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UNIDROIT Principles of International Commercial Contracts with Official Commentary [1994]

FOREWORD

INTRODUCTION

THE UNIDROIT GOVERNING COUNCIL [in 1994]

MEMBERS OF THE WORKING GROUP [1994]

OTHER PARTICIPANTS IN THE PROJECT

PREAMBLE

PREAMBLE - (Purpose of the Principles)

Preamble - (Purpose of the Principles)
COMMENT
1. "International" contracts
2. "Commercial" contracts
3. The Principles and domestic contracts between private persons
4. The Principles as rules of law governing the contract
a. Express choice by the parties
b. The Principles applied as lex mercatoria
5. The Principles as a substitute for the domestic law otherwise applicable
6. The Principles as a means of interpreting and supplementing existing international instruments
7. The Principles as a model for national and international legislators

CHAPTER 1 - GENERAL PROVISIONS

ARTICLE 1.1 - (Freedom of contract)

Article 1.1 - (Freedom of contract)
COMMENT
1. Freedom of contract as a basic principle in the context of international trade
2. Economic sectors where there is no competition
3. Limitation of party autonomy by mandatory rules

ARTICLE 1.2 - (No form required)

Article 1.2 - (No form required)
COMMENT
1. Contracts as a rule not subject to formal requirements
2. Possible exceptions under the applicable law
3. Form requirements agreed by the parties

ARTICLE 1.3 - (Binding character of contract)

Article 1.3 - (Binding character of contract)
COMMENT
1. The principle pacta sunt servanda
2. Exceptions
3. Effects on third persons not dealt with

ARTICLE 1.4 - (Mandatory rules)

Article 1.4 - (Mandatory rules)
COMMENT
1. Mandatory rules prevail
2. Mandatory rules applicable in the event of mere incorporation of the Principles in the contract
3. Mandatory rules applicable if the Principles are the law governing the contract
4. Recourse to the rules of private international law relevant in each individual case

ARTICLE 1.5 - (Exclusion or modification by the parties)

Article 1.5 - (Exclusion or modification by the parties)
COMMENT
1. The non-mandatory character of the Principles
2. Exclusion or modification may be express or implied
3. Mandatory provisions to be found in the Principles

ARTICLE 1.6 - (Interpretation and supplementation of the Principles)

Article 1.6 - (Interpretation and supplementation of the Principles)
COMMENT
1. Interpretation of the Principles as opposed to interpretation of the contract
2. Regard to the international character of the Principles
3. Purposes of the Principles
4. Supplementation of the Principles

ARTICLE 1.7 - (Good faith and fair dealing)

Article 1.7 - (Good faith and fair dealing)
COMMENT
1. "Good faith and fair dealing" as a fundamental idea underlying the Principles
Illustrations
2. "Good faith and fair dealing in international trade"
Illustrations
3. The mandatory nature of the principle of good faith and fair dealing

ARTICLE 1.8 - (Usages and practices)

Article 1.8 - (Usages and practices)
COMMENT
1. Practices and usages in the context of the Principles
2. Practices established between the parties
Illustration
3. Agreed usages
4. Other applicable usages
Illustration
Illustration
5. Application of usage unreasonable
Illustration
6. Usages prevail over the Principles

ARTICLE 1.9 - (Notice)

Article 1.9 - (Notices)
COMMENT
1. Form of notice
2. Receipt principle
3. Dispatch principle to be expressly stipulated
4. "Reaches"

ARTICLE 1.10 - (Definitions)

Article 1.10 - (Definitions)
COMMENT
1. Courts and arbitral tribunals
2. Party with more than one place of business
3. "Obligor" - "obligee"
4. "Writing"

CHAPTER 2 - FORMATION

ARTICLE 2.1 - (Manner of formation)

Article 2.1 - (Manner of formation)
COMMENT
1. Offer and acceptance
2. Conduct sufficient to show agreement
Illustration

ARTICLE 2.2 - (Definition of offer)

Article 2.2 - (Definition of offer)
COMMENT
1. Definiteness of an offer
Illustration
2. Intention to be bound
Illustrations

ARTICLE 2.3 - (Withdrawal of offer)

Article 2.3 - (Withdrawal of offer)
COMMENT
1. When an offer becomes effective
2. Withdrawal of an offer

ARTICLE 2.4 - (Revocation of offer)

Article 2.4 - (Revocation of offer)
COMMENT
1. Offers as a rule revocable
2. Irrevocable offers
a. Indication of irrevocability contained in the offer
Illustrations
b. Reliance by offeree on irrevocability of offer
Illustrations

ARTICLE 2.5 - (Rejection of offer)

