A party must perform its obligations:
(a) if a time is fixed by or determinable from the contract, at that time;
(b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the other party is to choose a time;
(c) in any other case, within a reasonable time after the conclusion of the contract.
With a view to determining when a contractual obligation is to be performed, this Article, which is inspired by Article 33 CISG, distinguishes three situations. The first is where the contract stipulates the precise time for performance or makes it determinable. If the contract does not specify a precise moment but a period of time for performing, any time during that period chosen by the performing party will be acceptable unless circumstances indicate that the other party is to choose the time. Finally, in all other cases, performance is due within a reasonable time.
1. A offers to advise B in the latter’s plans to buy computer equipment and software and it is agreed that A’s experts will visit B “in May”. It is in principle for A to announce when precisely in May that visit will take place. The circumstances may however leave the option to B, as would be the case if the contract expressly left to B the choice of the precise dates, or where, for example, it was understood that some of B’s staff who are often absent on business trips must be present when A’s experts arrive (see Article 6.1.1(b)).
2. A, a building contractor, encounters unusual difficulties when excavating a site and needs special equipment to continue the work which it does not have. A immediately telephones B, another contractor, who has the necessary equipment and agrees to lend it to A. Nothing however is said as to when the equipment should be delivered to A. Performance is then to take place “within a reasonable time” in the circumstances. Since the work has been interrupted because of the above-mentioned difficulties, A urgently needs to receive the equipment and in such a case “within a reasonable time” probably means that performance is due almost immediately (see Article 6.1.1(c)).
In cases under Article 6.1.1(b) or (c), a party must perform its obligations at one time if that performance can be rendered at one time and the circumstances do not indicate otherwise.
A party’s performance is of necessity sometimes rendered at one time (e.g. delivery of a single object), or, alternatively, must take place over a period of time (e.g. construction). There are however also cases where it can be rendered either at one time or in instalments (e.g. delivery of quantities of goods). This Article addresses the latter situation, in circumstances where there is no contractual provision as to how such performance should be rendered, or where it is not determinable from the contract. The principle stated is that performance is due at one time, unless the circumstances indicate otherwise.
1. A promises to deliver 100 tons of coal to B “in March”. It would be materially possible and perhaps convenient for A to deliver the 100 tons in instalments, for instance 25 tons each week of the month. In principle, however, according to Article 6.1.2, A must deliver the 100 tons at one time.
2. The facts are the same as in Illustration 1, except that B needs the coal gradually, to meet the needs of its operations. B also has limited storage facilities and could not cope adequately with a consignment of 100 tons at any one time. A knows of B’s specific needs. Here the circumstances suggest that A should deliver in instalments during the month of March.
(1) The obligee may reject an offer to perform in part at the time performance is due, whether or not such offer is coupled with an assurance as to the balance of the performance, unless the obligee has no legitimate interest in so doing.
(2) Additional expenses caused to the obligee by partial performance are to be borne by the obligor without prejudice to any other remedy.
1. Partial performance distinguished from performance at one time or in instalments
The situation covered by this Article should be distinguished from that of Article 6.1.2.
Article 6.1.2 attempts to solve a preliminary question which concerns only certain special cases. If a party’s performance can be rendered at one time or in instalments and if the contract does not make it clear or determinable how that party is to perform, it must in principle perform at one time.
This Article has a more general scope. It provides that at the time performance is due the obligee may in principle reject an offer of partial performance. This applies at maturity, irrespective of whether what is due then is a global performance or an instalment of a wider obligation (which, in some cases, has been previously determined on the basis of Article 6.1.2).
1. A owes USD 1,000,000 to a bank and it has been agreed that A will pay back USD 100,000 on the first day of each month, starting in January. On 1 April A offers to reimburse only USD 50,000, and the balance two weeks later. In principle, the bank is entitled to refuse A’s proposal.
2. Obligee entitled in principle to reject partial performance
When performance is due at maturity (be it the whole performance or an instalment), that which is due must be performed completely. In principle, the obligee may reject an offer of partial performance, whether or not it is coupled with an assurance as to the balance of the performance, since it is entitled to receive the whole of what was stipulated. Subject to what will be said below, partial performance normally constitutes a breach of contract. A party who does not obtain full performance at maturity may resort to the available remedies. As a rule, the obligee has a legitimate interest in requiring full performance of what was promised at the time that performance is due.
The obligee may of course also refrain from rejecting the offer to perform in part, while reserving its rights as to the breach, or may accept it without any reservation, in which case partial performance can no longer be treated as a non-performance.
2. A wishes to open a branch office in country X and rents the necessary office space in a building under construction, due to be finished in time for the move on 1 September. On that date, only four of the ten offices are made available to A, with an assurance that the remaining six will be ready in one month. In principle, A may refuse to move into those four offices.
3. Obligee’s right to reject partial performance conditional on its legitimate interest in so doing
There may be situations where the obligee’s legitimate interest in receiving full performance is not apparent and where temporary acceptance of partial performance will not cause any significant harm to the obligee. If the party tendering partial performance proves this to be the case, the obligee cannot then refuse such partial performance (subject to paragraph (2)), and there is no non-performance in such cases. This may be seen as a consequence of the general principle of good faith and fair dealing enunciated in Article 1.7.
3. An airline promises to transport 10 automobiles from Italy to Brazil in one single consignment due to be delivered on a definite date. When performance is due, some circumstances make it difficult, although not impossible, for the airline to find sufficient space in a single aircraft. The airline suggests making two successive deliveries within a week. It is established that this will cause no inconvenience to the purchaser of the cars, which will not actually be used before the following month. In such a case the obligee has no legitimate interest in refusing partial performance.
