PECL Article 7:104 [Order of Performance]

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.

SEE ALSO:

PECL Article 7:106 [Performance by a Third Person]

(1) Except where the contract requires personal performance the creditor cannot refuse performance by a third person if: (a) the third person acts with the assent of the debtor; or (b) the third person has a legitimate interest in performance and the debtor has failed to perform or it is clear that it will not perform at the time performance is due.

(2) Performance by the third person in accordance with paragraph (1) discharges the debtor.

PECL Article 7:107 [Form of Payment]

(1) Payment of money due may be made in any form used in the ordinary course of business.

(2) A creditor which, pursuant to the contract or voluntarily, accepts a cheque or other order to pay or a promise to pay is presumed to do so only on condition that it will be honoured. The creditor may not enforce the original obligation to pay unless the order or promise is not honoured.

PECL Article 7:108 [Currency of Payment]

(1) The parties may agree that payment shall be made only in a specified currency.

(2) In the absence of such agreement, a sum of money expressed in a currency other than that of the place where payment is due may be paid in the currency of that place according to the rate of exchange prevailing there at the time when payment is due.

(3) If, in a case falling within the preceding paragraph, the debtor has not paid at the time when payment is due, the creditor may require payment in the currency of the place where payment is due according to the rate of exchange prevailing there either at the time when payment is due or at the time of actual payment.

PECL Article 7:109 [Appropriation of Performance]

(1) Where a party has to perform several obligations of the same nature and the performance tendered does not suffice to discharge all of the obligations, then subject to paragraph (4) the party may at the time of its performance declare to which obligation the performance is to be appropriated.

(2) If the performing party does not make such a declaration, the other party may wihin a reasonable time appropriate the performance to such obligation as it chooses. It shall inform the performing party of the choice. However, any such appropriation to an obligation which: (a) is [either] not yet due, or (b) is illegal, or (c) is disputed, is invalid.

(3) In the absence of an appropriation by either party, and subject to paragraph (4), the performance is appropriated to that obligation which satisfies ;one of the following criteria in the sequence indicated: (a) the obligation which is due or is the first to fall due; (b) the obligation for which the creditor has the least security; (c) the obligation which is the most burdensome for the debtor; (d) the obligation which has arisen first. If none of the preceding criteria applies, the performance is appropriated proportionately to all obligations.

(4) In the case of a monetary obligation, a payment by the debtor is to be appropriated, first, to expenses, secondly, to interest, and thirdly, to principal, unless the creditor makes a different appropriation.

A party has to effect its performance:

(1) if a time is fixed by or determinable from the contract, at that time;

(2) if a period of time is fixed by or determinable from the contract, at any time within that period unless the circumstances of the case indicate that the other party is to choose the time;

(3) in any other case, within a reasonable time after the conclusion of the contract.

Comment

A. Significance

The time for performance has significance in several connections. An early performance by a party may be and a late performance is almost always a non-performance of the contract, see Article 8:101. If the party which is to receive performance which is duly tendered at the time for performance does not do so at that time it will often bear the risk for performance not being effected.

B. Concurrent performance of the parties' obligations

It is the general rule that the two performances have to be rendered simultaneously, so that each party can withhold its performance until the other performs (Pflicht zur Leistung Zug um Zug, as it is put in German). These issues are treated in Article 9:201 Right to Withhold Performance.

C. Time determinable from the contract

If a time is fixed by or determinable from the contract, performance must be made at that time. This may be a date which at the conclusion of the contract is fixed by the calendar, for instance "delivery on October 15", or it may be otherwise determined.

D. Performance within a period of time

It may also occur that the time of performance is to be set within a period of time or by a certain time; and in that case Article 7:102(2) comes into operation.[page 332]

If the contract or the circumstances do not indicate that the receiving party is to choose the time of performance, it is for the party which has to make the performance to choose the time.