Article 2.5 - (Rejection of offer)
COMMENT
1. Rejection may be express or implied
Illustration
2. Rejection only one cause of termination of an offer

ARTICLE 2.6 - (Mode of acceptance)

Article 2.6 - (Mode of acceptance)
COMMENT
1. Indication of assent to an offer
2. Acceptance by conduct
3. Silence or inactivity
Illustrations
4. When acceptance becomes effective
Illustrations
ARTICLE 2.7 - (Time of acceptance)
COMMENT

ARTICLE 2.8 - (Acceptance within a fixed period of time)

Article 2.8 - (Accpeptance within a fixed period of time)
COMMENT

ARTICLE 2.9 - (Late acceptance. Delay in transmission)

Article 2.9 - (Late acceptance. Delay in transmission)
COMMENT
1. Late acceptance normally ineffective
2. Offeror may nevertheless "accept" late acceptance
Illustration
3. Acceptance late because of delay in transmission
Illustration

ARTICLE 2.10 - (Withdrawal of acceptance)

Article 2.10 - (Withdrawal of acceptance)
COMMENT

ARTICLE 2.11 - (Modified acceptance)

Article 2.11 - (Modified acceptance)
COMMENT
1. Acceptance with modifications normally to be considered a counter-offer
2. Modifications which do not alter the nature of the acceptance
Illustrations

ARTICLE 2.12 - (Writings in confirmation)

Article 2.12 - (Writings in confirmation)
COMMENT
1. "Writings in confirmation"
Illustrations
2. Writing in confirmation to be sent within a reasonable time after conclusion of the contract
3. Invoices

ARTICLE 2.13 - (Conclusion of contract dependent on agreement on specific matters or in a specific form)

Article 2.13 - (Conclusion of contract dependent on agreement on specific matters or in a specific form)
COMMENT
1. Conclusion of contract dependent on agreement on specific matters
Illustration
Illustration
2. Conclusion of contract dependent on agreement in a specific form
Illustrations

ARTICLE 2.14 - (Contract with terms deliberately left open)

Article 2.14 - (Contract with terms deliberately left open)
COMMENT
1. Contract with terms deliberately left open
2. Open terms not in themselves an impediment to valid conclusion of contract
Illustration
3. Failure of mechanism provided for by parties for determination of open terms
Illustration

ARTICLE 2.15 - (Negotiations in bad faith)

Article 2.15 - (Negotiations in bad faith)
COMMENT
1. Freedom of negotiation
2. Liability for negotiating in bad faith
Illustrations
3. Liability for breaking off negotiations in bad faith
Illustration

ARTICLE 2.16 - (Duty of confidentiality)

Article 2.16 - (Duty of confidentiality)
COMMENT
1. Parties in general not under a duty of confidentiality
Illustration
2. Confidential information
Illustrations
3. Damages recoverable

ARTICLE 2.17 - (Merger clauses)

Article 2.17 - (Merger clauses)
COMMENT

ARTICLE 2.18 - (Written modification clauses)

Article 2.18 - (Written modification clauses)
COMMENT
Illustration

ARTICLE 2.19 - (Contracting under standard terms)

Article 2.19 - (Contracting under standard terms)
COMMENT
1. Contracting under standard terms
2. Notion of "standard terms"
3. General rules on formation apply
Illustrations

ARTICLE 2.20 - (Surprising terms)

Article 2.20 - (Surprising terms)
COMMENT
1. Surprising terms in standard terms not effective
2. Terms "surprising" by virtue of their content
Illustration
3. Terms "surprising" by virtue of their language or presentation
Illustrations
4. Express acceptance of "surprising" terms

ARTICLE 2.21 - (Conflict between standard terms and non-standard terms)

Article 2.21 - (Conflict between standard terms and non-standard terms)
COMMENT

ARTICLE 2.22 - (Battle of forms)

Article 2.22 - (Battle of forms)
COMMENT
1. Parties using different standard terms
2. "Battle of forms" and general rules on offer and acceptance
3. The "knock-out" doctrine
Illustration
Illustrations

CHAPTER 3 - VALIDITY

ARTICLE 3.1 - (Matters not covered)

Article .1 - (Matters not covered)
COMMENT

ARTICLE 3.2 - (Validity of mere agreement)

Article 3.2 - (Validity of mere agreement)
COMMENT
1. No need for consideration
2. No need for cause
Illustration
3. All contracts consensual
Illustration

ARTICLE 3.3 - (Initial impossibility)

Article 3.3 - (Initial impossibility)
COMMENT
1. Performance impossible from the outset
2. Lack of legal title or power

ARTICLE 3.4 - (Definition of mistake)

Article 3.4 - (Definition of mistake)
COMMENT
1. Mistake of fact and mistake of law
2. Decisive time

