Principles of European Contract Law - Part III 9789041180995, 9041180990

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Principles of European Contract Law Part III Prepared by The Commission on European Contract Law Edited by OIe Lando, Eric Clive, Andre Prüm and Reinhard Zimmermann

KLUWER LAW INTERNATIONAL

PRINCIPLES OF EUROPEAN CONTRACT LAW

PRINCIPLES OF EUROPEAN CONTRACT LAW PART

III

Prepared by The Commission on European Contract Law Chairman: Professor Ole Lando

Edited by OLE LANDO, ERIC CLIVE, ANDRE PROM AND REINHARD ZIMMERMANN

KLUWER LAW INTERNATIONAL THE HAGUE / LONDON / NEW YORK

Library of Congress Cataloging-in-Publication Data is available

web-ISBN 978-90-411-8099-5

Published by Kluwer Law International, P.O. Box 85889, 2508 CN The Hague, The Netherlands. Sold and distributed in North, Central and South America by Kluwer Law International, 101 Philip Drive, Norwell, MA 02061, USA In all other countries, sold and distributed by Kluwer Law International, Distribution Centre, P.O. Box 322, 3300 AH Dordrecht, The Netherlands.

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THE PRINCIPLES OF EUROPEAN CONTRACT LAW Part III

Table of Contents PREFACE TO PART III

xx

MEMBERS OF THE COMMISSION ON EUROPEAN CONTRACT LAW FOR PART III

xx

INTRODUCTION TO PART III

xv

SURVEY OF CHAPTERS IN PART III

xxi

LIST OF ABBREVIATIONS

XXXlll

TEXT OF ARTICLES 10:101 to 17:101 IN ENGLISH AND FRENCH

1

CHAPTER 10: PLURALITY OF PARTIES Section 1: Plurality Article 10:101: Article 10:102: Article 10:103: Article 10:104:

Article 10:105: Article 10:106: Article 10:107: Article Article Article Article

10:108: 10:109: 10:110: 10:111:

of debtors Solidary, Separate and Communal Obligations When Solidary Obligations Arise Liability under Separate Obligations Communal Obligations: Special rule when money claimed for non-performance Apportionment between Solidary Debtors Recourse between Solidary Debtors Performance, Set-off and Merger in Solidary Obligations Release or Settlement in Solidary Obligations Effect of Judgment in Solidary Obligations Prescription in Solidary Obligations Opposability of other Defences in Solidary Obligations

v

59 59 63 65 66 67 69 71

72 73 74 75

vi

Contents

Section 2: Plurality Article 10:201: Article 10:202: Article 10:203: Article 10:204: Article 10:205:

of creditors Solidary, Separate and Communal Claims Apportionment of Separate Claims Difficulties of Executing a Communal Claim Apportionment of Solidary Claims Regime of Solidary Claims

77 77

80 80 81 82

CHAPTER 11: ASSIGNMENT OF CLAIMS Section 1: General Principles Article 11:101: Scope of Chapter Article 11:102: Contractual Claims Generally Assignable Article 11:103: Partial Assignment Article 11:104: Form of Assignment

85 85 90 93 95

Section 2: Effects of Assignment as between Assignor and Assignee Article 11:201: Rights Transferred to Assignee Article 11:202: When Assignment Takes Effect Article 11:203: Preservation of Assignee's Rights against Assignor Article 11:204: Undertakings by Assignor

98 98 100 101 102

Section 3: Effects of Assignment as between Assignee and Debtor Article 11:301: Contractual Prohibition of Assignment Article 11:302: Other Ineffective Assignments Article 11:303: Effect on Debtor's Obligation Article 11:304: Protection of Debtor Article 11:305: Competing Demands Article 11:306: Place of Performance Article 11:307: Defences and Rights of Set-off Article 11:308: Unauthorised Modification not Binding on Assignee

107 107 109 111 114 114 115 117 120

Section 4: Order of Priority between Assignee and Competing Claimants Article 11:401: Priorities

121 121

CHAPTER 12: SUBSTITUTION OF NEW DEBTOR: TRANSFER OF CONTRACT Section 1: Substitution of New Debtor Article 12:101: Substitution: General rules Article 12:102: Effects of Substitution on Defences and Securities

125 125 129

Section 2: Transfer of Contract Article 12: 201: Transfer of Contract

134

Contents

vii

CHAPTER 13: SET-OFF Article Article Article Article Article Article Article

13:101: 13:102: 13:103: 13:104: 13:105: 13:106: 13:107:

Requirements for Set-off Unascertained Claims Foreign Currency Set-Off Notice of Set-Off Plurality of Claims and Obligations Effect of Set-Off Exclusion of Right of Set-Off

134 139 144 146 148 150 151

CHAPTER 14: PRESCRIPTION Section 1: General Provision Article 14:101: Claims subject to Prescription

154 157

Section 2: Periods of Prescription and their Commencement Article 14:201: General Period Article 14:202: Period for a Claim Established by Legal Proceedings Article 14:203: Commencement

162 162 166

Section 3: Extension of Period Article 14:301: Suspension in Case of Ignorance Article 14:302: Suspension in Case of Judicial and Other Proceedings Article 14:303: Suspension in Case of Impediment beyond Creditor's Control Article 14:304: Postponement of Expiry in Case of Negotiations Article 14:305: Postponement of Expiry in Case of Incapacity Article 14:306: Postponement of Expiry: Deceased's Estate Article 14:307: Maximum Length of Period

174 174 179

Section 4: Renewal of Period Article 14:401: Renewal by Acknowledgement Article 14:402: Renewal by Attempted Execution

198 198 200

Section 5: Effects of Prescription Article 14:501: General Effect Article 14:502: Effect on Ancillary Claims Article 14:503: Effect on Set-Off

202 202 205 205

Section 6: Modification by Agreement Article 14:601: Agreements Concerning Prescription

207 207

168

184 186 188 192 193

viii

Contents

CHAPTER 15: ILLEGALITY

Article Article Article Article Article

15:101: 15:102: 15:103: 15:104: 15:105:

Contracts Contrary to Fundamental Principles Contracts Infringing Mandatory Rules Partial Ineffectiveness Restitution Damages

211 213 221 222 225

CHAPTER 16: CONDITIONS

Article 16:101: Types of Condition Article 16:102: Interference with Conditions Article 16:103: Effect of Conditions

229 233 236

CHAPTER 17: CAPITALISATION OF INTEREST

Article 17:101: When Interest to be Added to Capital

239

BIBLIOGRAPHY OF WORKS REFERRED TO IN PART III General National: Austria Common Law (England, Ireland, United States) Denmark Finland France, Belgium and Luxembourg Germany Greece Italy The Netherlands Portugal Scotland Spain Sweden Comparative and general works

245 251 251 251 252 252 252 253 254 254 255 255 255 255 256 256

TABLE OF CASES REFERRED TO IN PART III

257

TABLE OF CODE PROVISIONS AND LEGISLATION REFERRED TO IN PART III

261

TABLE OF CONTENTS OF PARTS I AND III

281

INDEX TO PART III

287

Preface

THE WORK COMPLETED

The present volume is the third and final part of a project, extending over two decades, for the publication of Principles of European Contract Law. The work has been carried out, in three stages, by the Commission on European Contract Law. 1

PARTS I AND

II

The Commission began to prepare the Principles of European Contract Law in 1982. Part 1 of the Principles, dealing with performance, non-performance and remedies, was published in English in 1995. 2 A French version appeared in Paris in 1997. 3 A German version of the articles of Part I was published in a leading periodical on European private law. 4 In 1992 the Commission started to prepare additional principles. A second volume, Principles of European Contract Law, Parts I and II, was published in English in 1999. 5 It covers, in addition to a revised version of the matters covered in Part 1, the formation, validity, interpretation and contents of contracts and the authority of agents to bind their principal. An Italian version of Parts I and II was published in 2001 6 and a German version in 2002.7 French and Spanish versions are in preparation. For the guidance of readers, the full Table of Contents of Parts I and II is reproduced before the Index at the end of this volume.

PART

III

At its last meeting on Part II, in Stockholm in 1995, the Commission agreed that the work should be continued in a third stage which would include principles on plurality of parties, assignment of claims, substitution of a new debtor and transfer of contract, set-off, prescription, illegality, conditions and capitalisation of interest. The Commission began to prepare Part III of the Principles at a meeting in Regensburg in December 1997. It held four later meetings, in Edinburgh from 5th to 9th January 1999, in Graz from 14th to 19th February 2000, in Regensburg from 23rd to 24th November 2000 and in Copenhagen from 6th IX

x

Preface

to 10th February 2001. The Commission is grateful to the host universities for the accommodation and facilities provided. The present Part III is a continuation of the 1999 publication. The two volumes and their 201 articles cover a substantial portion of the general part of contract law. With Part III the Commission has finished its work. However, as is mentioned in the Introduction, the Study Group on a European Civil Code under the chairmanship of Professor Christian von Bar is presently preparing principles on a number of important specific contracts such as sales and services, and on delict, unjustified enrichment, and the transfer of moveable property including secured transactions in moveables. Options for the outcome of this work remain open but it is possible that the Principles of European Contract Law will eventually be merged with these new principles and will become part of a future European Civil Code. The members of the Commission who worked on Part III of the Principles are listed immediately after this preface. Due to pressure of other work Maitre Marc Elvinger left the Commission in 1999 and was replaced by Professor Andre Priim, Luxembourg, who is a professor at the University of Nancy. Having been appointed a member of the English Law Commission, Professor Hugh Beale left the Commission on European Contract Law in 2000 and was replaced by Professor Eric Clive, University of Edinburgh. As will be clear from the list, most of the members of the Commission have been academics. However, several of them have also been practising lawyers or engaged in law reform or public affairs. FURTHER INFORMATION

Information about the literature on the Principles and about further developments on the European scene of potential relevance to the Principles may be found on the web at the home page of the Commission on European Contract Law. 8

How WE WORKED The drafting of the articles, comments and notes was the task of a Reporter. The Reporters for the third stage of the Commission's work were Professor Denis Tallon and Professor Claude Witz (Chapter 10 on Plurality of Parties) Professor Sir Roy Goode (Chapter 11 on Assignment of Claims) Professor Willibald Posch (Chapter 12 on Substitution of New Debtor and Transfer of Contract) Professor Reinhard Zimmermann (Chapters 13 on Set-off and 14 on Prescription)

Preface

Xl

Professor Hector MacQueen (Chapter 15 on Illegality) Professor Michael Bridge (Chapter 16 on Conditions) Professor Ulrich Drobnig (Chapter 17 on Capitalisation of Interest) Each Reporter presented to the Commission a draft chapter with comments and notes on existing national laws, the notes being based largely on information supplied by members of the Commission on the laws of their respective countries. At its meetings the Commission approved the texts, changed them or sent them back for further consideration and development. Before the last two meetings of the Commission all the drafts were considered by a Drafting Group.9 After the last meeting in Copenhagen an Editing GrouplO chaired by Eric Clive checked the terminology, the presentation and the internal coherence and balance of the articles, comments and notes and prepared an edited version in English. This stage involved communication with the authors of the Chapters, all of whom are warmly thanked for their patience and toleration of editing queries and suggestions. Andre Priim translated the Articles (except those in Chapter 10, which were drafted in both French and English from the start) into FrenchY Valuable comments were given by Professor Georges Rouhette, of the University of Auvergne,12 who had kindly agreed to look over the Articles from the point of view of terminological consistency with Parts I and II. The last stage was to send the edited English text of the articles in Part III to all the members of the Commission for an opportunity to comment before the whole text was sent to the publishers. A few minor drafting changes were made as a result of useful comments received. The secretaries to the Commission for the third stage of its work were Sonja Meier and Konrad Rusch both of the University of Regensburg. The Commission is indebted to the secretaries for their valuable work. Their main task was to prepare the minutes of the meetings, a task which they performed with great competence, interest and care. Valued assistance was also given by Martin Laing who helped with meetings of the Drafting Group and by Deirdre Mackintosh who helped with the preparation of the bibliographies. It took the years from 1982 to 1995, and twelve meetings of the Commission to prepare the first volume, which contains 59 articles, the years from 1992 to 1999, and nine meetings to produce the second volume, which contains an additional 73 articles, and the years from 1997 to 2002 and five meetings to bring out the third part which has 69 new articles. There may be several reasons for this acceleration. One is that we gained experience in doing this kind of work.

THE SPONSORS

In 1997 the Commission still had some of the funds which various sponsors through the Stiftverband der deutschen Wissenschaft had placed at its disposalY However, these funds were far from sufficient to cover the expenses of the

xu

Preface

meetings of the Commission and of its working and drafting groups. The costs of these meetings were met by funds made available by Professor Reinhard Zimmermann out of the Leibniz Prize awarded by the German Research Association (Deutsche Forschungsgemeinschaft). Without this support the Commission might not have been able to carry through the work. The same holds true of the support provided by my colleagues the members of the Commission who, without being paid for it, gave their time and effort for the cause. Holte, May 2002 Ole Lando

NOTES 1.

2. 3.

4. 5. 6. 7.

8. 9. 10.

11. 12. 13.

The Commission was reconstituted after the first stage, and again after the second stage, with a different but overlapping membership. For a list of those who worked on Part I ("the First Commission") and Part II ("the Second Commission") of the Principles see Lando and Beale (eds) Principles of European Contract Law. Parts I & II (the Hague 1999) pp. xvii to xviii. For a list of those who worked on Part III ("the Third Commission") see the section immediately following this preface. Lando & Beale (eds.) Principles of European Contract Law, Part 1. Performance, Non-performance and Remedies (Dordrecht 1995). Sold out. Les Principes du droit europeen du contrat. L'execution, ['inexecution et ses suites, Version franyaise, Isabelle de Lamberterie, Georges Rouhette, Denis Tallon (Paris 1997). (1995) 3 ZEuP 864. Lando & Beale (eds.), Principles of European Contract Law. Parts I & II (the Hague 1999) (hereinafter PECL I & II). Castronovo (ed.), Commissione per if diritto europeo dei contratti, Principi di diritto europeo dei contratti, Parte I e II, Edizione italiana a cura di Carlo Castronovo (Milano 2001). Grundregeln des Europtiischen Vertragsrechts, Teife I und II, Deutsche Ausgabe von Christian von Bar und Reinhard Zimmermann (Miinchen 2002). http://www.cbs.dk/departments/law/staff/ol/commission_on_ecl/index.html. The members are listed in the section immediately following this preface. The members are listed in the section immediately following this preface. Chapter 10 (Plurality of Parties) was originally drafted in French and the associated articles were drafted in both French and English. The Chapter was translated into English by Eric Clive. Chairman of the editing groups for Parts I and II. See the Preface to PECL I & II.

Members of the Commission on European Contract Law for Part III of the Principles

The Members of the Commission on European Contract Law which prepared the Principles and text of this volume were as follows. 1 Professor Christian von Bar Professor Hugh Beale (until 2000) Maitre Marc Elvinger (until 1999) Professor Michael Joachim Bonell Professor Michael Bridge Professor Carlo Castronovo Professor Eric Clive (from 2000) Professor Ulrich Drobnig Professor Carlos Ferreira de Almeida Professor Sir Roy Goode Professor Arthur Hartkamp Professor Ewoud Hondius Professor Konstantinos Kerameus Professor Ole Lando Professor Hector MacQueen Professor Fernando Martinez Sanz Professor Bryan McMahon Professor Willibald Posch Professor Andre Priim (from 1999) Professor Jan Ramberg Professor Matthias E. Storme Professor Denis Tallon Professor Thomas Wilhelmsson Professor Claude Witz Professor Reinhard Zimmermann

CHAIRMAN OF THE COMMISSION

Ole Lando Xlll

xiv

Members of the Commission on European Contract Law MEMBERS OF THE DRAFTING GROUP FOR PART III

Hugh Beale Ulrich Drobnig Ole Lando Reinhard Zimmermann MEMBERS OF THE EDITING GROUP FOR PART

III

Eric Clive (Chairman) Ole Lando Andre Priim Reinhard Zimmermann SECRETARIES TO THE COMMISSION FOR PART

III

Sonja Meier Konrad Rusch

NOTE 1. The members of the Commission and the Drafting Groups, Editing Groups and Secretaries who worked on the first two stages of the Commission's work are listed in Parts I and II at pp xvii to xix.

Introduction to Part III

1. A CONTINUATION OF PARTS I AND II

This volume is a continuation of the Principles of European Contract Law, Parts I and II, Combined and Revised 1 which was published in 2000. 2 It is designed to be used in conjunction with the earlier volume. It is important to bear in mind, in particular, that some of the general definitions in the earlier Articles apply for the purposes of the Articles in this volume. This volume has the same purposes as Parts I and II. One is to provide a possible framework for European draft legislation. The Principles could form an important part of a Draft European Civil Code. Work on the patrimonial aspects of such a draft (obligations and aspects of property law) is progressing actively under the leadership of Professor Christian von Bar. The work was encouraged by the European Parliament. 3 The other European institutions have now also become involved and the Parliament's views have become more firm. The Tampere European Council 4 instructed the Council and Commission to carry out preparatory work with a view to achieving 'greater convergence of civil law'. The European Commission in July 2001 adopted a Communication on European Contract Law. 5 Following further consideration by the Committee on Legal Affairs and the Internal Market6 the European Parliament then adopted a resolution on the approximation of the civil and commercial law of the Member States. 7 This noted the deleterious effects of a multiplicity of national laws, and badly harmonised European laws, noted that private international law could not provide an adequate solution and urged the Commission to submit an action plan, comprising various stages of comparative law analysis and use of uniform concepts and terminology and culminating from 2010 in the establishment and adoption of a body of rules on contract law in the European Union that would take account of the common legal concepts and solutions established under previous initiatives. The work of the Commission on European Contract Law was specifically mentioned. Other purposes of the Principles are to provide rules which would be available for express adoption by the parties to contracts, to provide a modern formulation of an internationally accepted law merchant or lex mercatoria for the use of arbitrators and others, and to provide a model available for courts and national legislatures to follow in developing their own laws. Thus, as was stated in the earlier volumes xv

xvi

Introduction to Part III

"the Principles have both immediate and longer-term objectives. They are available for immediate use by parties making contracts, by courts and arbitrators in deciding contract disputes and by legislators in drafting contract rules whether at the European or the national level. Their longerterm objective is to help bring about the harmonisation of general contract law within the European Communities."

2. SUBJECTS COVERED

The chapters in this volume fall into two groups. Those in the first group plurality of parties, assignment of claims, substitution of new debtor and transfer of contract, set-off and prescription - deal with major topics in the law of obligations. They do not simply fill minor gaps in the earlier Principles and would appear as separate chapters in a combined volume covering all three Parts. Those in the other group - illegality, conditions and capitalisation of interest- fill relatively small gaps in the earlier Principles. In a combined volume covering all three Parts they would not appear as separate chapters but would be inserted at the appropriate places in other chapters. Most of the topics covered in the new chapters relate not only to contractual obligations but to obligations in general. The fact that the focus of substantial parts of this volume is the general law of obligations rather than just contractual obligations caused the Commission some concern when it came to the matter of a title. In the end it was decided to retain the title Principles of European Contract Law while recognising that some of those principles apply also to non-contractual obligations and are best expressed in general terms.

3. SOURCES

As in the case of the earlier Parts, the Commission has drawn largely on the legal systems of Member States of the European Union, without regarding any one legal system as a preferred starting point or decisive influence. The search has been for the most appropriate rules for the future, not for prevailing trends or for compromises. Materials from outside Europe, including important international instruments, have also been used where appropriate.

4. STRUCTURE AND METHOD

The Principles contained in this volume consist of a set of principles and rules embodied in 69 Articles divided into 8 chapters. The last chapter in the volume covering Parts I and II was Chapter 9. So the first chapter in this volume is Chapter 10. The structure is as follows.

Introduction to Part III

Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter

10 11 12 13 14 15 16 17

xvii

Plurality of parties Assignment of claims Substitution of New Debtor: Transfer of Contract Set-off Prescription Illegality Conditions Capitalisation of interest

The thinking behind this structure is that it is more natural to deal with an initial plurality of parties before dealing with cases where the parties change subsequently as a result of assignment, substitution of a new debtor or transfer of an entire contract. It is also more natural to deal with these types of case, which concern continuing obligations, before dealing with events, such as setoff or prescription, which end or substantially alter obligations. The reason for dealing with the topics covered by Chapters 15, 16 and 17 at the end of the book is that in any future combined volume covering Parts I, II and III the treatment of these topics could be incorporated at the appropriate places earlier in the volume without disturbing the numbering of the remaining chapters. As in the earlier volume, each chapter consists of a series of Articles, sometimes grouped into sections. Each Article is followed by a comment stating the reasons for the rule, and its purpose, operation and relationship to other rules. The operation of the rule is further explained by the use of illustrations. Concluding notes to the rule identify the principal sources utilised and describe briefly the manner in which the issue is dealt with in the various legal systems of the Member States of the European Communities. Every effort has been made to draft short and general rules which will be easily understood not only by lawyers but also by their clients. The Principles are designed to provide maximum flexibility and to be capable of accommodating future developments in legal thinking in the fields covered. The Commission has therefore resisted the temptation to seek to cover every particular eventuality, which would have led to excessive detail and specificity and might have inhibited future development. It must be remembered that Article 1:106 provides that the Principles are to be interpreted in accordance with their purposes and that issues within the scope of the Principles but not expressly settled by them are so far as possible to be settled in accordance with the ideas underlying them. This is of fundamental importance to the creative function of the Principles.

5.

THE CONCEPT OF A "CLAIM"

The noun "claim" is used frequently in the Articles in this book. It means here a right to performance of an obligation. The meaning of this term is of great importance because it helps to delimit the scope of many provisions. It is

xviii

Introduction to Part III

obvious that "claim" does not cover, for example, land or corporeal movable property or intellectual property, with the result that the Chapter on assignment of claims does not cover transfers of such property. It is equally obvious that the term "claim" does not include fundamental human rights, such as the right to life or liberty, or political rights, such as the right to vote. Nor does it include all rights in the sphere of private law. It does not cover any rights other than rights to performance of obligations. Such excluded rights might, depending on precise content, include • property rights, such as the right of an owner to use or dispose of the property • procedural rights, such as a right to be heard in an action • defensive or protective rights, such as a right to withhold performance, or to avoid or terminate a contract • rights involving mere freedoms or liberties, such as a general right to roam over unenclosed land • certain highly personal rights, such as the right to bodily integrity or privacy • certain rights in the area of family law, such as the right to marry or obtain a divorce • certain rights in the area of succession, such as the right to be heir or executor. A claim, being simply a right to performance, is the counterpart of an obligation to perform. It follows that the articles of the Principles which apply to claims are part of the law of obligations in a wide sense. Unless otherwise stated in particular articles, the source of the obligation to perform does not matter. It might, for example, be a contract, or a rule of law giving a right to damages (for example, for non-performance of a contract or for harm caused by another in a non-contractual situation) or a rule of law on unjustified enrichment. A typical right to performance is a right to the payment of money and in some contexts, such as set-off or assignment, this is by far the most important type of claim, but the term "claim" also covers other rights to performance, such as a right to delivery of goods or a right to services. The obligation to perform may consist of an obligation to refrain from doing something. 6.

EDITING NOTES

The editing has been done on the footing that the present volume is merely the third part of a unified work. Every attempt has therefore been made to maintain consistency with Parts I and II in relation to such matters as terminology, layout, formatting and methods of citation. This has meant in some cases departing from the styles of citation commonly used in the countries from which the sources in question originate, a practice which would be worth reconsidering in any future combined edition.

Introduction to Part III

XIX

The length of the notes differs from chapter to chapter. This is due partly to the different nature of the subject matter. Where the Articles reflect concepts which are recognised in roughly the same way in most European legal systems, detailed consideration of national laws in the Notes is unnecessary. Where, however, national laws adopt a multiplicity of approaches, more detail is appropriate by way of explanation of the background to the rules adopted. 7. CHANGES IN NATIONAL LAWS AFTER COMPLETION OF TEXT

The Commission last met and agreed on the text, subject to editing changes, in February 2001. The comparative notes therefore generally reflect the law as it stood by the end of December 2000. Some editorial updating of references has been possible since then but it has not been possible to include major changes in national laws or other developments which would have involved substantial rewriting. In particular, the German BGB is quoted in its old form, i.e. before the reform of the law of obligations that entered into effect on 1 January 2002. That reform does not affect most of the chapters dealt with in Part III of the Principles. The law of prescription, however, has been completely revised. The new German law on prescription takes account of the international trends mentioned in the comments and notes to Chapter 14 and corresponds in its core features (relatively short general prescription period of three years; the relevance of the discoverability criterion for the running of the general period; a long stop of ten or thirty years) to the system proposed in the present Principles (as well as to that now recommended by the English Law Commission, Law Com No 270, Limitation of Actions, 2001). There are, however, a number of differences in detail. It is worthy of note that the Chapter of the Principles dealing with prescription was made available (in its original unedited form) to the German legislature and was influential in shaping the final reform. For further information and references, see the postcript to the Notes on Article 14:101.

NOTES 1. 2. 3.

4. 5. 6.

7. 8.

Edited by Ole Lando and Hugh Beale. By Kluwer Law International See Resolution of 26 May 1989, OJEC No. C 158/401 of 26 June 1989 and Resolution of 6 May 1994, OJEC No. C 205 (519) of25 July 1994. 15 and 16 October 1999, Conclusion 39. Communication from the Commission to the Council and the European Parliament on European Contract Law July 2001, COM (2001) 398, C5-0471/2001, OJC 255,13.9.2001, p. 1. See the Report by M Lehne, A5-0384/2001. 15 November 2001. 2001/2187(COS)). At p. xxiv.

Survey of Chapters 10-17

CHAPTER

10: PLURALITY OF PARTIES

(a) General. Chapter 10 deals with the situation where there is a plurality of debtors or creditors. This situation can arise in relation to non-contractual as well as contractual obligations. Section 1. Plurality of Debtors (b) Types of plurality

Where there are several debtors in an obligation the consequences vary significantly depending on how the debtors are bound. There are three main possibilities. The first is that they are bound in such a way that all are bound to render the total performance, the creditor being able to require the full performance from anyone of them. The second main possibility is that each is bound only to render a separate part of the performance, the creditor being able to demand only that part from each debtor. The third main possibility is that they are all bound to render the total performance but in such a way that the creditor cannot demand the total performance from one but must demand it from all. (c) Terminology

There is no internationally agreed terminology for these three situations. National terminology varies greatly and is sometimes misleading. The Commission therefore preferred to adopt a new terminology which is not drawn directly from any national system and which attempts to express more accurately the nature of the different types of obligation. Solidarity is the essence of the first type, each being liable for the whole in a question with the creditor. Separateness is the essence of the second type, each being liable only for a share. Communality is the essence of the third type, there being no possibility of separate liabilities unless the obligation is replaced by a monetary obligation. So the Articles refer to solidary, separate and communal obligations. (d) Default rule

Solidary obligation is the default type of obligation where there is a plurality of debtors. This is made clear by Article 10:102. XXI

XXll

Survey of Chapters 10-17

(e) Regime of Solidary Obligations Articles 10:105 to 10:111 contain the rules on the effects of various acts, events or defences on solidary obligations, including the effects of (a) performance by one debtor; (b) set-off or merger in respect of one debtor; (c) release by the creditor of one debtor; (d) a court decision as to the liability or non-liability of one debtor; (e) prescription of the claim against one debtor; and (f) defences which might be available to one debtor. (f) Special Rulesfor Separate and Communal Obligations

Article 10:103 lays down a presumption of equality in the case of separate obligations and article 10:104 contains a special rule for the case where a communal obligation is converted, by non-performance, into an obligation to pay money. In this case the debtors become liable as solidary debtors, there being no further reason to retain the unusual communal nature of the obligation. Section 2. Plurality of Creditors (a) Types of Plurality

The remaining articles of Chapter 10 deal with the situation where there is a plurality of creditors in an obligation. Three situations are covered. In the first, any of the creditors can require full performance from the debtor and the debtor may render performance to any creditor. In the second, the debtor owes each creditor, and each creditor can claim, only that creditor's part of the total performance. In the third, the debtor owes performance to all the creditors together and a creditor can require performance only in favour of all the creditors. (b) Terminology

The terminology is the mirror image of that used for a plurality of debtors. The creditors' claims in the first situation described above are said to be solidary; in the second type, separate and in the third type, communal. Again, the terminology is new, there being no accepted and satisfactory existing terminology. (c) Default rule

There is no default rule in favour of solidarity. In the absence of express provision, the nature of plural claims under a contract will be a question of interpretation. In practice the normal situation is that the creditors have separate claims. Solidarity is risky for creditors as the debtor can pay anyone of their number, who may disappear or become insolvent.

Survey of Chapters 10-17

XX111

(d) Regime of Solidary Claims

The rules for solidary claims are to a large extent based on those for solidary obligations with any necessary modifications. As between the creditors there is a presumption of equality: a creditor who has received more than the due share must transfer the excess to the other creditors to the extent of their shares (Article 10:204). Although full performance to one creditor will extinguish the obligation, a release by one creditor, without there being performance, does not affect the other creditors (Article 10:205(1)). The rules on performance, setoff, merger, judgments, prescription and defences are the same, with appropriate adaptastions, as for solidary obligations (Article 10:205(2)). (e) Special Rulesfor Separate and Communal Claims

There is a presumption of equality in the case of separate claims (Article 10:202). Article 10:203 contains a special rule enabling a debtor in a communal claim, faced with the situation where one creditor refuses performance or is unable to receive performance, to obtain a discharge by depositing money or goods into the hands of a third party.

CHAPTER

11: ASSIGNMENT OF CLAIMS

(a) Importance

The possibility of transferring rights to performance ("claims" - see the Introduction, § 5) is very important in the worlds of business and finance in all European countries. It is necessary for commercial reasons to allow claims, particularly contractual rights to the payment of money, to be transferred as a rule without the consent of the debtor. Yet this gives rise to an obvious risk of prejudice to the debtor who may, for example, be faced with having to pay several creditors instead of one, possibly at inconvenient locations. There are also obvious risks to the assignee, for example the risk that the claim will have been modified by a secret agreement between the assignor and the debtor. For these reasons it is necessary for the Principles to have carefully balanced rules on assignment. Chapter 11 contains these rules. (b) Scope of Chapter

The Chapter deals not only with the assignment of claims (whether outright or in security) but also with the creation of rights in security over claims by methods other than assignment. This extension was made for functional reasons. Many of the policy considerations applying to the creation of rights in security over claims otherwise than by assignment are similar to those applying to assignments of claims - a point recognised in a number of international conventions. Clearly, however, the placing of material on non-assignment securities will have to be reconsidered in the context of any future draft European civil code which deals separately with securities over movables. From

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Survey of Chapters 10-17

a logical and conceptual point of view it is not obvious that material on securities created otherwise than by assignment should appear in a chapter on assignment. It should be noted too that the rules in Chapter 11 can be applied to non-assignment securities only with appropriate adaptations. The Principles themselves do not spell out what these adaptations are but any future national or European law on securities based on the Principles would have to do so. Questions such as form, registration requirements, date of producing certain effects and priorities would have to be considered. (c) General Principles

Section 1 of the Chapter deals with certain general principles applying to assignments, namely that (i) (ii) (iii) (iv)

contractual claims are assignable; future claims are assignable; claims are assignable in part, the assignor, however, being liable to the debtor for any increased costs which the debtor thereby incurs; and no particular form is required (Articles 11:102-11:104).

(d) Effects of Assignment as Between Assignor and Assignee

Section 2 of the Chapter deals with the effects of an assignment as between the assignor and the assignee. It regulates among other things what is covered by the assignment, when it takes effect and the undertakings which the assignor is deemed to give, such as an undertaking that there was a right to assign the claim and that it exists and is enforceable at the time of the assignment (Articles 11:201 -11:204). It is also made clear that an assignment is effective as between the assignor and assignee even if it is ineffective against the debtor (Article 11:203). (e) Effects of Assignment as Between Assignee and Debtor

Section 3 of the Chapter deals with the effects of an assignment as between the assignor and the debtor. It deals with assignments which are ineffective as between the assignee and the debtor because prohibited by an underlying contract. Generally speaking such prohibited assignments are ineffective against the debtor but there are exceptions, including a special exception relating to contracts for the assignment of future rights to the payment of money, which is designed to recognise the realities of large scale factoring of debts (Article 11:301). Section 3 includes the important rule that an assignment to which the debtor has not consented is ineffective against the debtor so far as it relates to a performance which the debtor, by reason of the nature of the performance or the relationship of the debtor and the assignor, could not reasonably be required to render to anyone except the assignor (Article 11:302). It also includes rules on when the debtor becomes liable to perform in favour of the assignee rather than the assignor, the general rule being that the debtor is bound to perform in favour of the assignee only if the debtor has received a

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notice in writing from the assignor or the assignee which reasonably identifies the claim which has been assigned and requires the debtor to give performance to the assignee (Article 11:303). The section also contains the universally recognised rule that the assignee is in no better position than the assignor the debtor may set up against the assignee all substantive and procedural defences to the assigned claim which the debtor could have set up against the assignor (Article 11:307(1)). And it contains rules to protect the debtor in the case of competing demands or demands for performance at a different place to that specified in the underlying contract (Articles 11:305-11:306). (f) Priority Between Assignee and Competing Claimants

Section 4 of the Chapter deals with the question of priority between the assignee and competing claimants. The general rule, subject to qualifications, is that the assignee whose assignment is first notified to the debtor has priority (Article 11:401). CHAPTER

12: SUBSTITUTION OF NEW DEBTOR: TRANSFER OF CONTRACT

(a) General

Assignment is concerned with the transfer of rights to performance ("claims"). Chapter 12 is concerned with the transfer of obligations, by the substitution of a new debtor for the original debtor in the obligation, and with the transfer of a whole contract, including both rights and obligations. An important difference between the assignment of a claim under Chapter 11 and the transfer of an obligation or of an entire contract under Chapter 12 is that, whereas an assignment can take place without the consent of the debtor, the transfer of an obligation or of an entire contract requires the consent of all three parties. It would clearly be unacceptable to allow a new debtor to be foisted on a creditor without the creditor's consent. (b) Substitution of New Debtor

Section 1 of Chapter 12 deals with the substitution of a new debtor for the existing debtor. The rules on this topic are contained in two Articles. The topic is therefore much less closely regulated than assignment. As the agreement of all three parties is required there is less need for special protective rules. There is, however, a need (i) (ii)

to make it clear that it is possible by agreement to substitute a new debtor, with the effect that the original debtor is discharged; and to provide for the possibility, extremely important in practice, of advance consent by the creditor to a substitution.

These matters are dealt with in Article 12:101. There is also a need to regulate the effect of the substitution of a new debtor on defences and securities. This is done by Article 12:102.

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Survey of Chapters 10-17

(c) Transfer of Contract It is often necessary to replace a party to a contract entirely by another party.

This commonly happens in the case of contracts of long duration such as certain leases. It also commonly happens as a result of company amalgamations or take-overs. Section 2 of Chapter 12 deals with this situation. It makes it clear that the transfer of a whole contract, including both rights and obligations, is possible with the consent of the original parties to the contract and the transferee. For the rest it adopts by reference the rules on assignment, in so far as claims are transferred, and the rules on substitution of a new debtor, in so far as obligations are transferred. (d) Interface with Novation

It is important to note that the transfers dealt with in Chapters 11 and 12 do

not amount to novation in the sense of the extinction of rights and obligations under the original contract and their replacement by rights and obligations under a new contract. The conceptual framework of Chapters 11 and 12 is that the contract continues but rights or obligations, or a whole package of rights and obligations, are transferred. It is, of course, always possible for all the parties concerned to agree to a novation in the above sense. Nothing in Chapters 11 or 12 prevents this. CHAPTER 13: SET-OFF

(a) General

The topic dealt with in Chapter 13 is known in many legal systems by a term derived from the Latin compensatio. It is called "compensation" in Scottish law, for example. However, as the word "compensation" has other meanings in English, it was thought to be clearer to use the term "set-off". This term has the advantage of indicating that the topic under discussion is concerned with the circumstances in which something can be set off against something else. The typical underlying question requiring resolution by the law is this: if A has a right to be paid €1000 by Band B has a right to be paid €500 by A, must both parties pay, or is it possible to arrive at the solution, and if so how, whereby everything is solved by a payment of €500 by B to A? Chapter 13 makes it clear that set-off is possible in this situation, and in other slightly less obvious situations, subject to certain limitations. (b) How Set-offis Effected

Set-off under Chapter 13 does not take place automatically. There may well be situations where, for accounting transparency or other reasons, both parties would prefer full payments to be made in both directions. Modern methods of transferring funds mean that this will often not be at all inconvenient. Under the Principles, a party wishing to effect set-off must give notice to

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the other party (Article 13:104). So, in the above example, if B wishes to arrive at the position whereby a single payment of €500 is all that is required, it will be necessary for B to give notice to A that set-off is to be operated. B must be entitled to make payment of the €500 and entitled to demand payment of the counterpart debt. (Article 13:101). In a case where there are several claims it will, of course, be necessary for B to identify the claim in relation to which setoff is to operate. (Article 13:105). (c) When Set-off is Possible

Set-off is possible where the claims are of the same kind (Article 13:101). Typically they will both be claims for the payment of money. The currency need not necessarily be the same, however (Article 13:103). The two parties must be debtor and creditor of each other. An individual who happens to be a trustee or a representative cannot set off a debt due by him or her as an individual against a debt due to the trust or person represented. Normally both claims must be ascertained. Article 13:102 provides, however, that an unascertained claim may be set-off where this would not operate to the other party's prejudice, and an absence of prejudice is presumed where the claims of both parties arise from the same legal relationship. Article 13:107 deals with the situations where set-off is excluded. Set-off may be excluded by agreement. Claims which are not subject to attachment, typically those, such as certain subsistence allowances, where it would be contrary to public policy to allow the claim to be interfered with, may not be extinguished by set-off. The same applies to claims arising from wilful delict. A creditor who is owed a large sum by a debtor who has no chance of ever being able to pay is not to be allowed to assault the debtor, safe in the knowledge that any claim to damages can be extinguished by set-off. (d) Effect of Set-off

Article 13:106 provides that set-off discharges the obligations, as far as they are coextensive, as from the time of notice. It is important to note that set-off operates prospectively under the Principles. This is a simpler and more satisfactory solution than that operating under many national laws at present where set-off operates retrospectively.

CHAPTER

14: PRESCRIPTION

(a) General

This chapter deals with the effect of the running of time on rights to performance ("claims"). There are sound policy reasons for providing that rights are affected if a long time elapses without the creditor taking any steps to assert them. Debtors are lulled into a false sense of security. Proof becomes more difficult and costly. There are basically two options. One is to make everything depend

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Survey of Chapters 10-17

on the circumstances of the case, rights being adversely affected only if a court concludes that there has been prejudice to the debtor. The other is to lay down arbitrary periods of time after which rights are affected. In the interests of certainty and predictability the Principles, in common with European national systems, adopt the second approach. However, the Principles also recognise the need for flexibility and the difficulties faced by claimants in certain cases. They therefore include a provision, based on the discoverability criterion, to ensure that the period of prescription does not generally run against a person who cannot reasonably be expected to know of the existence of the claim. They also include provisions suspending the running of the period of prescription, or postponing its expiry, in certain cases where this is required by considerations of fairness. An important feature of the rules in Chapter 14 is that the prescription regime is very streamlined compared to that existing in many national systems. There is, in particular, only one period of prescription for all claims other than those based on a judgment. Many national systems are, or have until recently been, complicated by a multiplicity of periods and the associated problems of delimitation. (b) Scope

The Chapter applies to claims of all kinds, including rights to performance under a contract and rights to damages for non-performance of a contract or for harm caused by another in a non-contractual situation. (See the Introduction, § 5.) (c) Conceptual Framework

The Articles distinguish between prescription, which is the legal effect, and the period of prescription, which is the length of time after which prescription operates to change the nature of the right. Prescription operates at a precise moment. The period of prescription starts, runs and expires. Its running can be suspended. Its expiry can be postponed. In certain cases a new period may start to run before the initial period has expired. (d) The effect of prescription

The effect of prescription under Chapter 14 is that the debtor is entitled to refuse performance. It is neither a simple limitation of actions, operating procedurally in the context of litigation, nor a full extinctive prescription, extinguishing rights and obligations automatically. The idea that the obligation continues even though the debtor is entitled to refuse performance may seem like a contradiction in terms. Nonetheless the notion of an imperfect obligation of this nature is well known and useful. Its main significance is that if the debtor does perform, the performance is not a gift or a performance made without legal ground but a performance under an existing obligation. It follows that, as Article 14:501 expressly provides, anything paid or transferred in order to

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XXIX

discharge a claim may not be reclaimed merely because the period of prescription had expired at the time of the payment or transfer. It also follows that, if the debtor chooses not to invoke prescription, a claim in relation to which the period of prescription has expired may nonetheless be set off (Article 14:503). (e) The Period of Prescription The general period of prescription under the Principles is 3 years: this applies to all claims except those established by a judgment or the equivalent (such as an arbitral award) where the period is 10 years (Articles 14:201-14:202). The period of prescription for ancillary claims expires not later than the period for the principal claim (Article 14:502). The simplicity of this regime is in stark contrast to the complexity which has been common in national laws where there has often been, and sometimes still is, a multiplicity of different periods. It is important to note, however, that the length of the period may be extended in various situations, either by a suspension of its running while the situation subsists or by the postponement of its expiry until a year after the situation comes to an end. The period also begins to run again in certain situations, including the case where the debtor acknowledges the claim. (f) When the Period Begins to Run

The period begins to run when the debtor has to effect performance or, in the case of a right to damages, from the date of the act which gives rise to the claim. In the case of a claim established by a judgment the period begins to run when the judgment obtains the effect of res judicata. When the debtor is under a continuing duty to do or refrain from doing something the period begins to run with each breach of duty (Article 14:203). (g) Suspension of Running of Period

The running of the period is suspended: (i) (ii) (iii)

so long as the creditor does not know of, and could not reasonably know of, the identity of the debtor or the facts giving rise to the claim; during judicial or equivalent proceedings on the claim; and so long as the creditor is prevented from claiming by an impediment arising in the last six months of the period if the impediment is one which is beyond the creditor's control and which the creditor could not reasonably have been expected to avoid or overcome (Articles 14:301-14:303).

The type of impediment covered here does not include incapacity on the part of the creditor: this is covered by a separate Article. (h) Postponement of Expiry of Period

There are three situations in which the expiry of the period of prescription is postponed under the Principles.

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xxx (i)

(ii)

(iii)

If the parties have entered into negotiations about the claim or its circumstances, the period does not expire before one year has passed after the date of the last communication in the negotiations. If a person subject to an incapacity is without a representative, the period does not expire before one year has passed after either the incapacity has ended or a representative has been appointed. If the creditor or debtor has died, the period of prescription does not expire before one year has passed after the claim can be enforced by or against an heir or representative (Articles 14:304-14:306).

The rules on postponement of the expiry of the period operate in a different way from the rules on suspension of its running. Suspension always extends the period but does not guarantee the creditor any minimum time for action after the impeding situation comes to an end. The rules on postponement of the expiry of the period may not extend the period at all if, for example, the impeding situation ends in the first year of the period. On the other hand, they always guarantee the creditor a year in which to take action after the impeding situation has come to an end. (i) Maximum Effect of Suspension of Running or Postponement of Expiry In the interests of certainty Article 14:307 provides that the period of prescription cannot be extended by suspension of its running or postponement of its expiry to more than 10 years or, in the case of personal injuries, to more than 30 years. This does not apply to suspension during judicial proceedings. (j) Renewal of Period of Prescription The general period of prescription begins to run again if the debtor acknowledges the claim (Article 14:401). The ten year period of prescription for claims established by a judgment or the equivalent begins to run again with each reasonable attempt at execution by the creditor (Article 14:402). (k) Modification by Agreement Article 14:601 makes it clear that the parties to an obligation can modify the requirements for prescription by agreement but cannot reduce the period of prescription to less than one year or extend it to more than thirty years. There is, however, a difference between modifying the requirements for prescription and establishing the contents and boundaries of the obligations undertaken. Article 14:601 does not prevent parties from undertaking obligations for short or long times, as they consider appropriate. CHAPTER 15: ILLEGALITY

(a) General

This Chapter deals with the effect of illegality on contracts. It distinguishes

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between contracts which are contrary to principles recognised as fundamental in the laws of the Member States of the European Union and contracts which infringe less fundamental rules. Contracts which infringe fundamental principles are automatically ineffective (Article 15:101). A contract for the transport of slaves would, for example, be ineffective by operation of law under the Principles. Contracts which infringe other laws are not automatically ineffective (unless the law which is infringed expressly so provides) but may be declared ineffective by a court or tribunal. The Principles lay down certain guidelines for courts and tribunals to apply in deciding this question (Article 15:102). If the law which is infringed says nothing about the effect on the contract, and if the matter is never raised before a court or tribunal, the contract remains effective. (b) Contracts Contrary to Fundamental Principles

Article 15:101 provides that a contract is of no effect to the extent that it is contrary to principles recognised as fundamental in the laws of the Member States of the European Union. (c) Contracts Infringing Mandatory Rules Contracts which infringe mandatory rules vary greatly in the extent to which they are objectionable on the ground of illegality. Some may be seriously and obviously illegal and of such a nature that any reasonable person would say that they ought not to have effect. Others may involve only an unintentional infringement of an obscure technical rule of a regulatory nature. Indeed the rule itself may provide that the validity of infringing contracts is to be unaffected, the only sanction being a penalty. It would therefore be inappropriate to provide in the Principles for automatic ineffectiveness. Instead Article 15:102 provides that if the rule in question provides expressly for its effect on the contract then that result follows. So if, for example, a mandatory law provides that contracts which infringe certain protective rules are to be enforceable by but not against a consumer then that result follows. Where the rule infringed does not provide expressly for the effect of an infringement on the contract, which is very often the case, the Principles adopt a flexible approach, leaving it to any court or tribunal dealing with the issue to hold the contract wholly or partly ineffective as may be appropriate and proportional having regard to certain guidelines set out in the Principles. These include the purpose of the rule which has been infringed; the category of persons for whose protection the rule exists; any sanction that may be imposed under the rule infringed; whether the infringement was intentional; the seriousness of the infringement; and the closeness of the relationship between the infringement and the contract. (d) Other Rules

The Principles make it clear that a contract may be rendered only partially ineffective on the ground of illegality (Article 15:103). They provide for the

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Survey of Chapters 10-17

possibility of restitution of what has been paid or transferred under a contract rendered ineffective on the ground of illegality and they provide for the possibility of recovering damages from a person who knew or ought to have known of the illegality but nonetheless entered into the illegal contract (Articles 15:104-15:105). Both these remedies are made available in a flexible way which enables all the factors to be taken into account. CHAPTER 16: CONDITIONS

Chapter 16 deals with contractual obligations which are made conditional on the occurrence or non-occurrence of a future uncertain event. It draws the classical distinction between a suspensive condition, which means that the obligation takes effect only if the condition is fulfilled, and a resolutive condition, which brings an existing obligation to an end if the condition is fulfilled (Article 16:101). The most important provision in the Chapter is Article 16:102 which provides that if fulfilment of a condition is prevented by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment would have operated to that party's disadvantage, the condition is deemed to be fulfilled. There is a similar provision for the case where fulfilment of a condition is brought about by a party, contrary to duties of good faith and fair dealing or co-operation. Here, if fulfilment operates to that party's advantage, the condition is deemed not to have been fulfilled. CHAPTER 17: CAPITALISATION OF INTEREST

This short Chapter is designed to fill a gap in the earlier provisions of the Principles on the consequences of delay in performance. Article 9:508 (1) had already provided for interest to be payable on overdue amounts but said nothing about capitalisation of interest (or compound interest). Article 17:101 now provides that interest payable according to Article 9:508(1) is to be added to the outstanding capital every 12 months. This rule may be excluded by the parties and is treated as excluded if the parties have provided for interest upon delay in payment.

List of Abbreviations in Part III

See also the bibliographies at the end of the book. This list does not include common abbreviations ("e.g.", for example) which can be found in standard dictionaries. ABGB A.C. AcP AJCL All E.R. A.P. art(s). BAG BAGE BGB BGB-KE BGB-PZ BGBl BGH BGHZ Bull.civ. BW c.A. Camb.L.J. Casso Cass.civ. Cass.com. Cass.req. Cass.soc. CB(ns)

Allgemeines Burgerliches Gesetzbuch (Austrian Civil Code) Appeal Cases (1891-) (Law Reports, England and Wales) Archiv fUr die civilistische Praxis American Journal of Comparative Law All England Law Reports (1936-) Areios Pagos (Greek Supreme Court in civil matters) article(s) Bundesarbeitsgericht Amtliche Sammlung der Entscheidungen des Bundesarbeitsgerichts Burgerliches Gesetzbuch (German Civil Code) Draft provisions of the German Civil Code, as proposed by the German Commission on Reform of the Law on Obligations Draft provisions of the German Civil Code, as proposed in the report by Peters and Zimmermann Bundesgesetzblatt (Federal Law Gazette, Germany) Bundesgerichtshof (German Supreme Court) Entscheidungen des Bundesgerichtshofs in Zivilsachen Bulletin des arrets de la Chambre Civile de la Cour de Cassation (1792-) Burgerlijk Wetboek (Netherlands Civil Code) Court of Appeal Cambridge Law Journal (1921-) Cour de cassation (Belgium, France, Luxembourg); Corte di Cassazione (Italy) Cour de cassation (Chambres civiles) Cour de cassation (Chambre commerciale et financiere) Cour de cassation (Chambre des requetes) Cour de cassation (Chambre sociale) Common Bench (new series) (England and Wales law reports) XXXlll

xxxiv

List of Abbreviations in Part III

CC Chron. CISG Comm.c. D. Danske Lov D.L.R. ELR ERPL EU EvBI if. Fs Foro It. Foro pad Giur. It. Giust. civ. H.L.

Hell.Dni. HGB HR IECL lL.R.M. lR. JBl J.Cl. JZ K.B. Lloyd's Rep. LM M

Mass. Giur. It. MLR NGCC Ned.Jur NJA NJW NoB NTBR OBA

Civil Code (Belgium, France, Greece, Italy, Luxembourg, Quebec, Portugal, Spain, Switzerland) Chronique United Nations Convention on Contracts for the International Sale of Goods Commercial Code (Belgium, France, Spain, Portugal) Recueil Dalloz (France) Kong Christian den Femtis Danske Lov 1683 (Danish Code) Dominion Law Reports (Canada) Edinburgh Law Review European Review of Private Law European Union Evidenzblatt der Rechtsmittelentscheidungen (Austria - part of Osterrreichische Juristenzeitung) and following (page or pages, article or articles, etc.) Festschrift II Foro italiano II Foro padano Giurisprudenza Italiana Giustizia civile House of Lords (United Kingdom Supreme Court in civil matters) Helliniki Dikaiosyni Handelsgesetzbuch (Austrian and German Commercial Codes) Hoge Raad (Netherlands Supreme Court) International Encyclopedia of Comparative Law Irish Law Reports Monthly (1981-) Irish Reports (1894-) Juristische Blatter (Austria) J urisclasseur Juristenzeitung (Germany) King's Bench Division (1891-) Law Reports (England and Wales) Lloyd's List Reports (1951-) Lindenmaier/M6hring (Nachschlagewerk des BGH) Macpherson (Series of Scottish law reports 1862-73) Massimario de Giurisprudenza Italiana Modern Law Review La nuova giurisprudenza civile comment at a Nederlandse Jurisprudentie Nytt Juridiskt Arkiv (Swedish Supreme Court Annual, 1874-) Neue Juristische Wochenschrift Nomiko Virna (Greece) Nederlands Tijdschrift voor Burgerlijk Recht Osterreichisches Bankarchiv

List of Abbreviations in Part III

OGH O.J. OR ORZ Pas. Pas. Lux. PECL PNA Q.B. Q.B.D. R

RabelsZ Rep.Droit civ. RIDC Riv.dir.comm. Riv. Notar. R.W. Russ S. SC SCR STJ STS SZ TPR TR UCC WBI WPNR ZEuP ZPO

xxxv

Oberster Gerichtshof (Austrian Supreme Court) Official Journal (of the European Communities) Obligationenrecht/Code des Obligations (Switzerland) Osterreichische Richterzeitung Pasicrisie (Belgium) Pasicrisie (Luxembourg) The Principles of European Contract Law Promissory Notes Act (Nordic countries) Queen's Bench Division (1891-) Law Reports (England and Wales) Queen's Bench Division (1875-1890) Law Reports (England and Wales) Rettie (Series of Scottish law reports 1873-98) Rabels Zeitschrift fUr ausHindisches und internationales Privatrecht Repertoire Dalloz de droit civil Revue Internationale de Droit Compare Rivista del diritto commerciale 1903Rivista del notariato Rechtskundig Weekblad Russell (English Reports 1823-29) Recueil Sirey Session Cases (Scottish law reports) Supreme Court Reports (Canada) Supremo Tribunal de Justi~a (Portugese Supreme Court) Sentencias del Tribunal Supremo (Spain) Sammlung der Entscheidungen des Osterreichischen Obersten Gerichtshofes in Zivil- und Justizverwaltungsachen Tijdschrift voor Privaatrecht (The Netherlands) Tijdschrift voor Rechtsgeschiedenis (The Netherlands) Uniform Commercial Code (United States of America) Wirtschaftsrechtliche Blatter (Austria) Weekblad voor Privatrecht, Notariaat en Registratie (The Netherlands) Zeitschrift fUr Europaisches Privatrecht Zivilproze13ordnung (Austria and Germany)

PRINCIPLES OF EUROPEAN CONTRACT LAW

TEXT OF ARTICLES IN PART III IN ENGLISH AND FRENCH

1

CHAPTER 10

Plurality of Parties Section 1: Plurality of Debtors

ARTICLE

(1) (2) (3)

10:101: SOLIDARY, SEPARATE AND COMMUNAL OBLIGATIONS

Obligations are solidary when all the debtors are bound to render one and the same performance and the creditor may require it from anyone of them until full performance has been received. Obligations are separate when each debtor is bound to render only part of the performance and the creditor may require from each debtor only that debtor's part. An obligation is communal when all the debtors are bound to render the performance together and the creditor may require it only from all of them.

ARTICLE

10:102: WHEN SOLIDARY OBLIGATIONS ARISE

(1) If several debtors are bound to render one and the same performance to a creditor under the same contract, they are solidarily liable, unless the contract or the law provides otherwise. (2) Solidary obligations also arise where several persons are liable for the same damage. (3) The fact that the debtors are not liable on the same terms does not prevent their obligations from being solidary.

ARTICLE

10:103: LIABILITY UNDER SEPARATE OBLIGATIONS

Debtors bound by separate obligations are liable in equal shares unless the contract or the law provides otherwise.

2

CHAPITRE 10

Pluralite de sujets Section 1: Pluralite de debiteurs

ARTICLE 10:101: OBLIGATIONS SOLID AIRES, DISJOINTES ET COMMUNES

(1)

(2)

(3)

Les obligations sont solidaires lorsque to us les debiteurs sont tenus d'executer une seule et meme prestation et que Ie creancier peut la reclamer a chacun d'eux jusqu'a complete execution. Les obligations sont disjointes lorsque chacun des debiteurs n'est tenu d'executer qu'une part de la prestation et que Ie creancier ne peut reclamer a chacun que sa part. L'obligation est commune lorsque tous les debiteurs sont tenus d'executer ensemble la prestation et que Ie creancier ne peut en reclamer l'execution qu'a tous.

ARTICLE 10:102: SOURCES DES OBLIGATIONS SOLIDAIRES

(1)

(2) (3)

Lorsque plusieurs debiteurs sont tenus envers un creancier d'une seule et meme prestation en vertu d'un meme contrat, ils sont codebiteurs solidaires, a moins que Ie contrat ou la loi n'en disposent autrement. Les obligations sont solidaires egalement lorsque plusieurs personnes sont responsables d'un meme prejudice. Des modalites differentes de l'obligation ne font point obstacle a la solidarite.

ARTICLE

10:103: REGIME DES OBLIGATIONS DISJOINTES

Les debiteurs lies par des obligations disjointes sont tenus envers Ie creancier par des parts egales, a moins que Ie contrat ou la loi n'en disposent autrement.

3

4

Chapter 10

ARTICLE

10:104: COMMUNAL OBLIGATIONS: SPECIAL RULE WHEN MONEY CLAIMED FOR NON-PERFORMANCE

Notwithstanding Article 10:101(3), when money is claimed for non-performance of a communal obligation, the debtors are solidarily liable for payment to the creditor.

ARTICLE

(1) (2)

10:105: ApPORTIONMENT BETWEEN SOLIDARY DEBTORS

As between themselves, solidary debtors are liable in equal shares unless the contract or the law provides otherwise. If two or more debtors are liable for the same damage under Article 10:102(2), their share of liability as between themselves is determined according to the law governing the event which gave rise to the liability.

ARTICLE

(1)

(2)

(3)

10:106: RECOURSE BETWEEN SOLIDARY DEBTORS

A solidary debtor who has performed more than that debtor's share may claim the excess from any of the other debtors to the extent of each debtor's unperformed share, together with a share of any costs reasonably incurred. A solidary debtor to whom paragraph (1) applies may also, subject to any prior right and interest of the creditor, exercise the rights and actions of the creditor, including accessory securities, to recover the excess from any of the other debtors to the extent of each debtor's unperformed share. If a solidary debtor who has performed more than that debtor's share is unable, despite all reasonable efforts, to recover contribution from another solidary debtor, the share of the others, including the one who has performed, is increased proportionally.

ARTICLE

10:107: PERFORMANCE, SET-OFF AND MERGER IN SOLIDARY OBLIGATIONS

(1) (2)

Performance or set-off by a solidary debtor or set-off by the creditor against one solidary debtor discharges the other debtors in relation to the creditor to the extent of the performance or set-off. Merger of debts between a solidary debtor and the creditor discharges the other debtors only for the share of the debtor concerned.

Chapitre 10 ARTICLE

5

10:104: OBLIGATION COMMUNE: REGLE SPECIALE EN CAS DE DOMMAGES-INTERETS DUS POUR INEXECUTION

Nonobstant l'article 10:101, aline a 3, les debiteurs d'une obligation commune sont tenus solidairement a l'egard du creancier lorsque l'inexecution de l'obligation se res out en dommages-interets.

ARTICLE

10:105: REPARTITION DE LA DETTE ENTRE LES CODEBITEURS SOLID AIRES

(1) (2)

Les codebiteurs solidaires sont tenus, les uns a l'egard des autres, a des parts egales, a moins que Ie contrat ou la loi n'en disposent autrement. Si plusieurs personnes sont solidairement responsables d'un meme prejudice en vertu de l'article 10:102 alinea 2, leur part contributive de responsabilite est determinee seIon les regles regissant Ie fait generateur de responsa bili teo

ARTICLE

(1) (2)

(3)

10:106: RECOURS ENTRE LES DEBITEURS SOLIDAIRES

Le debiteur qui a paye plus que sa part peut reclamer l'excedent a l'un quekonque des autres debiteurs dans la limite de la part impayee de chacun, ainsi que la part correspondant aux frais qu'il a engages. Le debiteur solidaire a qui s'applique l'alinea precedent peut egalement, sous reserve des droits qu'aurait pu conserver Ie creancier, exercer les droits et actions de ceIui-ci, y compris les si'tretes qui s'y attachent, pour repeter contre l'un quekonque des autres debiteurs la part impayee de chacun, a condition de respecter les droits anterieurs du creancier. Lorsque Ie debiteur solidaire qui a paye plus que sa part n'a pu, en depit d'efforts raisonnables, repeter sa contribution contre l'un des autres codebiteurs solidaires, la part des autres, y compris celui qui a paye, est augmentee en proportion. ARTICLE 10:107: OBLIGATIONS SOLIDAIRES: PAIEMENT, COMPENSATION, CONFUSION

(1)

(2)

Le paiement ou la compensation par un debiteur solidaire ou la compensation operee par Ie creancier avec la dette de l'un des debiteurs solidaires libere les autres a l'egard du creancier dans la mesure du paiement ou de la compensation. La confusion intervenue dans les rapports entre Ie creancier et un debiteur solidaire ne libere les codebiteurs que de la part du debiteur concerne.

6

Chapter 10 ARTICLE

(1)

(2) (3)

10:108: RELEASE OR SETTLEMENT IN SOLIDARY OBLIGATIONS

When the creditor releases, or reaches a settlement with, one solidary debtor, the other debtors are discharged of liability for the share of that debtor. The debtors are totally discharged by the release or settlement if it so provides. As between solidary debtors, the debtor who is discharged from that debtor's share is discharged only to the extent of the share at the time of the discharge and not from any supplementary share for which that debtor may subsequently become liable under Article 10:106(3).

ARTICLE

10:109: EFFECT OF JUDGMENT IN SOLIDARY OBLIGATIONS

A decision by a court as to the liability to the creditor of one solidary debtor does not affect: (a) the liability to the creditor of the other solidary debtors; or (b) the rights of recourse between the solidary debtors under Article 10:106.

ARTICLE

10:110: PRESCRIPTION IN SOLIDARY OBLIGATIONS

Prescription of the creditor's right to performance ("claim") against one solidary debtor does not affect: (a) the liability to the creditor of the other solidary debtors; or (b) the rights of recourse between the solidary debtors under Article 10:106.

ARTICLE

10:111: OPPOSABILITY OF OTHER DEFENCES IN SOLIDARY OBLIGATIONS

(1)

(2)

A solidary debtor may invoke against the creditor any defence which another solidary debtor can invoke, other than a defence personal to that other debtor. Invoking the defence has no effect with regard to the other solidary debtors. A debtor from whom contribution is claimed may invoke against the claimant any personal defence that that debtor could have invoked against the creditor.

Chapitre 10

7

ARTICLE 10:108: OBLIGATIONS SOLIDAIRES: REMISE DE DETTE, TRANSACTION

(1)

(2) (3)

Lorsque Ie creancier remet la dette d'un debiteur solidaire ou conclut une transaction avec lui, les autres debiteurs sont liberes pour la part du debiteur qui en beneficie. Les debiteurs sont liberes totalement par la remise de dette ou la transaction si l'acte Ie prevoit. Dans les rapports entre debiteurs solidaires, Ie debiteur libere de sa part ne l'est qu'a hauteur de sa part a la date de cette liberation et non pour la part supplementaire qui pourrait ulterieurement lui incomber en vertu de l'article 10:106, alinea 3. ARTICLE 10:109: OBLIGATIONS SOLIDAIRES: EFFETS D'UNE D"EcISION JUDICIAIRE

La decision judiciaire relative a la dette d'un debiteur solidaire a l'egard du creancier n'affecte pas (a) les droits du creancier a l'encontre des aut res debiteurs (b) Ie recours entre les debiteurs solidaires sur Ie fondement de l'article 10:106.

ARTICLE

10:110: OBLIGATIONS SOLIDAIRES: PRESCRIPTION

La prescription acquise a l'egard d'un debiteur solidaire n'affecte pas (a) les droits du creancier a l'encontre des aut res debiteurs (b) Ie recours entre les debiteurs solid aires sur Ie fondement de l'article 10:106. ARTICLE 10:111: OBLIGATIONS SOLIDAIRES: OPPOSABILITE DES AUTRES MOYENS DE DEFENSE

(1)

(2)

Le debiteur solidaire peut opposer au creancier tout moyen de defense qu'un autre codebiteur pourrait invoquer, a l'exception des moyens personnels a ce dernier. L'invocation du moyen est sans effet a l'egard des autres debiteurs. Le debiteur a qui est reclamee sa contribution peut opposer au demandeur les moyens de defense personnels qu'il aurait pu opposer au creancier.

8

Chapter 10

Section 2: Plurality of Creditors

ARTICLE

(1) (2) (3)

10:201: SOLIDARY, SEPARATE AND COMMUNAL CLAIMS

Claims are solidary when any of the creditors may require full performance from the debtor and when the debtor may render performance to any of the creditors. Claims are separate when the debtor owes each creditor only that creditor's share of the claim and each creditor may require performance only of that creditor's share. A claim is communal when the debtor must perform to all the creditors and any creditor may require performance only for the benefit of all.

ARTICLE

10:202: ApPORTIONMENT OF SEPARATE CLAIMS

Separate creditors are entitled to equal shares unless the contract or the law provides otherwise.

ARTICLE

10:203: DIFFICULTIES OF EXECUTING A COMMUNAL CLAIM

If one of the creditors in a communal claim refuses, or is unable to receive, the performance, the debtor may discharge the obligation to perform by depositing the property or money with a third party according to Articles 7:110 or 7:111 of the Principles.

ARTICLE

(1) (2)

10:204: ApPORTIONMENT OF SOLIDARY CLAIMS

Solidary creditors are entitled to equal shares unless the contract or the law provides otherwise. A creditor who has received more than that creditor's share must transfer the excess to the other creditors to the extent of their respective shares.

Chapitre 10

9

Section 2: Pluralite de creanciers

ARTICLE

(1) (2) (3)

10:201: CREANCES SOLIDAIRES, DISJOINTES OU COMMUNES

Les creances sont solidaires lorsque l'un des creanciers peut reclamer la totalite de la prestation au debiteur et que ce dernier peut se liberer aupres de l'un quelconque des creanciers. Les creances sont disjointes lorsque Ie debiteur ne doit a chaque creancier que la part de celui-ci et que chaque creancier ne peut reclamer que sa part. La creance est commune lorsque Ie debiteur doit fournir la prestation a l'ensemble des creanciers et que l'un des creanciers ne peut reclamer l'execution qu'au profit de tous.

ARTICLE

10:202: REPARTITION DES CREANCES DISJOINTES

Les creanciers disjointes ont droit a des parts egales, ou la loi n'en disposent autrement.

ARTICLE

a moins que Ie contrat

10:203: DIFFICULTES D'EXECUTION DE LA CREANCE COMMUNE

Lorsque l'un des creanciers refuse la prestation ou est dans l'impossibilite de la recevoir, Ie debiteur peut se liberer en remettant Ie bien entre les mains d'un tiers ou en consignant l'argent conformement aux articles 7:110 et 7:111 des Principes.

ARTICLE

(1) (2)

10:204: REPARTITION DES CREANCES SOLIDAIRES

Les creanciers solidaires ont droit a des parts egales, a moins que Ie contrat ou la loi n'en disposent autrement. Le creancier qui a rec;u plus que sa part doit restituer l'excedent aux autres creanciers a proportion de leur part respective.

10

Chapter 10 ARTICLE

(1)

(2)

10:205: REGIME OF SOLIDARY CLAIMS

A release granted to the debtor by one of the solidary creditors has no effect on the other solidary creditors The rules of Articles 10:107, 10:109, 10:110 and 10:111(1) apply, with appropriate adaptations, to solidary claims.

Chapitre 10 ARTICLE

(1)

(2)

11

10:205: REGIME DES CREANCES SOLIDAIRES

La remise de dette cons en tie au debiteur par l'un des creanciers solidaires est sans effet a l'egard des autres creanciers. Les regles posees par les articles 10:107, 10:109, 10:110 et 10:111 alinea premier s'appliquent so us reserve des adaptations appropriees.

CHAPTER 11

Assignment of Claims Section 1: General Principles

ARTICLE

(1) (2) (3)

(4) (5)

11:101: SCOPE OF CHAPTER

This Chapter applies to the assignment by agreement of a right to performance ("claim") under an existing or future contract. Except where otherwise stated or the context otherwise requires, this Chapter also applies to the assignment by agreement of other transferable claims. This Chapter does not apply: (a) to the transfer of a financial instrument or investment security where, under the law otherwise applicable, such transfer must be by entry in a register maintained by or for the issuer; or (b) to the transfer of a bill of exchange or other negotiable instrument or of a negotiable security or a document of title to goods where, under the law otherwise applicable, such transfer must be by delivery (with any necessary indorsement). In this Chapter "assignment" includes an assignment by way of security. This Chapter also applies, with appropriate adaptations, to the granting by agreement of a right in security over a claim otherwise than by assignment.