An example of where the time for performance is to be determined by the party which is to receive the performance is the f.o.b. sale where delivery is to be made during a period of time. Here it is for the buyer to provide the vessel (see INCOTERMS 1990 f.o.b. under B7) and thus decide the date he will receive the goods on board the ship.

It may follow from the circumstances of the case that the period of the time fixed for the performance begins as soon as the contract is made and as soon as the creditor - or in an appropriate case the debtor - requires performance.

E. Performance within reasonable time

If no time is fixed or determinable from the contract, performance is to be made within a reasonable time after the conclusion of the contract. What is reasonable time is a question of fact depending upon the nature of the goods or services to be performed and the circumstances, see Article 1:302.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Time of performance agreed

The rule in Article 7:102(1) appears to be in accordance with the laws of the Member States. It follows from the parties' freedom of contract and is only, as in CISG art.33(a), provided for the sake of clarity.

2. Performance within a period of time

The rule in Article 7:102(2) seems to be widely accepted, see GERMAN BGB § 271(2), ITALIAN CC art.1184 and PORTUGUESE CC art. 779. The same rule probably applies in FRANCE, compare CC art. 1187 and Malaurie & Aynès no. 1100; in DENMARK, see Sale of Goods Act § 13, which applies to other kinds of contract also; and FINLAND and SWEDEN, Sale of Goods Act § 9(2). See also CISG art. 33(b) and Unidroit art. 6.1.1(b).

3. No time for performance agreed

The rule in Article 7:102(3) is in accordance with the COMMON LAW rule, see U.K. Sale of Goods Act 1979, s. 29(3); IRISH Sale of Goods Act 1893, s. 29 and Macauley v. Horgan [1925] I.R. 1; FINNISH and SWEDISH Sale of Goods Act § 9(1). It has also been adopted by CISG art.33(c) and Unidroit art. 6.1.1.(c).

Most of the other laws provide rules which are different but which will often bring about the same or very similar results as the rule on performance within a reasonable time laid down in Article 7:102(3). They generally provide that the creditor may demand performance at once. See for FRANCE CC art. 1901 and Ponsard & Blondel nos. 136 and 137; AUSTRIA, ABGB § 904; DENMARK, Sale of Goods Act § 12; GERMANY, BGB § 271(1); GREECE, CC art. 323; ITALY, CC art. 1183; NETHERLANDS, BW art. 6:38; PORTUGAL CC art. 777(1). However usage, the nature of the contract or other circumstances will often prevent the creditor from demanding immediate performance: ITALIAN CC art. 1183; PORTUGUESE CC art. 777(2); and SPAIN, CC art. 1128, under which the court may fix the time for performance. In GERMANY the rule on immediate performance is tempered by the principle of good faith, BGB § 242 and the same applies in DENMARK (semble), Court of Appeal (East) 31 March 1987 , U.f.R. 1987, 738; GREECE, CC art. 288; and the NETHERLANDS, BW art. 6:2.[page 333]

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.

Comment

In any synallagmatic contract it must be determined whether the parties are to perform simultaneously or whether one is to perform before the other. Article 7:104 provides that in general performances should be rendered simultaneously. This is because, if one party is to perform first, it will necessarily have to extend credit (in one form or another) to the other party, thereby incurring a risk that the other will [page 335] default when the time fot its performance comes. This additional risk is avoided if the performances are made simultaneously. Thus it is the general rule in sales contracts that, unless otherwise agreed, delivery and payment are to be simultaneous.

However, simultaneous performance is often impracticable. An employer cannot realistically be expected to pay a builder brick by brick. Either the employer must pay in advance or, as is more usual, the builder must complete some or all of the work before payment.

The Article does not provide a presumption as to which party should perform first if simultaneous performance is not appropriate. The variety of circumstances is too great for this to be practical. In most cases the matter is settled by usages (cf. Article 1:105), and almost every general rule seems to have many exceptions. Thus it in contracts for services it is common to find the custom, "work first, payment later", which may reflect the fact that the employer is a better credit risk than the sevice provider or may simply be a reflection of market power or social standing; but there are situations in which payment is expected in advance.