4. Additional expenses entailed by partial performance to be borne by obligor
If partial performance is accepted, it may entail additional expenses for the obligee. In all cases, such expenses are to be borne by the other party. If partial performance amounts to a non-performance (as it usually does), these expenses will be part of the damages, without prejudice to any other available remedy. If partial performance does not amount to a non-performance (the obligee has been shown not to have any legitimate interest in rejecting the offer of partial performance, or has found the offer to be acceptable without reservation), it will only be entitled to those expenses.
4. The facts are the same as in Illustration 3. If the purchaser has to meet additional expenses on account of having to make double arrangements for picking up the cars at the airport, those extra costs will be borne by the airline.
(1) To the extent that the performances of the parties can be rendered simultaneously, the parties are bound to render them simultaneously unless the circumstances indicate otherwise.
(2) To the extent that the performance of only one party requires a period of time, that party is bound to render its performance first, unless the circumstances indicate otherwise.
In bilateral contracts, where each of the parties has an obligation towards the other, the basic but complex question arises of which party is to perform first. If the parties have not made any specific arrangements, then in practice much will depend on usages and it must also be recalled that there are often several obligations on each side which may have to be performed at different times.
This Article states two broad principles, while recognising that in both cases the circumstances may indicate otherwise. In effect, the main purpose of this Article is to draw the parties’ attention to the problem of order of performance, and to encourage them, where necessary, to draft appropriate contractual provisions.
A distinction is drawn between cases where the parties’ performances can be rendered simultaneously and those where the performance of only one party requires a period of time.
1. Simultaneous performance to be made when possible
In the first situation, the rule is that the parties are bound to perform simultaneously (paragraph (1)). A seller is entitled to payment on delivery but circumstances may indicate otherwise, for example any exception originating from the terms of the contract or from usages which may allow a party to perform some time after the other.
1. A and B agree to barter a certain quantity of oil against a certain quantity of cotton. Unless circumstances indicate otherwise, the commodities should be exchanged simultaneously.
2. Exception where performance requires a period of time
If the performance of only one party’s obligation by its very nature requires a period of time, for example in construction and most service contracts, the rule established in paragraph (2) is that that party is bound to render its performance first. Circumstances may frequently however indicate the contrary. Thus, insurance premiums are normally paid in advance, as also are rent and freight charges. In construction contracts, payments are usually made in agreed instalments throughout the duration of the work.
2. A promises to write a legal opinion to assist B in an arbitration. If no arrangement is made as to when A should be paid for the services, A must prepare the opinion before asking to be paid.
3. Relation of order of performance to withholding of performance
This Article sets out the rules which will condition the application of Article 7.1.3 concerning the withholding of performance.
(1) The obligee may reject an earlier performance unless it has no legitimate interest in so doing.
(2) Acceptance by a party of an earlier performance does not affect the time for the performance of its own obligations if that time has been fixed irrespective of the performance of the other party’s obligations.
(3) Additional expenses caused to the obligee by earlier performance are to be borne by the obligor, without prejudice to any other remedy.
1. Obligee in principle entitled to reject earlier performance
When performance is due at a certain moment (to be determined in accordance with Article 6.1.1), it must take place at that time and in principle the obligee may reject an earlier performance. Usually, the time set for performance is geared to the obligee’s activities, and earlier performance may cause it inconvenience. The obligee has therefore a legitimate interest in refusing it. Earlier performance, in principle, constitutes non-performance of the contract.
The obligee may of course also abstain from rejecting an earlier performance while reserving its rights as to the non-performance. It may also accept such performance without reservation, in which case earlier performance can no longer be treated as non-performance.
1. A agrees to carry out the annual maintenance of all lifts in B’s office building on 15 October. A’s employees arrive on 14 October, a day on which important meetings, with many visitors, are taking place in the building. B is entitled to refuse such earlier performance which would cause it obvious inconvenience.
2. Obligee’s right to reject earlier performance conditional on its legitimate interest in so doing
Situations may arise in which the obligee’s legitimate interest in timely performance is not apparent and when its accepting earlier performance will not cause it any significant harm. If the party offering earlier performance proves this to be the case, the other party cannot reject earlier performance.
2. The facts are the same as in Illustration 1, except that neither 14 nor 15 October has any special significance. A can probably prove that B has no legitimate interest in refusing the earlier performance.
3. Effect of acceptance by obligee on its own performance of earlier performance of the other party’s obligations
If one party accepts earlier performance by the other, the question arises of whether this affects the time for performance of its own obligations. Paragraph (2) deals with cases where obligations are due at a certain time which is not linked to the performance of the other party’s obligations; that time for performance remains unchanged.
This provision does not however deal with the converse case where the performances are linked in time. Several situations may then arise. This circumstance may in itself establish the obligee’s legitimate interest in rejecting earlier performance. If earlier performance is thus rejected, the obligee’s time of performance is unaffected. If earlier performance is accepted with all due reservations as to the non-performance involved, the obligee may also reserve its rights as to its time for performance. If earlier performance is acceptable to the obligee it may at the same time decide whether or not to accept the consequences as regards its own obligations.
3. B undertakes to deliver goods to A on 15 May and A to pay the price on 30 June. B wishes to deliver the goods on 10 May and A has no legitimate interest in refusing such earlier performance. This will however have no effect on the time agreed for payment of the price, which was determined irrespective of the date of delivery.
4. B undertakes to deliver goods to A on 15 May and A to pay the price “on delivery”. If B tenders the goods on 10 May, A, depending on the circumstances, may reject such earlier performance, claiming that it is not in a position to pay at that date, take delivery of the goods subject to observing the original deadline for payment of the price, or decide to accept the goods and pay for them immediately.
