Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance.
This Article defines “non-performance” for the purpose of the Principles. Particular attention should be drawn to two features of the definition.
The first is that “non-performance” is defined so as to include all forms of defective performance as well as complete failure to perform. Thus, it is non-performance for a builder to erect a building which is partly in accordance with the contract and partly defective or to complete the building late.
The second feature is that for the purposes of the Principles the concept of “non-performance” includes both non-excused and excused non-performance.
Non-performance may be excused by reason of the conduct of the other party to the contract (see Articles 7.1.2 (Interference by the other party) and 7.1.3 (Withholding performance) and Comments) or because of unexpected external events (see Article 7.1.7 (Force majeure) and Comment)). A party is not entitled to claim damages or specific performance for an excused non-performance of the other party but a party who has not received performance will as a rule be entitled to terminate the contract whether or not the non-performance is excused (see Article 7.3.1 et seq. and Comment).
There is no general provision dealing with cumulation of remedies. The assumption underlying the Principles is that all remedies which are not logically inconsistent may be cumulated. So, in general, a party who successfully insists on performance will not be entitled to damages but there is no reason why a party may not terminate a contract for non-excused non-performance and simultaneously claim damages (see Articles 7.2.5 (Change of remedy), 7.3.5 (Effects of termination in general) and 7.4.1 (Right to damages)).
A party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party’s act or omission or by another event for which the first party bears the risk.
1. Non-performance caused by act or omission of the party alleging non-performance
This Article can be regarded as providing two excuses for non-performance. However conceptually, it goes further than this. When the Article applies, the relevant conduct does not become excused non-performance but loses the quality of non-performance altogether. It follows, for instance, that the other party will not be able to terminate for non-performance.
Two distinct situations are contemplated. In the first, one party is unable to perform either wholly or in part because the other party has done something which makes performance in whole or in part impossible.
1. A agrees to perform building work on B’s land beginning on 1 February. If B locks the gate to the land and does not allow A entry, B cannot complain that A has failed to begin work. B’s conduct will often amount to non-excused non-performance either because of an express provision entitling A to access the land or because B’s conduct infringes the obligations of good faith and co-operation. This result does not however depend on B’s non-performance being non-excused. The result will be the same where B’s non-performance is excused, for instance because access to the land is barred by strikers.
The Principles contemplate the possibility that one party’s interference result only in a partial impediment to performance by the other party. In such cases it will be necessary to decide the extent to which non-performance was caused by the first party’s interference and that to which it was caused by other factors.
2. Non-performance caused by event for which party alleging non-performance bears the risk
Another possibility is that non-performance may result from an event the risk of which is expressly or impliedly allocated by the contract to the party alleging non-performance.
2. A, a builder, concludes a construction contract to be performed on the premises of B, who already has many buildings on those premises which are the subject of an insurance policy covering any damage to the buildings. If the parties agree that the risk of accidental damage is to fall on B as the person insured, there would normally be no reason to reject the parties’ allocation of risk since risks of this kind are normally covered by insurance. Even therefore if a fire were to be caused by A’s negligence, the risk may be allocated to B, although it would clearly need more explicit language to carry this result than would be the case if the fire which destroyed the building were the fault of neither party.
(1) Where the parties are to perform simultaneously, either party may withhold performance until the other party tenders its performance.
(2) Where the parties are to perform consecutively, the party that is to perform later may withhold its performance until the first party has performed.
This Article must be read together with Article 6.1.4 (Order of performance). This Article is concerned with remedies and corresponds in effect to the civil law concept of exceptio non adimpleti contractus.
A agrees to sell B a thousand tons of white wheat, payment to be made by confirmed letter of credit opened on a bank from country X. A is not obliged to ship the goods unless and until B opens the letter of credit in conformity with its contractual obligations.
The text does not explicitly address the question which arises where one party performs in part but does not perform completely. In such a case the party entitled to receive performance may be entitled to withhold performance but only where in normal circumstances this is consonant with good faith and fair dealing (see Article 1.7).
(1) The non-performing party may, at its own expense, cure any non-performance, provided that
(a) without undue delay, it gives notice indicating the proposed manner and timing of the cure;
(b) cure is appropriate in the circumstances;
(c) the aggrieved party has no legitimate interest in refusing cure; and
(d) cure is effected promptly.
