(1) On termination of a contract to be performed at one time either party may claim restitution of whatever it has supplied under the contract, provided that such party concurrently makes restitution of whatever it has received under the contract.
(2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable.
(3) The recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party.
(4) Compensation may be claimed for expenses reasonably required to preserve or maintain the performance received.
1. Contracts to be performed at one time
This Article refers only to contracts to be performed at one time. A different regime applies to contracts under which the characteristic performance is to be made over a period of time (see Article 7.3.7). The most common example of a contract to be performed at one time is an ordinary contract of sale where the entire object of the sale has to be transferred at one particular moment. This Article however refers also to, e.g. construction contracts in which the contractor is under an obligation to produce the entire work to be accepted by the customer at one particular time. A turnkey contract provides an important example.
Under a commercial contract one party will usually have to pay money for the performance received. That obligation is not the one that is characteristic of the contract. Thus, a contract of sale where the purchase price has to be paid in instalments, will fall under this Article provided that the seller’s performance is to be made at one time.
2. Right of parties to restitution on termination
Paragraph (1) of this Article gives each party a right to claim the return of whatever the party has supplied under the contract provided that that party concurrently makes restitution of whatever it has received.
1. In the process of a takeover of a company, controlling shareholder A agrees to sell and transfer to B shares for GBP 1,000,000. B only pays GBP 600,000 after the shares have been transferred and A therefore terminates the contract. A can claim back the shares. At the same time, A has to return the GBP 600,000 received from B.
This rule also applies when the aggrieved party has made a bad bargain. If, in the case mentioned in Illustration 1, the real market value of the shares is GBP 1,200,000, A may still require the return of the shares.
This Article also applies to the situation where the aggrieved party has supplied money in exchange for property, services, or other performances which the party has not received or which are defective.
2. Art dealer A sells a Constable painting to art dealer B for EUR 600,000. B only pays EUR 200,000 for the painting, and A therefore terminates the contract. Subsequently it turns out that the painting is not a Constable but a copy. On termination of the contract, B can reclaim the purchase price and must return the painting to A.
As regards the costs involved in making restitution, Article 6.1.11 applies.
3. Restitution in kind not possible or appropriate
Restitution must normally be made in kind. There are, however, instances where instead of restitution in kind, an allowance in money has to be made. This is the case first of all where restitution in kind is not possible. The allowance will normally amount to the value of the performance received.
3. Company A, which has contracted to excavate company B’s site, leaves it after only part of the work has been done. B, which then terminates the contract, will have to pay A a sum in compensation for the work done, measured by the value that work has for B. At the same time B will have a claim against A for whatever damages B may have suffered as a result of A’s breach of contract (see Article 7.3.5 (2)).
4. Company A charters a ship for a company cruise for its employees which is to take them up the Australian Coral Reef. Half-way the cruise ship breaks down and cannot continue the cruise. A terminates the contract with B, the owner of the business organising the cruise, and decides to fly its employees home. If A had already paid the price A can now claim it back. At the same time, A owes B an allowance amounting to the value of the cruise so far. In addition, A can claim damages for the loss suffered as a result of B’s non-performance (see Article 7.3.5 (2)).
An allowance is further envisaged by paragraph (2) of this Article whenever restitution in kind would not be appropriate. This is so in particular when returning the performance in kind would cause unreasonable effort or expense. The standard, in that respect, is the same as under Article 7.2.2(b).
5. A, an artist, sells 200 silver-plated rings to dealer B. B fails to pay for the rings and A thereupon terminates the contract. It turns out that B has, in the meantime, attempted to ship the rings to his business premises. However, the boat on which they had been stored has sunk. Although it would be possible, at great expense, to rescue the rings from the wrecked ship, this cannot be expected of B. B has to pay a reasonable sum to A, measured by the value of the rings.
The purpose of specifying that an allowance has to be made in money “whenever reasonable” is to make it clear that an allowance only has to be made if, and to the extent that, the performance has conferred a benefit on its recipient. That is not the case, for example, where the defect which gives the recipient of the performance a right to terminate has only become apparent in the course of processing the object of that performance.