ARTICLE

11:102: CONTRACTUAL CLAIMS GENERALLY ASSIGNABLE

(1)

Subject to Articles 11:301 and 11:302, a party to a contract may assign a claim under it. (2) A future claim arising under an existing or future contract may be assigned if at the time when it comes into existence, or at such other time as the parties agree, it can be identified as the claim to which the assignment relates.

12

CHAPITRE 11

Cession de

cn~ance

Section 1: Dispositions generales

AARTICLE 11:101: OBJET DU CHAPITRE

(1) (2) (3)

(4) (5)

Le present chapitre regit la cession conventionnelle des creances nees d'un contrat actuel ou futur. Sauf volonte contraire et a moins que les circonstances n'imposent une solution differente, Ie present chapitre regit egalement la cession conventionnelle d'autres obligations cessibles. Le present chapitre ne regit: (a) ni la transmission d'un instrument financier ou d'une valeur mobiliere, lorsque cette transmission requiert, en vertu de la loi qui lui est applicable, l'inscription dans un registre tenu par ou pour Ie compte de l'emetteur, (b) ni la transmission d'une lettre de change, d'un autre titre negociable, d'une valeur mobiliere ou d'un titre de propriete sur des marchandises lorsque celle-ci requiert, en vertu de la loi qui lui est applicable, la tradition (et endossement, si necessaire) du titre. Dans Ie present chapitre, Ie terme «cession» s'applique au transfert de creances a titre de garantie. Le present chapitre s'applique egalement, so us les adaptations appropriees, a la constitution conventionnelle d'une silrete ou d'une garantie sur une creance autrement que par sa cession. ARTICLE 11:102: CREANCES CONTRACTUELLES CESSIBLES

(1)

Sous reserve des dispositions des articles 11:301 et 11:302, un contractant peut ceder les creances nees du contrat. (2) Une creance future qui naitra d'un contrat actuel ou futur est cessible a condition qu'elle puisse etre identifiee comme faisant partie de la cession au moment ou elle viendra a exister ou a tout autre moment convenu entre les parties.

13

14

Chapter 11 ARTICLE

11:103: PARTIAL ASSIGNMENT

A claim which is divisible may be assigned in part, but the assignor is liable to the debtor for any increased costs which the debtor thereby incurs.

ARTICLE

11:104: FORM OF ASSIGNMENT

An assignment need not be in writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.

Chapitre 11

15

ARTICLE 11:103: CESSION PARTIELLE

Dne creance divisible peut etre cedee partiellement, mais Ie cedant est alors tenu envers Ie debiteur des frais supplementaires que ce dernier encourt de ce fait. ARTICLE 11:104: FORME DE LA CESSION

La cession ne requiert pas d'ecrit ni aucune autre exigence de forme. Elle peut etre prouvee par to us moyens, y compris par temoins.

16

Chapter 11

Section 2: Effects of Assignment As Between Assignor and Assignee

ARTICLE

(1)

(2)

11:201: RIGHTS TRANSFERRED TO ASSIGNEE

The assignment of a claim transfers to the assignee: (a) all the assignor's rights to performance in respect of the claim assigned; and (b) all accessory rights securing such performance. Where the assignment of a claim under a contract is associated with the substitution of the assignee as debtor in respect of any obligation owed by the assignor under the same contract, this Article takes effect subject to Article 12:201.

ARTICLE

(1) (2)

11:202: WHEN ASSIGNMENT TAKES EFFECT

An assignment of an existing claim takes effect at the time of the agreement to assign or such later time as the assignor and assignee agree. An assignment of a future claim is dependent upon the assigned claim coming into existence but thereupon takes effect from the time of the agreement to assign or such later time as the assignor and assignee agree.

ARTICLE

11:203: PRESERVATION OF ASSIGNEE'S RIGHTS AGAINST ASSIGNOR

An assignment is effective as between the assignor and assignee, and entitles the assignee to whatever the assignor receives from the debtor, even if it is ineffective against the debtor under Article 11:301 or 11:302.

ARTICLE

11:204: UNDERTAKINGS BY ASSIGNOR

By assigning or purporting to assign a claim the assignor undertakes to the assignee that: (a) at the time when the assignment is to take effect the following conditions will be satisfied except as otherwise disclosed to the assignee: (i) the assignor has the right to assign the claim;

Chapitre 11

17

Section 2: Effets de la cession entre cedant et cessionnaire

Article 11:201: DROITS TRANSMIS AU CESSIONNAIRE (1) (2)

La cession de creance transfere au cessionnaire: (a) to us les droits du cedant a l'execution relativement ala creance cedee, (b) et to us les droits accessoires qui garantissent l'execution. Lorsque la cession d'une creance contractuelle est couplee avec la substitution du cessionnaire au cedant en tant que debiteur d'obligations resultant du meme contrat, Ie present article s'applique sous reserve des dispositions de l'article 12:201.

ARTICLE 11:202: PRISE D'EFFET DE LA CESSION (1)

(2)

La cession d'une creance existante prend effet au moment de l'accord de cession ou a tel moment ulterieur dont Ie cedant et Ie cessionnaire sont convenus. La cession d'une creance future est subordonnee a sa naissance, mais, lorsque celle-ci survient, el1e prend effet des Ie moment de l'accord de cession ou a tel moment ulterieur dont Ie cedant et Ie cessionnaire sont convenus. ARTICLE 11:203: CONSERVATION DES RECOURS CONTRE LE cEDANT

La cession de creance produit ses effets entre Ie cedant et Ie cessionnaire et celui-ci peut pretendre a tout ce que Ie cedant reryoit du debiteur, alors meme qu'elle est inopposable ace dernier par application des articles 11:301 ou 11:302.

ARTICLE 11:204: GARANTIES DUES PAR LE cIlDANT En cedant ou en s'engageant a ceder une creance, Ie cedant garantit au cessionnaire que (a) au moment oil la cession prend effet, sauf indication contraire, les conditions suivantes seront remplies: (i) Ie cedant est en droit de ceder la creance,

18

Chapter 11

(ii)

the claim exists and the assignee's rights are not affected by any defences or rights (including any right of set-off) which the debtor might have against the assignor; and (iii) the claim is not subject to any prior assignment or right in security in favour of any other party or to any other incumbrance; (b) the claim and any contract under which it arises will not be modified without the consent of the assignee unless the modification is provided for in the assignment agreement or is one which is made in good faith and is of a nature to which the assignee could not reasonably object; and (c) the assignor will transfer to the assignee all transferable rights intended to secure performance which are not accessory rights.

Chapitre 11

(b)

(c)

19

(ii) la cn::ance existe et les droits du cede ne sont pas menaces par des moyens de defense ou droits (y compris de compensation) que Ie debiteur pourrait opposer au cedant, (iii) et la creance n'a pas ete cedee anterieurement, donnee en garantie ou nantie au profit d'un tiers et ne fait l'objet d'aucune autre charge, la creance et Ie contrat dont elle est issue ne seront pas modifies sans l'accord du cessionnaire, a moins que la modification n'ait Me prevue dans l'acte de cession ou n'ait ete effectuee de bonne foi et soit telle que Ie cessionnaire n'ait pu raisonnablement y faire objection, et que Ie cedant transmettra au cessionnaire tous les droits cessibles destines a garantir l'execution de la creance et qui n'en sont pas l'accessoire.

20

Chapter 11

Section 3: Effects of Assignment As Between Assignee and Debtor

ARTICLE

(1)

(2)

11:301: CONTRACTUAL PROHIBITION OF ASSIGNMENT

An assignment which is prohibited by or is otherwise not in conformity with the contract under which the assigned claim arises is not effective against the debtor unless: (a) the debtor has consented to it; or (b) the assignee neither knew nor ought to have known of the nonconformity; or (c) the assignment is made under a contract for the assignment of future rights to payment of money. Nothing in the preceding paragraph affects the assignor's liability for the non-conformity.

ARTICLE

11:302: OTHER INEFFECTIVE ASSIGNMENTS

An assignment to which the debtor has not consented is ineffective against the debtor so far as it relates to a performance which the debtor, by reason of the nature of the performance or the relationship of the debtor and the assignor, could not reasonably be required to render to anyone except the assignor.

ARTICLE

(1)

(2) (3) (4)

11:303: EFFECT ON DEBTOR'S OBLIGATION

Subject to Articles 11:301, 11:302, 11:307 and 11:308, the debtor is bound to perform in favour of the assignee if and only if the debtor has received a notice in writing from the assignor or the assignee which reasonably identifies the claim which has been assigned and requires the debtor to give performance to the assignee. However, if such notice is given by the assignee, the debtor may within a reasonable time request the assignee to provide reliable evidence of the assignment, pending which the debtor may withhold performance. Where the debtor has acquired knowledge of the assignment otherwise than by a notice conforming to paragraph (1), the debtor may either withhold performance from or give performance to the assignee. Where the debtor gives performance to the assignor, the debtor is discharged if and only if the performance is given without knowledge of the assignment.

Chapitre 11

21

Section 3: Effets de la cession entre cessionnaire et debiteur

ARTICLE

(1)

(2)

11:301: INTERDICTION CONVENTIONNELLE DE CESSION

La cession interdite par Ie contrat dont est issue la creance cedee ou qui n'y est pas conforme pour d'autres raisons est inopposable au debiteur a moms que: (a) Ie debiteur y ait consenti, (b) Ie cessionnaire ait ignore la non-conformite et n'ait pas du la connaitre, (c) ou la cession concerne une creance future de somme d'argent. Les dispositions du precedent alinea sont sans incidence sur la responsabilite du cedant pour la non-conformite.

ARTICLE

11:302: AUTRES CESSIONS INOPPOSABLES

Est inopposable au debiteur la cession a laquelle il n'a pas consenti, lorsqu'elle se rapporte a une prestation qu'il ne peut raisonnablement etre tenu d'effectuer au profit d'un autre que Ie cedant, en raison de la nature de la prestation ou de ses relations avec Ie cedant.

ARTICLE

(1)

(2) (3) (4)

11:303: EFFET SUR L'OBLIGATION DU DEBITEUR

Sous reserve des articles 11:301, 11:302, 11:307 et 11:308, Ie debiteur n'est tenu de payer la dette au cessionnaire que s'il a re.;:u de celui-ci ou du cedant une notification ecrite qui identifie de fa.;:on raisonnable la creance cedee et lui enjoint de la payer au cessionnaire. Toutefois, si la notification emane du cessionnaire, Ie debiteur peut, dans un delai raisonnable, lui demander d'apporter une preuve digne de foi de la realite de la cession et suspendre l'execution dans l'intervalle. Lorsque Ie debiteur a eu connaissance de la cession autrement que par une notification faite conformement a l'alinea premier, il peut soit suspendre l'execution soit s'executer entre les mains du cessionnaire. Lorsque Ie debiteur execute entre les mains du cedant, il n'est delie de son obligation que s'il ignorait la cession au moment de l'execution.

22

Chapter 11 ARTICLE

11:304: PROTECTION OF DEBTOR

A debtor who performs in favour of a person identified as assignee in a notice of assignment under Article 11:303 is discharged unless the debtor could not have been unaware that such person was not the person entitled to performance.

ARTICLE

11:305: COMPETING DEMANDS

A debtor who has received notice of two or more competing demands for performance may discharge liability by conforming to the law of the due place of performance, or, if the performances are due in different places, the law applicable to the claim.

ARTICLE

(1)

(2)

Where the assigned claim relates to an obligation to pay money at a particular place, the assignee may require payment at any place within the same country or, if that country is a Member State of the European Union, at any place within the European Union, but the assignor is liable to the debtor for any increased costs which the debtor incurs by reason of any change in the place of performance. Where the assigned claim relates to a non-monetary obligation to be performed at a particular place, the assignee may not require performance at any other place.

ARTICLE

(1) (2)

11:306: PLACE OF PERFORMANCE

11:307: DEFENCES AND RIGHTS OF SET-OFF

The debtor may set up against the assignee all substantive and procedural defences to the assigned claim which the debtor could have used against the assignor. The debtor may also assert against the assignee all rights of set-off which would have been available against the assignor under Chapter 13 in respect of any claim against the assignor: (a) existing at the time when a notice of assignment, whether or not conforming to Article 11:303(1), reaches the debtor; or (b) closely connected with the assigned claim.

Chapitre 11 ARTICLE

23

11:304: PROTECTION DU DimITEUR

Le debiteur qui s'execute au profit d'une personne qu'une notification conforme a l'article 11:303 designe comme Ie cessionnaire est delie de son obligation, a moins qu'il n'ait pu ignorer que cette personne n'etait pas celIe pouvant pretendre a l'execution.

ARTICLE

11:305: DEMANDES CONCURRENTES

Le debiteur qui a re.;:u notification de deux ou plusieurs demandes d'execution concurrentes se deIie de son obligation en se conform ant a la loi du lieu d'execution ou, si l'obligation doit etre executee en des lieux differents, a la loi applicable a celIe-ci.

ARTICLE

(1)

(2)

Lorsque la cession porte sur une obligation de somme d'argent payable en un lieu determine, Ie cessionnaire peut demander l'execution en tout lieu du meme pays ou, si celui-ci est membre de l'Union Europeenne, en tout lieu de l'Union Europeenne, mais Ie cedant est tenu envers Ie debiteur de tous les frais supplementaires que ce1ui-ci encourt du fait du changement de lieu d'execution. Lorsque la cession porte sur une obligation autre que de somme d' argent qui do it etre executee en un lieu determine, Ie cessionnaire ne peut demander l'execution en un autre lieu.

ARTICLE

(1) (2)

11:306: LIEU D'EXEcUTION

11:307: MOYENS DE DEFENSE ET DROITS DE COMPENSATION

Le debiteur est en droit d'opposer au cessionnaire toutes defenses au fond et moyens de procedure relatifs a la creance cedee dont il aurait pu se prevaloir vis a vis du cedant. Le debiteur peut egalement faire valoir a l'encontre du cessionnaire toute compensation qu'il aurait pu invoquer contre Ie cedant en vertu du chapitre 13 relativement a des creances sur ce dernier (a) qui existaient au moment ou une cession lui a ete notifiee conformement ou non a l'alinea premier de l'article 11:303, (b) ou qui sont connexes ala creance cedee.

24

Chapter 11 ARTICLE

11:308: UNAUTHORISED MODIFICATION NOT BINDING ON ASSIGNEE

A modification of the claim made by agreement between the assignor and the debtor, without the consent of the assignee, after a notice of assignment, whether or not conforming to Article 11:303(1), reaches the debtor does not affect the rights of the assignee against the debtor unless the modification is provided for in the assignment agreement or is one which is made in good faith and is of a nature to which the assignee could not reasonably object.

Chapitre 11 ARTICLE

25

11:308: INOPPOSABILITE AU CESSIONNAIRE D'UNE MODIFICATION DE LA CREANCE SANS SON AUTORISATION

La modification de la creance qui resulte d'un accord entre Ie cedant et Ie debiteur posterieur a la remise au cessionnaire de la notification de la cession, conforme ou non a l'alinea premier de l'artic1e 11:303, et a laquelle Ie cessionnaire n'a pas consenti, n'affecte pas les droits de celui-ci al'encontre du debiteur, a moins qu'elle n'ait Me prevue dans l'acte de cession ou n'ait ete effectuee de bonne foi et soit telle que Ie cessionnaire n'ait pu raisonnablement y faire objection.

26

Chapter 11

Section 4: Order of Priority between Assignee and Competing Claimants

ARTICLE

(1)

(2) (3)

(4)

11:401:

PRIORITIES

Where there are successive assignments of the same claim, the assignee whose assignment is first notified to the debtor has priority over any earlier assignee if at the time of the later assignment the assignee under that assignment neither knew nor ought to have known of the earlier assignment. Subject to paragraph (1), the priority of successive assignments, whether of existing or future claims, is determined by the order in which they are made. The assignee's interest in the assigned claim has priority over the interest of a creditor of the assignor who attaches that claim, whether by judicial process or otherwise, after the time the assignment has taken effect under Article 11:202. In the event of the assignor's bankruptcy, the assignee's interest in the assigned claim has priority over the interest of the assignor's insolvency administrator and creditors, subject to any rules of the law applicable to the bankruptcy relating to: (a) publicity required as a condition of such priority; (b) the ranking of claims; or (c) the avoidance or ineffectiveness of transactions in the bankruptcy proceedings.

Chapitre 11

27

Section 4: Ordre de preference entre Ie cessionnaire et des creanciers concurrents

ARTICLE

11:401:

ORDRE DE PRIlFERENCE

En cas de cessions successives de la meme creance, Ie beneficiaire de la cession qui a ete notifiee la premiere au debiteur est paye par preference a un cessionnaire anterieur si, au moment de la cession, il n'avait pas, et n'aurait pas dfr avoir, connaissance d'une cession anterieure. (2) Sous reserve de l'alinea premier, la preference entre cessions successives de creances actuelles ou futures se regIe suivant l'ordre dans lequel el1es sont intervenues. (3) Le droit du cessionnaire prevaut sur ce1ui des creanciers du cedant qui ont pratique une saisie sur la creance cedee, dans Ie cadre d'une procedure judiciaire ou autrement, apres que la cession a pris effet en vertu de l'artic1e 11:202. (4) En cas de faillite du cedant, Ie droit du cessionnaire prevaut sur ceux de l'administrateur de la faillite du cedant et de ses creanciers sous reserve des dispositions de la loi applicable a la faillite relatives: (a) ala publicite prescrite comme condition de cette preference; (b) au rang des creances; (c) et, ala nullite ou l'inopposabilite des actes dans la procedure de faillite.

(1)

CHAPTER 12

Substitution of New Debtor: Transfer of Contract Section 1: Substitution of New Debtor

ARTICLE 12:101: SUBSTITUTION: GENERAL RULES (1) (2)

A third person may undertake with the agreement of the debtor and the creditor to be substituted as debtor, with the effect that the original debtor is discharged. A creditor may agree in advance to a future substitution. In such a case the substitution takes effect only when the creditor is given notice by the new debtor of the agreement between the new and the original debtor.

ARTICLE 12:102: EFFECTS OF SUBSTITUTION ON DEFENCES AND SECURITIES (1) (2)

(3)

(4)

The new debtor cannot invoke against the creditor any rights or defences arising from the relationship between the new debtor and the original debtor. The discharge of the original debtor also extends to any security of the original debtor given to the creditor for the performance of the obligation, unless the security is over an asset which is transferred to the new debtor as part of a transaction between the original and the new debtor. Upon discharge of the original debtor, a security granted by any person other than the new debtor for the performance of the obligation is released, unless that other person agrees that it should continue to be available to the creditor. The new debtor may invoke against the creditor all defences which the original debtor could have invoked against the creditor.

28

CHAPITRE 12

Substitution d'un nouveau debiteur et cession de contrat Section 1: Substitution d'un nouveau debiteur

ARTICLE 12:101: SUBSTITUTION: DISPOSITIONS GENERALES

Un tiers peut, avec l'accord du debiteur et du creancier, s'engager a se substituer au debiteur, ce dernier etant delie de ses obligations. (2) Le creancier peut consentir a l'avance a une substitution future. La substitution ne prend alors effet que lorsque Ie nouveau debiteur lui notifie l'accord qu'il a conc1u avec Ie debiteur originel.

(1)

ARTICLE 12:102: EFFETS DE LA SUBSTITUTION SUR LES MOYENS DE DEFENSE ET LES GARANTIES

(1) (2)

(3)

(4)

Le nouveau debiteur ne peut invoquer a l'encontre du creancier aucun droit ni moyen de defense procedant de ses rapports avec Ie debiteur originel. La liberation du debiteur originel s'etend aux garanties qu'il avait consenties au creancier pour surete de sa creance, a l'exception de celles qui portent sur un bien transfere au nouveau debiteur en vertu d'un acte qu'il a conc1u avec Ie debiteur originel. La liberation du debiteur originel s'etend aux garanties consenties pour surete de la creance par to ute personne autre que Ie nouveau debiteur, a moins que cette personne consente a maintenir sa garantie au profit du creancier. Le nouveau debiteur est en droit d'opposer au creancier tout moyen de defense que Ie debiteur originel aurait pu opposer au creancier.

29

30

Chapter 12

Section 2: Transfer of Contract

ARTICLE

(1)

(2)

12:201: TRANSFER OF CONTRACT

A party to a contract may agree with a third person that that person is to be substituted as the contracting party. In such a case the substitution takes effect only where, as a result of the other party's assent, the first party is discharged. To the extent that the substitution of the third person as a contracting party involves a transfer of rights to performance ("claims"), the provisions of Chapter 11 apply; to the extent that obligations are transferred, the provisions of Section 1 of this Chapter apply.

Chapitre 12

31

Section 2: Cession de contrat

ARTICLE

(1)

(2)

12:201: CESSION DE CONTRAT

Vne partie a un contrat peut convenir avec un tiers que ce dernier lui sera substitue en tant que partie contractante. La substitution ne prend effet que si l'autre partie accepte que la substitution libere ainsi son co contract ant originel. Dans la mesure oil la substitution de contractant implique une cession de creance, les dispositions du chapitre 11 reyoivent application; dans la mesure oil il y a cession de dette, on applique les dispositions de la section 1 du present chapitre.

CHAPTER 13

Set-Off

ARTICLE 13:101: REQUIREMENTS FOR SET-OFF

If two parties owe each other obligations of the same kind, either party may set off that party's right to performance ("claim") against the other party's claim, if and to the extent that, at the time of set-off, the first party:

(a) is entitled to effect performance; and (b) may demand the other party's performance.

ARTICLE 13:102: UNASCERTAINED CLAIMS

(1) (2)

A debtor may not set off a claim which is unascertained as to its existence or value unless the set-off will not prejudice the interests of the other party. Where the claims of both parties arise from the same legal relationship it is presumed that the other party's interests will not be prejudiced. ARTICLE 13:103: FOREIGN CURRENCY SET-OFF

Where parties owe each other money in different currencies, each party may set off that party's claim against the other party's claim, unless the parties have agreed that the party declaring set-off is to pay exclusively in a specified currency. ARTICLE 13:104: NOTICE OF SET-OFF

The right of set-off is exercised by notice to the other party.

ARTICLE 13:105: PLURALITY OF CLAIMS AND OBLIGATIONS

(1)

Where the party giving notice of set-off has two or more claims against the other party, the notice is effective only if it identifies the claim to which it relates. 32

CHAPITRE 13

Compensation

ARTICLE 13:101: CONDITIONS DE LA COMPENSATION

Lorsque deux parties se trouvent debitrices l'une envers l'autre de dettes de meme nature, chacune d'elles peut compenser sa creance avec celIe de l'autre si et dans la mesure ou, a l'epoque de la compensation, (a) sa dette est exigible, (b) et la dette de l'autre partie l'est egalement.

ARTICLE 13:102: CREANCES INCERTAINES

(1) (2)

Un debiteur ne peut compenser une creance incertaine dans son existence ou son montant, a moins que la compensation ne porte pas atteinte aux droits de l'autre partie. Lorsque les creances reciproques naissent d'un meme rapport juridique, on presume qu'il n'est pas porte atteinte aux droits de l'autre partie.

ARTICLE 13:103: COMPENSATION DE CREANCES DE MONNAIE ETRANGERE

La compensation peut intervenir entre des creances libellees dans des monnaies diflhentes, a moins que les parties ne soient convenues que la dette de celIe qui se prevaut de la compensation s'executerait exclusivement dans une monnaie determinee. ARTICLE 13:104: NOTIFICATION DE LA COMPENSATION

La compensation s'opere par notification

a l'autre partie.

ARTICLE 13:105: PLURALITE DE CREANCES ET D'OBLIGATIONS

(1)

Lorsque la partie qui notifie la compensation a deux ou plusieurs creances sur l'autre partie, la notification ne produit effet que si elle identifie la creance a laquelle elle se rapporte. 33

34

Chapter 13

(2)

Where the party glVlng notice of set-off has to perform two or more obligations towards the other party, the rules in Article 7:109 apply with appropriate adaptations.

ARTICLE

13:106: EFFECT OF SET-OFF

Set-off discharges the obligations, as far as they are coextensive, as from the time of notice.

ARTICLE

13:107: EXCLUSION OF RIGHT OF SET-OFF

Set-off cannot be effected: (a) where it is excluded by agreement; (b) against a claim to the extent that that claim is not capable of attachment; and (c) against a claim arising from a deliberate wrongful act.

Chapitre 13

(2)

35

Lorsque la partie qui notifie la compensation a deux ou plusieurs dettes envers l'autre partie, les regles de l'article 7:109 s'appliquent avec les adaptations appropriees.

ARTICLE

13:106: EFFETS DE LA COMPENSATION

A compter de la notification, la compensation eteint les obligations rence de la plus faible.

ARTICLE

a concur-

13:107: EXCLUSION DE LA COMPENSATION

La compensation n'a pas lieu (a) lorsqu'elle est exclue par la convention des parties, (b) dans Ie cas de creances insaisissables, dans la mesure de leur insaisissabilite, (c) et dans Ie cas de creances nees d'un delit intentionnel.

CHAPTER 14

Prescription Section 1: General Provision

ARTICLE 14:101: CLAIMS SUBJECT TO PRESCRIPTION

A right to performance of an obligation ("claim") is subject to prescription by the expiry of a period of time in accordance with these Principles.

36

CHAPITRE 14

Prescription Section 1: Dispositions generales

ARTICLE 14:101: CREANCES SUJETTES

A PRESCRIPTION

Dne creance est prescrite it l'expiration du delai fixe par les presents Principes.

37

38

Chapter 14

Section 2: Periods of Prescription and their Commencement

ARTICLE

14:201: GENERAL PERIOD

The general period of prescription is three years.

ARTICLE

14:202: PERIOD FOR A CLAIM ESTABLISHED BY LEGAL PROCEEDINGS

(1) (2)

The period of prescription for a claim established by judgment is ten years. The same applies to a claim established by an arbitral award or other instrument which is enforceable as if it were a judgment.

ARTICLE

(1)

14:203: COMMENCEMENT

The general period of prescription begins to run from the time when the debtor has to effect performance or, in the case of a right to damages, from the time of the act which gives rise to the claim. (2) Where the debtor is under a continuing obligation to do or refrain from doing something, the general period of prescription begins to run with each breach of the obligation. (3) The period of prescription set out in Article 14:202 begins to run from the time when the judgment or arbitral award obtains the effect of res judicata, or the other instrument becomes enforceable, though not before the debtor has to effect performance.

Chapitre 14

39

Section 2: DeIais de prescription et points de depart

ARTICLE

14:201: DELAI DE DROIT COMMUN

Le de1ai de prescription de droit commun est de trois ans.

ARTICLE

14:202: DELAI APPLICABLE AUX CREANCES CONSTATEES EN JUSTICE

(1) (2)

Le de1ai de prescription d'une creance constatee par un jugement est de dix ans. Le meme de1ai s'applique a une creance constatee par une sentence arbitrale ou un autre titre qui s'execute comme un jugement.

ARTICLE

(1) (2) (3)

14:203: POINT DE DEPART

Le delai de prescription de droit commun commence a courir du moment ou Ie debiteur do it executer ou, s'agissant d'une creance de dommagesinterets, de la date du fait generateur de cette creance. Lorsque Ie debiteur est tenu d'une obligation continue de faire ou de ne pas faire, Ie delai de prescription de droit commun court de chaque manquement a cette obligation. Le delai de prescription prevu par l'article 14:202 commence a courir du moment ou Ie jugement ou la sentence arbitrale sont revetus de l'autorite de la chose jugee ou du moment ou Ie titre extrajudiciaire devient executoire, sans que ce moment puisse etre anterieur a celui ou Ie debiteur est tenu d'executer.

40

Chapter 14

Section 3: Extension of Period

ARTICLE 14:301: SUSPENSION IN CASE OF IGNORANCE

The running of the period of prescription is suspended as long as the creditor does not know of, and could not reasonably know of: (a) the identity of the debtor; or (b) the facts giving rise to the claim including, in the case of a right to damages, the type of damage.

ARTICLE 14:302: SUSPENSION IN CASE OF JUDICIAL AND OTHER PROCEEDINGS

(1) (2) (3)

The running of the period of prescription is suspended from the time when judicial proceedings on the claim are begun. Suspension lasts until a decision has been made which has the effect of res judicata, or until the case has been otherwise disposed of. These provisions apply, with appropriate adaptations, to arbitration proceedings and to all other proceedings initiated with the aim of obtaining an instrument which is enforceable as if it were a judgment. ARTICLE 14:303: SUSPENSION IN CASE OF IMPEDIMENT BEYOND CREDITOR'S CONTROL

(1)

(2)

The running of the period of prescription is suspended as long as the creditor is prevented from pursuing the claim by an impediment which is beyond the creditor's control and which the creditor could not reasonably have been expected to avoid or overcome. Paragraph (1) applies only if the impediment arises, or subsists, within the last six months of the prescription period.

ARTICLE 14:304: POSTPONEMENT OF EXPIRY IN CASE OF NEGOTIATIONS

If the parties negotiate about the claim, or about circumstances from which a

claim might arise, the period of prescription does not expire before one year has passed since the last communication made in the negotiations.

Chapitre 14

41

Section 3: Extension du deIai

ARTICLE 14:301: SUSPENSION EN CAS D'IGNORANCE

Le cours du de1ai de prescription est suspendu aussi longtemps que Ie creancier ignore, et ne pouvait pas raisonnablement connaitre: (a) l'identite du debiteur, (b) ou les faits generateurs de la creance y indus, dans Ie cas d'une creance de dommages-interets, la categorie de dommage. ARTICLE 14:302: SUSPENSION EN CAS DE PRocEDURE JUDICIAIRE OU EXTRAJUDICIAIRE

(1) (2) (3)

Le cours du de1ai de prescription est suspendu a partir de l'introduction de procedures judiciaires relatives a la creance. La suspension se prolonge jusqu'a ce qu'une decision revetue de l'autorite de la chose jugee ait ete rendue ou que Ie litige ait re.yu une autre solution. Les presentes dispositions s'appliquent avec les adaptations appropriees aux procedures arbitrales ainsi qu'a to utes autres procedures entamees en vue d'obtenir un titre qui s'execute comme un jugement. ARTICLE 14:303: SUSPENSION EN CAS D'EMPEcHEMENT EcHAPPANT AU CREANCIER

(1)

(2)

Le cours du delai de prescription est suspendu aussi longtemps que Ie creancier ne peut faire valoir sa creance en raison d'un empechement qui lui echappe et dont on ne pouvait raisonnablement attendre de lui qu'il Ie previenne ou Ie surmonte. L'alinea premier ne s'applique que si l'empechement survient, ou persiste, dans les six derniers mois du de1ai de prescription.

ARTICLE 14:304: REPORT D'ECHEANCE DU DELAI EN CAS DE NEGOCIATIONS

Si les parties sont en negociation a propos de la creance, ou de circonstances pouvant donner naissance a une creance, Ie delai de prescription n'expire point avant qu'une annee se soit ecoulee a compter de la derniere communication faite dans Ie courant des negociations.

42

Chapter 14 ARTICLE

14:305: POSTPONEMENT OF EXPIRY IN CASE OF INCAPACITY

(1)

If a person subject to an incapacity is without a representative, the period

(2)

of prescription of a claim held by or against that person does not expire before one year has passed after either the incapacity has ended or a representative has been appointed. The period of prescription of claims between a person subject to an incapacity and that person's representative does not expire before one year has passed after either the incapacity has ended or a new representative has been appointed.

ARTICLE

14:306: POSTPONEMENT OF EXPIRY: DECEASED'S ESTATE

Where the creditor or debtor has died, the period of prescription of a claim held by or against the deceased's estate does not expire before one year has passed after the claim can be enforced by or against an heir, or by or against a representative of the estate.

ARTICLE

14:307: MAXIMUM LENGTH OF PERIOD

The period of prescription cannot be extended, by suspension of its running or postponement of its expiry under these Principles, to more than ten years or, in case of claims for personal injuries, to more than thirty years. This does not apply to suspension under Article 14:302.

Chapitre 14 ARTICLE

(1)

(2)

43

14:305: REPORT D'ECHl3ANCE DU DELAI EN CAS D'INCAPACITE

Le delai de prescription au profit ou it l'encontre d'un incapable depourvu de representant n'expire point avant qu'une annee se soit ecoulee it compter de la fin de l'incapacite ou de la nomination d'un representant. Dans les rapports entre un incapable et son representant, Ie delai de prescription n'expire point avant qu'une annee se soit ecoulee it compter de la fin de l'incapacite ou de la nomination d'un nouveau representant.

ARTICLE

14:306: REPORT D'EcHEANCE DU DELAI EN MATIERE SUCCESSORALE

En cas de deces du creancier ou du debiteur, Ie delai de prescnptIOn des creances de la succession du creancier ou it l'encontre de la succession du debiteur n'expire point avant qu'une annee se soit ecoulee it compter du moment ou la creance a pu etre mise it execution par un heritier ou un representant de la succession, ou it leur encontre.

ARTICLE

14:307: DUREE MAXIMUM DU DELAI

Le delai de prescription ne peut, par l'effet de la suspension ou de la prorogation prevues par les presents Principes, exceder dix ans, ou trente ans lorsqu'il s'agit de creances de reparation de dommages it la personne. La presente regIe ne s'applique pas it la suspension regie par l'article 14:302.

44

Chapter 14

Section 4: Renewal of Periods

ARTICLE

(1)

(2)

14:401: RENEWAL BY ACKNOWLEDGEMENT

If the debtor acknowledges the claim, vis-a-vis the creditor, by part pay-

ment, payment of interest, giving of security, or in any other manner, a new period of prescription begins to run. The new period is the general period of prescription, regardless of whether the claim was originally subject to the general period of prescription or the ten year period under Article 14:202. In the latter case, however, this Article does not operate so as to shorten the ten year period.

ARTICLE

14:402: RENEWAL BY ATTEMPTED EXECUTION

The ten year period of prescription laid down in Article 14:202 begins to run again with each reasonable attempt at execution undertaken by the creditor.

Chapitre 14

45

Section 4: Interruption du deIai de prescription

ARTICLE

14:401: INTERRUPTION SUITE A UNE RECONNAISSANCE DE DETTE

Si Ie debiteur reconnait sa dette vis-a-vis du creancier par un paiement partieI, Ie paiement d'interets, l'octroi d'une garantie ou par tout autre moyen, Ie delai de prescription recommence a courir. (2) Le nouveau delai de prescription est alors Ie delai de droit commun, que Ia creance flit sujette initialement au deIai de droit commun ou a Ia prescription decennale regie par l'artic1e 14:202. Dans Ie dernier cas, Ia presente regIe ne peut cependant avoir pour effet d'abreger Ie deIai decennal.

(1)

ARTICLE

14:402: INTERRUPTION SUITE A UNE TENTATIVE D'EXECUTION

Le deIai decennal de prescription etabli par l'artic1e 14:202 recommence a courir a chaque tentative raisonnable du creancier en vue d'obtenir l'execution de Ia creance.

46

Chapter 14

Section 5: Effects of Prescription

ARTICLE 14:501: GENERAL EFFECT

(1) (2)

After expiry of the period of prescription the debtor is entitled to refuse performance. Whatever has been performed in order to discharge a claim may not be reclaimed merely because the period of prescription had expired. ARTICLE 14:502: EFFECT ON ANCILLARY CLAIMS

The period of prescription for a right to payment of interest, and other claims of an ancillary nature, expires not later than the period for the principal claim. ARTICLE 14:503: EFFECT ON SET-OFF

A claim in relation to which the period of prescription has expired may nonetheless be set off, unless the debtor has invoked prescription previously or does so within two months of notification of set-off.

Chapitre 14

47

Section 5: Effets de la prescription

ARTICLE

(1) (2)

14:501: EFFET GENERAL

Au terme du de1ai de prescription, Ie debiteur est fonde a refuser d'executer l'obligation. Le paiement effectue pour eteindre une dette ne peut etre repete au seul motif que Ie delai de prescription etait expire.

ARTICLE

14:502: EFFETS SUR LES CREANCES ACCESSOIRES

Le de1ai de prescription des creances d'interets et des autres creances de caractere accessoire n'expire pas posterieurement a celui qui s'applique a la creance principale.

ARTICLE

14:503: COMPENSATION

Vne dette prescrite peut neanmoins etre compensee a moins que Ie debiteur n'ait oppose la prescription anterieurement ou l'oppose dans un delai de deux mois a compter du moment 011 la compensation lui a ete notifiee.

48

Chapter 14

Section 6: Modification by Agreement

ARTICLE

(1)

(2)

14:601: AGREEMENTS CONCERNING PRESCRIPTION

The requirements for prescription may be modified by agreement between the parties, in particular by either shortening or lengthening the periods of prescription. The period of prescription may not, however, be reduced to less than one year or extended to more than thirty years after the time of commencement set out in Article 14:203.

Chapitre 14

49

Section 6: Modification par accord des parties

ARTICLE 14:601: ACCORDS RELATIFS

(1) (2)

A LA

PRESCRIPTION

Les regles relatives a la prescription peuvent etre modifiees par accord des parties qui peuvent en particulier abreger ou allonger les deIais. Le deIai de prescription ne peut toutefois etre reduit a moins d'un an ou etendu a plus de trente ans a compter du point de depart fixe a l'artic1e 14:203.

CHAPTER

15

Illegality

ARTICLE

15:101: CONTRACTS CONTRARY TO FUNDAMENTAL PRINCIPLES

A contract is of no effect to the extent that it is contrary to principles recognised as fundamental in the laws of the Member States of the European Union.

ARTICLE

(1) (2)

(3)

15:102: CONTRACTS INFRINGING MANDATORY RULES

Where a contract infringes a mandatory rule of law applicable under Article 1:103 of these Principles, the effects of that infringement upon the contract are the effects, if any, expressly prescribed by that mandatory rule. Where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the contract may be declared to have full effect, to have some effect, to have no effect, or to be subject to modification. A decision reached under paragraph (2) must be an appropriate and proportional response to the infringement, having regard to all relevant circumstances, including: (a) the purpose of the rule which has been infringed; (b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether the infringement was intentional; and (f) the closeness of the relationship between the infringement and the contract.

ARTICLE

(1) (2)

15:103: PARTIAL INEFFECTIVENESS

If only part of a contract is rendered ineffective under Articles 15:101 or

15:102, the remaining part continues in effect unless, giving due consideration to all the circumstances of the case, it is unreasonable to uphold it. Articles 15:104 and 15:105 apply, with appropriate adaptations, to a case of partial ineffectiveness.

50

CHAPITRE 15

Illiceite

ARTICLE

15:101: CONTRATS CONTRAIRES AUX PRINCIPES FONDAMENTAUX

Un contrat est prive de tout effet dans la mesure OU il est contraire aux principes reconnus comme fondamentaux par Ie droit des Etats membres de l'Union Europeenne.

ARTICLE

(1) (2) (3) (a) (b) (c) (d) (e) (f)

15:102: CONTRATS VIOLANT DES REGLES IMPERATIVES

La violation d'une regie imperative qui s'applique en vertu de l'article 1:103 des presents Principes produit sur Ie contrat les effets que ladite regIe a pu prescrire expressement. A defaut de prescription expresse de la regIe imperative violee, Ie contrat peut etre declare comme ayant plein effet, ou certains effets, ou etant sans effet ou sujet a modification. Une decision prise conformement al'alinea (2), doit constituer une reponse appropriee et proportionnee a la violation compte tenu de toutes les circonstances pertinentes, y compris Ie but de la regIe violee, la categorie de personnes que la regIe en tend proteger, toute sanction qui pourrait etre imposee en vertu de la regIe violee. la gravite de la violation, Ie caractere intentionnel ou non de la violation, et Ie rapport plus ou moins etroit entre la violation et Ie contrat.

ARTICLE

(1)

(2)

15:103: INEFFICACITE PARTIELLE DU CONTRAT

Lorsque seule une fraction du contrat est privee d'effet en vertu des articles 15:101 ou 15:102, Ie contrat est maintenu pour Ie surplus a moins qu'eu egard a toutes les circonstances de la cause il ne soit deraisonnable de maintenir les autres dispositions du contrat. Les articles 15:104 et 15:105 s'appliquent, avec les adaptations appropriees, a l'inefficacite partielle.

51

52

Chapter 15 ARTICLE

(1)

(2) (3) (4)

15:104: RESTITUTION

When a contract is rendered ineffective under Articles 15:101 or 15:102, either party may claim restitution of whatever that party has supplied under the contract, provided that, where appropriate, concurrent restitution is made of whatever has been received. When considering whether to grant restitution under paragraph (1), and what concurrent restitution, if any, would be appropriate, regard must be had to the factors referred to in Article 15: 102 (3). An award ofrestitution may be refused to a party who knew or ought to have known of the reason for the ineffectiveness. If restitution cannot be made in kind for any reason, a reasonable sum must be paid for what has been received.

ARTICLE

(1)

(2) (3)

15:105: DAMAGES

A party to a contract which is rendered ineffective under Articles 15:101 or 15:102 may recover from the other party damages putting the first party as nearly as possible into the same position as if the contract had not been concluded, provided that the other party knew or ought to have known of the reason for the ineffectiveness. When considering whether to award damages under paragraph (1), regard must be had to the factors referred to in Article 15:102(3). An award of damages may be refused where the first party knew or ought to have known of the reason for the ineffectiveness.

Chapitre 15 ARTICLE

(1)

(2) (3) (4)

(2) (3)

15:104: RESTITUTIONS

Lorsqu'un contrat est prive d'effet sur Ie fondement des articles 15:101 ou 15:102, chaque partie est en droit de demander la restitution de ce qu'elle a fourni en execution du contrat, pourvu qu'elle restitue simultanement ce qu'elle a re.;u dans la me sure ou cela parait approprie. Pour apprecier s'il faut permettre la restitution sur Ie fondement de l'alinea premier, et quelle restitution reciproque est, Ie cas echeant, appropriee, on a egard aux circonstances mentionnees a l'article 15:102, alinea (3). Le prononce de la restitution peut etre refuse au profit d'une partie qui connaissait ou aurait dfr connaitre la cause de l'inefficacite du contrat. Si, pour une raison quelconque, la restitution ne peut s'effectuer en nature, elle s'effectue par Ie paiement d'une somme raisonnable.

ARTICLE

(1)

53

15:105: DOMMAGES-INTERETS

La partie a un contrat, prive d'effet en vertu des articles 15:101 ou 15:102, est en droit d'obtenir de son cocontractant des dommages-interets qui permettent de la placer autant que possible dans la situation ou elle se serait trouvee si Ie contrat n'avait pas ete conclu, des lors que Ie cocontractant connaissait ou aurait dfr connaitre la cause de l'inefficacite du contrat. Pour apprecier s'il faut accorder des dommages-interets sur Ie fondement de l'alinea premier, on a egard aux circonstances mentionnees a l'article 15:102, alinea (3). L'allocation de dommages-interets peut etre refusee au profit d'une partie qui connaissait ou aurait dfr connaitre la cause de l'inefficacite du contrat.

CHAPTER 16

Conditions

ARTICLE 16:101: TYPES OF CONDITION

A contractual obligation may be made conditional upon the occurrence of an uncertain future event, so that the obligation takes effect only if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition). ARTICLE 16:102: INTERFERENCE WITH CONDITIONS

(1)

(2)

If fulfilment of a condition is prevented by a party, contrary to duties of

good faith and fair dealing or co-operation, and if fulfilment would have operated to that party's disadvantage, the condition is deemed to be fulfilled. If fulfilment of a condition is brought about by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment operates to that party's advantage, the condition is deemed not to be fulfilled. ARTICLE 16:103: EFFECT OF CONDITIONS

(1) (2)

Upon fulfilment of a suspensive condition, the relevant obligation takes effect unless the parties otherwise agree. Upon fulfilment of a resolutive condition, the relevant obligation comes to an end unless the parties otherwise agree.

54

CHAPITRE 16

Conditions

ARTICLE 16:101: TYPES DE CONDITIONS

L'obligation contractuelle peut etre conditionnelle si on la fait dependre d'un evenement futur et incertain, soit en en differant sa prise d'effet jusqu'a ce que l'evenement arrive (condition suspensive), soit en la resiliant lorsque l'evenement arrive (condition resolutoire). ARTICLE 16:102: IMMIXTION DANS LE JEU DE LA CONDITION

(1) (2)

La condition est reputee accomplie lorsqu'une partie, en violation de son devoir de bonne foi ou de cooperation, a empeche sa realisation, qui aurait tourne a son desavantage. La condition est reputee defaillie lorsqu'une partie, en violation de son devoir de bonne foi ou de cooperation, a provoque sa realisation, qui a tourne a son avantage. ARTICLE 16:103: EFFETS DE LA CONDITION

(1) (2)

L'obligation sous condition suspensive prend effet lorsque la condition se realise, a moins que les parties n'en conviennent autrement. L'obligation sous condition resolutoire s'eteint lorsque la condition se realise, a moins que les parties n'en conviennent autrement.

55

CHAPTER 17

Capitalisation of Interest

ARTICLE

(1) (2)

17:101: WHEN INTEREST TO BE ADDED TO CAPITAL

Interest payable according to Article 9:508(1) is added to the outstanding capital every 12 months. Paragraph (1) of this Article does not apply if the parties have provided for interest upon delay in payment.

56

CHAPITRE 17

Capitalisation des interets

ARTICLE

(1) (2)

17:101:

CONDITIONS DE CAPITALISATION DES INTERETS

Les interets payables sur Ie fondement de l'article 9:508, aline a premier, s'ajoutent to us les douze mois au capital impaye. L'alinea premier du present article ne s'applique pas lorsque les parties sont convenues d'un interet pour retard de paiement.

57

CHAPTER 10

Plurality of Parties Section 1: Plurality of Debtors

Article 10:101: Solidary, Separate and Communal Obligations (1)

(2)

(3)

Obligations are solidary when all the debtors are bound to render one and the same performance and the creditor may require it from anyone of them until full performance has been received. Obligations are separate when each debtor is bound to render only part of the performance and the creditor may require from each debtor only that debtor s part. An obligation is communal when all the debtors are bound to render the performance together and the creditor may require it only from all of them.

COMMENT

A. General Remarks Article 10:101 is not intended to cover all cases of plurality of debtors. The Principles deal only with those cases which call for regulation because of their practical importance or theoretical difficulty. So, the Principles do not cover multiple obligations arising from a number of different contracts concluded in order to meet a single objective, such as orders given by a trader to several suppliers to satisfy the needs of the trader's customers. The fact that several debtors are bound by parallel obligations arising from distinct contracts does not affect the legal nature of each debt. The Principles deal with the three types of plural obligations defined in article 10:101- solidary obligations, separate obligations and communal obligations. Solidary obligations and separate obligations are known in all legal systems, with variations in terminology and detail, but only some laws expressly recognise communal obligations. Legal systems which do not recognise communal obligations sometimes have a category of "indivisible obligations" which covers much of the same ground. Some systems, such as French law, give indivisibility a special role in the law of succession: a debt which is indivisible, in contrast to a solidary debt, is not divided among the heirs. It goes without saying that the fact that a contract is governed by the Principles does not 59

60

Chapter 10

prevent the parties, to the extent permitted by the law of succession, from supplementing a solidarity clause, covered by the Principles, with a clause of indivisibility for the purpose of obtaining particular effects in relation to succession.

B. Solidary Obligations Paragraph (1) of article 10:101 defines solidary obligations, which are the plural obligations most frequently encountered in practice. The definition reflects their characteristic features. The creditor can claim the whole performance from any one of the debtors, without being obliged to involve all the debtors or even warn them. The debtor against whom the claim is made cannot compel the creditor to divide the claim. Illustration 1: A lends €10,000 to Band C. The contract contains a clause of solidarity. A can claim repayment of the loan from B or C according to choice.

Having the option of claiming the whole performance from any of the debtors, the creditor is in a position, if that debtor fails to perform, to put into operation right away the various remedies for non-performance provided by the Principles. So, the creditor can terminate the contract under Article 9:301 if the selected debtor's non-performance is fundamental. Similarly, the creditor can withhold performance according to the rules of Article 9:201 so long as the selected debtor has not performed or tendered performance. However, the other debtors can substitute themselves for the non-performing debtor in order to put a stop to the termination of the contract or the withholding of performance. (See Article 7:106.) C. Separate Obligations Paragraph (2) defines separate obligations. They are distinguished from solidary obligations in that each of the debtors is liable for only part of the performance due. So the creditor cannot claim the whole performance from one of the debtors but must necessarily divide the claim. Illustration 2: A lends €1O,000 to Band C. The contract provides that B must repay €8000 and C €2000. A can claim only the agreed part from each.

The effects of non-performance by one of the debtors on the operation of the creditor's right to terminate the contract or withhold performance are very different in this case. Non-performance by one of the debtors leads, in principle, only to partial termination. A contract giving rise to separate obligations can be analysed as a contract to be performed in separate parts, leading to the application of Article 9:302 of the Principles (which relates to the termination, for fundamental non-performance, of a "contract to be performed in parts").

Article 10:101: Solidary, Separate and Communal Obligations

61

Similarly, the creditor may not, as a general rule, withhold performance except partially. (See Article 9:201(1), second sentence.) Where, however, the performance due by the creditor is indivisible, the debtors having only a communal right, the withholding will necessarily be total. Illustration 3: Three farmers, A, Band C, order twelve sacks of winter wheat seed from a producer, D, for a price of €9000. The contract provides that each buyer is liable only for a one-third share (€3000). A becomes insolvent. D could terminate the contract only partially. Illustration 4: Two farmers, A and B, order an agricultural machine from a manufacturer, C. The contract provides that the two buyers are to be under separate obligations for the price, payable on delivery. A and B having a communal right against C for delivery ofthe machine (see Article 10:201(3)), C can withhold delivery so long as A does not pay A's part of the price.

D. Communal Obligations Paragraph (3) defines communal obligations, which are characterised by the unitary nature of the obligation binding the several debtors. Communal obligations are more rare in practice. They relate to performances which by their nature have to be rendered in common by several debtors, bound to the creditor by a single contract. The communal obligation is distinguished from solidary obligations in that the creditor in a communal obligation can take action only against all the debtors together. It is distinguished from separate obligations in that the performance due by each debtor is not limited to an independent performance. The communal obligation is not simply a combination of isolated obligations. Each of the debtors is obliged to collaborate with the others to provide the common performance. The communal obligation is thus not to be confused with independent plural obligations arising out of distinct contracts concluded in order to realise a single operation. Communal obligations as defined in the Principles must not be confused with community debts in the sense in which that term is used in various legal systems in the area of matrimonial community property regimes. In that context, community debts are contrasted with separate debts, depending on the nature of the property, community or separate, answerable for the debts contracted by the spouses. A communal obligation, as the term is used in the Principles, does not imply the existence of a patrimony or property common to the debtors. The communal character of the obligation is indicated, not by the fact that liability for payment of the debt attaches to any particular mass of property, but by the collective engagement of the debtors. Illustration 5: A recording company enters into a single contract with several musicians who are to play a symphony with a view to making a

62

Chapter 10

record. In the event of non-performance, the recording company will have to take action against all the musicians. Illustration 6: The owners of a piece of ground wish to have a house built. If they approach contractors in different trades, asking for a single perfor-

mance (namely the construction of the house), and if the co-contractors agree to work together to achieve that result, the obligation will be a communal one. The non-performance of one of the debtors in a communal obligation necessarily has an effect on the contract as a whole. It follows that the creditor can terminate the contract for fundamental non-performance, under Article 9:301, even if the non-performance is imputable to only one of the debtors. Similarly, the creditor can withhold performance totally, under Article 9:201, even if the failure to give or tender the debtors' performance emanates from only one of the debtors.

NOTES 1.

2.

General The Principles reproduce the two types of obligation most widely recognised in legal systems, solidary and separate obligations. Their main originality is in expressly recognising the communal obligation and in not providing for certain other types of concurrent obligations frequently found in Europe, namely the indivisible obligation and the obligation in solidum. (See below.) GERMAN law is the only legal system to find a place for the communal obligation (Gemeinschaftliche Schuld). It is not recognised expressly in the BGB but is recognised by the case law and the majority of the writers. A number of legal systems deal with indivisibility alongside solidarity: AUSTRIA (ABGB §§ 890-895); SPAIN (CC arts. 1149-1151); FRANCE, BELGIUM and LUXEMBOURG (CC arts. 1217-1224, the principle of division of debts among the heirs by operation of law, even where the debts are solidary, being found in art. 1220); GREECE (CC arts. 494-495); ITALY (CC arts. 1316-1320); the NETHERLANDS (BW art. 6:6(2)); PORTUGAL (CC art. 535). The BGB also mentions indivisible obligations as giving rise to solidary liability (see BGB § 431). Some of the texts cited above mention natural indivisibility and conventional indivisibility. On the other hand, indivisibility does not seem to be the object of any special developments in the NORDIC or COMMON LAW countries. FRENCH, BELGIAN and LUXEMBOURG laws recognise an obligation in solidum, in relation to jointly caused damage, which differs from an ordinary solidary obligation. It does not have the secondary effects of a normal solidary obligation under these laws, such as the fact that a formal notice given to one of the debtors is deemed to be equally effective in relation to the others. These secondary effects (which have no equivalent in the Principles) flow from the idea of a community of interests which is supposed to unite solidary debtors and which is generally absent when the same damage is caused by several persons. Solidary obligations Most European codes recognise solidarity and give a definition similar to that in Article 10:101: see the GERMAN BGB § 421 ff.; the AUSTRIAN ABGB § 891; the SPANISH CC art. 1137; the CCs of FRANCE, BELGIUM AND LUXEMBOURG arts. 1200 ff.; the GREEK CC art. 481; the ITALIAN CC arts. 1292 ff.; the BW of the NETHERLANDS art. 6:1 ff; the PORTUGUESE CC art. 512. In the NORDIC countries, doctrine adopts the same definition and the uniform

Article 10:102: When Solidary Obligations Arise

3.

4.

63

Nordic Promissory Note Act (DENMARK, FINLAND and SWEDEN) makes use of it. In ENGLISH law, the category of "joint and several" debts corresponds to solidary obligations (Chitty, chap. 18). In IRISH law solidary obligations, described as in solidum, are expressly regulated by Part 3 of the Civil Liability Act 1961 which deals with liability to make reparation for damage caused by several persons. The rules are very similar to those in the text. SCOTTISH law also recognises solidary obligations, using the terms "joint and several" or in solidum to describe them (Gloag & Henderson 61). Separate obligations Separate obligations, known by various terms some of which are rather misleading, are the rule where there is no presumption of solidarity. It is sometimes even presumed that in any case of plurality of debtors the obligations are separate: see e.g. the SPANISH CC art. 1138. The idea of separate obligations is often linked with that of divisible obligations. The national texts either define the divisible obligation by reference to the indivisible obligation (e.g. the FRENCH CC art. 1217) or refer to it as a notion on its own (GERMAN BGB § 420; AUSTRIAN ABGB § 889; GREEK CC art. 480; ITALIAN CC art. 1314; the NETHERLANDS BW art. 6:6(1)). Communal obligations The notion of the communal obligation is unknown in most national laws. Its effects partly overlap those of the obligation which is indivisible by nature. It is found however in GERMAN doctrine and case law (see Palandt BGB § 420 no.7 ff.). ITALIAN doctrine also speaks of the indivisible obligation to be performed collectively. Some writers in other countries argue for its recognition. (See, in FRANCE, Briand These, "Elements d'une theorie de la cotitularite des obligations", Nantes, 2000).

Article 10:102: When Solidary Obligations Arise (1)

(2)

(3)

If several debtors are bound to render one and the same performance to a creditor under the same contract, they are solidarily liable, unless the contract or the law provides otherwise. Solidary obligations also arise where several persons are liable for the same damage. The fact that the debtors are not liable on the same terms does not prevent their obligations from being solidary.

COMMENT A. General This article sets out the situations where solidary obligations arise, it being always understood that the solidary character of a contractual obligation, like the separate or communal character of such an obligation, depends primarily on the intention of the parties. B. Principle of Solidarity in Contractual Obligations

Paragraph (1) is useful when the parties to a contract have not made any provision, expressly or tacitly, on the nature of the obligations undertaken. Whenever several debtors owe the same performance under the same contract, the paragraph lays down the principle that their obligations are solidary. Any other rule could operate disproportionately to the prejudice of the creditors in contractual obligations.

64

Chapter 10 Illustration 1: Several friends conclude a contract with a landlord for the

rent of a holiday villa in the south of France. The landlord can claim the whole rent from one of the tenants under the rule in Article 10:102(1). The solidarity provided for by this paragraph is only a general rule which can be displaced by the agreement of the parties or by the law. Illustration 2: A and B order, by one contract, a fixed quantity of fuel to be delivered to different tanks. The reason for the combined order is to benefit from a reduction in price. The general rule of solidarity will be displaced if A and B have expressly indicated their intention to be bound only by separate obligations. The same result will follow if the parties have agreed that the supplier will send separate bills to A and B, that being a tacit indication that the parties wished to displace solidarity.

C. Solidarity when Several Persons Liable for Same Damage

Paragraph (2) provides, in order to protect the victim of a single harm caused by several people, that obligations of reparation arising out of such harms are solidary. The victim can therefore claim reparation for the harm from anyone of those responsible for it. This solidarity applies whatever the nature of the responsibility in question. One of those responsible could be bound contractually, the other non-contractually. (On recourse between the co-debtors, see Article 10:106.) Illustration 3: A, an employer, and B, an employee, are bound by a contract

of employment containing a lawful restrictive covenant. C employs B with full knowledge that this violates the contract. Band C will be solidarily liable to A. B is contractually liable for breach of the restrictive covenant and C is liable for wrongfully inducing the breach of contract.

D. Debtors Not Liable on Same Terms Paragraph (3) deals with the case where the conditions required for solidarity are fulfilled but the obligation of one or more of the debtors is subject to a qualification, such as a condition or a time limit. The existence of this qualification does not prevent solidarity. The same rule applies when one of the obligations, but not others, is backed by a security. Illustration 4: A, Band C borrow funds to buy a building from D. B's liability is subject to the condition that he can find a purchaser for his present house within a year. This condition affecting B's obligation does not prevent the debt of A, Band C from being solidary. Similarly, the solidary character of the obligation is not excluded if A's debt is secured and the debts of Band C are unsecured.

Article 10:103: Liability under Separate Obligations

65

NOTES 1.

2.

3.

Presumption of solidarity in contractual obligations National solutions are diverse and can be classified in three categories. First, GERMAN law (BGB § 427), ITALIAN law (CC art. 1294, except in succession matters) and the NORDIC countries have a general presumption of solidarity in the circumstances indicated in the paragraph. Secondly, in some countries, such as GREECE (CC art. 480), the NETHERLANDS (BW art. 6:6(1)), SCOTLAND (Gloag & Henderson 61) and SPAIN (CC arts. 1137 and 1138), solidarity in contractual obligations is not presumed and there is therefore no solidarity unless it is provided for. Thirdly, some legal systems distinguish between civil obligations, where solidarity is not presumed, and commercial obligations, where it is presumed. (See e.g. FRENCH CC art. 1202, which can be displaced by a commercial custom; PORTUGUESE CC art. 513 and code of commerce, art. 100.) In ENGLISH law the question is one of interpretation of the contract (Treitel, Contract 527). Solidarity between joint wrongdoers Solidarity between those responsible for the same harm is very widely recognised. See e.g. the GERMAN BGB § 840(1); the AUSTRIAN ABGB § 1304; the SPANISH CC art. 107; the GREEK CC arts. 926-927; the IRISH Civil Liability Act 1961, ss. 11(1), 12(1) and 21; the ITALIAN CC art. 2053, the NETHERLANDS BW art. 601; the PORTUGUESE CC arts 497(1) and 507(1); the ENGLISH Civil Liability (Contribution) Act 1978 s. 1(1); the SCOTTISH Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 s. 3(1). Liability in solidum between those responsible for the same harm is recognised by case law in FRANCE, BELGIUM and LUXEMBOURG. It should be noted that the sharing of the liability for reparation among those responsible is done in different ways in different countries. See below under Article 10:105(2). Debtors not liable on same terms The solution adopted in paragraph (3) is very generally admitted, ifnot in the texts of national laws, at least in the doctrine. See e.g. the SPANISH CC art. 1140; the FRENCH CC art. 1201; the ITALIAN CC art. 1293; the PORTUGUESE CC art. 512(2).

Article 10:103: Liability under Separate Obligations Debtors bound by separate obligations are liable in equal shares unless the contract or the law provides otherwise.

COMMENT This Article provides a rule which comes into play when the intention of the parties as to the share of the debt for which each is liable cannot be established from the contract or from the circumstances of the case. The rule in Article 10:102(1) makes separate obligations more rare, which limits the scope of the present rule in practice. Illustration: A and B undertake to repay a sum of €1O,OOO to C. The contract contains a clause excluding solidarity between the debtors. A and B will each have to repay €5000.

66

Chapter 10 NOTE

This rule is often provided by the texts of national laws. See e.g. the GERMAN BGB § 420; the AUSTRIAN ABGB § 889; the SPANISH CC art. 1138; the GREEK CC art. 480; the NETHERLANDS BW art.6:6(1); the PORTUGUESE CC art. 534. In other countries doctrine admits the rule without difficulty.

Article 10:104: Communal Obligations: Special Rule when Money Claimed for Non-performance Notwithstanding Article 10:101 (3), when money is claimed for non-performance of a communal obligation, the debtors are solidarily liable for payment to the creditor.

COMMENT This provlSlon states clearly the principle that the debtors of a communal obligation have, in any case when money is claimed for total or partial nonperformance, a solidary responsibility towards the creditor. It follows that the creditor can claim damages from anyone of the debtors. Two considerations justify this rule. First, it is an extension of the principle of the communal obligation. The debtors being liable collectively, it is logical that they should assume full responsibility in the event of non-performance due to the acts of one of them. Secondly, the right to damages, unlike the primary right to performance, is divisible since it consists of a right to a sum of money. It is therefore capable of being satisfied by one of the debtors alone. It follows that each debtor should be held liable for the whole. It goes without saying that debtors who performed their part or who were prepared to do so will, under Article 8:101 of the Principles, have remedies for non-performance against the debtor who was responsible for the non-performance, at least if this debtor is not excused from performing by virtue of Article 8:108 of the Principles. This will enable them to claim damages (Article 9:501) to cover the whole of the loss which they have suffered (Article 9:502). In certain cases the damages could exceed the sum which the non-performing debtor was due to pay to the creditor. Illustration 1: A contracts with B, a firm of masons and plumbers, and C, a carpenter, for the construction of a country cottage. Band C undertake a communal obligation of collective performance. B does its work but C does not. In any proceedings by A for damages, B cannot avail itself of the fact that it has done its part of the work. On the other hand, B can avail itself of that fact in the context of its remedies against C. Illustration 2: The facts are as in Illustration 5 to Article 10:101. One of the musicians does not turn up. As the recording cannot proceed without

Article 10:105: Apportionment Between Solidary Debtors

67

all the musicians being present, those who are present and ready to perform on the agreed day cannot plead, in any subsequent action against them by the creditor, that they were ready to play. But they will be able to found on that fact in the context of an action for damages (Articles 8:101 and 9:502) brought by them against the musician who failed to turn up.

NOTE As the notion of the communal obligation is not used in most laws there is little to be found on its operation. The rule of Article 10:104 is found, however, in most laws in relation to indivisible obligations. See above under Article 10:101. GERMAN jurisprudence is divided on this question. The BGH has held that the debtors are solidarily liable in case of non-performance (BGH, 18 October 1951, LM § 278 no. 2/3). On the other hand, the BAG has held that only the debtor responsible for the non-performance is liable to the creditor. (BAG, 24 April 1974, BAGE 26, 130)

Article 10:105: Apportionment Between Solidary Debtors (1)

(2)

As between themselves, solidary debtors are liable in equal shares unless the contract or the law provides otherwise. If two or more debtors are liable for the same damage under Article 10:102(2), their share of liability as between themselves is determined according to the law governing the event which gave rise to the liability.

COMMENT

A. Presumption of Equality In providing for the principle of equal sharing, paragraph (1) adopts a natural and logical rule in line with Article 10:103 on separate obligations. Illustration 1: A lends €1O,OOO to Band C. The contract contains a clause of solidarity. If B has paid the €1O,OOO to the creditor, B will be able to reclaim €5000 from C.

The rule of equal sharing is laid down only as a general rule. Unequal sharing may result from an express or implied provision of the contract or from the law. Illustration 2: A and B order from C, by a contract including a clause of solidarity, a fixed quantity of fuel to be delivered into two tanks of different volume. 10,000 litres are to be delivered to A and 5000 to B. C claims payment from A who pays the whole amount. A will have a right of recourse against B but there is in the circumstances an implied provision of the contract that this will be only for the price of 5000 litres. Illustration 3: D lends €60,000 to A, Band C who are made solidarily

68

Chapter 10

liable. A is to receive €30,000. Band C are to receive €15,000 each. A pays the whole amount and can reclaim a share from Band C but again there is in the circumstances an implied provision of the contract that A can reclaim from each of Band C only the amount of their part of the loan, namely €15,000, and not €20,000.

B. Rule for Cases of Damage Paragraph (2) refers the question of determining the share of liability resulting from causing the same damage to the law governing the event giving rise to the liability. The relevant rules will be contained in national laws or possibly in the future in international instruments providing for a uniform law on civil liability for damage caused to another. The liability of those responsible for the damage may be contractual or non-contractual. Illustration 4: A German company, A, and a French company, B, are liable for loss caused to a French company, C, by unfair competition consisting of the release of products on to the French market. The three companies submit their dispute to an arbitrator, the submission providing that the applicable rules of law are to be those which the arbitrator considers appropriate. The arbitrator will be able to use Article 10:102(2) of the Principles to find A and B solidarily liable for damages to C. Under Article 10:105(2) the French law on civil liability, as the law of the country where the events giving rise to the liability took place or of the relevant market, should determine how liability is shared between A and B. It will lead the arbitrator to apportion the liability between A and B according to the degree of seriousness of their respective wrongdoing.

NOTES 1.

Presumption of equality The presumption of equal shares is contained in some civil codes. See e.g. the GERMAN BGB § 426(1); the AUSTRIAN ABGB § 896; the FRENCH CC art. 1213; the GREEK CC art. 487; the ITALIAN CC art. 1298; the NETHERLANDS BW art. 6:1; and the PORTUGUESE CC art. 516. Elsewhere it is recognised by doctrine. See, e.g. for ENGLISH law, Chitty para. 18.027. The presumption does not exist in IRISH law. 2. Wrongful damage The sharing of liability for damages between those responsible for the same damage is done in different ways in different legal systems. Sometimes it is done according to the degree of seriousness of the wrongdoing of those involved. This is the case, for example, in FRENCH jurisprudence; under the DANISH Law on Damages for Wrongful Acts, § 25; under the GREEK CC art. 926, but in non-contractual matters only. Elsewhere causal participation is what matters. See the GERMAN BGB § 254; the AUSTRIAN ABGB § 1302; the ITALIAN CC art. 2035; and SPANISH jurisprudence. Finally, under the ENGLISH Civil Liability Contribution Act 1978 s. 2, and the SCOTTISH Law Reform (Miscellaneous Provisions) (Scotland) Act 1940, s. 3( 1) the matter is left to the discretion of the judge. It is the same in IRISH law under s. 21(2) of the Civil Liability Act 1961.

Article 10:106: Recourse Between Solidary Debtors

69

Article 10:106: Recourse Between Solidary Debtors (1)

(2)

(3)

A solidary debtor who has performed more than that debtor's share may claim the excess from any of the other debtors to the extent of each debtor's unperformed share, together with a share of any costs reasonably incurred. A solidary debtor to whom paragraph (1) applies may also, subject to any prior right and interest of the creditor, exercise the rights and actions of the creditor, including accessory securities, to recover the excess from any of the other debtors to the extent of each debtor's unperformed share. If a solidary debtor who has performed more than that debtor's share is unable, despite all reasonable efforts, to recover contribution from another solidary debtor, the share of the others, including the one who has performed, is increased proportionally.