The question will have to be decided by references to such usages or, if there are none, by the factors listed in Article 6:102, Implied terms - (a) the intention of the parties, (b) the nature and purpose of the contract and (c) good faith and fair dealing.

Even where simultaneous performance is feasible, the contract or the circumstances may lead to a different result. Thus it is possible for food in a restaurant to be handed over in exchange for an immediate cash payment, as happens in some cheaper restaurants and bars; but in others the customer is obliged to pay only after the meal has been finished.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

This provision is in line with the law in most jurisdictions in Europe, such as AUSTRIA, ABGB § 904; FRANCE (case-law as set ouit by Terré, Simler & Lequette no. 616) and ENGLAND (see Beale, 28-34 and Treitel, Contract. 677-685) -and with Unidroit art. 6.1.4. In other European jurisdictions, [page 336] the rule is the same although there is no express provision. This is the case in ITALY, where it follows from CC art. 1460 on exceptio non adimpleti contractus, unless something different is provided by the contract or results from the nature of the contract, and PORTUGAL.

In all systems, the rule that performances are due simultaneously is only a presumption which will not apply if the parties have agreed otherwise, for example when credit is given by one party to the other, or if the circumstances make it inappropriate, e.g. when the performance by one party is necessary before the other party can perform (see e.g. in BELGIUM, Cass. 5 May 1971, Arr. 871, Rechtskundig Weekblad 1971-72, 147, Journal des Tribunaux 1972, 85).

Some jurisdictions provide a further rule for the case where performance by one of the parties requires some time. The other party will then only have to perform his side after the performance of the former party has been rendered. Thus in BELGIAN law, when the obligation of one party concerns a continuous performance, and the other one not, the former party normally has to perform first. Similarly Unidroit art. 6.1.4(2) provides that 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. But in all systems there are customary exceptions: for example, it is customary for theatre-goers to have to pay in advance of seeing the performance. See also notes to Article 9:201.[page 337]

(1) Except where the contract requires personal performance the creditor cannot refuse performance by a third person if: (a) the third person acts with the assent of the debtor; or (b) the third person has a legitimate interest in performance and the debtor has failed to perform or it is clear that it will not perform at the time performance is due.

(2) Performance by the third person in accordance with paragraph (1) discharges the debtor.

Comment

A. Scope

Article 7:106 treats the questions, under what conditions does performance by a third person constitute due performance in relation to the creditor who cannot then refuse performance, and under what conditions does the performance by a third person discharge the debtor vis-à-vis the creditor. It does not address the question whether a third person who has made a performance acquires the rights of the creditor vis-à-vis the debtor by way of assignment or subrogation.

B. When will a tender constitute performance?

The third person making the performance is often acting with the assent of the debtor or on its directions. An agent or a sub-contractor of the debtor may have been entrusted to perform the contract. In these cases the creditor cannot refuse performance, unless the contract requires personal performance, see Article 7:106(1)(a).

However, performance by a third person may also be made without the volition of the debtor. The third person may have a legitimate interest in doing so. A surety pays a debt in order to avoid costly proceedings against the debtor which eventually the surety will have to pay. A tenant pays the mortgage in order to avoid a forced sale of the property. In the interests of the family, a wife pays the debt of her husband for which she is not liable. A parent company pays the debt of its subsidiary to save the latter's credit rating. In these cases the creditor cannot refuse performance by the third person provided that the debtor has failed to perform when performance fell due or it is clear that it will not perform at the time when it falls due, see Article 7:106(1)(b).[page 338]

C. Is the obligor discharged?

Due performance by the third person who is entitled to perform discharges the obligor, see Article 7:106(2).