ARTICLE 3.5 - (Relevant mistake)

Article 3.5 - (Relevant mistake)
COMMENT
1. Serious mistake
2. Conditions concerning the party other than the mistaken party
Illustration
3. Conditions concerning the mistaken party
Illustration

ARTICLE 3.6 - (Error in expression or transmission)

Article 3.6 - (Error in expression or transmission)
COMMENT
1. Relevant mistake
Illustration
2. Mistakes on the part of the receiver

ARTICLE 3.7 - (Remedies for non-performance)

Article 3.7 - (Remedies for non-performance)
COMMENT
1. Remedies for non-performance preferred
2. Actual and potential conflicts
Illustration

ARTICLE 3.8 - (Fraud)

Article 3.8 - (Fraud)
COMMENT
1. Fraud and mistake
2. Notion of fraud

ARTICLE 3.9 - (Threat)

Article 3.9 - (Threat)
COMMENT
1. Threat must be imminent and serious
2. Unjustified threat
Illustration
3. Threat affecting reputation or economic interests
Illustration

ARTICLE 3.10 - (Gross disparity)

Article 3.10 - ()
COMMENT
1. Excessive advantage
2. Unjustifiable advantage
a. Unequal bargaining position
Illustration
c. Other factors
3. Avoidance or adaptation

ARTICLE 3.11 - (Third persons)

Article 3.11 - (Third persons)
COMMENT
1. Third person for whom a party is responsible
2. Third person for whom a party is not responsible

ARTICLE 3.12 - (Confirmation)

Article 3.12 - (Confirmation)
COMMENT

ARTICLE 3.13 - (Loss of right to avoid)

Article 3.13 - (Loss of right to avoid)
COMMENT
1. Performance of the contract as understood by the mistaken party
2. Decision to be made promptly
3. Loss of right to avoid
4. Damages

ARTICLE 3.14 - (Notice of avoidance)

Article 3.14 - (Notice of avoidance)
COMMENT
1. The requirement of notice
2. Form and content of notice
Illustration
3. Notice must be received

ARTICLE 3.15 - (Time limits)

Article 3.15 - (Time limits)
COMMENT

ARTICLE 3.16 - (Partial avoidance)

Article 3.16 - (Partial avoidance)
COMMENT
Illustrations

ARTICLE 3.17 - (Retroactive effect of avoidance)

Article 3.17 - (Retroactive effect of avoidance)
COMMENT
1. Avoidance generally of retroactive effect
2. Restitution
Illustration

ARTICLE 3.18 - (Damages)

Article 3.18 - (Damages)
COMMENT
1. Damages if ground for avoidance known to the other party
2. The measure of damages
Illustration

ARTICLE 3.19 - (Mandatory character of the provisions)

Article 3.19 - (Mandatory character of the provisions)
COMMENT

ARTICLE 3.20 - (Unilateral declarations)

Article 3.20 - (Unilateral declarations)
COMMENT

CHAPTER 4 - INTERPRETATION

ARTICLE 4.1 - (Intention of the parties)

Article 4.1 - (Intention of the parties)
COMMENT
1. Common intention of the parties to prevail
2. Recourse to the understanding of reasonable persons
3. How to establish the common intention of the parties or to determine the understanding of reasonable persons
4. Interpretation of standard terms

ARTICLE 4.2 - (Interpretation of statements and other conduct)

Article 4.2 - (Interpretation of statements and other conduct)
COMMENT
1. Interpretation of unilateral acts
2. How to establish the intention of the party performing the act or to determine the understanding of a reasonable person

ARTICLE 4.3 - (Relevant circumstances)

Article 4.3 - (Relevant circumstances)
COMMENT
1. Circumstances relevant in the interpretation process
2. "Particular" and "general" circumstances compared
Illustrations
Illustrations
3. "Merger" clauses

ARTICLE 4.4 - (Reference to contract or statement as a whole)

Article 4.4 - (Reference to contract or statement as a whole)
COMMENT
1. Interpretation in the light of the whole contract or statement
Illustration
2. In principle no hierarchy among contract terms

ARTICLE 4.5 - (All terms to be given effect)

Article 4.5 - (All terms to be given effect)
COMMENT
Illustration

ARTICLE 4.6 - (Contra proferentem rule)

Article 4.6 - (Contra proferentem rule)
COMMENT
Illustration

ARTICLE 4.7 - (Linguistic discrepancies)

Article 4.7 - (Linguistic discrepancies)
COMMENT
Illustration
Illustration

ARTICLE 4.8 - (Supplying an omitted term)

Article 4.8 - (Supplying an omitted term)
COMMENT
1. Supplying of omitted terms and interpretation
2. When omitted terms are to be supplied
3. Criteria for the supplying of omitted terms
Illustration
Illustration