COMMENT A. General Article 10:106 gives the solidary debtor who has paid or performed more than that debtor's share a right of recourse against the co-debtors to the extent that they, or any of them, have not paid or performed their shares. The Principles do not give a right of recourse before performance. However, the co-debtors are bound by the general obligation of good faith which may, in certain situations, oblige them to contribute to the settlement of the debt before it has been satisfied by the debtor who is pursued by the creditor. Article 10:106 should be read along with Articles 10:107 to 10:110.

B. Personal Right of Recourse Paragraph (1) deals with the debtor's personal action, generally recognised by national laws on the basis of mandate, negotiorum gestio or unjustified enrichment. The text makes it clear that costs reasonably incurred can be added to the principal claimed. C. Subrogatory Recourse

Paragraph (2) allows the solidary debtor to exercise, in the context of the right of recourse, the rights and actions of the creditor. The rule therefore recognises what is known in a number of national systems as sub rogatory recourse, by virtue of which the debtor who has performed more than a proper share benefits from securities obtained by the creditor. The debtor can choose the most advantageous course of action. The Article makes it clear, however, that the exercise of this right of subrogatory recourse must not prejudice the creditor. Such prejudice might occur because of a potential competition between the creditor who has not yet been fully paid and the debtor subrogated to the creditor's rights. The rule gives effect to the adage that subrogation should not operate against the subrogated person - "nemo contra se subrogare censetur".

70

Chapter 10 Illustration 1: Bank A agrees to a loan of €200,000 to a customer, B. The loan is secured by a real security and by a solidary obligation undertaken by C. C pays €150,000 for which C is subrogated to A. B being insolvent, the building subject to the real security is sold for €100,000, to be shared between A and C. By virtue of the rule in paragraph (2), the exercise by C as paying solidary debtor of the rights and actions of the creditor cannot prejudice A, the creditor, who will take €50,000. Without this rule the price might have been shared proportionately between the two holders of the real security, ranking equally - that is, €25,000 for A and €75,000 for C. A would then have lost €25,000.

D. Effect of Inability to Recover Paragraph (3) contains a rule based on equitable considerations and commonly recognised. The risk of non-payment by one of the solidary debtors should be shared proportionally among the solvent debtors. The burden of the risk should not depend on which debtor the creditor chooses to pursue. Illustration 2: A, Band C are under a solidary obligation to repay a sum of €12,000, A being liable for €6000, and Band C for €3000 each. The creditor claims the full amount from A who pays the full €12,000. B is insolvent. The shares of the two solvent debtors, A and C, are then increased in proportion to their respective shares. The ratio of A's share to C's share is 2:1. So, of the €3000 due by B, €2000 is apportioned to A and €1000 to C, which increases Ns share to €8000 and C's to €4000.

NOTES 1.

2.

3.

Personal right of recourse This right of recourse is often provided for by national statutes, even if they do not always mention reasonable costs. See e.g. the GERMAN BGB § 426(1); the AUSTRIAN ABGB § 896; the NORDIC Promissory Notes Act § 2(2); the SPANISH CC art. 1145(2); the FRENCH CC art. 1214; the ITALIAN CC art. 1299(1); the NETHERLANDS BW art. 6:10; and the PORTUGUESE CC art 524. In ENGLAND and SCOTLAND the right of recourse depends partly on statute and partly on case law. See the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 s. 3 (applying to joint wrongdoers) and the Civil Liability (Contribution) Act 1978 (applying to liability for damages): both statutes give the courts considerable discretion. For IRELAND see the Civil Liability Act 1981. In GREECE the right of recourse is admitted by doctrine. Subrogatory recourse The right of subrogatory recourse is mentioned in many national laws - the GERMAN BGB § 426(2); the AUSTRIAN ABGB § 896; the SPANISH CC art. 1210(3); the FRENCH CC arts. 1251(3) and 1252(2) which mentions also that the subrogation cannot prejudice the creditor; the GREEK CC art. 488; the ITALIAN CC art. 1203(3); the NETHERLANDS BW art. 6:12(1). It is also known in ENGLISH law and IRISH law (Civil Liability Act 1981). Effect offailure to recover The rule in paragraph (3) is very widely adopted. See the GERMAN BGB §426(1) second sentence; the AUSTRIAN ABGB § 896; the SPANISH CC art. 1145; the FRENCH CC art. 1214(2); the GREEK CC art. 487(2); the ITALIAN CC art. 1299(2); the NETHERLANDS

Article 10:107: Performance, Set-off and Merger in Solidary Obligations

71

BWart. 6:13; and the PORTUGUESE CC art. 526. The NORDIC and IRISH laws are similar. In ENGLISH and SCOTTISH law the principles of enrichment law could be used to reach the same kind of result in any case not covered by the statutes mentioned above.

Article 10:107: Performance, Set-off and Merger in Solidary Obligations (1)

(2)

Performance or set-offby a solidary debtor or set-offby the creditor against one solidary debtor discharges the other debtors in relation to the creditor to the extent of the performance or set-off. Merger of debts between a solidary debtor and the creditor discharges the other debtors only for the share of the debtor concerned.

COMMENT A. Effect of Performance or Set-off The rule in paragraph (1) is the consequence of the extinction of the obligation by performance or by some equivalent, such as set-off. This has a discharging effect in relation to the creditor to the extent of the performance made or amount set off, subject of course to the right of recourse of the debtor who has performed. In the event of bankruptcy it will be necessary to take account in appropriate cases of any restrictive rules of the applicable bankruptcy law. Illustration 1: A lends €2,500,000 to B, C and D who are associates in a financial group. B becomes a creditor of A for €500,000 and gives notice of set-off. (See Article 13:104.) The solidary debt will be reduced to €2,000,000. The set-off will benefit the other debtors.

B. Effect of Merger The rule in paragraph (2) will apply where, for example, one of the debtors inherits from the creditor or there is an amalgamation of debtor and creditor companies. Where merger of debts (confusio) operates between the creditor and one of the debtors, the whole of the debt borne by the other debtors is reduced by the amount affected. If one of those debtors is insolvent, that debtor's share must be borne by all the debtors including the one concerned by the confusio, in application of the principle of Article 10:106(3). Illustration 2: A is creditor of a solidary debt of €12,000 owed by B, C and D in equal shares. Following on an amalgamation, B becomes entitled to A's right. The right acquired by B is extinguished in relation to B by the operation of merger of debts (confusio), but subsists in relation to C and D to the amount of €8000. If C is insolvent, Band D must bear C's share by virtue of Article 10: 106 (3). B will be able to claim €6000 from D (4000 plus 2000).

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So far as payment or other performance is concerned, the rules under discussion flow from the very definition of solidarity. See Article 10:101. Set-off is normally treated as a form of payment. See the GERMAN BGB § 422(1); the AUSTRIAN ABGB § 896; the NORDIC Promissory Note Act § 2; the SPANISH CC art. 1143( 1); the GREEK CC art. 483; the ITALIAN CC art. 1302( 1); the NETHERLANDS BW art. 6:7(2); and the PORTUGUESE CC art. 523. ENGLISH law is to the same effect. (Owen v. Wilkinson (1858) 5CB(ns) 526) as is IRISH law (Civil Liability Act 1961 ss. 16 and 17). The position in FRENCH law is more complex because of the special nature of set-off or compensation which, in principle, operates automatically. (Terre. Simler. Lequette n. 1158). Merger of debts (confusio) is not always mentioned in the texts of national laws but the solution can be deduced from the other types of extinction of the obligation provided for. See the SPANISH CC art. 1142; the FRENCH CC art. 1209; the GREEK CC art. 488; the ITALIAN CC art. 1303. The GERMAN BGB § 425(2) refers expressly to merger of debts as one of the events which does not affect the other debtors.

Article 10:108: Release or Settlement in Solidary Obligations (1)

(2) (3)

When the creditor releases, or reaches a settlement with, one solidary debtor, the other debtors are discharged of liability for the share of that debtor. The debtors are totally discharged by the release or settlement if it so provides. As between solidary debtors, the debtor who is dischargedfrom that debtor's share is discharged only to the extent of the share at the time of the discharge and not from any supplementary share for which that debtor may subsequently become liable under Article 10:106 (3).

COMMENT A. Effect of Release or Settlement The rule in paragraph (1) is the same as for merger of debts under Article 10:107(2). It is equally appropriate in the present context. There is, however, no public policy requirement that the discharge provided for by paragraph (1) must be only partial. Those responsible for the release or settlement can, under the principle of freedom of contract, discharge the other debtors completely if they so wish. This is recognised by paragraph (2). But the intention to do so must be made clear. B. Effect on Later Liability for Supplementary Share

It is fair that the discharged debtor should nonetheless bear any appropriate supplementary burden (under Article 10:106(3)) due to the insolvency of one of the other debtors. Illustration: A has agreed to a commercial lease in favour of a partnership, the partners B, C and D being, under the applicable law, solidarily liable

Article 10:109: Effect of Judgment in Solidary Obligations

73

for the partnership debts. Arrears of €60,000 mount up. A releases B. C and D remain bound but only for €40,000. If D turns out to be insolvent, B will be bound to pay €1O,000 in spite of the release.

NOTES

1.

2.

Effect of release and settlement Few national laws expressly cover both release and settlement, but the solutions of Article 10:108 are generally accepted. It is everywhere admitted that the rules apply only in the absence of an expression of intention on the matter by the creditor who releases the debt or by those who have agreed the settlement. See the GERMAN BGB § 423 (for the release of debt: according to the case law a settlement has, in principle, no effect on those who are not parties to it); the AUSTRIAN ABGB § 894 and case law; the SPANISH CC art 1143(1) (release of debt); the FRENCH CC art. 1285 (release of debt: case law since Cass.req. 3.12.1906, S. 07.1.269, admits that a settlement applies to the other co-debtors when it is favourable to them, by an effect of representation); the GREEK CC art. 484 (release of debt); the ITALIAN CC art 1301 (release of debt) and 1304 (settlement: this benefits the other co-debtors except if they declare that they do not wish to benefit from it); the NETHERLANDS BW art. 6:14 (release of debt). See also the PORTUGUESE CC art. 864(1). In ENGLISH law a release of debt benefits all the debtors unless it must be interpreted differently. It is different with a simple "covenant not to sue" which leaves the creditor's rights against the other debtors intact (Chitty para. 18-017). IRISH law is substantially the same as the rules in Article 10:108 (Civil Liability Act 1981, s. 17(1) and (2).) Effect on later liability for supplementary share The rule in paragraph (3), as far as is known, does not appear in any ofthe national laws.

Article 10:109: Effect of Judgment in Solidary Obligations A decision by a court as to the liability to the creditor of one solidary debtor does not affect: (a) (b)

the liability to the creditor of the other solidary debtors; or the rights of recourse between the solidary debtors under Article 10:106.

COMMENT A. Effect of Court Decision as to Liability of one Debtor on Liability of Others

It will be remembered that under Article 1:301(2) the reference to a court extends to arbitrators. It is also appropriate to bear in mind the provisions on

good faith and fair dealing (Article 1:201) given the risk of a fraudulent collusion between the creditor and one of the debtors to adversely affect the others. National laws adopt different solutions to the problem of a court decision as to the liability of one debtor - no effects on the other debtors; full effects in favour of, but not against, the other debtors. The Principles adopt the rule that the decision has no effects on the other debtors who were not parties to it. The idea of reciprocal representation is rejected. Each debtor should be free to make maximum use of that debtor's own defensive resources. There will be no res judicata effect except in relation to those who were parties to the litigation.

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B. Effect of Court Decision as to Liability of One Debtor on Rights of Recourse The rule in (b) is intended primarily to clarify the effects of a court decision that one debtor is not liable in relation to the rights of recourse which the other debtors have. The rule on the absence of wider effects of the court decision applies here also. The other debtors retain their rights of recourse. Of course, a decision by a court that one debtor is liable does not prevent that debtor from exercising the right of recourse against the others: this situation too is covered by paragraph (b).

NOTES National laws are divided on the question regulated by this Article. Under some laws a court decision on one debtor's liability has no effect on the co-debtors. This is the case under GERMAN law (BGB § 425(2), AUSTRIAN case law; the GREEK CC art. 486 and NORDIC doctrine. It is the same in ENGLISH law (Chitty para. 18.016) and IRISH law (Civil Liability Act 1981 s. 18). The SPANISH CC art. 1252(3) gives full effect to the judgment in relation to the co-debtors who are not parties to it. In other laws such effect is only partial. See the ITALIAN CC art. 1306 (there is absence of effect in principle but the other debtors can plead the decision against the creditor, except when it is based on reasons personal to the debtor party to it). PORTUGUESE law is similar (CC art. 522). FRENCH case law considers on the other hand that the decision is pleadable against the other debtors except in the case of fraudulent collusion or if the debtor against whom the decision is pleaded can take advantage of a personal defence or exception.

Article 10:110: Prescription in Solidary Obligations Prescription of the creditor's right to performance ("claim") against one solidary debtor does not affect: (a) (b)

the liability to the creditor of the other solidary debtors; or the rights of recourse between the solidary debtors under Article 10:106.

COMMENT Under paragraph (a) the effect of prescription is personal to the debtor concerned and does not affect the liability of the other debtors to the creditor. There is no reason why the other debtors should benefit from the prescription of the claim against one debtor when the claims against them have not prescribed. This rule fits in well with the way prescription operates under Chapter 14 of the Principles: it does not extinguish the claim automatically but merely gives the debtor a right to refuse performance. Paragraph (b) is justified primarily by the need to protect a debtor (not the one whose debt has prescribed) who has paid more than that debtor's share. Such a debtor should not be deprived, by the creditor's inaction, of the right of recourse against the debtor whose debt has prescribed. Paragraph (b) also

Article 10:111: Opposability of Other Defences in Solidary Obligations

75

protects the debtor whose debt has prescribed but who nonetheless pays. As prescription under the Principles does not extinguish the obligation (see Article 14:501) it follows that such a debtor is fulfilling an existing obligation and is entitled to any available right of recourse against the co-debtors. Illustration: A has lent €20,000 to Band C, who are solidary debtors. After

3 years the claim against B has prescribed but, because C has acknowledged the claim, the period of prescription against C has not yet expired. At this stage A cannot compel B to pay but can proceed against C for the whole amount. By virtue of the rule in paragraph (2), if C pays the whole amount he will be able to reclaim €1O,000 from B. NOTES 1.

2.

Effect of prescription of claim against one debtor on liability of other debtors The solutions in national laws are contradictory, reflecting to some extent the different ways in which prescription or limitation of actions operates in the system concerned. In favour of the absence of effects on other debtors are: the GERMAN BGB § 425(2); AUSTRIAN law (solution deduced from ABGB § 894); the GREEK CC art. 486 and the PORTUGUESE CC art. 52l. DANISH law is also to this effect, as is ENGLISH law (Limitation Act 1980 s. 31(6)). In favour of full effect are SCOTTISH law (Prescription and Limitation (Scotland) Act 1983, s.6); SPANISH law (CC art. 1148); FINNISH law (Decree on Prescription of 9.11.1868); FRENCH and BELGIAN case law; and ITALIAN doctrine (reasoning on the basis ofCC art. 1319(1) on the interruption of prescription). Effect of prescription of claim against one debtor on right of recourse GERMAN case law is to the same effect as the rule in paragraph (2) (RG 16 November 1908, RGZ 69, 422 ff.). See also the ITALIAN CC art. 1310(3) and the PORTUGUESE CC art. 52l. The NETHERLANDS BW art. 6:11(3) has a special rule. A debtor against whom recourse by way of contribution is sought can take advantage of the prescription of the creditor's claim only if, at the time when the obligation to contribute arose, both that debtor and the one who claims contribution could have pleaded prescription against the creditor.

Article 10:111: Opposability of Other Defences in Solidary Obligations

(1)

(2)

A solidary debtor may invoke against the creditor any defence which another solidary debtor can invoke, other than a defence personal to that other debtor. Invoking the defence has no effect with regard to the other solidary debtors. A debtor from whom contribution is claimed may invoke against the claimant any personal defence that that debtor could have invoked against the creditor

COMMENT Paragraph (1) recognises the traditional distinction between defences inherent in the debt itself and defences personal to each of the debtors. Only defences of the first type can be pleaded by all the debtors. Personal defences are exclusive to the debtors concerned.

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Defences inherent in the debt are those, such as ineffectiveness as a result of illegality or non-compliance with a formal requirement, which flow from the contract itself. Personal defences are those, such as lack of free consent or incapacity, which relate only to the personal position of one of the debtors. Indeed, the possibility of avoiding the contract for a defect in consent under Articles 4:103 (Mistake), 4:107 (Fraud) or 4:108 (Threats) is necessarily personal to the person whose consent was affected. Illustration 1: A, Band C borrow €50,000 from D at a rate of interest of 12%. The contract is in French. C, who does not speak French, is subject to an error producing a lack of true consent. B, if pursued by the creditor, cannot take advantage of this.

Paragraph (2) provides that personal defences can be pleaded against a debtor who claims a contribution from a co-debtor, whether the recourse is by personal action (Article 10:106(1)) or based on subrogation (Article 10:106(2)). Illustration 2: The facts are as in Illustration 1. B, having paid the whole amount to D, now seeks recourse against C. C can found on the lack of true consent to defeat B's claim.

NOTES 1.

Invoking defences against creditor The distinction between personal defences and defences inherent in the debt is a general one, subject to some nuances. The general rule may sometimes be modified by special provision for certain types of defence (such as prescription or res judicata). The distinction is found in the GERMAN BGB §§ 422-425; the AUSTRIAN ABGB § 1148; the SPANISH CC art. 1148; the FRENCH CC art. 1208; the GREEK CC art. 486 (which mentions certain exceptions operating subjectively); the ITALIAN CC art. 1297; and the PORTUGUESE CC art. 514(1). The distinction is taken for granted in ENGLISH law and is also used in IRISH law. The second sentence of paragraph (1) regulates a matter which is sometimes unregulated, and a matter of dispute, in national systems. 2. Invoking defences against other debtors exercising right of recourse The rule in this paragraph is not expressed in a general form in national laws (but see the PORTUGUESE CC art. 525) where one finds only particular applications of it. There is generally, however, nothing to cast doubt on it. See, however, the SPANISH CC art. 1148 (in the opposite direction) and the NETHERLANDS BW art. 6:11 (slightly different).

Article 10:201: Solidary, Separate and Communal Claims

77

Section 2: Plurality of Creditors

Article 10:201: Solidary, Separate and Communal Claims (1)

(2)

(3)

Claims are solidary when any of the creditors may require full performance from the debtor and when the debtor may render performance to any of the creditors. Claims are separate when the debtor owes each creditor only that creditor's share of the claim and each creditor may require performance only of that creditor's share. A claim is communal when the debtor must perform to all the creditors and any creditor may require performance only for the benefit of all.

COMMENT A. General Article 10:201 is not intended to cover all cases where there is a plurality of creditors. The Principles do not deal with an accumulation of rights arising out of multiple contracts concluded by several creditors with one person, such as customers who order merchandise from one dealer. The existence of such parallel contracts does not affect their legal nature. The typology of plural claims follows that of plural debts (Article 10:101). Solidary claims, separate claims and communal claims are thus, broadly speaking, the converse of solidary, separate and communal obligations. The following Articles in this Chapter are not, however, a simple reflection of the Articles on a plurality of debtors. A "claim" means a right to performance. (See Article 10:110). It is the counterpart of an obligation. (See the Introduction, § 5.)

B. Solidary Claims Solidarity of claims always implies a contractual agreement to that effect. Because of the risks inherent in solidarity of claims (notably, that one creditor may claim and squander the whole funds) the Principles do not lay down any presumption of solidarity. For the same reason, solidarity of claims is rarely stipulated for by the parties. It is, however, frequently encountered in relation to bank accounts, particularly joint accounts where the holders are solidary creditors of the bank. The definition of solidary claims given by the Principles reflects their characteristic features. Each creditor can obtain from the debtor the totality of the debt without the debtor being able to plead that it should be divided.

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Reciprocally, the debtor can make payment of the whole debt to one of the creditors, at the debtor's choice, thereby being discharged in relation to all the creditors. The debtor retains this choice even when faced with demands from all or any of the creditors. In the event of non-performance by the debtor in the face of a claim by one of the creditors, the creditor can put in operation the various remedies for non-performance provided by the Principles, without any obligation to act in concert with the other creditors. So, the creditor can terminate the contract, under Article 9:301, if there is substantial non-performance by the debtor. Similarly, the creditor can withhold performance, subject to the conditions laid down in Article 9:201, until the debtor performs or tenders performance. C. Separate Claims

Separate claims are the most frequent in practice. It follows that the relative practical importance of the different categories of plurality is different in the case of claims and debts. D. Communal Claims Communal claims depend in principle on the intention of the parties. They can also result from the very nature of the obligation. This is the case when the performance is indivisible and when it can be rendered only for the benefit of all the creditors. A common field of application for communal claims is that of joint and indivisible bank accounts. Another is contracts concluded by the title holders of property held jointly and indivisibly, as may happen, depending on the applicable law, under the law of trusts or succession. It is of the essence of a communal claim that its execution is in the hands of all the creditors. It is conceivable, however, that one of the creditors may have received a mandate or authority from the others to receive the funds or performance due. Illustration 1: A and B, members of a partnership or society which does not have legal personality, open a joint bank account as such members. They are communal creditors of the bank. Illustration 2: A engages a married couple as caretakers and makes a caretakers' apartment available to them. Each is a communal creditor of the right to the tenancy. Illustration 3: A group of friends hire a car with a driver for a communal excursion. The driver's performance can only be rendered for the benefit of the whole group, the members being accordingly creditors of a communal claim.

In the situation where the debtor in a communal claim does not perform the

Article 10:201: Solidary, Separate and Communal Claims

79

obligation, the question arises whether the creditors must act in concert against the debtor or whether it is sufficient for one of them to act for the benefit of all. Article 10:201(3), in providing that "any creditor can require performance only for the benefit of all", facilitates recovery and allows the creditors to avoid the paralysis which would otherwise result from the inaction of one of their number. Illustration 4: A is the debtor in relation to a communal claim held by B and C. The debt is due but has not been paid. C can sue A for payment of the debt to both creditors.

Non-performance by the debtor in the case of a communal claim necessarily affects the whole of the contract. The nature of the claim, and corresponding obligations, makes a termination or suspension by only one or some of the creditors inconceivable. All the creditors will have to act together to terminate the contract under Article 9:301 or to withhold their performance under Article 9:201. Illustration 5: The facts are as in Illustration 3. The driver does not turn up on the agreed date. The group of friends want to terminate the contract and recover the money paid in advance. They will have to give notice of termination jointly to the debtor or authorise one of them to give notice on behalf of all.

NOTES 1.

2.

3.

General Plurality of creditors is not always dealt with in national laws (as is the case in ENGLAND, SCOTLAND and IRELAND) and is sometimes covered by reference to the regulation of plurality of debtors. The notion of the communal claim does not exist in most national laws, otherwise than in doctrine. Only GERMAN law provides for it expressly (BGB § 432( 1)) Some other laws have the notion of indivisibility on the creditors' side, the rules being similar to those of the communal obligation. There are references to this type of indivisibility in the ITALIAN CC arts. 1314-1320; the GREEK CC art. 495 and the AUSTRIAN ABGB §§ 891, 892 and 895. Solidary claims The elements of the definition and governing rules in this paragraph are to be found in a certain number of codes. See e.g. GERMAN BGB §§ 428; the SPANISH CC arts. 1147-1143; the CC's of FRANCE, BELGIUM and LUXEMBOURG arts. 1197 and 1198; the GREEK CC arts. 489-493; the ITALIAN CC arts. 1292-1310 (each article dealing successively with active and passive solidarity); and the PORTUGUESE CC art. 512(1) and 528(1). There is also reference to solidary claims in the NORDIC laws (Gomard, 14-16). It is uncertain whether ENGLISH law recognises solidary claims as a distinct juridical category (Treitel, Contract 533-537). Separate claims As it is the background norm, sometimes even built on a presumption of divisibility (PORTUGUESE CC art. 513; the NETHERLANDS BW art. 6:15), the separate claim is not always defined in the national codes. See, however the FRENCH CC art. 1217; the ITALIAN CC art. 1314; the NETHERLANDS BW art. 6:15 and the PORTUGUESE CC art. 534. The GERMAN BGB envisages the existence of the divisible claim without defining it. Note also the

80

4.

Chapter 10 provisions of the FRENCH CC arts. 1220 and 1221 on divisibility by operation of law between heirs. Communal claims The category of communal claims, as distinct from indivisible claims, is not directly known except in GERMAN law. It is sometimes referred to by analogy (AUSTRIAN ABGB § 890, second sentence and § 892). In other laws, reference may be made to the rules on indivisibility. The reference to such rules is sometimes made expressly: the NETHERLANDS BW art. 6:16.

Article 10:202: Apportionment of Separate Claims Separate creditors are entitled to equal shares unless the contract or the law provides otherwise.

COMMENT This provision is the counterpart of Article 10:103 which provides a comparable principle for the case of a plurality of debtors. The general rule laid down in Article 10:202 is subject to the same exceptions resulting from the contract or the law. Illustration: A and Blend €1O,000 to C. In the absence of any special provision, C owes €5000 to each of the creditors. Conceivably, however, a clause in the contract might provide for a different apportionment because, for example, of a debt owed by one of the creditors to the other.

NOTE This rule is rarely expressed. See the GERMAN BGB § 420; the GREEK CC art. 493; the PORTUGUESE CC art. 534. It is not contested.

Article 10:203: Difficulties of Executing a Communal Claim If one of the creditors in a communal claim refuses, or is unable to receive, the performance, the debtor may discharge the obligation to perform by depositing the property or money with a third party according to Articles 7:110 or 7:111 of the Principles.

COMMENT This rule is intended to protect the debtor who, without it, could not obtain an effective discharge if one of the creditors refused, or was unable, to receive the performance. It will be remembered that the debtor must render the performance to the creditors together (Article 10:201(3). Because of the rule in Article 10:203 the debtor will, in case of difficulty caused by this requirement,

Article 10:204: Apportionment of Solidary Claims

81

be able to put into operation the measures provided for by Articles 7:110 and 7:111 of the Principles. Illustration: A and B buy a second hand car from C, the contract making it clear that they have a communal claim. B is hospitalised and, because of his condition, is not able to receive the performance or give a mandate to A. C wants to deliver the car at the agreed time. C cannot deliver the car for the sole benefit of A, because A and B have a communal claim. C will be able to deposit the car with a third party for the benefit of A and B according to the rules laid down in Article 7:110 of the Principles.

NOTE Only GERMAN law has a rule comparable to Article 10:203 (BGB § 432(1) second sentence). In other laws a similar result can be obtained by applying the general mechanisms of deposit (in this type of situation) and consignation. See the notes on Articles 7:111 and 7:112 of the Principles.

Article 10:204: Apportionment of Solidary Claims (1) (2)

Solidary creditors are entitled to equal shares unless the contract or the law provides otherwise. A creditor who has received more than that creditor's share must transfer the excess to the other creditors to the extent of their respective shares.

COMMENT Article 10:204( 1) is the counterpart of Article 10:105( 1) which regulates apportionment between solidary debtors. The agreement constituting the solidarity will generally specify the share due to each of the creditors. In the absence of such provision, sharing will be in equal parts. Paragraph (2) lays down an understandable rule. A creditor who has received more than that creditor's share obviously cannot be allowed to keep the excess. It must be handed over to the other creditors. Illustration: A and B are solidary creditors of C for an amount of €1O,000. C pays €1O,000 to B. A has a right of recourse against B for €5000.

NOTE The rule in paragraph (1) is not found in many of the national laws, but it follows from the parallelism with the rules on passive solidarity. It is found, however, in the GERMAN BGB § 430; the SPANISH CC art. 1143(1); the GREEK CC art. 493; the ITALIAN CC arts. 1298 and the PORTUGUESE CC arts. 516 and 533.

82

Chapter 10 Article 10:205: Regime of Solidary Claims

(1)

(2)

A release granted to the debtor by one of the solidary creditors has no effect on the other solidary creditors. The rules of Articles 10:107, 10:109, 10:110 and 10:111 (1) apply, with appropriate adaptations, to solidary claims.

COMMENT A. Release by One Solidary Creditor Under paragraph (1) a release of the debt agreed to by one of the solidary creditors has no effect on the other creditors. This rule is different from the rule provided by the Principles for the case of solidary obligations (Article 10:108). It means in effect that one creditor cannot dispose of the claim to the detriment of the other or others. Illustration 1: A and B are solidary creditors of C for the amount of €10,000. A grants a total release to C, who is therefore discharged in relation to A. A will no longer therefore be able to sue for recovery of the claim. B remains creditor of C for the whole amount of €10,000.

The rule envisages only the release of the debt, as opposed to a settlement. A settlement, in so far as it provides for partial payment, will come under the rules on payment (see Article 10:205(2) read with Article 10:107(1)) and, in so far as it involves a release, will come under the rule of the present paragraph. Illustration 2: A and B are solidary creditors of C for an amount of €10,000. A sues C and, in the course of the proceedings, concludes a settlement providing for a release of half the debt on payment of the other half. In accordance with the settlement C pays €5000 to A. The settlement cannot be pleaded against B who has the right to sue C. However, because of the partial payment which has been made, B can claim only €5000 (Article 10:205(2) read with Article 10:107 of the Principles).

B. Application of Certain Rules for Solidary Obligations The form of paragraph (2) is explained by the parallelism between plurality of debtors and plurality of creditors. It avoids a repetition of the relevant rules provided for the case of a plurality of debtors. The following consequences ensue. By virtue of the application of Article 10:107(1) both the payment of the debt and the operation of set-off between the debt due by the debtor and one of the claims discharge the debtor in relation to the co-creditors. It is the same in the case of merger (confusio): the debt is extinguished, but the debtor who has thus become creditor is exposed to the right of recourse of the other creditors, as provided by Article 10:204(2).

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83

Illustration 3: A and B are solidary creditors of C for an amount of €1O,000. B dies and C, his sole heir, succeeds. A will be able to claim €5000 from C, the new co-creditor, by virtue of Article 10:204(2).

In the same way, by virtue of Article 10:109, a court decision has effect only between the parties to the litigation. Under Article 10:110(1), as applied to solidary claims, when one of the claims has prescribed, the other creditors keep their rights. Under Article 10:110(2) the creditor whose claim has prescribed can nonetheless exercise a right of recourse (under Article 10:204(2)) against a creditor who has received more than a due share of the claim. Illustration 4: A and B are solidary creditors of C for an amount of €1O,000. B's claim has prescribed but A's has not. A can proceed against C and recover the whole of the sum. B can then exercise a right of recourse (under Article 10:204(2)) against A to the extent of €5000.

Finally, by virtue of Article 10:111(1) the debtor can plead against the creditor any defences, personal or inherent in the debt, apart from any defences personal to another of the solidary creditors. Illustration 5: A and B are solidary creditors of C for €1O,000. C can argue against A that the contract giving rise to the claim is ineffective by reason of its illegality, as it relates to a matter which cannot be the object of a lawful contract. This would be a defence inherent in the debt. Illustration 6: A joint bank account is opened in the names of A and B. B is legally incapable of contracting by reason of mental incapacity. A wants to make a withdrawal. The Bank cannot plead the incapacity of B against A. This is a personal defence which can be invoked only in the Bank's relations with B.

Article 10:111(2) is not applied by analogy to solidary claims. The creditor who has received full payment, the debtor being thereby discharged, is exposed to the right of recourse of the co-creditors without being able to plead against them the defences which the debtor could have used against them. The sharing of the amount of the claim should be regulated exclusively by the agreement which unites the solidary creditors. Illustration 7: A and B are solidary creditors of C for an amount of €1O,000. A sues C who pays €10,000. C could have pleaded a vice of consent against B. A will have to pay over €5000 to B, without being able to invoke the vice of consent which C could have pled against B.

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Chapter 10 NOTES

1.

2.

Release by one solidary creditor The rule in this paragraph is different from that of several legal systems which, in the case of a release by one of the solidary creditors, come down expressly in favour of a partial reduction of the claim. See the SPANISH CC art. 1143; the FRENCH CC art. 1198(2); the GREEK CC art. 491(1); the ITALIAN CC arts. 1301(2) and the PORTUGUESE CC art. 864(3). For settlements, see the ITALIAN CC art. 1304 (according to which a settlement between one of the creditors and the debtor has effect against the other creditors only if they declare that they want to benefit from it). In the absence of express provisions, other laws adopt the solution of a partial reduction by analogy with passive solidarity. Application of certain rules for solidary obligations The technique of legislation by reference to the rules on passive solidarity is found in a number oflaws. See the GERMAN BGB § 429(3) (the second paragraph of this article being devoted to merger); the SPANISH CC art. 1137. Others deal together with active and passive solidarity (the ITALIAN CC arts. 1300-1306) or have distinct rules (GREEK CC arts. 491 and 492; PORTUGUESE CC arts. 532,869,530 and 514(2)). In the absence of express rules, the rules on passive solidarity will probably be applied by analogy. In addition the SPANISH CC provides in art. 1141 that each co-creditor can act for the benefit of the others but not to their detriment.

CHAPTER 11

Assignment of Claims Section 1: General Principles

Article 11:101: Scope of Chapter (1) (2) (3)

(4) (5)

This Chapter applies to the assignment by agreement of a right to performance ("claim") under an existing or future contract. Except where otherwise stated or the context otherwise requires, this Chapter also applies to the assignment by agreement of other transferable claims. This Chapter does not apply: ( a) to the transfer of a financial instrument or investment security where, under the law otherwise applicable, such transfer must be by entry in a register maintained by or for the issuer; or (b) to the transfer of a bill of exchange or other negotiable instrument or of a negotiable security or a document of title to goods where, under the law otherwise applicable, such transfer must be by delivery (with any necessary indorsement). In this Chapter "assignment" includes an assignment by way of security. This Chapter also applies, with appropriate adaptations, to the granting by agreement of a right in security over a claim otherwise than by assignment.

COMMENT A. General

Contractual claims represent a major tradeable asset. They can be sold outright, as in the typical factoring transaction, or assigned by way of security for a loan or other obligation. The purpose of this Chapter is to set out principles and rules which are designed to facilitate the assignment of claims, whether individually or in bulk, whilst at the same time ensuring that the debtor's rights are not prejudiced by the assignment. An assignment of a contractual claim is a transfer of a right to performance, often a right to the payment of money. It does not involve any transfer of the assignor's obligations. The debtor's own claims under the contract continue to lie solely against the assignor. Since an assignment does not involve the release of either of the parties to the contract, it does not require the consent of the debtor unless the underlying contract so

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provides. Assignment is therefore to be distinguished from the situation where a third party is substituted for the debtor, who is released from liability, an arrangement requiring the assent of all three parties (see Article 12:101). It is also to be distinguished from the situation where a third party is substituted completely for one of the contracting parties, taking over both rights and obligations. This also requires the assent of all three parties (see Article 12:201).

B. Scope (i) "Assignment" This Chapter deals with the situation where the holder of a right to performance of an obligation (a "claim") deals with it in such a way as to confer the claim, or rights in the claim, on another. Such a dealing may take one of three forms: an outright transfer, for example pursuant to a contract for the sale of claims; a transfer by way of security, for example a mortgage; and the grant of security otherwise than by way of transfer. This third category embraces all forms of security over a claim not involving a transfer. This generic approach to security, which is reflected in paragraph (5), avoids reference to forms of non-transfer security particular to a given legal system or family, such as pledge (which in civil law systems is admissible even for intangibles on the basis of a notional delivery of possession where the legal requirements are satisfied but which in common law systems is available only for tangible movables) and equitable charge (a form of security not found outside the common law). The Chapter applies to such non-transfer grants of rights in security with appropriate adaptations. The most general adaptation is that references to assigning (both in the Articles and in these Comments) must be taken as including references to granting the right in security, and similarly for "assignor" and "assignee". There are other necessary adaptations of a more substantial nature. For example, Article 11:201 (Rights transferred to Assignee) cannot apply to a non-transfer grant of a right in security. Where there is a transfer of an entire contract (i.e. of the obligations as well as the rights under the contract) this Chapter must be read with, and subject to, Chapter 12. (ii) "Claim" The word "claim" means a right to performance of an obligation. It is used also in other Chapters and has important delimiting effects. (See the Introduction § 5.) In the present context it is important to note that it includes debts already payable or becoming payable in the future and rights to non-monetary performance such as the construction of buildings, the delivery of goods, and the provision of services. However, there are certain types of claim (for example, those embodied in or evidenced by financial instruments or investment securities or negotiable instruments) for which the provisions of this Chapter are not necessarily appropriate. (See (v) below.)

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(iii) Only Consensual Transfers Covered This Chapter is confined to consensual assignments of claims. It does not apply to the transfer of claims by operation of law (for example by way of legal subrogation) or by unilateral act (such as a declaration of trust). (iv) Non-contractual Claims As assignment is of most practical importance in relation to contractual claims, the Chapter has been drafted primarily with rights to payment or other performance under contracts in mind. However, it applies also, except where otherwise stated or the context otherwise requires, to the assignment by agreement of other transferable claims, such as rights to payment under a unilateral undertaking, or rights to the payment of damages for non-performance of a contract, or rights to payment or restitution under the law on unjustified enrichment. In a dispute referred to arbitration under the Principles, claims of various types might be intermingled and it would be inconvenient and unjustifiable to have one set of rules applying to the assignment of rights to performance under a contract and other rules applying to the assignment of other closely related claims. The word "transferable" excludes from the scope of the Chapter those noncontractual claims which, under the law governing them, are of their nature not transferable. For example, the law conferring a right to certain social security payments may well provide that the right to the payments is not transferable. Note also that the rules on overriding mandatory provisions (Article 1:103(2)) and on performance of a nature personal to the assignor (Article 11:302) may limit or affect the assignability of certain claims, whether contractual or non-contractual. See Comment C and Notes to Article 11:102 below. The words "except where otherwise stated" reflect the fact that a few of the provisions in this Chapter (see Articles 11:102; 11:201(2); 11:204(b)) are limited expressly to contractual claims. The words "or the context otherwise requires" reflect the fact that a few provisions (e.g. Article 11:301) are relevant only to contractual claims, although not expressly so limited. (v) Financial Instruments, Investment Securities, Negotiable Instruments and

Similar Documents Transfers of financial instruments or investment securities, such as stocks and certain bonds, which must take place by entry in the issuer's register, or a register kept for the issuer by a third party, are outside the scope of this Chapter. The same applies to transfers of documentary intangibles (that is, of claims embodied in a negotiable instrument, a negotiable security or a document of title to goods) transferable by delivery, with any necessary indorsement. These exclusions are effected by paragraph (3) of the Article. (a)

Financial instruments and investment securities Although the holder of a bond or stock in the nature of a registered

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(b)

(c)

(d)

financial instrument or investment security will have a right to payment (a "claim") against the issuer, such instruments or securities differ in important respects from ordinary rights governed by the law of obligations. Their transfer will be governed by special rules, generally involving an entry in the issuer's register. They are therefore excluded from the scope of this Chapter. Negotiable instruments Although a bill of exchange or other negotiable instrument may set up a series of contractual relationships, the transfer of rights under a negotiable instrument is usually effected by delivery, with any necessary indorsement, not by assignment. Since the obligation of the party or parties liable on the instrument is to pay the current holder, who may not be the original payee, there is no requirement of notice of the transfer as there would be for an assignment; and a debtor who pays an assignee who is not the holder of the instrument remains liable to the holder. Moreover, negotiable instruments are by their nature governed by distinct rules which in various respects differ sharply from those applicable to assignments. For example, a person taking a negotiable instrument for value and without notice of any defect in the transferor's title is not affected by such a defect or by defences that would have been available against the transferor, whereas an assignee takes subject to these matters. While negotiable instruments as such are outside the scope of this Chapter, this does not necessarily preclude an assignment of the underlying debt. This is most likely to occur in a global assignment of assets which does not involve the delivery of negotiable instruments. Where a debt embodied in a negotiable instrument is assigned, negotiable instruments law will usually give the holder of the instrument priority over the assignee. This also is a matter not covered by the present Chapter; the priority rules laid down in Section 4 are confined to competing assignments. Negotiable securities A negotiable security is a document of title to unregistered stock, shares, bonds or notes issued on a market. As in the case of negotiable instruments, the right embodied in the instrument is transferred by delivery. The comments made above in relation to negotiable instruments are equally applicable to negotiable securities. Documents of title to goods Similar considerations apply to documents of title to goods. Although a document of title is not as such a claim, it may be evidence of a right to delivery of the goods. The obligation of the carrier or custodian issuing such a document is to the current holder, who is not necessarily the original shipper or depositor, so that the right to delivery of the goods is transferred by delivery of the bill of lading, warehouse warrant, or other document of title.

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(vi) Focus is on Assignment rather than Agreement to Assign An assignment within this Chapter derives from an agreement to assign. In some cases this agreement is separate from and prior to the assignment and governs the wider business transaction or relationship of which the assignment will form part. In other cases the agreement and the assignment are embodied in a single contract document. There may, indeed, be an assignment which contains no express contractual undertakings or other contractual provisions at all and is framed as a simple assignment, in which case any contractual obligations will arise only by implication or under a legal rule. In all cases it is necessary to distinguish the contractual aspects of the assignment from the effects of the assignment as a transfer. The present Chapter is primarily devoted to the latter but does deal with undertakings considered to be given by the assignor (see Article 11:204). Thus the formal and material validity of an assignment as a contract are governed by Chapters 2 and 4, not by this Chapter. In some legal systems an assignment under a contract is considered to take effect by virtue of the contract, so that if the contract is invalid the purported transfer is ineffective. In other legal systems the assignment is considered to be a distinct juridical act which is insulated from the contract that gave it birth and is in principle unaffected by the invalidity of that contract. In yet other systems the transfer is treated as separate from the contract but may be affected by the invalidity of the contract. This Chapter does not take a position on this question. However, for the protection of the debtor, Article 11:304 provides that if after receiving a notice of assignment the debtor performs in favour of a person identified as assignee in the notice of assignment the debtor is discharged unless the debtor could not have been unaware that such person was not the person entitled to performance. This Chapter does not cover all aspects of an assignment. So it does not, for example, deal with the enforcement of security interests in claims. This is left to the applicable law.

NOTES This Chapter covers the assignment of both monetary and non-monetary claims. It is therefore somewhat broader than the UN Convention on Assignment of Receivables in International Trade (hereafter the UN Convention), which by its nature is confined to claims to payment of money (art. 2). In most European legal systems a consensual assignment is considered to be based on agreement and dependent on the validity of the agreement. However, GERMAN law, GREEK law and SWISS law adopt a principle of abstraction by which the assignment is considered to be independent of the agreement to assign, so that a defect in the latter does not necessarily affect the validity of the assignment, though in most cases it will. See, for a comparative treatment, Katz, IECL para 67, reproduced in Zweigert and Katz 446; for a Franco-German comparison, Cashin-Ritaine; for GERMAN law Larenz 571 and Munchener Kommentar (-Roth) § 398, n.2 and 23-25; for GREEK law A.P. 481/1960, Note 1961.297. In ENGLISH law a completed assignment of an existing claim, as opposed to a mere agreement to assign or an assignment of a future claim, is treated as a transfer of property and accordingly is not required to fulfil the conditions of a valid contract, such as consideration: Holt v. Heatherfield Trust Ltd. [1942] 2 KB 1, 5; Chitty paras. 20-018,20-027; Goode, Commercial Law 680-681.

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Chapter 11 The AUSTRIAN ABGB § 1392 describes assignment as a form of novation by substitution of a new creditor, though not so as to impose on the assignee any liability to the debtor: § 1395. In the BELGIAN, LUXEMBOURG and FRENCH CCs the provisions relating to consensual assignments are contained in the chapter on sales but extend to other forms of assignment. In addition Title XVII of Book 3 of the FRENCH CC includes provisions covering the pledge of claims. Similarly GERMAN law distinguishes between the assignment of claims, which is governed by the general rules on contract (BGB §§ 398 if.) and pledge, which is governed by the rules on property law (BGB §§ 1273 if.). The rules governing the consensual assignment of claims (cessioni di crediti) in ITALIAN law are laid down in CC arts. 1260-1267 and in statute no. 52, 21st February 1991. The LUXEMBOURG CC deals with the assignment of claims in arts. 1689-1691 and 1295. The original provisions were modified in important respects by the Loi of 21st December 1994 to relax the legal requirements. In the NETHERLANDS the provision on assignment in BW art. 3:94 forms part of the general rules on transfer of ownership (BW arts. 3:83 if.). Dutch law considers a full transfer of fiduciary ownership to be void (on the basis of BW 3:84(3), as interpreted by HR 19th May 1995, NJ 1996, 119), but recognises two forms of pledge of claims. The first is the normal pledge, which is considered possessory in character and for the creation of which it is necessary that the pledge be in writing signed by the assignor and that notice be given to the debtor: arts. 3:236(2), 3:94,3:98. The second is the so-called 'silent' (or non-possessory) pledge, which does not depend on notice to the debtor but must be contained in a writing which is either authenticated by a duly authorised person (e.g. a notary) or has the date of its signature certified by a tax authority and the fact of certification entered in a register which is not open to the public. PORTUGUESE law treats the assignment of claims as falling within the law of obligations, distinguishing between transfers (CC arts. 577 if.) and pledges (arts. 679 if.). Both outright assignments and assignments by way of security are covered by the NORDIC Uniform Promissory Notes Acts (DANISH PNA 1938, FINNISH PNA 1947, SWEDISH PNA 1936), parts of which apply even to the assignment of non-documentary, non-negotiable claims: Bjorn 107.

Article 11:102: Contractual Claims Generally Assignable (1)

(2)

Subject to Articles 11:301 and 11:302, a party to a contract may assign a claim under it. Afuture claim arising under an existing or future contract may be assigned if at the time when it comes into existence, or at such other time as the parties agree, it can be identified as the claim to which the assignment relates.

COMMENT A. Existing Contracts It is universally accepted that a person may assign rights under an existing contract even if they have not yet matured. So both present and future claims arising under an existing contract may be assigned; indeed, in many legal systems a right to performance under an existing contract is considered to be an existing claim even though it does not become due until a future date or is dependent on counter-performance or some other stated event (debitum in praesenti, solvendum in futuro). Illustration 1: A company, C, has entered into a contract with E to construct

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a factory, payment to be made in stages against architects' certificates. C may validly assign its rights to future payment although these are dependent on its execution of the contract works.

B. Future Contracts More difficulty has been experienced with the assignment of claims under future contracts, partly from a concern about the economic effects on the assignor of parting with future assets and possible means of subsistence and partly from a perception that an assignment requires specificity of subjectmatter at the time of its making, coupled with notification to, or acceptance by, the debtor which is often impossible in the case of assignment of future claims. But the commercial importance of receivables financing (i.e. the provision of finance through the purchase of, or loans on the security of, debts and other accounts receivable) and the impracticability of requiring claims to be individually specified or determinable at the time of the assignment have led to an increasingly general acceptance of the assignment of future claims without the need for any new act of transfer by the assignor after the claims have come into existence. At the international level this is manifested by the 1988 UNIDROIT Convention on International Factoring and the UN Convention on Assignment of Receivables in International Trade. Under Article 5 of the former it suffices that the claims are identifiable to the assignment at the time they come into existence. The present Article is more flexible still, allowing the parties to agree on the time when the identification requirement has to be satisfied. Illustration 2: S, a company supplying timber to timber merchants, enters into a factoring agreement with F, a factoring company, by which S assigns to F by way of sale all its existing and future debts arising under sale contracts made or to be made with S's customers carrying on business in the United Kingdom. This is a valid assignment, since in relation to any future debt it can be ascertained at the time it comes into existence whether it falls within the factoring agreement as a receivable due from a United Kingdom customer of S. The time at which such a receivable vests in F is determined by reference to Article 11:202. Illustration 3: S, a furniture manufacturer, supplies furniture to retail shops and department stores. S agrees to sell to F, a factoring company, such of its existing and future debts as are listed in schedules from time to time sent by S to F. The sale is effective as to all debts so listed. Illustration 4: C, a credit card issuer, obtains a large loan from its bank, B, and agrees to assign to B its future claims against cardholders to a value not exceeding the amount of the loan. While this agreement is perfectly valid as a contract, it is not an effective transfer, since it does not provide the means by which the assigned claims can be identified.

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C. Overriding Mandatory Rules This Article gives way to mandatory rules which, according to the relevant rules of private international law, are overriding in that they apply irrespective of the law governing the contract to assign (Art. 1:103(2)) and therefore cannot be displaced by a choice of law clause. The relevant rules of private international law are those of the law of the forum state, which will apply its own overriding mandatory rules and may apply those of a third state. Illustration 5: H, a private individual, purports to assign all his future income and assets to A as security for a loan. Proceedings are brought in England to enforce payment. Under English law the assignment is void as contrary to public policy in that its effect is to deprive the assignor of all means of livelihood. This overriding rule of English law will displace Article 11:102. NOTES All European legal systems recognise the assignability of contract rights (claims) under existing contracts, though with exceptions, for example, where the assignment would be against public policy or where the rights are personal to the creditor: Katz, IECL, paras. 68 ff. A global assignment of future debts by an individual will in most systems be considered contrary to public policy in that it deprives the assignor of future livelihood. Also considered against public policy in many jurisdictions are the assignment of salaries of public officers, such as judges, and the assignment of disputed claims. The Principles contain no specific rule on the point but simply embody a general provision in Article 1:103(2) requiring effect to be given to any overriding mandatory rules. The unassignability of rights personal to the creditor is covered in the more general provisions of Article 11:302. The assignment of claims under future contracts has long been recognised in COMMON LAW jurisdictions, which, like paragraph (2) of the present Article, require identifiability but not specificity: Goode, Commercial Law 676-677. The same position is taken in the UNIDROIT Convention, art. 9(1)(b)). However, under ENGLISH law a statutory assignment (which enables the assignee to sue in the assignee's own name) is confined to the assignment of existing claims of which notice is given to the debtor. CIVIL LAW jurisdictions have tended to be hostile to the assignment of claims under future contracts, partly on the ground of want of specificity and the fact that the claims cannot be "determined" at the time of the assignment, partly, in some cases, because of the legal rule that an assignment of claims is not complete until notice has been given to the debtor or the assignment has been accepted by the debtor, which of course requires that the debtor is identifiable. Though a number of CIVIL LAW systems now accept the principle of assignability of claims under future contracts, there is divergence as to the time at which the determinability of the claim is required to be satisfied. In some systems it is sufficient ifthe claims are determinable at the time they come into existence. This is the position under AUSTRIAN LAW (OGH EvBl1969/15; JB11984, 85; SZ 61/74; OGH SZ 55/170) and the same is true of GERMAN law as regards transfers (Katz, IECL para 82) but not as regards pledges (Miinchener Kommentar (-Roth) § 398, nn.81 and 82; Staudinger (-Kaduk) § 398, n. 43 ff. In other systems the rule that the claim must be determinable at the time of the assignment is retained, either expressly or through a requirement of notification to the debtor or identifiability of the debtor as a condition of validity of the assignment. This is the position in BELGIAN law (Dirix, De vormvrje cessie 27); SCOTTISH law, DUTCH law (BW art. 3:84(2)) and probably LUXEMBOURG law, as regards ordinary pledges. FRENCH law does not in principle recognise the assignment of debts under future contracts (Terre, Simler,

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Lequette n. 1181), but in the case of assignments to a bank or other credit institution the Loi Dailly of 2nd January 1981 allows delivery of a memorandum (bordereau) identifying the

accounts transferred which can include accounts from future operations where the amount of the debt and the identity of the debtor have not yet been determined. (art.1). A similar rule exists in DUTCH law in relation to a 'silent' pledge (BW art. 3:239(1), and see Verhagen & Rongen Chap. 4) but for ordinary pledges the requirement of notification to the debtor limits the possibility of assignment of future claims. In ITALY the prevailing view is that only claims arising out of existing contracts (including claims payable in the future) may be assigned (Bianca, IV 589; Perlingieri, Cessione n. 3421). However, there is a special regime for factoring (Law No. 52 of 21 February 1991, art. 3) which permits the assignment to the factor of claims under future contracts. See Bassi 1993.

Article 11:103: Partial Assignment

A claim which is divisible may be assigned in part, but the assignor is liable to the debtor for any increased costs which the debtor thereby incurs.

COMMENT A. Divisibility The creditor may not wish to assign the whole claim but only such part as is necessary to achieve the commercial purpose of the assignment. For example, a company wishing to borrow €30 million from its bank on the security of a debt of €200 million owed to it by a third party may want to assign to the bank only such part of the debt as will provide the bank with adequate security for the loan. Similarly, a wholesaler who has contracted to buy a quantity of fungible goods to be delivered in two separate consignments to be separately paid for and who has orders from two sub-buyers, each for half the total quantity, may wish to assign the right to the first consignment to one subbuyer and the right to the second to the other. Whether a claim may be assigned in part depends on whether, under the express or implied terms of the contract, the claim is divisible. (i) Claims to Money There is a presumption that a claim to money is divisible. This does not usually lead to any practical difficulties in the operation of the contract, though it may expose the debtor to increased costs, which under this Article the debtor would be entitled to recover (see Comment C). The presumption of divisibility of a money claim may be excluded by the terms of the contract. Illustration 1: L lends B €10,OOO. L can assign to A the right to €4,OOO forming part of the debt of €10,OOO. If B incurs additional bank charges as the result of having to make two separate payments B is entitled to recover these from L or set them off against the liability to L.

(ii) Claims Other Than to Money Where the claim is to non-monetary performance it will normally be presumed divisible only where the debtor is entitled to separate payment for the part of

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the claim assigned. Where this is not the case it would be unfair to the debtor to require a division of the performance of an entire contract, for this would change the relationship between performance and counter-performance in a manner which could prove detrimental to the debtor. For example, where there is a contract for an entire work, such as the construction of a block of flats, a defect affecting one flat might not constitute a fundamental non-performance of the contract as a whole so as to justify termination by the employer, but if the flat were sold and the employer's rights relating to it were to be assigned to the purchaser, the defect might well constitute a fundamental non-performance in relation to the assigned part of the contract. This could lead to the absurd position that the construction contract could be terminated by the assignee as regards the assigned part while remaining in force as regards the remainder of the block of flats. Accordingly in this case partial assignment is not possible. This is so even if the single price for the contract as a whole is payable by instalments. The position is otherwise where the contract provides for separate payment for the assigned part, for the effect is then to create a contract within a contract, so that each part is treated separately and the assignee of the part does not enjoy any greater rights than the assignor would have had in relation to that part. Illustration 2: S contracts to sell 100 computers to B, delivery to be made to B in Hamburg in four instalments of 25 computers each. B can assign to A the right to delivery in Hamburg of one, two or three instalments, but cannot assign the right to delivery of part of an instalment, for this would require S to divide the performance of a contract which by its terms is indivisible as to each instalment. Illustration 3: F engages C to build a factory, including a tool shed, for €20 million, payable in stage payments against architects' certificates. If F sells the tool shed to A for €50,000 while retaining the rest of the factory, F cannot assign to A its rights under the contract as regards the tool shed, because the contract is an entire contract under which C's performance is indivisible. Illustration 4: The facts are as in Illustration 3 except that the contract allocates a separate price to the tool shed and stipulates that this is to become payable on completion of its construction. On selling the tool shed F can assign its rights relating to the construction of the tool shed. B. Security or Other Accessory Rights

Assignment of part of a claim in conformity with this Article carries with it a transfer of a pro rata share of any security rights or other accessory rights securing performance of the debtor's obligations (Article 11:201(1)(b)) and obliges the assignor to transfer to the assignee a pro rata share of all transferable independent rights (Article 11:204(c)).

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C. Protection of the Debtor

From the debtor's perspective partial assignments have the disadvantage of bringing exposure to the expense and inconvenience of multiple claims. In practice it is unlikely that a creditor will make more than a few partial assignments, and if this involves the debtor in additional expense then this Article gives a right to recovery from the assignor. Alternatively the debtor can set the right to recovery off against the debt under Chapter 13. However, there may be cases in which the right to recover additional expenses does not provide the debtor with adequate protection. One is where the creditor decides to make a large number of individual assignments and the settlement of these causes dislocation to the debtor's business or an otherwise unacceptable degree of inconvenience. A more likely, and in some respects a more serious, risk arises where the claim as a whole is disputed, in which event the debtor, having pleaded and called evidence in one case, would face the burden of doing so all over again in subsequent proceedings, with the danger of conflicting decisions, the debtor's defence being upheld in one case and rejected in another. For these types of case the debtor's protection must be found in the applicable procedural law. NOTE Divisible claims are assignable under the laws of most Member States of the European Union. There is no special statutory rule for partial assignments under GREEK or DUTCH law, but partial assignments have been explicitly recognised in case law: see HR 19th December 1997, Ned. Jur. 1998,690 (ZuidgeestjFurness) and further Verhagen & Rongen chap. 8. None of these countries appears to have a particular rule for the protection ofthe debtor of the kind embodied in this Article, though German scholars have argued for such a rule: Norr, Scheying & Poggeler 104 and GREEK law is understood to require that the assignment should not be detrimental to the debtor: Georgiadis 409, no. 16.

Article 11:104: Form of Assignment

An assignment need not be in writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.

COMMENT A. Absence of Formal Requirements The formalities for an assignment (that is, as a transfer, not as a contract) vary considerably from one jurisdiction to another. Some require that the assignment be in writing, some allow assignments that are oral or are inferred from conduct, as where the creditor deposits the contract with a bank with the intention that it should be held by the bank as security for a loan. A third possibility is to allow oral assignments to have effect as between the assignor and the assignee but to require them to be in writing in order to bind the debtor and third

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parties, including the debtor's insolvency administrator and general creditors. In practice, assignments are almost invariably in writing. This Article (the drafting of which follows the lines of Article 2:101(2)) permits an assignment to be made orally or to be inferred from conduct. However, it is necessary to distinguish (a) the requirements for the formal validity of an assignment, (b) the circumstances which preclude the debtor from performing in favour of the assignor (e.g. receipt of a notice of assignment), (c) the conditions that have to be satisfied before the assignee can require performance from the debtor, and (d) the requirements for preservation of the assignee's priority. The present Article is concerned only with (a). Issues (b) and (c) are covered by Article 11:303, which requires written notice of assignment to the debtor, and issue (d) by Article 11:401, which requires notification to the debtor (not necessarily in writing) to preserve the assignee's priority against a subsequent assignee taking without notice of the earlier assignment. While the present Article requires no formalities for an assignment, the debtor is given a right to request evidence of the making of the assignment where it is the assignee who has given notice of the assignment (see Article 11:303(2)).

B. Notice to Debtor not a Constitutive Requirement In some legal systems an assignment of a claim is not validly constituted, except as between the parties, unless and until notice of the assignment has been given to the debtor or some other overt act performed, such as entry of the assignment in the assignor's accounting records. Failing such notice or equivalent act the assignment is of no effect even against unsecured creditors in the assignor's bankruptcy, and its validity as between assignor and assignee has little significance in property terms unless there is at least one category of third person affected by it, such as a later assignee acting in bad faith. In other systems, notice to the debtor is required only for the purpose of imposing on the debtor the obligation to pay the assignee and of preserving an assignee's priority against the claim of a subsequent assignee, and is not a prerequisite of the efficacy of the assignment in the assignor's bankruptcy. The latter is the approach adopted in the present Article and Articles 11:201 to 11:203. There are two reasons for this. The first relates to the question whether the notice requirement serves any useful purpose. Notice to the debtor is not equivalent to public notice (for example, by registration), since it is visible only to the debtor. While a requirement of notice may help to prevent a collusive antedating of an assignment made, for example, to overcome insolvency rules governing unfair preference, the date of an assignment is rarely in question and can usually be established by other means. The second, and more important, reason for omitting notice as a constitutive requirement is that it is inimical to modern receivables financing, which involves the assignment of a continuous stream of receivables arising from both present and future contracts. In the nature of things, future debtors cannot normally be identified at the time of the assignment. Moreover, in recent years there has been a sharp movement, particularly in factoring operations, from notification to non-notification

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financing, also known as invoice discounting, in order to avoid disturbing relations between the assignor-supplier and its customer, the debtor, and to allow the assignor to collect in the debts on behalf of the assignee. The use of non-notification financing depends heavily on the validity of the transfer of the debts from assignor to assignee. Accordingly any requirement of notice to the debtor as a constitutive element of the assignment could seriously undermine receivables financing generally and non-notification financing in particular.

NOTES These Notes are concerned only with requirements for the formal validity of an assignment as between assignor and assignee. Other aspects are dealt with in the Notes to Articles 11:303 and 11:40l. The UN Convention has no substantive rule but provides in art. 8 that an assignment is valid as to form if it meets the formal requirements either of the law of the State in which the assignor is located or of the applicable law by virtue of rules of private international law. The UNIDROIT Factoring Convention does not prescribe any formal requirements for the assignment of receivables but is confined to assignments of which notice in writing is to be given to the debtor. The laws of most countries of the European Union do not have formal requirements for the validity of a nongratuitous assignment of claims as between assignor and assignee. These countries include AUSTRIA, BELGIUM, ENGLAND, GERMANY, GREECE, ITALY, LUXEMBOURG, PORTUGAL, SCOTLAND, SPAIN and the NORDIC countries. FRENCH law requires delivery of the document evidencing the claim (CC art. 1689) but the parties can dispense with this requirement by agreement, though not where the Loi Dailly applies, when the formalities relating to the bordereau must be observed. In the NETHERLANDS an assignment and a pledge are always required to be in writing signed by the assignor (BW arts. 3:94 and 3:236(2)), and notice to the debtor is required in order for the assignment to have any effect, even as between assignor and assignee (BW art. 3:94), though sustained criticism of this rule seems likely to lead to a change in the law. For the creation of a 'silent', or non-possessory, pledge of claims either the written instrument must be officially authenticated (e.g. by a notary) or, if it not, the date of its creation must be officially certified. While an informal transfer is in most of the above countries effective as between assignor and assignee, the more important question for the assignee is whether the assignment will be effective against third parties, and in particular against subsequent assignees and against creditors in the assignor's bankruptcy. Here the rules are usually stricter (see Notes to Article 11:401).

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Section 2: Effects of Assignment As Between Assignor and Assignee

Article 11:201: Rights Transferred to Assignee (1)

(2)

The assignment of a claim transfers to the assignee: (a) all the assignors rights to performance in respect of the claim assigned; and (b) all accessory rights securing such performance. Where the assignment of a claim under a contract is associated with the substitution of the assignee as debtor in respect of any obligation owed by the assignor under the same contract, this Article takes effect subject to Article 12:201.

COMMENT

A. Transfer of Primary Rights The first effect of an assignment is to transfer to the assignee all the rights to payment or other performance in respect of the assigned claim (or part claim: see Article 11:103). The assignee becomes the new holder of the claim. However, the present Article affects only the relations between assignor and assignee. By virtue of the assignment the assigned claim becomes vested in the assignee, either absolutely or by way of security, depending on the agreement between the parties. But the assignment does not by itself oblige the debtor to perform in favour of the assignee. This obligation arises only where the conditions set out in Article 11:303 are satisfied, and even then it is subject to the other provisions of this Chapter, including the debtor's defences and rights of set-off under Article 11:304. Moreover, this Article does not deal with priority issues. A wrongful double assignment is treated in this Chapter as raising a priority issue governed by Article 11:401 rather than as a matter affecting the validity of the second assignment (see Comment A to Article 11:401). Similarly, the priority of the assignee's rights in the event of the assignor's bankruptcy is regulated by Article 11:401(4). B. Transfer of Remedies

An assignment of a claim carries with it by implication a transfer of the assignor's right to damages and default interest for future non-performance. This follows from the fact that the assignee is now the holder of the claim. Whether the assignment also transfers any rights accrued for past non-performance depends on the terms of the assignment.

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C. Transfer of Accessory Rights

An assignment also operates to transfer all accessory rights (or in the case of a partial assignment within Article 11:103, a pro rata share of those rights) securing the debtor's performance, for example, suretyship guarantees and forms of real security which under the applicable law are considered accessory to the claim so as to be discharged when the claims are satisfied. In many legal systems the transfer of accessory rights is considered so inherent in an assignment that it cannot be excluded by agreement, for the effect would be to leave the assignor with security for a claim no longer vested in the assignor, with the result that neither assignor nor assignee would be able to enforce the security. However, there are also rights which, though intended to secure performance, are not accessory in character. For example, demand guarantees and standby letters of credit are payable on production of specified documents and without regard to whether there has in fact been default by the debtor. The requirement for such default is found only in the internal relationship between the debtor and the creditor and not in the payment undertaking furnished by the bank. Similarly there are forms of real security which are abstract in character, such as the German Grundschuld, which is intended to fulfil a security function but is not conditioned on the debtor's default. Since these rights are not accessory, it follows that they do not automatically pass with the assignment and require to be separately transferred if they are to vest in the assignee. See Article 11:204(c). D. Assignment of Claims and Substitution of Assignee as Debtor Where the assignment of claims is associated with an agreement by which the assignee also assumes responsibility, in place of the assignor, for payment of claims incurred by the assignor to the debtor, this Article takes effect subject to Article 12:201. That Article is designed to ensure that the assignee cannot obtain the benefit of the rights assigned before effectively assuming the burdens taken over from the assignor, this requiring the assent of the other party to the contract.

NOTE This Article reflects the law in most jurisdictions: Katz, IECL para. 91. Paragraph 1(a) reflects the inherent nature of the transaction. Paragraph 1(b) produces the effect stated in most ofthe European codes or doctrines, namely that accessory rights pass without the need for a separate act of transfer.. In AUSTRIA it is considered implicit in ABGB § 1393: see OGH SZ 60/46; ORZ 1992/26, RdW 1993,362. Similarly, BELGIUM (van Malderen para. 3216); the NORDIC countries; FRANCE (CC art. 1692 and Loi Dailly art. 4(3)); GERMANY (BGB §§ 398, 401), GREECE (CC art. 458; Athens Court of Appeals 459/1993, NoB 42 [1994] 206 at 207); ITALY (CC art. 1263(1)), LUXEMBOURG(CC art. 1692), the NETHERLANDS (BW arts. 6:142 and 3.82), PORTUGAL (CC art. 482) and SPAIN (CC art. 15228). As to paragraph (2), see the Notes to Article 12.102.

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Article 11:202: When Assignment Takes Effect (1) (2)

An assignment of an existing claim takes effect at the time of the agreement to assign or such later time as the assignor and assignee agree. An assignment of a future claim is dependent upon the assigned claim coming into existence but thereupon takes effect from the time of the agreement to assign or such later time as the assignor and assignee agree.

COMMENT This Article deals with the time an assignment takes effect It does not govern priorities between competing assignments, which are regulated by Article 11:401.

A. Assignment of an Existing Claim Where the claim exists at the time of the agreement to assign, the assignment takes effect at that time unless the parties agree to defer its effect. It is not necessary that an assigned claim to money has become payable; it suffices that it arises under an existing contract as a debitum in praesenti, solvendum infuturo. Illustration 1: On May 1st C enters into a contract with 0 to construct a factory at a price of €2 million, payment to be made in instalments against architects' certificates. On June 1st C assigns its rights to A. The first certificate is issued on August 12th. The assignment takes effect on June 1st.

B. Assignment of a Future Claim Plainly claims cannot vest in the assignee until they have come into existence, but once they have been created the assignment has effect from the time of the agreement to assign. This retrospective effect, given by paragraph (2), is relevant primarily to the issue of priorities (Article 11:401), but it may also be significant in determining whether the assignment is for value or gratuitous, since value given after the assignment and before the claim comes into existence constitutes new value, not past value. Under paragraph (2) as under paragraph (1), the parties may agree to defer the effect of the assignment until a time later than that provided by this Article. See also Comment B to Article 11:102 as to the assignment of future claims. Illustration 2: On September 1st X, a property developer, assigns to its bank, Y, all its rights under contracts of sale to be entered into in the future with purchasers of the properties currently in course of construction. The development is completed the following year and X sells one of the properties to P on 10th August of that year. The assignment of X's claim to the price is dependent on the sale but thereupon takes effect as from September 1st of the previous year.