4. Additional expenses entailed by earlier performance to be borne by the performing party
If earlier performance is accepted, it may entail additional expenses for the obligee. In all cases, such expenses are to be borne by the other party. If earlier performance amounts to non-performance (the normal case), those expenses will be part of the damages, without prejudice to any other remedy available. If earlier performance does not amount to non-performance (the obligee has been shown not to have any legitimate interest in rejecting the offer of earlier performance, or has found that offer to be acceptable without reservation), the obligee will only be entitled to those expenses.
5. A has no legitimate interest in refusing delivery of goods on 10 May instead of 15 May, but some additional storage fees are payable for those five extra days. Those costs will be borne by B.
(1) If the place of performance is neither fixed by, nor determinable from, the contract, a party is to perform:
(a) a monetary obligation, at the obligee’s place of business;
(b) any other obligation, at its own place of business.
(2) A party must bear any increase in the expenses incidental to performance which is caused by a change in its place of business subsequent to the conclusion of the contract.
1. Place of performance fixed by, or determined from, the contract when possible
The place where an obligation is to be performed is often determined by an express term of the contract or is determinable from it. It is obvious, for instance, that an obligation to build must be performed on the construction site, and that an obligation to transport goods must be performed in accordance with the agreed route.
2. Need for suppletive rules
Rules are however needed to cover cases in which the contract is silent on the matter and circumstances do not indicate where performance should take place. Paragraph (1) provides two solutions.
The general rule is that a party is to perform its obligations at its own place of business. The second rule is specific to monetary obligations where the converse solution applies, namely that the obligor is to perform its obligations at the obligee’s place of business (subject to the application of Article 6.1.8 concerning payments by funds transfers).
These solutions may not be the most satisfactory in all cases, but they do reflect the need for rules where the parties have not made any other arrangement or where the circumstances do not indicate otherwise.
1. A wishes some of its engineers to learn the language of country X, where they will be employed for some time. It agrees with B, a language school, for a series of intensive lessons. If nothing else is stipulated, the lessons are to take place at B’s place of business (see Article 6.1.6(1)(b)).
2. The facts are the same as in Illustration 1. The language school sends its bill to A. The cost of the lessons must, in principle, be paid at B’s place of business (see Article 6.1.6(1)(a)).
3. Consequences of change in a party’s place of business subsequent to conclusion of contract
In view of the importance of the parties’ respective places of business for the application of paragraph (1), it is necessary to cater for the situation where a party changes its location after the conclusion of the contract, a move which may involve additional expense for the performing party. The rule established in paragraph (2) is that each party must bear any such increase of expenses occasioned by a change in its place of business.
It is moreover possible that a party’s move may entail other inconvenience for the other party. The obligation to act in good faith (Article 1.7) and the duty to cooperate (Article 5.1.3) will often impose on the moving party an obligation to inform the other party in due time so as to enable the latter to make such arrangements as may be necessary.
3. A enters into a technical assistance agreement with B, under the terms of which A undertakes to train ten of B’s engineers for a period of two months on A’s premises. The engineers are to be accommodated at a local hotel which offers very reasonable rates on account of A’s location in a rural area. After the agreement has been concluded, but before B’s engineers arrive, A notifies B that it has moved to the capital city where hotel rates are much higher. Irrespective of whether the initial costs of accommodation were to be paid by A or by B, the additional costs will be borne by A.
4. Each year on 3 May, A must pay royalties to B at B’s place of business. B moves to another country, to which it takes some time (e.g. two months) for a payment to arrive. A formerly gave its bank the transfer order on or about 15 April, but from now on the order must be given towards the end of March at the latest if A wishes to avoid late payment. B is under a duty to inform A of its new place of business in sufficient time to permit A to make the necessary arrangements for payment and B will bear the additional costs.
(1) Payment may be made in any form used in the ordinary course of business at the place for payment.
(2) However, an obligee who accepts, either by virtue of paragraph (1) or voluntarily, a cheque, any other order to pay or a promise to pay, is presumed to do so only on condition that it will be honoured.
Discharge of monetary obligations is frequently made by cheques or similar instruments, or by transfers between financial institutions. The problems involved have however very seldom been the subject of codification, one notable exception being the UNCITRAL Model Law on International Credit Transfers. Without attempting to provide a detailed regulation, which would not be compatible with the very rapid evolution of techniques in this field, Articles 6.1.7 and 6.1.8 establish some basic principles which should be of assistance in regard to international payments.
1. General rule regarding form of payment
Paragraph (1) allows for payment to be made in any form that is usual at the place for payment. Subject to the reservation contained in paragraph (2), the obligor may for instance pay in cash, by cheque, banker’s draft, a bill of exchange, credit card, or in any other form such as the newly developing electronic means of payment, provided it chooses a mode that is usual at the place for payment, i.e. normally at the obligee’s place of business. In principle, the obligee should be satisfied to receive payment in a form that is customary at its place of business.
1. A, an importer in Luxembourg, receives a bill for goods bought from B, a firm in Central America, and sends a eurocheque in payment. B may reject this mode of payment if the banks in its country are not familiar with eurocheques.
2. Presumption that payment will be honoured a condition for acceptance
Paragraph (2) states the generally recognised principle according to which the obligee’s acceptance of an instrument that has to be honoured by a financial institution or another person (a third person or the obligor itself) is given only on condition that the instrument will actually be honoured.
