell Michael, The UNIDROIT Principles of International Commercial Contracts and the Principles of European Contract Law: Similar Rules for the Same Purposes? (2008) [Electronic Version]. Retrieved on 23rd December 2009 from <http://www.cisg.law.pace.edu/cisg/biblio/bonell96.html#i>
4 Chinalawinfo, Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL. (2004) [Electronic Version]. Retrieved on 19th December 2009 from <http://big5.chinalawinfo.com/article1.chinalawinfo.com/article_print.asp?articleid=24403>
5 Ole Lando, The CISG, the UNIDROIT Principles and the Principles of European Contact Law in a Global Commercial Code (2009). Retrieved on 24th December 2009 from <www.docstoc.com/docs/3445834/THE-CISG-the-Unidroit-Principles-and-the-Principles-of-European>
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9 UNIDROIT, UNIDROIT Principles of International Commercial Contracts. Rome. (2004) Retrieved on 23rd December 2009 from <http://www.unidroit.org/english/principles/contracts/principles2004/integralversionprinciples2004-e.pdf>
10 Commission on European Contract Law The Principles of European Contract Law (1999) [Electronic Version]. Retrieved on 22nd December 2009 from <http://frontpage.cbs.dk/law/commission_on_european_contract_law/PECL%20engelsk/engelsk_partI_og_II.htm>
11 Sellier, Review of the Convention on Contracts for the International Sale of Goods. 3rd edition, European Law Publishers, Munchen (2006) P9-15 [Electronic Version]. Retrieved on 20th December 2009 from <books.google.co.in/books?id=1h1HO2k1Z6sC&pg=PT17&lpg=PT17&dq=cisg,+unidroit+and+pecl&source=bl&ots=LQrsVtN6Rj&sig=Y3_rkOvqMiwlB-8ocS2fZ4xcDvw&hl=en&ei=NpcrS9aRB4vY7APyiqiHBg&sa=X&oi=book_result&ct=result&resnum=7&ved=0CBkQ6AEwBg#v=onepage&q=cisg%2C%20unidroit%20and%20pecl&f=false>
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13 Sarah Howard Jenkins, Exemption for Non performance: UCC, CISG, UNIDROIT Principles — A Comparative Assessment: 72 Tulane Law Review (1998); p. 2026. [Electronic Version]. Retrieved on 19th December 2009 from <http://www.cisg.law.pace.edu/cisg/biblio/jenkins.html>