The parties are free to enter into a contract and to determine its content.
1. Freedom of contract as a basic principle in the context of international trade
The principle of freedom of contract is of paramount importance in the context of international trade. The right of business people to decide freely to whom they will offer their goods or services and by whom they wish to be supplied, as well as the possibility for them freely to agree on the terms of individual transactions, are the cornerstones of an open, market-oriented and competitive international economic order.
2. Economic sectors where there is no competition
There are of course a number of possible exceptions to the principle laid down in this Article.
As concerns the freedom to conclude contracts with any other person, there are economic sectors which States may decide in the public interest to exclude from open competition. In such cases the goods or services in question can only be requested from the one available supplier, which will usually be a public body, and which may or may not be under a duty to conclude a contract with whoever makes a request, within the limits of the availability of the goods or services.
3. Limitation of party autonomy by mandatory rules
With respect to the freedom to determine the content of the contract, in the first instance the Principles themselves contain provisions from which the parties may not derogate (see Article 1.5).
Moreover, there are mandatory rules, whether of national, international or supra-national origin, which, if applicable in accordance with the relevant rules of private international law, prevail over the provisions contained in the Principles and from which the parties cannot derogate (see Article 1.4).
Nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form. It may be proved by any means, including witnesses.
1. Contracts as a rule not subject to formal requirements
This Article states the principle that the conclusion of a contract is not subject to any requirement as to form. The same principle also applies to the subsequent modification or termination of a contract by agreement of the parties.
The principle, which is to be found in many, although not in all, legal systems, seems particularly appropriate in the context of international trade relationships where, thanks to modern means of communication, many transactions are concluded at great speed and by a mixture of conversations, telefaxes, paper contracts, e-mail and web communication.
The first sentence of the Article takes into account the fact that some legal systems regard requirements as to form as matters relating to substance, while others impose them for evidentiary purposes only. The second sentence is intended to make it clear that to the extent that the principle of freedom of form applies, it implies the admissibility of oral evidence in judicial proceedings.
2. Statements and other unilateral acts
The principle of no requirement as to form applies also to statements and other unilateral acts. The most important such acts are statements of intent made by parties either in the course of the formation or performance of a contract (e.g. an offer, acceptance of an offer, confirmation of the contract by the party entitled to avoid it, determination of the price by one of the parties, etc.), or in other contexts (e.g. the grant of authority by a principal to an agent, the ratification by a principal of an act performed by an agent without authority, the obligor’s acknowledgement of the obligee’s right before the expiration of the general limitation period, etc.).
3. Possible exceptions under the applicable law
The principle of no requirement as to form may of course be overridden by the applicable law (see Article 1.4). National laws as well as international instruments may impose special requirements as to form with respect either to the contract as a whole or to individual terms (e.g. arbitration agreements; choice of court agreements).
4. Form requirements agreed by the parties
Moreover, the parties may themselves agree on a specific form for the conclusion, modification or termination of their contract or for any other statement they may make or unilateral act they may perform in the course of the formation or performance of their contract or in any other context. In this connection see, in particular, Articles 2.1.13, 2.1.17 and 2.1.18.
A contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in these Principles.
1. The principle pacta sunt servanda
This Article lays down another basic principle of contract law, that of pacta sunt servanda.
The binding character of a contractual agreement obviously presupposes that an agreement has actually been concluded by the parties and that the agreement reached is not affected by any ground of invalidity. The rules governing the conclusion of contractual agreements are laid down in Chapter 2 Section 1 of the Principles, while the grounds of invalidity are dealt with in Chapter 3, as well as in individual provisions in other Chapters (see, e.g., Articles 7.1.6 and 7.4.13(2)). Additional requirements for the valid conclusion of contracts may be found in the applicable national or international mandatory rules.
A corollary of the principle of pacta sunt servanda is that a contract may be modified or terminated whenever the parties so agree.
Modification or termination without agreement are on the contrary the exception and can therefore be admitted only when in conformity with the terms of the contract or when expressly provided for in the Principles (see Articles 3.2.7(2), 3.2.7(3), 3.2.10, 5.1.8, 6.1.16, 6.2.3, 7.1.7, 7.3.1 and 7.3.3).
3. Effects on third persons
By stating the principle of the binding force of the contract between the parties, this Article does not intend to prejudice any effect which that contract may have vis-à-vis third persons under the applicable law. Thus, a seller may in some jurisdictions be under a contractual duty to protect the physical integrity and property not only of the buyer, but also of accompanying persons during their presence on the seller’s premises.
Similarly the Principles do not deal with the effects of avoidance and termination of a contract on the rights of third persons.
With respect to cases where the agreement between the parties by its very nature is intended to affect the legal relations of other persons, see Section 2 of Chapter 2 on “Authority of Agents”, Section 2 of Chapter 5 on “Third Party Rights”, Chapter 9 on “Assignment of Rights, Transfer of Obligations, Assignment of Contracts” and Chapter 11 on “Plurality of Obligors and Obligees”.
Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law.