The presumption can sometimes be overturned by usages. There are for instance countries where delivery of instruments such as certified cheques, banker’s drafts and cashier’s cheques is considered as being equivalent to payment by the obligor, with the consequence that the risk of the bank’s insolvency is transferred to the obligee. In such countries, the rule in Article 6.1.7(2) would apply only to so-called personal cheques.
2. A, a contractor, must pay B, a sub-contractor, for work completed by the latter on a building site. A is experiencing a cash-flow crisis as its client C is late in paying the first instalment due. C has however given A a set of promissory notes up to the amount of its debt. A offers to pay B by assigning a sufficient number of promissory notes. If B accepts them (in this case it probably does not have to do so as this is not a usual form of payment), the effectiveness of the payment by A to B is conditional on C’s honouring the promissory notes at maturity.
(1) Unless the obligee has indicated a particular account, payment may be made by a transfer to any of the financial institutions in which the obligee has made it known that it has an account.
(2) In case of payment by a transfer the obligation of the obligor is discharged when the transfer to the obligee’s financial institution becomes effective.
1. Admissibility of funds transfers
Although the principle enunciated in Article 6.1.6 that payment of a monetary obligation should be made at the obligee’s place of business still stands, paragraph (1) of this Article provides that it can also be made to one of the financial institutions in which the obligee has made it known that it keeps an account. If however the obligee has indicated a particular account, payment should then be made to that account. Naturally, the obligee can also make it known that it does not wish payment to be made by transfer.
1. A, a shipyard established in country X, repairs a ship belonging to B, a company from country Y, and the bill is sent on a letter-head that mentions a bank account in country X and another in country Y. Unless A states that payment has to be made to the account in country X, or by a means other than a bank transfer, B is entitled to make payment to the account in country Y.
2. Time at which the obligor’s obligation is discharged by a funds transfer
Paragraph (2) of this Article deals with the difficult question of determining when a payment by funds transfer is to be considered as completed, i.e. when the obligor’s obligation is discharged. This matter is of importance, for example when deciding whether a payment was made in time, or in the event of one of the banks not forwarding the funds it has received. The choice of a satisfactory solution has been the centre of considerable controversy in many countries and international fora. Various possible times have been suggested, such as that of the debiting of the account of the transferor, the crediting to the account of the transferee bank, the notice of credit to that account, the decision of the transferee bank to accept a credit transfer, the entry of credit to the transferee’s account, the notice of credit to the transferee, etc. The matter is further complicated by the changes in the procedures for the transfer of funds entailed by new electronic transfer mechanisms, while bank practices may also differ from one case to another.
This uncertainty makes it extremely difficult to establish a definite rule providing when payment by a transfer is completed. Paragraph (2) of this Article nevertheless serves a useful purpose in that it states the basic principle which will permit the finding of a more precise rule in each case. Such a payment will be effective when the transfer to the obligee’s financial institution becomes effective, a solution founded on the notion that the institution acts as the obligee’s agent. This means that the payment will not be effective simply because an order has been given to the transferor’s financial institution, and the transferor’s account has been debited. However, payment is effective before the transferee is notified or credited with it by its financial institution, although the precise moment at which payment to the obligee’s financial institution can be considered as being effective will depend on banking practices in the case concerned.
2. A, a licensee, gives its bank, C, a transfer order for USD 5,000, royalties due to B, a licensor, who has an account with bank D. C debits A’s account, but fails to forward the funds to D and becomes bankrupt. A has not effectively paid B.
(1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless
(a) that currency is not freely convertible; or
(b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed.
(2) If it is impossible for the obligor to make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).
(3) Payment in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due.
(4) However, if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment.
Monetary obligations are usually expressed in a certain currency (currency of account), and payment must normally be made in the same currency. However, when the currency of the place for payment is different from the currency of account, paragraphs (1) and (2) of this Article provide for those cases where the obligor may or must make payment in the former currency.
1. Monetary obligation expressed in currency different from that of place for payment
As a general rule, the obligor is given the alternative of paying in the currency of the place for payment, which may have definite practical advantages and, if that currency is freely convertible, this should cause no difficulty to the obligee.
If, however, the currency of the place for payment is not freely convertible, the rule does not apply. Parties may also exclude the application of the rule by agreeing that payment is to be made only in the currency in which the monetary obligation is expressed (effectivo clause). If it has an interest in the payment actually being made in the currency of account, the obligee should specify this in the contract.
1. A company from country X receives an order for machinery from a buyer from country Y, the price being expressed in US dollars. According to Article 6.1.6, payment of that monetary obligation must in principle be made at the obligee’s place of business, i.e. country X. If the company from country Y finds it more convenient, it may pay the price in euro which is the currency of X (see Article 6.1.9(1)).
2. The same company from country X frequently needs to buy from suppliers in country Z certain parts to be included in the machines, and has stipulated that the buyer from country Y should pay only in US dollars. In this case, payment may only be made in dollars (see Article 6.1.9(1)(b)).
3. The same company from country X has a plant in country W, where the machines will be assembled. The contract provides that the buyer from country Y has to pay the price to the firm’s subsidiary in country W. Since the currency of country W is not convertible, payment may only be made in dollars (see Article 6.1.9(1)(a)).
2. Impossibility for obligor to make payment in currency in which obligation is expressed
In some instances, the obligor may find it impossible to make payment in the currency in which the obligation was expressed. This may be the result of the application of exchange regulations or other mandatory rules, or due to any other cause preventing the obligor from obtaining that currency in sufficient quantity. Paragraph (2) gives the obligee the option of requiring payment in the currency of the place for payment, even if the contract contains an effectivo clause. This is an additional option open to the obligee who may find it acceptable or even advantageous in the circumstances. It does not preclude the exercise of any available remedy in the event of the obligor’s inability to pay in the currency of account amounting to a non-performance of the contract (e.g. damages).