CHAPTER 5 - CONTENT

ARTICLE 5.1 - (Express and implied obligations)

Article 5.1 - (Express and implied obligations)
COMMENT

ARTICLE 5.2 - (Implied obligations)

Article 5.2 - (Implied obligations)
COMMENT
Illustrations

ARTICLE 5.3 - (Co-operation between the parties)

Article 5.3 - (Co-operation between the parties)
COMMENT
Illustrations

ARTICLE 5.4 - (Duty to achieve a specific result Duty of best efforts)

Article 5.4 - (Duty to achieve a specific result Duty of best efforts)
COMMENT
1. Distinction between the duty to achieve a specific result and the duty of best efforts
2. Distinction provides criteria for determining whether a party has performed its obligations
Illustrations

ARTICLE 5.5 - (Determination of kind of duty involved)

Article 5.5 - (Determination of kind of duty involved)
COMMENT
1. Criteria for determining the nature of the obligation
2. Nature of the obligation as expressed by the contract
Illustration
3. Price or other terms of the contract
4. Degree of risk in performance of an obligation
Illustrations
Illustration

ARTICLE 5.6 - (Determination of quality of performance)

Article 5.6 - (Determination of quality of performance)
COMMENT
Illustration
1. Performance must be of average quality
Illustration
2. Performance must be reasonable
Illustration

ARTICLE 5.7 - (Price determination)

Article 5.7 - (Price determination)
COMMENT
1. General rule governing price determination
Illustrations
2. Determination of price by one party
3. Determination of price by third person
4. Determination of price by reference to external factors
Illustration

ARTICLE 5.8 - (Contract for an indefinite period)

Article 5.8 - (Contract for an indefinite period)
COMMENT
Illustration

CHAPTER 6 - PERFORMANCE

SECTION 1: Performance in General

ARTICLE 6.1.1 - (Time of performance)

Article 6.1.1 - (Time of performance)
COMMENT
Illustrations

ARTICLE 6.1.2 - (Performance at one time or in instalments)

Article 6.1.2 - (Performance at one time or in instalments)
COMMENT
Illustrations

ARTICLE 6.1.3 - (Partial performance)

Article 6.1.3 - (Partial performance)
COMMENT
1. Partial performance distinguished from performance at one time or in instalments
Illustration
2. Obligee entitled in principle to reject partial performance
Illustration
3. Obligee's right to reject partial performance conditional on its legitimate interest in so doing
Illustration
4. Additional expenses entailed by partial performance to be borne by obligor
Illustration

ARTICLE 6.1.4 - (Order of performance)

Article 6.1.4 - (Order of performance)
COMMENT
1. Simultaneous performance to be made when possible
lllustration
2. Exception where performance requires a period of time
Illustration
3. Relation of order of performance to withholding of performance

ARTICLE 6.1.5 - (Earlier performance)

Article 6.1.5 - (Earlier performance)
COMMENT
1. Obligee in principle entitled to reject earlier performance
Illustration
2. Obligee's right to reject earlier performance conditional on its legitimate interest in so doing
Illustration
3. Effect of acceptance by obligee on its own performance of earlier performance of the other party's obligations
Illustrations
4. Additional expenses entailed by earlier performance to be borne by the performing party
Illustration

ARTICLE 6.1.6 - (Place of performance)

Article 6.1.6 - (Place of performance)
COMMENT
1. Place of performance fixed by, or determined from, the contract when possible
2. Need for suppletive rules
Illustrations
3. Consequences of change in a party's place of business subsequent to conclusion of contract
Illustrations

ARTICLE 6.1.7 - (Payment by cheque or other instrument)

Article 6.1.7 - ()
COMMENT
1. General rule regarding form of payment
Illustration
2. Presumption that payment will be honoured a condition for acceptance
Illustration

ARTICLE 6.1.8 - (Payment by funds transfer)

Article 6.1.8 - (Payment by funds transfer)
COMMENT
1. Admissibility of funds transfers
Illustration
2. Time at which the obligor's obligation is discharged by a funds transfer
Illustration

ARTICLE 6.1.9 - (Currency of payment)

Article 6.1.9 - (Currency of payment)
COMMENT
1. Monetary obligation expressed in currency different from that of place for payment
Illustrations
2. Impossibility for obligor to make payment in currency in which obligation is expressed
Illustration
3. Determination of applicable rate of exchange
Illustration

ARTICLE 6.1.10 - (Currency not expressed)

Article 6.1.10 - (Currency not expressed)
COMMENT
Illustration

ARTICLE 6.1.11 - (Costs of performance)