1. Mandatory rules prevail
Given the particular nature of the Principles as a non-legislative instrument, neither the Principles nor individual contracts concluded in accordance with the Principles, can be expected to prevail over mandatory rules of domestic law, whether of national, international or supranational origin, that are applicable in accordance with the relevant rules of private international law. Mandatory rules of national origin are those enacted by States autonomously (e.g. particular form requirements for specific types of contracts; invalidity of penalty clauses; licensing requirements; environmental regulations; etc.), while mandatory rules of international or supranational origin are those derived from international conventions or general public international law (e.g. Hague-Visby Rules; UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects; United Nations Convention against Corruption; United Nations Universal Declaration of Human Rights, etc.) or adopted by supranational organisations (e.g. European Union competition law, etc.).
2. Broad notion of “mandatory rules”
The mandatory rules referred to in this Article are predominantly laid down by specific legislation, and their mandatory nature, may either be expressly stated or inferred by way of interpretation. However, in the various national legal systems restrictions on freedom of contract may also derive from general principles of public policy, whether of national, international or supranational origin (e.g. prohibition of commission or inducement of crime; prohibition of corruption and collusive bidding; protection of human dignity; prohibition of discrimination on the basis of gender, race or religion; prohibition of undue restraint of trade; etc). For the purpose of this Article the notion of “mandatory rules” is to be understood in a broad sense, so as to cover both specific statutory provisions and general principles of public policy.
3. Mandatory rules applicable in case of incorporation of the Principles as terms of contract
Where, as is the traditional and still prevailing approach adopted by domestic courts with respect to soft law instruments, the parties’ reference to the Principles is considered to be merely an agreement to incorporate them in the contract (see Comment 4 lit. (a), third paragraph, to the Preamble), the Principles and the individual contracts concluded in accordance with the Principles will first of all encounter the limit of the principles and rules of the domestic law that govern the contract from which parties may not contractually derogate (so-called “ordinary” or “domestically mandatory” rules). Moreover, the mandatory rules of the forum State, and possibly of other countries, may also apply if the mandatory rules claim application irrespective of what the law governing the contract is, and, in the case of the mandatory rules of other countries, there is a sufficiently close connection between those countries and the contract in question (so-called “overriding” or “internationally mandatory” rules).
4. Mandatory rules applicable in case of reference to the Principles as law governing the contract
Where, as may be the case if the dispute is brought before an arbitral tribunal, the Principles are applied as the law governing the contract (see Comment 4 lit. (a), fourth paragraph, to the Preamble), they no longer encounter the limit of the ordinary mandatory rules of any domestic law. As far as the overriding mandatory rules of the forum State or of other countries are concerned, their application basically depends on the circumstances of the case. Generally speaking, since in international arbitration the arbitral tribunal lacks a predetermined lex fori, it may, but is under no duty to, apply the overriding mandatory rules of the country on the territory of which it renders the award.
In determining whether to take into consideration the overriding mandatory rules of the forum State or of any other country with which the case at hand has a significant connection, the arbitral tribunal, bearing in mind its task to “make every effort to make sure that the Award is enforceable at law” (so expressly e.g. Article 35 of the 1998 ICC Arbitration Rules), may be expected to pay particular attention to the overriding mandatory rules of those countries where enforcement of the award is likely to be sought. Moreover, the arbitral tribunal may consider it necessary to apply those overriding mandatory rules that reflect principles widely accepted as fundamental in legal systems throughout the world (so-called “transnational public policy” or “ordre public transnational”).
5. Recourse to rules of private international law relevant in each given case
In view of the considerable differences in the ways in which domestic courts and arbitral tribunals determine the mandatory rules applicable to international commercial contracts, this Article deliberately refrains from stating which mandatory rules apply and the Article refers instead to the relevant rules of private international law for the solution in each given case (see e.g. Article 9 of EC Regulation No. 593/2008 (Rome I) (replacing Article 7 of the 1980 Rome Convention on the Law applicable to Contractual Obligations); Article 11 of the 1994 Inter-American Convention on the Law Applicable to International Contracts; Articles 28, 34 and 36 of the UNCITRAL Model Law on International Commercial Arbitration; and Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards).
The parties may exclude the application of these Principles or derogate from or vary the effect of any of their provisions, except as otherwise provided in the Principles.
1. The non-mandatory character of the Principles
The rules laid down in the Principles are in general of a non-mandatory character, i.e. the parties may in each individual case either simply exclude their application in whole or in part or modify their content so as to adapt them to the specific needs of the kind of transaction involved (see the Model Clause in the footnote to the second paragraph of the Preamble).
2. Exclusion or modification may be express or implied
The exclusion or modification of the Principles by the parties may be either express or implied. There is an implied exclusion or modification when the parties expressly agree on contract terms which are inconsistent with provisions of the Principles and it is in this context irrelevant whether the terms in question have been negotiated individually or form part of standard terms incorporated by the parties in their contract.
If the parties expressly agree to the application of some only of the Chapters of the Principles (e.g. “As far as the performance and non-performance of this contract is concerned, the UNIDROIT Principles shall apply”), it is presumed that the Chapters concerned will be applied together with the general provisions of Chapter 1.