4. A, a Swiss bank, lends USD 1,000,000 to B, to be reimbursed in Geneva. At maturity, B is unable to find the necessary US dollars. A, which knows that B has deposits in Swiss francs with another local bank, may require payment in Swiss francs, even though the loan agreement stipulated that reimbursement was to be made only in US dollars (see Article 6.1.9(2)).
3. Determination of applicable rate of exchange
Paragraphs (3) and (4) deal with the problem of the determination of the rate of exchange to be chosen when payment is made in the currency of the place for payment rather than in a different currency stipulated in the contract. This may occur when the obligor avails itself of paragraph (1), or the obligee the provisions of paragraph (2).
Two widely accepted solutions are offered. In normal cases, the rate of exchange is that prevailing when payment is due. If, however, the obligor is in default, the obligee is given an option between the rate of exchange prevailing when payment was due or the rate at the time of actual payment.
The double reference to the “applicable” rate is justified by the fact that there may be different rates of exchange depending on the nature of the operation.
5. The facts are the same as in Illustration 4. A chooses to be reimbursed in Swiss francs (CHF) and payment, which was due on 10 April, actually takes place on 15 September. The rate of exchange on 10 April was 2 Swiss francs to 1 US dollar. By 15 September it has become CHF 2,15 to USD 1. A is entitled to apply the latter rate. If the US dollar had depreciated rather than increased in value, A would have chosen the rate applicable on 10 April.
Where a monetary obligation is not expressed in a particular currency, payment must be made in the currency of the place where payment is to be made.
Determining the currency of payment gives rise to a special problem if the contract does not state the currency in which a monetary obligation is due. Although such cases may be infrequent, they do exist; a contract may for example state that the price will be the “current price”, or that it will be determined by a third person, or that some expenses or costs will be reimbursed by one party to the other, without specifying in which currency those sums are due. The rule laid down in Article 6.1.10 is that in such situations payment must be made in the currency of the place where payment is to be made.
Article 6.1.10 is not concerned with the currency in which damages are to be assessed, a matter dealt with in Article 7.4.12 in the context of non-performance.
A, a Japanese client, instructs its broker, B, to buy shares on the Shanghai stock exchange. If B pays for them in Chinese Yuan Renminbi (CNY), should A be billed in Yuan Renminbi or in Japanese Yen? If A is to pay B in Japan, it will pay in Yen.
Each party shall bear the costs of performance of its obligations.
The performance of obligations often entails costs, which may be of different kinds: transportation costs in delivering goods, bank commission in making a monetary transfer, fees to be paid when applying for a permission, etc. In principle, such costs are to be borne by the performing party.
Other arrangements may of course be made by the parties and there is nothing to prevent the performing party from including those costs in advance in the price it quotes. The rule set out in Article 6.1.11 applies in the absence of such arrangements.
The provision states who shall bear the costs, not who shall pay them. Usually, it will be the same party, but there may be different situations, for example where tax regulations place the burden of payment on a specific party. In such cases, if the person who has to pay is different from the person who must bear the costs under Article 6.1.11, the latter must reimburse the former.
A, a consultant, agrees to send five experts to perform an audit of B’s company. Nothing is said concerning the experts’ travel expenses, and A does not take those costs into account when determining its fees. A may not add the travel expenses to the bill.
(1) An obligor owing several monetary obligations to the same obligee may specify at the time of payment the debt to which it intends the payment to be applied. However, the payment discharges first any expenses, then interest due and finally the principal.
(2) If the obligor makes no such specification, the obligee may, within a reasonable time after payment, declare to the obligor the obligation to which it imputes the payment, provided that the obligation is due and undisputed.
(3) In the absence of imputation under paragraphs (1) or (2), payment is imputed to that obligation which satisfies one of the following criteria and in the order indicated:
(a) an obligation which is due or which is the first to fall due;
(b) the obligation for which the obligee has least security;
(c) the obligation which is the most burdensome for the obligor;
(d) the obligation which has arisen first.
If none of the preceding criteria applies, payment is imputed to all the obligations proportionally.
Articles 6.1.12 and 6.1.13 deal with the problem of imputation of payments. If an obligor owes several monetary obligations at the same time to the same obligee and makes a payment the amount of which is not sufficient to discharge all those debts, the question arises of the debts to which that payment applies.
Article 6.1.12 offers the obligor the possibility of imputing its payment to a particular debt, provided that any expenses and interest due are discharged before the principal. In the absence of any imputation by the obligor, this provision enables the obligee to impute the payment received, although not to a disputed debt. Paragraph (3) lays down criteria which will govern in the absence of any imputation by either party.
A receives under separate contracts three loans, each of USD 100,000, from bank B payment of which is due on 31 December. B receives USD 100,000 from A on 2 January with the imprecise message: “Reimbursement of the loan”. B pays little attention to the matter and at first does not react, but three months later sues A for payment of the remaining USD 200,000 and the parties disagree as to which of the loans had been reimbursed by the January payment. B had similar security in each case, but the interest rates were not the same: 8% on the first loan, 8,50% on the second and 9% on the third. The January payment will be imputed to the third loan.
Article 6.1.12 applies with appropriate adaptations to the imputation of performance of non-monetary obligations.
The problem of imputation of payments normally concerns monetary obligations, but similar difficulties may sometimes occur in relation to obligations of a different nature. Article 6.1.13 provides that the rules governing monetary obligations will apply, with appropriate adaptations also to these cases.