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Illustration 3: S, a timber supplier, enters into a factoring agreement with F by which S agrees to offer for sale to F monthly batches of debts arising from sales of timber to S's customers. The agreement provides for the sale to take effect as regards any such receivables when the offer relating to them is accepted by F. A batch of receivables is offered to F on May 15th and accepted on May 20th. The assignment of those receivables takes effect on May 20th. NOTE This Article corresponds to art. 10 of the UN Convention and also reflects those national laws which recognise the assignment of claims under future contracts. See Katz, IECL para. 104 Such claims are treated as nascent at the time of the contract to assign.

Article 11:203: Preservation of Assignee's Rights Against Assignor

An assignment is effective as between the assignor and assignee, and entitles the assignee to whatever the assignor receives from the debtor, even ifit is ineffective against the debtor under Article 11:301 or 11:302.

COMMENT The rules laid down in Articles 11:301 and 11:302 are intended for the protection of the debtor, who has a legitimate interest in dealing only with the assignor but has no concern for the relationship between assignor and assignee. There is no reason why an assignment which is not binding on the debtor, e.g. because of a no-assignment clause, should not be effective against the assignor. Since the right to performance usually involves dealings with the debtor, the main purpose of this Article is to make it clear that when the debtor has rendered performance to the assignor then whatever the assignor has received from the debtor in respect of the assigned claim must be handed over to the assignee. This Article does not deal with the position where the assignee has meanwhile become bankrupt. That is a question left to the applicable bankruptcy law. Illustration: S agrees to carry out road building works for a local authority, L, for a payment of €400,000. The contract between Sand L contains a provision prohibiting assignment by S. Nevertheless S assigns its rights to its bank, B, as security for a loan of €1 million. S completes the road building works. L, exercising its right to treat the assignment as ineffective, pays S €400,000. B is entitled to recover this sum from S. NOTE The laws of most countries of the European Union are silent on the question whether an assignment which is ineffective against the debtor (as to which see Article 11:301 and 11:302)

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can nevertheless be effective as between assignor and assignee. In GERMAN law the issue is controversial. The courts and most scholars have held the assignment to be invalid even against the assignor: BGH 31 Oct. 1990, BGHZ 112, p. 387,389; BGH 27 May 1971; BGHZ 56, 228, 230; Staudinger(-Kaduk) §§ 399, nn. 85 ff. However, some scholars would restrict the invalidity to the assignor-debtor relationship: Norr, Scheying & Poggeler 31. The position in ENGLISH law is unsettled. In one case it was held that an assignment in breach of a prohibition against assignment was wholly void (Helstan Securities Ltd. v. Hertfordshire County Council [1978] 3 All ER 262), but since the case concerned only the question whether the assignee could recover from the debtor the ruling went beyond what was necessary for the decision, and a subsequent comment on the case suggesting that the debtor could not validly prohibit the assignor from disposing of the sums paid to it by the debtor (Goode, "Inalienable Rights?") received sympathetic consideration by the House of Lords in Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd. [1994] AC 85, 104, though it was not found necessary to decide the point. ITALIAN law has no express provision corresponding to the present Article but the Corte di Cassazione has applied the principle of unjustified enrichment to require the assignor to transfer to the assignee the benefit of any performance received by the assignor from the debtor after the assignment (Cass. 29th October 1971, n. 3087, in Foro It. 1972, I, 58). The position in LUXEMBOURG and the NETHERLANDS (see BW art. 6:36) is similar.

Article 11:204: Undertakings by Assignor By assigning or purporting to assign a claim the assignor undertakes to the assignee that: (a)

(b)

(c)

at the time when the assignment is to take effect the following conditions will be satisfied except as otherwise disclosed to the assignee: (i) the assignor has the right to assign the claim; (ii) the claim exists and the assignee's rights are not affected by any defences or rights (including any right of set-off) which the debtor might have against the assignor; and (iii) the claim is not subject to any prior assignment or right in security in favour of any other party or to any other incumbrance; the claim and any contract under which it arises will not be modified without the consent of the assignee unless the modification is provided for in the assignment agreement or is one which is made in good faith and is of a nature to which the assignee could not reasonably object; and the assignor will transfer to the assignee all transferable rights intended to secure performance which are not accessory rights.

COMMENT

A. General Assignments of claims frequently contain undertakings (warranties) by the assignor designed to ensure that the assignee acquires the benefit of the bargain. Often these are restricted to warranties as to the assignor's legal rights against the debtor and undertakings to perform any further acts necessary to perfect the assignee's title. Sometimes such undertakings go further and provide that

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if the debtor defaults the assignor will be liable for performance or will repurchase the assigned claims. In the absence of such a provision the normal rule, and that adopted in this Article, is that the assignor incurs no liability for the debtor's non-performance. However, the effect of the Article is to import into an assignment a series of undertakings by the assignor which are designed to protect the assignee in the event that the assigned claims prove legally worthless or are subordinate to the interests of a prior party or are reduced in value by a modification of the contract under which they arise. While in many jurisdictions the law does not impose obligations of this kind on gratuitous assignors, there is no uniform concept of value or of what is to be considered gratuitous. Accordingly this Article does not distinguish assignments for value from gratuitous assignments. B. Right to Assign

Paragraph (a) of this Article imports an undertaking, first, that the assignor has a right to assign the claim. This undertaking is broken if the assignor is not the holder of the claim or has agreed with the debtor not to assign it. While Article 11:301(2) gives effect in certain conditions to assignments which are made in breach of an undertaking not to assign, Article 11.301(3) makes it clear that this does not affect the assignor's liability for breach of contract. Illustration 1: C assigns to X by way of sale a batch of debts due from D. Subsequently C purports to assign the same debts to A by way of security for a loan. C thereby commits a breach of the undertaking to A implied under paragraph (a) of this Article.

C. Existence and Enforceability of Claims

Under paragraph (a) the assignor is deemed to undertake, secondly, that at the time when the assignment is to take effect the claims to which it relates will exist and will not be subject to defences or rights of set-off against the assignor. This undertaking covers a number of matters: (i) (ii) (iii) (iv)

the factual basis of the claim; its substantive validity; its formal validity and enforceability; and the absence of any substantive defences or rights of set-off against the assIgnor.

The undertaking covers all forms of defence and right of set-off open to the debtor against the assignor. Illustration 2: C assigns to A a purported claim against D for the price of goods said to have been sold and delivered under a contract of sale. No such contract was ever made. C is liable to A for breach of the undertaking as to the factual existence of the claim.

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However, the undertaking is not broken by the existence of rights of set-off that do not affect the assignee, for example, set-off in respect of cross-claims by the debtor against the assignor arising from dealings between them after the debtor's receipt of notice of assignment (see Article 13:101). Moreover, the undertaking does not cover the assignee's inability to obtain performance because the debtor absconds or becomes bankrupt.

D. Freedomfrom Prior Rights The third undertaking in paragraph (a) is that the claim has not previously been assigned or made subject to a security interest or any other encumbrance. Where, for example, the assignor has previously assigned the same claim to an earlier assignee, the undertaking is broken and this is so even if the later assignment has priority under the priority rules in Article 11:401 or laid down by the applicable law. The undertaking is not limited to freedom from consensual security interests; it also applies to security interests or other incumbrances created by law. E. No Modification Without Consent

In principle, once claims have been assigned it should not be open to the assignor and the debtor to agree on modifications to them, or to a contract under which they arise, unless the assignment agreement so provides or the assignee consents to the modification. However, a strict adherence to this principle would cause considerable commercial inconvenience, particularly where the assignment relates to rights under an executory contract involving

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continuous performance on the part of the assignor, such as a construction contract. For example, in the course of performance of a construction contract circumstances may arise where the parties find it necessary to agree on a variation outside the contractual variation provisions, as where additional work is required that could not have been reasonably anticipated. Again, the modification may be of a part of the contract which has no relevance to the assigned claims. Accordingly paragraph (b) permits modifications without the assignee's consent where these are made in good faith and are not modifications to which the assignee could reasonably object. Illustration 6: C, a building contractor, agrees with D, a bank, to construct a vault for the storage of securities and other valuables belonging to D's customers. Soon afterwards D sells its banking business to E, to whom D assigns its rights under the building contract. In the course of construction it is discovered that a stream, the existence of which is not shown on any drawings relating to the site, flows directly under the floor of the vault and that to prevent the entry of water it is necessary to install an underground pump at considerable additional expense to pump away the water. Though this does not fall within the variation clause of the contract the architect nevertheless considers the installation of the pump unavoidable if the vault is not to be rendered unusable and issues the requisite order to the contractor, indicating that the cost of the pump and labour will be an addition to the contract price. This modification is binding on E even though made without E's consent.

F. Transfer of Non-Accessory Rights Accessory rights pass automatically to the assignee under Article 11:201(1)(b) and do not require separate assignment. See Comment C to Article 11:201. By contrast rights which are not accessory to the claim but independent require to be specifically transferred. Examples of such non-possessory rights are given in Comment C to Article 11:201. Accordingly paragraph (c) of the present Article imports an undertaking on the part of the assignor to transfer them if they are transferable. This obligation, which can be excluded by agreement, applies only to non-accessory rights which are transferable. If, for example, an assignment is secured by a non-transferable letter of credit (and credits are non-transferable unless otherwise expressly designated - see Uniform Customs and Practice for Documentary Credits, art. 48(b)), this Article does not import an undertaking by the assignor to transfer the credit but the assignor can be required to transfer the proceeds of the credit (see UCP art. 49). G. Other Duties This Article is not exhaustive of the obligations to the assignee which may be imposed on an assignor. In particular, while it does not import any undertaking that the assignor has no knowledge of any matters casting doubt on the debtor's

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ability to pay, other Articles, such as Article 1:201 relating to good faith and fair dealing, may require disclosure of matters known to the assignor indicating that the debtor may be insolvent. No warranty is implied under this Article that the debtor is solvent at the time of assignment or will perform, and European legal systems in general adopt the same approach.

NOTE Provisions similar to those of Article 11.204 are contained in the UN Convention, art. 14. GERMAN law applies the rules of the BGB governing warranties on a sale, which equate to those contained in paragraph (1). Similar warranties are to be found in PORTUGUESE law (CC arts. 587, 892 If., 957 If.; Varela 331 If., 602 If.; Lima & Varela 602 If.), FRENCH law (CC art. 1693), ITALIAN law (CC art. 1266), LUXEMBOURG law (CC arts. 1693 and 1694) and DUTCH law in respect of a silent pledge (BW art. 3:239(2)) and a sale or swap of claims (BW arts. 7:47, 7:17). Section 41 of the FINNISH and SWEDISH Sale of Goods Acts can be interpreted in this way, while under section 9 of the NORDIC PNA the seller of a claim warrants its validity. The UN Convention and the German BGB draw no distinction in this regard between assignments for value and gratuitous assignments; most other codes confine the warranties to assignments for value. Under SPANISH law the assignor warrants the existence and legitimacy of the claim at the time of the assignment (CC art. 1529) but as a rule gives no further warranties, though ifto the knowledge of the assignor and unknown to the assignee the debtor was insolvent at the time of assignment the assignor is liable for the debtor's default. There appear to be no reported cases in ENGLISH law concerning implied warranties in an assignment, nor is the question discussed in the contract textbooks. This may be because of the common practice of including express warranty provisions in assignment contracts. It is thought that on general principles at least the warranties set out in paragraphs (a) and (b) of the present Article would be implied. AUSTRIAN law (ABGB § 1397) goes further, providing that if the assignment is made for consideration the assignor warrants that the claim will be paid at maturity, though liability is limited to what the assignor received from the assignee.

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Section 3: Effects of Assignment As Between Assignee and Debtor

Article 11:301: Contractual Prohibition of Assignment (1)

(2)

An assignment which is prohibited by or is otherwise not in conformity with the contract under which the assigned claim arises is not effective against the debtor unless: (a) the debtor has consented to it; or (b) the assignee neither knew nor ought to have known of the nonconformity; or (c) the assignment is made under a contract for the assignment offuture rights to payment of money. Nothing in the preceding paragraph affects the assignor's liability for the non-conformity.

COMMENT A. Respect for Contractual Prohibition Where a contract contains a clause prohibiting the creditor from assigning claims under it, such a prohibition should in principle be respected. The debtor may have good commercial reasons for inserting a no-assignment clause. In the first place, the debtor may not want to have to deal with an unknown creditor who may be more severe than the assignor. Secondly, the debtor may wish to avoid the risk of overlooking the notice of assignment and paying the assignor, in which event there would be a risk of having to make a payment or give other performance a second time, to the assignee. Thirdly, a debtor who expects to have continued mutual dealings with the creditor will wish to preserve the right of set-off, a right which would be cut off as regards crossclaims arising after receipt of notice of assignment. Fourthly, the assignee may be incorporated or have its principal place of business in a jurisdiction whose legal or tax regime is unfavourable to the transaction. The general rule, therefore, is that an assignment in breach of a no-assignment clause is ineffective against the debtor, and this is the case whether the contract contains an outright prohibition or restricts the creditor's right to assign, e.g. by requiring the debtor's consent. The effect of a prohibition against assignment is that the debtor is not required to recognise the status of the assignee and can ignore any notice of assignment and give performance to the assignor. However, while the prohibition against assignment renders it ineffective against the debtor, it does not affect the relationship between assignor and assignee (see Article 11:203).

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B. Exceptions The general rule stated in the first part of paragraph (1) works well enough in circumstances where it is commercially practicable for an intending assignee to obtain sight of the contract under which the assigned claims arise and to discover the existence of the no-assignment clause. But there may be cases in which the assignee would not know of the prohibition, for example where this is contained in a separate contract the existence of which was unknown to the assignee. Accordingly, apart from the obvious case stated in paragraph (l)(a) where the debtor consents to the assignment, paragraph (l)(b) allows the assignment to have effect against the debtor where the assignee neither knew nor ought to have known of the prohibition. A further exception relates to future money claims (that is, money claims arising under future contracts, as opposed to claims which arise under existing contracts but are payable in the future). In this case too the assignment is effective. This exception is particularly necessary where the assignment relates to a continuing stream of future debts, for example, by a supplier to a factor under a factoring agreement. In this type of arrangement it is manifestly impossible to expect the factor to scrutinise the individual contracts, which may run into hundreds, in order to see whether these contain a provision against assignment. Even where, as will usually be the case, the contract is a standard-term contract which does not embody such a provision, the assignee who examines one such contract cannot be sure that the assignor will not at some stage change the terms without notifying him. So paragraph (l)(c) allows the assignment to take effect where it is made under a contract for the assignment of future money claims. While it may seem hard on the debtor to override a no-assignment clause in this way, it needs to be borne in mind that a debtor who is able to insist on such a clause will almost invariably hold the stronger bargaining position and is therefore not the party primarily in need of protection. In such a situation the debtor may be able to resist the creditor's request for security for payment, such as a letter of credit or bank guarantee. If the creditor were also to be prevented from laying off risk by assigning the receivables to a factor under a non-recourse factoring agreement the creditor could be severely prejudiced. This second exception is confined to the assignment of debts, for it is in the field of receivables financing that the no-assignment clause typically creates problems. Claims to non-monetary performances are outside the scope of paragraph (l)(c). These exceptions to the efficacy of no-assignment clauses represent a response to commercial needs which is steadily gaining acceptance. See, for example, the American Uniform Commercial Code, section 9-401(1)(b); the 1988 UNIDROIT Convention on International Factoring, Article 6(1); and the UN Convention, Article 11. C. Assignor Remains Liable for Breach The exceptions provided by Article 11:301(1) are designed for the protection of the assignee and do not affect the assignor's liability to the debtor for breach

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of contract in making a prohibited assignment, a point made clear by paragraph (2). D. Rights of Assignee against Assignor not Affected Even where the assignment is ineffective against the debtor under this Article, it operates to transfer to the assignee the right to all benefits received by the assignor from the debtor. See Article 11:203 and Comment. NOTE This Article adopts the approach first taken in what is now section 9-401 (1)(b) ofthe AMERICAN UCC and in article 6(1) of the UNIDROIT Factoring Convention. For national laws on the effect, if any, of a no-assignment clause as between assignor and assignee, see the Notes to Article 11:203. The effect of such a clause on the assignee's rights against the debtor differs from country to country. Under the ITALIAN CC art. 1260(2), a no-assignment clause is ineffective even as between assignee and debtor unless it is proved that the assignee knew of the clause at the time of the assignment, and the position is similar under GREEK law, CC art. 466(2) (though with a different allocation of the burden of proof), and PORTUGUESE law: CC art. 577(2). Under SPANISH law a prohibition against assignment is generally considered to be of no effect against an assignee except where the assignee acts in bad faith (Dfez-Picazo II, 4th edn. 813), but some authors consider that even an assignee who took the claim without knowledge of the no-assignment clause cannot assert the claim against the debtor unless the latter consented to the assignment (Pantale6n 1023). In ENGLAND the House of Lords has rejected the contention that a no-assignment clause is contrary to public policy, though the decision concerns only the relations between the assignee and the debtor (see the Notes to Art. 11.203). NORDIC law fully recognises the validity and effectiveness of a no-assignment clause vis-a-vis the debtor (Ussing, Aftaler 229, as does DUTCH law (BW art. 3:83(2)) except in the rare case where the debtor led the assignee to believe that the claim was assignable and the assignee relied in good faith and reasonably on the debtor's statement or other conduct (BW art. 3:36). In FRANCE, in an important recent decision of the Cour de cassation, it has been held that since the assignee is not a party to the assigned contract the assignee is not bound by the no-assignment clause and can obtain payment from the debtor: Cass.com. 21st November 2000, D. 2001, p. 123, obs. Valerie Avena-Robardet). LUXEMBOURG law has no express provision corresponding to the present Article but as it is quite similar to the FRENCH CC the same solution should prevail.

Article 11:302: Other Ineffective Assignments An assignment to which the debtor has not consented is ineffective against the debtor so far as it relates to a performance which the debtor, by reason of the nature of the performance or the relationship of the debtor and the assignor, could not reasonably be required to render to anyone except the assignor.

COMMENT A. Rights Personal to the Creditor

In a sense, every assignment of a claim changes the debtor's position in some degree. The debtor has to perform in favour of a different person, and that

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person may have a more stringent attitude towards enforcement of rights than the original creditor. That by itself is not a sufficient consideration to prevent the assignment. There are, however, claims which by the nature of the subject-matter or the relationship between the parties are personal to the creditor, so that it would be unfair to expose the debtor to performance in favour of an assignee (compare, in relation to specific performance, Article 9:102(c)). Different legal systems have different formulations of the principle underlying this conception. Under some the rule is stated as being that personal contracts, or contracts for personal services, are not assignable; in others that a claim cannot be assigned if this would significantly alter the nature or content of the performance or render counter-performance less likely. All these formulations would appear to be encompassed by the rule embodied in this Article, since they all presuppose that the identity of the intending assignor is important to the debtor. The typical example given of an assignment that would materially increase the burden or risk on the debtor is one which relates to the assignment of an insurance policy covering goods which the assignor is selling to the assignee. Since the personal character of the insured is material to the insurer's risk, to allow an assignment would be to expose the insurer to a risk of a kind different from that which it had agreed to accept. The increase in the burden on the assignee is simply a factor indicating that the benefits of the insurance policy are intended to be personal to the insured. Illustration: P agrees to publish a book W is writing. A purported assignment by P to A of P's right to call for the book from W is not effective against W, since the character and reputation of the publishing house are matters of importance to an author and the publisher cannot be changed without the author's consent.

An employer's right to performance under a contract of employment also falls into the category of non-assignable claims, since for both parties the relationship is a personal one which does not in principle permit substitution of a new party as creditor without the consent of the other party to the contract. As in the case of Article 11:301, an assignment within the present Article is ineffective only as against the debtor. The assignee remains entitled to all benefits received by the assignor from the debtor. See Article 11:203 and Comment. B. Mandatory Rules

Independently of this and the preceding Article, overriding mandatory rules may render a purported assignment ineffective. See Comment C to Article 11:102. NOTE In GERMAN law a claim cannot be assigned if the effect would be to alter the substance of the debtor's performance (BGB § 399) or if the claim is personal to the creditor. The position is

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similar under BELGIAN, FRENCH, LUXEMBOURG, GREEK and DUTCH law. Similarly art. 1260( 1) of the ITALIAN CC expressly excludes the assignability of claims which are of a strictly personal character. These are considered to include claims where performance in favour of the particular creditor is of importance to the debtor, such as claims under an insurance policy or a contract of employment ENGLISH law too does not recognise the validity of an assignment of claims personal to the creditor, e.g. the benefit of an author's contract to write a book or the assignment of a motor insurance policy: Treitel, Contract 639-641.

Article 11:303: Effect on Debtor's Obligation Subject to Articles 11:301,11:302,11:307 and 11:308, the debtor is bound to perform in favour of the assignee if and only if the debtor has received a notice in writing from the assignor or the assignee which reasonably identifies the claim which has been assigned and requires the debtor to give performance to the assignee. (2) However, if such notice is given by the assignee, the debtor may within a reasonable time request the assignee to provide reliable evidence of the assignment, pending which the debtor may withhold performance. (3) Where the debtor has acquired knowledge of the assignment otherwise than by a notice conforming to paragraph (1), the debtor may either withhold performance from or give peiformance to the assignee. ( 4) Where the debtor gives performance to the assignor, the debtor is discharged if and only if the performance is given without knowledge of the assignment. (1)

COMMENT This Article sets out the conditions on which the debtor becomes bound to perform in favour of the assignee, and the options open to a debtor who acquires knowledge of the assignment otherwise than through a proper notice of assignment. A. Written Notice of Assignment The debtor cannot be required to pay the assignee unless notified of the assignment; and to avoid disputes as to whether notice has been given paragraph (1) of this Article requires that the notice be in writing and that it reasonably identify the assigned claims and the assignee. The notice may be given either by the assignor or by the assignee, but in the latter case the debtor is entitled to require the assignee to provide reasonable evidence of the making of the assignment (see Comment B). It is necessary not only that notice of the assignment should be given to the debtor identifying the assigned claims but also that the notice should require the debtor to give performance to the assignee. This prerequisite to enforcement has been introduced in several jurisdictions to take account of the fact that a debtor who receives a notice of assignment may be uncertain of its effect on the obligation in the absence of an express direction to give performance to the assignee.

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B. Evidence of Assignment Where the notice of assignment is received from the assignee the debtor is entitled to require the assignee to furnish reliable evidence of the making of the assignment. This would include any writing emanating from the assignor and indicating that the assignment has taken place. The debtor is entitled to withhold performance until the evidence is furnished. C. Debtors Option Where Procedure Defective Where the debtor has received a notice of assignment from the assignee but the notice is not in writing, or where the debtor acquires knowledge of the assignment from another source, then, while such notice or knowledge does not oblige the debtor to give performance to the assignee, the debtor is free to do so. What the debtor cannot do is give performance to the assignor. As is made clear in paragraph (4), once the debtor has acquired knowledge of the assignment, by whatever means and from whatever source, the debtor ceases to be able to perform in favour of the assignor, and a debtor who does so risks having to perform a second time, in favour of the assignee. Illustration 1: C orally assigns to A a debt due from D. A gives notice of

the assignment to D but fails to respond when D requests evidence of the assignment. D may either pay A, in which case D obtains a discharge from liability, or withhold performance until A has provided reliable evidence of the making of the assignment. Illustration 2: C assigns to A a debt due from D. Neither C nor A gives notice of the assignment but D learns of it from another source. D may not pay C but may either pay A or withhold payment until receipt of a notice of assignment in conformity with paragraph (1). NOTES 1.

General All systems agree that a debtor who has no knowledge of the assignment obtains a good discharge by giving performance to the assignor, whilst a debtor who has been notified in accordance with the requisite formalities or (in most jurisdictions) has accepted the assignment must perform in favour of the assignee. However, in most legal systems all that the notice need state is that an identified claim has been assigned. The present Article requires, for avoidance of misunderstanding on the part of the debtor, that it must also require performance to be given to the assignee. Difficulties arise where notice is given to the debtor but is defective or where no notice is given but the debtor acquires knowledge of the assignment from other sources and in either case has not accepted the assignment. It is necessary to avoid confiating what are in fact four distinct issues, namely the conditions in which (1) the debtor becomes bound to perform in favour of the assignee; (2) the debtor may give performance either to the assignee or to the assignor; (3) the debtor is entitled but not bound to give performance to the assignee and ceases to be able to perform in favour of the assignor; and (4) the debtor remains bound to give performance to the assignor and is thus not entitled to give it to the assignee.

Article 11:303: Effect on Debtor's Obligation 2.

3.

4.

5.

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When debtor bound to perform in favour of assignee Most systems seek to protect the debtor by a rule to the effect that a debtor cannot be compelled to give performance to the assignee unless the debtor has received notice in writing (sometimes reinforced by further formalities for the notice) or has accepted the assignment. So while the debtor may be able to obtain a good discharge by performing in favour of the assignee after receiving a defective notice or merely in reliance on knowledge ofthe assignment acquired from other sources, the debtor cannot be compelled to give such performance. Exceptions, in which the debtor's knowledge is equated with notice for all purposes, are PORTUGUESE law (Lima & Varela 602 ff.) and SPAIN (Viez-Picazo II, 4th edn. 815-816), under which a debtor acquiring knowledge of the assignment must give performance to the assignee even in the absence of notification. It is generally assumed that under ENGLISH law s. 136 of the Law of Property Act 1925 has the effect that an assignee cannot sue in its own name alone, but as a mere equitable assignee must join the assignor as claimant, unless the assignment was in writing signed by or on behalf of the assignor and written notice of assignment has been given to the debtor. Nevertheless a debtor who has acquired knowledge of the assignment cannot safely pay the assignor; and the question whether an equitable assignee is precluded from suing in its own name alone remains unsettled and may depend on whether the requirement to join the assignor is considered a rule of substantive law or merely a rule of practice: Furmston para. 6.273. Right to give performance either to assignee or to assignor Again, in most systems the debtor's knowledge of the assignment, even without notification, precludes the debtor from performing in favour of the assignor, for this is seen as contrary to good faith. However, in SCOTTISH law mere knowledge does not preclude the debtor from performing in favour of the assignor (McBryde 12.112), so that in effect the debtor has the choice whether to give performance to the assignor or the assignee. This is true also in NORDIC law (PNA § 29) and in the NETHERLANDS (BW art. 6:37). The position in BELGIAN law is controversial, some authors taking the position that mere knowledge of the assignment does not preclude the debtor from performing in favour of the assignor (Dirix nos. 15-11; Comelis, Handboek no. 335), while others (e.g. Herbots n. 309) consider that a debtor who performs in favour of the assignor after knowledge of the assignment is necessarily acting in bad faith .. Option to perform infavour of assignee; no right to perform infavour of assignor The majority of European Union legal systems favour the rule embodied in paragraph (3) of the present Article by which the debtor is entitled to act on mere knowledge of the assignment to perform in favour of the assignee but cannot any longer give performance to the assignor. This is the position in ITALY (CC art. 1264(2)), AUSTRIA (ABGB § 1396), GERMANY (BGB § 407(1)), the NETHERLANDS BW art. 6:37), the NORDIC countries (PNA § 29), ENGLAND (Tolhurst v. Associated Portland Cement Manufacturers (1900) Ltd. [1902] 2 K.B. 660, 668) and, according to one theory, BELGIUM (see (3) above) and LUXEMBOURG (CC art. 1691). Debtor remains bound to perform infavour of assignor Both FRENCH law and DUTCH law require a debtor to give performance to the assignor, even where the debtor has become aware of the assignment, in the absence of a notification in accordance with the prescribed formalities or acceptance ofthe assignment by the debtor. In FRANCE the jurisprudence of the Cour de cassation establishes that mere knowledge of the assignment is not only ineffective to expose the debtor to liability to pay the assignee but precludes the debtor from setting up the assignment against the assignor: Ghestin para. 390; Malaurie & Aynes no. 279. The position is the same in the NETHERLANDS (BW, arts. 3:94, 3:236(2)) except that the debtor's assent to the assignment is not sufficient to complete it. A silent charge (which does not require notice to the debtor) imposes no obligation on the debtor to the assignee and only the assignor can collect unless the charge is converted into a normal charge by notice. In other jurisdictions the requirement to give notice is for the benefit of the debtor, and while its absence will in some jurisdictions leave the debtor free to give a bona fide performance to the assignor, there is no obligation to do so. A rule comparable to that laid down in paragraph (2) of this Article is found in some legal

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systems, including those of the NETHERLANDS (BW art. 3:94(3)), GERMANY (BGB § 410) and AUSTRIA (where it is acknowledged by doctrine that in case of doubt the debtor may require the assignee to provide evidence of the assignment, but it is usually the assignor who is bound to inform the debtor of the assignment).

Article 11:304: Protection of Debtor A debtor who performs in favour of a person identified as assignee in a notice of assignment under Article 11 :303 is discharged unless the debtor could not have been unaware that such person was not the person entitled to performance.

COMMENT This Article is designed to protect a debtor who in response to a notice of assignment gives performance to the person identified in the notice as assignee, except where the debtor could not have been unaware that such person is not the person entitled to performance. The phrase "could not have been unaware" (rather than "ought to have known") is used to avoid any implication of a duty on the debtor to investigate or make enquiries; it denotes that the fact of nonentitlement was obvious from the circumstances, so that the debtor's knowledge can be inferred. In the absence of such actual or constructive knowledge the debtor is protected even where there has been no assignment or a purported assignment is for some reason ineffective. A debtor who is in doubt can, under Article 11:303(1)(b), request the assignee to provide reliable evidence of the assignment.

NOTE In several countries the result produced by this Article is reached by the application of the principle that a debtor acting in good faith is to be protected.

Article 11:305: Competing Demands A debtor who has received notice of two or more competing demands for performance may discharge liability by conforming to the law of the due place of performance, or, if the performances are due in different places, the law applicable to the claim.

COMMENT The debtor may be faced with competing demands for performance from two or more parties claiming an interest in the assigned claims. The assignor may dispute the assignment, though this would be unusual. Somewhat more common is the situation where the assignor has assigned the same claims to

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two or more assignees, whether dishonestly or because the first assignment is by way of security only and is for a debt substantially below the value of the assigned claims, so that there is scope for one or more further assignments. There may also be a competition between the assignee of the claims and a creditor of the assignor who is seeking to attach them to enforce payment of a debt owed by the assignor. A debtor who gives performance to a claimant who has not the best right to receive it may have to perform again, in favour of the person who has the best right. National laws usually address this problem through rules to protect the debtor, for example, by allowing the amount of a money claim to be deposited in court or with some other institution or by allowing the debtor to apply to a court to determine the dispute and abide by the court's decision. Under this Article, a debtor obtains a good discharge by conforming to the rules of the law of the due place of performance if this is the same for both or all of the competing claimants, or if the performances are due in different places, the law applicable to the claim. Article 7:101 of these Principles specifies the due place of performance if this is not fixed by or determinable from the contract.

NOTE All the systems surveyed possess a rule of some kind for the protection of the debtor faced with competing demands.

Article 11:306: Place of Performance (1)

(2)

Where the assigned claim relates to an obligation to pay money at a particular place, the assignee may require payment at any place within the same country or, if that country is a Member State of the European Union, at any place within the European Union, but the assignor is liable to the debtor for any increased costs which the debtor incurs by reason of any change in the place of performance. Where the assigned claim relates to a non-monetary obligation to be performed at a particular place, the assignee may not require performance at any other place

COMMENT

A. Effect of Assignment on Place of Performance of Money Obligation Where the debtor has to pay the creditor at the latter's place of business or by transfer to the creditor's bank account an assignment of the claim necessarily involves a change in the place of performance. Within a given country the place of payment is usually of little significance, since most payments of any significance are made by inter-bank transfer, and it is as easy for the debtor to arrange payment to the assignee's account as to the assignor's account. Rather

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different considerations may apply where the place of payment is changed to one in a different country. Apart from increased costs, which the debtor is entitled to recover from the assignor under paragraph (1) of this Article, the debtor may be affected by currency controls, increased transfer risks and the need to allow greater time for the transfer to be effected. Hence the general rule stated in paragraph (1) that the assignee may not require payment in a country different from that of the contractual place of payment, whether that place be specified in the contract itself or determined in accordance with Article 7:101(a) of these Principles. However, this rule is modified where the original contractual place of payment is in a Member State of the European Union, in which case the assignee may require payment to be made either in that State or in any other Member State. In effect, the European Union is treated as a single country for the purpose of paragraph (1) of this Article. This reflects the concept of the European Union as a single market and the advent of the European Monetary Union and the euro as the obligatory common currency of Member States of the EMU. Illustration 1: S in Hamburg sells goods to B in Paris, payment to be made by inter-bank transfer to the credit of S's account with its bank in Hamburg. S assigns the debt to A in Milan. On giving notice of the assignment A can require B to make payment to the credit of A's account in Milan. Illustration 2: The facts are as in Illustration 1 except that S is in New York and B is required to make payment to S in New York. A, the assignee in Milan, can require B to pay anywhere in the United States but not in any other country.

B. Place of Performance of Non-monetary Obligations Cannot be Changed Non-monetary obligations raise quite different considerations, since a change to a new place of performance even within the same country may fundamentally alter the nature of the obligation. For example, where there is a contractual obligation to ship goods f.o.b. Southampton, the place of shipment is an essential term of the contract and the obligation ought not, by reason of an assignment, to be converted into an obligation to ship f.o.b. Liverpool. Accordingly paragraph 2 provides that the assignee of a claim to the performance of a nonmonetary obligation cannot change the place of the debtor's performance.

NOTE An assignment of a money claim almost invariably entails a change in the place of performance of the debtor, namely to the assignee's place of business or into its bank account instead of the place of business or bank account of the assignor. It is indeed inherent in the assignability of money claims that the assignee can require payment to be made to it instead of to the assignor. Accordingly while most legal systems do not appear to have an express rule concerning payment to the assignee it is generally accepted that, at least so long as payment is to be made within the

Article 11 :307: Defences and Rights of Set-Off 117 same country, the assignee can require such payment to its location, though the assignor may be liable for any increased costs incurred by the debtor. NORDIC law is one ofthe few laws to make express provision to this effect in § 3 of the NORDIC PNA. In GREECE doctrinal opinions are divided, some taking the view that the debtor remains entitled to pay at the assignor's domicil (e.g. Georgiades & Stathopoulos art. 455, no. 60) while others argue for the domicil of the assignee (Georgiades 421, note 57). GERMAN law imposes on the creditor who changes domicil the increased cost or risk of remittance (BGB § 270( 3)) and this rule, which is also found in DUTCH law (BW art. 6:116-117) and in Article 57 of the Convention on Contracts for the International Sale of Goods (CISG), is considered to be applicable by analogy to assignments. Some writers on CISG argue against the analogy, but the better view is that to insist on the debtor's right to pay at the original place of payment is inconsistent with the assignability of the claim.

Article 11:307: Defences and Rights of Set-Off (1)

(2)

The debtor may set up against the assignee all substantive and procedural defences to the assigned claim which the debtor could have used against the assignor. The debtor may also assert against the assignee all rights of set-off which would have been available against the assignor under Chapter 13 in respect of claims against the assignor: (a) (b)

existing at the time when a notice of assignment, whether or not coriforming to Article 11 :303 (1), reaches the debtor; or closely connected with the assigned claim.

COMMENT A. Defences

This Article assumes the existence of a valid assignment. If the purported assignment has not taken place or is void the debtor has no obligation to pay or otherwise perform in favour of the purported assignee. Nevertheless a debtor who does give performance to the purported assignee obtains a good discharge under Article 11:304 unless the debtor could not have been unaware that the purported assignee was not entitled to performance. A widely accepted principle, and that adopted in this Article, is that the assignee cannot stand in any better position than the assignor. Accordingly the assignee acquires the claims subject to all defences which the debtor could have asserted against the assignor, and this is so whether the grounds of defence arose before or after the notice of assignment. For this purpose, "defences" includes procedural defences arising under the contract. Illustration 1: S sells and delivers goods to B and then assigns the seller's rights to A. The goods do not conform to the contract of sale. B can reject the goods and refuse to pay the price to A. Alternatively B can retain them and set up a cross-claim for damages in diminution of the liability for the price.

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B. Assignee Incurs No Positive Contractual Liability The assignee has no contractual relationship with the debtor and therefore incurs no positive contractual liability to the debtor for non-performance by the assignor. All the debtor can do is to rely on that non-performance as a defence to the assignee's claim and to make a separate claim against the assIgnor. C. Right of Set-Off (i) General

Somewhat different rules apply to set-off. It is generally accepted that the debtor should be allowed to exercise against the assignee the same right of setoff (if any) as the debtor could have invoked against the assignor in respect of cross-claims which exist at the time of receipt of the notice of assignment, and that for such cross-claims the set-off should be available even if they are independent claims in the sense that they do not arise out of the same contract and are not closely connected with the contract. Illustration 4: C, who is owed €100,OOO by 0 for the cost of building works, assigns the rights under the building contract to A, who gives notice of the assignment to o. Subsequently 0 lends C €40,OOO under a loan agreement which is unconnected with the building contract. 0 cannot set off the claim for repayment of the loan against the liability to A. Illustration 5: S sells machinery to B at a price of €1 million payable by five annual instalments of €200,OOO. By a separate contract S agrees to service the equipment for a period of five years. S assigns all S's rights under these contracts to A. In a claim by A for non-payment of an instalment B can set off a cross-claim for damages for loss suffered as the result of S's breach of the servicing contract.

(ii) Unmatured Obligations It is not necessary to the right of set-off that the relevant cross-claim should have matured at the time of the debtor's receipt of notice of assignment; it

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suffices that it is in being as a debitum in praesenti, solvendum in futuro. If the rule were otherwise, a debtor's potential right to set off against the creditor a cross-claim due to mature at the same time as the creditor's claim would be extinguished by the creditor's assignment of the creditor's claim, contrary to the fundamental principle that an assignment should not prejudice the debtor. However, under Article 13:101 it is necessary that the cross-claim should have matured by the time the debtor is called upon to give performance of the assigned claim, for the debtor is not entitled to use set-off to accelerate the cross-claim. Once the debtor has received a notice of assignment it would be unfair to the assignee to allow the assignee's interest to be reduced or extinguished as the result of the debtor setting off independent claims arising from new dealings between the debtor and the assignor. Where, however, those new claims are closely connected with the assigned claim, it is reasonable that the assignee should take subject to them. Illustration 6: In June S supplies goods to B at the price of€lO,OOO, payment to be made on or before 31st December. In August Blends S €4,000 under a loan agreement which requires the loan to be repaid by 1st November. In October S assigns to A the debt of €10,000 due from B, and A gives notice of the assignment to B immediately afterwards and requires B to pay the €1O,000 on or before 31st December. B can set off the loan of€4,000 which will by then have become repayable, and it is irrelevant that it had not become repayable when B received the notice of assignment from A. Illustration 7: The facts are as in Illustration 6 except that the loan of €4,000 is not repayable until 1st February in the following year. On 15th January in that year, following B's failure to pay A the €1O,000, A makes demand for payment of that sum. B cannot set off the loan of €4,000, since this has not yet become repayable.

NOTE The principle that the assignee acquires rights subject to all defences which the debtor could have asserted against the assignor is common to all European legal systems and reflects the policy that the debtor should not be prejudiced by the assignment (Katz, IECL para. 97) .. However, legal systems differ as to whether the grounds of defence must exist, either actually or potentially, at the time of the debtor's receipt of notice of assignment. This is a requirement in FRANCE (CC art. 1690), LUXEMBOURG (CC art. 1690), GERMANY (BGB § 404), BELGIUM (Cornelis, Handboek para. 335), and PORTUGAL (CC art. 585). In most other systems, and under art. 20(1) of the UN Convention, it is immaterial whether the ground of defence arises before or after the receipt of notice of assignment. The right of set-off is more complex. In some systems the right of set-off is excluded altogether if the assignment has been perfected by acceptance by the debtor, as opposed to notification, unless the debtor in signifying acceptance reserves the right of set-off. This is the position in FRANCE (CC art. 1295), LUXEMBOURG (CC art. 1295), ITALY (CC art. 1248(1); Casso 15th October 1997, no. 4416; Casso 1980, no. 1484) and SPAIN (CC art. 1198). In most systems the availability of set-off depends on whether the debtor's claim against the assignor is closely connected to the claim or is an

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independent claim. In the former case set-off is available even in respect of a claim arising after receipt of notice of assignment; in the latter case it is restricted to claims that have matured prior to such receipt (though under art. 4(2) of the Loi Dailly in FRENCH law the relevant date is the date of the assignment) and to claims accrued but not matured at the time of receipt provided that these have matured at the time of the assignee's demand for payment (e.g. LUXEMBOURG CC art. 1295). Under these Principles the same results follow from a combination ofthe present Article and Article 13:101. See Katz, IECL para. 98.

Article 11:308: Unauthorised Modification not Binding on Assignee A modification of the claim made by agreement between the assignor and the debtor, without the consent of the assignee, after a notice of assignment, whether or not conforming to Article 11 :303 (1), reaches the debtor does not affect the rights of the assignee against the debtor unless the modification is provided for in the assignment agreement or is one which is made in good faith and is of a nature to which the assignee could not reasonably object.

COMMENT This Article complements the undertaking deemed to be given by the assignor under Article 11:204(b). However, a debtor who has not yet become aware of the assignment has no reason to suppose that there is any restriction on modifying the contract. Accordingly any modification made between the time of assignment and before the debtor becomes aware of it is binding on the assignee, who will however have a claim against the assignor for breach of the undertaking implied under Article 11:204(b). Even after receipt of notice of the assignment the debtor is free to agree on a modification if it is provided for in the assignment itself or is made in good faith and is a modification to which the assignee could not reasonably object. See Comment E to Article 11:204 and the illustration there given.

NOTE The general rule that an assignee is not bound by a modification of the agreement made after the debtor's receipt of notice of assignment appears to be common to all jurisdictions within the European Union. The exception is based on the UCC s. 9-405.

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Section 4: Order of Priority between Assignee and Competing Claimants

Article 11:401: Priorities (1)

(2)

(3)

( 4)

Where there are successive assignments of the same claim, the assignee whose assignment is first notified to the debtor has priority over any earlier assignee if at the time of the later assignment the assignee under that assignment neither knew nor ought to have known of the earlier assignment. Subject to paragraph (1), the priority of successive assignments, whether of existing or future claims, is determined by the order in which they are made. The assignee's interest in the assigned claim has priority over the interest of a creditor of the assignor who attaches that claim, whether by judicial process or otherwise, after the time the assignment has taken effect under Article 11 :202. In the event of the assignor's bankruptcy, the assignee's interest in the assigned claim has priority over the interest of the assignor's insolvency administrator and creditors, subject to any rules of the law applicable to the bankruptcy relating to: ( a) publicity required as a condition of such priority; ( b) the ranking of claims; or (c) the avoidance or ineffectiveness of transactions in the bankruptcy proceedings.

COMMENT Thus Article deals with the priority of an assignee as against others asserting an interest in the assigned claim. Such an interest may arise by way of a competing assignment, a judicial or other attachment or the bankruptcy of the assignor. The effect of giving priority to a particular assignment depends on whether it is absolute or by way of security. If it is absolute then the competing interest is extinguished; if it is only by way of security, the competing interest is merely subordinated, and where the secured obligation is discharged the competing interest becomes effective.

A. Competing Assignments (i) The First-to-Notify Rule Legal systems differ in their approach to competing assignments. In some systems the principle nemo dat quod non habet is applied Having made the first

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assignment, the creditor has nothing left to assign. Accordingly the second assignment is ineffective, and while the debtor obtains a good discharge by giving performance to the second assignee without knowledge of the first assignment, the second assignee is required to account to the first assignee for any performance received. Other legal systems treat the question as one of priority, not of validity, and give priority to the second assignee who neither knew nor ought to have known of the prior assignment if the second assignee's assignment is the first to be notified to the debtor (whether by that assignee or by the assignor). This latter approach is that adopted here. It reflects two distinct ideas. The first is that giving notice of assignment is the closest equivalent to the taking of possession, which is a recognised method of obtaining priority in the case of tangible movables. The second is that an intending assignee, before giving value, can ask the debtor whether the debtor has received any prior notice of assignment. If the first assignee has failed to give such a notice the second assignee should be entitled to assume that there is no earlier assignment, unless the second assignee has acquired knowledge of the earlier assignment in some other way or ought to have known of the earlier assignment, e.g. because it had been registered in a public register. Illustration 1: S assigns to Al a debt due from D and then assigns the same debt to A2, who is the first to give notice of assignment to D. If A2 neither knew nor ought to have known of the prior assignment at the time of taking A2's own assignment, A2 has priority. This is the case whether the assignments or either of them were outright transfers or were transfers by way of security only. However, if the assignment to A2 is outright, AI's rights are not merely subordinated but extinguished.

(ii) "Notifies" In this context notification denotes receipt of notice by the debtor, not merely the dispatch of notice. See Article 11:303 and, as regards the time when a notice takes effect, Article 1:303(2). (iii) Neither Party Notifies Where neither party has given notice of assignment, the ordinary rule qui prior est tempore potior est jure applies. However, the priority of the first assignee is provisional only, being liable to be displaced if the second assignee, being unaware of the earlier assignment, gives notice of assignment before such a notice has been given by the first assignee. B. Assignee versus Attachment Creditor

Under paragraph (3), once an assignment takes effect it has priority over a subsequent attachment creditor of the assignor, whether the attachment is by way of pre-trial court order, post-judgment garnishment or execution or any other form of attachment of claims. Article 11:202 deals with the question when an assignment takes effect The retroactive effect of Article 11:202(2) has no

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significance in this context, since a creditor cannot in any event attach a debt that has not yet come into existence, so that the contest can only arise in relation to an existing debt. Illustration 2: On March 1st D assigns an existing debt to A by way of outright transfer. On March 10th D's creditor, C, seeks a court order requiring the debtor to pay C instead of D. The order must be refused, as the debt is no longer owned by D. Illustration 3: The facts are as in Illustration 1 except that the assignment to A is by way of security. No order can be made to take effect unless and until the obligation secured by the assignment has been discharged. Illustration 4: On February 25th C who has obtained a judgment against D for payment of €100,OOO, applies for and is granted a court order against T, who owes D €150,OOO, requiring T to pay €100,OOO of this debt to C instead of to D. On March 10th D assigns to A the debt due from T. The assignment takes effect subject to the court order, so that A can collect payment from D only after that order has been complied with and to the extent of the balance of €50,OOO remaining.

C. Bankruptcy (i) The General Rule: Priority to the Assignee If an assignment is to have any real significance as a transfer of a claim it must in principle be recognised as effective to give the assignee priority over the assignor's insolvency administrator and general creditors. The effect of such priority is that if the assignment is by way of outright transfer the assigned claims will not form part of the bankruptcy estate at all, while if the assignment is by way of security the interest of the bankruptcy estate will be limited to the surplus (if any) remaining after the security interest has been discharged.

(ii) Qualifications of the Assignees Priority The assignee's priority is subject to three qualifications. First, if the law applicable to the bankruptcy, itself or by reference to another law, imposes a publicity requirement, such as registration, as a condition of the priority of the assignment against the assignor's representative and general creditors in the assignor's bankruptcy, the failure to conform to that requirement will invalidate the assignment against the assignor's bankruptcy creditors and the assignee will simply have a personal claim against the assignor's estate ranking pari passu with the claims of the assignor's general creditors. Secondly, this Article does not affect any special rules of bankruptcy law relating to the ranking of claims. For example, the bankruptcy law may subordinate even certain types of real right to preferential claims, such as taxes and wages of employees. Thirdly, the Article does not affect any rules of the bankruptcy law relating to the avoidance

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or ineffectiveness of transactions in the bankruptcy proceedings. The assignment, for example, may be voidable as an unfair preference if it was given in or towards discharge of the assignor's existing indebtedness to the assignee and at the time of giving it the assignor was insolvent, so that the assignee was treated more favourably than the assignor's other creditors. In all such cases the priority rule stated in paragraph (3) of this Article gives way to the bankruptcy law as a lex specialis.

NOTE Paragraph (1) of this Article represents the majority rule in European legal systems, albeit with certain variations in detail. It is the rule found in ENGLAND (Dearie v. Hall (1828) 3 Russ. 1), FRANCE (Terre, Simler, Lequette n. 1189), NORDIC countries (under the PNA § 31(2)), GREECE (Stathopoulos 2, (1992) 599), ITALY (CC art. 1265(1)), PORTUGAL (CC art. 584), and SCOTLAND (McBryde 12.100(2), 12.104-12.106; Wilson para. 27.5(a)). By contrast AUSTRIAN law (OGH SZ 54/104; JBI 1986, 235; JBI 1996, 251) and GERMAN law give priority to the first assignee, this being a corollary of the principle in those jurisdictions that a second assignment is devoid oflegal effect. In the NETHERLANDS an assignment is ineffective without notification. It follows that the priority question arises only if both or all the competing assignees have given notice. In that event priority goes to the first assignee in accordance with the principle nemo dat quod non habet. Paragraphs (2), (3) and (4) state the rules in those countries that do not require notice to the debtor as a condition of validity of the assignment, but in countries such as FRANCE and the NETHERLANDS, where notification to the debtor is an essential element of the assignment if the debtor has not accepted the assignment, then in the case of competing assignments both assignments remain ineffective until notice is given or the assignment accepted and this cannot be done after the opening of bankruptcy proceedings except, in the case of the Netherlands, where the pledge is a silent pledge. Moreover, in the Netherlands an assignment offuture claims ceases to have effect on the opening of bankruptcy proceedings against the assignor as regards those claims that have not then come into existence: Faillissementswet, art. 35(2). While the conditions of a valid assignment vary, it is everywhere the rule that once those conditions have been fulfilled the assignee has priority over a creditor who subsequently attaches the assigned claim. Accordingly where the assignment is governed by these Principles and has taken effect under Article 11:202, paragraph (3) of the present Article confers on the assignee priority over a subsequent attachment creditor.

CHAPTER 12

Substitution of New Debtor: Transfer of Contract Section 1: Substitution of New Debtor

Article 12:101: Substitution: General Rules

(1)

(2)

A third person may undertake with the agreement of the debtor and the creditor to be substituted as debtor, with the effect that the original debtor is discharged. A creditor may agree in advance to a future substitution. In such a case the substitution takes effect only when the creditor is given notice by the new debtor of the agreement between the new and the original debtor.

COMMENT A. Scope

Article 12:101 deals only with the substitution of a new debtor for the original debtor, with the effect of discharging the original debtor. The addition of a new debtor to the original one is not dealt with by any specific rule, because no peculiar problems occur when a contractual agreement is made by which a third person joins a debtor in an existing obligation. In such a case the result is to create a plurality of debtors, a topic dealt with in Chapter 10 of these Principles.

B. The Concept of Substitution It is a widely accepted principle that a person (the "third person" or "new debtor") may accept the debt of another person (the "debtor" or "original debtor"), thereby being substituted for the debtor. An agreement between the third person and the debtor cannot by itself have the effect of discharging the debtor from the obligation to the creditor. To achieve that result the creditor has to assent to the substitution. There is no uniform answer in the different European legal systems to the question whether the debtor's assent is necessary for the substitutionary effect of an agreement between the third person and the creditor aimed at the substitution of the third person for the debtor. Under Article 12:101 an agreement between the third party and the creditor does not bring a substitution 125

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into operation unless the debtor also agrees. This does not, of course, prevent the creditor from unilaterally releasing the debtor in accordance with the applicable national rules on waiving or renouncing rights but in such a case there would be two separate juridical acts - a contract between the creditor and the third person and a separate release by the creditor - rather than a single juridical act of substitution under Article 12:101. C. Relationship to other concepts (i) Assignment Substitution is to some extent the antithesis of assignment. Assignment results in a new creditor. Substitution results in a new debtor. Assignment, however, does not require the agreement of all three parties.

(ii) Novation "Novation" is used in different senses in different legal systems. Generally it means the replacement of a contract by a new contract, often between the same parties. Substitution under Article 12:101, on the other hand, involves a change in the debtor, the contract remaining in force and unchanged in other respects. (iii) Stipulation in Favour of a Third Party The substitution of a new debtor under Article 12:101 involves the agreement of all three parties. This distinguishes it from a stipulation in favour of a third party, as regulated in Article 6:110 of these Principles. (iv) Performance by a Third Person Article 7:106 of these Principles dealing with "performance by a third person" does not involve a change in the person of the debtor. That Article simply provides an answer to the question whether performance by a third person may qualify as "due performance" which cannot be refused by the creditor. D. Importance of Creditor's Agreement The wording of Article 12:101 (1) makes it clear that the creditor's agreement to the substitution is essential to create the effects of substitution. Often the substitution will be based on an initial agreement between the debtor and the third person, to which the creditor's assent is required if the debtor is to be discharged. The declaration of assent need not be express, but it must be definite and unequivocal. As long as the creditor's assent has not been declared, the agreement cannot have the effect that the debtor is replaced by the third party. Otherwise, the creditor would bear the great and unacceptable risk of being forced to accept a debtor who might be less solvent, less trustworthy or less reliable than the original debtor. Illustration 1: A has borrowed €100,000 from Bank B. Shortly thereafter C

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buys a building from A for a price of €120,000 and agrees with A to take over, in part payment, A's debt to Bank B thereby replacing A as debtor. B declares its assent to this agreement. As a result, C is substituted for A as debtor to B. If the creditor does not assent to the agreement between the original debtor

and the third person, the agreement has legal effects only between the debtor and that person. This does not mean, however, that the third person automatically joins the debtor in the obligation to the creditor, so as to give the creditor a right to require performance from either. Whether the creditor acquires a right against the incoming person will depend primarily on the terms of the contract between the debtor and that person. The rules of Article 6:110 on stipulations in favour of a third party will apply, the creditor being a third party in relation to the agreement in question. Article 12:101(2) makes it clear that assent may be given in advance by the creditor. In this case, the substitution will take effect only after the original debtor and the new debtor have reached agreement and the new debtor has notified the creditor of it. Since the creditor must know whether and when the substitution will take effect, the requirement that the creditor receives notice is not limited to cases where the new debtor has not yet been identified at the time of the advance assent. Illustration 2: A is about to sell a building to C, but urgently needs a loan from Bank B. A asks Bank B to agree in advance to C taking over responsibility for repayment of the loan as from the conclusion of the contract of sale of the building. B agrees. C later agrees also and notifies B accordingly. As from the moment when the contract of sale is concluded, C is substituted for A as the debtor.

E. Matters Left to Implication

Article 12:101 does not provide expressly for the substitution of a new debtor in relation to only part of the obligations under the contract. This, however, is not excluded by the Article and if the obligations are divisible substitution may take place in relation to any part of them identifiable as a separate obligation. As the creditor must agree to the substitution there is no need for any equivalent of the special protection afforded by Article 11:103 in the case of partial assignments. Article 12:101 does not contain any formal requirements for an agreement substituting a new debtor for the original debtor. It follows that, in accordance with the general provision in Article 2:101, there are no formal requirements. NOTES 1.

Wide recognition of concept The underlying concept of substituting a new debtor for the original debtor is widely recognised in national legal systems but terminology varies.

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In the civil codes of AUSTRIA (ABGB §§ 1405-1410), GERMANY (BGB §§ 414-418), PORTUGAL (CC arts. 595-600) and the NETHERLANDS (BW art. 6:155-158) there are express rules under headings denoting the assumption, or taking over, of debts. Under GREEK law too (CC art. 471) a third party may assume the debt and thereby release the debtor. "Assumption of debt" is an expressly acknowledged concept (Kerameus-Kozyris 89.) In these systems asssumption of debt is distinguished from novation. Many European systems mention the substitution of a new debtor under the heading of novation, although in some countries doctrine may also recognise a separate concept of assumption of debt without novation. The FRENCH CC, for example, provides (art. 1271 (2)) that one of the ways in which novation may operate is when a new debtor is substituted for the old debtor, who is discharged by the creditor. Doctrine has also, however, developed a concept of cession de dette. (See Terre, Simler, Lequette n. 1211. Note, however, that some authors show scepticism in accepting this concept. Cf. Malaurie & Aynes no. 310; Aubert, no.1.) The ITALIAN CC regards the situation where a new debtor is substituted for the original one who is released as a type of novation (subjective novation, art. 1235). The SPANISH CC, under the general heading of novation, provides in art. 1203(2) that an obligation may be modified by substituting another person for the debtor. The term asuncion de deuda is also, however, well-known in case law and literature. In ENGLISH and IRISH law novation covers the replacement of one contract by another, whether between the same parties or by substitution of a third person as party to a contract in place of one of the existing parties (Treitel, Contract 647; Chitty para. 20-084). In FINLAND the substitution of a new debtor for the original debtor is usually shortly mentioned under the general heading of novation: see Barlund, Nybergh, Petrell 216; Aurjarvi & Hemmo 179: n. In SCOTLAND the term delegation is used to describe the substitution of a new debtor for the original debtor, the original debtor being discharged. This is sometimes, however, regarded as a sub-head of novation. See Gloag & Henderson 189, 190. In DANISH law, there is a legal instrument called debitorskifte meaning "change of debtors". Functionally, this concept corresponds to substitution of a new debtor (see Gomard III, 143-156). In SWEDEN the substitution of a new debtor for the original debtor is recognised and is distinguished from novation. That would require an animus novandi which is not at hand when the debt in essence remains the same (Rodhe 639 ff.). "Cumulative" and "discharging" assumption of debt Many European civil codes deal expressly with two types of assumption of debt. In the first type the debtor continues to be bound, with the third person collaterally stepping in as an additional debtor (cumulative assumption of debt). In the second type the original debtor is released from the debt and fully replaced by the new debtor (discharging or privative assumption of debt). See e.g. the AUSTRIAN ABGB §§ 1405, 1406; the GERMAN BGB §§ 305,414-418; the GREEK CC arts. 471, 477; the ITALIAN CC arts. 1268-1273 and the PORTUGUESE CC art. 595(2). The FRENCH CC clearly recognises the possibility of a cumulative assumption of debt in art. 1275. On cumulative assumption of debt in SPANISH law, see Dfez-Picazo II 4th edn 852. In the NETHERLANDS, the BW art. 6:155 deals only with a "transfer of a debt from the debtor to a third person" with the effect, if the creditor declares approval, of substituting the new debtor for the original debtor. The distinction between cumulative and discharging assumption of a debt is also recognised in non-codified systems. In SCOTLAND, for example, the original debtor will be released by delegation only if this is the creditor's clear intention. There is a presumption against release. (Gloag & Henderson 189). Formal requirements The codifications dealing expressly with the substitution of a new debtor for the original debtor do not generally lay down any formal requirements. This is true, for example, of GERMAN law: if, however, the contract from which the transferred debt arises required a special form, the same requirements are applicable for the agreement for the replacement of debtor (Munchener Kommentar (-Moschel) § 414 nA). Distinctions between different types of agreement In all legal systems providing express rules on the substitution of a new debtor for the original

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debtor such substitution may be arranged in different ways: either by an agreement between the creditor and the third party to which the original debtor mayor may not have to agree; or by an agreement between the original and the new debtor to which the creditor consents. Everywhere, the creditor's consent is mandatory for the release of the original debtor, but systems differ on the question whether the debtor's consent is necessary to create the effects of substitution. The GERMAN BGB provides two rules for the creation of an assumption of debt: § 414 concerns the agreement between the creditor and the third person stepping in as the new debtor to which neither the co-operation nor consent of the original debtor is required; and § 415 provides for the practically more important agreement between the debtor and the person who is to replace the debtor. This needs approval by the creditor to have the effect of replacing the debtor; (see Miinchener Kommentar (-Moschel) § 414 n. 3, § 415, nn. 3 and 6; Larenz 601 ff.) Under AUSTRIAN law, § 1405 of the ABGB provides for the case in which the debtor and the third person agree to have the debt transferred to the latter and states that the creditor's assent is necessary to replace the debtor, whereas § 1406( 1) provides for the assumption of a debt by agreement between the third party and the creditor, which does not need the debtor's consent to be valid. In FRENCH law art. 1273 of the CC deals with the situation where the agreement is between the creditor and the third party. It provides that a novation by substitution of the new debtor can operate without the concurrence of the first debtor. Art. 1274 deals with delegation, by which the debtor finds another debtor who undertakes an obligation to the creditor. This does not release the old debtor by novation unless the creditor expressly declared that discharge was intended. A cession de dette may result from an agreement between the original debtor, the new debtor and the creditor (Terre, Simler, Lequette n. 1211). Under Article 595(1) of the PORTUGUESE CC, a debt may be transferred either by a contract between the original and the new debtor, which the creditor ratifies, or by a contract between the new debtor and the creditor to which the original debtor mayor may not consent. A similar solution is provided by the GREEK CC art. 471: a bilateral agreement between the creditor and a third person willing to assume the debt is deemed to be sufficient for replacing the original debtor who may not necessarily become part ofthis agreement. Under DANISH law the agreement of the creditor, the debtor and the third person is required (see Gomard III, 143 ff.). In the ITALIAN CC, arts. 1268-1271 deal with cumulative delegation (delegazione cumulativa, where the debtor assigns to the creditor a new debtor who undertakes an obligation to the creditor) and art. 1272 deals with expromission (espromissione, where the third party, without delegation by the debtor, assumes the debt). In both cases the original debtor is not released unless the creditor expressly grants a release. Art. 1273 deals with assumption of debt (accollo) by an agreement between the debtor and the third person to which the creditor may adhere. Accollo is considered as a contract in favour of a third person (see Casso 7/8/1941, n. 2776, in Foro It., I, 916 but, for a contrary opinion, Casso 28/9/1971, n. 2663, in Giur. It., 1971, I, 1, 302). The adhesion of the creditor imports the release of the original debtor only if this constitutes an express condition of the agreement or if the creditor expressly grants a release. (See generally, Bianca, 665-666; Mancini, 512; Gazzoni, 618; see also Casso 7/7/1976, n. 2525, in Foro It. 1977, I, 708; Casso 21/2/1983, n. 6935, in Giust. Civ. 1983,2376). Under ENGLISH and IRISH law a substitution by novation requires the assent of all three parties.

Article 12:102: Effects of Substitution on Defences and Securities (1)

(2)

The new debtor cannot invoke against the creditor any rights or defences arisingfrom the relationship between the new debtor and the original debtor. The discharge of the original debtor also extends to any security of the

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Chapter 12 original debtor given to the creditor for the performance of the obligation, unless the security is over an asset which is transferred to the new debtor as part of a transaction between the original and the new debtor. Upon discharge of the original debtor, a security granted by any person other than the new debtor for the performance of the obligation is released, unless that other person agrees that it should continue to be available to the creditor. The new debtor may invoke against the creditor all defences which the original debtor could have invoked against the creditor.

COMMENT

A. General Effect of Substitution The mere transfer of the debt to a new debtor does not change the content of the obligation. In contrast to "novation", in its traditional meaning within the civil law tradition, the content of the debt is not affected by the substitution of a new debtor for the original debtor but remains unchanged. What is transferred to the new debtor is the original debt with the same content and accessory rights (for instance, the right to interest) as existed before. However, any real or personal security for the debt granted by a person who is not a party to the contractual relationship between the original debtor, the new debtor, and the creditor is released upon the discharge of the original debtor. If, however, the person having granted the security agrees that it should not be affected by the change in the person of the debtor, the security will remain effective. Accessory rights which the creditor may have against the debtor remain available to the creditor and are not affected by the substitution. If the new debtor had granted a security to the creditor before agreeing to be substituted as debtor, that security will continue to be available to the creditor, who may also take advantage of any additional securities provided by the new debtor on or after that time. B. Effect on Defences Stemming from the Agreementfor Substitution Article 12:102( 1) makes it clear that the creditor is not affected by any rights or defences which the third person may derive from that person's agreement with the debtor. Even a defect in the agreement for substitution between the original debtor and the new debtor that would make it void or voidable does not change the position of the new debtor in relation to the creditor. The creditor is entitled to proceed against the new debtor even if the creditor knew or ought to have known that the relationship between the original debtor and the new debtor is defective because it lacks consent of the parties, or is of such a kind as would allow the new debtor to raise a defence against the original debtor. The substitution is to this extent regarded as being "abstract" - independent of defects in the underlying relationship between the original debtor and the new debtor The policy is to protect the creditor. The creditor should not

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be concerned with defects in the legal relationship between the original debtor and the new debtor. Illustration 3: A sells to C an alleged original piece of medieval Chinese art for €20,000 and agrees with C that in exchange C should be substituted for A as debtor of Bank B. Upon notification by A, Bank B declares its assent to the substitution. Soon thereafter it becomes evident that A - who has meanwhile gone bankrupt - had sold a fake to C. This does not affect the substitution.

C. Discharge of the Original Debtor and of Third Persons with Regard to Securities Under Article 12:102(2) the original debtor who has granted a security for the performance of the obligation is generally discharged with regard to that security, as soon as the substitution takes effect. Under Article 12:102(3), any third person who has granted a security for the performance of the obligation by the original debtor is also, as a rule, released. These rules are to be found in a clear majority of European legal systems. There are however exceptions to these rules. With regard to securities granted by the original debtor the rule does not apply to any security over an asset which is transferred as part of a transaction between the original debtor and the third person stepping in as new debtor. This may have practical importance in the case of a reservation of title clause in respect of goods, for which part of the price had been owed to the creditor by the original debtor. With regard to securities, such as surety and pledge, granted by any other person for the performance of the debt, this other person may agree to the continuation of the security in favour of the creditor, but will be released in the absence of any such agreement.

D. Defences Stemmingfrom the Original Debt The substitution of a new debtor for the original debtor means that the new debtor is put into the same legal position as the original debtor. The new debtor may therefore set up - with certain exceptions - all the substantive and procedural defences against the creditor which the original debtor would have had in relation to the original contract with the creditor. This applies, for example, with regard to the defence of prescription. The crucial moment for setting up a defence is the moment of conclusion of the agreement by which the new debtor is substituted for the original debtor. All the objections the original debtor might have been able to raise prior to this time, or based on events which had taken place by this time, may be raised by the new debtor. Defences that became available to the original debtor at a time when the substitution had already been effected cannot be raised by the new debtor. The new debtor cannot, however, use the original debtor's claim in order

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to effect set-off, since this goes beyond utilising a defence and, as a rule, the new debtor is not entitled to dispose of such a claim without the assent of the original debtor. There are certain exceptions to the rule that the new debtor may raise the defences of the original debtor. In particular, this rule will not apply whenever the new debtor has accepted an obligation that existed independently from the original debt. Neither can the new debtor set up any defences against the creditor that stem from the contractual relationship between the original debtor and the new debtor.

