This Chapter does not deal with lack of capacity.
This Article makes it clear that not all the grounds of invalidity of a contract to be found in the various national legal systems fall within the scope of the Principles. This is in particular the case of lack of capacity. The reason for its exclusion lies in both the inherent complexity of questions of status and the extremely diverse manner in which these questions are treated in domestic law. In consequence, matters such as ultra vires will continue to be governed by the applicable law.
As to the authority of organs, officers or partners of a corporation, partnership or other entities to bind their respective entities, see Comment 5 on Article 2.2.1.
A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement.
The purpose of this Article is to make it clear that the mere agreement of the parties is sufficient for the valid conclusion, modification or termination by agreement of a contract, without any of the further requirements which are to be found in some domestic laws.
1. No need for consideration
In common law systems, “consideration” is traditionally seen as a prerequisite for the validity or enforceability of a contract, as well as for the modification or termination of a contract by the parties.
However, in commercial dealings this requirement is of minimal practical importance since in that context obligations are almost always undertaken by both parties. It is for this reason that Article 29(1) CISG dispenses with the requirement of consideration in relation to the modification and termination by the parties of contracts for the international sale of goods. The fact that this Article extends this approach to the conclusion, modification and termination by the parties of international commercial contracts in general can only bring about greater certainty and reduce litigation.
2. No need for cause
This Article also excludes the requirement of “cause” which exists in some civil law systems and is in certain respects functionally similar to the common law “consideration”.
1. At the request of its French customer A, bank B in Paris issues a guarantee on first demand in favour of C, a business partner of A in England. Neither B nor A can invoke the possible absence of consideration or cause for the guarantee.
It should be noted, however, that this Article is not concerned with the effects which may derive from other aspects of cause, such as its illegality (see Comment 2 on Article 3.1.3).
3. All contracts consensual
Some civil law systems have retained certain types of “real” contract, i.e. contracts concluded only upon the actual handing over of the goods concerned. These rules are not easily compatible with modern business perceptions and practice and are therefore excluded by this Article.
2. Two French businessmen, A and B, agree with C, a real estate developer, to lend C EUR 300,000 on 2 July. On 25 June, A and B inform C that, unexpectedly, they need the money for their own business. C is entitled to receive the loan, although the loan is generally considered a “real” contract in France.
(1) The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract.
(2) The mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract.
1. Performance impossible from the outset
Contrary to a number of legal systems which consider a contract of sale void if the specific goods sold have already perished at the time of conclusion of the contract, paragraph (1) of this Article, in conformity with the most modern trends, states in general terms that the mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract.
A contract is valid even if the assets to which it relates have already perished at the time of contracting, with the consequence that initial impossibility of performance is equated with impossibility occurring after the conclusion of the contract. The rights and duties of the parties arising from one party’s (or possibly even both parties’) inability to perform are to be determined according to the rules on non-performance. Under these rules appropriate weight may be attached, for example, to the fact that the obligor (or the obligee) already knew of the impossibility of performance at the time of contracting. The rule laid down in paragraph (1) also removes possible doubts as to the validity of contracts for the delivery of future goods.
If an initial impossibility of performance is due to a legal prohibition (e.g. an export or import embargo), the validity of the contract depends upon whether under the law enacting the prohibition the latter is intended to invalidate the contract or merely to prohibit its performance.
Paragraph (1) moreover departs from the rule to be found in some civil law systems according to which the object (objet) of a contract must be possible.
The paragraph also deviates from the rule of the same systems which requires the existence of a cause, since, in a case of initial impossibility, the cause for a counter-performance is lacking (see Article 3.1.2).
2. Lack of legal title or power
Paragraph (2) of this Article deals with cases where the party promising to transfer or deliver assets was not entitled to dispose of the assets because it lacked legal title or the right of disposition at the time of the conclusion of the contract.
Some legal systems declare a contract of sale concluded in such circumstances to be void. Yet, as in the case with initial impossibility, and for even more cogent reasons, paragraph (2) of this Article considers such a contract to be valid. Indeed, a contracting party may, and often does, acquire legal title to, or the power of disposition over, the assets in question after the conclusion of the contract. Should this not occur, the rules on non-performance will apply.
Cases where the power of disposition is lacking must be distinguished from those of lack of capacity. The latter relate to certain disabilities of a person which may affect all or at least some types of contract concluded by it, and falls outside the scope of the Principles (see Article 3.1.1).
The provisions on fraud, threat, gross disparity and illegality contained in this Chapter are mandatory.
The provisions of this Chapter relating to fraud, threat, gross disparity and illegality are of a mandatory character. It would be contrary to good faith for the parties to exclude or modify these provisions when concluding their contract. However, nothing prevents the party entitled to avoidance for fraud, threat and gross disparity to waive that right once that party learns of the true facts or is able to act freely.
On the other hand, the provisions of this Chapter relating to the binding force of a mere agreement, to initial impossibility or to mistake are not mandatory. Thus the parties may reintroduce special requirements of domestic law, such as consideration or cause. They may likewise agree that their contract shall be invalid in case of initial impossibility, or that mistake by one of the parties is not a ground for avoidance.