A is performing construction work on several sites in an African country and, through five separate and successive contracts with B, purchases different quantities of cement, all to be delivered in Antwerp on the same date and to be loaded on the same ship. The contracts are similar, except that the third and fifth contracts stipulate very high liquidated damages in the event of late delivery. On account of certain difficulties, B can only deliver part of what it was supposed to. Upon delivery B is entitled to specify that the quantities delivered are to be imputed to the third and fifth contracts.
Where the law of a State requires a public permission affecting the validity of the contract or its performance and neither that law nor the circumstances indicate otherwise
(a) if only one party has its place of business in that State, that party shall take the measures necessary to obtain the permission;
(b) in any other case the party whose performance requires permission shall take the necessary measures.
If the validity or the performance of a contract is subject to compliance with public permission requirements, several issues arise as to who has the burden of filing the application (see Article 6.1.14), the time for filing (see Article 6.1.15), the legal consequences of failure to obtain an administrative decision in due time (see Article 6.1.16) and the rejection of the application (see Article 6.1.17).
1. Scope of the permission requirement
The Principles do not deal with the relevance of public permission requirements. What kind of public permission is required, if any, is to be determined under the applicable law, including the rules of private international law.
Courts tend to give effect only to the public permission requirements of the lex fori, and sometimes to those prescribed by the lex contractus. Arbitral tribunals may enjoy wider discretion than courts in deciding which public permissions are relevant to the contract.
Under the relevant conflict of laws rules public permission requirements of the law of other jurisdictions connected with the contract may also come into play (see Article 9(3) of EC Regulation No. 593/2008 (Rome I); Article 11(2) of the 1994 Inter-American Convention on the Law Applicable to International Contracts). Long-arm statutes in some jurisdictions too may impose public permission requirements on licensees or subsidiaries of companies located abroad. This Article assumes that the requirements prescribed by the applicable law are to be observed.
a. Broad notion of “public permission”
The term “public permission” is to be given a broad interpretation. It includes all permission requirements established pursuant to a concern of a public nature, such as health, safety, or particular trade policies. It is irrelevant whether a required licence or permit is to be granted by a governmental or by a non-governmental institution to which Governments have delegated public authority for a specific purpose. Thus, the authorisation of payments by a private bank pursuant to foreign exchange regulations is in the nature of a “public permission” for the purposes of this Article.
b. Timing of public permission
The provisions on public permissions refer primarily to those required by the applicable law or by a regulation in force at the time of the conclusion of the contract. However, these provisions may also apply to public permissions that may be introduced after the conclusion of the contract.
c. Public permission may affect the contract in whole or in part
The provisions on public permissions apply both to those requirements affecting the contract as a whole and to those merely affecting individual terms of the contract. However, where the legal consequences of failing to obtain a public permission differ according to whether such permission affects the contract in whole or in part, different rules are established (see Articles 6.1.16 (2) and 6.1.17).
d. Public permission may affect the validity or performance of a contract
The absence of the required permission may affect the validity of a contract or render its performance impossible.
Notwithstanding differences in the legal consequences of failing to obtain a required public permission, the problems raised in connection with the application for, or the obtaining of, a public permission are the same. As to the further consequences, Article 6.1.17(2) provides that the rules on non-performance apply to a situation where the refusal of a permission makes the performance of a contract impossible in whole or in part.
2. Duty to inform of the existence of a public permission requirement
There is as a rule no duty to provide information concerning the requirement to obtain a public permission. However, the existence of such a requirement must be disclosed by the party upon whom rests the burden of obtaining a public permission when such permission is required under rules which are not generally accessible. Thus, the overriding principle of good faith and fair dealing (see Article 1.7) may require the party whose place of business is located in the State requiring a public permission to inform the other party of the existence of that requirement. Failure to do so may lead a court to disregard the permission requirement altogether or to conclude that the party who failed to communicate the existence of the requirement implicitly guaranteed that it would be obtained.
3. Which party is bound to take measures to obtain a public permission
a. Party with place of business in State requiring public permission
The rule set out in sub-paragraph (a) of this Article which places the burden to apply on the party who has its place of business in the State which requires the relevant public permission reflects current international trade practices. It is that party who is in the best position to apply promptly for a public permission, since it is probably more familiar with the application requirements and procedures.
If a party needs further information from the other to file an application (e.g. information relating to the final destination of the goods, or information as to the purpose or subject matter of the contract), the other party must furnish such information pursuant to the duty of co-operation (see Article 5.1.3). Should that party not furnish such information it may not rely on the obligation of the first party. This duty to cooperate with the other party applies even if the contract stipulates that one of the parties bears the burden of applying for a public permission. Thus, if the parties have incorporated in their contract the term “ex works”, which imposes far-reaching obligations on the buyer, the seller is nevertheless bound “to render the buyer, at the latter’s request, risk and expense, every assistance in obtaining […] any export licence or other official authorisation necessary for the export of the goods” (INCOTERMS 2000, A 2, see also B 2).
b. Party whose performance requires public permission
Sub-paragraph (b) of this Article contemplates those cases where none of the parties has a place of business in the State requiring the permission. It also envisions a contract which is truly international notwithstanding the fact that both parties have their places of business in that State. In either case, the party whose performance requires the public permission is bound to take the necessary measures to obtain such a permission.