NOTES In GERMAN law BGB § 417 corresponds approximately to Article 12:102(4) and BGB § 418 corresponds to Article 12:102(3). The third person is allowed to raise defences against the creditor which arise from the legal relationship between the creditor and the third person. As a consequence of the separation of the obligating from the disposing part of a substitution, the third person cannot, however, raise any defences against the creditor resulting from the obligating relationship to the debtor, but solely defences arising from the disposing contract. The third person is not allowed to use a claim of the debtor to effect set-off (Cf., Miinchener Kommentar (-Moschel) § 417, n. 2 ff.; Larenz, 606 ff.) The BGB § 418 states that, in a case of assumption of debt, accessory security interests expire when the debtor changes (Miinchener Kommentar (-Moschel) § 418, n. 1). Only ifthe person providing security consents to the change of debtor does the security remain (Miinchener Kommentar (-Moschel) § 418, n. 6 ff.). The same rule is applicable to non-accessory security interests, because the policy of BGB § 418 is to protect the person providing security from being liable to an unknown debtor (cf. Norr, Scheying & Poggeler 250, Staudinger(-Kaduk) § 418, n.6). According to the AUSTRIAN ABGB § 1407(2), existing rights with respect to the claim are, as a rule, not affected by the change in the person of the debtor. However, Austrian law is the same as Article 12:102(3) in that the second sentence of ABGB § 1407(2) makes the continuation of sureties and pledges by a third person dependent on that person's consent; and similar to Article 12:102(4) in that the new debtor may invoke, according to ABGB § 1407(1), all defences that the old debtor would have had against the creditor (see OGH SZ 55/132). Under SPANISH law there is no problem with the possibility of raising those defences based on the relationship between creditor and new debtor but some uncertainty about other defences and securities (Diez-Picaza II, 4th edn 848-849). In ITALY, in the case of espramissione, the third person cannot set up against the creditor defences connected with the third person's relationship with the original debtor (CC art. 1272(2)) but may raise against the creditor all the defences which the original debtor could have raised against the creditor unless such defences are personal to the original debtor or are derived from acts subsequent to the expromission. According to CC art. 1272(3), the third person cannot set up against the creditor the compensation which might have been set up by the original debtor, even if such compensation occurred before the expromission. A similar position can be found in art. 598 of the PORTUGUESE Cc. In ITALY, in the case of accol/a, the third person is, in every case, bound to the creditor who adhered to the stipulation up to the limits within which the third person assumed the debt, and can set up against the creditor the defences founded on the contract on the basis of which the assumption took place: CC art. 1273(3). So far as securities are concerned, the CC art. 1275 provides that in all cases where the creditor releases the original debtor all guarantees attached to the claim are extinguished unless the person who furnished them agrees specifically to continue them. As a consequence of the rule in DANISH law that a change of persons in a contractual

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relationship is not to affect adversely any of the persons involved, the new debtor may set up against the creditor all defences which the old debtor could have used against the creditor. Under SWEDISH law, whether any security given by the original debtor or another person remains effective, depends upon their agreement. Since under the laws of ENGLAND and IRELAND any debt created by the contract is extinguished on novation it follows that accessory rights given by the debtor, such as security for the debt, are also extinguished except where they are over an asset transferred to the new debtor, who will take the asset subject to the security. Novation may also have the unintended consequence of releasing a surety to the original contract unless the surety's consent is obtained or the terms of the guarantee preserve the surety's liability in the event of a novation.

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Section 2: Transfer of Contract

ARTICLE

(1)

(2)

12:201: TRANSFER OF CONTRACT

A party to a contract may agree with a third person that that person is to be substituted as a contracting party. In such a case the substitution takes effect only where, as a result of the other party's assent, the first party is discharged. To the extent that the substitution of the third person as a contracting party involves a transfer of rights to performance ("claims"), the provisions of Chapter 11 apply; to the extent that obligations are transferred, the provisions of Section 1 of this Chapter apply.

COMMENT

A. General Remarks Whereas an assignment is limited to the transfer of claims and a substitution of a new debtor for the original debtor concerns only a change in the person owing a debt, the present article deals with the transfer of the entirety of contractual rights and duties from a contracting party to a third person. Given that contracts of long duration, and take-overs or amalgamations of businesses, are common in Europe, the rules on transfer of an entire contract are of great practical importance. It was therefore considered necessary to provide an article on this subject in the Principles. Agreements for the transfer of contracts are often concluded with regard to tenancy agreements, loan arrangements, labour contracts and other types of contract of long duration. The transfer of an entire contract must not be confused with novation. Novation implies the extinction of the old contractual relationship and the constitution of a new one with a different object or a different source, whereas in a transfer of the contract the relationship remains the same. The contractual bond is the same, but it is transferred from the first party to the incoming third party. B. Substitution of a Party in Respect of the Entire Contractual Relationship Either party to a contract can, with the necessary agreement of the other, substitute a third person in the entire relationship arising from a contract, so that the third person assumes both the benefit and the burden of the contract in place of the first party. The third person takes over both the first party's right to performance and the first party's contractual duties to perform. Illustration 1: A concludes a contract for the construction of a prefabricated

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house with Company B for a certain price and pays a first instalment. B becomes bankrupt soon thereafter. Provided A agrees, Company C may step into the contract in place of B with all the contractual rights and obligations which were previously B's. C. The Importance of the Other Party's Assent

For the first party to be released from all obligations to the other contracting party that other party's assent is necessary. This assent may be given in advance, a situation which is common and important in practice. If the other party does not assent, the transfer has no effect. Neither obligations nor rights will be transferred. Of course it would then often be possible for the first party (a) to assign rights to the third party (which would not require the other party's consent) and (b) to entrust the performance of duties to the other party. But the latter would only be effective in accordance with Article 8:107 of the Principles and the original party would remain responsible for proper performance of the obligations. D. Applicability of Rules on Assignment and Substitution A transfer of the contract is more than a mere combination of assignment of claims and substitution of a new debtor. It is a uniform transaction, transferring a whole structure of rights, legal positions, and duties, which can appropriately be regarded as more than a mere combination of single acts transferring claims and duties. In practice, however, the result of such a transaction is the transfer of all contractual claims including collateral ones, as well as the acceptance of all contractual obligations by the incoming party. That explains why the Articles on assignment and substitution of a new debtor apply with any appropriate adaptations. Thus, accessory rights are to be treated in the same way as provided by Article 11:201(1) in the context of assignment of claims. Notice by the new party is required for the transfer of the contract to take effect when the other party's assent has been given in advance (as in Article 12:101(2)) and the incoming party cannot invoke against the other party any rights or defences that are based on the incoming party's relationship with the replaced party (as in Article 12:102( 1)).

NOTES 1.

Provisions in recent codifications The transfer of an entire contract is expressly acknowledged in some recent codes. See e.g the ITALIAN CC arts. 1406-1410, the PORTUGUESE CC arts. 424-427 and the DUTCH BW art. 6.159 (discussed in Asser-Hartkamp I, nos. 610-612. Under the ITALIAN CC art. 1406 "each party can substitute for himself a third person in the relationships arising from a contract for mutual counter-performances, if these have not yet taken place, provided that the other party consents thereto". It is a multilateral contract, and the consent of the three parties involved is essential. (See Casso 14/5/1962, n. 999, in Giust. Civ. 1962, I 1906; Casso 18/10/1971, n. 2929 in Riv. Notar. 1972,278). Art. 1408(1) and (2) of the

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ITALIAN CC states that, as the transfer becomes effective, the transferor is released from the obligations to the original contracting party, unless the latter refuses to release the transferor. Art. 1409 empowers the original contracting party to raise against the transferee all defences arising out of the contract, (for instance a defence based upon non-performance) but not those based on other relationships with the transferor, unless the contracting party expressly reserved a right thereto on consenting to the transfer. According to a certain doctrinal opinion the transferee acquires every right arising from the contract, save the right to avoidance and rescission (Fusaro 249; for a contrary opinion see Galgano 121). In PORTUGUESE law the transmisstio da posirtio contratual is expressly acknowledged by arts. 424-427 of the Cc. This concept is essentially the same as what is provided for in Article 12:201, although the express provision of a rule similar to Article 12:201(2) is not considered necessary in Portuguese law. It is the predominant opinion that the transfer of a contract cannot be seen as a mere accumulation of transfers of claims and duties (see Varela 415 ff.; Pinto 387 ff.). Under the CC art. 427 the remaining party may raise against the transferee all the defences which might have been raised against the transferor. However, the defence of set-off that is available in the context of assignment may not be raised in the case of transfer of contract (see Varela 406). Concept acknowledged by practitioners and doctrine In those countries lacking a statutory provision on the transfer of contracts, the possibility of transferring the contract as a whole is nonetheless generally recognised. Thus, in AUSTRIA the transfer of a contract is conceived, by courts and writers, as a uniform transaction requiring the agreement of all the three parties involved; see e.g. OGH JBl 1986, 131 (note Krejci); OGH JB11988, 720; OGH JB11990, 717; Bydlinski; Koziol 137; Krejci; Schima 319. The GERMAN BGB does not expressly provide for a transfer of the entire contract. Nevertheless, the concept is acknowledged by the Federal Court; cf. BGH decision of 27. Nov. 1985, BGHZ 96, 302, see Dorner 2916; Fabricius 144; Munchener Kommentar (-Moschel) Introduction to § 414, n. 7, 8. The uniform concept of transfer of contract is needed to terminate the relationship to the original contracting party in its entirety. This solution cannot be achieved by a mere assumption of debt, since certain rights the old debtor may unilaterally exercise remain intact, such as the right to avoid, rescind or terminate. In FRENCH law, in the absence of an express provision in the CC, the traditional doctrinal position was to see a transfer of contract as a mere combination of an assignment and a cession of debt, but it has become the dominant opinion that it is the transfer of the entirety of rights and duties stemming from the original contract. (See Aynes, Cession; Malaurie & Aynes no. 510; Terre, Simler, Lequette n. 1213; cf. Cass.civ. I, 12.12.1982, Bull. civ. I, no. 360). The Cour de Cassation makes the former party's agreement a requirement and accepts that the agreement may be given in advance in the first contract (Cass.com., 6.5.1997, Bull. civ. IV, N° 117, note Mazeaud, Rep. Defrenois 1997, 977; note Mazeaud, D. 1997, 588; note Billiau et Jamin, Rev.trim.dr.civ. 1997, 936, Note Mestre. See also Cass.com., 6.5.1997, Bull. civ. IV, no. 118 and Aynes, Nouvelles precisions D. 1998, chron. 25 ff.). There is a similar situation under SPANISH law. Although it was once a matter of discussion whether, given that the CC contains no provision, a contract as a whole could be transferred, today the predominant view is in favour of such a possibility, arguing on the basis of CC art. 1255 (freedom of contract; cf. Garcia Amigo; Diez-Picazo II, 4th edn 842-843). Some special Acts contemplate the possibility (insurance contracts, labour contracts, leases). No express provision on the transfer of an entire contract can be found in the GREEK Cc. Nevertheless, the combination of an assignment of the claims arising from a contract and the substitution of a new debtor is acknowledged by the writers (see Papantoniou; Sourlas art. 455 no. 3; Kritikos, in Georgiadis & Stathopoulos art. 455 no. 39) and the Courts: (see A.P. 1002/ 1991; HellDni 33 (1992) 829; 1369/1993, ibid. 36 (1995) 304, at 306; 681/1995, NoB 45 (1997) 607, at 606-607. In SCOTTISH law the notion of the transfer of an entire contract is recognised. It is called assignation of the contract. The consent of the other contracting party is required if the

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transferor is to be released from liability. Many of the cases are concerned with determining whether the advance consent of the other contracting party can be inferred. (See Gloag 416-425; McBryde paras 12.39-12.48.) No general statutory provisions on transfer of a contract exist under DANISH law but the problems are discussed in the context of the sale of an enterprise. Basically, the position is similar to that provided by Article 12:201. All three parties must agree to the transfer. There are, however, exceptions provided by a number of statutory provisions, and even by customary rules. Thus, if a newspaper or other periodical is transferred the subscribers will immediately get a claim against the new owner, whereas the old owner remains liable until the contract with the subscribers could have been terminated by notice (see Gomard III 155). With regard to DANISH and FINNISH law Article 12:201 corresponds with doctrinal thinking. Under SWEDISH law, an agreement between the original parties and the new party is required to create the effects of a transfer of contract. Clauses permitting a person to substitute as a new party a legal entity within the same group of companies as the original party (often with the replaced party remaining as guarantor) are frequently contained in contracts. Unless otherwise agreed, the new party assumes all the rights and obligations of the original party (in accordance with the main principle on assignment as expressed in sec. 27 of the 1936 Act on Promissory Notes: Lag [1936:81] om skuldebrev); cf Supreme Court, NJA 1997 p. 886 concerning an arbitration clause; "special circumstances", however, may bar the substituted party from invoking the clause against the remaining party (see Ramberg, Stockholm Arbitration Report 1999:1 p. 26). ENGLISH law deals with the transfer of an entire contract under the heading of novation (Chitty para. 20-084). It is important in relation to the amalgamation of companies, business take-overs, the commodity markets, credit card transactions and in other contexts. In theory, however, novation results in a new contract. The possibility of novation is often provided for contractually in advance.

CHAPTER 13

Set-Off

Article 13:101: Requirements for Set-off

If two parties owe each other obligations of the same kind, either party may set off that party's right to performance ("claim") against the other party's claim, if and to the extent that, at the time of set-off, the first party; (a) (b)

is entitled to effect performance; and may demand the other party's performance.

COMMENT A. Nature of Set-Off In these Principles set-off is regarded as a matter of substantive law rather than as a purely procedural device. If the requirements for set-off are met (Article 13:101), and if set-off has been declared (Article 13:104), the obligations confronting each other are discharged (Article 13:106). Thus, if either of the parties subsequently sues the other, the action will have to be dismissed as unfounded since the claim on which it is based no longer exists. There is one exception to this rule which is spelt out in Article 13:102 (cross-claim not being ascertained) . If a defendant declares set-off in the course of legal proceedings, it will have to be determined, under the rules of civil procedure applicable to the proceedings, whether such a plea is admissible. If it is, the set-off is immediately effective on the level of substantive law and the fact that the obligations have been discharged has to be taken into account in deciding the dispute (unless Article 13:102 applies). If it is not, the defendant may still assert the claim outside the proceedings. On the meaning of "claim" see the Introduction § 5. B. Requirementsfor Set-Off

Set-off has four requirements. ( 1) Mutuality The claims must exist between the same parties. There must, in the traditional formulation, be concursus debiti et crediti. So, for example, a surety who has a personal claim against the creditor cannot set off that claim against the creditor's claim against the main debtor. It follows from the requirement of mutuality

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that there can be no set-off between a debt owed by a person (P) as an individual and one due to that person as a representative or fiduciary. P owes the first debt but the other debt is regarded as being owed, not to P, but to the person on whose behalf or for whose benefit P is acting. A commonly adopted way of expressing this idea is to say that the claims must exist between the same parties in the same capacity or in the same right. There is one exception to the requirement of mutuality: where a claim has been assigned, the debtor can assert against the assignee certain rights of setoff which would have been available against the assignor (Article 11:307). This is justified by the need to protect the debtor. Protection should also be granted to a surety against a claim by the creditor in situations where the creditor can obtain satisfaction by declaring set-off against a claim of the main debtor, and perhaps also where the main debtor may declare set-off against the claim of the creditor. But this must be left to a set of principles dealing with suretyship. (2) Obligations of the Same Kind

Both obligations must be of the same kind: a money claim can be set off only against a money claim, a claim for the delivery of grain only against a claim for the delivery of grain of the same kind. Set-off usually relates to monetary obligations; the prime example of non-monetary obligations, to which set-off may be relevant today, are securities, whether certificated or dematerialised. Whether claims are of the same kind depends on their state at the time that notice of set-off is given. Set-off concerning foreign currency debts - the most important practical question in this context - is dealt with in Article 13:103. (3) Cross-Claim Due

Since set-off constitutes a form of enforcement of the cross-claim (i.e. the claim of the party declaring set-off), the cross-claim has to be enforceable. Thus, it has to be due, the other party must not be able to raise a defence, and the cross-claim must not relate to a natura lis obligatio (i.e. an obligation which is not enforceable but which allows the recipient to retain performance once it has been effected). However, as far as prescription of the cross-claim is concerned, see Article14:503. Illustration: A has a claim against B for €100 which arises from the sale of kitchen equipment and which has become due on 10 October. B wishes to effect set-off with a claim against A. B's claim (i.e. the cross-claim) is based on a loan, repayment of which is due on 20 October. Before 20 October B may not declare set-off. After 20 October B may still not effect set-off if A has a defence against B's claim. The same applies if B tries to set off an unenforceable claim such as, in some legal systems, one arising from gambling. (4) Party Declaring Set-Off Entitled to Perform

The principal claim (i.e. the claim against the person declaring set-off) does not necessarily have to be due; it is sufficient that the person declaring set-off

Article 13:101: Requirements for Set-off 141

is entitled to effect performance. For as soon as a debtor may thrust performance on the creditor (which may be long before the claim falls due) there is no reason not to allow the debtor to declare set-off. A debtor who is not yet entitled to effect performance, however, may not declare set-off. Set-off is also excluded if the debtor may no longer perform because the principal claim has become subject to an order of attachment. Illustration 1: A has a claim against B, due on 10 October. B has a claim

against A, due on 10 September. While A is not entitled to declare set-off before 10 October, B may do so as from 10 September, provided that B is entitled to render performance in favour of A as from that date. Illustration 2: A has invested a sum of €10,000 with B, the money being

repayable on 10 October. The parties have fixed an interest rate of 10%. A still owes B €1O,000 arising from a contract of sale concerning B's car. B had transferred the car on 1 August and on the same day A's obligation to effect payment had become due. Nevertheless, B may not give notice of setoff before 10 October since in terms of Article 7:103(1) A may decline to receive back the sum invested with B before 10 October. C. Unascertained Cross-Claim It is not always a requirement for set-off that the cross-claim is ascertained as to its existence or its value; see the rule in Article 13:102.

D. Obligations to be Performed at Different Places Set-off is not excluded by the fact that the obligations have to be performed at different places (e.g. loan repayable at the lender's place of business in terms of Article 7:101(1)(a) to be set off against a right to payment of a purchase price which has to be paid at the seller's place of business in terms of Article 7:101 (1 )(a)). Allowing set-off in this type of situation is unlikely to cause any prejudice to the creditor of the principal claim. E. Insolvency Set-Off

These principles do not deal with set-off in insolvency. Special rules provided by the applicable national insolvency laws prevail.

NOTES 1.

Nature of Set-Off Set-off may be regarded as a purely procedural device or as a matter of substantive law. The Principles follow the latter approach, which prevails among the continental legal systems. The Principles also follow the continental approach in providing for a uniform, rather than fragmented, regime of set-off. They thereby reflect a development which is also occurring in ENGLISH law. The traditional English distinction between statutory and equitable set-off (both of them originally procedural devices) has been considerably reduced as the equitable rules will

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prevail; significantly, however, a strong body of opinion now favours the substantive nature of equitable set-off (cf. Derham 56 ff.; Wood 4-1 ff.). It is thus brought into line with insolvency setoff and set-off by agreement which are both, undoubtedly, substantive in nature. The modem approach recognises that equitable set-off is based on notions of fairness and natural justice (cf. McCracken 53 ff., 66 ff.) which ties in well with the underlying rationale traditionally advanced for set-off in continental jurisprudence: if A sues B for an amount which A is bound to pay B then A is acting in contravention of the precepts of good faith (dolo petit qui petit quod statim redditurus est - whoever claims what will have to be given back immediately, claims fraudulently): Windscheid & Kipp § 349, 2. In the development of continental jurisprudence, too, there has been a shift from a fragmented towards a uniform approach to set-off which has implied a shift from procedure to substance; see Zimmermann, Fs. Medicus, 710 ff. Mutuality It is generally recognised that the creditor of the one claim has to be the debtor of the other, and vice versa (requirement of mutuality, concursus debiti et crediti, reciprocite, Wechselseitigkeit); FRANCE: CC art. 1289 and Terre, Simler, Lequette n. 1297; BELGIUM: CC art. 1289 and Cornelis, Algemene theorie 869; LUXEMBOURG: CC art. 1289; GERMANY: BGB § 387 and Gernhuber 233 ff.; ITALY: CC art. 1241 and Bianca 481 ff.; the NETHERLANDS: BW art. 6:127(2) and Asser-Hartkamp, Verbintenissenrecht I, n. 533; SPAIN: CC art. 1195; PORTUGAL: CC art. 847, n. 1; Varela II, 200 ff.; AUSTRIA: ABGB §§ 1438, 1441, Koziol-Welser 11,101 and Dullinger 5 ff.; GREECE: CC art. 440; SCOTLAND: McBryde 25.44 ff. and Wilson 13.4; SWEDEN: Lindskog, Kvittning 43; DENMARK: Gomard III, 189; FINLAND: Aurejtirvi & Hemmo 187 ff. The DUTCH BW has specifically added a provision according to which the right of compensation does not exist with reference to a debt and a claim falling into estates which are distinct from each other (BW art. 6:127(3); on which, see Parlementaire Geschiedenis 491). In ENGLAND, the underlying idea is often expressed by stating that the claims must exist between the same parties and in the same right; see, e.g., Goode, Credit and Security 154. For IRELAND, see Murdoch's Dict. 722. The right of set-off was conferred by s. 27( 3) of the Supreme Court of Judicature (Ireland) Act 1877 and by s. 284 of the Companies Act, 1963. See Frawley v. Governor and Co. of Bank of Ireland [1975] I.R. 376; In re Fredericks Inns Ltd. [1994] I.L.R.M. 387. In general Ireland follows the common law position. Concerning protection of a debtor whose creditor has assigned the claim to a third party, see the note to Article 11:307. Obligations of the Same Kind All legal systems agree in principle that both claims must be of the same kind; GERMANY: BGB § 387 and Gernhuber 236 ff.: ITALY: CC art. 1243(1) and Perlingieri, Estinzione 316 ff.; the NETHERLANDS: BW art. 6:127(2) and Asser-Hartkamp, Verbintenissenrecht I n. 534; SPAIN: CC art. 1196(2); PORTUGAL: CC art. 847, n.l-b; Varela II, 205 f.; AUSTRIA: ABGB §§ 1438, 1440, Rummel(-Rummel) § 1440, n. 1 and Dullinger 77 ff.; GREECE: CC art. 440; SCOTLAND: McBryde 25.37 f.; SWEDEN: Lindskog, Kvittning 43; DENMARK: Gomard III, 184; FINLAND: Aurejtirvi & Hemmo 185. For FRANCE, BELGIUM and LUXEMBOURG, CC art. 1291 lays down the same principle but adds that uncontested payments in crops and commodities whose price is regulated by market lists may be set off against sums which are liquid and enforceable. According to Terre, Simler, Lequette n. 1298 this innovation by the drafters of the code civil, the reasonableness and advisability of which is far from obvious, does not appear to have been much applied. ENGLISH law confines set-off to money debts which is explicable in view of the exceptional nature of specific performance. Moreover, it reflects economic realities in that, in other countries too, set-off usually relates to money debts. Although IRELAND generally follows the common law, there seems to be no Irish authority or any rational reason why set-off should be confined to money debts. Cross-Claim Eriforceable All legal systems accept that the cross-claim has to be enforceable; ENGLAND: Derham 27 f.; SCOTLAND: McBryde 25.40ff.; Wilson 13.5; FRANCE: CC art.1291 (1) and Terre, Simler, Lequette n.l300; BELGIUM; CC art. 1291(1) and Cornelis, Algemene theorie n. 673; LUXEMBOURG: CC art. 1291(1); GERMANY: BGB §§ 387, 390(1) [see now § 215 since 1 Jan. 2002]

Article 13:101: Requirements for Set-off 143 and Gernhuber 247 ff.; ITALY: CC art. 1343(1) and Bianca 485 ff.; the NETHERLANDS: BW art. 6:127(2) and Asser-Hartkamp Verbintenissenrecht I, n.536; SPAIN: CC art. 1196(3)(4); PORTUGAL: CC art. 847, n.1-a and Varela II, 204 ff.; AUSTRIA: ABGB § 1439, Koziol-Welser II, 102, Dullinger 82 ff.; GREECE: CC art. 440; SWEDEN: Lindskog, Kvittning 43; DENMARK: Gomard III 185; FINLAND: Aurejiirvi & Hemmo 185 ff. 5. Party Entitled to Perform may Declare Set-Off Also, it is widely recognised that the principal claim does not have to be enforceable; it is sufficient that the person giving notice is entitled to perform; GERMANY: BGB § 387 and Gernhuber 252 ff.; the NETHERLANDS: BW art. 127(2) and Parlementaire Geschiedenis 492; AUSTRIA: Rummel(-Rummel) § 1439, n. 7; PORTUGAL: Varela II, 207 ff.; GREECE: Stathopoulos, Obligations 164 (against the wording of CC art. 440); SWEDEN: Lindskog, K vittning 43; DENMARK: Gomard III 185; FINLAND: Aurejiirvi & Hemmo 185 ff. According to ENGLISH and IRISH law, the principal claim has to be enforceable; this is a natural consequence of the - traditionally - procedural nature of set-off in those legal systems. The laws of FRANCE, BELGIUM and LUXEMBOURG also require both claims to be exigible (CC art. 1291(1)); cf. also ITALY: CC art. 1243(1) and Bianca IV, 485 ff.; SPAIN: CC art. 1196(3)). This follows from the ipso iure effect of set-off: none of the claims can be labelled principal claim or cross-claim. French courts, however, often reach the same result as German law by means of compensation facultative: the party exposed to a claim which has not yet become due may renounce the legal protection arising from the lack of exigibility (see Terre, Simler, Lequette n. 1312). 6. Obligations to be Performed at Different Places It is generally accepted that set-off is not excluded by the fact that performance of the two obligations has to occur at different places. A number of legal systems, however, grant the creditor of the principal claim a right to recover damages for any loss suffered as a result of not receiving performance or not being able to make performance at the right place; FRANCE, BELGIUM and LUXEMBOURG: CC art. 1296; GERMANY: BGB § 391; ITALY: CC art. 1245; the NETHERLANDS: BW art. 6:138; SPAIN: CC art. 1199; PORTUGAL: CC art. 852; GREECE: CC art. 446; DENMARK: Ussing, Aim. Del. 324; cf. also Dullinger 80 ff.; Wood 24-31 ff. 7. Insolvency Set-Off Most legal systems have special rules dealing with insolvency set-off. However, they are usually part of that country's insolvency regime: ENGLAND: Insolvency Act 1986, s. 323 on which see Goode, Credit and Security 176 ff. and Derham 149 ff.; IRELAND: Bankruptcy Act 1988 and, in case of insolvency of companies, Companies Act 1963 (esp. s. 284); SCOTLAND: "balancing accounts in bankruptcy": McBryde 25.59 ff.; Wilson 13.10; GERMANY: Insolvenzordnung §§ 94 ff.; FRANCE: art. 33 (1) loi du 25 janvier 1985 relative au redressement et a la liquidation judiciaires des entreprises, as modified by the loi du 10 juin 1994, on which see Ripert/Roblot n. 3039 ff.; ITALY: art. 56leggefallimentare, on which see Bianca IV, 511 ff.; Perlingieri, Estinzione 260 ff.; AUSTRIA: Ausgleichsordnung §§ 19 ff. and Konkursordnung §§ 19 ff, on which see Rummel (-Rummel) § 1439, nn. 8-11 and Dullinger 307 ff.; SWEDEN: chapter 5, §§ 15-17 konkurslag (1987); DENMARK: §§ 42-45 konkurslov (1997); FINLAND: §§ 33, 33a and 34 konkurssisiiiintO (konkursstadga) (1868); GREECE: art. 537 Commercial Code; PORTUGAL: art. 153 C6digo dos Processos Especiais de Recuperayao de Empresa e de Falencia (Insolvency Code, 1993); art. 153 C6digo dos Valores Mobiliarios (Securities Code, 1999); for LUXEMBOURG, however, see art. 455 code de commerce. The matter is disputed in SPANISH law: according to the prevailing view set-off is not admitted once insolvency has been declared (Rubio GarciaMina 234); cf. also CC art. 926 (set-off between a company and its members in the case of unpaid calls). There is an EU-regulation on insolvency proceedings (No. 1346/2000 of29 May 2000, OJ L 160, 30 June 2000, 1 ff.) art. 6 of which provides that the opening of insolvency proceedings does not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor's claim.

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Article 13:102: Unascertained Claims (1) (2)

A debtor may not set off a claim which is unascertained as to its existence or value unless the set-off will not prejudice the interests of the other party. Where the claims of both parties arise from the same legal relationship it is presumed that the other party's interests will not be prejudiced.

COMMENT

A. The Options There is an obvious danger that a defendant may protract legal proceedings by invoking set-off on account of a dubious cross-claim such as one which cannot easily be proved or the existence of which is as yet uncertain, and there is thus the necessity of affording some protection to the claimant. This can be done in one of three ways. (1) Cross-Claim Must be Ascertained

The fact that the cross-claim is ascertained ("liquidity") could be elevated to a fifth substantive requirement of set-off. But this would go too far. There may be cases where set-off would not prejudice the other party and would be entirely appropriate. It may, for example, be clear that the value of the cross-claim will be ascertained within the period which legal proceedings involving the principal claim will take anyway. Or it may be certain that the cross-claim exceeds the value of the principal claim. A substantive requirement of liquidity, without any discretion on the part of the judge, would inhibit unnecessarily the possibility of set-off. (2) Cross-Claim Need Not Be Ascertained

Alternatively, a legal system may take the view that, on the level of substantive law, set-off is not prevented by the fact that the cross-claim is unascertained. For practical reasons such a solution would normally be accompanied by provisions requiring the judge to refuse to consider set-off if this would unduly protract the proceedings. Typically, therefore, there would be a procedural provision allowing the judge to deal separately with principal claim and crossclaim and to give a provisional judgment on the principal claim. But this solution would appear to be awkward, and somewhat impractical, in that a claimant who wants to enforce the provisional judgment would run the risk that this step may later turn out not to have been based on a valid title, with the consequence that the claimant might have to repay the amount obtained and pay damages. The claimant, in other words, does not really have a secure and useful title yet - a point which is hardly likely to prompt the defendant to tender payment. (3) Judicial Discretion

The Principles therefore adopt a third approach which can, essentially, be regarded as a compromise between the first two. If the cross-claim cannot be

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readily ascertained, the judge is empowered to adjudicate upon the principal claim without taking account of the set-off declared by the defendant, provided that the principal claim is otherwise ready for adjudication. The judge is thus given a discretion and will have to take account of all the circumstances of the case, such as the probable duration of the proceedings concerning both principal claim and cross-claim, or the effect of a delay on the claimant. In the exercise of this discretion, the judge will, however, have to distinguish two cases. (a) If principal claim and cross-claim arise from the same legal relationship, the judge will not normally deal only with the principal claim but will deal also with the cross-claim and consider the issue of set-off. The Principles establish a factual presumption that the interests of the creditor of the principal claim are not normally prejudiced in this situation. (b) If principal claim and cross-claim do not arise from the same relationship, the decision will normally go the other way: Commercial predictability and fairness demand that a party who has an ascertained claim should not be held up in pursuing this claim. If the judge decides to adjudicate upon the principal claim, the judgment is not merely of a provisional nature. The decision rests solely on the merits of the claimant's claim which the judge regards as being unaffected by the declaration of set-off. As a result, the declaration of set-off must be regarded as ineffective. The defendant's claim will therefore have to be pursued independently.

B. Right to Withhold Performance The problems analysed above do not arise in situations where the defendant can make use of a right to withhold performance in terms of Article 9:201. In these cases the (principal) claim is not ready for adjudication.

NOTES 1.

"Liquidity" as a Requirement for Set-Off FRENCH and BELGIAN law as well as the law of LUXEMBOURG regard liquidite as a substantive requirement of set-off which, moreover, applies not only to the cross-claim but also to the principal claim (CC art. 1291, on which see, for France, Terre, Simler, Lequette n. 1299 and Kegel, Aufrechnung 160 ff., and for BELGIUM, Cornelis, Algemene theorie n. 672). For ITALY, see CC art. 1243 (on the interpretation of which cf. Perlingieri, Estinzione 294; Di Prisco 321; for the meaning of liquidity, cf. Cass.Civ. 22 April 1998, n.4073); for SPAIN, see CC art. 1196 (4). This must be seen against the background of the ipso iure effect of set-off in French law: unless the principal claim and the cross-claim are easily ascertainable it would be impossible to say whether, and to what extent, they have been discharged. But the requirement of liquidite also gives rise to a number of problems, so that in French practice it has been modified considerably. On the one hand, the judge is granted some leeway in determining whether the claim is sufficiently certain in order to be treated as liquid and thus capable of being taken into account for purposes of set-off. (For ITALY see, most recently, Cass.Civ. 16 November 1996, n. 10065; Cass.Civ. 1 February 1995, n. 1114.) On the other hand, and more importantly, the device of compensation judicia ire may be resorted to, provided the defendant asserts the cross claim by way of cross-action (demande reconventionelle). The legal nature of compensation judiciaire is disputed, but since the judge may decide to deal with both actions at one and the same time, and to give judgment for the balance, it has at least the practical effect of set-off. On

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compensation judiciaire, see Terre, Simler, Lequette n. 1313; Kegel, Aufrechnung 10 f.; Camelis, Algemene theorie n.680; Kruithof, de Ly, Bocken & de Temmerman 711; Bianca IV, n.257. Despite the fact that set-off does not take effect ipso iure in SCOTLAND, there is nonetheless a requirement ofliquidity under the Compensation Act 1592: the debt to be used for set-off must be certain in amount, presently payable and not disputed: McBryde 25.40 ff.; Wilson 13.5. According to ENGLISH law, claim and cross-claim must be liquidated or ascertained at the time of pleading (Hanak v. Green [1958] 2 All ER 151 at 145; Stooke v. Taylor [1880] 5 QBD 569 at 575). However, this only applies to statutory set-off (i.e. in situations where claim and cross-claim arise from unconnected transactions). For IRELAND, see Walek v. Seafield Gentex [1978] I.R. 167. The position is generally as for England. The Procedural Approach Even in France, therefore, the emphasis has shifted from substantive law to procedure. The path towards a procedural solution (mapped out by Justinian and the Glossators and subscribed to by the pandectist authors; see Demburg 554 ff.) has been followed in GERMANY by the draftsmen of the BGB. Liquidity of the cross-claim is not a requirement for set-off (see von Kabel 1092; the same view is usually advocated today, in spite of ABGB § 1439, for AUSTRIAN law: see Koziol- Welser II, 102; Dullinger 90 ff.; Reiterer 38 ff.; for a comparative evaluation, see Kegel, Aufrechnung 158 ff.). The draftsmen of the BGB could refer to two provisions in the Civil Procedure Act (which have been preserved, essentially unchanged, until today) according to which the Court may decide to deal separately with principal claim and cross-claim (as long as both do not arise from the same legal relationship) and that a provisional judgment may be given, under these circumstances, concerning the principal claim (ZPO §§ 145(3), 302). There is also no requirement that the cross-claim be ascertained in FINLAND: Halila & Ylostalo 58 ff. and in PORTUGAL: CC art. 847, n. 3. Judicial Discretion A compromise approach is adopted in the NETHERLANDS: the judge may adjudicate upon the claim without taking account of the set-off declared by the defendant, if it cannot easily be determined whether that defence is well founded, and if the claim is otherwise ready for adjudication: BW art. 6:136, on which see Parlementaire Geschiedenis 509 f. and Asser-Hartkamp Verbintenissenrecht I, nn. 550 ff. The solution proposed in the present article is also accepted by GREEK doctrine: see Balis 442 ff.; Georgiadis 497. DANISH law does not require liquidity as a condition for substantive law but the courts will not allow set-off if it prejudices the interests of the other party (see §§ 249(2) and 253 of the Code of Procedure). It is uncertain whether there is a presumption that the other party's interest will not be prejudiced if both claims arise from the same legal relationship; see Supreme Court, Ugeskrift for Retsvaesen 1970, 599. Here the court held that a landlord had been entitled to evict the tenant for not having paid rent even though the tenant claimed to have paid more than the required rent and to be entitled to repayment of some rent. The tenant's claim for repayment was to be tried by another court. In IRISH law the judge is given an over-arching discretion, if the plaintiff applies before the trial (Sheehan v. National Bank [1937] I.R. 783), to refuse the defendant permission to use a set-off or counterclaim if it cannot be conveniently disposed of in the pending action, or ought not to be allowed for special reasons. See also Rohan Construction Ltd. v. Antigen Ltd. [1989] I.L.R.M. 783.

Article 13:103: Foreign Currency Set-Off Where parties owe each other money in different currencies, each party may set off that party's claim against the other party's claim, unless the parties have agreed that the party declaring set-off is to pay exclusively in a specified currency.

COMMENT

A. Set-Off Not Prevented It is doubtful whether debts in different currencies are "of the same kind" in terms of Article 13:101 and whether they may thus be set off against each

Article 13:103: Foreign Currency Set-Off 147

other. The Principles have taken their lead from Art. 8(6) of the EU-Regulation on the Introduction of the Euro, no. 974/98 of 3 May 1998 (OJEC 1998, 139/1) which came into force on 1 January 1999. In terms of this regulation, the Euro has become the uniform denomination for those countries that have joined the monetary union. For a transitional period (until 31 December 2001) the former national currencies were regarded as sub-units of the Euro. As a result, set-off was no longer prevented, within the Euro-zone, as a result of the fact that the obligations were expressed in different currencies. This should also be the rule with respect to other currencies. It is in line with the modern view increasingly adopted in the national legal systems since it facilitates set-off without unduly prejudicing the reasonable interests of the creditor of the principal claim. The free availability of foreign currency set-off may possibly encourage speculation on fluctuation of the money markets. However, this very fact will normally induce the party most likely to lose out as a result of such fluctuation to give notice of set-off as soon as possible. Since 1 January 2002 the issue of conversion no longer arises within the Euro-zone. Illustration: A has to pay B a sum of £10,000 for the delivery of a machine. Payment is due on 10 October. On 20 October a claim of A against B for payment of €40,000 arising under a loan agreement becomes due. As from 20 October (i.e. the due date of the cross-claim), A may effect set-off by giving notice of set-off to B.

B. Exchange Rate Article 8(6) of the Euro Regulation states that any conversion has to be effected "at the conversion rates". "Conversion rate" is defined in Article 1 of the Regulation as "the irrevocably fixed conversion rate adopted for the currency of each participating Member State by the Council according to Article 109 I (4) first sentence (now Art. 123(4) first sentence) of the EC-Treaty". As far as other currencies are concerned, the rate of exchange to be applied should be the unified rate if there is such rate; if not, it should be the buying rate for the currency of the claim against which set-off is declared.

NOTE A straightforward solution was the one traditionally adopted in ENGLISH law where foreign currency debts were always converted to pounds sterling at the rate of exchange of the date when they fell due. In the 1975 case of Miliangos v. George Frank (Textiles) Ltd. [1976] A.C. 443 (H.L.), however, it was held that an English court may give judgment for a sum of money expressed in a foreign currency and that conversion will normally take place at the date when the Court authorises enforcement of the judgment in pounds sterling: Derham 130 ff. This applies to statutory set-off; the position with regard to equitable set-off still appears to be unclear: Derham 131 ff.; cf. also the detailed discussion by Wood 11-1 ff. on foreign currency debts in the context of set-off in general. IRISH law generally follows English law on this matter. Contrary to England, Ireland has however joined the monetary union within which the problem no longer arises. SCOTTISH law follows Miliangos: see Commerzbank Aktiengesellschaft v.

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Large 1977 SC 375. According to the prevailing opinion in GERMAN law, debts in foreign and domestic currency are never "of the same nature". Set-off can consequently only be effected if the parties have so agreed: see, e.g., Miinchener Kommentar (- von Feldmann) § 387, n. 16. The same view is held in PORTUGAL: Varela II, 205. There are good reasons for regarding this view as outdated: Gernhuber 238 ff. (conversion at the date of set-off). FRENCH and BELGIAN legal writers incline towards accepting set-off of debts in different currencies, except where they are not convertible: Malaurie & Aynes no. 123 (for France) and Cornelis, Algemene theorie n.671 (for Belgium); for the NETHERLANDS, see BW art. 6:129(3) and Asser-Hartkamp, Verbintenissenrecht I, n. 534; for ITALY, the possibility of setting off claims in different currencies implicitly results from the rules on payment of pecuniary obligations (CC arts. 1278 ff.); for AUSTRIA, see Rummel(-Rummel) § 1440, n. 2 (set-off concerning debts in foreign currencies is possible, unless effective payment (EfJektivzahlung) has been agreed upon); for GREECE, see Stathopoulos, Obligations, 547, n. 24 (obligations in different currencies are "of the same kind" and they may therefore be set-off against each other, provided they can be converted to the same currency); for DENMARK, see Gomard III, 184 (set-off permissible also when the claims are payable in different currencies; an exception is possibly made when one of the currencies is not convertible); for FINLAND see Aurejiirvi & Hemmo 185 (claims in different currencies are not regarded to be of the same kind; however, according to art. 7 of the Promissory Notes Act, the debtor may choose to pay a debt in the currency of the place where payment is due - unless there is an agreement to the contrary - and a debtor who has this choice may also use it in the case of set-off); for a comparative survey, see Wood 24-34. On the legal nature of a foreign currency debt, see Staudinger (-K. Schmidt) § 244, nn. 11 ff.; Grothe 558 ff.; Dullinger 78 ff.

Article 13:104: Set-Off by Notice The right of set-off is exercised by notice to the other party.

COMMENT

A. The Requirement of Notice An informal, unilateral, extrajudicial declaration to the other party is sufficient to declare set-off; see Art. 1:303 for the requirements of notice. If the matter subsequently comes to court, the judgment has a merely declaratory effect: it does not bring about the set-off but merely confirms that it has been brought about. Since a declaration of set-off has the effect of discharging the two obligations as far as they are coextensive (Article 13:106), it has a direct impact on the legal relationship between the parties. Like other such unilateral rights to alter a legal relationship it cannot be subjected to a condition or time clause (dies). Thus, in particular, it is not possible for a debtor, if all requirements for set-off are met, to declare set-off as from some future date (deferred set-off). On the other hand, however, a debtor whose claim is not yet due may declare set-off, but such declaration only takes effect when the claim has become due (declaring set-off early). B. Set-Off by Agreement It goes without saying that the parties may, alternatively, effect set-off by agreement. This follows from the general recognition of freedom of contract.

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149

In the case of set-off by agreement the parties may derogate from the requirements of set-off, as proposed in these Principles. Usually, in fact, the parties resort to set-off by agreement if one or other of the normal requirements for set-off is not met. An agreement for a current account implies that the debits and credits will be set off against each other at each balancing of the account.

NOTES 1.

2.

Set-Off by Notice and Automatic Set-Off Since the days of the Glossators two different approaches have been vying with each other in continental Europe (see Zimmermann, Obligations 760 ff.). The one takes its cue from texts like Inst. IV, 6, 30 (... ut actiones ipso iure minuant, ... that the actions should be automatically reduced), the other is based on texts which appear to indicate that set-off has to be raised, or declared. This difference is still reflected in modern legal systems. The first approach finds its clearest expression in art. 1290 of the FRENCH CC: as soon as two obligations capable of being set off against each other confront each other, both of them are extinguished ipso iure. French courts and legal writers have not, however, found it practical to implement this regime in its most literal and uncompromising form. Set-off is only held to be effective if the defendant raises it in court: see, e.g., Terre, Simler, Lequette no. 1311. Strictly speaking, therefore, the automatic discharge of the two obligations confronting each other is subject to a requirement that the defence of set-off be pleaded in court. This regime has also been adopted in LUXEMBOURG, and, at least at first blush, in SPAIN (see CC art. 1202 and art. 543, old Ley de Enjuiciamento Civil) and ITALY (CC art. 1242(1». The position in SCOTLAND is similar but not identical: set-off must be pleaded in court and sustained by judgment before it has effect (McBryde 25.54; Wilson 13.6). The IRISH approach appears to be similar. See Supreme Court of Judicature (Ireland) Act. s. 27(3) and the Rules of Supreme Courts 0.12 R.7. To raise a set-off of deduction a tenant, in an action by the landlord for rent, must give notice to the landlord (see Deale 42). In BELGIUM neither courts nor legal writers follow the French approach. The second of the approaches mentioned above has found its way into the GERMAN Civil Code: set-off has to be asserted by an extrajudicial, informal and unilateral declaration to the other party (BGB § 388, and see von Kabel 1075 ff.).1t has been followed in AUSTRIAN law (in spite of the fact that ABGB § 1438 would appear to endorse the ipso iure effect of set-off; see Koziol- Welser II, 102 ff.; Dullinger 96 ff.), in GREECE (CC art. 441, on which see Stathopoulos, Obligations n. 241), in PORTUGAL (CC art. 848, n. 1, and see Varela II, 214 ff.) and in the NETHERLANDS (BW art. 6:127, on which see Asser-Hartkamp, Verbintenissenrecht I, n. 530). It also enjoys widespread support in ITALIAN (Bianca IV, 494, Perlingieri, Estinzione 280 and Cian, (1998) 6 ZEuP 220 ff.) and SPANISH law (Diez-Picazo II, 4th edn 554 ff.). SWEDISH, DANISH and FINNISH law also recognise set-off by notice (Lindskog, Kvittning 533 ff., 526 ff.; Gomard 111,182 and 184; Aurejiirvi & Hemmo 183). Set-Offby Agreement All legal systems allow set-off by agreement (contractual set-off); ENGLAND (and, following English law, IRELAND): Derham 540 ff.; SCOTLAND: McBryde 25.54; Wilson 13.6; GERMANY: Gernhuber 326 ff.; AUSTRIA: Dullinger 259 ff., Rummel(-Rummel) § 1438, nn. 31 ff.; GREECE: Georgiadis 493; DENMARK: Gomard III, 219; SPAIN: Diez-Picazo II, 4th edn 538; Rojo Ajuria 58 f.; Supreme Court, STS 14.6.1971; 7.6.1983; 2.2.1989; PORTUGAL: Varela II, 227 f.; comparative overview in Wood 24-43 ff. Cf. also the comprehensive monograph by Berger. On compensation conventionelle, or facultative, in FRANCE, see Terre, Simler, Lequette n. 1312; in BELGIUM, see Cornelis, Algemene theorie nn. 681-685; in LUXEMBOURG, see Cour d'Appel of 17 March 1999, Pas. Lux., vol. 31, 129. For ITALY, see CC art. 1252 (compensazione voluntaria). On set-off in current account relationships see Wood 3-1 ff. (ENGLAND);

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Berger 173, 285 If. (GERMANY); BW art. 6:140 (NETHERLANDS); Parlementaire Geschiedenis 517 If. and Wood 24-36 If. (comparative).

Article 13:105: Plurality of Claims and Obligations

(1)

(2)

Where the party giving notice of set-off has two or more claims against the other party, the notice is effective only if it identifies the claim to which it relates. Where the party giving notice of set-off has to perform two or more obligations towards the other party, the rules in Article 7: 109 apply with appropriate adaptations.

COMMENT The party giving notice of set-off may have two or more claims against the other party, or may be exposed to two or more claims of that party, or both. Where the party giving notice has two or more claims, that party has to identify the claim, or claims, to which the notice of set-off relates. If this is not done, the notice of set-off is invalid for being insufficiently specific. However, it is not necessary expressly to identify the claim, or claims, to which the notice of setoff relates; the intention of the party giving notice of set-off may be inferred in accordance with the rule of Article 2:102. If no such intention may be inferred, it must be the party giving notice of set-off who has to bear the risk of uncertainty. Set-off constitutes a form of enforcement of the cross-claim and a creditor who has several claims against a debtor must always be sufficiently specific as to which of the claims is being enforced. Illustration 1: A has three claims for €30 each against B. B has a claim for €300 against A. All claims are enforceable. A gives notice of set-off. A has to identify the claim to which the notice of set-off relates. If this is not done, the notice of set-off is invalid.

Where the party giving notice of set-off is exposed to two or more claims of the other party, the party giving notice is in the position envisaged in Article 7:109. Since giving notice of set-off is a means of discharging an obligation, the rules provided in that Article should apply with appropriate modifications. This means that, subject to Article 7:109(4), the determination by the party declaring set-off is decisive. If that party fails to determine to which of the obligations the notice of set-off relates, the other party may make the determination in accordance with Article 7:109(2). Failing determination by either party, the sequence indicated in Article 7:109(3) applies. In a number of national legal systems, the party receiving the notice of set-off is given the right to object, without undue delay, to the determination made by the party giving notice of set-off, provided the objecting party is in a position to give notice of

Article 13:106: Effect of Set-Off 151

set-off. This rule is based on the consideration that the issue of appropriation, in the context of set-off, should not depend on which of the parties happens to give notice of set-off first. The provision in these Principles, on the other hand, is based on the desire to encourage set-off. Illustration 2: The situation is the same as in Illustration 1, but B gives notice of set-off. B may determine which of A's three claims is discharged. If B fails to make such determination, A may within a reasonable time make such determination and inform B of the choice. Failing that, the criteria provided in Article 7:109(3) apply in the sequence indicated in that Article.

NOTE The regime prevailing most widely in Europe can be summarised as follows: If either of the parties has several claims suitable for set-off, the party giving notice of set-off may determine which of these claims are to be set off against each other. If no such specification is given, or if the other party objects without undue delay, the general rules relating to appropriation of performance apply with appropriate modifications; GERMANY: BGB § 396; the NETHERLANDS: BW art. 6:137 and see Parlementaire Geschiedenis 512 ff.; AUSTRIA: Rummel(-Rummel) § 1438, n.l7; GREECE: CC art. 452; SCOTLAND: Wilson 13.6; PORTUGAL: CC art. 855. In legal systems where set-off operates automatically, the first part of this proposition does not, of course, apply and the rules relating to the appropriation of performance (with appropriate modifications) apply immediately; FRANCE, BELGIUM and LUXEMBOURG: CC art. 1297; ITALY: CC art. 1249; SPAIN: CC art. 1199.

Article 13:106: Effect of Set-Off Set-off discharges the obligations, as far as they are coextensive, as from the time of notice.

COMMENT A. No Retrospective Effect

Set-off does not operate retrospectively. It merely has prospective effect: it is effective as from the moment when all substantive requirements for set-off have been met and when the notice of set-off has become effective. Generally speaking, therefore, the situation has to be evaluated as if both obligations had been paid at the moment when set-off was declared. This has the following consequences.

B. Interest Interest (on both obligations) runs until set-off has been declared. It may therefore be advantageous to the party paying the higher rate of interest to declare set-off on becoming aware of this possibility.

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C. Delay in Payment Concerning delay in payment, the position is as follows. If B under a contract of sale has to pay A a sum of €100,000 on 10 October and fails to pay on that date, B would normally have failed to perform without excuse under Article 8:108. A has the option of claiming performance, of claiming damages, or of terminating the contract. If B fails to declare a set-off or only subsequently becomes aware of the fact that there is a claim against A for the same amount, this does not condone B's breach on 10 October. D. Agreed Payment for Non-Performance Whether an agreed payment for non-performance has become due from a party who has not exercised the right to give notice of set-off, depends on the interpretation of the relevant clause. Normally, the agreed sum will have to be paid. Illustration 1: A has to pay back a sum of€1O,000, which he had borrowed from B, by 10 October. The parties have agreed that A has to pay an extra amount of €2000 if he fails to return the money by that date. On 1 September A inherits from his aunt C a claim of €30,000 against B. He only realises that on 20 December and declares set-off. Since A has failed to make payment on 10 October, B may claim the agreed sum of €2000.

E. Payment Made after Set-Off If payment is made after set-off has been declared it may be reclaimed (under

most laws on unjustified enrichment) since it is payment of what is not due (i.e. there has been a performance without legal ground). If it was made before the declaration of set-off, it has had the effect of discharging the obligation and thereby removing the mutuality requirement for set-off. Thus, there is no particular problem about restitution. F. Prescription of Cross-Claim On the effect of prescription on the right to declare set-off, see Article 14:503. G. Discharge Only asfar as the Obligations are Coextensive Set-off discharges the obligations only as far as they are coextensive. This means, as far as monetary obligations are concerned, that they are discharged only to the extent of the smaller one. Illustration 2: A has a claim of €1O,000 against B, B has a claim of €5000

against A. Notice of set-off by either A or B leads to the result that A's obligation is discharged entirely, whereas B still owes A €5000. H. Set-Off of Part of the Cross Claim The party declaring set-off may set off only part of the claim against the other party. The remaining part of the claim will then not be discharged.

Article 13:106: Effect of Set-Off 153 NOTES 1.

2.

Automatic Effect and Retrospectivity Wherever set-off is effective ipso iure (FRANCE, SPAIN, BELGIUM, LUXEMBOURG), it operates although the parties have no knowledge of it. But even most legal systems which require a notice of set-off attribute retrospective effect to that notice: Set-off has the effect that the claims, as far as they are coextensive, are deemed to have been discharged at the moment at which, being suitable for set-off, they first confronted each other. This is the rule adopted in GERMANY (BGB § 389), AUSTRIA (Dullinger 96 ff.), GREECE (CC art. 441), the NETHERLANDS (BW art. 6:129 and Asser-Hartkamp, Verbintenissenrecht I, n. 538) and PORTUGAL (CC art. 854 and Varela II, 224 ff.). The position is the same in ITALY where set-off extinguishes both obligations "dal giorno della loro coesistenza" (CC art. 1242(1)) but where, nonetheless, according to prevailing opinion, a declaration of set-off is required before the set-off can be taken into account (Bianca IV, 494; Perlingieri, Estinzione 273 ff.; Cian, (1998) 6 ZEuP 220 f.). Set-off in SCOTLAND (which must be pleaded in court and sustained by judgment before it has effect) also operates retrospectively: McBryde 25.55; Wilson 13.6. Both approaches largely lead to the same practical results. Thus, in particular, it is generally accepted that interest no longer accrues (and where it has been paid it may be reclaimed by means of the condictio indebiti; but cf., for the NETHERLANDS, BW art. 6:129(2)), that neither party can be held to have been in delay (mora debitoris), and that conventional penalties have not become exactable; GERMANY: Gernhuber 309 ff.; ITALY: Cian-Trabucchi art. 1242, II; the NETHERLANDS: Asser-Hartkamp, Verbintenissenrecht I, n.538 and also BW art. 6:134; AUSTRIA: Rummel(Rummel) § 1438, n. 14. Where a debtor has paid the debt even though it had already been discharged by way of setoff, according to FRENCH and BELGIAN law and the law of LUXEMBOURG the debtor is granted the condictio indebiti only if there was a just cause for not knowing of the claim on account of which the obligation had been discharged (CC art. 1299). In GERMANY, the question has for a long time been disputed (see, e.g., Dernburg 587 ff.); the prevailing view today is that a person who has paid without realising that notice of set-off could have been given cannot make a successful unjustified enrichment claim (Gernhuber 288 ff.; for AUSTRIA, see Rummel(-Rummel) § 1438, n. 15 who, however, records a number of dissenting authors; for ITALY, see Cian- Trabucchi art. 1242, I; cf. also the discussion by Dullinger 162 ff.). In SPAIN, modern writers maintain that a debtor who has paid without realising that there is an enforceable claim against the creditor cannot take advantage of the condictio indebiti (in spite ofthe fact that CC art. 1202 seems to adopt the ipso iure effect of set-off): Dfez-Picazo II, 4th edn 554. Prospective Effect The only legal systems in Western Europe which rely on an informal declaration of set-off but which do not attribute retrospective effect to it are the Nordic ones; for SWEDEN, see Lindskog, Kvittning 533 ff., 526 f.; for DENMARK, see Gomard III, 207; for FINLAND, see Aurejtirvi & Hemmo 183. Somewhat surprisingly, in view of this, Swedish and Finnish law also know a rule which mirrors BGB § 390(2) [see now § 215 since 1 Jan. 2002] ("Prescription does not exclude set-off, if the claim barred by prescription had not prescribed at the time at which it could have been set-off against the other claim"): Preskriptionslag § 10; Decree on Prescription 1868 § 5. It does not correspond with the general prospective effect of set-off in Swedish law and is therefore the subject of criticism: Lindskog, Kvittning 115 ff.; for DENMARK, see Gomard III, 207. However, for claims arising from the same legal relationship set-off, in certain respects, operates retrospectively. Interest will not accrue from the moment when the two claims could have been set off against each other; also set-off is not excluded if the cross-claim had prescribed before the notice of set-off was given; see Supreme Court, Ugeskrift for Retsvaesen 1956,977; Gomard III, 207. ENGLISH (and probably also IRISH) law also merely attributes prospective effect to setoff: it takes effect on and from the date of judgment. In GERMANY and AUSTRIA, retrospectivity has recently come in for criticism: see Bydlinski, (1996) 196 AcP 281 ff.; Dullinger 174 ff., 182 ff.; Zimmermann, Fs. Medicus 721 ff. It is not based on convincing rational arguments but rather constitutes an unreflected continuation of a thinking pattern of the ius commune, based

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upon Justinian's obscure pronouncements on the ipso iure effect of set-off (Inst. IV, 6, 30; cf. also C. 4, 31,14; and see Zimmermann, Fs. Medicus 724; Pichonnaz, (2000) 68 TR 541 ff. Prospectivity appears to be the more natural rule and leads to entirely satisfactory results.

Article 13:107: Exclusion of Right of Set-Off

Set-off cannot be effected: (a) (b) (c)

where it is excluded by agreement; against a claim to the extent that that claim is not capable of attachment; and against a claim arising from a deliberate wrongful act.

COMMENT A. Exclusion by Agreement Following the general principle of freedom of contract, the right of set-off may be excluded by agreement, provided that the general limitations on private autonomy (e.g. the rules dealing with unfair standard terms such as Article 4:110 of these Principles) are observed. It is a question of interpretation whether an agreement to exclude set-off refers only to claims arising from a specific legal relationship or to all claims between the parties.

B. Claim not Capable of Attachment Set-off should not deprive a person of claims (such as those for maintenance or wages) which provide a minimum level of subsistence. The simplest, most appropriate and most comprehensive way of dealing with this issue is to prohibit set-off to the extent that the principal claim is not capable of attachment. Whether, and to what extent, the principal claim is capable of attachment is decided by the law applicable to that issue. C. Claim Arisingfrom a Deliberate Wrongful Act

A creditor who is unable to collect what is due may be tempted to resort to self-help. The usual textbook example of a disappointed creditor feeling free to assault the debtor (secure in the knowledge that he will be able to set off his unpaid claim against the debtor's claim for damages) may not appear to be practically relevant. More realistic is the situation where the creditor holds some object belonging to the debtor and proceeds wrongfully to sell that object in order to satisfy the debt out of the proceeds. In those legal systems which do not allow the attachment of claims arising from delict, paragraph (b) of the Article would already have the effect of excluding set-off. D. Liability for Unpaid Calls In some national legal systems it is regarded as desirable to prohibit contributories to a company from setting off the company's debt to them against their

Article 13:107: Exclusion of Right of Set-Off 155

liability for unpaid calls. Such a rule serves to safeguard the interest of the company's creditors in the undiminished capital fund of the company but belongs in company law rather than in the general rules on set-off.

NOTES 1.

2.

3.

4.

Exclusion by Agreement It is recognised everywhere that set-off may be excluded by contract; ENGLAND: Derham 140 ff.; IRELAND: Hegarty & Sons Ltd. v. Royal Liver Friendly Society [1985] I.R. 524; SCOTLAND: McBryde 25.54 and 25.58, Wilson 13.6; FRANCE: Starck, Roland & Boyer n. 347; BELGIUM: Cornelis, Algemene theorie n.678 (p.879 bottom); LUXEMBOURG: Cour d«Appel, 1 October 1963, Pas. Lux. vol. 19,209; PORTUGAL: Varela II, 198; GERMANY: Gernhuber 274 ff.; ITALY: Bianca IV n. 251; NETHERLANDS: Asser-Hartkamp, Verbintenissenrecht I, n. 531; AUSTRIA: Koziol-Welser II, 103; Rummel(-Rummel) § 1440, n.29; SCOTLAND: McBryde 25.58 f; SWEDEN: Lindskog, Kvittning 303 f.; DENMARK: Gomard III, 196 (exceptions apply with regard to leases of land and consumer contracts where the tenant's and the consumer's right to set-off cannot be excluded); FINLAND: Aurejarvi & Hemmo 192. According to the GREEK CC art. 450(2) the debtor may waive in advance - even unilaterally - the right of set-off. Claim not Capable of Attachment Nearly all legal systems also ensure that set-off should not be allowed to deprive a person of claims which provide a minimum level of subsistence; FRANCE and BELGIUM: CC art. 1293, n. 3, Terre, Simler, Lequette n. 1302 (for France) and Cornelis, Algemene theorie n. 674 (for Belgium); GERMANY: BGB § 394 and Gernhuber 261 ff.; ITALY: CC art. 1246, n. 3 and Bianca IV, n. 251; the NETHERLANDS: BW art. 6:135(a) and Asser-Hartkamp, Verbintenissenrecht n. 552; SPAIN: CC art. 1200(2); PORTUGAL: CC art. 853, n.1-b (except where both claims are not capable of attachment); AUSTRIA: Koziol-Welser 11,103 and Dullinger 121 ff.; GREECE: CC art. 451; SWEDEN: Lindskog, Kvittning 247 ff., 283; DENMARK: Gomard III, 196; FINLAND: Aurejarvi & Hemmo 192 ff.; concerning ENGLISH (and probably IRISH) law, see Wood 12-04 ff. Claim Arisingfrom a Wilful Delict The rule concerning wilful delicts (dating back to C. 4, 31, 14,2; on which see Dernburg 511 ff.) is found, in some form or other, in many legal systems. The FRENCH and BELGIAN CCs contain a fairly literal version of the Roman rule: set-off may not take place as far as concerns a claim for restitution of an object of which the owner was unlawfully deprived: CC art. 1293, n. 1 and Terre, Simler, Lequette n. 1302; cf. also for ITALY CC art. 1246, n. 1; and, for AUSTRIA, ABGB § 1440. The GERMAN BGB has generalised the underlying idea: set-off is not permissible against a claim arising from a wilful delict: BGB § 393 and Gernhuber 259 ff.; rules along the same, or very similar, lines can be found in the NETHERLANDS (BW art. 6:135(b)); PORTUGAL (CC art. 853, n.1-a); GREECE (CC art. 450(1)); SWEDEN (Lindskog, Kvittning 258 ff.) and FINLAND (Supreme Court 1969 II 90 and 1995: 196). ENGLISH and IRISH law do not have this rule; but see Wood 12-127 ff. for certain "latent expressions" of it. Liability for Unpaid Calls Most legal systems prohibit contributories to a company from setting off the company's debt to them against their liability for unpaid calls, though there are a number of differences in detail. But this is widely seen to be a matter of company law. For ENGLAND: Wood 12-127 ff. and Derham 250 ff.; for GERMANY: Gernhuber 270 ff.; for AUSTRIA: Rummel(-Rummel) § 1440, n.28.

CHAPTER 14

Prescription Section 1: General Provision

Article 14:101: Claims subject to Prescription

A right to performance of an obligation ("claim") is subject to prescription by the expiry of a period of time in accordance with these Principles.

COMMENT A. Terminology and Meaning of Prescription

In traditional civilian terminology the term "prescription" comprehends (i) the acquisition of title to property as a result of the lapse of time ("acquisitive prescription") and (ii) the loss of a right as a result of the lapse of time ("extinctive prescription"). Predominantly, however, the combination of both types of prescription under one doctrinal umbrella is no longer regarded as helpful since they are largely governed by different rules. These Principles deal only with the latter type of prescription. The term "extinctive" prescription, however, is incorrect in the present context because, under the Principles, the right is not extinguished. It continues to exist but the debtor is granted a right to refuse performance; see Article 14:501(1). More appropriate, though not very descriptive, is the terminology of Scottish law ("negative prescription"). An alternative would be "liberative prescription". Another possibility would be "limitation of claims", i.e., a transposition into terms of substantive law of the English concept of "limitation of actions". For the sake of simplicity and since these Principles do not deal with acquisitive prescription the term "prescription" is generally used without any qualifying adjective. In the Articles the term "prescription" refers to the legal effect on the claim of the lapse of time. Prescription occurs at a precise moment. The term "period of prescription" refers to the period on the expiry of which prescription occurs.

B. Prescription of Claims Central to the institution of prescription is the notion of a "claim". It is a notion used elsewhere in the Principles and means a right to performance of an obligation. (See the Introduction § 5.) Prescription is thus conceived as an 157

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institution of substantive law: because of the lapse of time the debtor is entitled to refuse performance. If the debtor does so, the creditor effectively loses the right to demand performance. As a result, of course, the creditor can no longer pursue the claim in court. But prescription does not only limit the right to bring an action: it bars the actual right to receive performance. Thus, for instance, where a debtor invokes prescription against a demand to pay, and where all requirements for prescription are met, the debtor is no longer delaying payment in terms of Article 9:508 of these Principles and therefore no longer suffers the consequences of that rule. Since prescription applies only to claims, it does not affect a party's right to give notice of avoidance (Article 4:112), to terminate the contract (Article 9:301), or to affect a legal relationship in any other way. Such rights must be exercised "within a reasonable time". This is provided in special rules such as Article 4:113 and Article 9:303(2). (On such special time limits, see also D, below.) C. Right to Withhold Performance and Right to Reduce the Price

A right to withhold performance (such as the one laid down in Article 9:201) is also not subject to prescription. This means that a right to withhold performance is still available even if the prescription period for the claim on which it is based, has run out. Illustration: A has sold a car to B. The car has to be delivered on 10 October 1996, the purchase price has to be paid on 10 December of the same year. The prescription period for both claims is three years. After three years, B has still not received the car. If B sues A for the car after 10 October, A can raise the defence of prescription. If A, in turn, sues B for the purchase price on 10 November, B may exercise the right to withhold performance in terms of Article 9:201; it remains unaffected by the prescription of B's own claim against A. After 10 December, B can raise the defence of pre scription against A's claim.

The right to reduce the price set out in Article 9:401 is also not subject to prescription. If a party, as a result of having accepted a performance not conforming to the contract, has such a right of reduction, it may be exercised when the other party demands payment. The right to payment itself, of course, is subject to the normal rules of prescription. If the party entitled to reduce the price has already paid a sum exceeding the reduced price, the excess may be recovered from the other party (Article 9:401(2)). This right to payment of the overpaid amount is subject to the normal rules of prescription. D. Range of Application This Chapter applies not only to contractual claims but also to other rights to performance. It would be unjustifiable in theory, and productive of difficulty

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and inconvenience in practice (see the comments to Article 14:201) to apply the rules on prescription only to some rights to performance. On the other hand, it does not appear to be advisable to cover other types of asset or right, such as property rights or the right to marry or the right to be an heir or executor. Here we are often dealing with the protection of absolute rights (such as the right of ownership). If they were subject to prescription, this would entail a considerable, and arguably unjustifiable, qualification of the absolute right. Thus, it may be maintained that claims arising from absolute rights should only perish with the absolute right itself. Also, within the law of property there will have to be a careful co-ordination with the law of acquisitive prescription, or usucaption. At the same time, the law on rights to performance of obligations is a sufficiently broad and distinct area of the law to warrant a special set of rules. The comparative evidence points in the same direction: most modern prescription regimes apply, expressly or at least effectively, to the law of obligations. The Principles contain a number of time limits (see Article 2:206, on the time limit for acceptance; Article 4:113, on the time limit for notice of avoidance; Article 9:303(2) on the time limit for notice of termination and Article 9:102(3) on the time limit for the right to seek specific performance). These time limits do not constitute prescription periods. However, some of the rules contained in this Chapter (e.g. Article 14:303) express policies which are also relevant in assessing whether an acceptance has been declared, or a notice for avoidance or of termination has been given, or specific performance has been sought, "within a reasonable time" from the moment set out in the relevant provisions. The rules contained in this Chapter do not rule out the possibility that a party may be barred from pursuing a claim even before the period of prescription has run out. This may be the case if the party has engendered reasonable reliance in the other party that the claim would no longer be pursued and if the decision to pursue the claim would therefore constitute a breach of the principle of good faith and fair dealing in Article 1:201. E. Underlying Policy Considerations

Prescription is based, essentially, on three policy considerations. (1) Protection must be granted to a debtor who, in view of the "obfuscating power of time" (Windscheid & Kipp § 105 (p. 544)), finds it increasingly difficult to defend an action. (2) Lapse of time demonstrates an indifference of the creditor towards the claim which, in turn, may engender a reasonable reliance in the debtor that no claim will be pursued. (3) Prescription prevents long drawn-out litigation about claims which have become stale. Thus, prescription aims, in a very special way, at legal certainty. Even well-founded claims may be defeated, but that is the necessary price a legal system has to pay for the benefits of prescription. The need for legal certainty must, however, be balanced against the reasonable interests of the creditor. Since prescription can effectively amount to an act of expropriation, the creditor must have had a fair chance of pursuing

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the claim. This consideration is taken account of, particularly, by the suspension ground provided in Article 14:301. In spite of its potential for causing harsh results in individual cases, prescription is generally regarded as an indispensable feature of a modern legal system.