(2) The right to cure is not precluded by notice of termination.
(3) Upon effective notice of cure, rights of the aggrieved party that are inconsistent with the non-performing party’s performance are suspended until the time for cure has expired.
(4) The aggrieved party may withhold performance pending cure.
(5) Notwithstanding cure, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure.
1. General principle
Paragraph (1) of this Article provides that, if certain conditions are met, the non-performing party may cure by correcting the non-performance. In effect, by meeting these conditions, the non-performing party is able to extend the time for performance for a brief period beyond that stipulated in the contract, unless timely performance is required by the agreement or the circumstances. This Article thus favours the preservation of the contract. It also reflects the policy of minimising economic waste, as incorporated in Article 7.4.8 (Mitigation of harm), and the basic principle of good faith stated in Article 1.7.
This Article is related to the cure provisions contained in Articles 37 and 48 CISG and in some domestic laws governing contracts and sales. Even many of those legal systems that do not have a rule permitting cure would normally take a reasonable offer of cure into account in assessing damages.
2. Notice of cure
Cure may be effected only after the non-performing party gives notice of cure. The notice must be reasonable with regard to its timing and content as well as to the manner in which it is communicated. Notice of cure must be given without undue delay after the non-performing party learns of the non-performance. To the extent information is then available, the notice must indicate how cure is to be effected and when. Notice must also be communicated to the aggrieved party in a manner that is reasonable in the circumstances.
Notice of cure is considered to be “effective” when the requirements of paragraph (1)(a) – (c) have been met.
3. Appropriateness of cure
Whether cure is appropriate in the circumstances depends on whether it is reasonable, given the nature of the contract, to permit the non-performing party to make another attempt at performance. As indicated in paragraph (2), cure is not precluded merely because the failure to perform amounts to a fundamental non-performance. The factors to be considered in determining the appropriateness of cure include whether the proposed cure promises to be successful in resolving the problem and whether the necessary or probable delay in effecting cure would be unreasonable or would itself constitute a fundamental non-performance. However, the right to cure is not defeated by the fact that the aggrieved party subsequently changes its position. If the non-performing party gives effective notice of cure, the aggrieved party’s right to change position is suspended. Nonetheless, the situation may be different if the aggrieved party has changed position before receiving notice of cure.
4. The aggrieved party’s interest
The non-performing party may not cure if the aggrieved party can demonstrate a legitimate interest in refusing cure. However, if notice of cure is properly given and if cure is appropriate in the circumstances, it is presumed that the non-performing party should be permitted to cure. A legitimate interest may arise, for example, if it is likely that, when attempting cure, the non-performing party will cause damage to person or property. On the other hand, a legitimate interest is not present if, on the basis of the non-performance, the aggrieved party has simply decided that it does not wish to continue contractual relations.
1. A agrees to construct a road on B’s property. When the road is complete, B discovers that the road grade is steeper than the contract permits. B also discovers that, during construction, A’s trucks caused damage to B’s timber. A gives notice of cure to regrade the road. Even if cure would otherwise be appropriate in the circumstances, B’s desire to prevent further damage to the timber may provide a legitimate interest for refusing cure.
5. Timing of cure
Cure must be effected promptly after notice of cure is given. Time is of the essence in the exercise of the right to cure. The non-performing party is not permitted to lock the aggrieved party into an extended waiting period. The lack of inconvenience on the part of the aggrieved party does not justify the non-performing party in delaying cure.
6. Proper forms of cure
Cure may include repair and replacement as well as any other activities that remedy the non-performance and give to the aggrieved party all that it is entitled to expect under the contract. Repairs constitute cure only when they leave no evidence of the prior non-performance and do not threaten the value or the quality of the product as a whole. It is left to the courts to determine the number of times the non-performing party may attempt a cure.
2. A agrees to install an assembly line for high temperature enamel painting in B’s factory. The motors are installed with insufficient lubricant and as a result “lock up” after a few hours of operation. A replaces the motors in a timely fashion, but refuses to examine and test the rest of the equipment to ensure that other parts of the line have not been damaged. A has not effectively cured.