3. Mandatory provisions to be found in the Principles
A few provisions of the Principles are of a mandatory character, i.e. their importance in the system of the Principles is such that parties should not be permitted to exclude or to derogate from them as they wish. It is true that given the particular nature of the Principles the non-observance of this precept may have no consequences. On the other hand, it should be noted that the provisions in question reflect principles and standards of behaviour which are of a mandatory character under most domestic laws also.
Those provisions of the Principles which are mandatory are normally expressly indicated as such. This is the case with Article 1.7 on good faith and fair dealing, with the provisions of Chapter 3 on substantive validity, except in so far as they relate or apply to mistake and to initial impossibility (see Article 3.1.4), with Article 5.1.7(2) on price determination, with Article 7.4.13(2) on agreed payment for non-performance and Article 10.3(2) on limitation periods. Exceptionally, the mandatory character of a provision is only implicit and follows from the content and purpose of the provision itself (see, e.g., Articles 1.8 and 7.1.6).
(1) In the interpretation of these Principles, regard is to be had to their international character and to their purposes including the need to promote uniformity in their application.
(2) Issues within the scope of these Principles but not expressly settled by them are as far as possible to be settled in accordance with their underlying general principles.
1. Interpretation of the Principles as opposed to interpretation of the contract
The Principles, like any other legal text, be it of a legislative or of a contractual nature, may give rise to doubts as to the precise meaning of their content. The interpretation of the Principles is however different from that of the individual contracts to which they apply. Even if the Principles are considered to bind the parties only at contractual level, i.e. their application is made dependent on their incorporation in individual contracts, they remain an autonomous set of rules worked out with a view to their application in a uniform manner to an indefinite number of contracts of different type entered into in various parts of the world. As a consequence they must be interpreted in a different manner from the terms of each individual contract. The rules for the interpretation of contracts (as well as of statements by or other conduct of the parties) are laid down in Chapter 4. This Article deals with the manner in which the Principles as such are to be interpreted.
2. Regard to the international character of the Principles
The first criterion laid down by this Article for the interpretation of the Principles is that regard is to be had to their “international character”. This means that their terms and concepts are to be interpreted autonomously, i.e. in the context of the Principles themselves and not by reference to the meaning which might traditionally be attached to them by a particular domestic law.
Such an approach becomes necessary if it is recalled that the Principles are the result of thorough comparative studies carried out by lawyers coming from totally different cultural and legal backgrounds. When drafting the individual provisions, these experts had to find sufficiently neutral legal language on which they could reach a common understanding. Even in the exceptional cases where terms or concepts peculiar to one or more national laws are employed, the intention was never to use them in their traditional meaning.
3. Purposes of the Principles
By stating that in the interpretation of the Principles regard is to be had to their purposes, this Article makes it clear that they are not to be construed in a strict and literal sense but in the light of the purposes and the rationale underlying the individual provisions as well as the Principles as a whole. The purpose of the individual provisions can be ascertained both from the text itself and from the comments thereon.
As to the purposes of the Principles as a whole, this Article, in view of the fact that the Principles’ main objective is to provide a uniform framework for international commercial contracts, expressly refers to the need to promote uniformity in their application, i.e. to ensure that in practice they are to the greatest possible extent interpreted and applied in the same way in different countries. As to other purposes, see the remarks contained in the Introduction. See further Article 1.7 which, although addressed to the parties, may also be seen as an expression of the underlying purpose of the Principles as such to promote the observance of good faith and fair dealing in contractual relations.
4. Supplementation of the Principles
A number of issues which would fall within the scope of the Principles are not settled expressly by them. In order to determine whether an issue is one that falls within the scope of the Principles even though it is not expressly settled by them, or whether it actually falls outside their scope, regard is to be had first to what is expressly stated either in the text or in the Comments (see, e.g., Comment 3 on Article 1.3; Comment 5 on Article 1.4; Article 2.2.1(2) and (3) and Comment 5 on Article 2.2.1; Comment 5 on Article 2.2.7; Comment 5 on Article 2.2.9; Comment 1 on Article 2.2.10; Article 3.1.1; Comment 1 on Article 6.1.14; Article 9.1.2; Article 9.2.2; Article 9.3.2). A useful additional guide in this respect is the subject-matter index of the Principles.
The need to promote uniformity in the application of the Principles implies that when such gaps arise a solution should be found, whenever possible, within the system of the Principles itself before resorting to domestic laws.
The first step is to attempt to settle the unsolved question through an application by analogy of specific provisions. Thus, Article 6.1.6 on place of performance should also govern restitution. Similarly, the rules laid down in Article 6.1.9 with respect to the case where a monetary obligation is expressed in a currency other than that of the place for payment may also be applied when the monetary obligation is expressed by reference to units of account such as the Special Drawing Right (SDR). If the issue cannot be solved by a mere extension of specific provisions dealing with analogous cases, recourse must be made to their underlying general principles, i.e. to the principles and rules which may be applied on a much wider scale because of their general character. Some of these fundamental principles are expressly stated in the Principles (see, e.g., Articles 1.1, 1.3, 1.5, 1.7 and 1.8). Others have to be extracted from specific provisions, i.e. the particular rules contained therein must be analysed in order to see whether they can be considered an expression of a more general principle, and as such capable of being applied also to cases different from those specifically regulated.
