(1) On avoidance either party may claim restitution of whatever it has supplied under the contract, or the part of it avoided, provided that the party concurrently makes restitution of whatever it has received under the contract, or the part of it avoided.
(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. Right of parties to restitution on avoidance
According to paragraph (1) of this Article either party may claim restitution of what the party has supplied under the contract or the part of it avoided. The only condition is that each party makes restitution of whatever the party has received under the contract or the part of it avoided.
1. In the process of a takeover of a company, the controlling shareholder A agrees to sell and transfer to B shares for GBP 100,000. After discovering that A had fraudulently misstated the profits the company was earning, B avoids the contract. B can claim back the purchase price of GBP 100,000. At the same time, B has to return the shares received from A.
As regards the costs involved in making restitution, Article 6.1.11 applies.
2. Restitution in kind not possible or appropriate
Restitution must normally be 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.
2. A commissions B to paint A’s factory. B had fraudulently induced A to conclude the contract at a price that is much higher than the market price. After having discovered the fraud, A avoids the contract. A can reclaim the purchase price from B while A is itself under a duty to pay for the value of having had its factory painted.
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).
3. Antiquarian A fraudulently induces antiquarian B to buy a collection of gold coins. The gold coins are reloaded onto one of B’s ships. In a heavy storm the ship sinks. B subsequently discovers the fraud and avoids the contract. B can recover the price that it has paid, while itself having to make an allowance representing the value of the gold coins. This is in view of the fact that recovery of the gold coins from the sunken ship would involve expenses vastly exceeding their value.
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 received constitutes a benefit for the recipient.
4. A has undertaken to decorate the entrance hall of B’s business centre. After A has completed about half of the decorations B discovers that A is not the well-known decorator A has pretended to be. B avoids the contract. Since the decorations so far made cannot be returned and if they have no value for B, A is not entitled to any allowance for the work done.
3. 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 irrespective of whether the recipient was responsible for the deterioration or destruction of what it had received. This 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 if 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).
5. Art dealer A buys from art dealer B a painting which both of them believe to be a genuine Constable. Subsequently doubts arise about the authenticity of the painting. B undertakes to obtain an expert opinion by the well-known expert C. C confirms that the painting actually is from a much less well-known painter living at the time of Constable. Due to B’s negligence, the painting is destroyed on the way back from C to A. A avoids the contract on the ground of a relevant mistake under Article 3.2.2. A can claim back the purchase price but does not have to make an allowance for the value of the painting.
The recipient’s liability to pay 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.
6. Company A sells and transfers earth-moving equipment to company B. The equipment is subsequently destroyed by a hurricane that floods the properties of both A and B. B avoids the contract because of a relevant mistake under Article 3.2.2. B can reclaim the purchase price but, at the same time, B has to make an allowance for the value of the earth-moving equipment.
Nor is the recipient’s liability to make good the value of the performance excluded in cases where it has been led to conclude the contract by the other party’s fraudulent representation.
7. Antique dealer A has fraudulently induced garage owner B to swap A’s ramshackle car against a valuable ancient Greek vase belonging to B. The car is accidentally destroyed while standing in B’s garage. If B avoids the contract under Article 3.2.5, B can claim the vase back but has to make good the value of the car.
While Article 3.2.5 is intended to make sure that B is not bound by the contract that it has entered into (hence the right of avoidance) and that B is not saddled with the consequences of a bad bargain that A has induced B to make (hence the right to restitution), Article 3.2.5. does not protect B against accidents.
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 avoidance of the contract. If what has been performed deteriorates or is destroyed after avoidance of the contract, 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.
8. Art dealer A buys from art dealer B a painting which both parties believe to be a genuine Constable. After it has become apparent that the painting actually is from a much less well-known painter living at the time of Constable, A avoids the contract on the ground of a relevant mistake under Article 3.2.2. As a result, A can reclaim the purchase price but is under a duty to return the painting. Before A can return the painting it is stolen by burglars. Whether B can claim damages depends on whether the burglary can be regarded as force majeure (see Article 7.1.7).
4. Compensation for expenses
If the recipient of a performance has 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 in cases where the contract has been avoided and where, therefore, the parties have to return what they have received.
9. Company A has sold and delivered a race horse to company B. After some time B realizes that A has fraudulently concealed from him the true parentage of that horse. B avoids 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 9 it would matter whether the horse had been sold as a race horse or as an ordinary farm horse.
Compensation cannot be claimed for expenses which are not required to preserve or maintain the performance received, even if they are reasonable.
10. Company A has sold and delivered a software package to company B which both parties believe to possess a certain functionality. When B discovers that this is not the case, B asks C to check whether that functionality can still be implemented. Since that turns out not to be possible, B avoids the contract for relevant mistake under Article 3.2.2. B cannot recover from A the fee paid to C as expenses under paragraph (4).
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.