7. Suspension of other remedies
When the non-performing party has given effective notice of cure, the aggrieved party may, in accordance with paragraph (4), withhold its own performance but, pursuant to paragraph (3), may not exercise any remedies inconsistent with the non-performing party’s right to cure until it becomes clear that a timely and proper cure has not been or will not be effected. Inconsistent remedies include giving notice of termination, entering into replacement transactions and seeking damages or restitution.
8. Effect of a notice of termination
If the aggrieved party has rightfully terminated the contract pursuant to Articles 7.3.1(1) and 7.3.2(1), the effects of termination (see Articles 7.3.5, 7.3.6 and 7.3.7) are also suspended by an effective notice of cure. If the non-performance is cured, the notice of termination is inoperative. On the other hand, termination takes effect if the time for cure has expired and any fundamental non-performance has not been cured.
9. Right of aggrieved party to damages
Under paragraph (5) of this Article, even a non-performing party who successfully cures is liable for any harm that, before cure, was occasioned by the non-performance, as well as for any additional harm caused by the cure itself or by the delay or for any harm which the cure does not prevent. The principle of full compensation for damage suffered, as provided in Article 7.4.2, is fundamental to the Principles.
10. The aggrieved party’s obligations
The decision to invoke this Article rests on the non-performing party. Once the aggrieved party receives effective notice of cure, it must permit cure and, as provided in Article 5.1.3, cooperate with the non-performing party. For example, the aggrieved party must permit any inspection that is reasonably necessary for the non-performing party to effect cure. If the aggrieved party refuses to permit cure when required to do so, any notice of termination is ineffective. Moreover, the aggrieved party may not seek remedies for any non-performance that could have been cured.
3. A agrees to construct a shed on B’s property in order to protect B’s machinery from the weather. The roof is constructed in a defective manner. During a storm, water leaks into the shed and B’s machinery is damaged. B gives notice of termination. A gives timely notice of cure. B does not wish to deal further with A and refuses the cure. If cure is appropriate in the circumstances and the other conditions for cure are met, B cannot invoke remedies for the faulty construction but can recover for damage caused to the machinery before the cure was to be effected. If cure is inappropriate in the circumstances, or if the proposed cure would not have solved the problem, the contract is terminated by B’s notice.
(1) In a case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance.
(2) During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages but may not resort to any other remedy. If it receives notice from the other party that the latter will not perform within that period, or if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under this Chapter.
(3) Where in a case of delay in performance which is not fundamental the aggrieved party has given notice allowing an additional period of time of reasonable length, it may terminate the contract at the end of that period. If the additional period allowed is not of reasonable length it shall be extended to a reasonable length. The aggrieved party may in its notice provide that if the other party fails to perform within the period allowed by the notice the contract shall automatically terminate.
(4) Paragraph (3) does not apply where the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party.
This Article deals with the situation where one party performs late and the other party is willing to give extra time for performance. It is inspired by the German concept of Nachfrist although similar results are obtained by different conceptual means in other legal systems.
1. Special characteristics of late performance
The Article recognises that late performance is significantly different from other forms of defective performance. Late performance can never be remedied since once the date for performance has passed it will not occur again, but nevertheless in many cases the party who is entitled to performance will much prefer even a late performance to no performance at all. Secondly, at the moment when a party fails to perform on time it is often unclear how late performance will in fact be. The commercial interest of the party receiving performance may often therefore be that a reasonably speedy completion, although late, will be perfectly acceptable but that a long delayed completion will not. The procedure enables that party to give the performing party a second chance without prejudicing its other remedies.
2. Effects of granting extension of time for performance
The party who grants the extension of time cannot terminate or seek specific performance during the extension time. The right to recover damages arising from late performance is not affected.
The position at the end of the period of extension depends on whether the late performance was already fundamental at the time when the extension was granted. In this situation, if the contract is not completely performed during the extension, the right to terminate for fundamental non-performance simply springs into life again as soon as the extension period expires. On the other hand, if the late performance was not yet fundamental, termination would only be possible at the end of the period of extension if the extension was reasonable in length.