NOTES 1.

2.

3.

4.

General All European legal systems recognise that rights and obligations can be affected by the lapse of time. On the history of the law of prescription, see Coing 1,183 ff.; Coing II, 280 ff.; Zimmermann, Obligations 768 ff.; Johnston 1.13 ff.; Oetker 12 ff. Substantive or procedural? The functional equivalent to liberative prescription in ENGLISH and IRISH law is limitation of actions. This is procedural in nature: limitation does not affect the right but merely the ability to pursue that right in court. This approach is by no means alien to the civilian tradition, and indeed there are still conflicting texts and views in some jurisdictions, but the prevailing doctrine today in most continental European countries is that prescription is a matter of substantive law and that the obligation itself is extinguished. See e.g. Marty & Raynaud, Obligations II, nn. 341 ff.; Ferid & Sonnenberger (1 C 246); Spiro, Begrenzung § 241; Storme, in: Hondius 47. Lipstein (n. 29) has noted that prescription in all modern European legal systems contains elements both of substantive and procedural law; cf. also Staudinger(-Peters) § 194, n. 4. The UNCITRAL Convention on the Limitation Period in the International Sale of Goods (in force 1 August 1988 but only ratified so far by 17 states, none belonging to the European Union) attempts "to sit on the fence": Smit, (1975) 23 AJCL 339; cf. also Boele-Woelki 112 ff. It uses the term "limitation" but talks of "claims" which can no longer be exercised. The qualification of prescription as substantive or procedural used to be important for private international law but the Rome Convention on the Law Applicable to Contractual Obligations has come down in favour ofa substantive characterisation (art. 10(1)(d)). Prescription of Claims but not Defences etc. Prescription of defences raises difficult problems doctrinally. Under the ius commune, defences were widely regarded as not being subject to prescription. This principle is still accepted in a number of jurisdictions; see for FRANCE, Ferid & Sonnenberger 1 C 249; for BELGIUM, Storme, in: Hondius 44; for GREECE CC art. 273. The position is, essentially, the same in ENGLAND as a result of the fact that only the remedy and not the right is barred. Most legal systems do not have a general rule, but some have specific provisions in terms of which defences may, under certain circumstances, survive prescription of the claim on which they are based. See Spiro, Begrenzung § 215; Peters & Zimmermann 266); for ITALY, see Casso 28.7.1987, n. 6542, in Giust. civ. 1988, I, 456 and the discussion in Vitucci 63 ff. Sometimes a distinction is drawn between independent defences and defences based upon a claim (for SPAIN, see STS 12.3.1965; Diez-Picazo & Gu1l6n Ballesteros, 467; Pantaliion, Prescripci6n 5009). Independent defences are not subject to prescription: others are. For GERMANY, see Miinchener Kommentar (-von Feldmann) § 194, n. 24. Generally on prescription of defences (and the effect of prescription of claims on defences), see Spiro, Begrenzung §§ 215 ff., 540. The matter of most practical relevance appears to be the right to withhold performance (cf. Article 9:201 PECL): see Peters & Zimmermann 266. According to the prevailing opinion in GERMANY, such rights can still be used as a shield, even if the claim on which they are based can no longer be used as a sword (see Staudinger (-Peters) § 222, n. 37); for PORTUGAL, see CC art. 430; for DENMARK, see Gomard III, 232; for the NETHERLANDS BW art. 6:56. Cf. also BGB-PZ § 212; BGB-KE § 222. Range of Application Most national laws give rules on prescription a wide application. The GERMAN rules relating to liberative prescription (BGB §§ 195 ff.) are based on the notion of Anspruchsverjahrung and

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5.

6.

161

cover a much wider ground than the law of obligations. For criticism, see Peters & Zimmermann 186, 287 If. The ITALIAN CC art. 2934 refers to the extinction of rights, without any qualification, but arts. 948(3) and 533(2) exempt rei vindicatio and hereditatis petitio from prescription. The PORTUGUESE prescription rules apply not only to obligations but, in principle, to any right (CC art. 298(1)). According to the AUSTRIAN ABGB § 1451, prescription leads to the loss of a "right" but the exceptions provided in §§ 1458 If. make it clear that prescription elfectively relates to claims based on an obligation. In the NETHERLANDS, the BW arts. 3:306 If. refers to rechtsvorderingen; on which concept see Asser-Hartkamp, Verbintenissenrecht I, nn. 638 If.; the same is true of BELGIUM, see CC arts. 2262 and 2262bis and Claeys, 1998-99 R.W. 386 f. Generally, see Spiro, Begrenzung §§ 334 If. For DENMARK, see art. 5.14.4 Danske Lov which refers to "instruments of debt". The Act no 274 of 22 Dec. 1908 applies to claims (fordringer). Underlying Policy Considerations For a discussion of underlying policy considerations, see Savigny 267 If.; Story n. 576; English Law Commission Consultation Paper No. 151 on Limitation of Actions, 11 If.; Andrews, (1998) 57 Camb.L.J. 590; Johnston 1.40 If.; Spiro, Begrenzung §§ 3 If.; Peters & Zimmerman, 104, 112 f., 189 f., 288 If.; Staudinger(-Peters) Vorbem zu §§ 194 If., nn. 5 If.; Asser-Hartkamp, Verbintenissenrecht I n. 653; Loubser 22 If.; Zimmermann, 2000 JZ 853 If.. Postscript: new German law As noted in the Introduction (§ 7) there have been important recent changes in the German law on prescription. These came too late to be included in this Chapter. The Comments and Notes therefore refer to the old law. This postcript is confined to some brief information and references. Generally, the main features of the new German law are similar to those of the Principles. There are, however, a number of dilferences in the details of implementing the regime. For an analysis of the new German law of prescription, see Heinz-Peter Mansel, Die Neuregelung des Verjahrungsrechts, 2002 NJW 89 If.; Heinz-Peter Mansel, Christine Budzikiewicz, Das neue Verjahrungsrecht (2002); for a detailed comparison of the new German law of prescription with the regime proposed in the present Principles, and for a critical evaluation, see Reinhard Zimmermann, Das neue deutsche Verjahrungsrecht: ein Vorbild fUr Europa?, in: Ingo Koller, Herbert Roth, Reinhard Zimmermann, Schuldrechtsmodernisierungsgesetz 2002 (2002), pp. 9 If. A "discussion draft" of the law revising the German law of obligations, published in September 2001, had proposed an entirely dilferent regime but this attracted much criticism (see, in particular, Heinz-Peter Mansel, Die Reform des Verjahrungsrechts, in: Wolfgang Ernst, Reinhard Zimmermann (eds.), Zivilrechtswissenschaft und Schuldrechtsreform (2001), pp. 333 If.; Detlef Leenen, Die Neuregelung der Verjahrung, 2001 JZ 552 If.). In the course of 2002, another commission charged with the task of revising the discussion draft elfected the change towards the model which was ultimately adopted. That commission had before it a German translation of the provisions of the Principles of European Contract Law as they had been accepted at the meeting of the Commission on European Contract Law in February 2001 in Copenhagen (they have since been slightly revised by the editorial group). The German translation was prepared by Ulrich Drobnig and Reinhard Zimmermann and was published in (2001) 9 ZEuP 400 If. The German legislature acknowledged that it had "widely taken over the model on the law of prescription as adopted by the Commission on European Contract Law": see Beschlussempfehlung und Bericht des Rechtsausschusses (6. Ausschuss), Drucksache 14/7052 (9 October 2001), p. 178; along the same lines Begriindung zum Regierungsentwurf (motivation of the government draft), Drucksache 14/6040, pp.96 and 103. This does not, however, apply to a number of details of the new law where the German law of prescription deviates from the Principles, without any critical examination of the latter; for criticism, see Reinhard Zimmermann, Detlef Leenen, Heinz-Peter Mansel, Wolfgang Ernst, Finis Litium?, Zum Verjahrungsrecht nach dem Regierungsentwurf eines Schuldrechts-modernisierungsgesetzes, 2001 JZ 684 If.

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Section 2: Periods of Prescription and their Commencement

Article 14:201: General Period The general period of prescription is three years.

COMMENT A prescription regime has to be as simple, straightforward and uniform as possible. This is why the Principles lay down a general period of prescription covering all claims arising within the law of obligations.

A. The Argument for Uniformity One of the functions of the law of prescription is to prevent costly and longdrawn out law-suits (ut sit finis litium). It would therefore be intolerable if the prescription rules themselves gave rise to excessive litigation on the question whether or not prescription had occurred in a particular case. Wherever a rule lays down a period of prescription for a specific type of claim, it is necessary to define that type of claim. The concepts used in any such definition, however, are open to interpretation. At the same time, any type of claim described in one provision will be bordering on other rules providing for different periods of prescription. Every creditor against whom the shorter of the two periods has run out will thus be tempted to argue that the claim falls under the provision with the longer period, and the courts will then have to determine where exactly the line between the two provisions must be drawn. If one of the prescription rules is regarded as objectionable, there is the added danger that courts and legal writers may be tempted to distort the concepts used in these rules and to redefine the borderline between, for instance, different types of contract from the point of view of prescription rather than from a general perspective. Moreover, there do not appear to be any general criteria which would be both sufficiently clear and convincing to provide a basis for a differentiated prescription regime, at least not within the law of obligations. Thus, one might want to subject claims arising from everyday transactions, or of a petty nature, to shorter periods of prescription than complex or extraordinary claims. But it is impossible to draw a plausible borderline and to define this borderline in precise statutory terms. Another potential point of reference might be the professional position of the creditor or debtor. But any regulation based on it would either be very casuistic and in permanent danger of being outdated, or too abstract and general (and thus open to conflicting interpretation). Moreover, any such differentiation would only appear to make sense as far as the

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right to performance under a contract and possibly also a right to damages for breach of contract are concerned. It is much less convincing for other claims arising ex lege, with the handling of which even a professional person often has little experience. The most common criterion employed in the context of differentiated periods of prescription is the (legal) nature of the claim. But this criterion, too, does not ultimately appear to be suitable. Whether or not prescription has occurred is a question which often has to be determined at a time when the legal position between the parties is unclear. It may be doubtful whether a contract is valid. The creditor does not, therefore, know whether there is a right to specific performance, to damages, or to redress of unjustified enrichment. Or a contract may lie on the borderline between sale and lease, or sale and the contract for work, or the contract for work and the contract of service. Or the creditor's right to damages may be based on contract or on the fact that damage has been caused by another in a non-contractual situation or on culpa in contrahendo, wherever that may fit in. Hardly any claim within the law of obligations can be dealt with in isolation. This interconnectedness is of particular relevance with regard to the law of prescription - with the result, inter alia, that differentiated periods of prescription tend to lead to inconsistencies in result and evaluation. Thus, for instance, rights to restitution arising as a result of the invalidity of a contract should not prescribe within a longer period than contractual rights to specific performance: the "obfuscating power of time" hits the debtor as hard in the one case as in the other. At the same time, it would be inadvisable to differentiate between contractual restitution claims and those based on unjustified enrichment, or between the different types of unjustified enrichment claims. Unjustified enrichment, moreover, is frequently an alternative to negotiorum gestio (management of another's affairs in the absence of a contract). Also, there is so often a concurrence between claims based on unjustified enrichment and claims based on damage caused by another in a non-contractual situation that they should be subject to the same prescription regime. Claims of the latter type are so closely related to culpa in contrahendo (fault in the process of contracting) or to contractual claims for consequential loss that no distinction should be drawn here either; and rights to damages for nonperformance should not, at any rate, be subject to a longer period of prescription than the right to specific performance in view of the aggravated problems of proof. In this way nearly all important types of claim are interconnected with each other. This is also the reason why the prescription rules should not be tailored specifically to contractual claims. If prescription rules are to conform to the general policy objectives mentioned in the Comments to Article 14:101, they cannot attempt to provide the best possible regime for each individual type of claim but must be applicable as broadly as possible. In particular, they have to take account of the need for clarity, certainty and predictability which is jeopardised by any unnecessary complexity. Thus, on balance, it is better to have a regime that does not suit all claims equally well than one that makes

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it difficult for debtors as well as creditors to assess their position and adjust their behaviour accordingly. It is also not advisable to lay down (as some codifications do) a special rule for periodical debts. The range of such claims is difficult to define. Moreover, the need for a special rule has to be evaluated against the background of a very long general period of prescription (e.g. thirty years). In the Principles, however, the general period is only three years. The general period laid down in the Principles covers all rights to performance. It has been pointed out above that any differentiation within this area of the law may easily lead to inconsistency and distortion. Claims of a different nature arising in other areas of the law (especially property law, family law and succession) are not covered by these Principles. B. International Trends

If we look at the development of the law of prescription, at new enactments and drafts proposed, over the past hundred years we find (i) a trend towards shorter periods of prescription and (ii) a trend towards uniform periods of prescription. And while modern European legal systems still recognise a large variety of periods, ranging from six months to thirty years, more and more claims in more and more countries are subject to a prescription period of between two and six years; and there is a growing conviction that the general period should be somewhere between these poles. To a certain extent the choice is arbitrary. But if a third international trend is also kept in mind, namely the increasing recognition of the discoverability criterion (see Article 14:301), a period closer to the lower rather than the upper end of this spectrum should be chosen. For as long as a legal system makes sure that the period of prescription does not run against a creditor who does not know, and cannot reasonably know, of the claim, it may expect the creditor to act reasonably expeditiously. Three years is the period provided in an important act of European legislation - the Product Liability Directive (85j374jEWG) art. 10 - and it appears to be more and more accepted as a general standard within ED legislation.

NOTES 1.

2.

Criticism of Unnecessary Complexity Unnecessary complexity in prescription rules has been widely criticised: see Spiro, Begrenzung § 259; Peters & Zimmermann 288 fr.; Hondius, in: Hondius, 15 fr.; Loubser 24. GERMAN law, in particular, has been criticised on this ground: see Peters & Zimmermann 186 fr., 196 fr.; Zimmermann, in: Jayme, 154 fr. Similar criticism has been made in ENGLAND and in FRANCE: see Law Commission Consultation Paper on Limitation of Actions, 241 fr.; Benabent 123 fr. The BELGIAN Constitutional Court has even held that inconsistencies, based on widely diverging periods of prescription, may constitute an act of unconstitutional discrimination: see M.E. Storme, (1997) 5 ERPL 82 fr.; Claeys, 1998-99 R.W. 379 fr. But cf. also Andrews, (1998) 57 Camb.L.J. 596. Long general periods: complex regimes

Article 14:201: General Period

3.

165

A number of European legal systems have long general periods coupled with many different shorter periods for special situations, leading to complex regimes. The GERMAN BGB retained the thirty year period of post-classical Roman vintage as the regular period of prescription (§ 195) but subjected many claims to shorter periods (see Peters & Zimmermann 108 ff., 115 ff.) Since 1900, Parliament has laid down further exceptions to the regular period in many statutes outside the BGB (see, e.g., Staudinger(-Peters) § 195, nn. 52 ff.). The general prescription period in the GREEK CC is twenty years (art. 249) but for many important claims the code lays down much shorter periods; cf., e.g., arts. 250, 554, 937). The ITALIAN CC has a general prescription period of ten years but recognises shorter periods for a whole range of important claims (arts. 2946 ff.). There is a twenty year period, however, for certain property rights; see CC arts. 954, 970, 1014. In the NETHERLANDS there is a general twenty year period (BW art. 3:306) but this is only nominally the general period. Effectively the general period is the five year period prescribed in arts. 3:307 (performance of a contractual obligation), 3:308 (payments of interest, liferents, dividends, etc.), 3:309 (unjustified enrichment), 3:310 (damages) and 3:311 (right of action to set aside a contract for failure to perform or a right of action to correct such failure). Under the PORTUGUESE CC, the general period of prescription is twenty years (art. 309) but a number of shorter periods are recognised (e.g. five years in art. 310). For extra-contractual liability for damage and unjustified enrichment a three-year period applies (arts. 498, 482). The FRENCH CC has a general prescription period of thirty years. For many situations, however, a ten year period applies, in particular for obligations involving merchants (Comm. c. art. 189 bis), for certain actions against a contractor (CC art. 2270) and for actions based on extracontractual liability (CC art. 2270-1, since the law of 5 July 1985); cf. also the law of 10 July 2000, art. 30, al. 3, concerning liability for sales at public auctions. The CC also recognises various shorter periods (five, three and two years, one year, six months: arts. 2271 ff.). The position in LUXEMBOURG is essentially the same, but for actions based on extra-contractual liability the general period of thirty years still applies. Under the AUSTRIAN ABGB (1811) the general period of prescription is thirty years, but there are numerous shorter periods, mainly of three years (for criticism, see Koziol-Welser 1,200). SPAIN has a general period of fifteen years (CC art. 1964 in fine (1889). Nonetheless there are several special prescription periods (thirty, twenty, six, five, three years and one year under the CC arts. 1963-1968 and five, four, three and two years, one year and six months under the Comm.c. arts. 945-954). In DANISH law there is a general period of twenty years (art. 5.14.4 Danske Lov of 1683), but the Law no. 274 of 22 December 1908 provides a period of five years for many common claims, including sale of goods and services, leases, interest and most non-contractual claims arising from damage caused by another. The trend towards shorter periods and simpler regimes SWEDEN has a ten year period (Preskriptionslag (1981:130) § 11): a shorter period of three years, however, applies with some exceptions for the benefit of consumers. FINLAND also has a ten year period (Prescription Decree of 1868 § 1) but a number of shorter periods in special legislation (such as, e.g., the Insurance Act of 1994). BELGIUM, since the law of 10 June 1998, now has five years for claims for damages arising from extra-contractual liability and ten years for all other personal claims (art. 2262 bis § 1; for criticism ofthis differentiation between claims arising from contractual and extra-contractual liability see, however, Claeys, 1998-99 R.W. 391 ff. and Claessens & Counye 83 ff.). However, a number of special periods have been retained, e.g. the ten year period of CC art. 2270. SCOTLAND used to have a general twenty year period and numerous shorter periods for special situations but the Prescription and Limitation (Scotland) Act of 1973 subjected the vast majority of claims within the law of obligations to a five year period (s.6 with schedule 1). A three year period applies to personal injuries actions and to actions for defamation (ss.17, 18 and 18A). The ENGLISH Limitation Act 1980 recognises a period of six years for actions on tort or "simple contract" but shorter periods apply to actions for personal injuries (three years), negligent latent damage (three years), product liability (three years) and defamation and malicious falsehood (one year) (Limitation Act 1980 ss. 2,5, 4A, 11, l1A, 12, 14A). IRISH law has

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six years for "simple contracts" and three years for tort actions and actions for personal injuries arising out of a breach of contract: Statute of Limitations Act 1957 s. 11. The UNCITRAL Convention (1974) has a four year period for claims arising from an international sale of goods. As far as the development of a general, uniform standard in European Community legislation is concerned, see von Bar I, n. 395. The German Commission on obligations law recommended periods of three, five and ten years (essentially: three for most contractual and non-contractual claims; five for disputes concerning defective buildings and building materials; ten for unjustified enrichment; BGB-KE §§ 195, 198, 199,201). The English Law Commission proposed a uniform limitation period of three years (Law Commission Consultation Paper on Limitation of Actions).

Article 14:202: Period for a Claim Established by Legal Proceedings (1) (2)

The period of prescription for a claim established by judgment is ten years. The same applies to a claim established by an arbitral award or other instrument which is enforceable as if it were a judgment.

COMMENT

A. The Needfor a Special Period This is the only special prescription period provided in these Principles. It cuts off any potential doctrinal discussion as to the effect of the judgment on the original claim. (Does it continue to exist, or is it replaced by a new claim?) The period applicable in this case has to be substantially longer than the general period laid down in Article 14:201. A claim established by judgment is as firmly and securely established as is possible and is thus much less affected by the "obfuscating power of time" than other claims. Moreover, the creditor has made it abundantly clear that the claim is seriously pursued; the debtor knows that payment is still required. And finally, the legal dispute between the parties has been resolved. It does not create a source of uncertainty or a danger to the public interest. To the contrary: it would create unnecessary costs, and thus be more injurious to the public interest, if a short prescription period were to force the creditor at regular intervals to attempt an act of execution which, in view of the debtor's financial position, is known to be futile. The law of prescription here, as always, should prevent, not encourage or even engender, litigation. Once again, of course, there is something arbitrary in fixing a specific period. But ten years would appear to be a reasonable choice in view of the fact that (i) it is the period most frequently found, or proposed, in modern legislation and (ii) it strikes a pragmatic balance between the two extremes of thirty years (German law) and six (or even three) years (English law and Law Commission proposal, respectively). Admittedly, the introduction of a special period for claims established by judgment is in conflict with the general quest for uniformity. But we are dealing here with a clearly distinguishable type of claim which does not interfere with

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any others covered by this Chapter. The general reasons militating against a differentiated regime do not apply in this case. B. Nature of the Period; Declaratory Judgments

The ten year period proposed is a normal prescription period which is subject to the general rules. The one issue that merits special consideration is when it starts to run: see the provision in Article 14:203; cf. also the provisions on renewal of prescription in Articles 14:401 and 14:402. A declaratory judgment is sufficient for the purposes of Article 14:202, as long as it establishes the claim and not only one of its prerequisites. C. Other Instruments It cannot be specified in these Principles which other instruments obtained by

the creditor can have the effect of triggering the ten year period. The relevant criterion is whether they are regarded as enforceable as if they were a judgment. A court-approved settlement of the claim between the parties could be one example. Private instruments are also covered as long as they do not require a formal act by a court before they can be enforced but may be enforced directly. Arbitral awards are mentioned because of their general recognition and practical importance.

NOTES 1.

2.

3.

Special Period Most codes have a special rule on prescription of a claim established by legal proceedings. The period is normally a long one: thirty years in FRANCE (Cass.soc., 7 October 1981, Bull. civ. V, n. 764), AUSTRIA (see Rummel(-Schubert) § 1487, n. 7) and GERMANY (BGB § 218(1) and BGB-KE § 205(1)); twenty years in GREECE (CC art. 268(1)), PORTUGAL (CC art. 311(1)), the NETHERLANDS (BW art. 3:234), DENMARK (see § 1(2) Law no. 274 of 22 December 1908 in conjunction with art. 5.14.4 Danske Lov), and SCOTLAND (Prescription and Limitation (Scotland) Act 1973 s.7 and Sch. 1, para.2(a)); twelve years in IRELAND (Statute of Limitations Act 1957 s. 6(a)); and ten years in ITALY (CC art. 2953 applicable, however, only to sentenza di condonna, not to declaratory judgments), BELGIUM (Claessens & Counye 80), SWEDEN (Preskriptionslag (1981:130) § 7) and FINLAND (Prescription Decree § 1). Only the (ENGLISH) Limitation Act 1980 recognises a shorter period (six years, s. 24). Obviously, in a number of systems the period chosen for the prescription of claims on a judgment is the general prescription period; but in other systems the long period is an exception to shorter general periods. The Effect of a Judgment on the Original Claim For doctrinal discussion of the effect of a judgment on the original claim see, as far as the precodification ius commune is concerned, Windscheid & Kipp § 129, n. 3; for echoes of this debate in SCOTLAND, see Johnston 6.43 ff.; cf. also Spiro, Begrenzung § 162. The GERMAN code specifically clarifies that the general prescription period applies to a claim established by judgment "even ifthe claim itself is subject to a shorter period of prescription" (BGB § 218 (1)). Periodical Payments Falling Due in the Future GERMAN, AUSTRIAN and PORTUGUESE laws recognise one exception to the long prescription period for claims established by judgment: a period of four years applies if the claim relates to periodical payments falling due only in the future (for Germany, BGB § 218(2); for

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Austria, Rummel(-Schubert) § 1478, n. 7; for Portugal, CC art. 311(2)). The German Commission proposes to retain this rule (BGB-KE § 205 III). The DUTCH code has a rule according to which "payments to be made annually or more frequently pursuant to a decision are prescribed in five years": BW art. 3:324(3). See also Spiro, Begrenzung § 164 with references to SWISS case law and literature. This special rule is intended to protect the debtor: it may be burdensome to keep receipts for thirty years. But it must be remembered that the period proposed in the Principles is ten, not thirty years. Other Instruments Concerning other instruments, to which the ten year period applies, see for GERMANY: BGB §§ 218-220, BGB-KE § 205; for ITALY: Roselli-Vitucci, 474; for GREECE, Full Bench of A.P. 30/1987, HeliDni 28 (1987) 1444 (1445) (relating to an order of payment). In IRELAND the twelve-year period of the Statute of Limitations Act 1957 s. 6(a) (cf. note 1, above) does not apply to arbitration awards: the general period of six years applies.

Article 14:203: Commencement (1)

(2)

(3)

The general period of prescription begins to run from the time when the debtor has to effect performance or, in the case of a right to damages, from the time of the act which gives rise to the claim. Where the debtor is under a continuing obligation to do or refrain from doing something, the general period of prescription begins to run with each breach of the obligation. The period of prescription set out in Article 14:202 begins to run from the time when the judgment or arbitral award obtains the effect of res judicata, or the other instrument becomes enforceable, though not before the debtor has to effect performance.

COMMENT

A. General Rule As a rule, the period of prescription should run only against a creditor who has the possibility of enforcing the claim in court, or of starting arbitration proceedings. For it is in the course of these proceedings that the merits of the case will be investigated. The running of the period is suspended as long as the proceedings last (see Article 14:302). A claim can, however, only be pursued in court, or before an arbitration tribunal, when it has become due - that is, when the debtor has to effect performance (Article 7:102). The concept of the time when a party has to effect performance is widely known and relevant in many other situations. Article 7:102 only provides a regulation for contractual claims. Concerning claims ex lege, the general rule would appear to be that the debtor has to effect performance once all requirements for the creditor's claim have been met. Illustration 1: A and B have agreed that A has to pay the purchase price for a car delivered to B on 10 October. The time for A's performance is

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determinable from the contract (Article 7: 102 (a): it is 10 October. The period of prescription starts to run against B on that day. Illustration 2: A has, by mistake, transferred a sum of money to C rather than to B. From the moment when he receives the transfer, C is under an obligation to retransfer the money; this obligation is based on unjustified enrichment. The period of prescription relating to A's claim for the retransfer starts to run on that day.

B. Rights to Damages There is, however, one situation which requires special consideration. A right to payment of damages for harm caused by another is generally due as soon as the right comes into being. But it comes into being only when all requirements of the rule imposing liability have been met. One of them will often be the occurrence of damage; and damage will sometimes only occur many years after the act giving rise to liability (infringement of somebody else's bodily integrity, or property) has been committed. Thus, it may be uncertain for a number of years whether a person has a right to damages based on an unlawful act. Also, it can sometimes be open to doubt whether the occurrence of damage is indeed a requirement of the rule imposing liability. Moreover, it may be difficult to determine whether all rights to damages arising as a consequence of the unlawful act have to be subjected to the same prescription regime, or whether there may be completely unexpected, latent consequences in relation to which prescription should only start to run once they have become apparent. Pure economic loss cases also present special problems in the application of a rule that focuses on the occurrence of damage. Thus, it appears advisable not to make commencement of the period of prescription dependent upon the occurrence of damage. The period of prescription, therefore, begins to run when all the other requirements for the right to damages have been met, i.e. at the moment when the unlawful act has been committed (or at the moment when the breach of contract has occurred). This rule does not cause hardship to the claimant, since the period does not run, according to Article 14:301, as long as the claimant does not know, and cannot reasonably know, about any latent damage. Thus, it is practically relevant only for the calculation of what is usually described as the "long-stop", and what is in these Principles expressed as the maximum period to which the period of prescription can be extended (Article 14:307). Here, however, an easily ascertainable date is required to counterbalance the uncertainty necessarily associated with the discoverability criterion. This date can only be the commission of the unlawful act. The specific advantage of the rule proposed here is that it provides, effectively, one and the same point of departure for the general prescription period and the "long-stop". Illustration 3: A has been injured, on 1 October 1956, in a car accident for which B has been responsible. A appears to have suffered only light injuries (a bruise, or a mild concussion). In the summer of 1961, however, it turns

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out that an inner organ has been seriously affected. The three year prescription period would begin to run from 1 October 1956 but for the fact that it is suspended as long as A did not know, and could not reasonably know, about the latent consequences of the accident, i.e., in this case, presumably sometime in the summer of 1961 (Article 14:301). If the latent consequences should have become apparent only in December 1986, A's claim would have been prescribed in view of the fact that the period of prescription cannot be extended beyond a total period of thirty years (Article 14:307). The same considerations apply to other rights to damages. The period of prescription of a right to damages for non-performance (see Articles 8:101, 8:108, 9:501 ff. of these Principles) runs from the date of non-performance, the period of prescription of a claim for culpa in contrahendo from the moment when the other party breaks off negotiations contrary to good faith and fair dealing (see Article 2:301 (2) of these Principles). C. Obligation to Refrainfrom Doing Something

Prescription relates to rights to performance of obligations (Article 14:101). This covers cases where a party is under an obligation to refrain from doing something. When does the period of prescription begin to run in these cases? The due date cannot be the appropriate moment since the creditor's claim is due even before the debtor has infringed the obligation. Yet, before such infringement has occurred, the creditor does not normally have any reason to sue the debtor so as to stop the period of prescription from running. Prescription problems can only arise where the debtor's obligation extends over some period of time, i.e. in the case of a continuing obligation to refrain from doing something. Here it appears to be appropriate for the period of prescription to commence, not once and for all with the first act of contravention, but with each new act of contravention. Illustration 4: A has a studio in which he occasionally produces CD's of famous pianists. On 10 October, he plans to produce a CD with Alfred Brendel playing Schubert. B, A's neighbour, is busy with noisy building operations to his house in the course of the month of October. A obtains an undertaking from B to stop these building operations for 10 October. Nevertheless, B carries on with them on that day. Here we do not have specific prescription problems. Before 10 October, a period of prescription cannot start; after 10 October, compliance has become impossible and A can only claim damages. The right to damages is subject to the normal rules of prescription. Illustration 5: A is a former employee of B, an insurance company in Hamburg. She is under an obligation not to sell any insurance policies on her own account for the next three years in Hamburg. On 20 March, she sells some policies in a small suburb still belonging to the state of Hamburg.

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On 20 October, however, she sets up her own insurance agency right in the centre of Hamburg. Concerning the infringement on 20 March, the period of prescription begins to run on that day; concerning the one on 20 October, a new period begins to run on 20 October. This is justified in view of the fact that B may have refrained from taking steps which would have had the effect of extending or even recommencing the period of prescription, not because it wanted to condone any infringement of A's obligation, but merely because the first infringement was not sufficiently serious to warrant the cost and trouble of taking such steps. The same problem may arise where the debtor is under a continuing obligation to do something. Illustration 6: D, the owner of a dairy, has agreed to deliver 20 cans of milk to a restaurant in the neighbourhood every morning. As long as D complies with this obligation, the owner of the restaurant has no reason to sue him. He may, quite legitimately, not even want to sue him when occasionally less than the 20 cans are delivered or when, due to momentary difficulties that D may have with his own suppliers, he does not deliver at all for a day or two. That should not, however, prevent him from bringing an action against D if the latter, four years later, decides no longer to honour his obligation.

D. Claims Established by Legal Proceedings Here the choice would seem to be between the date of judgment and the date when that judgment becomes final (i.e. when an appeal is not, or no longer, possible). The second of these alternatives is the one more often found in existing legislation. It commends itself for reasons which will become apparent when the closely related question of the effect of legal proceedings upon a period of prescription is considered (see Article 14:302). In order to cover all types of appeal that may possibly be brought against a judgment, paragraph (2) refers to the moment when the effect of res judicata is obtained. If a declaratory judgment establishes an obligation on the part of the debtor to make periodic payments in the future, the period of prescription concerning each of these payments only starts to run when it falls due (see the clause starting with the words "though not" in paragraph (2)). In the case of arbitral awards the relevant moment may also be described as the moment when the effect of res judicata is obtained. For other instruments, however, the period of prescription begins to run when they become enforceable (Article 14:203(3); enforceability, after all, is the characteristic that justifies placing these instruments on a par with a judgment (Article 14:202(2)).

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1.

General rule The moment when the claim becomes enforceable is widely used to commence the period of prescription: for AUSTRIA, ABGB § 1478; for ITALY, CC art. 2935; for PORTUGAL, CC art. 306; for BELGIUM, Claessens & Counye 84; for SCOTLAND, Prescription and Limitation (Scotland) Act 1973, ss.6, 7 and 11; Johnston 4.06 If.; for DENMARK, § 3 Law no. 274 of 22 December 1908 (but under Danske Lov art. 4.14.4 the period begins when the obligation comes into existence); for SPAIN, CC art. 1969; for the NETHERLANDS, BW art. 3:307 (claims for performance of a contractual obligation). According to GERMAN law (BGB § 198), prescription begins to run when the claim comes into being but it is generally agreed that this has to be taken to refer to the date when the debtor can be forced to render performance (the due date): see Peters & Zimmermann 172 If.; Staudinger(-Peters) § 198, nn. 1 If.; BGB-PZ § 196 I; BGB-KE § 196 I. In FINLAND prescription begins to run when the obligation is created (see Prescription Decree § 1); in SWEDEN when the claim arises (Preskriptionslag (1981:130) § 2). According to GREEK law (CC art. 251), the claim must have come into being and become enforceable. See further Spiro, Begrenzung § 26; Koopmann 45 If.; Loubser 48 If. The ENGLISH Limitation Act 1980 refers to the date of accrual of the cause of action (cf., e.g., ss. 2 and 5). This is the moment "when a potential plaintilf first has a right to succeed in an action against a potential defendant" (Preston & Newsom 8; cf. also Dannemann. Karatzenis & Thomas, (1991) 55 RabelsZ 702). IRISH law is the same (Statute of Limitations Act 1957 s. 11(1)). Art. 9 of the UNCITRAL Convention refers to "the date when the claim accrues". 2. Claimsfor Damages Damages claims present problems for all legal systems which regard due date or accrual of the cause of action as relevant for commencement of prescription (see Peters & Zimmermann, 173 f.; Staudinger(-Peters) § 198, nn. 17 If.; Law Commission Consultation Paper on Limitation of Actions, 30 If.). This is why there is a growing reliance on the discoverability criterion (see Article 14:301). However, the long-stop (see Article 14:307) is usually counted from the moment when the wrongful act is committed; see e.g. GERMANY: BGB § 852(1); AUSTRIA: Rummel(-Schubert) § 1487, n. 7; the NETHERLANDS: BW art. 3:310. In SCOTLAND, however, the long stop runs from enforceability (Prescription and Limitation (Scotland) Act 1973, s.7). 3. Obligation to Refrainfrom Doing Something The GERMAN code contains a special rule concerning obligations to refrain from doing something: prescription runs from each contravention: see BGB §198, 2; Peters & Zimmermann 303 f.; Staudinger(-Peters) §198, nn. 33 If. The retention of this provision is advocated both by Peters & Zimmermann: BGB-PZ § 196 III, and by the Reform Commission: BGB-KE § 196 I 2. German authors have argued for an analogous application of this rule to cases where the debtor is under a continuing obligation to act: see Munchener Kommentar(-von Feldmann) § 198, n. 11; but cf. Staudinger(-Peters) § 198, n. 13 (arguing that this follows anyway). Other legal systems reach similar conclusions by arguing from general principle; see Asser-Hartkamp, Verbintenissenrecht I n. 664; Spiro, Begrenzung § 48 f.; for DENMARK, see Ussing, AIm. Del. 399 and 407 (prescription runs from each act of non-compliance). 4. Claims Established by Legal Proceedings Prescription of a claim established by judgment starts to run at the date of judgment in the NETHERLANDS (BW art. 3:324(1)) and AUSTRIA (Rummel(-Schubert) § 1478, n. 7; cf. also Spiro, Begrenzung § 162. Prescription starts to run at the date when the judgment becomes final in GERMANY (BGB § 218(1); BGB-KE § 205 I); ITALY (CC art. 2953); GREECE (CC art. 268, first sentence); and SWEDEN (Preskriptionslag (1981:130) § 7). Under s. 24(1) of the ENGLISH Limitation Act 1980 the limitation period for actions on a judgment starts from the date when the judgment becomes enforceable. The same applies under s. 6(a) of the IRISH Statute of Limitations Act 1957. This appears to be too restrictive since it excludes declaratory judgments; see Spiro, Begrenzung § 133; Staudinger(-Peters) § 218, n. 5.

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Special commencement dates Some codes have special commencement dates for certain situations - e.g. the end of the year in which services were rendered or goods delivered (GERMANY: BGB § 201); the date when notice can be given requiring payment of a sum (GERMANY: BGB § 199; GREECE: CC art. 252; for comparative discussion, see Spiro, Begrenzung § 35; Loubser 54 If.). The need for such special commencement dates has, however, been doubted: see Peters & Zimmermann 245 If; Spiro, Begrenzung § 125. Cf. also Staudinger(-Peters) § 198, nn. 7 If.

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Section 3: Extension of Period

Article 14:301: Suspension in Case of Ignorance

The running of the period of prescription is suspended as long as the creditor does not know of, and could not reasonably know of (a) (b)

the identity of the debtor; or the facts giving rise to the claim including, in the case of a right to damages, the type of damage.

COMMENT

A. Terminology Civilian legal systems traditionally distinguish between "interruption" and "suspension" of a period of prescription. If the period of prescription is interrupted, the time which has elapsed before the interrupting event is not taken into account: the period of prescription begins to run afresh. Suspension of the period of prescription, on the other hand, has the effect that the period during which prescription is suspended is not counted in calculating the period of prescription: when the cause of suspension ends, it is therefore the old prescription period that continues to run its course (unless the period of prescription had not even started to run in which case it only starts to run after the cause of suspension has ended). Suspension thus extends a given period of prescription. Another device that has the effect of extending the period of prescription is postponement of its expiry. Here the period of prescription runs its course but is only completed after the expiry of a certain extra period. The Principles use these three techniques but do not use the word "interruption", which can be misleading. Instead the Principles use the term "renewal" to cover the case where a new period begins to run on the happening of some event. Thus, the systematic exposition for Sections 3 and 4 is as follows. The period of prescription can be (i) extended (Section 3) or (ii) renewed, so that a new period begins to run (Section 4). An extension may occur by way of (a) a suspension of the running of the period (Articles 14:301-14:303) or (b) a postponment of its expiry (Articles 14:304-14:306). It should be noted that the running of a period of prescription can be suspended whether or not it has already started. A renewal may be triggered by an acknowledgement by the debtor (Article 14:401) or, in the case of the ten year period, by an attempt at execution by the creditor (Article 14:402). B. The Argument for a General Discoverability Criterion

Prescription can effectively amount to an act of expropriation: a claim is an asset of the creditor which loses its value if it can no longer be pursued in

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court. This is justifiable only if the creditor has previously had a fair chance of pursuing the claim. So, in the first place, the creditor must have known about the claim or, at least, ought reasonably to have known about it. The importance of a discoverability criterion is accentuated, if (as under the Principles) the general prescription period is comparatively short. Whereas the short period, and the institution of prescription of claims as such, are largely intended to protect the debtor (see Comment E to Article 14:101), the discoverability criterion provides the necessary counterbalance to take account of the creditor's reasonable interests. This is increasingly recognised today. Not surprisingly, the rise of the discoverability criterion has been closely related to the general tendency towards shorter prescription periods. More precisely, there has been a trend towards (i) taking account of the creditor's ignorance with regard to a growing range of claims while (ii) reducing the inherent potential of this consideration for delaying the course of prescription by moving from lack of knowledge towards a test of reasonable discoverability. The Principles reflect these developments. Essentially, there is a fundamental choice to be made. If discoverability applies across the board, a uniform three year period is acceptable. If, however, the uncertainty necessarily associated with a discoverability criterion is regarded as sufficiently serious to make the running of prescription dependent merely on objective criteria, the consequence is necessarily a differentiated system of prescription periods. But there is a very wide consensus that not all types of claims can be subjected to an objective regime: the prescription of non-contractual claims based on harm caused by another must depend on knowledge (or reasonable possibility to acquire knowledge). It is, however, precisely with regard to such claims (and, more specifically, those arising from personal injury) that the discoverability criterion is particularly important. The other type of situation where a creditor will often be unaware of the claim is breach of contract. Non-contractual claims for damages and claims for damages based on breach of contract can be closely related; the one claim is often an alternative for the other. If it is unfair in the one case for the claim to prescribe before the creditor knew or reasonably could have known of it, it is equally unfair in the other. Once, however, a legal system is prepared to swallow the subjective criterion with regard to damages claims it might as well, given the interconnectedness of claims within the law of obligations, accept it across the board. The price to be paid in terms of legal uncertainty is not considerable. For, to mention some prominent types of claims, the parties to a contract will normally know when their transaction has been concluded and when they are entitled to demand its (specific) performance. Also, they will usually be aware whether it has been avoided with the result that they may claim restitution of any benefit conferred, particularly under a system that makes avoidance for error, or fear, or fraud dependent on notice to the other party (cf. Article 4:112 of these Principles). And, as far as restitution for wrongs is concerned, this is too close to damages for non-contractual harm to justify a different treatment.

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C. What Must be Discoverable? What, precisely, must the creditor's lack of knowledge relate to? It seems to be widely agreed that the facts giving rise to the claim and the identity of the debtor are the two key issues. Illustration 1: In the course of the early morning of 10 October 1994, A crashes his car into B's car which was parked in front of B's house. Since A fears public prosecution for drunken driving, he drives away from the scene of the accident. Nobody has observed the accident. Early in 1998, and in the course of a pub crawl, A boasts about what has happened that night. One of the persons present relates the story to B who now wants to sue A for damages. The running of the period of prescription (which would normally have begun on 10 October 1994) was suspended until B had heard about A:s involvement in the accident. Before that time, he did not know and could not reasonably have known about the identity of his debtor. In addition, a significance test is sometimes recommended: the running of the

period of prescription is also suspended as long as the claimant did not know, and could not reasonably know, that the claim is significant. This test is designed to prevent an apparently trivial injury triggering the prescription period for unexpected, serious consequences arising from the injury at a later stage. These concerns are also reflected in the development of the case law of a number of countries. Another, related, problem arises in cases where the victim of an accident is aware, at first, of having suffered, for instance, damage to property and only later becomes aware of an injury to health as a result of the accident. Both types of cases are covered by the words "type of damage" in clause (b). Illustration 2: On his way home from a football match, A is beaten up by supporters of another team. He has a laceration on his forehead which, at first, bleeds heavily but can quite easily be dressed. He therefore decides not to take action against those who have beaten him up. Only a year later, in October 1995, does he become aware of the fact that he has picked up internal injuries of a much more serious nature. The period of prescription starts to run in October 1995. Illustration 3: A is severely injured in a brawl in the course of which B has hit his head with a club. As a result of this, A's eyesight is diminished by 40%. Four years later, A becomes completely blind. It can be established that this is a late result of B hitting A's head. Running of the period of prescription for the damage resulting from blindness (as opposed to the loss of 40% of his eyesight) is suspended until A has become blind (unless that consequence was reasonably foreseeable at the date of the injury).

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D. Ignorance as a Groundfor Suspending the Running of the Period of Prescription The period of prescription should not run while the creditor is unaware of the claim and cannot reasonably become aware of it. It might appear natural to link the discoverability criterion to the commencement of the period of pre scription. This is not the approach adopted here. The starting date remains the moment when the debtor has to effect performance, but the running of the period of prescription is suspended until the creditor becomes aware of the claim or could reasonably have become aware of it. This means that normally the period of prescription does not start to run until the moment of reasonable discoverability; it is, in other words, a case of an "initial" suspension. Matters are different, where the creditor's ignorance is not an initial one; this may be the case when either the creditor or the debtor dies and either the new creditor does not know that the claim has been inherited or the old creditor cannot reasonably find out who is the new debtor. Ignorance as a ground of suspension of the running of the period of prescription (as opposed to knowledge as the criterion for commencement of the period) has the following advantages. (i) Even if discoverability were to determine commencement of the period of prescription, it would also have to be required that the obligation has come into existence and that performance is due. (ii) That the period of prescription should not run against a creditor who cannot reasonably become aware of the claim is one specific emanation of a much wider idea: a claim must not prescribe if it is impossible for the creditor to pursue it (agere non valenti non currit praescriptio). This is why the period of prescription does not run in cases of vis major and why the expiry of the period of prescription is postponed if the creditor is legally incompetent and does not have a legal representative. These (and other) impediments are taken into account by extending the period of prescription. It does not matter whether the impediment already existed at the time of commencement of the period of prescription. Thus, it would appear to be systematically more satisfactory to deal with the discoverability issue under the same heading. (iii) A creditor who brings an action against the debtor has to establish the requirements on which the claim is based. That the claim has not prescribed is not one of these requirements. Prescription is a defence. If it is invoked by the debtor, it is the debtor who has to establish the requirements of that defence. The central requirement, of course, is that the period of prescription applicable to the claim has elapsed. That depends on the date of commencement. If that were the date of discoverability, the debtor would, in many cases, face an unreasonably difficult task. For whether the damage to the creditor's house, the injury to the creditor's body, the consequences flowing from defective delivery, etc. were reasonably discoverable, or whether the creditor perhaps even had positive knowledge, are matters within the creditor's sphere and largely removed from the debtor's range of perception. Also, by and large, and considering the full range of claims, the creditor will normally know about the

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claim at the time it falls due. That, exceptionally, this was not so, is a matter to be raised, and established to the satisfaction of the court, by the creditor. This would come out more clearly if discoverability were not to be made a requirement for commencement of the period of prescription but if the fact that the creditor could not reasonably be aware of the claim were to give rise to an extension of the period of prescription: for it would, according to general principle, normally be for the creditor to prove that the running of the period of prescription was suspended, or that the period was otherwise extended. (iv) This way of proceeding also considerably simplifies the structure of the prescription regime, for it dispenses with the need to lay down a separate "long-stop" period running from a date different to that for the "normal" period of prescription and subject to specific regulation concerning extension, renewal, etc. It merely has to be stated that the period of prescription cannot be extended to a period longer than ten (or thirty) years (see Article 14:307).

NOTES 1.

Terminology

On the traditional distinction between interruption and suspension of prescription, see Windscheid & Kipp §§ 108 f.; Mugdan I, 523; Spiro, Begrenzung §§ 69 ff., 127 ff.; Peters & Zimmermann 124 ff. For definitions, see, for GERMANY, BGB §§ 205, 217; for GREECE, CC arts. 257, 270; for AUSTRIA, ABGB §§ 1494, 1497. Suspension of prescription is a well known device: see, for FRANCE, BELGIUM and LUXEMBOURG: CC arts. 2251; for AUSTRIA: ABGB §§ 1494 ff.; for GERMANY: BGB §§ 202 ff.; for GREECE: CC arts. 255 ff.; for ITALY: CC arts. 2941 ff. The idea of postponing the expiry of the period of prescription is generally more recent but has gained ground: we find it in AUSTRIA, GERMANY and GREECE. See Mugdan I, 528; Spiro, Begrenzung §§ 87 ff. In the NETHERLANDS this idea has completely replaced suspension: see BW arts. 3:320 f.; AsserHartkamp, Verbintenissenrecht I n. 682; Koopmann 83 ff. Suspension of commencement of prescription (Anlaufhemmung) is a notion familiar in a number of countries; see for GERMANY BGB § 204; for GREECE: CC art. 256; for ITALY: CC art. 2941, no. 1 (concerning, i.a., suspension of claims by one spouse against the other as long as the marriage lasts). Cf. also the DANISH suspension rule in case of ignorance (sub 2. in fine). 2.

The Rise of the Discoverability Criterion

The GERMAN code recognises a subjective criterion only for reparation for wrongful conduct: the injured party has to have had knowledge of the injury and of the identity of the person bound to make compensation (BGB § 852(1)). The position in GREEK law (CC art. 937) is the same. In AUSTRIA (ABGB § 1489) no distinction is made between contractual and noncontractual claims (Rummel (-Schubert), § 1489, n. 2). The SWISS code requires knowledge with regard to claims for damages for wrongful conduct and actions based on unjustified enrichment (OR arts. 60(1), 67(1)). In the NETHERLANDS knowledge is required in the case of unjustified enrichment claims, claims for the recovery of damages and claims "to set aside a contract for failure to perform it or to correct such failure" (BW arts. 3:309, 310, 311). According to the ENGLISH Limitation Act 1980 knowledge matters in actions for personal injuries or death, for latent damage in the tort of negligence, and products liability (see ss.11, 11 A, 12, 14, 14A). In IRELAND the Statute of Limitations (Amendment) Act 1991 provided that in the case of personal injuries arising from breach of duty (tortious, contractual or statutory) the injured party has three years to bring an action from the date on which the cause of action accrued or the date of knowledge (iflater) ofthe person injured. SCOTLAND has a discoverability test for

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4.

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latent damage and personal injuries and a knowledge test for defamation (Prescription and Limitation (Scotland) Act 1973 ss.11(3), 17, 18, 18A; Johnston, 4.17 ff.). In BELGIUM, there has been doubt about the constitutionality of short prescription periods, "unless prescription runs only from the moment at which the damage manifests itself" (M.E. Storme, (1997) 5 ERPL 88; cf. also Claeys, 1998-99 R.W. 381). There was also doubt in IRELAND, before the Statute of Limitations (Amendment) Act 1991, about the constitutionality of a regime which had the effect of depriving a person of a property right even when the person was ignorant of having it. These doubts persist in relation to certain breaches of contract which are still subject to the rule that time runs from the date of accrual of the action. See Morgan v. Park Developments Ltd. [1983] I.L.R.M. 156; Heagerty v. O'Loughren [1990] ILR 148; Brady & Kerr 59 ff. Under SPANISH law, it is disputed whether knowledge or discoverability is relevant in relation to claims based on liability for wrongful conduct: STS 10.10.1977 as opposed to STS 11.11.1968; cf. Diez-Picazo & Gu1l6n Ballesteros I, 472. Under art. 498(2) of the PORTUGUESE CC prescription commences when the occurrence of damage is known by the injured person, even if the identity of the debtor and the extent ofthe damage are unknown. For ITALY, see CC art. 2941, n. 8: if a debtor has fraudulently concealed the existence of the debt, prescription is suspended until the fraud has been discovered. In DENMARK prescription under the Law no. 274 of 22 December 1908 (5 years) is suspended if the creditor did not know and could not reasonably have known of the claim or the residence of the debtor (§ 3). In FINLAND the provision concerning the ten year period of prescription for claims based on liability for a wrongful act is interpreted to mean ten years from when the consequence of the act became clear; see Routamo & Stahlberg 345. Under the new BELGIAN law of 10 June 1998 the date of discoverability determines the commencement of the five-year prescription period for succh claims (CC art. 2262 bis, § 1(2)). SWEDISH law, however, does not recognise the creditor's ignorance as a ground for extending the period of prescription (except for product liability). Christian von Bar regards discoverability as the emerging general standard in European Community legislation on prescription, see von Bar I, n. 395. Cf. further Zimmermann, 2000 JZ 861 ff. (comparative), but also Andrews, (1998) 57 Camb.LJ. 589 ff. (criticising the English Law Commission's proposal to extend the discoverability criterion). Significance Test In ENGLAND, the three year period for personal injury claims will not start to run until the claimant knows that the injury is significant; and similarly for latent damage: Limitation Act 1980, ss.14( 1), 14A(7). There is a similar rule in the IRISH Statute of Limitations (Amendment) Act 1991 s. 2(1). Other systems may reach similar results by the way in which the courts interpreted a knowledge requirement for claims for damages (see, e.g., for GERMANY, the discussion and references in Miinchener Kommentar(-Stein) § 852, n. 22). Onus of Proof On questions of onus of proof, in the present context, see Spiro, Begrenzung §§ 359 f.; Peters & Zimmermann 248, 306; Loubser 112; Law Commission Consultation Paper on Limitation of Actions, 398.

Article 14:302: Suspension in Case of Judicial and Other Proceedings (1) (2) (3)

The running of the period of prescription is suspended from the time when judicial proceedings on the claim are begun. Suspension lasts until a decision has been made which has the effect of res judicata, or until the case has been otherwise disposed of These provisions apply, with appropriate adaptations, to arbitration proceedings and to all other proceedings initiated with the aim of obtaining an instrument which is enforceable as if it were a judgment.

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COMMENT

A. The Options A creditor who institutes an action on the claim does what the law of prescription expects: the creditor takes the initiative to bring about an authoritative resolution of the dispute. It would be manifestly unfair if the period of prescription were to continue to run while judicial proceedings are pending. The debtor is now able to raise whatever other defence there may be and knows that the creditor is not treating the incident as closed. The proceedings prevent the claim from becoming stale. In this situation a legal system can do one of three things. It can determine (1) that the period of prescription ceases to run; or (2) that it is "interrupted" or renewed, with the effect that it starts to run afresh or (3) that its running is suspended as long as legal proceedings are pending. (1) Cessation of period of prescription. The first option (cessation) is the one following most naturally from a concept of a limitation of actions. It does not commend itself for a set of Principles of private law for it either leaves open the question of what happens when the legal proceedings have ended without a decision on the merits of the case, or it has to deal with this situation by way of a somewhat artificial fiction. (2) Interruption or renewal of period of prescription. The second option (interruption or renewal) is the solution traditionally adopted in Roman-law based legal systems. There is, however, something odd in the idea that the bringing of an action should renew rather than merely suspend the period of prescription. For by instituting an action the claimant sets in motion the court proceedings which last until a decision is given or until the case has been otherwise disposed of. Thus, we are not, as in other cases of renewal, dealing with a momentary event which could not sensibly extend the original prescription period, but with a continuing process. At the end of this process, there is normally clarity about the merits of the claim. And if there is not, there is no reason to have the entire period of prescription run afresh. Those legal systems subscribing to the interruption approach normally either specify how long the "interruption" lasts, or regard every act by any of the parties to the proceedings, and by the court, as a new cause of interruption. Both solutions are unsatisfactory. In particular, they lead to unnecessary complexities as well as undesirable practical consequences in cases where the proceedings have ended without a decision on the merits of the claim. Even an action that is dismissed without consideration of the merits of the claim (because it has been brought before a court lacking jurisdiction or because it is procedurally defective in other ways) has to have some effect on the running of the period of prescription because: (a) the creditor cannot always avoid the defect; (b) it would be impracticable to investigate in every individual case whether the creditor can be blamed for proceeding; and (c) the creditor has, after all, demonstrated a determination to pursue the claim. Legal systems subscribing to the interruption option can only come to one of two conclusions in this situation: the period of prescription is

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interrupted (which would go too far); or it is not interrupted after all (which not only entails clumsy fictions but is also practically unsatisfactory for the reason just mentioned). (3) Suspension of running of period of prescription. The preferable solution, therefore, is the third option: the running of the period of prescription is suspended while the legal proceedings last. If these proceedings lead to a judgment on the merits of the claim, there are two possibilities. Either the claimant succeeds in which case the claim is now established by legal proceedings and thus subject to the prescription period of Article 14:202. Or the action is dismissed and it is now authoritatively settled that there is no claim that could be subject to prescription. Where the proceedings end without a decision on the merits of the claim (because the action is procedurally defective, or because it has subsequently been withdrawn), the creditor merely has what remains of the old period of prescription to bring a new action. This is exactly what is required. In particular, no certainty as to the substance of the claim has been achieved which might justify the setting in motion of an entirely new period of prescription under headings (i) and (iii) of the policy considerations mentioned in Comment E to Article 14:101.

B. Details of Implementation Special attention may have to be paid to the claimant whose action is dismissed, for procedural reasons, at a time when only very little of the old period of prescription is left. Here it may be regarded as reasonable to fix a minimum period which the claimant should have for taking action after suspension has ended. However, there appears to be no reason to place the creditor in a better position than if no action had been brought in the first place. When suspension begins depends on what is regarded, under the applicable law, as an appropriate act to commence a lawsuit. Suspension lasts until a decision has been passed which is final in the sense of having the effect of res judicata, or until the case has been otherwise disposed of. Conveniently, therefore, if the judgment has been in favour of the claimant, the period of prescription of the claim based on the judgment should also only start at that moment (see Article 14:203(3)) and not when judgment is given. The latter approach would appear to be related to the view, rejected above, that every event within the legal proceedings, including the judgment itself, constitutes a cause of interruption. Illustration: A has a claim against B which is due on 15 March 1994. On

1 March 1997, A commences judicial proceedings on this claim before the regional court in Regensburg. On 10 October 1997, the court passes a decision dismissing the claim for lack of jurisdiction: the action should have been brought before the local court in Regensburg. On the same day, A waives the right to appeal. The running of the period of prescription was suspended between 1 March (the date when judicial proceedings were begun) and 10 October 1997 (the date when the decision of the regional

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court obtained the effect of res judicata). As a result, A now has another fourteen days to commence legal proceedings before the local court in Regensburg. Normally, the claimant will bring an action with the aim of obtaining a title to start execution. However, an application for a declaratory judgment establishing the claim is sufficient for the purposes of suspending the running of the period of prescription: just as the declaratory judgment itself is sufficient to warrant application of the special regime provided in Article 14:202. C. Other Proceedings The rules applicable to judicial proceedings also apply to other proceedings, as long as these proceedings aim at procuring an instrument which is enforceable. Details depend on the applicable law. Arbitration proceedings are specifically mentioned because of their general recognition and practical importance. The general rule, as far as the commencement of arbitration proceedings are concerned, has to be that the creditor must have done everything in the creditor's power to start them. In the case of private instruments which may be enforced directly (see Comment C to Article 14:202) it must be left to interpretation when the proceedings are begun.

NOTES 1.

2.

Limitation Period Ceases to Run In ENGLISH law, the limitation period ceases to run when the creditor commences proceedings against the debtor (McGee 2.001 If.; Law Commission Consultation Paper on Limitation of Actions 164). This is also the approach adopted in IRELAND and by the UNCITRAL Convention: art. 13. On the problem of procedural delays, see, for English law, McGee 355 If. Under art. 14 of the UNCITRAL Convention, the limitation period is "deemed to have continued to run" where legal proceedings end without a decision binding on the merits of the claim but the creditor has an extra year if, when the proceedings end, the limitation period has expired or has less than one year to run. For criticism, see Smit (1975) 23 AJCL 342 If. Prescription Is Interrupted Commencement of judicial proceedings has the elfect of interrupting prescription in FRANCE, BELGIUM and LUXEMBOURG (CC art. 2244); AUSTRIA (ABGB § 1497); GERMANY (BGB § 209); SPAIN (CC art. 1973; Comm. C. art. 944(1)); PORTUGAL (CC art. 323); GREECE (CC art. 261); SWITZERLAND (OR art. 138); ITALY (CC art. 2943); the NETHERLANDS (BW art. 3:316); SCOTLAND (Prescription and Limitation (Scotland) Act 1973 ss.6, 7 and 9 and Johnston 5.04 If.) and SWEDEN (Preskriptionslag (1981-130) § 7). In DENMARK prescription under Law no. 274 of 22 December 1908 is interrupted if the creditor brings a legal action and without unnecessary delay pursues that action to obtain judgment, settlement or other judicial decree (§ 2). There are no such rules for prescription under art. 5.14.4 of the Danske Lov since here prescription begins to run again after a reminder by the creditor. The situation in FINLAND is the same as with regard to prescription under the Danske Lov. Reminder (skriftlig erinran) also triggers a fresh prescription period according to SWEDISH law (§§ 5 f. Preskriptionslag (1981:130)). For rules on how long the "interruption" lasts, see the German BGB § 211; the Greek CC art. 261; the Italian CC art. 2945. Under the Austrian ABGB § 1497 interruption lasts as long as

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3.

4.

5.

6.

7.

8.

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the judicial proceedings are "properly continued". Every act by any of the parties to the proceedings, and by the court, is regarded as a new cause of interruption under the Swiss OR art. 138; cf. also Spiro, Begrenzung § 147; for Scottish law, see Johnston 5.40. Procedurally Defective Actions; Withdrawal of Action Under AUSTRIAN law (ABGB § 1497, 2) only an action meeting all procedural requirements interrupts prescription. In 19th century GERMAN law, even procedurally defective actions were regarded as sufficient, though not an action that was dismissed for lack of jurisdiction. In FRANCE and LUXEMBOURG (CC art. 2246) an action before a court without jurisdiction interrupts prescription. In ITALIAN law (CC art. 2943(3)) too, interruption is effective even if the judge lacks jurisdiction; the same applies to an action which is otherwise defective as long as it can be regarded as an act placing the debtor in default. In Germany, under the BGB § 212(1)(2), if the proceedings end with a decision not turning on the merits of the claim, commencement of the proceedings is not to be treated as an interruption. However, the creditor can retain the effects of interruption by instituting another action within six months after the end of the first proceedings: prescription is then deemed to have been interrupted by the first action - a double fiction. The same regime applies if the claimant subsequently withdraws the action. For GREECE, cf. also CC art. 263; A.P. 1267/1995, HeliDni 38 (1997) 838; for the NETHERLANDS, see BW art. 3:316(2). In Germany, Greece and the Netherlands an action that is subsequently withdrawn is usually treated in the same way as a procedurally defective action; see Spiro, Begrenzung § 142 with references. Under art. 944(2) ofthe SPANISH Comm. e. prescription is deemed not to have been interrupted if the decision is not favourable to the claimant or if the action is withdrawn. SWISS law attributes the effect of interruption only to actions which result in a decision on the merits of the case and gets into difficulties where the claimant withdraws the action; see Spiro, Begrenzung §§ 139 ff. These problems are largely obviated by "downgrading" the effects of judicial proceedings from interruption to suspension. Legal Proceedings Remain in Abeyance Some codes provide for the case where the legal proceedings remain in abeyance because the claimant fails to pursue them further; see, for GERMANY, BGB § 211(2); for GREECE, CC art. 261; for ITALY, CC art. 2945(3); and, for a comparative discussion, Spiro, Begrenzung § 147. However, a regulation of this situation appears to be dispensable since, if the claimant fails to advance the proceedings the defendant may normally be expected to take steps to have the action dismissed; see Spiro, Begrenzung § 147 (n. 16); Peters & Zimmermann 261, 325; contra: AbschluBbericht, 86. Details, of course, depend on the applicable procedural law. Extra Time The minimum period for a claimant to bring another action where the proceedings have ended without a decision on the merits of the claim varies: sixty days (SWITZERLAND: OR art. 139); six months (GERMANY: BGB § 212(2); GREECE: CC art. 263(2); the NETHERLANDS: BW art. 3:316(2)); one year (art. 14(2) UNCITRAL Convention). Against granting any extra time, convincingly, the German Reform Commission: AbschluBbericht, 86. When Does Prescription Cease to Run? Prescription is interrupted from the moment when judicial proceedings on the claim are begun. The precise date will depend on the applicable procedural law. See the comparative observations in (1979) 10 UNCITRAL Yearbook 159. Declaratory Judgment An action for a declaratory judgment may interrupt prescription: see, for GERMANY, BGB § 209; BGB-PZ § 205; BGB-KE § 208; for SOUTH AFRICA: Loubser 135; comparative: Spiro, Begrenzung § 133. Arbitration Proceedings Prescription may also be suspended or interrupted while arbitration proceedings are pending: see, for GERMANY, BGB § 220 and BGB-KE § 217; for SWITZERLAND, OR art. 135, no. 2; for GREECE: CC art. 269; for ITALY: CC art. 2943(4); for PORTUGAL: CC art. 324; for SCOTLAND: Johnston 5.07 f.; UNCITRAL Convention art. 14. Some of these provisions specifically regulate the moment from which prescription ceases to run: see e.g. BGB § 220(2); UNCITRAL Convention art. 14.

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Article 14:303: Suspension in Case of Impediment beyond Creditor's Control (1)

(2)

The running of the period of prescription is suspended as long as the creditor is prevented from pursuing the claim by an impediment which is beyond the creditor's control and which the creditor could not reasonably have been expected to avoid or overcome. Paragraph (1) applies only if the impediment arises, or subsists, within the last six months of the prescription period.

COMMENT The creditor must have a fair chance of pursuing the claim: otherwise prescription would operate unduly harshly. The creditor can hardly, however, be reproached for not pursuing a claim when not able to pursue it: agere non valenti non currit praescriptio. Also, it must be remembered that while the short general period of prescription set out in Article 14:201 accommodates the reasonable interests of the debtor, the rules concerning commencement and suspension of the period of prescription have to be tilted in favour of the creditor. Moreover, it would seem incongruous to protect a creditor who does not know about the claim and not one who is unable to pursue it. There is, however, no compelling reason to extend the period of prescription if the impediment preventing the institution of an action has ceased to exist well before the end of the prescription period. Thus, it would appear to be quite sufficient to extend the period of prescription by the amount of time for which the creditor was prevented, within the last six months of the prescription period, from pursuing the claim. Illustration 1: B has a claim for €100,000 against A, which has fallen due on 10 March 1992. On 1 January 1993 B's holiday resort in Austria is cut off from the outside world by a huge avalanche. Only two weeks later are communications restored and is he able to leave the resort. Prescription of A's claim occurs on 10 March 1995. The period is not extended since although A was prevented from claiming his money for two weeks in 1993 on account of an impediment beyond his control, he still had more than two years after that event to pursue his claim. Illustration 2: The facts are as above but B is cut off between 25 August and 6 September 1994. Prescription of the claim only occurs on 16 March 1995 since the impediment prevented B from exercising his claim for six days within the last six months of the prescription period. Illustration 3: The facts are as above but B is cut off between 20 and 23 January 1995. Prescription of the claim occurs on 14 March 1995 since B was prevented from exercising his claim for four days within the last six months of the prescription period.

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Illustration 4: The facts are as above but B is cut off between 6 and 14 March 1995. Prescription of the claim occurs on 18 March 1995. B was prevented from exercising his claim for nine days due to an impediment arising within the last six months of the prescription period. Suspension began on 6 March and ended on 14 March. But what was suspended was the running of the original prescription period which, but for the suspension, would have run out on 10 March. Thus, it is only the remaining four days of that period that run after the end of the suspension.

The formula chosen to define the range of impediments leading to suspension of the running of the period of prescription ties in with Article 8:108 PEeL; the comments to that provision apply.

NOTES 1.

2.

3.

Suspensionfor Vis Major Some codes have rules suspending prescription where it is factually impossible for the creditor to pursue the claim. In GERMANY, the creditor must have been prevented from exercising the right as a result of vis major (hOhere Gewalt), "cessation of the administration of justice" being an example (BGB § 203). GREEK law (CC art. 255,1) is virtually identical and so is PORTUGUESE law (CC art. 321). The UNCITRAL Convention takes account of "a circumstance which is beyond the control of the creditor and which he could neither avoid or overcome" (art. 21). The SWISS code has a rule (OR art. 134, no. 6), suspending prescription as long as a claim cannot be asserted before a Swiss court. The interpretation of this rule is disputed (see Spiro, Begrenzung § 72; Peters & Zimmermann 271). For AUSTRIA, see ABGB § 1496. Codes without such Suspension Ground Other codes have no equivalent rule (for the NETHERLANDS, cf. Asser-Hartkamp, Verbintenissenrecht I n.684) or one which only covers a very special situation (for ITALY, see CC art. 2942: claims against members of the armed forces, and related persons, in time of war; for SPAIN, see art. 955 Comm. c.: prescription can be suspended by the Government in cases of war, health disasters or revolution; the CC does not contain an equivalent rule). Presumably, the courts have recourse to the exceptio doli or comparable devices in appropriate cases: see Spiro, Fs Muller-Freienfels, 624. In FRANCE, the draftsmen of the code civil adopted only specific grounds of suspension and made it clear that these grounds were to be exhaustive (CC art. 2251). Nonetheless, the courts have drawn upon the old maxim of the Roman-Canon common law agere non valenti non currit praescriptio (which was supposed to have been abolished) in order to establish suspension of prescription in cases ofimpossibilite absolue d'agir (see Ferid & Sonnenberger 1 C 224 who comment that the courts have decided essentially contrary to the text of the law; the same view is expressed by Terre, Simler, Lequette n. 1396). BELGIAN case law has accepted suspension of prescription in cases where the claimant is prevented by law from exercising the rights in question (see Storme, in: Hondius 69) but otherwise has continued to hold that the statutory grounds for suspension are exhaustive. In ITALIAN law, the agere non valenti rule is still occasionally relied upon though only to justify application by analogy of a specific ground of suspension, e.g. in cases of a pactum de non petendo (cf. Roselli-Vitucci 413). ENGLISH and IRISH law do not recognise vis major as a ground of suspension. There are also no rules concerning the effect of vis major on prescription in SWEDISH, DANISH or FINNISH law. Only the Last Part of the Period is Relevant The codes and statutes suspending prescription in cases of vis major, etc., tend to confine the effect of this rule in a similar, though not identical, manner to the one set out in the Article.