Article 6.1.11 - (Costs of performance)
COMMENT
Illustration

ARTICLE 6.1.12 - (Imputation of payments)

Article 6.1.12 - (Imputation of payments)
COMMENT
Illustration

ARTICLE 6.1.13 - (Imputation of non-monetary obligations)

Article 6.1.13 - (Imputation of non-monetary obligations)
COMMENT
Illustration

ARTICLE 6.1.14 - (Application for public permission)

Article 6.1.14 - (Application for public permission)
COMMENT
1. Scope of the permission requirement
a. Broad notion of "public permission"
b. Timing of public permission
c. Public permission may affect the contract in whole or in part
d. Public permission may affect the validity or performance of a contract
2. Duty to inform of the existence of a public permission requirement
3. Which party is bound to take measures to obtain a public permission
a. Party with place of business in State requiring public permission
b. Party whose performance requires public permission
Illustration
c. Suppletory nature of provisions on public permissions
Illustration
4. Nature of obligation to take the "necessary measures"
Illustration

ARTICLE 6.1.15 - (Procedure in applying for permission)

Article 6.1.15 - (Procedure in applying for permission)
COMMENT
1. Time for filing an application
2. Expenses
3. Duty to give prompt notice of the grant or refusal of the permission
4. Duty to give notice "whenever appropriate"
5. Consequences of the failure to inform
Illustrations

ARTICLE 6.1.16 - (Permission neither granted nor refused)

Article 6.1.16 - (Permission neither granted nor refused)
COMMENT
1. No decision taken as regards the permission
2. Termination of the contract
Illustration
3. Permission affecting individual terms only
Illustration

ARTICLE 6.1.17 - (Permission refused)

Article 6.1.17 - (Permission refused)
COMMENT
1. Application for permission rejected
2. Legal consequences of a refusal of permission
a. Refusal of permission affecting validity of the contract
Illustration
Illustration
b. Refusal rendering performance of the contract impossible
Illustration
Illustration

SECTION 2: HARDSHIP

ARTICLE 6.2.1 - (Contract to be observed)

Article 6.2.1 - (Contract to be observed)
COMMENT
1. Binding character of the contract the general rule
Illustration
2. Change in circumstances relevant only in exceptional cases

ARTICLE 6.2.2 - (Definition of hardship)

Article 6.2.2 - (Definition of hardship)
COMMENT
1. Hardship defined
2. Fundamental alteration of equilibrium of the contract
Illustration
a. Increase in cost of performance
b. Decrease in value of the performance received by one party
3. Additional requirements for hardship to arise
a. Events occur or become known after conclusion of the contract
b. Events could not reasonably have been taken into account by disadvantaged party
Illustration
Illustration
c. Events beyond the control of disadvantaged party
d. Risks must not have been assumed by disadvantaged party
Illustration
4. Hardship relevant only to performance not yet rendered
Illustration
5. Hardship normally relevant to long-term contracts
6. Hardship and force majeure
7. Hardship and contract practice

ARTICLE 6.2.3 - (Effects of hardship)

Article 6.2.3 - (Effects of hardship)
COMMENT
1. Disadvantaged party entitled to request renegotiations
Illustration
Illustration
Illustration
2. Request for renegotiations without undue delay
3. Grounds for request for renegotiations
4. Request for renegotiations and withholding of performance
Illustration
5. Renegotiations in good faith
6. Resort to the court upon failure to reach an agreement
7. Court measures in case of hardship
Illustration

CHAPTER 7 - NON-PERFORMANCE

SECTION 1: NON-PERFORMANCE IN GENERAL

ARTICLE 7.1.1 - (Non-performance defined)

Article 7.1.1 - (Non-performance defined)
COMMENT

ARTICLE 7.1.2 - (Interference by the other party)

Article 7.1.2 - (Interference by the other party)
COMMENT
1. Non-performance caused by act or omission of the party alleging non-performance
Illustration
2. Non-performance caused by event for which party alleging non-performance bears the risk
Illustration

ARTICLE 7.1.3 - (Withholding performance)

COMMENT
Illustration

ARTICLE 7.1.4 - (Cure by non-performing party)

COMMENT
1. General principle
2. Notice of cure
3. Appropriateness of cure
4. The aggrieved party's interest
Illustration
5. Timing of cure
6. Proper forms of cure
Illustration
7. Suspension of other remedies
8. Effect of a notice of termination
9. Right of aggrieved party to damages
10. The aggrieved party's obligations
Illustration

ARTICLE 7.1.5 - (Additional period for performance)

COMMENT
1. Special characteristics of late performance
2. Effects of granting extension of time for performance
Illustrations

ARTICLE 7.1.6 - (Exemption clauses)