1. A, a contractor whose place of business is located in country X, sells a plant on a turn-key basis to B, whose place of business is located in country Y. Acceptance is to take place after performance tests in country Y. On the one hand, A has to apply for all public permissions required in country X, as well as for permissions in third countries (transit, sub-deliveries). On the other, B has to apply for import licences, as well as for all other permissions relating to the site, the use of local services, and the technology imported into country Y. A is also bound to furnish the information and documentation needed by B to obtain import licences and other permissions related to B’s performance. A is not responsible for applying for public permissions in country Y, unless this is agreed in the contract or is required, explicitly or implicitly, by the applicable law or the circumstances of the case (e.g. the applicable law may require certain technical permits in country Y to be applied for by the licensor).
c. Suppletory nature of provisions on public permissions
The purpose of this Article is to determine the party who must apply for a public permission in those cases where it is not clear who is to bear that burden. It is a suppletory rule to be applied when neither the contract, nor the law requiring the permission or the circumstances specify which party is under an obligation to apply for the required public permission.
2. The law of country X subordinates the granting of an export licence for computers to a sworn declaration indicating the country where the computers will ultimately be sent. However, neither the contract nor the law of country X indicates which party bears the burden of applying for a licence. Since it is reasonable to suppose that only the buyer knows what it plans to do with the computers, the policy behind the rule imposing the permission requirement leads to the conclusion that it is the buyer who has to file the application.
4. Nature of obligation to take the “necessary measures”
The party who has to apply for the permission must take the “necessary measures” to obtain such permission, but is not responsible for the outcome of the application. That party is bound to exhaust available local remedies to obtain the permission, provided that they have a good chance of success and that resorting to local remedies appears reasonable in view of the circumstances of the case (e.g. the value of the transaction, time constraints).
Which measures have to be taken depends on the relevant regulations and the procedural mechanisms available in the State where the permission is to be granted. The obligation is in the nature of an obligation of best efforts (see Article 5.1.4(2)).
3. A, a principal whose place of business is in country X, enters into a contract with B, a self-employed agent, whose place of business is in country Y. B, who has no authority to conclude contracts, is to represent A in countries Y and Z. Among other duties, B must exhibit A’s goods at a fair which is to take place in country Z. B must apply for all permissions which are required to undertake these professional activities in countries Y and Z. B’s duty to take “necessary measures” includes that of applying for public permissions required to import A’s goods temporarily into countries Y and Z, as well as any other public permission that would enable B to participate in the fair. However, unless otherwise agreed, B is not required to apply for public permissions required for goods imported through B by customers located in countries Y and Z.
(1) The party required to take the measures necessary to obtain the permission shall do so without undue delay and shall bear any expenses incurred.
(2) That party shall whenever appropriate give the other party notice of the grant or refusal of such permission without undue delay.
1. Time for filing an application
The party under an obligation to obtain a public permission must take action immediately after the conclusion of the contract and pursue this action as necessary under the circumstances.
According to Article 6.1.11, each party shall bear the costs of performance of its obligations. This rule has been restated in paragraph (1) of this Article for the sake of clarity.
3. Duty to give prompt notice of the grant or refusal of the permission
The parties to the contract need to know as soon as possible whether the permission can be obtained. Accordingly, paragraph (2) of this Article provides that the party required to take the necessary measures must inform the other of the outcome of the application. This duty of information extends to other relevant facts, such as for example the timing and outcome of the application, whether a refusal is subject to appeal and whether an appeal is to be lodged.
4. Duty to give notice “whenever appropriate”
The “appropriateness” of giving notice of the grant or refusal refers to the need to give notice and the manner of providing it. The necessity of giving notice obviously exists where such notice is required by law, but may also be inferred from the mere fact that a permission requirement is referred to in the contract.
The “appropriateness” of the duty to give notice is also related to the relevance of the information to be provided. Accordingly, the applying party is not bound to inform the other party of the outcome of that application in cases where the latter party obtains the information from the granting authority, or where applications for permissions are regularly granted. The fact that the permission is, contrary to normal practice, refused in a given case makes the obligation to inform more compelling.
This Article does not establish particular requirements concerning the formalities relating to the communication (see Article 1.10).
5. Consequences of the failure to inform
Failure to provide information regarding the grant or refusal of the permission amounts to non-performance. Accordingly, the general consequences of non-performance, as set forth in Chapter 7, apply. The duty to give notice of the grant of the public permission is a contractual obligation arising at the time the contract comes into existence. The duty to give notice of the refusal of the permission is part of the duty to take the “necessary measures” to obtain the permission under Article 6.1.14 (see Comment 4).
1. A, whose place of business is in country X, and B, a contractor, enter into a contract for the construction of a plant in country X. The parties agree that B is not bound to begin the construction and A’s advance payments are not due until the grant of a permission by the authorities of country X.
A applies for and obtains the permission but fails to inform B that the permission has been granted. Two months later, B learns through inquiries with the authorities of country X that the permission has been granted and begins work on the construction of the plant.
Although the parties had agreed that their performances were due as of the time of the granting of the permission, A’s failure to inform B that the permission has been granted precludes A from relying on B’s failure to perform as of that date (see Article 7.1.2). Thus, the contractual period begins to run for B as from when it learns of the granting of the permission.
Moreover, B may also claim damages if it is able to establish, for example, damage resulting from failure to use its production capacity, additional costs arising from storing raw materials during that two-month period, etc. (see Article 7.4.1 et seq.). A, who from the very beginning had notice of the grant of the permission, must observe the original date of its performance, as provided for in the contract. If A fails to make an advance payment due four weeks after the granting of the permission, A must pay interest as from that date.
2. The facts are the same as in Illustration 1, except that the proper authority simultaneously informs A and B that the permission has been granted. B may not avail itself of A’s failure to inform in order to postpone its performance, nor is it entitled to damages for A’s failure to inform.
