After the general review made in this Chapter (as well as in Chapter 1), in line with the three major remedies and other valuable deliberations, the discussion in this contribution, although the description of the major substantive contents will have to be limited here to a bare outline, is furthered in details grouped roughly under the headings as follows:
Preserving performance by means of specific performance, so-called Nachfrist procedure, cure by non-performing party or the reduction of price is of great significance in the context of international commercial transactions, where a great deal of time and effort may be incurred by the innocent party in finding an alternate one. This is particularly true when the contract concerns unique and otherwise identified or specific items. But even in cases where the items are not especially unique or otherwise identified it might be easier and less expensive to require performance of obligations of the breaching party instead of seeking damages or obtaining the subject matter from somewhere else.
A clear indication from the present CISG is that it provides an aggrieved party, both the seller (under Art. 46) and the buyer (under Art. 62), a clear right to require performance of obligations under the contract. As a rule, the CISG adopts the primacy of specific performance, which was nevertheless once regarded as one of the biggest obstacles to reaching a compromise on the final text of the Convention. This will be discussed in Chapter3. The CISG has certain provisions that even more clearly demonstrate the priority given to specific performance. This is confirmed through giving rise to an opportunity to save the contract from being avoided, on the one hand, by Arts. 47 and 63, where the aggrieved party is given the right to grant an additional period of time for performance -- the so-called Nachfrist procedure; on the other hand, by Art. 48, which provides the seller with the right to cure (by either remedying the non-conformity or delivering substitute goods) under certain conditions that secure the buyer's interests. These two means serving to preserve performance will be given more details in Chapter 4 and Chapter 5, respectively.
Indeed, the three means mentioned above can be grouped roughly under the aggrieved party's right to performance because the nature of these remedies requires the non-performing party to perform his contractual obligations as originally agreed. However, along with the aforementioned means, there is another remedy designed to preserve the bargain i.e. reduction of the price, provided by the traditional civil law doctrine action quanti minoris, where the aggrieved party is entitled to a proportional reduction in the contract price where the other party's performance is incomplete or otherwise fails to conform to the contract. This is expressly contained in CISG Art. 50 and will be dealt with in Chapter 6.
In sum, theses methods preserving performance illustrate that one of the main purposes of the CISG is to prevent termination of the contract by preserving the enforceability of the contract as concluded by the parties if it is feasible and to avoid economic waste in trade. This principle is also followed under the UNIDROIT Principles and the PECL. Furthermore, the examination in this PART will demonstrate that the two sets of Principles have taken a more modern and uniform way to handle these issues. Arguably, the primacy of preserving performance by mean of various remedies and the preference of specific performance over other remedies such as termination (PART III) or damages (PART IV), appear to be established under each of the three instruments and bear great significance in international commercial transactions.
The third major remedy of the aggrieved party -- apart from specific performance and damages -- is termination of the contract. It should be mentioned here that the term "termination" in this context has a meaning resembling in effect the term "avoidance" in the CISG, the same as which is used in the UPICC and PECL in various provisions in the context of the invalidity. In the context of defects of consent resulting in invalidity, "avoidance" means under the UPICC/PECL and most legal systems that a contract becomes void ex tunc. In the context of the CISG "avoidance", by contrast, means that a contract is terminated ex nunc. To avoid being plunged into a battle of conceptual issues, both terms, i.e. "termination" and "avoidance" (as well as their various parts of speech or tenses) are used equally in this PART to mean that a contract is terminated ex nunc, unless specified otherwise.
It is said that the right to termination is the most drastic remedy in case of non-performance, which reflects the gravity of the negative effects of non-performance or performance not complying with the terms of contract. Whether in a case of non-performance by one party the other party should have the right to terminate the contract depends upon the weighing of a number of considerations. A crucial challenge is therefore to identify the grounds on which the aggrieved party may be entitled to terminate the contract where the other party has failed to perform his obligations in accordance with the contract terms. In this respect, Chapter 7 carries on a general discussion on the major grounds for a party's right to terminate the contract as contained in the CISG, UNIDROIT Principles and PECL. To go on with the discussion, Chapter 8 focuses on the concept of fundamental non-performance; Chapter 9 examines the suspension and termination mechanism against anticipatory non-performance; Chapter 10 touches on the termination of breached installment or part.
As to be demonstrated through these examinations, the grounds for termination focus on the fundamentality of the non-performance, actual or anticipatory. An aggrieved party may terminate the contract only if the non-performance of the other party is "fundamental", i.e. material and not merely of minor importance. Read together with the remedial specific performance discussed in PART II, limiting the availability of the right to termination as to be discussed in this PART serves a further contribution to preserving the enforceability of the contract and arguably to promoting good faith and efficiency in commercial dealings.
After the identification of the grounds for termination, Chapter 11 reviews the declaration of termination. As a rule termination is effective only if notice thereof is given by the aggrieved party to the defaulting party. Other than this mere notice, by way of contrast with the approach of some civil law jurisdictions, there is no such procedural requirements restricting the exercise of termination as that the party avoiding the contract obtain judicial approval or confirmation. Termination may be effected by the act of the aggrieved party alone. Generally speaking, termination affects the legal life of the contract and the contractual relationship of the parties. Finally, the effects of termination are to be explored in Chapter 12.