1. A agrees to construct a special bullet-proof body for B’s Mercedes. The contract provides that the body is to be finished by 1 February so that the car can be shipped to B’s country of residence. On 31 January the car is needed but not yet quite finished. A assures B that it will be able to complete the work if given another week and B agrees to a week’s extension of time. If the car is finished within the week B must accept it but may recover any damages, for example extra shipping charges. If the work is not finished within the week, B may refuse to accept delivery and terminate the contract.
2. A, a company in country X, concludes a contract with B, a company in country Y, to build 100 km. of motorway in the latter country. The contract provides that the motorway will be finished within two years from the start of the work. After two years, A has in fact built 85 km. and it is clear that it will take at least three more months to finish the motorway. B gives A notice to complete within a further month. B is not entitled to terminate at the end of the month because the additional period of time is not reasonable; it shall be extended to the reasonable period of three months.
A clause which limits or excludes one party’s liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract.
1. The need for a special rule on exemption clauses
The Principles contain no general rule permitting a court to strike down abusive or unconscionable contract terms. Apart from the principle of good faith and fair dealing (see Article 1.7) which may exceptionally be invoked in this respect, there is only one provision permitting the avoidance at any time of the contract as a whole as well as of any of its individual terms when they unjustifiably give one party an excessive advantage (see Article 3.2.7).
The reason for the inclusion of a specific provision on exemption clauses is that they are particularly common in international contract practice and tend to give rise to much controversy between the parties.
Ultimately, this Article has opted in favour of a rule which gives the court a broad discretionary power based on the principle of fairness. Terms regulating the consequences of non-performance are in principle valid but the court may ignore clauses which are grossly unfair.
2. “Exemption clauses” defined
For the purpose of this Article exemption clauses are in the first instance those terms which directly limit or exclude the non-performing party’s liability in the event of non-performance. Such clauses may be expressed in different ways (e.g. fixed sum, ceiling, percentage of the performance in question, deposit retained).
Exemption clauses are further considered to be those which permit a party to render a performance substantially different from what the other party reasonably expected. In practice clauses of this kind are in particular those the purpose or effect of which is to allow the performing party unilaterally to alter the character of the performance promised in such a way as to transform the contract. Such clauses are to be distinguished from those which are limited to defining the performance undertaken by the party in question.
1. A tour operator offers at a high price a tour providing for accommodation in specifically designated luxury hotels. A term of the contract provides that the operator may alter the accommodation if the circumstances so require. If the operator puts up its clients in second class hotels, it will be liable to them notwithstanding the contractual term since the clients expected to be accommodated in hotels of a category similar to that which had been promised.
2. A hotelkeeper exhibits a notice to the effect that the hotel is responsible for cars left in the garage but not for objects contained in the cars. This term is not an exemption clause for the purpose of this Article since its purpose is merely that of defining the scope of the hotelkeeper’s obligation.
3. Exemption clauses to be distinguished from forfeiture clauses
Exemption clauses are to be distinguished from forfeiture clauses which permit a party to withdraw from a contract on payment of an indemnity. In practice, however, there may be forfeiture clauses which are in reality intended by the parties to operate as disguised exemption clauses.
4. Exemption clauses and agreed payment for non-performance
A contract term providing that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance (see Article 7.4.13) may also have the effect of limiting the compensation due to the aggrieved party. In such cases the non-performing party may not be entitled to rely on the term in question if the conditions laid down in this Article are satisfied.
3. A enters into a contract with B for the building of a factory. The contract contains a penalty clause providing for payment of Australian dollars (AUD) 10,000 for each week of delay. The work is not completed within the agreed period because A deliberately suspends the work for another project which was more lucrative for it and in respect of which the penalty for delay was higher. The actual harm suffered by B as a result of the delay amounts to AUD 20,000 per week. A is not entitled to rely on the penalty clause and B may recover full compensation of the actual harm sustained, as the enforcement of that clause would in the circumstances be grossly unfair in view of A’s deliberate non-performance.
5. Cases where exemption clauses may not be relied upon
Following the approach adopted in most national legal systems, this Article starts out from the assumption that in application of the doctrine of freedom of contract (see Article 1.1) exemption clauses are in principle valid. A party may not however invoke such a clause if it would be grossly unfair to do so.