COMMENT
1. The need for a special rule on exemption clauses
2. "Exemption clauses" defined
Illustration
3. Exemption clauses to be distinguished from forfeiture clauses
4. Exemption clauses and agreed payment for non-performance
Illustration
5. Cases where exemption clauses may not be relied upon
Illustrations
6. Consequence of inability to rely on exemption clauses

ARTICLE 7.1.7 - (Force majeure)

COMMENT
1. The notion of force majeure
Illustration
2. Effects of force majeure on the rights and duties of the parties
Illustration
3. Force majeure and hardship
4. Force majeure and contract practice

SECTION 2: RIGHT TO PERFORMANCE

ARTICLE 7.2.1 - (Performance of monetary obligation)

COMMENT

ARTICLE 7.2.2 - (Performance of non-monetary obligation)

COMMENT
1. Right to require performance of non-monetary obligations
2. Remedy not discretionary
3. Exceptions to the right to require performance
a. Impossibility
b. Unreasonable burden
Illustration
c. Replacement transaction
Illustration
d. Performance of an exclusively personal character
Illustrations
e. Request within reasonable time

ARTICLE 7.2.3 - (Repair and replacement of defective performance)

COMMENT
1. Right to performance in case of defective performance
2. Cure of defective performance
3. Restrictions
Illustration

ARTICLE 7.2.4 - (Judicial penalty)

COMMENT
1. Judicially imposed penalty
2. Imposition of penalty at discretion of the court
3. Beneficiary
4. Judicial penalties distinguished from damages and from agreed payment for non-performance
5. Form and procedure
6. Penalties imposed by arbitrators
7. Recognition and enforcement of decisions imposing penalties

ARTICLE 7.2.5 - (Change of remedy)

COMMENT
1. Aggrieved party entitled to change of remedy
2. Voluntary change of remedy
3. Unenforceable decision
4. Time limits

SECTION 3: TERMINATION

ARTICLE 7.3.1 - (Right to terminate the contract)

COMMENT
1. Termination even if non-performance is excused
Illustration
2. Right to terminate the contract dependent on fundamental non-performance
3. Circumstances of significance in determining whether non-performance is fundamental
a. Non-performance substantially depriving the other party of its expectations
Illustration
Illustration
b. Strict performance of contract of essence
c. Intentional non-performance
d. No reliance on future performance
Illustration
e. Disproportionate loss
Illustration
4. Termination after Nachfrist

ARTICLE 7.3.2 - (Notice of termination)

COMMENT
1. The requirement of notice
2. Performance overdue
3. "Reasonable time"
4. Notice must be received

ARTICLE 7.3.3 - (Anticipatory non-performance)

COMMENT
Illustration

ARTICLE 7.3.4 - (Adequate assurance of due performance)

COMMENT
1. Reasonable expectation of fundamental non-performance
2. Right to withhold performance pending adequate assurance of performance
Illustration
3. Termination of the contract

ARTICLE 7.3.5 - (Effects of termination in general)

COMMENT
1. Termination extinguishes future obligations
2. Claim for damages not affected
Illustration
3. Contract provisions not affected by termination
Illustration

ARTICLE 7.3.6 - (Restitution)

COMMENT
1. Entitlement of parties to restitution on termination
Illustration
Illustration
2. Restitution not possible or appropriate
Illustration
Illustration
3. Contracts to be performed over a period of time
Illustration
Illustration
4. Other rules applicable to restitution
5. Rights of third persons not affected

SECTION 4: DAMAGES

ARTICLE 7.4.1 - (Right to damages)

COMMENT
1. Right to damages in general
2. Damages may be combined with other remedies
3. Damages and pre-contractual liability

ARTICLE 7.4.2 - (Full compensation)

COMMENT
1. Aggrieved party entitled to full compensation
2. Damages cover loss suffered, including loss of profit
Illustrations
3. Damages must not enrich the aggrieved party
Illustration
4. Damages in case of changes in the harm
5. Compensation of non-material harm
Illustration

ARTICLE 7.4.3 - (Certainty of harm)

COMMENT
1. Occurrence of harm must be reasonably certain
2. Determination of extent of harm
Illustration
3. Harm must be a direct consequence of non-performance as well as certain

ARTICLE 7.4.4 - (Foreseeability of harm)

COMMENT
Illustrations

ARTICLE 7.4.5 - (Proof of harm in case of replacement transaction)

COMMENT
1. Amount of harm presumed in case of replacement transaction
2. Further damages recoverable for additional harm
Illustration

ARTICLE 7.4.6 - (Proof of harm by current price)

COMMENT
1. Amount of harm presumed when no replacement transaction
2. Determination of "current price"
3. Further damages recoverable for additional harm