Parties are of course always free to agree on a particular national law to which reference should be made for the supplementing of the Principles. A provision of this kind could read “This contract is governed by the UNIDROIT Principles supplemented by the law of Country X”, or “This contract shall be interpreted and executed in accordance with the UNIDROIT Principles. Questions not expressly settled therein shall be settled in accordance with the law of Country X” (see the Model Clause in the footnote to the second paragraph of the Preamble).
(1) Each party must act in accordance with good faith and fair dealing in international trade.
(2) The parties may not exclude or limit this duty.
1. “Good faith and fair dealing” as a fundamental idea underlying the Principles
There are a number of provisions throughout the different Chapters of the Principles which constitute a direct or indirect application of the principle of good faith and fair dealing. See above all Article 1.8, but see also for instance, Articles 1.9(2); 2.1.4(2)(b), 2.1.15, 2.1.16, 2.1.18 and 2.1.20; 2.2.4(2), 2.2.5(2), 2.2.7 and 2.2.10; 3.2.2, 3.2.5 and 3.2.7; 4.1(2), 4.2(2), 4.6 and 4.8; 5.1.2 and 5.1.3; 5.2.5; 5.3.3 and 5.3.4; 6.1.3, 6.1.5, 6.1.16(2) and 6.1.17(1); 6.2.3(3)(4); 7.1.2, 7.1.6 and 7.1.7; 7.2.2(b)(c); 7.4.8 and 7.4.13; 9.1.3, 9.1.4 and 9.1.10(1). This means that good faith and fair dealing may be considered to be one of the fundamental ideas underlying the Principles. By stating in general terms that each party must act in accordance with good faith and fair dealing, paragraph (1) of this Article makes it clear that even in the absence of special provisions in the Principles the parties’ behaviour throughout the life of the contract, including the negotiation process, must conform to good faith and fair dealing.
1. A grants B forty-eight hours as the time within which B may accept its offer. When B, shortly before the expiry of the deadline, decides to accept, it is unable to do so: it is the weekend, the fax at A’s office is disconnected and there is no telephone answering machine which can take the message. When on the following Monday A refuses B’s acceptance A acts contrary to good faith since when it fixed the time-limit for acceptance it was for A to ensure that messages could be received at its office throughout the forty-eight hour period.
2. A contract for the supply and installation of a special production line contains a provision according to which A, the seller, is obliged to communicate to B, the purchaser, any improvements made by A to the technology of that line. After a year B learns of an important improvement of which it had not been informed. A is not excused by the fact that the production of that particular type of production line is no longer its responsibility but that of C, a wholly-owned affiliated company of A. It would be against good faith for A to invoke the separate entity of C, which was specifically set up to take over this production in order to avoid A’s contractual obligations vis-à-vis B.
3. A, an agent, undertakes on behalf of B, the principal, to promote the sale of B’s goods in a given area. Under the contract A’s right to compensation arises only after B’s approval of the contracts procured by A. While B is free to decide whether or not to approve the contracts procured by A, a systematic and unjustified refusal to approve any contract procured by A would be against good faith.
4. Under a line of credit agreement between A, a bank, and B, a customer, A suddenly and inexplicably refuses to make further advances to B whose business suffers heavy losses as a consequence. Notwithstanding the fact that the agreement contains a term permitting A to accelerate payment “at will”, A’s demand for payment in full without prior warning and with no justification would be against good faith.
2. Abuse of rights
A typical example of behaviour contrary to the principle of good faith and fair dealing is what in some legal systems is known as “abuse of rights”. It is characterised by a party’s malicious behaviour which occurs for instance when a party exercises a right merely to damage the other party or for a purpose other than the one for which it had been granted, or when the exercise of a right is disproportionate to the originally intended result.
5. A rents premises from B for the purpose of setting up a retail business. The rental contract is for five years, but when three years later A realises that business in the area is very poor, it decides to close the business and informs B that it is no longer interested in renting the premises. A’s breach of contract would normally lead to B’s having the choice of either terminating the contract and claiming damages or requesting specific performance. However, under the circumstances B would be abusing its rights if it required A to pay the rent for the remaining two years of the contract instead of terminating the contract and claiming damages from A for the rent it has lost for the length of time necessary to find a new tenant.
6. A rents premises from B for the purpose of opening a restaurant. During the summer months A sets up a few tables out of doors, but still on the owner’s property. On account of the noise caused by the restaurant’s customers late at night, B has increasing difficulties finding tenants for apartments in the same building. B would be abusing its rights if, instead of requesting A to desist from serving out of doors late at night, it required A not to serve out of doors at all.