This will above all be the case where the term is inherently unfair and its application would lead to an evident imbalance between the performances of the parties. Moreover, there may be circumstances in which even a term that is not in itself manifestly unfair may not be relied upon: for instance, where the non-performance is the result of grossly negligent conduct or where the aggrieved party could not have obviated the consequences of the limitation or exclusion of liability by taking out appropriate insurance.
In all cases regard must be had to the purpose of the contract and in particular to what a party could legitimately have expected from the performance of the contract.
4. A, an accountant, undertakes to prepare B’s accounts. The contract contains a term excluding any liability of A for the consequences arising from any inaccuracy whatsoever in A’s performance of the contract. As a result of a serious mistake by A, B pays 100% more taxes than were due. A may not rely on the exemption clause which is inherently unfair.
5. A, a warehouse operator, enters into a contract with B for the surveillance of its premises. The contract contains a term limiting B’s liability. Thefts occur in the terminal resulting in loss exceeding the amount of the limitation. Although the term, agreed upon by two professional parties, is not inherently unfair, it may not be relied upon by B if the thefts were committed by B’s servants in the course of their employment.
6. Consequence of inability to rely on exemption clauses
If a party is not entitled to rely on an exemption clause, its liability is unaffected and the aggrieved party may obtain full compensation for the non-performance. Contrary to the rule laid down with respect to agreed payment for non-performance in Article 7.4.13, the court has no power to modify the exemption clause.
(1) Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.
(2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.
(3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.
(4) Nothing in this article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.
1. The notion of force majeure
This Article covers the ground covered in common law systems by the doctrines of frustration and impossibility of performance and in civil law systems by doctrines such as force majeure, Unmöglichkeit, etc. but it is identical with none of these doctrines. The term “force majeure” was chosen because it is widely known in international trade practice, as confirmed by the inclusion in many international contracts of so-called “force majeure” clauses.
1. A, a manufacturer in country X, sells a nuclear power station to B, a utility company in country Y. Under the terms of the contract A undertakes to supply all the power station’s requirements of uranium for ten years at a price fixed for that period, expressed in US dollars and payable in New York. The following separate events occur:
(1) After five years the currency of country Y collapses to 1% of its value against the dollar at the time of the contract. B is not discharged from liability as the parties have allocated this risk by the payment provisions.
(2) After five years the Government of country Y imposes foreign exchange controls which prevent B paying in any currency other than that of country Y. B is excused from paying in US dollars. A is entitled to terminate the contract to supply uranium.
(3) After five years the world uranium market is cornered by a group of speculators. The price of uranium on the world market rises to ten times the contract figure. A is not excused from delivering uranium as this is a risk which was foreseeable at the time of making the contract.
2. Effects of force majeure on the rights and duties of the parties
The Article does not restrict the rights of the party who has not received performance to terminate if the non-performance is fundamental. What it does do, where it applies, is to excuse the non-performing party from liability in damages.
In some cases the impediment will prevent any performance at all but in many others it will simply delay performance and the effect of the Article will be to give extra time for performance. It should be noted that in this event the extra time may be greater (or less) than the length of the interruption because the crucial question will be what is the effect of the interruption on the progress of the contract.
2. A contracts to lay a natural gas pipeline across country X. Climatic conditions are such that it is normally impossible to work between 1 November and 31 March. The contract is timed to finish on 31 October but the start of work is delayed for a month by a civil war in a neighbouring country which makes it impossible to bring in all the piping on time. If the consequence is reasonably to prevent the completion of the work until its resumption in the following spring, A may be entitled to an extension of five months even though the delay was itself of one month only.
3. Force majeure and hardship
This Article must be read together with Chapter 6, Section 2 of the Principles dealing with hardship (see Comment 6 on Article 6.2.2).
4. Force majeure and contract practice
The definition of force majeure in paragraph (1) of this Article is necessarily of a rather general character. International commercial contracts often contain much more precise and elaborate provisions in this regard. The parties may therefore find it appropriate to adapt the content of this Article so as to take account of the particular features of the specific transaction.