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According to GERMAN and GREEK law (BGB § 203, BGB-KE § 212, CC art. 255, 1), prescription is only suspended for as long as the creditor is prevented from pursuing the claim as a result of vis major within the last six months of the prescription period. Thus, the maximum period for which suspension may be suspended is six months. PORTUGAL has a period of three months (CC art. 321). Art. 21 of the UNCITRAL Convention extends the limitation period "so as not to expire before the expiration of one year from the date on which the relevant circumstance ceased to exist" (for comment, see (1979) 10 UNCITRAL Yearbook 164). Effectively, therefore, the creditor is granted a minimum period of one year to pursue the claim. But most impediments covered by the present rule will only last for a short while. It appears to be disproportionate to grant the creditor a full period of one year (or even six months) after the impediment has fallen away.

Article 14:304: Postponement of Expiry in Case of Negotiations

If the parties negotiate about the claim, or about circumstances from which a claim might arise, the period of prescription does not expire before one year has passed since the last communication made in the negotiations.

COMMENT Negotiations between the parties to reach a settlement out of court deserve to be encouraged. They should not have to be carried out under the pressure of an impending prescription of the claim. Nor should negotiations be allowed to constitute a trap for the creditor. A debtor who starts negotiating about a claim and who thus prevents the creditor from bringing an action should not later be allowed to refuse performance by invoking the time that has elapsed during those negotiations. Ultimately, the present provision has to be regarded as a special manifestation of the principle of good faith, as contained in Article 1:201 of these Principles. In order to minimise the effect of negotiations on prescription it is sufficient to postpone the expiry of the period of prescription rather than suspend its running (on the difference, see Comment A to Article 14:301). Once negotiations have failed, the creditor does not need more than a reasonable minimum period to decide whether to pursue the claim in court. Illustration 1: A has a claim for €20,000 against B. The claim falls due on 10 October 1994. Between 10 October 1994 and 10 March 1995, negotiations are pending between A and B about whether the claim exists. Prescription occurs on 10 October 1997; the period is not extended as a result of the negotiations. Illustration 2: The facts are as above, but the negotiations take place between 20 December 1996 and 5 May 1997. The period of prescription is only completed on 5 May 1998 (one year after the end of negotiations). Illustration 3: The facts are as above, but the negotiations take place between

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1 September 1997 and 15 May 1998. Prescription occurs on 15 May 1999 (one year after the end of negotiations). The term "negotiations" has to be interpreted widely. It covers any exchange of opinion which may reasonably lead the claimant to believe that the claim has not been finally rejected by the other party. Conciliation proceedings, which appear to be of growing importance with regard, e.g., to medical malpractice suits in some countries, should also be taken as covered by the term negotiations. The Principles do not establish any formal requirements to clarify when the period during which prescription is delayed begins or ends. However, a debtor would be well advised to try to establish clearly when negotiations have broken down since, in accordance with general principle, it is the debtor who has to prove that negotiations have broken down. The rules of Article 1:303, on when a notice or other communication takes effect, may be relevant in this connection: the last communication in the negotiations will normally be regarded as made only when it reaches the addressee.

NOTES 1.

2.

Negotiations as a Statutory Ground ojSuspension The idea of negotiations as a ground for suspending prescription has gained considerable support in GERMAN law in recent years. See BGB § 852(2) (re. claims for compensation for damage caused by a wrongful act), § 651 g (2) 2 (package tours) and § 639(2) (defects under a contract of locatio conductio operis). The rule in § 852(2) has been referred to in special statutes and applied by analogy to certain contractual damage claims (BGHZ 93, 64 (68 f.); and see Manchener Kommentar(-Stein) § 852, n. 67). In cases not covered by these special rules, the courts still have to fall back directly on the good faith provision in BGB § 242 (see the references in Manchener Kommentar(-von Feldmann) § 194, n.16 and Manchener Kommentar(-Stein) § 852, n.67). Both German reform proposals therefore recommend the establishment of a generalised rule for negotiations. It is generally recognised in German law that the reference to negotiations has to be interpreted as widely as suggested in the Comments to this rule: cf., e.g., Manchener Kommentar(-Stein), § 852, n. 68; Spiro, Begrenzung § 108. According to DANISH law, if the debtor has embarked upon serious negotiations, prescription is suspended until these negotiations have broken down; see Gomard III, 239. In GREEK law, prescription is suspended as long as the debtor fraudulently dissuades the creditor from pursuing the claim within the last six months of the prescription period. This rule was applied by the Areios Pagos in the case of negotiations (13/1989, HellDni 31 (1990), 1235 (1236)). In ITALY it has been held that prescription is suspended from the moment when a settlement out of court is reached until the final judgment invalidating that settlement (cf. Roselli-Vitucci 413). This is a situation similar to suspension as a result of negotiations. The principle behind the ruling appears to be that prescription does not run against a person who is unable to bring an action. Other Approaches Most of the other legal systems do not have a provision of this kind, but only very few of them are happy to allow the debtor "to negotiate himselfinto limitation" (see the report on NORWEGIAN law to case study 20, Prescription I, in Zimmermann & Whittaker 504). Most want to help the creditor somehow. As far as SWITZERLAND is concerned, Spiro, Begrenzung (§ 108) takes prescription to be suspended during negotiations even without a statutory basis. In other

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countries we find extended interpretations of the notions of acknowledgement and waiver; the use of equitable doctrines like promissory estoppel or personal bar; or resort to the general notion of good faith, to the doctrine of abuse of right or to the exceptio doli (for details, see the country reports for GREECE, AUSTRIA, FRANCE, BELGIUM, SPAIN, ITALY, the NETHERLANDS, ENGLAND, IRELAND, SCOTLAND and the NORDIC COUNTRIES to case 20, as well as the comparative observations at the end of case 21, in Zimmermann & Whittaker 493 If., 530 f.). For the case law in the NETHERLANDS cf. also Koopmann 72 If. In IRELAND the courts, on the basis of their equitable jurisdiction, may stop a party from pleading limitation if it apears that there was a representation (express or implied) by one of the parties that a suspension would occur during the negotiations; see Brady & Kerr 171 If. In SWEDISH law, negotiations would normally constitute a "reminder" which triggers a new ten year period according to Preskriptionslag (1981:130) §§ 5 If. A Form Requirement? An argument against a rule suspending prescription in case of negotiations is that it can lead to uncertainty. When does suspension start and end? (See Preston & Newsom 146). A form requirement has sometimes been suggested to meet this objection: suspension begins if one of the parties requests negotiations in writing, and ends if one of them refuses, in writing, to continue to negotiate (see Peters & Zimmermann 320 If.). The German Reform Commission, however, has argued against such an approach: it is contrary to general usage and would place the less skilled and experienced party at a disadvantage (AbschluLlbericht, 94). Also, it is too restrictive and would leave too much scope for general good faith considerations. Conciliation Proceedings Conciliation proceedings are especially mentioned as suspending prescription in both German reform proposals (Peters & Zimmermann 322; AbschluLlbericht 94).

Article 14:305: Postponement of Expiry in Case of Incapacity (1)

(2)

If a person subject to an incapacity is without a representative, the period of prescription of a claim held by or against that person does not expire before one year has passed after either the incapacity has ended or a representative has been appointed. The period of prescription of claims between a person subject to an incapacity and that person's representative does not expire before one year has passed after either the incapacity has ended or a new representative has been appointed.

COMMENT A. The Options The principle that prescription does not run against a person who is unable to bring an action also requires prescription not to run against a creditor who is subject to an incapacity. The paradigmatic example is the minor who is unable because of minority to pursue a claim in court. Some legal systems, therefore, have a general rule to the effect that prescription does not run against a minor. Arguably, however, it overshoots the mark. For a minor normally has a representative adult (such as a parent or guardian) capable of bringing proceedings on his or her behalf. It is arguable, therefore, that the minor only requires protection where there is no such representative.

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B. The General Approach The choice between these two approaches is not an easy one. On balance, however, commercial certainty would appear to be too gravely jeopardised if a person exposed to a claim by a minor had to wait at least until the minor had reached the age of majority plus three years. The interests of the minor cannot in this respect prevail against those of the third party, since the legal system may reasonably proceed from the assumption that the parent or guardian has a responsibility to look after the interests of the minor. This is particularly obvious in the case of claims other than those for personal injuries, such as contractual claims. If the adult representative fails to act in the appropriate manner this is a risk that the minor should bear, subject to claims against the representative. Moreover, the minor can be protected at least to the extent that expiry of the period of prescription of the minor's claims against the representative adult can be postponed until a reasonable time after the minor reaches the age of majority. C. Person under Disability without a Representative The Article specifies the situations in which protection is required. The effect of the first paragraph is confined to the situation where the minor or other person subject to an incapacity is without a representative. Two additional points have to be noted. (i) Protection of the person subject to an incapacity only appears to be necessary if the lack of representation existed within the last year of the prescription period, as long as the law makes sure that a reasonable period is available after either the incapacity or the lack of representation has been removed. Lack of representation, therefore, does not suspend the running of the prescription period but merely postpones its expiry. (ii) The rule works both ways, i.e. it also affects claims against the person subject to an incapacity. Though not impossible, it is often not easy for the creditor of a person subject to an incapacity who lacks a representative to pursue the claim. Thus, it appears to be equitable to grant such a creditor the same protection as is granted to the person subject to the incapacity.

D. Claims between Person Subject to an Incapacity and the Representative The second paragraph supplements the first. If, as far as third parties are concerned, a minor (for example) has to bear the consequences of the representative's failure to act, the minor must at least be able to sue the representative for damages. This the minor can normally only do on attaining the age of majority. Once again, however, it is unnecessary to suspend prescription. It is sufficient that a reasonable period is available for bringing an action after reaching the age of majority. Once again, it is equitable to make the rule work both ways. E. Personal Injuries

In some countries, sexual abuse of children has given rise to civil litigation. Here the law may arguably rely on the representative adult to take whatever

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action is appropriate, where the person abusing the child is an unrelated stranger. Where the person abusing the child is the parent, postponing the expiry of the period of prescription of all claims between child and parent would help, at least to a certain extent. However, the minor will often have repressed the traumatic childhood experience and may need considerable time to break down the psychological barriers preventing acknowledgement of what has happened. Thus, it may be more appropriate in these cases to suspend the running of, rather than to postpone the expiry of, the period of prescription. Moreover, there have been cases where the child is abused by another family member with whom the parent connives or whom he or she does not want to sue for other reasons. Here it may also be necessary to introduce a rule suspending prescription - either of the claims against the third party or at least against the parent. While acknowledging the possibility that special rules may be required to deal with claims arising from sexual abuse of children, the Commission felt that the relevant issues could not be fully considered in the present context and that, if the rules in the Principles were considered inadequate for this special situation, the matter would be best dealt with by special laws relating to this matter.

F. Claims between Spouses Another related matter may be mentioned here, although it is not a question of incapacity. In a number of codes, claims between spouses are subjected to the same regime as claims between children and their parents or guardians: prescription is suspended as long as the marriage persists. The common denominator is the family tie which constitutes, in the old-fashioned language of the draftsmen of the BGB, a relationship of piety requiring utmost care and protection. But such a rule appears hardly defensible today. It leads to problems being swept under the carpet rather than solved. The death of one of the spouses should not enable the other to surprise disagreeable heirs by presenting them with claims which would normally have prescribed many years ago. Nor should divorce provide the trigger for settling old scores. Marriage would then have had the effect of removing protection against stale claims: a result which may well be regarded as discriminatory. If, on the other hand, one were to regard the rationale underlying suspension concerning claims between spouses as sound, it is difficult to see why the rule should not be generalised so as to cover other closely related persons living in a common household. However, delimitation of its range of application would then become an intricate exercise which would inevitably jeopardise legal certainty. The only special rule that is required is the one concerning claims between persons under a disability and their representatives, and it is based on a different rationale: not on the close personal ties existing between these persons but on the impossibility of action by the person under the disability.

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G. Adults Subject to an Incapacity The previous remarks have often focused on the minor. Of course, they apply with appropriate modifications also to persons who lack the capacity to pursue claims because they are of unsound mind. NOTES 1.

2.

3.

4.

Prescription not Running against Persons Subject to an Incapacity In FRANCE, BELGIUM, LUXEMBOURG, ENGLAND, IRELAND and SCOTLAND prescription does not run against persons subject to an incapacity: see, for the first three of these countries, CC art. 2252 first part; the English Limitation Act 1980 s.28; the Irish Statute of Limitations Act 1957 s. 49; the Prescription and Limitation (Scotland) Act 1973 s. 6(4)(b) and Johnston, 6.130 ff. For exceptions to this general rule, see the French CC art. 2252, second part (on which, see Ferid & Sonnenberger 1 C 223); and see the complex regulation in the English Limitation Act 1980 ss.28, 28A. The Law Commission has now left open the question whether the rule should be retained (Consultation Paper on Limitation of Actions 297 ff.). Person Subject to an Incapacity without a Representative Protection is granted to a person subject to an incapacity, but without a representative, according to AUSTRIAN (ABGB § 1494); GERMAN (BGB § 206); GREEK (CC art. 258(2)), PORTUGUESE (CC art. 320) and ITALIAN law (CC art. 2942). At the same time, these codes generally suspend the prescription of claims of the person under disability against the representative as long as the disability lasts: ABGB § 1495; BGB § 204; Greek CC art. 256; Portuguese CC art. 320; Italian CC art. 2941, nos. 2-4. For similar rules, see for SWITZERLAND OR art. 134, nos. 1 and 2, for the NETHERLANDS, BW art. 3:321 (1) under (b); for FRANCE CC art. 475; generally, see Spiro, Begrenzung §§ 75 f. For the shift in continental legal development from taking account of the legal disability as such towards balancing the interest of the minor against those of the debtor, see Mugdan 1,528; Peters & Zimmermann 128. In SWITZERLAND and the NETHERLANDS the codes do not contain any provision suspending the prescription of a minor's claims (except insofar as these claims are directed against the representative). For details, and circumventions, see Spiro, Begrenzung §§ 95 ff., 106. In SPANISH law prescription runs to the disadvantage even of persons subject to an incapacity, who are left to their remedy against the "representative whose negligence has caused the prescription" (CC art. 1932). In GERMANY lack of representation does not suspend the running of the prescription period but merely postpones its expiry for six months; BGB § 206, supported by the German Reform Commission (BGB-KE § 214). For the similar rule in GREECE, see CC art. 258(2). The Italian rule is different in that prescription is suspended for the period during which the person under disability lacks representation and for six months following the appointment of such representative or the termination of the disability: CC art. 2942. On whether prescription is suspended for and against the person under a disability who lacks representation see Peters & Zimmermann 251 ff., 321; AbschluBbericht, 90 ff.; contra: BGB § 206 and ITALIAN CC art. 2942. Claims between Person under Disability and Representative Prescription of claims between a person under a disability and his or her representative is normally extended by way of suspension rather than postponement of the expiry of the period of prescription; AUSTRIA: ABGB § 1495; GERMANY: BGB § 204; GREECE: CC art. 256, nos. 2 and 3; SWITZERLAND: OR art. 134, nos. 1 and 2; ITALY: CC art. 2941, nos. 2-4; PORTUGAL: CC art. 318, b; BGB-KE § 213; for FRANCE, see Taisne, Jurisclasseur civil, Arts. 2251-2259, n.14. Contra: the NETHERLANDS: BW art. 3:321(1) under (b); Staudinger(-Peters) § 204, n. 3. Personal Injuries On prescription in cases involving sexual abuse of children, see Hondius 9 f.; Law Commission

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Consultation Paper on Limitation of Actions 294 f.; the NETHERLANDS HR, 23 October 1998 and 25 June 1999, Ned. Jur. 2000, 15/16; and the IRISH Statute of Limitations (Amendment) Act 2000. Claims between Spouses Claims between spouses are suspended, as long as the marriage persists, in FRANCE, BELGIUM and LUXEMBOURG (CC art. 2253); AUSTRIA (ABGB § 1495); GERMANY (BGB § 204); GREECE (CC art. 256); PORTUGAL (CC art. 318, a); SWITZERLAND (OR art. 134, no. 3); ITALY (CC art. 2941 no. 1 and Constitutional Court, 19.2.1976, n. 135 in Giust. civ. 1976, III, 131); the NETHERLANDS (BW art. 3:321 (1) under (a)). Generally, see Spiro, Begrenzung § 74 and Fs Bosch, 975 If.. There has been little inclination to extend the rule to marriagelike relationships. See the German Reform Commission, AbschluBbericht, 90 and the decision of the Italian Constitutional Court (29.1.1998, n. 2). There is no such rule in ENGLAND or SCOTLAND. For a spirited attack on the rule, see Staudinger(-Peters) § 204, n. 2.

Article 14:306: Postponement of Expiry: Deceased's Estate Where the creditor or debtor has died, the period of prescription of a claim held by or against the deceased's estate does not expire before one year has passed after the claim can be enforced by or against an heir, or by or against a representative of the estate.

COMMENT When a person has died it can happen, at least under some succession regimes prevailing in Europe, that the estate is without a personal representative, or heir, who can sue or be sued for claims by or against the estate. It is reasonable in such a case to postpone expiry of the period of prescription on the model established for persons subject to an incapacity (Article 14:305). The situations are very similar, and so is the underlying rationale that prescription does not run against a person who is unable to bring an action. This applies to claims by and against the estate.

NOTE The rule can be found in GERMAN law: BGB § 207 but the minimum period is six months rather than one year. The rule has not given rise to problems and its wisdom has never been questioned. Its retention is advocated in both reform proposals; see § 204 BGB-PZ; § 215 BGB-KE; AbschluBbericht, 91. Few other legal systems, however, contain the same or a similar rule. See, however, for GREECE, CC art. 259 and for PORTUGAL, CC art. 321. In SWITZERLAND, the general provision of OR art. 134, no.6-concerning claims which the creditor is unable to pursue before a Swiss court - appears to be applied in appropriate cases: see Spiro, Begrenzung § 72 (158 f.). The codes in FRANCE, BELGIUM and LUXEMBOURG (CC art. 2258(2)) and SPAIN (CC art. 1934) even specifically state that prescription is not suspended (cf. Diez-Picazo & Gullbn Ballesteros I, 471). The ENGLISH Limitation Act 1980 provides in s. 11 (5) that where an injured person dies before the three-year period has elapsed, the relevant period is three years from the date of death or from the date of the personal representative's knowledge of the facts, whichever is later. For IRELAND, see s. 9 ofthe Civil Liability Act 1961.

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Article 14:307: Maximum Length of Period The period of prescription cannot be extended, by suspension of its running or postponement of its expiry under these Principles, to more than ten years or, in case of claims for personal injuries, to more than thirty years. This does not apply to suspension under Article 14:302.

COMMENT A. Uniformity or Differentiation? The Principles establish a core regime of a short period of prescription (three years according to Article 14:201) but, because of the rule on reasonable discoverability (Article 14:301), prescription may nonetheless be postponed for decades. But prescription should not be deferred indefinitely: at some stage, the parties must be able to treat the incident as indubitably closed. A maximum period after which no claim may be brought, regardless of the creditor's knowledge, appears to be necessary as a counterbalance to the discoverability principle. It is required in terms of all three policy considerations referred to above (Comment E to Article 14:101) which underlie the law of prescription. This is increasingly recognised internationally. The question is how long this maximum period should be. Once again, we observe an international trend though not an entirely unequivocal one - towards a shorter period. But this shorter period often only applies to claims which do not involve personal injuries. Thus, taking account of the more modern codifications and reform proposals, there appear, once again, to be two fundamental options: differentiation or uniformity. Differentiation would have to be along the line of personal injuries claims versus other claims. Most situations which have been specified as being particularly problematic (sexual abuse of children, asbestosis, medical malpractice) fall into the category of personal injuries claims. The reasons for treating them differently are that there is often a long latency period and that life, health and the bodily integrity in general are particularly valuable objects of legal protection: personal injuries are generally regarded as more serious than property damage or economic harm. For the latter even a short long-stop of ten years is very widely regarded as sufficient. There should also be no objection to subjecting other types of claims (such as claims for specific performance, or claims for the redress of unjustified enrichment) to a ten year long-stop. For personal injuries, a long-stop of thirty years is widely regarded as appropriate. Finally, the distinction between personal injuries and other claims appears to be comparatively straightforward. Personal injuries are all injuries to the bodily integrity of a person. All claims arising from such injury (including, for instance, psychiatric injury and compensation for pain and suffering) are covered by the thirty-year period. Alternatively, one might try to find a compromise solution which accommodates both personal injuries and other claims while not providing a perfect

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solution to either of them. The arguments for this option are as follows. (i) Even a thirty year period will not provide a perfect solution for personal injury claims since there will still be cases where the creditor did not know about the claim. (ii) An incident might cause both personal injury and damage to property. For example, a defective machine explodes and damages the purchaser's health and property. Or asbestos is used in the process of renovating a house; after some years, the owner contracts asbestos-related cancer and has to undergo expensive treatment; at the same time, the house has to be pulled down. If it is possible, after all those years, to prove who was responsible for using asbestos, and that the presence of asbestos in the house has caused the owner's disease, it is hard to see why the owner should be able to pursue claims based on injury to health but not claims based on damage to property: if the one is established, so is the other. (iii) It is as difficult for the debtor to mount a defence after twenty or thirty years in a personal injuries action as it is in an action concerning damage to property. The obfuscating power of time does not distinguish between different types of claims. Witnesses die, the debtor's memory fades and vital documents are lost. Once again, it must be remembered that we usually only see the hardship involved for a creditor who is barred by prescription although able, even after the lapse of many years, to establish the claim; and that we tend to forget about the many cases in which a prescription regime prevents unjustified claims from being pursued. (iv) One important source of claims based on personal injuries is defective products. Here we have a general long-stop (for personal injuries and damage to property) in all member states of the EU as a result of the Product Liability Directive; and it was the relatively short period of ten years which was regarded as sufficient in this situation. (This period even starts to run when the producer has brought the defective product into circulation!). On balance, it has been decided to follow the first of these approaches and to adopt the distinction between claims based on personal injuries (long-stop of thirty years) and other claims (long-stop of ten years). However, within the framework of the Principles, this long-stop is not, as it is usually perceived, a prescription period. This is due to the fact that discoverability is not the moment of commencement of the period of prescription. Commencement is defined in Article 14:203, a provision which is of general application. The running of the period of prescription is merely suspended as long as the creditor does not know, and could not reasonably know, of the facts giving rise to the claim and of the identity of the debtor. Thus, the long-stop becomes in fact a rule on the maximum effect of extension of the period of prescription. As a result, we do not have two prescription periods for one and the same claim, running side by side with each other; instead, we have a uniform regime of one period of three years which may be extended to a maximum length of ten (or thirty) years. It goes without saying that the ten (or thirty) years must be counted from the time laid down in Article 14:203. Special consideration has to be given to environmental damage. As in

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personal injury cases, the Commission considered a maximum period of extension of merely ten years as inadequate. However, since "environmental damage" is a shifting concept which cannot yet be regarded as settled and which throws up complex problems, the Commission thought it unwise to deal with the problem in the context of general rules on prescription. The matter must be left to special legislation.

B. Range of Application Obviously, the maximum period applies to suspension in case of ignorance. If the special need for legal certainty in this field of law is kept in mind, however, it has to apply as broadly as possible. Only reasons inherent in the nature of things should override this final date. Such reasons are apparent only in one situation: suspension in case of judicial proceedings (Article 14:302). One cannot expect more of the creditor than to attempt to establish the claim by judicial proceedings. How long these proceedings take is very largely a matter the creditor cannot control. Everything is now under way to remove the existing uncertainty and it would clearly be inequitable if the creditor could be trapped by prescription in this situation. Apart from Article 14:302, the maximum period laid down in the present Article applies to all grounds of suspension or postponement of expiry provided for in these Principles, and also in situations where two or more of them apply to the same claim. It therefore provides a limit to the operation of Articles 14:301, 14:303, 14:304, 14:305 and 14:306. For extension of prescription by way of agreement, see Article 14:601. Illustration: On 10 March 1994, A observes some cracks in his house which was built by B a few years earlier. A investigates the matter and discovers (i) that the cracks are due to a defect in the foundations of the house, (ii) that B was responsible for that defect and (iii) that expensive repairs are necessary to prevent further deterioration. On the assumption that the moment triggering the period of prescription for A's claim for damages under Article 9:501 PECL (i.e. the moment of the defective performance) was 1 March 1986, the running of the period was suspended until 10 March 1994. If A and B now start to negotiate about the claim, the period of prescription can be further extended in terms of Article 14:109, but not beyond 1 March 1996.

C. Fraus Omnia Corrumpit (Fraud Unravels All)? In a number of countries, we find a general rule in terms of which the running of the period of prescription is suspended if the debtor fraudulently (or deliberately) conceals the existence of the claim. Such a rule, however, appears to be unnecessary in view of the fact that the running of the period is suspended anyway, as long as the creditor does not know, and could not reasonably know, about the claim. The only question of practical relevance is whether

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fraud (as opposed to mere ignorance) should override the long-stop. But even in this respect a special rule would do more harm than good. Whether the debtor, under certain circumstances, may be barred from raising the defence of prescription is a question of a general and complex nature which defies reduction to a simple and straightforward formula. A legal system that recognises an overriding requirement of good faith (Article 1:201 PEeL) will not, in principle, deny such a possibility. Raising the defence of prescription is a legal act which is, like any other legal act, subject to the requirements of good faith. Of course, it must be taken into account that prescription rules are geared specifically towards bringing about a state oflegal certainty (even at the expense of individual justice) and therefore must not be interfered with lightly. Moreover, even here the lapse of time cannot be considered entirely irrelevant since, after many years have passed, it becomes increasingly difficult and unproductive to argue about whether there has been fraudulent concealment or not. Still, however, the good faith issue can arise. But if it does, it does not do so only in a clearly definable category of cases which can be grouped under the heading of fraudulent concealment of the claim. Force and fear can be equally relevant. And even in cases where there has been neither fraud, nor force, nor fear, a debtor may in certain situations be barred from invoking prescription: particularly where the debtor has promised not to do so. NOTES 1.

Long-Stop: General Period The GERMAN BGB (§ 852(1)) provides for a long-stop ofthirty years (from the moment when the wrongful act was committed, the short period of three years running from the moment of knowledge). The GREEK rule is the same except that the long-stop is twenty years (CC art. 937(1) 2). The SWISS code has ten years in the two situations where it requires knowledge (OR art. 60(1), 67(1)). The NETHERLANDS (BW arts. 3:309, 310, 311) and SCOTLAND (Prescription and Limitation (Scotland) Act 1973 s. 7) have long-stops of twenty years and the ENGLISH Limitation Act 1980 recognises two exceptional long-stops of ten and fifteen years (ss.llA and 14A, relating to actions in negligence for latent damage and product liability). Peters & Zimmermann recommend a general long-stop of ten years (BGB-PZ § 208). The German Commission proposes a period of thirty years for personal injury claims and ten years for other claims arising out of a wrongful act (BGB-KE §§ 199, 201). The English Law Commission presents a solution based on a ten year long-stop applicable to all actions other than those for personal injury for which a period of thirty years is recommended (Law Commission Consultation Paper on Limitation of Actions, 290). The new BELGIAN law has a long-stop of twenty years (applicable to all claims for damages for a wrongful act: art. 2226 bis § 1 al. 2; for details, see Claeys, 1998-99 R.W. 388 If.). Generally, see Storme, in: Hondius, 58 (who regards the combination of two periods as the only balanced solution); Law Commission Consultation Paper on Limitation of Actions, 284 If.; Spiro, Begrenzung § 42; Zimmermann, 2000 JZ 863 f.; cf. also the approach adopted in the Product Liability Directive, arts. 10 If. (three and ten years) and art. 17 of the Convention on civil liability for damage resulting from activities dangerous to the environment (three and ten years). On the other hand, neither FRENCH law (see LambertFaivre n.388 with regard to the period laid down in CC art. 2270-1(1)), nor the SOUTH AFRICAN Prescription Act or the QUEBEC CC recognise a long-stop; for discussion, see Loubser 37; Deslauriers, in: Hondius, 300. IRELAND also does not have a long-stop (except in the Liability for Defective Products Act 1991 and with regard to actions for recovery of money

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charged on land; see Brady & Kerr, 34) but recognises a general discretion inhering in the courts to dismiss proceedings on the basis of inordinate or inexcusable delay in their prosecution; see Article 14:101, note 4. This has the effect of providing the judiciary with a long-stop which can trump the extended limitation period provided by the discoverability rule introduced by the Statute of Limitations (Amendment) Act 1991; see Article 14:301, note 2. 2. Personal Injuries Claims For a comparative assessment of the cases where a comparatively short long-stop may be problematic see Hondius 9 ff. The ENGLISH Law Commission recommends the exceptional thirty year period for personal injury claims (Consultation Paper on Limitation of Actions, 291); the GERMAN Reform Commission specifically lists life, health, bodily integrity and freedom as the relevant objects of legal protection. Freedom is included on the ground that unlawful deprivation of liberty may lead to psychological damage which only manifests itself much later: Abschlul3bericht 76. In the NETHERLANDS the Hoge Raad has decided in two recent pronouncements that the twenty-year long stop laid down in BW art. 3:310 can be set aside under exceptional circumstances: HR 28 April 2000, Ned. Jur. 2000, 430/431. Both cases concerned a special type of cancer caused by exposure to asbestos; the incubation period is normally between twenty and forty years. The Court based its ruling on BW art. 6:2 (according to which any rule based on the law, general usage or a legal act is not applicable as far as it is, under the circumstances, inappropriate according to the precepts of good faith). The cases have given rise to considerable comment, both favourable (e.g. Hondius, 2000 NTBR 275) and unfavourable (e.g. van Schaick, 2000 WPNR 6414). For an assessment of the situation cf. also Hartfiel, 2001 NTBR 58 ff. At present (March 2001) a bill is pending which seeks to set aside the long stop, and thereby extend the prescription period, for asbestos victims. 3. Fraud Prescription is suspended on the ground of fraudulent conduct by the debtor (e.g. concealment, dissuasion) under the ITALIAN CC (art. 2941, no. 8; Roselli-Vitucci 416); the GREEK CC art. 255, 2; the NETHERLANDS BW art. 3:321 (1)(f); the ENGLISH Limitation Act 1980 s. 32(1)(b) the IRISH Statute of Limitations Act 1957 s. 71(1); and the SCOTTISH Prescription and Limitation (Scotland) Act 1973 s.6(4)(a)(i). The codes in FRANCE, BELGIUM, AUSTRIA, GERMANY, SWITZERLAND and QUEBEC do not have a general provision of this kind but for special provisions relating to certain short prescription periods see BGB §§ 477( 1), 638( 1). For comparative observations, see Spiro, Begrenzung § 82. Should fraud override the long stop? For a positive answer, see the English Law Commission's Consultation Paper on Limitation of Actions 304 ff.; for a negative one, from the point of view of BELGIAN law, see Claeys, 1998-99 R.W. 397 ff. On the question of whether the longstop may be dis applied, under certain circumstances, on the basis of good faith, see the Dutch decisions, referred to in note 2, above.

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Section 4: Renewal of Period

Article 14:401: Renewal by Acknowledgement (1)

(2)

If the debtor acknowledges the claim, vis-a-vis the creditor, by part payment, payment of interest, giving of security, or in any other manner, a new period of prescription begins to run. The new period is the general period of prescription, regardless of whether the claim was originally subject to the general period of prescription or the ten year period under Article 14:202. In the latter case, however, this Article does not operate so as to shorten the ten year period.

COMMENT

A. Terminology This Article deals with what, in civilian legal systems, would traditionally have been called "interruption", which means that the time which has elapsed before the interrupting event is not taken into account. Prescription begins to run afresh. In spite of its near universal acceptance, however, the term "interruption" (based on the interruptio temporis of the Roman sources) is awkward and misleading. The Article therefore talks of renewal of the period. The essence of the concept is that a new period of prescription begins to run. Obviously, renewal is a radical interference with the period of prescription, compared to suspension of its running and postponement of its expiry. It is justified only in two cases: acknowledgement of the claim by the debtor (Article 14:401) and acts of execution effected by, or on the application of, the creditor (Article 14:402). B. Acknowledgement A debtor who acknowledges the claim does not require the protection granted by prescription. Protection must, on the other hand, be granted to the creditor who may rely on the debtor's acknowledgement and refrain from instituting an action. The creditor's inactivity in this situation no longer carries the same weight, particularly in relation to any expectation on the part of the debtor that the matter is regarded as closed. Also, the debtor's acknowledgement reduces any uncertainty surrounding the claim. The only sensible way in which the law can take account of such acknowledgement is by starting a new period of prescription. Acknowledgement is a momentary event which cannot merely have a suspensive effect. Some legal systems require the acknowledgement to be in writing. The

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argument for this solution is that it promotes legal certainty. Most European codifications, however, regard an informal acknowledgement (which may be either express or implied) as sufficient. Of course, it may sometimes be difficult to interpret the debtor's conduct but these difficulties can be resolved, as with all declarations or other conduct which may have legal relevance, by having recourse to the general rules of interpretation. Moreover, even a written statement by the debtor will often be open to various interpretations. The general trend in contract law has certainly been towards informality and though we are not dealing here with a contractual declaration there is no reason to regard an acknowledgement as sufficiently serious, or special, or inherently precarious, to warrant the introduction of a form requirement. In none of the countries that recognise informal acknowledgements has the position been regarded as unsatisfactory. Legal certainty is safeguarded sufficiently, if the law requires acknowledgement of the claim to the creditor. The latter cannot reasonably rely on an acknowledgement to a third party. This might well be based on considerations arising from the relationship between debtor and third party and is not sufficient evidence of any clear recognition of obligation towards the creditor. Obvious examples of an acknowledgement by conduct are part payment, payment of interest, or the giving of security. Illustration 1: A owes B €400. B's obligation to pay that sum is due on

10 October 1996. On 5 October 1999, B pays part of the sum and confirms that he will pay the remainder as soon as he is able to. As a result, on 5 October 1999 a new three year period starts to run for the remaining debt. Illustration 2: A has been injured in a car accident caused by B. He has had expenses for hospitalization and medical bills amounting to €1O,000 which he now claims from B. B's insurance is only willing to pay €5000. B therefore sends a cheque for €5000 stating that this is the whole amount he is prepared to pay. There is no renewal of prescription concerning the remaining €5000 since B has not acknowledged A's claim so far as that amount is concerned.

The rule of Article 14:401 also applies to a claim established by judgment. However, acknowledgement of this claim by the debtor does not set in motion a new ten year period. It is now the general period of three years that starts to run, though not so as to shorten the ten year period laid down in Article 14:201 which is already running. Illustration 3: A owes B €20,000. The claim has been established by judgment which has become final on 10 October 1989. Four years later A acknowledges the claim by part payment. Prescription still occurs on 10 October 1999.

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Chapter 14 Illustration 4: The facts are as above but the acknowledgement takes place on 10 March 1998. On that date a new period of three years starts to run. NOTES

Whether an acknowledgement should have the elfect of interrupting prescription was disputed under the ius commune (see Peters & Zimmermann 130, with references) but is generally accepted today; see for FRANCE, BELGIUM and LUXEMBOURG: CC art. 2248; for AUSTRIA: ABGB § 1497; for GERMANY: BGB § 208; for GREECE: CC art. 260; for ITALY: CC art. 2944; for SPAIN: CC art. 1973; for PORTUGAL: CC art. 325; for the NETHERLANDS: BW art. 3:318; for SCOTLAND: Prescription and Limitation (Scotland) Act 1973 ss.6, 7 and 10; Johnston 5.66 If.; for DENMARK: Gomard III, 235; for SWEDEN Preskriptionslag (1981:130) § 5; UNCITRAL Convention art. 20; for ENGLAND: Limitation Act 1980 ss.29 If. (though not for all claims); BGB-PZ § 198; BGB-KE § 206; Law Commission Consultation Paper on Limitation of Actions 308 If. (recommending an extension of the present regime to all claims). An acknowledgement in writing is required in England and according to the UNCITRAL Convention (see the references above), but the other laws just mentioned do not establish any form requirement. Some of them specifically state that the acknowledgement can be implicit (Austrian ABGB § 1497, Portuguese CC art. 325) and others mention part payment, payment of interest or the giving of security as typical cases implying an acknowledgement (BGB § 208). The UNCITRAL Convention recognises an exception from the form requirement in cases of payment of interest or part payment "if it can reasonably be inferred from such payment or performance that the debtor acknowledges that obligation". English and Scottish law put part payment on a par with an acknowledgement in writing. Scottish law, apart from a written statement, also holds "such performance by or on behalf of the debtor towards implement of the obligation as clearly indicates that the obligation still subsists" to be an acknowledgement. The legal nature of an acknowledgement is explored by Spiro, Begrenzung §§ 151 If.; Staudinger(-Peters) § 208, nn. 5 If. Acknowledgement must be made to the creditor in GERMANY (BGB § 208; see also BGB-PZ § 198; BGB-KE § 206) and PORTUGAL (CC art. 325). The same is recognised, though not specifically stated, in the law of the NETHERLANDS (Asser-Hartkamp, Verbintenissenrecht I n.680). ENGLISH law, SCOTTISH law and the UNCITRAL Convention also require acknowledgement to the creditor. Generally, see Spiro, Begrenzung §§ 153. In DENMARK prescription under art. 5.14.4 Danske Lov (but not under the Law no. 274 of 22 December 1908) begins to run again after any reminder by the creditor of the debt of which the debtor gets notice. Such a reminder need not be in the form of a legal action or in writing. Under § 2 of the 1908 Law an acknowledgement, which need not be in any form, makes the 5 year prescription period run again. For renewal of prescription in FINLAND a reminder in any form is sufficient. An acknowledgement in any form has the same elfect. This applies to prescription under § 1 of the Prescription Decree. Under special prescription provisions the institution of legal proceedings may be required.

Article 14:402: Renewal by Attempted Execution The ten year period of prescription laid down in Article 14:202 begins to run again with each reasonable attempt at execution undertaken by the creditor.

COMMENT If the creditor has obtained a judgment that has become enforceable, or any

other instrument which is enforceable under the law under which it was made,

Article 14:402: Renewal by Attempted Execution

201

the claim based on such judgment, or other instrument, is also subject to prescription, though it is now the long ten year period laid down in Article 14:202 that applies. As a result, the creditor's claim can, once again, be threatened by prescription. The only way for the creditor to prevent this from happening (apart from extracting an acknowledgement from the debtor) is to attempt an act of execution. Such an act of execution will normally be of a momentary character and cannot, if it is to have any beneficial effect for the creditor, merely constitute a ground for suspending the running of the period or postponing its expiry. Also, the creditor has formally made clear that the claim is insisted on. The act of execution therefore has to have the effect of starting a new period of prescription. Normally, the attempt at execution will be effected on the application of the creditor by a court or public official. It is then sufficient that the creditor has made the application, as long as such application is not invalid or is not withdrawn before the act of execution has been attempted.

NOTE For renewal of prescription as a consequence of acts of execution, see, for GERMANY, BGB § 209(2) no. 5; BGB-KE § 207; for ITALY: CC art. 2943; for GREECE: CC art. 264; for FRANCE and BELGIUM, CC art. 2244; for SCOTLAND: Johnston 5.55. Implicitly also BW art. 3:316 (for the NETHERLANDS) and many other laws. See generally Spiro, Begrenzung § 134; AbschluJ3bericht, 80 fr. On acts of execution which are invalid for lack of one of their general requirements, and withdrawal of the application for execution, see BGB § 216; BGB-KE § 207 II; and, generally, Spiro, Begrenzung §§ 134, 139 fr.

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Section 5: Effects of Prescription

Article 14:501: General Effect (1)

(2)

After expiry of the period of prescription the debtor is entitled to refuse performance. Whatever has been performed in order to discharge a claim may not be reclaimed merely because the period of prescription had expired.

COMMENT

A. "Weak" Effect of Prescription Even if a legal system looks at prescription as a matter of substantive law (as these Principles do; see the Comment B to Article 14:101), it has two options. Once the period of prescription has run out, the claim may be held to have ceased to exist (strong effect of prescription); or the debtor may merely be granted a right to refuse performance (i.e. prescription constitutes a defence on the level of substantive law; weak effect). A debtor who has paid in spite of prescription having occurred, has paid with legal ground according to the latter approach and should be unable to recover; whereas the debtor should be able to recover as having paid without legal ground according to the former approach. This consequence, however, is not normally drawn by legal systems subscribing to the strong effect of prescription. Nor do all of them, as might be thought logical, regard prescription as a matter which must be taken into account ex officio by the court. Effectively, therefore, it is the weak effect of prescription that has been gaining ground internationally. This is not surprising. The weak effect is more appropriate in view of the aims pursued by the law of prescription. There is no reason for a legal system to foist protection on a debtor who is willing to pay and who can thus be taken to acknowledge the obligation to do so; and the public interest (ut sit finis litium) is not adversely affected if a debtor is allowed to pay, even after the period of prescription has run out. On the contrary, it would be detrimental to the public peace if the debtor were allowed to reclaim the payment made. Once payment has been made, even after prescription has occurred, the matter must be regarded as settled. While any prescription regime will inevitably result in creditors being unable to pursue even entirely valid claims, the law should not endorse this consequence where it is unnecessary in terms of the underlying policy objectives. According to paragraph (1), the debtor is therefore given a right to refuse performance (a peremptory defence). This means that prescription does not operate ipso iure. It also means that the obligation continues to exist. Whatever has been paid or transferred by way of performance may not be

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203

reclaimed merely because the period of prescription has expired. It may be reclaimed for other reasons, for example, if the debtor has performed under the reservation that the claim had not prescribed or if the creditor had fraudulently induced the debtor to believe that the claim had not prescribed. Whether the debtor knew about the fact that prescription had occurred or not is irrelevant. The debtor who did not know that prescription had occurred still cannot recover what has been paid. The debtor who knew that prescription had occurred has still paid in discharge of an existing obligation and can, therefore, not be taken to have made a gift (a conclusion which could be of importance in relation to, for example, claims by disadvantaged creditors). The Principles do not deal with the effect of prescription on security, whether real or personal. B. Defence of Prescription Inadmissible

As has been pointed out already (see Comment C to Article 14:307) raising the defence of prescription can, under certain circumstances, be inadmissible because it constitutes an infringement of the precepts of good faith. This is the case, for instance, where the debtor has prevented the creditor from pursuing the claim in good time, particularly where the debtor has waived the right to raise the defence of prescription. The question is of considerable practical relevance for those legal systems which prohibit agreements rendering prescription more difficult. Since they also usually regard a unilateral waiver as invalid, they can only help the creditor by having recourse to the general good faith provision. In view of the more liberal regime adopted in these Principles (Article 14:601) the problem is largely obviated: a waiver is no longer objectionable merely on account of the fact that the parties would not have been allowed to render prescription more difficult. Moreover, it is reasonable to assume that there will usually have been a tacit agreement. Nevertheless, the problem can still arise under the present Principles, particularly in personal injury cases where the debtor waives the right to invoke prescription shortly before the end of the thirty year maximum period provided in Articles 14:307 and 14:60l. Here the debtor will be barred from invoking the defence of prescription for the period that he or she has delayed enforcement of the claim (Article 1:201). After prescription has occurred, the debtor is entitled to waive the right of invoking the defence of prescription, either by way of agreement with the creditor or unilaterally: after all, the claim still exists and the waiver merely has the effect of removing the possibility of preventing it from being enforced.

NOTES 1.

The Effect of Prescription on the Claim In SCOTLAND prescription has the effect of extinguishing the obligation in question: Prescription and Limitation (Scotland) Act 1973 ss. 8A, 6, 7; and see Johnston 4.101. According to the civil codes of FRANCE, BELGIUM and LUXEMBOURG (CC art. 2223 on which see Terre, Simler, Lequette n. 1042), ITALY (CC arts. 2934, 2938) and SPAIN (CC, art. 1930(2) and see

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2.

3.

4.

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Diez-Picazo & Gu1l6n Ballesteros I, 467) prescription also extinguishes the obligation; nevertheless, the court cannot take note of this fact ex officio: prescription has to be pleaded as a defence. Cf. also for AUSTRIA ABGB §§ 1449, 1451, 1479, 1501. In GERMAN law, the defendant is granted a right to refuse performance; the obligation is not extinguished but continues to exist: BGB § 222(1) and Staudinger(-Peters) § 222, nn. 34 II.; cf. also, for GREEK law, CC art. 272(1); for the NETHERLANDS, Asser-Hartkamp, Verbintenissenrecht I n. 655; for PORTUGUESE law, CC arts. 303 II.; for DANISH law, Gomard III, 231 and Ussing, Aim. Del. 384; for SWEDISH law, Lindskog, Preskription 320 II.; for FINNISH law, Aurejarvi & Hemmo 222. The latter approach is supported by Spiro, Begrenzung §§ 226 II., 241, 244; Loubser 14 II.; AbschluBbericht, 100 II.; and Zimmermann, 2000 JZ 855 II. For the arguments advanced in favour of it by the draftsmen of the BGB and still valid today, see Peters & Zimmermann 136. In ENGLAND, expiry of the limitation period operates to bar the remedy, rather than extinguish the right (see Law Commission Consultation Paper on Limitation of Actions 162 II., 393 II.). The position in IRELAND is the same. According to art. 24 of the UNCITRAL Convention, expiration of the limitation period "shall be taken into consideration in any legal proceedings only if invoked by a party to such proceedings". What remains of the obligation after prescription has occurred is often described as a naturalis obligatio, both in legal systems which, in principle, proceed from the assumption that the obligation is extinguished and in those which hold that the obligation continues to exist: cf., e.g., Malaurie & Aynes n. 157; Staudinger( -Peters) § 222, n. 34; Asser-Hartkamp, Verbintenissenrecht I n. 657; Lindskog, Preskription 320 II.; Spiro, Begrenzung § 244. But it has also, correctly, been noted that the use of such terminology is not very helpful in view of the fact that, at any rate, we are not dealing with a naturalis obligatio in the historical sense of the word: after all, the creditor's claim is perfectly enforceable (as long as prescription is not invoked). "Presumptive" Prescription The civil codes of FRANCE, BELGIUM, LUXEMBOURG, ITALY and PORTUGAL recognise various short periods the expiry of which merely gives rise to a presumption that the obligation has been discharged: See, for France, CC arts. 2271 II. and Terre, Simler, Lequette, n. 1376; for Italy, CC arts. 2954 II.; for Portugal, CC arts. 316 II. Such a presumption provides only an imperfect protection against unjustified claims and therefore always requires, in addition, a proper prescription regime. If the general prescription period is brief, an additional presumptive prescription would render the law in this area unnecessarily complex. For criticism, see Spiro, Begrenzung § 246; Peters & Zimmermann 263 II.; Loubser 9 II. Exclusion of Unjustified Enrichment Claim It is very widely recognised that what has been performed in order to discharge a claim cannot be reclaimed merely because the period of prescription has expired: see, for FRANCE, Terre, Simler, Lequette n. 1403; for SPAIN, Pantaleon, Prescripci6n 5009; for PORTUGAL: CC art. 304(2); for AUSTRIA: ABGB 1432; for GERMANY: BGB § 222(2); for SWITZERLAND: OR art. 63(2); for GREECE: CC art. 272(2); for ITALY: CC art. 2940; for DENMARK: Gomard III, 231 and Ussing, Aim. Del. 384; for FINLAND: Aurejarvi & Hemmo 222; art. 26 UNCITRAL Convention; Spiro, Begrenzung § 232 II. Good Faith and Waiver For the elIect of good faith on the application of the prescription regime and, particularly, the way oftaking into consideration a waiver which the debtor has declared before prescription has run out, see Spiro, Begrenzung § 343; Staudinger(-Peters) § 222, nn. 17 II., 20 II.; and the country reports for GERMANY, GREECE, AUSTRIA, FRANCE, BELGIUM, SPAIN, ITALY, the NETHERLANDS, ENGLAND, IRELAND, SCOTLAND, DENMARK, SWEDEN and FINLAND to case study 21 (Prescription II) in Zimmermann & Whittaker 508 II. Cf. also Storme, in: Hondius, 70 II. Waiver of the right to invoke prescription after prescription has occurred is possible: see, for FRANCE, BELGIUM and LUXEMBOURG, CC art. 2220; FOR GREECE: CC art. 276; for ITALY: CC art. 2937; for PORTUGAL: CC art. 302; for GERMANY: Staudinger(-Peters) § 222, nn. 28 II.; for the NETHERLANDS: BW art. 3:322(2); Asser-Hartkamp, Verbintenissenrecht Inn. 659 II.; Koopmann 95 II.; and for a comparative survey: Spiro, Begrenzung § 343; Loubser 150 II.

Article 14:503: Effect on Set-Off 205 Article 14:502: Effect on Ancillary Claims The period of prescription for a right to payment of interest, and other claims of an ancillary nature, expires not later than the period for the principal claim.

COMMENT Prescription occurs ut sit finis litium. The law wants to prevent litigation about stale claims, both in the public interest and in order to protect the debtor. This policy would be undermined if the creditor could still sue the debtor for interest that may have become due on a claim for which the period of prescription has run out; for the debtor, in order to mount a defence, might then be forced to go into the merits of the principal claim itself. The same considerations apply to other claims of an ancillary nature, such as those for emoluments and costs. Hence the need for a rule that such claims prescribe with the principal claim, even if the prescription period applicable to them has not yet expired.

NOTE The rule is found in GERMANY (BGB § 224); GREECE (CC art. 274); SCOTLAND (Johnston 4.101(3)); SWITZERLAND (OR art. 133); the UNCITRAL Convention (art. 27, confined to interest); BGB-KE § 224. See also, for the NETHERLANDS, BW art. 3:312; for ITALY, Trabucchi 524; for DENMARK, Gomard III, 232; for SWEDEN, Preskriptionslag (1981:130) § 8 and Lindskog, Preskription 330, 341 If. The rule may be said to be "generally recognised today" (Spiro, Begrenzung §§ 59, 236). For details as to the range of claims covered, see Staudinger(-Peters) § 224, nn. 5 If.

Article 14:503: Effect on Set-Off A claim in relation to which the period of prescription has expired may nonetheless be set off, unless the debtor has invoked prescription previously or does so within two months of notification of set-off.

COMMENT A claim that is prescribed can no longer be enforced. But it may still provide a valid basis for a right of set-off. A number of codifications contain rules to the effect that the right of set-off is not excluded by the prescription of the cross-claim, provided it could have been set off against the principal claim at a time when it was not prescribed. The policy of these rules is to preserve a right of set-off that has once accrued, even though set-off has not been declared at that stage. It does not, however, fit in well with the policy considerations underlying the law of prescription. The "obfuscating power of time" affects the creditor's claim in the same way, whether it is pursued by way of action or used to effect set-off. In both cases the debtor needs protection. In both cases it would run counter to the public interest if a stale claim could become the

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object of litigation. Set-off, according to these Principles, does not operate restrospectively (see Article 13:106). This simplifies matters, for we merely have to look at the moment when set-off is declared. Obviously, considering the policy of the law of prescription, it cannot be declared where the debtor (of the cross-claim) has previously invoked prescription. But since the debtor has no reason to invoke prescription unless the creditor asserts a claim (whether by way of bringing an action or by declaring set-off), the debtor will have to be granted a reasonable period, after receipt of notice of set-off, to raise the defence of prescription. If the debtor fails to do so, the set-off is effective: after all, the claim continues to exist in spite of the prescription period having run out. Illustration: A has sold B a car for €15,000. The car is delivered to B on

1 October 1995. On the same day A's claim to receive the purchase price falls due. In September 1997 the car is involved in an accident caused by a defect in the brakes for which A was responsible. B suffers damage to the extent of €17,000. The period of prescription of B's claim against A started to run on 1 October 1995 (the day of non-performance) but its running was suspended so long as B was unaware of the defect (until September 1997). If B sues A for damages before 1 October 1998, A can set off his own claim for the purchase price. He may do so even when he is sued after 1 October provided B does not invoke prescription within two months of having received notice of set-off.

NOTE The right of set-off is not excluded by the prescription of the cross-claim, provided it could have been set off against the principal claim at a time when it was not prescribed: see, for GERMANY, BGB § 390,2 (the rule has been criticised by Peters & Zimmermann 266, P. Bydlinski, (1996) 196 AcP 293 ff.); GREECE: CC art. 443; PORTUGAL: CC art. 850; SWITZERLAND: OR art. 120(3) and Spiro, Begrenzung § 216; the NETHERLANDS: BW art. 6:131(1); art. 25(2) UNCITRAL Convention. For AUSTRIA, see Koziol-Welser II, 104 (but see the objections raised by Dullinger 165 ff.); for SCOTLAND, see Wilson 13.6; Johnston 4.101(1). The rule tries to take account of the retrospective effect of the declaration of set-off; obviously, it is unnecessary in a legal system (like the FRENCH one) where set-off operates ipso iure; but cf. for ITALY CC art. 1242 which specifically spells out that set-off is only excluded if prescription was completed on the date on which the two debts began to coexist. For SPAIN, see Pantaleon, Prescripci6n 5009. As far as legal systems are concerned which neither attribute ipso iure effect to set-off, nor retrospective effect to a declaration of set-off, see Wood 13-18 ff. (ENGLAND); Ussing, AIm. Del. 384 (DENMARK); Prescription Decree § 5 (FINLAND); Preskriptionslag (1981:130) § 10 (SWEDEN).

Article 14:601: Agreements Concerning Prescription

207

Section 6: Modification by Agreement

Article 14:601: Agreements Concerning Prescription (1)

(2)

The requirements for prescription may be modified by agreement between the parties, in particular by either shortening or lengthening the periods of prescription. The period of prescription may not, however, be reduced to less than one year or extended to more than thirty years after the time of commencement set out in Article 14:203.

COMMENT A. Agreements Rendering Prescription More Difficult The parties may wish to contract out of the prescription regime. This can happen in a number of ways. They may want to extend or shorten the period of prescription applicable to their claim; they may want to change the date when the period begins to run; they may want to add to, or subtract from, the list of grounds of suspension, and so on. Agreements rendering prescription more difficult are more widely regarded as objectionable than agreements facilitating prescription. These objections are usually based upon the public interest which the prescription of claims is intended to serve. It must, however, be remembered that the prescription of claims predominantly serves to protect the debtor and that, where the debtor renounces such protection, private autonomy may well be seen to prevail over the public interest. Also, the general prescription periods applying in countries objecting to agreements rendering prescription more difficult are comparatively long (ten, twenty, or thirty years) so that a further lengthening may indeed be problematic; much more problematic, at any rate, than where we have a short general prescription period. Widely, therefore, agreements lengthening the period are specifically admitted, where the period is, exceptionally, a short one. Contractual warranties concerning latent defects in buildings or goods can have that effect and provide an obvious and practically important example. Equally, it tends to be accepted that the prohibition does not affect agreements which indirectly render prescription more difficult, such as agreements postponing the due date of a claim, or pacta de non petendo (agreements allowing additional time for performance). However, it is not easy to see why the parties should not be able to postpone the commencement of the period of prescription as such if they can postpone the due date of the claim. Moreover, these subtle distinctions provide ample opportunity for effectively circumventing the prohibition. These problems are obviated by abandoning the prohibition.

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This appears all the more desirable under a system of prescription such as the one proposed in these Principles. Party autonomy provides the necessary counterbalance to (i) the short general prescription period of three years and (ii) the uniformity of the regime in general. Neither the three year period nor a number of the other rules fit all types of claims and all imaginable situations equally well. The parties must be free to devise a more appropriate regime, as long as they observe the general limitations placed on freedom of contract. The rules in this Chapter rest on a delicate balancing of interests and it must be recognised that a reasonable balance could conceivably be achieved in an entirely different way. The parties to a contract may, for example, quite reasonably regard suspension in case of ignorance as a source of uncertainty and they may wish to balance the exclusion of this rule by providing for a longer period.

B. Restrictions Two provisos have to be made. (i) Standard contract terms interfering with the prescription regime must be scrutinised particularly carefully. The Unfair Contract Terms Directive, as implemented in the member states, provides the necessary tool; cf. also Article 4:110 of these Principles. (ii) Public interest does not require a prescription regime to be mandatory: party autonomy may, to a large extent, prevail. The public interest is not adversely affected if a claim prescribes in seven rather than three years; not sufficiently adversely affected, at any rate, to override the decision of a debtor to waive this protection by agreement with the creditor. The debtor should not, however, be able to agree upon a period of fifty, or one hundred, years since that would effectively exclude the claim from prescription. This is why the present Article provides that prescription cannot be extended by agreement beyond a period of thirty years. Thirty years constitute the longest period envisaged in these Principles under exceptional circumstances (maximum period of extension in cases of personal injuries claims: Article 14:307) and one which is, at present, still applicable as a general period in a number of member states. The thirty years are to be counted from the general time of commencement of prescription, as laid down in Article 14:203. C. Agreements Facilitating Prescription What has been said above applies with even greater force to agreements facilitating prescription. They are much more widely recognised even today; moreover, they do not conflict with the public interest based policy concerns underlying the law of prescription. Nonetheless it has been regarded as equitable also to fix a minimum limit for party autonomy. This limit is a period of one year. It applies even to individually negotiated agreements between professional parties. NOTES 1.

Prescription Regime Mandatory There is a considerable divergence of views as to whether it is possible for the parties to contract

Article 14:601: Agreements Concerning Prescription

2.

3.

4.

209

out of the prescription regime by lengthening or shortening the prescription period, by providing for different starting dates, by introducing additional, or opting out of existing, grounds of suspension and so on. Some systems are particularly strict in this regard and prohibit agreements either way. See the SWISS OR art. 129; the GREEK CC art. 275; the ITALIAN CC art. 2936 and the PORTUGUESE CC art. 300; and cf. also, most recently, art. 2884 of the QUEBEC Cc. The UNCITRAL Convention, too, regards its prescription regime as mandatory: art. 22 ("The limitation period cannot be modified or affected by any declaration or agreement between the parties ..."). There are two exceptions, the one permitting the debtor at any time during the running of the period to extend it by a declaration in writing to the creditor, the other sanctioning, under certain circumstances, a clause in the contract of sale, in terms of which arbitral proceedings are to be commenced within a shorter period of limitation than that prescribed by the Convention. Prescription Regime Unilaterally Mandatory A number of legal systems allow the parties to facilitate prescription, especially by providing for a period that is shorter than the statutory one, while they refuse to recognise agreements rendering prescription more difficult, particularly by extending the statutory period. In these countries the prescription regime is thus of a unilaterally mandatory character: see, for GERMANY, BGB § 225; for AUSTRIA: ABGB § 1502; for FRANCE: Ferid & Sonnenberger 1 C 254 ff.; for BELGIUM: Comelis, Algemene theorie, no. 709 (but cf. the criticism by Storme, in: Hondius, 71 ff.); for the NETHERLANDS: Asser-Hartkamp, Verbintenissenrecht I n. 678; for DENMARK: Gomard III, 233; for FINLAND: Halila & YlOstaio 103 ff. This may also be the position in SCOTTISH law: see Johnston 4.05 (who, however, comments that the meaning of the relevant section - s. 13-ofthe Prescription and Limitation (Scotland) Act 1973 is unclear). However, where the prescription period is, exceptionally, a very short one, agreements lengthening it are permitted according to BGB §§477(1) 2, 480(1) 2, 490(1) 2, 638(2), HGB §§ 414(1) 2, 423, 439; for SWITZERLAND, see Spiro, Begrenzung § 345. Contractual warranties are thus permitted even if they have, as they often do, the effect of lengthening the period of prescription: see Munchener Kommentar( -Westermann) § 477, nn. 21 ff.; Spiro, Begrenzung § 346. Agreements which indirectly render prescription more difficult (e.g. agreements postponing the due date of a claim, or pacta de non petendo) are permissible (for details, see Spiro, Begrenzung § 344; Staudinger(-Peters) § 225, nn. 7 ff.). Staudinger(-Peters) § 225, n.2 therefore pointedly maintains that the parties do not meet unsurmountable obstacles if they wish to extend the period of prescription. Recognition of Agreements Both Ways Finally the GERMAN Reform Commission and the ENGLISH Law Commission recommend recognition, in principle, of agreements both ways: BGB-KE § 220 (and see Abschlul3bericht, 97 ff.); Law Commission Consultation Paper on Limitation of Actions, 389 ff. This seems to tie in with the legal position prevailing in England today (see Law Commission Consultation Paper, 389). However, the German Reform Commission proposes a limit of thirty years (to be calculated from the statutory commencement of prescription): BGB-KE § 220, 3. The English Law Commission suggests that the long-stop period as well as the date triggering it off might become mandatory: Consultation Paper, 390. SPANISH law also appears to allow, in principle, recognition of agreements both ways. For agreements facilitating prescription, see Diez-Picazo & Gu1l6n Ballesteros I, 468; Pantaieon, Prescripci6n 5013. Agreements rendering prescription more difficult by extending the period of prescription are also valid, except when they render the claim unprescribable (Diez-Picazo & Gu1l6n Ballesteros I, 468) or if they lead to a prescription exceeding the period of fifteen years of CC art. 1964 (Pantaieon, Prescripci6n 5013 ). According to SWEDISH law, agreements prolonging or shortening prescription are valid in principle, though they are subject to the general rule that unreasonable contract terms may be set aside or modified in terms of the Contracts Act § 36 (Lindskog, Preskription 582 ff.). Agreements Facilitating Prescription Agreements facilitating prescription promote the policy concerns underlying the law of prescription even more effectively than the normal regime; see, e.g., Zimmermann, in: Jayme, 188; AsserHartkamp, Verbintenissenrecht I n. 687. Even such agreements are regarded as undesirable by Spiro, Begrenzung §§ 347 ff. (who, however, also points out that the parties are free to limit their claims in other ways; considerable problems of delimitation can ensue).

CHAPTER 15

Illegality

Article 15:101: Contracts Contrary to Fundamental Principles

A contract is of no effect to the extent that it is contrary to principles recognised as fundamental in the laws of the Member States of the European Union.

COMMENT A. Scope and placing of Chapter This Chapter deals with the effects of illegality on contracts or contractual provisions. The topic is somewhat related to the matters dealt with in Chapter 4 (Validity) of the Principles, although it does not provide for the remedy of avoidance as such. In any new edition of all three Parts this Chapter would probably form a separate section in a slightly modified Chapter 4. In the meantime it is placed here, towards the end of Part 3, so as to facilitate any subsequent transposition without affecting the numbering of preceding Chapters.

B. Contrary to Principles Recognised as Fundamental in the Laws of the Member States

The formulation of Article 15:101 is intended to avoid the varying national concepts of immorality, illegality at common law, public policy, ordre public and bonos mores, by invoking a necessarily broad idea offundamental principles of law found across the European Union, including European Community law. Guidance as to these fundamental principles may be obtained from such documents as the EC Treaty (e.g. in favour of free movement of goods, services and persons, protection of market competition), the European Convention on Human Rights (e.g. prohibition of slavery and forced labour (art. 3), and rights to liberty (art. 5), respect for private and family life (art. 8), freedom of thought (art. 9), freedom of expression (art. 10), freedom of association (art. 11), right to marry (art. 12) and peaceful enjoyment of possessions (First Protocol, art. 1)) and the European Union Charter on Fundamental Rights (which includes many of the rights already mentioned and adds such matters as respect for personal data (art. 8), freedom to choose an occupation and right to engage in work (art. 15), freedom to conduct a business (art. 16), right to property (art. 17), equality between men and women (art. 23), children's rights (art. 24), 211

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rights of collective bargaining and action (art. 28), protection in the event of unjustified dismissal (art. 30), and a high level of consumer protection (art. 38). Merely national concepts as such have no effect upon contracts governed by the Principles and may not be invoked directly, although comparative study can give further help in the identification and elucidation of principles recognised as fundamental in the laws of the Member States. Thus Article 15:101 extends to contracts placing undue restraints upon individual liberty (for example, being constraints of excessive duration or covenants not to compete), upon the right to work, or upon being otherwise in restraint of trade, contracts which are in conflict with the generally accepted norms of family life and sexual morality, and contracts which interfere with the due administration of justice (e.g. champertous agreements in England, pacta de quota litis elsewhere). See further KOtz and Flessner 155-161. The public policy underpinning principles recognised as fundamental may change over time, in accordance with the prevailing norms of society as they develop. Because the Principles contain rules about contracts conferring excessive benefit or unfair advantage (Article 4:109) and unfair contract terms not individually negotiated (Article 4:110), these situations fall outside the scope of Article 15:101.

c.

Of No Effect

The Principles here avoid the national concepts of nullity (absolute or relative), voidness, void ability and unenforceability, and use instead a concept of "ineffectiveness". Ineffectiveness extends to non-enforcement of the contract where enforcement (as distinct from the contract itself) would be contrary to principles regarded as fundamental in the laws of the Member States of the European Union. D. No Discretion Unlike the position in Article 15:102, the judge or arbitrator is given no discretion to determine the effects of a contract which is contrary to European fundamental principles of law: such a contract is to be given no effect at all. The intentions and knowledge of the parties are irrelevant. NOTES All European systems make provision for the ineffectiveness of contracts which are contrary to fundamental principles of morality or public policy. The terminology varies. The FRENCH code, which locates its treatment of immorality in the doctrines of cause and objet, makes use of two concepts: bonos mores and ordre public (CC arts. 1133, 1172, 1217, 1218). In practice the first concept has been subsumed in the second. The ITALIAN CC (art. 1343) is framed in terms of ordine pubblico and buon costume. The PORTUGUESE CC (arts. 280, 281) is framed in terms of ordem publica and bons costumes: a special rule provides that voluntary limitations offundamental civil rights are void if contrary to the public interest (CC art. 81 n. 1). In the NETHERLANDS the BW (art. 3.40) talks of violation of good morals and public order.

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The SPANISH code (CC art. 1275) talks of a cause being unlawful when it is contrary to good morals. A contract may also be declared void and without effect (1) when the parties do not keep within the limits of freedom of contract, morals or ordre public being among these limits (CC art. 1255); (2) when the object of the contract is unlawful because it deals with services which are contrary to bonos mores (CC art. 1271(3)). The GERMAN (BGB § 138) and AUSTRIAN (ABGB § 879) codes speak of violation of good morals. The Swiss obligations code (OR art. 20) speaks simply of immorality. See also the GREEK Cc. art. 178. In FINNISH law contracts against bonos mores are held to be invalid. See e.g. Telaranta 250-274, and Hemmo 1,300-307. Under DANISH law, the rule in Danske Lov (1683) art. 5.1.2 provides that contracts which violate "decency" are void. This covers contracts to commit a crime or to reward a person who commits a crime. It also covers promises whereby the promisor undertakes to limit inappropriately his or her freedom of action, such as a promise to vote for a certain political party or to change or not change religious faith. A promise to pay a person for doing something which the law favours or requires may be immoral and unenforceable: e.g a promise to pay a person to speak the truth as a witness in a litigation (see Andersen & Madsen 235 and Gomard, Kontraktsret 195 ff.) In ENGLISH, IRISH and SCOTTISH law the subject matter of Article 15:101 is often presented under such headings as "illegality at common law", "immoral contracts" or contracts "contrary to public policy". While such a contract may be void, it is more often presented as "unenforceable". See Chitty paras. 17.003-17.139; Clark 323-7; MacQueen & Thomson 4.68-4.75. English law is currently under review by the Law Commission in its Consultation Paper on Illegal Transactions. The Commission's provisional proposals are to the effect that courts should have a discretion to decide whether or not illegality or infringement of public policy should act as a defence to a claim for contractual enforcement.