3. “Good faith and fair dealing in international trade”
The reference to “good faith and fair dealing in international trade” first makes it clear that in the context of the Principles the two concepts are not to be applied according to the standards ordinarily adopted within the different national legal systems. In other words, such domestic standards may be taken into account only to the extent that they are shown to be generally accepted among the various legal systems. A further implication of the formula used is that good faith and fair dealing must be construed in the light of the special conditions of international trade. Standards of business practice may indeed vary considerably from one trade sector to another, and even within a given trade sector they may be more or less stringent depending on the socio-economic environment in which the enterprises operate, their size and technical skill, etc.
It should be noted that whenever the provisions of the Principles and/or the comments thereto refer only to “good faith and fair dealing”, such references should always be understood as a reference to “good faith and fair dealing in international trade” as specified in this Article.
7. Under a contract for the sale of high-technology equipment the purchaser loses the right to rely on any defect in the goods if it does not give notice to the seller specifying the nature of the defect without undue delay after it has discovered or ought to have discovered the defect. A, a buyer operating in a country where such equipment is commonly used, discovers a defect in the equipment after having put it into operation, but in its notice to B, the seller of the equipment, A gives misleading indications as to the nature of the defect. A loses its right to rely on the defect since a more careful examination of the defect would have permitted it to give B the necessary specifications.
8. The facts are the same as in Illustration 7, except that A operates in a country where this type of equipment is so far almost unknown. A does not lose its right to rely on the defect because B, being aware of A’s lack of technical knowledge, could not reasonably have expected A properly to identify the nature of the defect.
4. The mandatory nature of the principle of good faith and fair dealing
The parties’ duty to act in accordance with good faith and fair dealing is of such a fundamental nature that the parties may not contractually exclude or limit it (paragraph (2)). As to specific applications of the general prohibition to exclude or limit the principle of good faith and fair dealing between the parties, see Articles 3.1.4, 7.1.6 and 7.4.13.
On the other hand, nothing prevents parties from providing in their contract for a duty to observe more stringent standards of behaviour (see, e.g., Article 5.3.3).
A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment.
1. Inconsistent behaviour and “good faith and fair dealing”
This provision is a general application of the principle of good faith and fair dealing (Article 1.7). It is reflected in other more specific provisions of the Principles (see, for example, Articles 2.1.4(2)(b), 2.1.18, 2.1.20, 2.2.5(2) and Comment 3 on Article 10.4). It imposes a responsibility on a party not to occasion detriment to another party by acting inconsistently with an understanding concerning their contractual relationship which it has caused that other party to have and upon which that other party has reasonably acted in reliance.
The prohibition contained in this Article can result in the creation of rights and in the loss, suspension or modification of rights otherwise than by agreement of the parties. This is because the understanding relied upon may itself be inconsistent with the agreed or actual rights of the parties. The Article does not provide the only means by which a right might be lost or suspended because of one party’s conduct (see, for example, Articles 3.2.9 and 7.1.4(3)).
2. An understanding reasonably relied upon
There is a variety of ways in which one party may cause the other party to have an understanding concerning their contract, its performance, or enforcement. The understanding may result, for example, from a representation made, from conduct, or from silence when a party would reasonably expect the other to speak to correct a known error or misunderstanding that was being relied upon.
So long as it relates in some way to the contractual relationship of the parties, the understanding for the purposes of this Article is not limited to any particular subject-matter. It may relate to a matter of fact or of law, to a matter of intention, or to how one or other of the parties can or must act.
The important limitation is that the understanding must be one on which, in the circumstances, the other party can and does reasonably rely. Whether the reliance is reasonable is a matter of fact in the circumstances having regard, in particular, to the communications and conduct of the parties, to the nature and setting of the parties’ dealings and to the expectations they could reasonably entertain of each other.
1. A has negotiated with B over a lengthy period for a contract of lease of B’s land under which B is to demolish a building and construct a new one to A’s specification. A communicates with B in terms that induce B reasonably to understand that their contract negotiations have been completed, and that B can begin performance. B then demolishes the building and engages contractors to build the new building. A is aware of this and does nothing to stop it. A later indicates to B that there are additional terms still to be negotiated. A will be precluded from departing from B’s understanding.
2. B mistakenly understands that its contract with A can be performed in a particular way. A is aware of this and stands by while B’s performance proceeds. B and A meet regularly. B’s performance is discussed but no reference is made by A to B’s mistake. A will be precluded from insisting that the performance was not that which was required under the contract.
3. A regularly uses B to do sub-contract work on building sites. That part of A’s business and the employees involved in it are taken over by A1, a related business. There is no change in the general course of business by which B obtains its instruction to do work. B continues to provide sub-contract services and continues to bill A for work done believing the work is being done for A. A does not inform B of its mistake. A is precluded from denying that B’s contract for work done is with it and must pay for the work done.