There can be no doubt that it has been established as a general principle of law that in case of breach of contract, the aggrieved party is entitled to damages. Remedies other than damages which are available to an aggrieved party such as specific performance and termination have previously been discussed. To the extent these remedies do not fully protect the aggrieved party's expectations under the contract, a general rule of full compensation which is applied when a party is entitled to claim damages has been well established under each of the three instruments. Generally, damages have to be paid in money and are not to be recovered as restitution or restoration. They require a breach of an obligation regardless of whether the breach consists of non-performance, late performance or defective performance.
In this PART, the discussion in Chapter 13 will indicate that the right to damages is established under the three instruments as a controlling remedy almost invariably pursued either in and of itself or in conjunction with other remedies; and that the principle underpinning the general measure of damages is full compensation. Damages can be claimed no matter whether the breach of contract has been culpably committed intentionally or negligently or in any other way. The mere fact of a breach of contract is sufficient. Compensation for damages is, however, limited by the some methods such as foreseeability of loss, certainty of harm, contribution to harm or the duty to mitigation. These limiting methods will be given details in Chapter 14. Nonetheless, the aggrieved party is generally entitled to recover damages whenever it suffers loss from the other party's unjustified failure to perform. Thus, even in the case of termination of the contract, damages may be requested to compensate the loss arising from such termination. In such a situation, two methods of measuring damages are available. As to be demonstrated in Chapter 15, when the contract is avoided, damages generally amount to the difference between the contract price and the costs of a cover transaction, together with any further damages; where a cover transaction has not been undertaken with regard to the contract breached and a market price is available, the injured party can also measure his damages with the difference between the contract price and the market price.
All legal systems appear to recognize the validity and social utility of a clause which estimates future damages, especially where proof of actual damage would be difficult. Such a clause, sometimes referred to as a "liquidated damages clause" and sometimes as a "penalty clause", is dealt with in the two Principles as agreed payment for non-performance (although the CISG doesn't expressly make such clauses valid in all systems). Such clauses are to be discussed in Chapter 16. Another important aspect which may falls under the general heading of damages is the recovery of attorneys' fees. This issue is of particular significance in international commercial transactions where such fees usually amount to a large number, and therefore will be explored in Chapter 17. Finally, the damages recoverable may include interest upon the amount of the loss from the date at which the loss was incurred to the date of payment. However, the determination of interest is not an issue to be simply resolved after the establishment of liability, but a question that deserves the strictest scrutiny. Thus, Chapter 18 will focus on the payment of interest.
The three main aspects of non-performance in a broad sense are the facts of the breach, i.e. failure to perform an obligation including defective performance and late performance, the responsibility of the non-performing party and the legal consequences of the breach, i.e. particular remedies such as specific performance (PART II), damages (PART III) or termination (PART IV). The matter to be discussed in this PART relates to the responsibility of the non-performing party. The main question addressed in this PART is: How can a party be excused from his primary and secondary obligations (performance and damages) under an originally agreed international commercial contract, or entitled to restoring its equilibrium in case of changed circumstances?
This PART begins with a general review of different approaches to the problem of changed circumstances, which excuses a party from performance of its obligations when a contract has become unexpectedly onerous or impossible to perform. It demonstrates that the concept of changed circumstances, also referred to as rebus sic stantibus, has in its basic form been incorporated into so many legal systems and has found a widely recognized expression in international instruments such as the Vienna Convention on the Law of Treaties, the CISG, UNIDROIT Principles and PECL, that it may be regarded as a general principle of law, albeit on different theoretical bases. This is confirmed by international arbitral practice that lots of awards have also admitted, albeit in exceptional cases and with care and prudence, the application of rebus sic stantibus, and regarded it as a general principle of law. (Chapter 19)
Then the discussion focuses on the two major legal concepts dealing with the problem of changed circumstances, which are exceptions to the basic rule pacta sunt servanda: force majeure (Chapter 20), which is at stake where the performance of the party concerned has, at least temporarily, become impossible, and primarily directed at settling the problems resulting from non-performance, either by suspension or by termination; and hardship (Chapter 21), which occurs where the performance of the disadvantaged party has become much more burdensome, but not impossible, and is mainly directed at the adaptation of the contract. Finally, the force majeure or hardship clauses which are frequently introduced into contracts in international trade are at hand (Chapter 22). It is to be noted that the doctrine of changed circumstances or rebus sic stantibus should only be applied with care and prudence and admitted in exceptional cases, especially if the intention of the parties has been clearly expressed in a contract. The standardized use of relevant clauses may help to define the criteria which may trigger excuses for non-performance and simplify an appropriate procedure for the suspension, termination or adaptation of agreed contracts, and are thus necessary to protect the interests of both parties in cases of unexpected changes in circumstances, in light of the observation of the good faith and equity principle.
Eric von Hippel
Erik S. Raymond