ARTICLE 7.4.7 - (Harm due in part to aggrieved party)

COMMENT
1. Contribution of the aggrieved party to the harm
2. Ways of contributing to the harm
Illustrations
3. Apportionment of contribution to the harm
Illustrations
4. Contribution to harm and mitigation of harm

ARTICLE 7.4.8 - (Mitigation of harm)

COMMENT
1. Duty of aggrieved party to mitigate harm
Illustrations
2. Reimbursement of expenses
Illustrations

ARTICLE 7.4.9 - (Interest for failure to pay money)

COMMENT
1. Lump sum compensation for failure to pay a sum of money
2. Rate of interest
3. Additional damages recoverable
Illustration

ARTICLE 7.4.10 - (Interest on damages)

COMMENT

ARTICLE 7.4.11 - (Manner of monetary redress)

COMMENT
1. Lump sum or instalments
Illustrations
2. Indexation
Illustration

ARTICLE 7.4.12 - (Currency in which to assess damages)

COMMENT

ARTICLE 7.4.13 - (Agreed payment for non-performance)

COMMENT
1. Agreed payment for non-performance defined
2. Agreed payment for non-performance in principle valid
Illustration
3. Agreed sum may be reduced
Illustration
4. Agreed payment for non-performance to be distinguished from forfeiture and other similar clauses
Illustrations

Endnotes

Endnotes

Metadata

SiSU Metadata, document information

Manifest

SiSU Manifest, alternative outputs etc.

Principles of International Commercial Contracts, 1994 - UNIDROIT

UNIDROIT

copy @ Lex Mercatoria

UNIDROIT Principles of International Commercial Contracts with Official Commentary [1994]

CHAPTER 6 - PERFORMANCE

SECTION 2: HARDSHIP

ARTICLE 6.2.2 - (Definition of hardship)

Article 6.2.2 - (Definition of hardship)
COMMENT
1. Hardship defined
2. Fundamental alteration of equilibrium of the contract
Illustration
a. Increase in cost of performance
b. Decrease in value of the performance received by one party
3. Additional requirements for hardship to arise
a. Events occur or become known after conclusion of the contract
b. Events could not reasonably have been taken into account by disadvantaged party
Illustration
Illustration
c. Events beyond the control of disadvantaged party
d. Risks must not have been assumed by disadvantaged party
Illustration
4. Hardship relevant only to performance not yet rendered
Illustration
5. Hardship normally relevant to long-term contracts
6. Hardship and force majeure
7. Hardship and contract practice

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.

COMMENT

1. Hardship defined

This article defines hardship as a situation where the occurrence of events fundamentally alters the equilibrium of the contract, provided that those events meet the requirements which are laid down in sub-paras. (a) to (d).

2. Fundamental alteration of equilibrium of the contract

Since the general principle is that a change in circumstances does not affect the obligation to perform (see Art. 6.2.1), it follows that hardship may not be invoked unless the alteration of the equilibrium of the contract is fundamental. Whether an alteration is "fundamental" in a given case will of course depend upon the circumstances. If, however, the performances are capable of precise measurement in monetary terms, an alteration amounting to 50% or more of the cost or the value of the performance is likely to amount to a "fundamental" alteration.

Illustration

1. In September 1989 A, a dealer in electronic goods situated in the former German Democratic Republic, purchases stocks from B, situated in country X, also a former socialist country. The goods are to be delivered by B in December 1990. In November 1990, A informs B that the goods are no longer of any use to it, claiming that after the unification of the German Democratic Republic and the Federal Republic of Germany there is no longer any market for such goods imported from country X. Unless the circumstances indicate otherwise, A is entitled to invoke hardship.

a. Increase in cost of performance

In practice a fundamental alteration in the equilibrium of the contract may manifest itself in two different but related ways. The first is characterised by a substantial increase in the cost for one party of performing its obligation. This party will normally be the one who is to perform the non-monetary obligation. The substantial increase in the cost may, for instance, be due to a dramatic rise in the price of the raw materials necessary for the production of the goods or the rendering of the services, or to the introduction of new safety regulations requiring far more expensive production procedures.

b. Decrease in value of the performance received by one party

The second manifestation of hardship is characterised by a substantial decrease in the value of the performance received by one party, including cases where the performance no longer has any value at all for the receiving party. The performance may be that either of a monetary or of a non-monetary obligation. The substantial decrease in the value or the total loss of any value of the performance may be due either to drastic changes in market conditions (e.g. the effect of a dramatic increase in inflation on a contractually agreed price) or the frustration of the purpose for which the performance was required (e.g. the effect of a prohibition to build on a plot of land acquired for building purposes or the effect of an export embargo on goods acquired with a view to their subsequent export).