4. Because of difficulties it is experiencing with its own suppliers, A is unable to make deliveries on time to B under their contract. The contract imposes penalties for late delivery. After being made aware of A’s difficulties, B indicates it will not insist on strict compliance with the delivery schedule. A year later B’s business begins to suffer from A’s late deliveries. B seeks to recover penalties for the late deliveries to date and to require compliance with the delivery schedule for the future. It will be precluded from recovering the penalties but will be able to insist on compliance with the schedule if reasonable notice is given that compliance is required for the future.
5. B is indebted to A in the sum of AUD 10,000. Though the debt is due A takes no steps to enforce it. B assumes in consequence that A has pardoned the debt. A has done nothing to indicate that such actually is the case. It later demands payment. B cannot rely on A’s inaction to resist that demand.
3. Detriment and preclusion
The responsibility imposed by the Article is to avoid detriment being occasioned in consequence of reasonable reliance. This does not necessarily require that the party seeking to act inconsistently must be precluded from so doing. Preclusion is only one way of avoiding detriment. There may, in the circumstances, be other reasonable means available that can avert the detriment the relying party would otherwise experience if the inconsistent action were allowed as, for example, by giving reasonable notice before acting inconsistently (see Illustration 4), or by paying for costs or losses incurred by reason of reliance.
6. A and B are parties to a construction contract which requires that additional works be documented in writing and be certified by the site architect. A’s contract manager orally requests B to do specified additional work on a time and materials basis and assures B it will be documented appropriately in due course. B commissions design works for the additional work at which stage A indicates that the work is not required. The cost incurred in commissioning the design work is far less than the cost that would be incurred if the additional work were to be done. If A pays B the costs incurred by B for the design work, B cannot then complain of A’s inconsistent behaviour.
7. A fails to meet on time a prescribed milestone in a software development contract with B. B is entitled under the contract to terminate the contract because of that failure. B continues to require and pay for changes to the software and acts co-operatively with A in continuing the software development program. A’s continued performance is based on B’s conduct subsequent to the breach. B will in such circumstances be precluded from exercising its right to terminate for the failure to meet the milestone. However, under the Principles B will be able to allow A an additional period of time for performance (see Article 7.1.5) and to exercise its right to terminate if the milestone is not met in that period.
(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.
(2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable.
1. Practices and usages in the context of the Principles
This Article lays down the principle according to which the parties are in general bound by practices and usages which meet the requirements set forth in the Article. Furthermore, these same requirements must be met by practices and usages for them to be applicable in the cases and for the purposes expressly indicated in the Principles (see, for instance, Articles 2.1.6(3), 4.3, and 5.1.2).
2. Practices established between the parties
A practice established between the parties to a particular contract is automatically binding, except where the parties have expressly excluded its application. Whether a particular practice can be deemed to be “established” between the parties will naturally depend on the circumstances of the case, but behaviour on the occasion of only one previous transaction between the parties will not normally suffice.
1. A, a supplier, has repeatedly accepted claims from B, a customer, for quantitative or qualitative defects in the goods as much as two weeks after their delivery. When B gives another notice of defects after a fortnight, A cannot object that it is too late since the two-weeks’ notice amounts to a practice established between A and B which will as such be binding on A.
3. Agreed usages
By stating that the parties are bound by usages to which they have agreed, paragraph (1) of this Article merely applies the general principle of freedom of contract laid down in Article 1.1. Indeed, the parties may either negotiate all the terms of their contract, or for certain questions simply refer to other sources including usages. The parties may stipulate the application of any usage, including a usage developed within a trade sector to which neither party belongs, or a usage relating to a different type of contract. It is even conceivable that the parties will agree on the application of what sometimes misleadingly are called usages, i.e. a set of rules issued by a particular trade association under the title of “Usages”, but which only in part reflects established general lines of conduct.
4. Other applicable usages
Paragraph (2) lays down the criteria for the identification of usages applicable in the absence of a specific agreement by the parties. The fact that the usage must be “widely known to and regularly observed […] by parties in the particular trade concerned” is a condition for the application of any usage, be it at international or merely at national or local level. The additional qualification “in international trade” is intended to avoid usages developed for, and confined to, domestic transactions also being invoked in transactions with foreigners.
2. A, a real estate agent, invokes a particular usage of the profession in its country vis-à-vis B, a foreign customer. B is not bound by such a usage if that usage is of a local nature and relates to a trade which is predominantly domestic in character.
Only exceptionally may usages of a purely local or national origin be applied without any reference thereto by the parties. Thus, usages existing on certain commodity exchanges or at trade exhibitions or ports should be applicable provided that they are regularly followed with respect to foreigners as well. Another exception concerns the case of a businessperson who has already entered into a number of similar contracts in a foreign country and who should therefore be bound by the usages established within that country for such contracts.
3. A, a terminal operator, invokes a particular usage of the port where it is located vis-à-vis B, a foreign carrier. B is bound by this local usage if the port is normally used by foreigners and the usage in question has been regularly observed with respect to all customers, irrespective of their place of business and of their nationality.
4. A, a sales agent from Country X, receives a request from B, one of its customers in Country Y, for the customary 10% discount upon payment of the price in cash. A may not object to the application of such a usage on account of its being restricted to Country Y if A has been doing business in that country for a certain period of time.