It follows from Article 8:107 that the obligor remains responsible if a third person who has promised to perform and who has got the obligor's assent to performance fails to perform or makes a defective tender. Where performance has been undertaken or carried out by a third person who has a legitimate interest in performance the obligor will also remain responsible, if the third person fails to tender performance when it is due, or if his tender is refused because it is defective. The obligor will not be excused under Article 8:108 for a failure to perform by a third person unless the third person's non-performance was due to an impediment which would also have excused the obligor. Whether the obligor is responsible for a defective performance by the third party which has caused a greater loss to the obligee than the expected non-performance by the obligor is to be decided by the applicable law.

An obligee who refuses to accept a performance by a third person made in pursuance of Article 7:106(1) will normally have failed to perform the contract and cannot exercise any of the remedies for non-performance set out in chapter 4. Article 7:110 or 7:111 may also apply.

D. When may a tender be refused?

There are, however, situations where the obligee is entitled to refuse performance by a third party. Such performance may be excluded by the terms of the contract. The terms which exclude third party performance may be express or they may be inferred from the language of the contract. There are also situations where it follows from the nature or purpose of the contractual obligation that it cannot be performed vicariously.

Where in contracts for the performance of personal services it can be inferred that the obligor has been selected to perform because of his skill, competence or other personal qualifications, the obligee may refuse performance by a third person. However, if it is usual in the type of contract to allow delegation of the performance of some or all of the services, or if this can be done satisfactorily by third persons, the obligee must accept such performance.

Where the third person cannot show any assent by the obligor or any legitimate interest the obligee is entitled to refuse his tender of performance. Thus it can refuse payment from a person who attempts to collect claims against the debtor. If the obligor has not assented to the performance the obligee may also refuse performance by a friend of the obligor whose motive is unselfish. Article 7:106 does not treat which consequences it has for the obligor if in these cases the obligee accepts performance by the third person.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Obligor assents to vicarious performance

The legal systems all seem to agree that performance by a third person which is agreed to by the obligor before or after it is made (vicarious performance) is, in principle, admitted. However, it may not be permitted if it is against the interests of the obligee. This idea is expressed differently in the [page 339] legal systems.

GREEK and PORTUGUESE law will not permit vicarious performance when it is prejudicial to the interests of the obligee, see Greek CC art. 317 in fine and PORTUGUESE CC art. 767(2). Under DUTCH law a third party may perform an obligation "unless this is contrary to its content or necessary implication", see BW art. 6:30.

Most of the laws exclude vicarious performance of obligations which have a personal character: DENMARK, see Ussing, Alm. Del. 58; FRANCE and BELGIUM, CC art. 1236, see Malaurie & Aynès, Obligations no. 962 and for Belgium Cass. 28 Sept. 1973, R.W. 1973-74, 1158, R.C.J.B. 1974, 238 obs. van Damme; ENGLAND, Treitel, Contract 672-673; AUSTRIA, a generally acknowledged principle based on provisions for specific contracts: ABGB § 1153 (labour contract), § 1171 (work contract), etc.; GERMANY, see BGB § 267(1); ITALY, CC art. 1180; GREECE: Zepos in Ermak II/1 art. 317 no. 13 (1949); NETHERLANDS, BW art. 6:30(1); SCOTLAND, McBryde 378-382; SPAIN, CC arts. 1158, 1161 and see Diez-Picazo II, 481; SWEDEN, see Rodhe, Obligationsrätt 158.

12. Performance without the consent of the obligor

Provided the performance by the third party is not excluded as being against the interests of the obligee under the rules discussed in note 1 above, the other civil law systems seem to allow it on varying conditions. Under AUSTRIAN law, the obligor's consent is not necessary, if the obligee accepts performance by the third party (see ABGB § 1423). In GERMANY, BGB § 267(2) and ITALY, CC art. 1180 the obligee must accept performance but may refuse if the obligor objects to it. If he objects the obligee has a choice whether or not to accept. This rule also applies in DENMARK, see Ussing, Alm. Del. 307; the NETHERLANDS, BW art 6:30(2); PORTUGAL, CC arts. 592(1) and 768(2); and SWEDEN, Rodhe, Obligationsrätt 66. In FRANCE the obligor can oppose performance if he can show that he will be prejudiced by it, see Malaurie & Aynès, Obligations, no. 962. In BELGIUM the obligor cannot oppose performance, but the third party will not acquire the rights of the creditor by subrogation unless the third party acted with the obligor's consent or had a legitimate interest in performance, CC art. 1236.