6. Company A hires company B to develop a specialised software to improve its existing internal communication system. Once B has developed and installed the software, the software does not perform the functions it was intended to. A can terminate the contract and re-claim the price paid, but since the installed system has no value for A, it would not be reasonable to expect A to pay B an allowance for the installed software.
4. The allocation of risk
The rule contained in paragraph (2) implies an allocation of risk: it imposes a liability on the recipient of the performance to make good the value of that performance if it is unable to make restitution in kind. The rule in paragraph (2) applies even if the recipient was responsible for the deterioration or destruction of what it had received. Such allocation of the risk of deterioration or destruction is justified, in particular, because the risk should lie with the person in control of the performance. On the contrary, there is no liability to make good the value where the deterioration or destruction is attributable to the other party: either because it was due to the other party’s fault, or because it was due to a defect inherent in the performance. Hence the rule in paragraph (3).
7. Manufacturer A sells and delivers a luxury car to company B. The car has defective brakes. Due to this defect it crashes into another car and is totally destroyed. Since the car was unfit to be used for its intended purpose, B can terminate the contract and reclaim the purchase price. B does not have to make an allowance for not being able to return the car.
The recipient’s liability to make good the value of the performance received is not excluded in cases where the deterioration or destruction would also have occurred had the performance not been rendered.
8. Manufacturer A sells and delivers a car to company B. After delivery has taken place, the car is totally destroyed by a hurricane flooding the properties of both A and B. B terminates the contract because of a defect attaching to the car. B can reclaim the purchase price but, at the same time, has to make an allowance for the value of the car prior to its destruction.
The question of the recipient’s liability to pay the value of the performance only arises in cases where the deterioration or destruction occurs before termination of the contract. If what has been performed deteriorates or is destroyed after termination of the contract, the normal rules on non-performance apply, as after termination the recipient of the performance is under a duty to return what the recipient has received. Any non-performance of that duty gives the other party a right to claim damages according to Article 7.4.1, unless the non-performance is excused under Article 7.1.7.
9. Company A sells and delivers to company B a limousine with a leaking roof. Since the limousine is unfit to be used for its intended purpose, B can terminate the contract. As a result, B can reclaim the purchase price but is under a duty to return the limousine. Before B can return the car it is totally destroyed by a thunderstorm. A cannot claim damages because B is excused under Article 7.1.7.
5. Compensation for expenses
The recipient of a performance may have incurred expenses for the preservation or maintenance of the object of the performance. It is reasonable to allow the recipient to claim compensation for these expenses where the contract has been terminated and where, therefore, the parties have to return what they have received.
10. Company A has sold and delivered a race horse to company B. Some time later it becomes apparent that the horse is not, as A had promised, a descendant of a particular stallion. B terminates the contract. B can claim compensation for the costs incurred in feeding and caring for the horse.
This rule applies only to reasonable expenses. What is reasonable depends on the circumstances of the case. In Illustration 10 it would matter whether the horse had been sold as a race horse or as an ordinary farm horse.
Compensation cannot be claimed for other expenses linked to the performance received, even if they are reasonable.
11. Company A has sold and delivered a software package to company B. B then discovers that the software is lacking a certain functionality it was supposed to have. B therefore asks software expert C to check whether that functionality can still be implemented. Since that turns out not to be possible, B terminates the contract. B cannot recover the fee paid to C as expenses under paragraph (4) from A.
The Principles do not take a position concerning benefits that have been derived from the performance, or interest that has been earned. In commercial practice it will often be difficult to establish the value of the benefits received by the parties as a result of the performance. Furthermore, often both parties will have received such benefits.
7. Rights of third persons not affected
In common with other Articles of the Principles, this Article deals with the relationship between the parties and not with any rights on the goods concerned that third persons may have acquired. Whether, for instance, an obligee of the buyer, the buyer’s receivers in bankruptcy, or a purchaser in good faith may oppose the restitution of goods sold is to be determined by the applicable law.