5. Application of usage unreasonable
A usage may be regularly observed by the generality of business people in a particular trade sector but its application in a given case may nevertheless be unreasonable. Reasons for this may be found in the particular conditions in which one or both parties operate and/or the atypical nature of the transaction. In such cases the usage will not be applied.
5. A usage exists in a commodity trade sector according to which the purchaser may not rely on defects in the goods if they are not duly certified by an internationally recognised inspection agency. When A, a buyer, takes over the goods at the port of destination, the only internationally recognised inspection agency operating in that port is on strike and to call another from the nearest port would be excessively costly. The application of the usage in this case would be unreasonable and A may rely on the defects it has discovered even though they have not been certified by an internationally recognised inspection agency.
6. Usages prevail over the Principles
Both courses of dealing and usages, once they are applicable in a given case, prevail over conflicting provisions contained in the Principles. The reason for this is that they bind the parties as implied terms of the contract as a whole or of single statements or other conduct on the part of one of the parties. As such, they are superseded by any express term stipulated by the parties but, in the same way as the latter, they prevail over the Principles, the only exception being those provisions which are specifically declared to be of a mandatory character (see Comment 3 on Article 1.5).
(1) Where notice is required it may be given by any means appropriate to the circumstances.
(2) A notice is effective when it reaches the person to whom it is given.
(3) For the purpose of paragraph (2) a notice “reaches” a person when given to that person orally or delivered at that person’s place of business or mailing address.
(4) For the purpose of this article “notice” includes a declaration, demand, request or any other communication of intention.
1. Form of notice
This Article first lays down the principle that notice or any other kind of communication of intention (declarations, demands, requests, etc.) required by individual provisions of the Principles are not subject to any particular requirement as to form, but may be given by any means appropriate in the circumstances. Which means are appropriate will depend on the actual circumstances of the case, in particular on the availability and the reliability of the various modes of communication, and the importance and/or urgency of the message to be delivered. For an electronic notice to be “appropriate to the circumstances” the addressee must expressly or impliedly have consented to receive electronic communications in the way in which the notice was sent by the sender, i.e. of that type, in that format and to that address. The addressee’s consent may be inferred from the addressee’s statements or conduct, from practices established between the parties, or from applicable usages.
1. Seller A and buyer B have a longstanding business relationship in the course of which they have always negotiated and concluded their contracts by telephone. On discovering a defect in the goods supplied on one occasion, B immediately sends A notice thereof by e-mail. A, who does not regularly read its e-mail and had no reason to expect an e-mail from B, on discovering B’s notice three weeks after it had been sent rejects it as being too late. B may not object that it had given prompt notice of the defects since the notice was not given by a means appropriate to the circumstances.
2. Seller A and buyer B have a longstanding business relationship in the course of which they have regularly communicated by electronic means. On discovering a defect in the goods supplied on one occasion, B immediately sends A notice thereof by e-mail to an e-mail address different from the one normally used. A, who had no reason to expect an e-mail from B at that address, on discovering B’s notice three weeks after it had been sent rejects it as being too late. B may not object that it had given prompt notice of the defects since the notice was not given by a means appropriate to the circumstances.
2. Receipt principle
With respect to all kinds of notices the Principles adopt the so-called “receipt” principle, i.e. they are not effective unless and until they reach the person to whom they are given. For some communications this is expressly stated in the provisions dealing with them: see Articles 2.1.3(1), 2.1.3(2), 2.1.5, 2.1.6(2), 2.1.8(1) and 2.1.10; 9.1.10 and 9.1.11. The purpose of paragraph (2) of this Article is to indicate that the same will also be true in the absence of an express statement to this effect: see Articles 2.1.9, 2.1.11; 2.2.9; 3.2.10, 3.2.11; 6.1.16, 6.2.3; 7.1.5, 7.1.7; 7.2.1, 7.2.2; 7.3.2, 7.3.4; and 8.3.
3. Dispatch principle to be expressly stipulated
The parties are of course always free expressly to stipulate the application of the dispatch principle. This may be appropriate in particular with respect to the notice a party has to give in order to preserve its rights in cases of the other party’s actual or anticipated non-performance when it would not be fair to place the risk of loss, mistake or delay in the transmission of the message on the former. This is all the more true if the difficulties which may arise at international level in proving effective receipt of a notice are borne in mind.
It is important in relation to the receipt principle to determine precisely when the communications in question “reach” the addressee. In an attempt to define the concept, paragraph (3) of this Article draws a distinction between oral and other communications. The former “reach” the addressee if they are made personally to it or to another person authorised by it to receive them. The latter “reach” the addressee as soon as they are delivered either to the addressee personally or to its place of business or (electronic) mailing address. The particular communication in question need not come into the hands of the addressee or actually be read by the addressee. It is sufficient that it be handed over to an employee of the addressee authorised to accept it, or that it be placed in the addressee’s mailbox, or received by the addressee’s fax or telex machine, or, in the case of electronic communications when it becomes capable of being retrieved by the addressee at an electronic address designated by the addressee (see Article 10(2) of the 2005 United Nations Convention on the Use of Electronic Communications in International Contracts).