Naturally the decrease in value of the performance must be capable of objective measurement: a mere change in the personal opinion of the receiving party as to the value of the performance is of no relevance. As to the frustration of the purpose of the performance, this can only be taken into account when the purpose in question was known or at least ought to have been known to both parties.

3. Additional requirements for hardship to arise

a. Events occur or become known after conclusion of the contract

According to sub-para. (a) of this article, the events causing hardship must take place or become known to the disadvantaged party after the conclusion of the contract. If that party had known of those events when entering into the contract, it would have been able to take them into account at that time and may not subsequently rely on hardship.

b. Events could not reasonably have been taken into account by disadvantaged party

Even if the change in circumstances occurs after the conclusion of the contract, sub-para. (b) of this article makes it clear that such circumstances cannot cause hardship if they could reasonably have been taken into account by the disadvantaged party at the time the contract was concluded.

Illustration

2. A agrees to supply B with crude oil from country X at a fixed price for the next five years, notwithstanding the acute political tensions in the region. Two years after the conclusion of the contract, a war erupts between contending factions in neighbouring countries. The war results in a world energy crisis and oil prices increase drastically. A is not entitled to invoke hardship because such a rise in the price of crude oil was not unforeseeable.

Sometimes the change in circumstances is gradual, but the final result of those gradual changes may constitute a case of hardship. If the change began before the contract was concluded, hardship will not arise unless the pace of change increases dramatically during the life of the contract.

Illustration

3. In a sales contract between A and B the price is expressed in the currency of country X, a currency whose value was already depreciating slowly against other major currencies before the conclusion of the contract. One month afterwards a political crisis in country X leads to a massive devaluation of the order of 80% of its currency. Unless the circumstances indicate otherwise, this constitutes a case of hardship, since such a dramatic acceleration of the loss of value of the currency of country X was not foreseeable.

c. Events beyond the control of disadvantaged party

Under sub-para. (c) of this article a case of hardship can only arise if the events causing the hardship are beyond the control of the disadvantaged party.

d. Risks must not have been assumed by disadvantaged party

Under sub-para. (d) there can be no hardship if the disadvantaged party had assumed the risk of the change in circumstances. The word "assumption" makes it clear that the risks need not have been taken over expressly, but that this may follow from the very nature of the contract. A party who enters into a speculative transaction is deemed to accept a certain degree of risk, even though it may not have been fully aware of that risk at the time it entered into the contract.

Illustration

4. A, an insurance company specialised in the insurance of shipping risks, requests an additional premium from those of its customers who have contracts which include the risks of war and civil insurrection, so as to meet the substantially greater risk to which it is exposed following upon the simultaneous outbreak of war and civil insurrection in three countries in the same region. A is not entitled to such an adaptation of the contract, since by the war and civil insurrection clause insurance companies assume these risks even if three countries are affected at the same time.

4. Hardship relevant only to performance not yet rendered

By its very nature hardship can only become of relevance with respect to performances still to be rendered: once a party has performed, it is no longer entitled to invoke a substantial increase in the costs of its performance or a substantial decrease in the value of the performance it receives as a consequence of a change in circumstances which occurs after such performance.

If the fundamental alteration in the equilibrium of the contract occurs at a time when performance has been only partially rendered, hardship can be of relevance only to the parts of the performance still to be rendered.

Illustration

5. A enters into a contract with B, a waste disposal company in country X, for the purpose of arranging the storage of its waste. The contract provides for a four-year term and a fixed price per ton of waste. Two years after the conclusion of the contract, the environmental movement in country X gains ground and the Government of country X prescribes prices for storing waste which are ten times higher than before. B may successfully invoke hardship only with respect to the two remaining years of the life of the contract.

5. Hardship normally relevant to long-term contracts

Although this article does not expressly exclude the possibility of hardship being invoked in respect of other kinds of contracts, hardship will normally be of relevance to long-term contracts, i.e. those where the performance of at least one party extends over a certain period of time.

6. Hardship and force majeure

In view of the respective definitions of hardship and force majeure (see Art. 7.1.7) under these Principles there may be factual situations which can at the same time be considered as cases of hardship and of force majeure. If this is the case, it is for the party affected by these events to decide which remedy to pursue. If it invokes force majeure, it is with a view to its non-performance being excused. If, on the other hand, a party invokes hardship, this is in the first instance for the purpose of renegotiating the terms of the contract so as to allow the contract to be kept alive although on revised terms.

7. Hardship and contract practice

The definition of hardship in this article is necessarily of a rather general character. International commercial contracts often contain much more precise and elaborate provisions in this regard. The parties may therefore find it appropriate to adapt the content of this article so as to take account of the particular features of the specific transaction.


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