(1) If, notwithstanding the fact that the party responsible has taken all measures required, permission is neither granted nor refused within an agreed period or, where no period has been agreed, within a reasonable time from the conclusion of the contract, either party is entitled to terminate the contract.
(2) Where the permission affects some terms only, paragraph (1) does not apply if, having regard to the circumstances, it is reasonable to uphold the remaining contract even if the permission is refused.
Whereas Articles 6.1.14 and 6.1.15 are concerned with the duties of the contracting parties, Articles 6.1.16 and 6.1.17 deal with the legal consequences in cases respectively where there has been no decision on the application within a given period or where the public permission has been refused.
1. No decision taken as regards the permission
Paragraph (1) of this Article deals with the “nothing happens” situation, that is to say a situation where permission has neither been granted nor refused within the agreed period or, where no period has been agreed, within a reasonable time from the conclusion of the contract. The reasons for the absence of a pronouncement may vary, for example the slow pace of processing the application, a pending appeal, etc. In any event there is no longer any reason to keep the parties waiting and either party is entitled to terminate the contract.
2. Termination of the contract
Remedies other than termination may be appropriate depending on the legal role played by the permission in the creation of the contractual obligations. This is in particular the case where the granting of the public permission is a condition for the validity of the contract, since in the absence of the permission either party may simply disregard the contract. The reason why this Article provides also in these cases for the termination of the contract is that the parties are, with a view to obtaining the permission, under a number of obligations which cannot be allowed to exist indefinitely.
The entitlement of the party responsible for obtaining the permission to terminate the contract under this Article is conditional on that party’s having taken “the necessary measures” to that effect.
1. A, situated in country X, sells rifles to B for resale by B in the hunting season starting in four months. The validity of the sale is subject to a public permission to be granted by the authorities of country X. No period is agreed for obtaining that permission. Notwithstanding the fact that A takes all the necessary measures to obtain the permission, after three months no decision has yet been taken on A’s application. Either party may terminate the contract.
The termination envisaged under this Article has no consequences for the expenses so far incurred by the parties for the purpose of obtaining the permission. The expenses will be borne by the party who has assumed the risk of not obtaining the permission.
3. Permission affecting individual terms only
Where the permission affects some terms only of the contract, paragraph (2) of this Article excludes the right of termination in cases where, even if the permission had been refused, it would according to Article 6.1.17(1) nevertheless be reasonable to uphold the contract.
2. A, situated in country X, enters into a contract with B, which contains a penalty clause for delay the validity of which is subject to a public permission to be granted by the authorities of country X. Notwithstanding the fact that A takes all the necessary measures to obtain the permission, time continues to pass without any decision being taken. It would be reasonable in the circumstances to uphold the contract. Even if the permission were to have been refused, neither party may terminate the contract.
(1) The refusal of a permission affecting the validity of the contract renders the contract void. If the refusal affects the validity of some terms only, only such terms are void if, having regard to the circumstances, it is reasonable to uphold the remaining contract.
(2) Where the refusal of a permission renders the performance of the contract impossible in whole or in part, the rules on non-performance apply.
1. Application for permission rejected
This Article contemplates the situation where the application for a permission is expressly refused. The nature of the obligation imposed on the responsible party with respect to the application for the permission is such that a refusal under this Article is one which is not subject to an appeal which has a reasonable prospect of success (see Comment 4 on Article 6.1.14). Moreover, means of recourse against the refusal need not be exhausted whenever a final decision on the permission would be taken only after the time at which the contract could meaningfully be performed.
2. Legal consequences of a refusal of permission
The consequences of a refusal to grant the permission vary depending on whether the permission affects the validity of the contract or its performance.
a. Refusal of permission affecting validity of the contract
Where the permission affects the validity of the whole contract, a refusal renders the whole contract void, i.e. the contract is considered as never having come into being.
1. A, situated in country X, enters into a contract with B, the validity of which is subject to a public permission to be granted by the authorities of country X. Notwithstanding the fact that A takes all the necessary measures to obtain the permission, A’s application is refused. The contract is considered never to have come into existenceWhere, on the other hand, a refusal affects the validity of some terms only of the contract, only such terms are void, while the remaining part of the contract may be upheld provided that such a result is reasonable in the circumstances.
2. A, situated in country X, enters into a contract with B, which contains a penalty clause for delay the validity of which is subject to a public permission to be granted by the authorities of country X. Notwithstanding the fact that A takes all the necessary measures to obtain the permission, A’s application is refused. If it is reasonable in the circumstances, the contract will be upheld without the penalty clause.
b. Refusal rendering performance of the contract impossible
If the refusal of the permission renders the performance impossible in whole or in part, paragraph (2) of this Article refers to the rules on non-performance embodied in Chapter 7.
3. Under a contract entered into with B, A owes B USD 100,000. The transfer of the sum from country X, where A is situated, to B’s bank account in country Y is subject to a permission by the Central Bank of country X. Notwithstanding the fact that A takes all the necessary measures to obtain the permission, A’s application is refused. The refusal of the permission renders it impossible for A to pay B. The consequences of A’s non-performance are determined in accordance with the provisions of Chapter 7.
The refusal of the permission may render the performance of a party impossible only in the State imposing the permission requirement, while it may be possible for that party to perform the same obligation elsewhere. In such cases the general principle of good faith and fair dealing (see Article 1.7) will prevent that party from relying on the refusal of the permission as an excuse for non-performance.
4. The facts are the same as in Illustration 3, except that A has sufficient funds to pay B in country Z, where no such permission requirement exists. A may not rely on the refusal of the permission by the authorities of country X as an excuse for not paying B.