Under BW art. 6:73 the obligee may refuse performance, but if the third party has a legitimate interest in performance the rules on the obligee's mora creditoris will apply.

Under SPANISH law the obligee must accept performance by a third party even if the obligor opposes it, but the third party will then not have a right of subrogation but only a claim for enrichment (CC arts. 1158(3) and 1159; Diez-Picazo II, 484; Albaladejo II, 1 § 24.3; TS 26 June 1925, 16 June 1969, 30 September 1987 and 12 November 1987).

In GREECE the obligee may not accept performance if the obligor opposes it, see CC art. 318.

In ENGLISH law a performance made without the permission of the obligor is not admitted. This holds true when the effect would be a subrogation in favour of the third party: "a man cannot make himself the creditor of another without his knowledge or consent". The same seems even to hold true when there is no subrogation, see Chitty § 29-093. It is probably now settled that payment by a third party will only discharge the obligor if he authorized or subsequently ratified the payment, see Goff and Jones 17. There are, however, specific provisions allowing a subtenant of a lease to intervene to prevent forfeiture of the head lease, see Law of Property Act 1925, s. 146. The IRISH and SCOTTISH laws are probably the same as the English.[page 340]

(1) Payment of money due may be made in any form used in the ordinary course of business.

(2) A creditor which, pursuant to the contract or voluntarily, accepts a cheque or other order to pay or a promise to pay is presumed to do so only on condition that it will be honoured. The creditor may not enforce the original obligation to pay unless the order or promise is not honoured.[page 340]

Comment

A. General remarks

Payment is not only made by legal tender but also by bank transfer, handing over of a cheque and in many other ways. The development of new techniques for payment must not be prevented by a detailed enumeration of possible manners of payment. It is in the general interest of business to allow payment to be made in any manner which is currently being used and is easy, quick and reliable. Without special permission the debtor can pay in such manner, e.g. by cheque, and the creditor is bound to accept it (see on this specific way also paragraph (2)).

B. Manner of payment

Many national laws provide that payment must be made by legal tender and that the creditor is not entitled to demand any other method of payment except where the contract so provides. However, the debtor may prefer another manner of payment, provided this is in conformity with the ordinary course of business. The creditor must be protected against a surprising, unusual or burdensome manner of payment.

What manner is usual depends on the nature of the transaction involved and on the usages prevailing at the place of performance for the payment (see Article 7:101). The creditor does not have the right unilaterally to demand or refuse any particular manner.

C. Acceptance of promise of alternative performance conditional only

It often occurs that the creditor, in order to accommodate the debtor, accepts in lieu of cash a cheque, a bill of exchange, a claim for the payment of money (transferred by way of assignment) or even an instruction (written, oral or in any other form) to a third person to pay. In all these cases the creditor generally does not wish to run the risk that the cheque or other claim for payment will not be honoured. Therefore paragraph (2) sent. 1 makes it clear that the original claim subsists until satisfaction of the substituted performance has in fact been achieved. If this is not done the creditor may enforce the underlying claim. But it cannot proceed with the latter until the substituted performance becomes due and remains unperformed (paragraph (2) sent. 2).

Paragraph (2) sent. 1 applies only to an assignment as payment and not to an ordinary assignment of debt.[page 341]

As paragraph (2) sent. 1 establishes a rebuttable presumption, parties may expressly or impliedly stipulate otherwise.