In these Principles
– “court” includes an arbitral tribunal;
– where a party has more than one place of business the relevant “place of business” is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract;
– “obligor” refers to the party who is to perform an obligation and “obligee” refers to the party who is entitled to performance of that obligation.
– “writing” means any mode of communication that preserves a record of the information contained therein and is capable of being reproduced in tangible form.
1. Courts and arbitral tribunals
The importance of the Principles for the purpose of the settlement of disputes by means of arbitration has already been stressed (see above the Comments on the Preamble). In order however to avoid undue heaviness of language, only the term “court” is used in the text of the Principles, on the understanding that it covers arbitral tribunals as well as courts.
2. Party with more than one place of business
For the purpose of the application of the Principles a party’s place of business is of relevance in a number of contexts such as the place for the delivery of notices (see Article 1.10(3)); a possible extension of the time of acceptance because of a holiday falling on the last day (see Article 1.12); the place of performance (Article 6.1.6) and the determination of the party who should apply for a public permission (Article 6.1.14(a)).
With reference to a party with multiple places of business (normally a central office and various branch offices) this Article lays down the rule that the relevant place of business should be considered to be that which has the closest relationship to the contract and to its performance. Nothing is said with respect to the case where the place of the conclusion of the contract and that of performance differ, but in such a case the latter would seem to be the more relevant one. In the determination of the place of business which has the closest relationship to a given contract and to its performance, regard is to be had to the circumstances known to or contemplated by both parties at any time before or at the conclusion of the contract. Facts known only to one of the parties or of which the parties became aware only after the conclusion of the contract cannot be taken into consideration.
3. “Obligor” – “obligee”
Where necessary, to better identify the party performing and the party receiving performance of obligations the terms “obligor” and “obligee” are used, irrespective of whether the obligation is non-monetary or monetary.
In some cases the Principles refer to a “writing” or a “contract in writing” (see Articles 2.1.12, 2.1.17 and 2.1.18). The Principles define this formal requirement in functional terms. Thus, a writing includes not only a telegram and a telex, but also any other mode of communication, including electronic communications, that preserves a record and can be reproduced in tangible form. This formal requirement should be compared with the more flexible form of a “notice” (see Article 1.10(1)).
(1) Official holidays or non-business days occurring during a period set by parties for an act to be performed are included in calculating the period.
(2) However, if the last day of the period is an official holiday or a non-business day at the place of business of the party to perform the act, the period is extended until the first business day which follows, unless the circumstances indicate otherwise.
(3) The relevant time zone is that of the place of business of the party setting the time, unless the circumstances indicate otherwise.
The parties may, either unilaterally or by agreement, fix a period of time within which certain acts must be done (see, e.g., Articles 2.1.7, 2.2.9(2) and 10.3).
In fixing the time limit the parties may either indicate merely a period of time (e.g. “Notice of defects in the goods must be given within ten days after delivery”) or a precise date (e.g. “Offer firm until 1 March”).
In the first case the question arises of whether or not holidays or non-business days occurring during the period of time are included in calculating the period of time, and according to paragraph (1) of this Article the answer is in the affirmative.
In both of the above-mentioned cases, the question may arise of what the effect would be of a holiday or non-business day falling at the expiry of the fixed period of time at the place of business of the party to perform the act.
Paragraph (2) provides that in such an eventuality the period is extended until the first business day that follows, unless the circumstances indicate otherwise.
Finally, whenever the parties are situated in different time zones, the question arises as to what time zone is relevant, and according to paragraph (3) it is the time zone of the place of business of the party setting the time limit, unless the circumstances indicate otherwise.
1. A sales contract provides that buyer A must give notice of defects of the goods within 10 days after delivery. The goods are delivered on Friday 16 December. A gives notice of defects on Monday 2 January and seller B rejects it as being untimely. A may not object that the holidays and non-business days which occurred between 16 December and 2 January should not be counted when calculating the ten days of the time limit.
2. Offeror A indicates that its offer is firm until 1 March. Offeree B accepts the offer on 2 March because 1 March was a holiday at its place of business. A may not object that the fixed time limit for acceptance had expired on 1 March.
3. Offeror A sends an offer to offeree B by e-mail on a Saturday indicating that the offer is firm for 24 hours. If B intends to accept, it must do so within 24 hours, even though the time limit elapses on a Sunday, since under the circumstances the time limit fixed by A was to be understood as absolute.
4. The facts are the same as in Illustration 2, except that A is situated in Frankfurt and B in New York, and the time limit fixed for acceptance is “by 5 p.m. tomorrow at the latest”. B must accept by 5 p.m. Frankfurt time.
5. A charterparty concluded between owner A, situated in Tokyo, and charterer B, situated in Kuwait City, provides for payment of the freight by B at A’s bank in Zurich, Switzerland, on a specific date by 5 p.m. at latest. The relevant time zone is neither that of A nor that of B, but that of Zurich where payment is due.