Article 15:102: Contracts Infringing Mandatory Rules (1)

(2)

(3)

Where a contract infringes a mandatory rule of law applicable under Article 1: 103 of these Principles, the effects of that infringement upon the contract are the effects, if any, expressly prescribed by that mandatory rule. Where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the contract may be declared to have full effect, to have some effect, to have no effect, or to be subject to modification. A decision reached under paragraph (2) must be an appropriate and proportional response to the infringement, having regard to all relevant circumstances, including: (a) the purpose of the rule which has been infringed; ( b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether the infringement was intentional; and (f) the closeness of the relationship between the infringement and the contract.

COMMENT A. General

Many contracts are illegal, in the sense that they contravene the law, without being contrary to any fundamental principle. Article 15:102 deals with such

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contracts. It is implicit in the structure of Articles 15:101 and 15:102 that if the infringement also involves a violation of a fundamental principle within the meaning of Article 15:101 it is that Article which applies. In practice, therefore, Article 15:102 deals with less important violations of the law than Article 15:101. Indeed, given the extent of statutory regulation in modern States, some infringements covered by Article 15:102 may be of a merely technical nature. This means that a flexible approach has to be taken to the effects of an infringement. B. Mandatory Rules of the Applicable Law

Article 15:102 does not declare when a contract is illegal. Although the Principles constitute a self-contained system of rules applying to contracts governed by them, it is not possible to ignore altogether the provisions of national and other positive laws otherwise applying to such contracts, in particular those rules or prohibitions expressly or impliedly making contracts null, void, voidable, annullable, or unenforceable in particular circumstances. Where such rules are applicable to the contract under international private law and Article 1:103 of the Principles, Article 15:102 is to be brought into play. The Article is however concerned only with the effects of the illegality. Article 1:103 of the Principles distinguishes between two types of mandatory rules: (1) those national mandatory rules which may be rendered inapplicable by the parties' choice of the Principles to govern their contract, where this is allowed by the law which would otherwise be applicable; (2) those rules which are applicable regardless of the law governing the contract according to the relevant rules of international private law. This distinction follows Article 7 of the Rome Convention on the Law Applicable to Contractual Obligations 1980, which provides that when applying the law of one country under the Convention effect may be given to the mandatory rules of another country with which the situation has a close connection if and in so far as under the law of the latter country these rules must be applied whatever the law applicable to the contract. In considering whether to give effect to such mandatory rules, regard is to be had to their nature and purpose and to the consequences of their application or non-application. But nothing in the Convention restricts the application of the rules of the law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract. It should also be noted that Article 16 of the Convention states that the application of a rule of law of a country specified by the Convention may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum. C. Infringement

An infringement of a mandatory rule of law may arise in respect of who may conclude the contract, how it may be concluded, the contents or purpose of the contract, or (exceptionally) the performance of the contract.

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The clearest case is where an applicable mandatory rule as to who may make certain contracts is infringed. Illustration 1: A statute provides that a company may provide credit to consumers only if it holds a licence granted by the government, and that consumer credit agreements entered into by unlicensed providers are unenforceable by the provider. The unlicensed provider of consumer credit is also guilty of a criminal offence. Here the making of a consumer credit agreement by an unlicensed provider would infringe the rule of law.

More difficult is the issue of the contract with an illegal purpose. In general, for an illegal purpose to impact upon the effectiveness of the contract, it would seem that this must be the common purpose of the parties, at least in the sense that the illicit purpose of one is known to or ought to be realised by the other. If the illegality pertains only to the performance of the contractual obligation the contract itself may well be unaffected by the rules on illegality. Thus if a haulier breaks the speed-limit from time to time, or jumps a stop light, while performing a contract for the carriage of goods by road the contract remains unaffected by the rules in this Article. The contract itself does not infringe the mandatory rules of the road traffic law. Only if it was intended by one or both parties from the outset that the contract be performed in an illegal manner do questions arise about whether and to what extent the contract or the agreement on its performance is effective. The situation is then similar to that of a contract with an illegal purpose. Illustration 2: A buyer, who is in urgent need of the seller's goods, persuades the seller to promise to break the speed limit when bringing the goods. This promise by the seller is within the scope of the rules on illegality.

The rules on illegality apply also to illegal conditions of a contract (for Conditions see Chapter 16 of these Principles). D. Effects of Illegality In determining the effects of an illegality upon a contract, regard is to be had first to what the mandatory rule in question provides upon the matter. If the mandatory rule provides expressly for the effect of an infringement then that effect follows. If, for example the relevant rule expressly states that infringement invalidates a contract, or if it provides that contracts are not to be invalidated by any infringement, then these consequences follow. Thus, for example, Article 81 of the EC Treaty prohibits agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition within the common market and declares such prohibited agreements to be "automatically void". Conversely, the legislation may provide that the criminal offence which may be committed in the course of forming or performing a contract does not of itself make the contract void or

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unenforceable or prevent any cause of action arising in respect of any loss (see e.g. UK Package Travel, Package Holidays and Package Tours Regulations 1992 reg. 27, implementing Council Directive 90j314jEEC on package travel, package holidays and package tours). The rule in question may not provide expressly for the effects upon a contract of an infringement of the rule. It is necessary for the Principles to deal with this second situation. They do so by addressing themselves to a person (judge or arbitrator) with power to determine matters arising under the contract. If the matter is never referred to a judge or arbitrator (and is not within Article 15:101) then the contract is not affected by the infringement. Contracts are valid unless otherwise provided, and in this situation there is no Article or mandatory rule of law which provides for invalidity. Where Article 15:102(2) is brought into operation, the judge or arbitrator is given a discretion to declare the contract to be of full effect, some effect or no effect, or to be subject to modification. The decision must be an appropriate and proportional response to the infringement having regard to all the relevant circumstances and, in particular, to those spelled out in Article 15:102(3). Article 15:102(2) gives the judge or arbitrator a choice from a range of possible effects, including that of leaving the contract wholly unaffected and fully enforceable. Equally, the contract may be given some but not complete effectiveness: for example, it may be enforceable by one of the parties only, or only in part, or only at a particular time. It may be that some remedies, such as specific performance, are not available, while others, such as damages for non-performance, are. It may be decided that the contract is of no effect at all (the phraseology is intended to cover both nullity and unenforceability), or that its enforceability is subject to modification by the judge or arbitrator. E. Factors to be Taken Into Account in Determining Effect of Illegality The Principles in Article 15:102(3) enjoin the judge or arbitrator to take into account all the relevant circumstances in determining the effect of the infringement of the law upon the contract. To assist in this process, a number of factors to be so taken into account are listed. The list is not exclusive, and the factors mentioned may well overlap in application. (i) Purpose of the Rule

Where the rule in question contains no express provision about the effect on the validity of a contract which infringes the rule, the legislative intent will have to be determined in accordance with the usual rules on the interpretation of the law. A purposive approach is to be adopted. The intention of the Principles is that consideration should always be given to whether, in the absence of an express statement on the point, enabling the rule to take full effect requires the contract to be set aside. Examples where the purpose of the legislation should be considered might include whether a piece of domestic legislation was intended to apply to a trans-national or cross-border transaction, or whether an international or Community law rule was to apply to a purely domestic transaction.

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(ii) For Whose Protection does the Rule Exist? This factor is closely related to the issue of the purpose of the rule (see (i) above). If, for example, the rule in question merely prohibits one party from entering or making contracts of the kind in question, it does not follow that the other party may plead the illegality to prevent the contract taking effect. Illustration 2: A statute lays down that domestic construction work is only to be carried out by registered builders, but does not say what effect the prohibition has upon contracts made by unregistered builders. 75% of a contract to build an extension to a private dwelling house is completed by an unregistered builder, who then abandons the job. If the court or arbitrator concludes that the main purpose of the rule is to protect clients then, while the client may not be able to insist on specific performance of the contract by the unregistered builder, the client may have a claim against the builder for damages in respect of defective work or the additional cost of having the work completed by a registered builder. Illustration 3: In breach of companies legislation, a company agrees to provide financial assistance to shareholders to enable them to purchase more of the company's shares. The purpose of the legislation is the protection of shareholders and creditors of the company. The agreement may be upheld if all the shareholders in the company are purchasers and no creditors are adversely affected by the transaction. Illustration 4: A consumer protection statute prohibits the negotiation or conclusion of loan agreements away from business premises. The aim of the statute is to protect consumers from 'cold selling' by home-visiting or telephoning salesmen of credit acting on behalf of consumer credit companies. While such companies are unable to enforce agreements entered in such circumstances, the consumer for whose protection the prohibition exists may do so.

(iii) Sanctions Already Incurred If the rule in question provides for a criminal or administrative sanction against the wrongdoer, the imposition of that sanction may be enough to deter the conduct in question without adding the ineffectiveness of the contract. The goal of deterrence is usually better achieved through such criminal or administrative sanctions than by way of private law. Often such sanctions will take into account the degree of blameworthiness of the party concerned, and this may be a more appropriate response to the conduct than rendering the contract wholly or partially ineffective. Illustration 5: A statute provides that ships of a certain size must not carry cargoes above a certain quantity. Criminal sanctions are provided, but the statute says nothing about any civil consequences of infringement of the

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prohibition. A, a shipowner, contravenes the statute in carrying a cargo for B. B invokes the illegality of the performance and refuses to pay the freight. Because the aim of the statute is sufficiently fulfilled by the imposition of the criminal sanction upon A, the contract is not invalid and B must pay the freight. Illustration 6: Legislation prohibits court officials from engaging in remunerated activities outside their employment. The purposes of the rule are protection of the professional integrity of officials and deterring them from entering such arrangements, but this can be achieved by the application of disciplinary sanctions adjusted to take account of the degree of guilt, rather than by enabling the other party to the transaction to have the official's services for nothing.

(iv) Seriousness of the Infringement The judge or arbitrator is able to consider the seriousness of the infringement of the rule in assessing what if any effect the illegality should have upon the contract. If the infringement is minor or very slight, that may point to the contract being given effect. Illustration 7: A ship owning company is in breach of statutory regulations as to the maximum load to be carried by ships but only by a very small amount. It should not be disabled on this ground alone from recovery of freight for the voyage. If on the other hand the infringement had major or serious consequences, that

might suggest that there should be some effect upon the contract. (v) Was the Infringement Intentional? This enables the judge or arbitrator to take account of the knowledge or innocence of the parties with regard to the infringement of the rule. Subject to the other factors in the case, in particular the purpose of the law in issue, there is a stronger case for the illegality rendering the contract ineffective if it was known to or intended by the parties than if both were unaware of the problem. More complex is the situation where one party knows of the infringement and the other does not, where much may depend upon which of them is trying to enforce the contract. Illustration 8: A contract of carriage involves illegal performance by the carrier, who is aware of the requirements of the law in question. The customer who is aware of the illegality when the contract is made or performed cannot sue for damages for breaches of contract by the carrier, unlike the customer who is not so aware. Whether or not the carrier can sue for payment of the price under the contract once it is fully performed

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may additionally depend upon factors such as the purpose of the prohibition and the other sanctions available, e.g. under the criminal law. The most difficult situation is the contract for an illegal purpose. If it is lawful for A to sell a weapon or explosive material to B, and these materials may be lawfully used (for example, in self-defence or in construction work), the fact that B intends to use the goods illegally ought not to affect the validity of the contract of supply. If however at the time of contracting A is aware of or shares B's illicit purpose (e.g. supplies Semtex to a person whom A knows to be an active member of a terrorist organisation), then there may be some deterrence from entering the contract (on credit terms at least) if A cannot compel B to pay for material supplied. (vi) Relationship between Infringement and Contract This factor requires examination of whether or not the contract expressly or impliedly stipulates for an illegal performance by one or both of the parties. Thus a contract of carriage which can only be performed by overloading the ship or lorry may be more readily seen as consequentially ineffective (although possibly the case might be addressed by an appropriate modification of the contract).

NOTES 1.

Contracts contrary to law All European systems deal with contracts which contravene some rule of law, as opposed to contracts which are contrary to fundamental principles of morality or public policy. In a number of systems the relevant rules are contained in the rules on the limits of contractual freedom or on the cause or object of the contract. See e.g. the FRENCH CC (art. 1133-cause illicit when prohibited by the law); the ITALIAN CC (art. 1343-cause unlawful when it is contrary to mandatory rules; art. 1344-cause also unlawful when the contract constitutes the means for evading the application of a mandatory rule; art. 1345-contract unlawful "when the parties are led to conclude it solely by an unlawful motive, common to both"; Sacco-De Nova 559-572; Mariconda 367-400); the SPANISH CC (arts. 1255, 1271, 1275; DfezPicazo I, 4th edn 242-243); and the PORTUGUESE CC (art. 280 n 1; Horster 526). GERMAN law (BGB § 134) speaks of violation of a statutory prohibition; as does the AUSTRIAN law (ABGB § 879). The ITALIAN CC (art. 1343) is framed in terms of mandatory rules, while the law in the NETHERLANDS (BW art. 3.40) has the concept of violation of an imperative statutory provision .. The SWISS law (OR art. 20) speaks simply of illegality. DANISH law deals with the situation where a legal rule is violated by the formation or content of a contract, or by the performance required or intended under a contract, or by an act which is the purpose of the contract. See Ussing, Afthaler 186 If; Gomard, Kontraktsret 195, and Andersen & Madsen 232. FINNISH law has no general statutory provision on the validity of illegal contracts, but both doctrine and court practice accept that contracts infringing legal rules can be invalid. See Telaranta 250-274, and Hemmo 300-307. In ENGLISH, IRISH and SCOTTISH law the standard texts all include chapter headings such as "Illegality", or "Statutory Invalidity". See further Enonchong and, for the confused development of Scottish law, Macgregor in Reid & Zimmermann vol. II, chap. 5.

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Effects of infringement The general starting point in most European legal systems is that contracts violating legal rules are void. There is often, however, considerable flexibility in the law. Art. 1418 of the ITALIAN CC provides that: "A contract that is contrary to mandatory rules is void, unless the law provides otherwise." And in the case of violation of a prohibition imposed by law, if this law explicitly provides for nullity the contract is void; but if the prohibition concerns the content, or the subjects of the contract, and in case of violation it provides an administrative or criminal sanction, without saying anything about the contract, nullity is ascertained having regard to the case in point (see Casso 16/7/1946, n. 892, in Foro It. 1947, I, 376; Gazzoni 965). FRENCH, BELGIAN, GERMAN and AUSTRIAN law distinguish between "absolute" and "relative nullity". Absolutely null and void are agreements violating statutes that aim at the protection of interests of the general public and safety. Everyone may resort to the nullity; no specific act of avoidance is necessary. However, if the violated statute aims at nothing more than the protection of a party to the contractual agreement, that party has to claim that the contract is null and void before a competent court. So, a victim of usurious activity [cf. 879 (2) N° 4 ABGB] who wants to have the agreement declared null and void has to invoke nullity of the bargain. The GERMAN BGB § 134, the SPANISH CC (art. 6.3), the PORTUGUESE CC (art. 294) and the GREEK CC (art. 174) state that a juridical act which violates a statutory prohibition is void unless a contrary intention appears from the statute. In AUSTRIA not every contractual agreement that is concluded in violation of a statutory provision is null and void. Unless a statute expressly provides that an agreement by which it is violated is null and void the effect of the illegality of an agreement depends on the normative goal and purpose ofthe violated statute. That need not necessarily entail nullity but may suggest other sanctions. Thus the validity of an agreement violating statutory rules not affecting its content but only the manner, place and time of its conclusion is upheld. Somewhat similarly, in the NETHERLANDS, the BW art. 3.40 paras 2 and 3, while stating that violation of an imperative statutory provision entails nullity, also provide that if the statute is for the protection of only one of the parties to a contract, the contract can only be annulled (i.e. it is not absolutely void). This does not apply if the necessary implication of the statute produces a different result, while statutory provisions which do not purport to invalidate juridical acts contrary to them will not have the above rule applied to them. The basic thrust of these provisions is to ensure judicial consideration of whether giving effect to the statute requires the nullity of the contract as a supporting sanction. Again, in PORTUGAL, in consumer credit transactions the omission of certain elements makes the contract void, avoidable or partially unenforceable according to the nature of the omitted elements (Decree-law n. 349/91, 21 Sept 1991, art. 7, n. 1, 2, 3). But where the statute is silent, the effect upon the contract may be inferred from the purpose of the rule: e.g. a contract of sale of goods made after the shop's legal closing time is valid, since the applicable mandatory rule concerns fair competition only (Horster 521). But if a contracting party does not have the professional qualifications required by law the contract is void (STJ 05.11.74). In ENGLISH and SCOTTISH law, while an illegal contract may be void, it is more often presented as "unenforceable", in that neither specific performance nor damages are available to the parties. Thus a party may withdraw from an illegal contract with impunity. Courts will take notice of illegality of their own motion and dismiss actions accordingly (Chitty para. 17-196; MacQueen & Thomson 4.67). Again, however, there is flexibility in the law on contracts infringing statutory provisions. There are several cases in which the courts have considered whether giving effect to the statute requires the nullity of the contract as a supporting sanction (see e.g. St John Shipping Corp V. Joseph Rank Ltd [1957] 1 Q.B. 267; Archbolds (Freightage) Ltd V. S Spangletts Ltd [1961] 2 Q.B. 374). English law is currently under review by the Law Commission: see its Consultation Paper on Illegal Transactions. The Commission's provisional proposals are to the effect that courts should have a discretion to decide whether or not illegality should act as a defence to a claim for contractual enforcement. But the discretion should be structured by requiring the court to take account of specific factors: (1) the seriousness of the

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illegality involved; (2) the knowledge and intention of the party seeking enforcement; (3) whether denying relief will act as a deterrent; (4) whether denial of relief will further the purpose of the rule rendering the contract illegal; and (5) whether denying relief is proportionate to the illegality involved. In DANISH law, the effect upon the contract is the effect declared by the rule in question. The issue of the absence of an express provision mainly arises when a prohibition dictated by the public interest is violated. Some infringements do not entail invalidity. Purchases made after business hours in violation of the Danish Shop Act, a sale of a plot of land made without the approbation required by the law on the parcelling out of estates, and moonlight agreements have not been considered invalid. However it is maintained in Andersen & Madsen (232 note 259) that a party who has only promised to perform but not actually performed the illegal act may refuse to do so. On the other hand agreements which violated the price ceilings fixed by law, the purchase from abroad of pornographic literature which was confiscated by a court order and which was at that time a violation of the criminal code, were declared unenforceable (Supreme Court Decision in Ugeskrift for Retsvresen 1963 303) and so was an agreement to evade the prohibition upon selling land to foreigners by agreeing on a tenancy for life (decision by the Western High Court in Ugeskrift for Retsvresen 1972 794). See generally, Ussing, Aftaler 186 ff; Gomard, Kontraktsret 195, and Andersen & Madsen 232 ff. In SWEDEN there is no general statutory provision. Some statutes explicitly declare that contracts involving illegal acts or tainted by illegality are null and void but other statutes do not deal with the legal effects at all. Generally, Swedish law seems to be in line with Article 15:102 (see, in particular the principles referred to by the Supreme Court in NJA 1997 p. 93 and the principle of partial invalidity in Jordabalken Chap. 4 § 1, second para.; a comprehensive study by Jan Andersson appears in TfR 1999, 533-752). In FINLAND the effect of illegality on a contract depends upon the situation. See Telaranta 250-274 and Hemmo 300-307.

Article 15:103: Partial Ineffectiveness (1)

(2)

If only part of a contract is rendered ineffective under Articles 15:101 or 15:102, the remaining part continues in effect unless, giving due consideration to all the circumstances of the case, it is unreasonable to uphold it. Articles 15:104 and 15:105 apply, with appropriate adaptations, to a case of partial ineffectiveness.

COMMENT A. Partial Ineffectiveness

Consistently with the general intention of minimising the impact of illegality and immorality upon transactions, the Principles provide the possibility that if a contract is tainted only in part the remainder of the contract continues to be valid and enforceable unless this would be unreasonable in all the circumstances. This is also consistent with the approach to avoidance in Article 4:116. Circumstances that might be taken into account include whether or not the contract has any independent life without the invalidated part; whether the parties would have agreed to a contract consisting only of the remaining parts of the contract; and the effect of partial invalidity upon the balance of the respective obligations of the parties as performance and counter-performance.

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Severability of a contract only partly illegal is widely recognised in the European legal systems, albeit in varying forms (see e.g. BELGIAN CC arts. 1217 and 1218; GERMAN BGB § 139; SWISS OR art. 20; GREEK CC art. 181; ITALIAN CC art. 1419; the NETHERLANDS BW art. 3.41). It is widely thought in GERMANY that BGB § 134 is a lex specialis to BGB § 139 (Munchener Kommentar(-Mayer-Maly) § 134 no. 109). The general rule under BGB § 134, is that the contract is void in its totality unless the purpose of the prohibitory rule can be met by partial voidness. The practical effect of that rule is normally however the same as it would be under § 139. The rule in the text of the Principles is consistent with the general principles of DANISH contract law: see Gomard, Alm.Del. 128. In SPAIN, while there is no explicit provision in the CC, there is special consumer protection legislation to this effect. There are no special rules about partial invalidity for illegality or contrariety to good custom or public police in the PORTUGUESE CC: the general rules are applicable (see the notes to Articles 4:115-4:117 of these Principles). For ENGLAND, see Chitty para. 17-185 ff; for SCOTLAND, Stair Memorial Encyclopaedia vol. 15, para. 764). Under AUSTRIAN law the extent of a "partial nullity" (Teilnichtigkeit) follows primarily from the protective purpose of the violated statutory rule (see e.g. Supreme Court OGH. SZ 63/ 23). The question whether it may be reasonable for a party to uphold the contract is not of the essence. In the majority of cases where a statute has been violated (especially in respect of consumer contracts that are concluded on the basis of pre-formulated clauses that are unfair and therefore unlawful under the Consumer Protection Act § 6), the contract will be upheld in those parts which are not affected by the violation of the law: the validity is reserved but the content of the agreement reduced (geltungserhaltende Reduktion). Under ITALIAN law, and according to a general principle ofJavor contractus, the nullity of single clauses does not imply the nullity of the contract, when, by operation of law, mandatory rules are substituted for the void clauses, but if it appears that the contracting parties would not have entered into the contract without that part of its content which is affected by nullity, partial nullity ofthe contract implies the nullity of the entire contract (CC art. 1419(1).

Article 15:104: Restitution (1)

(2)

(3)

( 4)

When a contract is rendered ineffective under Articles 15:101 or 15:102, either party may claim restitution of whatever that party has supplied under the contract, provided that, where appropriate, concurrent restitution is made of whatever has been received. When considering whether to grant restitution under paragraph (1), and what concurrent restitution, if any, would be appropriate, regard must be had to the factors referred to in Article 15:102(3). An award of restitution may be refused to a party who knew or ought to have known of the reason for the ineffectiveness. If restitution cannot be made in kind for any reason, a reasonable sum must be paid for what has been received.

COMMENT

A. Restitution If the prohibitions and rules of other legal orders commonly fail to state the effect upon contracts that infringe their requirements, it is even more common

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for them to fail to state what are the remedial consequences of a finding of invalidity for the contract where one or both parties have commenced performance of the obligations under it. In general, for reasons ranging from deterrence, punishment or protection of the dignity of the courts to a notion that parties to an illegal or immoral transaction have placed themselves outside the legal order, the national systems of Europe have commenced their analysis of this problem from the traditional basis of Roman law, which denied restitution and left the parties in whatever position had been achieved at the time the invalidity was recognised (ex turpi causa melior est conditio possidentis). But restitution, or unwinding the performances rendered under the illegal contract, appears to be a more appropriate response to the invalidity. The problems to which denial of restitution can lead, namely leaving the effects of the illegality standing, may be illustrated by the following example: Illustration 1: A statute declares that any contract using an abolished system of weights and measures is to be void. A sells goods to B in a contract using the abolished system of weights and measures to determine the quantity of goods to be delivered and the price. B, having taken delivery and consumed the goods, refuses to pay. If A has no action for the contract price under the Principles, denial of restitution would allow B to have the benefit of an illegal transaction without paying for it.

Article 15:104 therefore provides a flexible regime for restitution of performances rendered under the ineffective contract. The paragraph is based upon the general provisions contained in Article 4:115 (Validity) rather than the more specific provisions of Articles 9:307 to 9:309 (Non-performance). Nevertheless the rule or principle rendering the contract ineffective is to be examined to see whether or not it requires denial of restitution. The same considerations as those used under Article 15:102 to judge whether or not a contract should be invalidated (where the applicable mandatory rule does not expressly regulate that question) are to be applied to the questions whether there should be restitution and whether any concurrent restitution by the claimant is to be required. Illustration 2: A statute on credit consumer sales requires a minimum down payment by the consumer buyer: otherwise the contract is void. Despite knowing the law, a buyer is not asked for, and does not make, the required payment, but does make subsequent payments of instalments due under the void contract. The buyer is entitled to claim restitution of the instalments because the statute was passed for the protection of consumer buyers, and restitution will further the objects of the legislation. The buyer must also make concurrent restitution of what was received under the transaction. Illustration 3: A statute regulating lending by banks provides that loans to customers whose prior loans remain unpaid are illegal. The purpose of the

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statute is economic regulation rather than borrower protection. A bank seeks recovery of the amount lent under a contract rendered invalid under this statute. The bank should obtain restitution from its customer. Illustration 4: A landlord discovers that the tenant is using the leased premises as a brothel, which is contrary to public policy. The landlord should be able to recover the premises in order to prevent the continuation of a situation contrary to public policy.

Detailed application of restitutionary principles - for example, whether defences such as change of position are available - is left to the applicable law of unjustified enrichment. Similarly, the Principles contain no provisions about the transfer of property and ownership under illegal transactions. NOTES The starting point for many systems is that restitutionary as well as contractual remedies are unavailable to parties in a transaction tainted by illegality or immorality (as in AUSTRIA, ABGB § 1174; SWITZERLAND, OR art. 66; ITALY, CC art. 2035). In FRANCE and BELGIUM this approach has also been developed by the courts. This is usually taken to follow from the application oftwo principles ultimately derived from Roman law: (1) no claim can be based upon the claimant's own wrongdoing; (2) in cases of equal wrongdoing, there is no recovery (D 12.5.4.3). There is often a distinction drawn between illegality and immorality, with restitution being easier to obtain in the former case. This approach is much used in FRANCE, but leads to difficult borderline questions about whether a transaction is illegal or immoral. Refusal of restitution is now largely at the discretion of the court and this refusal is becoming exceptional (Terre, Simler, Lequette n.404). In SPAIN, under CC arts. 1305, 1306, recovery depends on whether or not the illegality is a criminal offence, and whether or not the illicit purpose is attributable to both parties. Where the illegality is a criminal offence attributable to both parties, they will have no actions against each other and the things which were the object of the contract will be treated as instruments of the criminal offence (CC art. 1305(1)). If only one of the parties is to blame for the criminal offence, then that party will not be granted the right to recover anything rendered in execution ofthe contract, but the other party will be able to recover and will not be compelled to perform (CC art. 1305(2)). Where the illegality does not constitute a criminal offence, the following rules apply: if both parties are to blame for the illegality, neither is entitled to demand recovery or ask for performance (CC art. 1306(1)); if only one of them is to blame, that party is not entitled to demand recovery or ask performance, while the innocent party may recover what was rendered and cannot be compelled to fulfil what was promised under the contract (CC art. 1306(1)).). In AUSTRIAN law there is restitution of what each party has performed when the contract is relatively null. The starting rule in GERMANY is that restitution is allowed, and the ex turpi causa non oritur actio defence in BGB § 817, second sentence, is the exception to the general rule. It is regarded as a rule of a punitive character and applied rather restrictively. Furthermore, the provision requires actual knowledge that the contract was void: even knowledge of the factors that render the contract void does not suffice if the party did not know the prohibitory rule; in any case "ought to have known" does not suffice. § 817 is applied by analogy if only the party rendering performance knew that the contract was illegal. In the NETHERLANDS, the BW, following the jurisprudence of the Hoge Raad under the old Dutch code, rejects a general rule against restitution: restitution is allowed unless the court finds it morally unacceptable to assess the value of a particular act or performance (BW art. 6.211). The GREEK CC requires restitution of a prestation the cause of which is illegal or immoral (art. 904), although this is restricted

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in immorality cases if the immoral cause also affected the party making the prestation (art. 907). In PORTUGAL there are no special rules about restitution in the case of a contract which is illegal or contrary to good custom or public policy: the general rules are applicable (see notes to PECL arts 4:115-117). The ITALIAN CC (art. 2035) provides that a person who has made a performance for a purpose which, as it affects both parties, is contrary to morals cannot demand return of what has been paid. Article 2035 is not applicable to a contract in fraud of law (art. 1344), because in this case the right to restitution of what was paid is admitted according to art. 2033. As far as illegal contracts in DANISH law are concerned, restitution will be granted only when it serves the purpose of the prohibition to grant it, e.g. when the purpose is to prevent the recipient from acquiring the property in question such as an unlicensed person buying a gun or a foreigner purchasing Danish land (Ussing, Aftaler 201). With contracts against morality, it is generally held that restitution will be granted when by accepting the performance the recipient acted contra bonos mores and the supplier did not. Thus restitution will be denied if both parties acted immorally. However, if only the recipient acted inappropriately restitution will often be granted, as in cases where a person has received money for doing something which the law favours, e.g. abstention from committing a crime (Ussing, Aftaler 199). In ENGLISH law the general rule is against restitution but it is possible in exceptional cases where the claimant is not in pari delicto with the recipient, or the transaction has not been completely executed, or if the claim can be formulated without reference to the prohibited contract (Treitel, Contract 452-65). IRISH law is similar (Clark 314-19), and so is SCOTTISH law (Stair Memorial Encyclopaedia vol. 15, paras. 764-765), although in one Scottish case where, by statute, contracts using old Scottish measures were void, restitutionary recovery was allowed in respect of a sale of potatoes by the Scottish acre, on the ground that there was no moral turpitude in such a transaction (Cuthbertson v. Lowes (1870) 8 M 1073; see further Macgregor, (2000) 4 ELR 19-45). The English Law Commission in its Consultation Paper on Illegal Transactions suggests that a court should have discretion to decide whether or not illegality should be recognised as a defence to a claim for restitution, various factors being taken into account. In addition the court should have a discretion to allow a party to withdraw from an illegal contract and to have restitution where this will reduce the likelihood of the completion of an illegal act or purpose, although it must be satisfied that the contract could not be enforced against the claimant, that there is genuine repentance of the illegality, and that it is not too serious.

Article 15:105: Damages (1)

(2) (3)

A party to a contract which is rendered ineffective under Articles 15:101 or 15:102 may recover from the other party damages putting the first party as nearly as possible into the same position as if the contract had not been concluded, provided that the other party knew or ought to have known of the reason for the ineffectiveness. When considering whether to award damages under paragraph (1), regard must be had to the factors referred to in Article 15:102(3). An award of damages may be refused where the first party knew or ought to have known of the reason for the ineffectiveness.

COMMENT A. Damages Restitution will not be possible in every case, since benefits will not necessarily have been transferred between the parties when the invalidity takes effect; yet

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one of the parties may be unfairly out of pocket as a result of entry into the ineffective contract. The Principles accordingly provide for a right to damages to cover this case. It would also be inappropriate for the damages to extend to the positive or expectation interest of the party, since putting the party in the position as if the contract had been performed (Article 9:502) would be to enforce the illegal or immoral contract. The aim ofthe damages should therefore be like that of restitution, to put the party as far as possible in the position as if the contract had not been made, that is, to protect the negative or reliance interest. A party who knows or ought to have known of the illegality of the contract cannot, however, recover damages. Illustration: Legislation requires the suppliers of certain chemicals to hold licences indicating compliance with safety and environmental standards. Contracts made by suppliers holding no licence are declared to be null. A Ltd, which has recently been deprived of its licence by government action, nevertheless enters a contract for the supply of the chemicals to B Ltd, which is unaware of A Ltd's fall from grace and buys from it because its price is lower than that of the only other licensed supplier, C Ltd. B intends to use the chemicals for industrial purposes leading on to profitable contracts of its own, and spends money preparing its premises to handle the material safely. A's illegal conduct is discovered and the contract with B is declared null before either delivery or payment have taken place. B is unable to make the intended further contracts. While B cannot recover the expectation loss of profit on these further contracts, it may recover its incidental reliance expenditure on preparing its premises and any other costs associated with having contracted with A. These might include a figure for the loss of the opportunity to contract with C (as distinct from the extra cost of contracting with C or the profits which would have been earned had B concluded the contract with C rather than A).

There seems no reason in principle why a party should not cumulate a restitutionary with a damages claim. If in the above example B had in addition made payment in advance to A, it should be entitled to recover that sum as well as its incidental expenditure.

NOTES GERMAN law (BGB § 309, 307) and GREEK law (CC arts. 365, 362, 363) enable a party to a contract contrary to a statutory provision to recover damages protecting that party's negative interest if the other party knew or should have known of the illegality and the first party did not. Under AUSTRIAN law a claim for damages is available only in the case of fault of the party responsible for the infringement of the law. In PORTUGUESE law there are no special rules about damages for contracts which are illegal or contrary to good custom or public police: the general rules are applicable (see notes to PECL arts. 4:115-117). DANISH law will only compensate for the reliance interest and only if this is not inconsistent with the law or with morality (Ussing, Aftaler 259 If.).

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The ITALIAN CC (art. 1338) provides that "A party who knows or should know the existence of a reason for invalidity of the contract and does not give notice to the other party is bound to compensate for the damage suffered by the latter in relying, without fault, on the validity of the contract." See Sacco 566; Bianca III, 167); Casso 8/5/1968, n. 1415, in Foro. pad. 1968, I, 446; Casso 28/9/1968, n. 3008, in Foro It. 1968, I, 966; Casso 16/3/1988, n. 2468, in Giur. It., 1989, I, 117. The compensation is aimed at recovering the loss suffered, (so called "negative interest") and putting the party as far as possible in the same position as if the contract had not been made. This means that positive interest (what the party would have gained if the contract had been performed) is excluded (Cass. 10/5/1950, n. 1205, Foro It. 1950, I, 1307; Casso 23/2/ 1952, n. 497, in Foro It. 1952, 1,1535).

CHAPTER 16

Conditions

Article 16:101: Types of Condition A contractual obligation may be made conditional upon the occurrence of an uncertain future event, so that the obligation takes effect only if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition ).

COMMENT A. Scope and Placing of Chapter This Chapter is concerned with contractual obligations which are conditional. It presupposes the existence of a contract. Note, however, that Article 1:107 of the Principles provides that the Principles apply with any appropriate modifications to "unilateral promises and to other statements and conduct indicating intention". The Chapter deals with a certain type of term often found in contracts. It therefore supplements Chapter 6 (Contents and Effects) of the Principles. In any new combined edition of all three Parts of the Principles it should be included there. Its present placing towards the end of Part 3 is temporary and designed to enable it to be transposed later without affecting the numbering of the preceding Chapters.

B. Condition Must Relate to Uncertain Event A contracting party's obligation to perform may be conditional on an event that mayor may not happen. The contractual provision qualifying the obligation in this way is a condition. A condition may be suspensive or resolutive. See Comment G below. Conditions may affect one party's, or both parties', contractual obligations. Illustration 1: The Government of Bettaravia has suspended indefinitely all exports of sugar beets from its ports. A contract requires the seller to ship beets on 31 July if the export embargo has been lifted by that date. This is a suspensive condition affecting the seller's obligation. Illustration 2: Under a joint venture agreement, a landscape gardener and a water engineer agree to develop land for a theme park if an environmental

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permit becomes available. This is a suspensive condition affecting both parties' obligations. An obligation may be conditional on the occurrence of a future uncertain event even although the condition is expressed negatively and refers to the nonoccurrence of the event. Illustration 3: A contract for the sale of sugar beets f.o.b. a named port in the country of Bettaravia provides that the seller's obligation to deliver is dependent upon the Government of Bettaravia not introducing export restrictions on sugar beets before the date fixed for delivery. Here the uncertain event is the introduction of the restrictions. The seller's obligation to deliver on the due date is subject to a resolutive condition. It will come to an end if the Government introduces export restrictions before that date.

The essence of a condition, as expressed in these Principles, is its uncertain character. This uncertainty stems from external events which the parties may in certain cases be able to influence but which they do not control. By exercising due diligence, a contracting party may help to bring about the fulfilment of a suspensive condition or prevent the occurrence of a resolutive condition. For example, in a contract for the export of goods the seller's obligation may be conditional on the award of an export licence. This may be subject to a quota or other system of discretionary control operated by the authorities. The award of an export licence may therefore be affected by the diligence and skill with which the applicant makes a case to the authorities. The seller's obligation to deliver the goods is nevertheless conditional upon the award of the licence. Some conditions, however, will be so heavily dependent upon the will of one party as to signify a total lack of contractual commitment by that party and hence the absence of a binding contract. For example, a company may contract to do something or pay a sum of money if, as a matter of pure discretion, it chooses to do so. This is not a conditional obligation: it is not an obligation at all. Such arbitrary conditions are to be distinguished from valid conditions where one party's obligation is dependent upon the will of another. A seller, for example, may be bound to supply raw materials to a buyer at a stated price in the event of the buyer deciding to accept an offer by a third person to purchase goods specially manufactured by the buyer. C. Condition Must Relate to Future Event

An obligation may appear to be conditional upon a past event in those cases where the parties do not know whether the event has occurred. Uncertainty concerning past events may playa vital role in shaping contractual obligation, even in a world of rapid communication. Nevertheless, it is not the past event that forms the basis of the condition but the future publication or availability of information concerning that event.

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Illustration 4: A agrees to purchase from B a number of shares in company C if C's net profits in the preceding financial year reached a stated minimum figure. It is not known at the time of the agreement whether the profits did reach the figure. The past profits of C will become known only when its accounts have been finalised. A's obligation falls to be interpreted as conditional on an uncertain future event - whether or not the amount of net profits brought out in the final accounts reaches the stated figure.

D. Condition Distinguished from Requirement of Performance of Obligation Under Contract A condition is to be distinguished from a term of the contract requiring the obligation of one contractual party to be performed before the other contracting party is bound under the terms of the contract to perform. The fulfilment of a contractual obligation to perform is something which the parties expect to happen and which the law will generally enforce if need be: it is not aptly classified as an "uncertain future event" for the purposes of this Chapter. On the order of performance of contractual obligations in the absence of express contractual provision, see the Comment to Article 7:104. Note also the remedies of withholding performance (Article 9:201) and termination of contract (Article 9:301) which have some functional resemblance to provisions making one party's performance conditional on the other's. Illustration 5: A, a site owner, is required by the contract to pay for work as and when it is satisfactorily completed by B, a builder.

In this example, Ns obligation to pay is subject to B's prior performance but the provision relating to B's performance is not regarded as a condition for the purposes of this Chapter. This is important in relation to Article 16:102. E. Conditions and Time Clauses

Conditions must also be distinguished from time clauses. A contract may require a party to perform on a future date which is fixed and sure to arrive, as would be the case where a contract of sale is concluded on July 1 with delivery to be made by the seller on July 15. It would be a misuse of language to say that the obligation to deliver is conditional upon the arrival of the due date, for July 15 is sure to arrive. The obligation does not depend on the occurrence of a future uncertain event. It may be said to be future, or deferred to a day, but not conditional. The line between conditions and time clauses is not always so clear-cut. Some events must occur though the date of their occurrence cannot be known. Provisions referring to such events will often be time clauses, but may involve a hidden condition if the obligation is contingent on something else happening or not happening before the specified event. Illustration 6: X is bound to pay Y €5000 when Z dies. This is not a

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condition but a simple time clause. Z is bound to die. The clause is a "when" clause, not an "if" clause. Illustration 7: The trustees of a family settlement undertake to provide A with alimentary support on the death of B, her father. Since B's death is sure to happen, this may look at first sight like an obligation which is future but not conditional. However, A may die before B, in which event the trustees would be under no obligation. So in fact the obligation is conditional on A surviving B..

F. Operation of Law Although the Principles do not deal with conditions arising by operation of law, compliance with a country's law which is not the law applicable to the contract may be an agreed condition. Illustration 8: A contract for the export of works of art from Pictoria provides that the seller's obligation is conditional upon the export being lawful according to Pictorian law, which is not the law governing the contract. Pictorian law requires an export licence. The seller's obligation is therefore conditional upon the grant of a licence by the Pictorian authorities. In the above illustration, the seller may be under a separate contractual obligation, express or implied, to obtain the licence or to use due diligence to obtain the licence (see Comment D to Article 16:102) and may be in breach of that obligation, as opposed to the delivery obligation, if unsuccessful in obtaining the licence.

G. Suspensive and Resolutive Conditions In the case of a suspensive condition, the creditor may not demand performance from the debtor whose obligation is suspended for that would be to alter the basis of the bargain. This does not prevent a contracting party from incurring liability for anticipatory non-performance (see Article 9:304). As is the case with suspensive conditions (see Illustrations 1 and 2 above), a resolutive condition may qualify the contractual obligations of one party or both parties. The following is an example of one party's obligations being affected. Illustration 9: A contract for the sale of five separate weekly shipments of 10,000 Russian birchwood standards to be shipped from a Northern Russian port provides that the seller's obligations are conditional on the port not being closed by ice at the date of shipment. The port is closed by ice after four shipments have been made. The seller's obligations were subject to a resolutive condition. In relation to the last shipment the condition has been fulfilled and the seller is no longer liable to make the shipment.

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If the buyer was responsible for supplying the ship and the seller had to

transport the standards in lighter vessels to the ship, then the condition that the port remain ice-free might qualify the obligations of both buyer and seller.

NOTES 1.

2.

3.

4.

History The rules in this Chapter have a long history. They can be traced back in some instances to the earliest records of Roman law and have formed an unbroken thread in the European legal tradition for many centuries. See generally Zimmermann, Obligations 716 if. Suspensive and resolutive conditions The distinction is common to many legal systems. See the BELGIAN, FRENCH and LUXEMBOURG CCs art. 1168; the GERMAN BGB § 158; the AUSTRIAN ABGB § 696; the SPANISH CC art. 1113; the ITALIAN CC arts. 1353-61; the GREEK CC arts. 201-02; and the PORTUGUESE CC art. 270. See also for DENMARK Ussing Aftaler, 447-57 and for SCOTLAND Gloag chap. XVI; McBryde para. 5.35 if.. The distinction is known in ENGLISH law though it is more usual to refer to suspensive conditions as conditions precedent and to resolutive conditions as conditions subsequent (Chitty para. 2-136; Treitel, Contract, 59.) IRISH law generally follows the English approach (Clark 198-205). FINNISH law has no general legislative provisions on the subject, though the distinction is known in the Land Act (Maakaari 12.4.1995/540). More recent Finnish authors subsume conditions in the discussion of interpret ation, though an earlier text (Kivimiiki & Y16stalo 291-97) devotes separate space to the subject. Uncertain events; past and future events It is generally recognised that the event on which an obligation may be conditional must be uncertain. See the FRENCH, BELGIAN and LUXEMBOURG CCs (arts. 1168 and 1181) and the SPANISH CC (art. 1113) where it is provided that the event may be either a future event or (in contrast with these Principles) a past event that is not known to the parties. See also the AUSTRIAN ABGB § 704. ITALIAN (e.g., Barbero 1099), GERMAN (e.g. Munchener Kommentar (-Westermann) § 158 no. 8), ENGLISH (e.g., Treitel, Contract 58), SCOTTISH (e.g. Stair 1.3.7) and IRISH (e.g., Clark 198-205) authors recognise the uncertain character of conditions. GREEK law insists on an uncertain future event (CC arts. 201 and 202). If the event is uncertain, yet past, there is no real condition but only a subjective uncertainty (see Balis 255). See generally Treitel, Remedies 255-65. Conditions and time clauses The distinction between a condition and a time clause (whether relating to a fixed time or an uncertain time which is nonetheless bound to arrive) is of very long standing in the European legal tradition and is generally recognised. See e.g. Zimmermann, Obligations 741 if.

Article 16:102: Interference with Conditions (1)

(2)

If fulfilment of a condition is prevented by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment would have operated to that party's disadvantage, the condition is deemed to befulfilled. If fulfilment of a condition is brought about by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment operates to that party's advantage, the condition is deemed not to be fulfilled.

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COMMENT

A. Conditions and Party Interference Duties of good faith and fair dealing and co-operation can be promoted by treating conditions as being fulfilled or not, as the case may be, when a contracting party improperly interferes with their fulfilment or non-fulfilment. B. Suspensive Conditions A case where a suspensive condition is treated as having been fulfilled is the following. Illustration 1: The licensing of a software package by B to A is agreed by the parties to be dependent upon the professional approval of the package by an independent computer engineer, C, who is nominated by A. Regretting the bargain, A bribes C, against C's better judgement, to disapprove the software package. C's approval is deemed to have been given so that A is bound to perform the licensing agreement.

On similar principles, a suspensive condition may be treated as not having been fulfilled. Illustration 2: The licensing of a software package by D to E is agreed by the parties to be dependent upon the professional approval of the package by an independent computer engineer, F, who is nominated by D. The contract is favourable to D and unfavourable to E. Despite F's professional misgivings, D persuades F to approve the package. F's approval is deemed not to have been given, so that E is under no obligation to perform the licensing agreement.

The rule of deemed fulfilment, nevertheless, is subject to the limits of practicality. For example, a buyer cannot require delivery of goods under an export contract where the seller has failed to apply in due time for an export licence. This accords with limitations on the availability of specific performance (see Article 9:102(2)(a)).

C. Resolutive Conditions An example of a resolutive condition being treated as not having been fulfilled is the following. Illustration 3 S enters into a contract to sell a horse to B. B expects to sell the horse on to T. Sand B agree that B's obligation under the contract is to come to an end if T does not take the horse by a certain date. B also obtains another horse from a different seller and sells this horse to T instead, making no effort to sell T the horse purchased from S.

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B cannot be allowed to invoke T's failure to take the horse when this is due to B's bad faith in refusing to make any effort to persuade T to buy it. Justice is best advanced by compelling B to accept and pay for the horse (if it is not already paid for) as if the resolutive condition had not been fulfilled, rather than by attempting to assess damages for B's breach of the obligation to act in accordance with good faith and fair dealing, which might require a rather speculative assessment of whether or not T would have taken the horse. An example of a resolutive condition being treated as having been fulfilled is the following: Illustration 4: When farmer H's tractor is stolen, he hires from 0, another farmer, a replacement tractor. As a favour to H, the rate of hire is below the market rate. O's obligation to make the tractor available is subject to the resolutive condition that it is to come to an end if H acquires a new tractor to replace the stolen tractor. H turns down an attractive offer of a replacement tractor made by T in order to continue benefiting from the favourable rate of hire.

The condition is deemed to be fulfilled when H ought to have accepted T's offer. D. Contractual Obligations Ancillary to Conditions Article 16:102 does not contain any obligation not to interfere with the fulfilment of conditions. That is left to the normal obligations to act in accordance with good faith and fair dealing and to co-operate in order to give full effect to the contract. (Articles 1:201 and 1:202.) Of course, a contracting party may expressly or impliedly undertake an obligation concerning the fulfilment of a condition that goes beyond the general obligations to act in accordance with good faith and fair dealing and to co-operate. Indeed, certain contracts could not operate in an effective way unless there were such an obligation on a contracting party ancillary to the condition. Illustration 5: The seller's obligation to deliver under an f.o.b. contract is subject to the grant of an export licence by the authorities in the country of export. Licences are awarded on a discretionary basis upon application. The contract identifies the seller, S, as the applicant.

Although the contract may not expressly stipulate the nature of any obligation resting upon S when applying for the licence, it will be at least to apply with due diligence and could, depending upon other contractual terms and the surrounding circumstances, be stricter. For the distinction between obligations to achieve a specified result (obligations de resultat) and obligations to use reasonable efforts to obtain a specified result (obligations de moyens), see Comment D to Article 6:102.

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1.

2.

Conditions and party interference FRENCH, BELGIAN and LUXEMBOURG laws have a provision similar to Article 16:102 (CC art. 1178), as does GERMAN law (BGB § 162). ITALIAN law recognises the principle in paragraph (1) (CC art. 1359); jurisprudence requires the interfering party's behaviour to be in breach of an obligation or contrary to good faith (Cass. 13 April 1985, n.2464, in NGCC 1985, I, 610, noted by Belfiore). ITALIAN jurisprudence also recognises the principle in paragraph (2) (Cass. 16 December 1991, n.l3519, in Giust. Civ. 1992, I, 3095) and the CC art. 1358 provides for awards of damages against a party acting in bad faith. A similar rule exists in PORTUGUESE law (CC art. 275(2)); GREEK law (CC art. 207); AUSTRIAN law (jurisprudence OGH JBI 1996, 782; OBA 1996, 892; JBI 1991, 382; JBI 1990, 37); and in FINNISH law (Kivimaki & Yliistalo 295). The principle in paragraph (1) is also to be found in the SPANISH CC (art. 1119). DANISH law recognises an obligation of non-interference but would deem fulfilment or non-fulfilment as the case may be to occur only in appropriate cases (Ussing, Aftaler 448 If.). SCOTTISH law may in appropriate cases deem a condition to be fulfilled or not fulfilled if a party has, in breach of an express or implied obligation, prevented or brought about fulfilment (cf. Mackay v. Dick & Stevenson (1881) 8R (H.L.) 37). ENGLISH law would often treat the action of the interfering party as the breach of an implied term of the contract but would not deem fulfilment or non-fulfilment to have occurred. IRISH law appears to adopt a similar approach to English law, the courts intervening only where there is an express or implied obligation to do or not to do something (see Clark 200-01). Contractual obligations ancillary to conditions Whether a contracting party has undertaken expressly or impliedly to exercise due diligence to assist the occurrence of a suspensive condition, or has even undertaken to bring about its occurrence, will be a question of interpretation of the contract. For examples in ENGLISH law see Re Anglo-Russian Merchant Traders Ltd [1917] 2 K.B. 679 Pagnan SpA v. Tradax Ocean Transportation [1987] 2 Lloyd's Rep 342. National laws do not generally provide for these specific obligations (as opposed to general obligations to act in good faith) to arise by operation oflaw.

Article 16:103: Effect of Conditions (1)

(2)

Upon fulfilment of a suspensive condition, the relevant obligation takes effect unless the parties otherwise agree. Upon fulfilment of a resolutive condition, the relevant obligation comes to an end unless the parties otherwise agree.

COMMENT

A. Prospective and Retrospective Effect The rule expressed in this Article ascribes a prospective (or ex nunc) effect to the fulfilment of a condition unless the parties otherwise agree. In some national legal systems, however, fulfilment is sometimes given a retrospective (or ex tunc) effect. The significance of this distinction lies mainly in the proprietary consequences arising out of the fulfilment of conditions. Since the Principles do not contain rules dealing with the transfer of proprietary interests, the simpler, prospective rule is adopted here. A rule giving retrospective effect to the fulfilment of a condition would have had to be subject to significant exceptions, which would have been difficult to formulate.

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237

An example of prospective effect in the case of a suspensive condition is the following. Illustration 1: A contract for the sale of a house in Bordeaux provides that the seller's obligation to sell is subject to the seller being appointed to a senior civil service position in Paris by a stated date. The seller is duly appointed. It is only when that appointment is made that the seller's obligation to sell the

house takes effect as an unconditional obligation. Before that there is only a conditional obligation. An example of prospective effect in the case of a resolutive condition is the following. It is important to determine the obligation that is affected by the condition. Illustration 2: A carrier enters into a contract with a farmer to transport water by lorry to the farm for four weeks but this obligation is to come to an end if the local drought comes to an end within that time. Under the contract, the farmer pays carriage charges 30 days after each delivery.

The end of the drought within the four week period brings to an end the carrier's obligation. The farmer, nevertheless, remains bound to pay outstanding charges for deliveries made before the end of the drought. These charges are not affected by the condition: they accrue with each delivery even if payable in the future.

B. Recovery of Money and Property In cases where a suspensive condition is not fulfilled or a resolutive condition is fulfilled, one of the contracting parties may have delivered property or money to the other in such a way that a restitutio nary obligation to repay the money or restore the property now arises. In Illustration 1, for example, the potential purchaser may have paid a deposit and the seller may not have secured the Paris appointment. In Illustration 2, the farmer may instead have paid carriage charges in advance for deliveries that now will not be made. Restitution in circumstances like these, if not regulated by the contract itself, is a matter for the law on unjustified enrichment.

NOTE The activation of a condition does not have retrospective effect in GERMAN law. An agreement that it should do so has only personal effect. (BGB §§ 158(2) and 159). A prospective effect is also the rule in GREEK law (CC art. 203(1) and (2)) and AUSTRIAN law (ABGB § 696-for resolutive conditions - and OGH SZ 55/109-for suspensive conditions). In FINNISH law, conditions operate prospectively, unless otherwise agreed (Kivimaki & YlOstalo 296-97). SCOTTISH law appears to be the same (Gloag & Henderson 59). It appears to be a matter of

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contractual construction in DANISH law just as it would be in ENGLISH and IRISH law whether conditions operate prospectively or retrospectively. The principle of retrospective effect upon the occurrence of a condition is firmly recognised by FRENCH law (CC art. 1179) but there are significant exceptions arising for example out of contrary agreement (Malaurie & Aynes n. 184), fiscal law and the transfer of risk (CC art. 1182(2)). The same principle of retroactivity is to be found in BELGIAN and LUXEMBOURG law (CC art. 1179), with similar exceptions, and in ITALIAN law (CC art. 1360), where it is subject to contrary agreement and where a rule to opposite effect applies in the case of long-term contracts (CC art. 1360(2)). Retroactivity is the rule in PORTUGUESE law (CC art. 276) but again there are exceptions. Again, it is the rule (but with exceptions) in SPANISH law (CC arts. 1120(1) and 1123(1)).

CHAPTER 17

Capitalisation of Interest

Article 17:101: When Interest to be Added to Capital (1)

(2)

Interest payable according to Article 9:508 (1) is added to the outstanding capital every 12 months. Paragraph (1) of this Article does not apply if the parties have provided for interest upon delay in payment.

COMMENT

A. Notion Simple interest (whether contractual or legal) does not affect the capital upon which it is calculated: the capital remains unaltered. If, however, a capitalisation of interest (or compound interest) has been agreed or is imposed by law or custom, the interest which has fallen due during the agreed period (rest period) and has remained unpaid, is added to the capital. Therefore, during the second rest period, since more capital is bearing interest, the amount of interest will increase, and so on. Illustration 1: Bank B has extended to L a credit of €10,000 due to be repaid on 31 December 2000. No payment is made. If the parties had not agreed upon delay interest, Article 9:508(1) applies: it is assumed that the interest rate according to this provision is 10% per year. Consequently, on 1 January 2002, an unpaid delay interest of €1000 will be added to the capital of €1O,000, increasing it to €11,000; and on 1 January 2003, an amount of €1100 will be added, increasing the capital to €12,100; etc. B. Placing and Scope of Application

In any new edition of all three Parts of the Principles this Article would appear as part of Article 9:508 (Delay in Payment of Money). It is, in the meantime, placed at the end of Part 3 so as to allow for a subsequent transposition without affecting the numbering of the preceding Chapters. Article 17:101 applies as a remedy for delayed payment of interest. But the capitalisation of interest may, of course, be agreed upon for contractual obligations in the absence of any question of delayed payment. An important example is the capitalisation of interest on positive or negative balances of a current 239

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account. Contractual arrangements of this type are not affected by the present rule. C. Justifications

Article 17:101 confers upon the creditor of an interest bearing monetary debt, after the debtor has failed to pay interest which has fallen due, a right to capitalisation of interest which is not granted by Article 9:508(1) (see Comment B). This extension is justified by the fact that interest earned by the creditor of a monetary obligation is an asset. Delay in its payment deprives the creditor of a due benefit as much as delay in the payment of the capital itself. Moreover, delay in payment often has a highly detrimental effect upon creditors, especially smaller business enterprises which may be driven into bankruptcy. There is therefore, both at Community level and in several member states, a clear tendency to provide a sanction for late payments. The capitalisation of interest is an effective sanction because of its gradually increasing effect. D. Party Agreement on Delay Interest Article 17:101 provides, in accordance with general principle, that the general rule on the capitalisation of interest does not apply where the parties have agreed, explicitly or implicitly, upon the payment of delay interest. The fact that the parties have addressed themselves to the question of interest means that it is up to them to provide for capitalisation if they so wish. Illustration 2: The parties agree on interest of 7% p. a. "until payment". This clause covers both credit interest and delay interest. The capitalisation of the delay interest is excluded by the second sentence of Article 17:101.

E. Computation of Time

In order to determine the beginning of the rest period of twelve months, one has to look to the contractual agreement as to when the payment of interest falls due. Unless the parties have agreed upon that time, it must be determined according to Article 7:102 on the time of performance. Reference may also be made to Article 9:508 (Delay in Payment of Money). F. Relation to Damages The obligation to pay interest upon delay in payment is functionally equivalent to an obligation to pay damages. The interest can be regarded as a form of abstract damages, although it is not ordinary damages. (See Comment B to Article 9:508.). The capitalisation of interest has the advantage of extending this remedy. Consequently, the scope of application of Article 9.508 (2) (additional damages for loss caused by delay in payment of money, so far as not covered by interest) will be further narrowed since the creditor need not and cannot claim damages for any loss which is already compensated by the payment of interest.

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However, the creditor is entitled to any additional damages that are not so compensated. But the amount of such damages and the - sometimes - difficult task of proving them will, generally speaking, be much restricted if and in so far as capitalisation of interest is allowed. G. Consumer Protection The national rules on consumer protection, especially on consumer credit, such as those based upon the relevant Ee-Directive of 1986, have, of course, preference. The Directive itself does not deal with capitalisation of interest. NOTES 1.

2.

3.

4.

General Due to the differing impact of religious and ideological conceptions, the national rules on interest for delayed payment of interest vary considerably. Six major justifications are recognized: remedy provided by law as a legal form of compensation; unilateral demand; judicial action; express agreement; current account; and usage. Legal Form of Compensation In the NETHERLANDS, capitalisation of interest is the only statutory compensation for delayed payment of interest (BW art. 6:119 (2)). This provision must be understood as an extension of a corresponding rule providing that (simple) statutory interest is the only remedy for delayed payment of a sum of money (art. 6:119 (1)). The parties may agree upon a higher rate of interest (art. 6: 119 (3 )). Under Dutch law, therefore, the creditor cannot claim compensation for that portion of the damage due to delayed payment of interest which is not covered already by interest on that interest when capitalised. In FINLAND (Wilhelmsson & Sevan 73) and SCOTLAND (Wilson 132), if the capital has been repaid but not interest due, interest starts to run on the unpaid interest. Under ENGLISH law, compound interest (or capitalisation of interest) may be awarded in special circumstances. One such circumstance is when the parties contemplated that the creditor would devote the money to a particular use and that in case oflate payment the creditor would have to borrow the money. The creditor may then recover the cost of borrowing which may include compound interest (Hartle v. Laceys 28 February 1997 (C.A.), unreported but on LEXIS). Compound interest may also be awarded in equity at the courts' discretion where money has been obtained by fraud or where it has been withheld or misapplied by a fiduciary (cf. President of India v. La Pintada Cia. Navigacion SA [1985] A.C. 104, 116). Unilateral Demand In BELGIUM, the provision of CC art. 1154 requiring a judicial action by the creditor (as in France and Luxembourg, see the following paragraph) has in recent years been interpreted broadly as authorising also an extrajudicial demand by the creditor. However, this demand cannot be made until, as required by CC art. 1154, one year has passed since the interest fell due (Cass. 28 March 1994, Pasicrisie 1994.1.317 at 321-322). Judicial Action In several other countries the creditor may obtain capitalisation of interest by unilateral, although formalized, action. This unilateral right must be based upon an implied basic legal obligation of the debtor and therefore appears to be related to the Dutch system of capitalisation of interest as a legal form of compensation for delayed payment of interest. However, the detailed requirements for exercising this right differ considerably, both from Dutch law and among the Romanic countries. Closest to the Dutch and the Belgian system is PORTUGUESE law since the creditor need merely request a judicial notification of the debtor demanding capitalisation of interest that has fallen due or will fall due (CC art. 560 (1)).

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In AUSTRIA, FRANCE, LUXEMBOURG, GREECE, ITALY and apparently also in SCOTLAND the creditor must bring an action against the debtor for payment of capitalised or compound interest. However, the requirements vary considerably from country to country. In AUSTRIA (Law on interest of 1868 § 3(1)(b)) and in SPAIN (CC art. 1109(1)), capitalised interest can be demanded as of the date of the action and at the statutory rate (although in Austria an agreed rate will prevail over the statutory rate). Many Romanic countries require that interest must have been due for at least one year (FRANCE, BELGIUM and LUXEMBOURG: CC art. 1154; GREECE: CC art. 296 (1)); PORTUGAL: CC art. 560 par. 2). In ITALY generally and in GREECE for debts among merchants, the period is reduced to six months (Italy: CC art. 1283 and Resolution ofInterministerial Committee on Credits and Savings of9 February 2000 (Banca, Borsa e Titoli di Credito 2000 I 439) art. 5; Greece: Introductory Law to the CC art. 111 (2)). However, the French and Luxembourg legal provision is interpreted differently in these countries. In Luxembourg, CC art. 1154 is understood narrowly as requiring a new action for every successive year because the creditor cannot demand capitalised interest pro futuro (Luxembourg: Casso 10 April 1908, Pas.Lux. VIII 148). By contrast, in France action may be brought for successive future maturities (Cass.com. 20 October 1992, Bull.civ. 1992 IV no. 332; Cass.civ. 18 Feb. 1998, Bull.civ. 1998 III no. 42). Agreement of the Parties An agreement of the parties is recognised everywhere, although subject to various restrictions. In some countries, the parties are free to agree on capitalisation of interest (AUSTRIA, Law on interest of 1868 § 3(1)(a); DENMARK, Gomard, II 196; FINLAND, Wilhelmsson & Sevan, 74; the NETHERLANDS, Asser-Hartkamp, Verbintenissenrecht I, nr. 525; SPAIN, Dfez-Picazo II, 4th edn 287; ENGLAND, Chitty para. 38-250; Mann 70. Other countries admit agreement on capitalisation of interest but only after interest has fallen due. This is the only condition in GERMANY (BGB § 248(1), but credit institutions are exempted, par. 2) and SPAIN (Comm.c. art. 317). In FRANCE and LUXEMBOURG, as well as in ITALY and GREECE, agreement is only permitted after one year has elapsed since interest had fallen due: thus both the requirements and even the sources are the same as indicated for these countries in Note 4. In ITALY generally and in GREECE for debts among merchants, the period is reduced to six months (Italy: CC art. 1283; Greece: Introductory Law to the CC art. 111(2)). Italy has recently forbidden agreements on capitalised interest for financing contracts providing for repayment by instalments, except if repayments have to be paid into a current account. By contrast, contracts for advance payments may provide for capitalising of the interest falling due at the end of the period of advance payments (Interministerial Committee on Credits and Savings, Resolution of9 February 2000 (Banca, Borsa e Titoli di Credito 2000 I 439) art. 3-4). Italy has also recently introduced an innovative special transparency rule for agreements on capitalised interest in credit and savings contracts. These must indicate the agreed rest period and the interest rate. If the rest period is shorter than one year, the effective interest rate, taking into account the effect of the capitalisation, must be indicated. Clauses on the capitalisation of interest are invalid, unless specifically approved by the customer in writing (Resolution cited above, art. 6). Current Account Current accounts, being based upon agreement, are everywhere recognized as an implied justification of capitalisation of interest, but without the restrictions mentioned above. Whenever a balance is struck, any interest covered, whether credit or debt interest, is integrated with the capital and bears interest thereafter. In GERMANY and AUSTRIA as well as GREECE and ITALY there are express statutory provisions on capitalisation (Germany and Austria: HGB § 355 (1); Greece: Introductory Law to the CC art. 112 (1); Italy: Resolution ofthe Interministerial Committee on Credits and Savings 9 February 2000 (Banca, Borsa e Titoli di Credito 2000 I 439) art. 2). In most other countries, case law has established the special situation of current accounts (FRANCE: Cass.com. 11 Jan. 1984, Bull.civ. 1984 IV no. 15; BELGIUM: Casso 27 Feb. 1930, Pas. 1930 1129 (134); LUXEMBOURG: Cour superieure 13 March 1934, Pas. Lux. XIII 240 (244); Cour d'appel 27 February 1986, Bulletin Droit et Banque 1986 no.9 p.76;

Article 17:101: When Interest to be Added to Capital

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ENGLAND: National Bank of Greece v. Pinios Shipping Co. No.1, [1990] 1 A.C. 637 (H.L.) at 683 ff.; for ITALY Casso 30 May 1989, no. 2644, Foro It. 1989 I 3127; cf. also Cian-Trabucchi (-Zaccaria) art. 1283 no. IV, art. 1825 no. II). In Italy it has been specified that within each current account the rest periods for the capitalisation of credit and debit interests must be the same. Further, it was thought necessary to specify that after closing of the current account the final balance may produce interest, if so agreed, but any post-closing interest cannot be capitalised (Resolution of9 February 2000, cited above, art. 2 (2) and (3)). Usage Usage as a separate source of allowing capitalisation of interest is in some countries expressly recognized, even if it deviates from statutory provisions (ITALY, CC art. 1283; PORTUGAL, CC art. 560 (3); cf. also for ENGLAND the National Bank of Greece case, cited above). Usage as a justification for capitalisation of interest is also recognized in DENMARK (Gomard, II, 1995, 196) and SWEDEN (Walin 255). The ITALIAN Supreme Court had held in several decisions that there is a fixed usage on capitalisation of interest in the relations between credit institutions and their customers (basic decision: Casso 15 December 1981, no. 6631, Riv.dir.comm. 1982 II 89; cf. also Casso 30 May 1989, cited in note 5 above). When in 1999 the court retreated from this line of decisions (cf. especially Casso 16 March 1999, Banca e Borsa 1999 II 389), the legislator immediately intervened and, by a legislative decree, validated contract clauses on capitalisation of interest. This governmental decree was in turn declared to be unconstitutional as being in violation of the enabling law (Const. Court 17 October 2000, Giurisprudenza Commerciale 2001 II 179). Thus, in effect, the case law of the Supreme Court since 1999 governs again but the issue is still hotly debated by writers. The standard practice in relation to current accounts (see note 6 above) is but one example, although a prominent one, of a usage.

Bibliography for Part III

Books, articles and similar sources referrred to in the Notes are listed both in the General List and in the National Bibliographies. In the Notes, books are generally indicated by the author's name in italics, volume number in capital Roman numerals (e.g. I), and a page, paragraph, article or other number depending on the system adopted in the particular work. However, in the case of some multi-volume works, such as the Miinchener Kommentar on the German BGB, the name of the work is given, followed in brackets after a hyphen by the name of the author of the particular part. Where more than one work by an author is cited in the Notes, an identifying word is shown in square brackets after the entry in the bibliography and is used in the Notes. Titles by Greek authors have been translated into English. References to periodical articles in the Notes take the form of the author's name in italics and a brief reference. A full reference will be found in the Bibliography. For abbreviations of journal titles, see the list of abbreviations at the beginning of this volume.

GENERAL LIST

Alpa-Bessone, I contratti in generale, IV (1991); Aggiornamento 1991-1998, vol. I, II, III (1999). Andersen & Madsen, Aftaler og Mellemm