D. Consequences of dishonouring the substituted performance

If the claim created or assigned in substitution of the original claim is not honoured the creditor may proceed with the underlying claim for payment as if no substituted performance had been accepted. If interest was due on the debt, it is recoverable. But where the creditor took a promissory note or another negotiable instrument in substitution for the original promise of payment, it will usually find it more efficient to ignore this promise and sue on the instrument.

However, if the creditor fails to take any steps necessary to enforce the claim received by it as a substitute, it cannot then revert to the original remedies for non-performance except to enforce the payment due itself.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Ordinary method of payment

In many countries the ordinary method of paying a monetary obligation is by transfer of legal tender. This rule is expressly fixed in ITALY (CC art. 1277 (1)) PORTUGAL (CC art. 550) and SPAIN CC art. 1170), but it is valid also in several other countries, especially in those of the French-inspired legal orbit (e.g. FRANCE, BELGIUM and LUXEMBOURG); in GREECE, see Stathopolous 191-192; in ENGLAND and SCOTLAND, see Chitty § 21-044 and Wilson, Debt paras. 1.2, 12.1; and in IRELAND, see Forde § 1.086. In AUSTRIA ABGB § 1054 requires in respect of sales that payment of the price be "in cash"; this provision is liberally interpreted, however. Special legislation in these countries often authorizes or even obliges a debtor to make payment of substantial sums of money in cashless form, e.g. by bank transfer or cheque. DUTCH BW art. 6:112 allows payment in "current" form and art. 6:114 authorizes a bank transfer if the creditor has a bank account in the country of the place of performance, unless the creditor has validly objected. In BELGIUM a Royal Decree of 10 Nov. 1967 makes it obligatory to accept a bank transfer or cheque for payments of more than 10,000 BF in commercial transactions; similarly in FRANCE for payment of over 5,000 FF (L. 22 October 1940).

Other countries allow payments to be made in any form that is current and acceptable for present-day business (DENMARK: Gomard, Obligationsret I 121; SWEDEN: Rodhe, Obligationsrätt 33; but in FINLAND a creditor is usually not obliged to accept payment by cheque, Aurejërin 13). This rule is expressly laid down in the UNITED STATES, although the creditor may refuse to accept a payment other than by legal tender provided he gives a reasonable extension of time for the debtor to procure it (UCC § 2-511(2)).

2. Substituted payment

The disadvantage of most forms of substituted payment is that they do not immediately transfer a monetary value to the creditor. Therefore in most countries the handing over of a cheque or the production of a credit card or any transfer of a similar form of substituted payment is considered to be a conditional performance of the monetary obligation, the condition being that the substituted obligation will be honoured. This general principle is quite elaborately laid down in the US: UCC §3-802(1)(a) and (b) and § 2-511(3); Restatement of Contracts 2d, § 249). A more general regulation is given by GERMAN BGB § 364(2), and see DUTCH BW art. 6:46.[page 342]

In FRANCE it is held on the basis of CC art. 1243 and special texts that the collection, not the handing over a cheque is a performance of, the monetary obligation (Cass. Req. 21 March 1932, D.P.33.1.65). However it is sometimes said that so called "paiement par chèque" - even in cases required by law, see note 1 above - is a conditional performance (Issa-Sa-yegh, J. Cl. civ. art. 1235 à 1248 Fasc. II no. 117-118). A presumption to this effect has been established in ENGLAND (D&C Builders Ltd. v. Rees [1966] 2 Q.B. 617 (C.A.); Chitty §§ 21-061-062), SCOTLAND (Leggat Bros. v. Gray 1908 S.C. 67, I.H.) and IRELAND (Forde § I.087, though it can be rebutted: P.M.P.S. v. Moore [1988] I.L.R.M. 526). According to SPANISH CC art. 1170(2) and (3) the transfer of a negotiable instrument or similar commercial instrument has the effect of payment only after the instrument has been honoured. In PORTUGAL it is assumed that acceptance of those instruments normally is a datio pro solvendo and therefore does not constitute payment until the instrument is actually honoured (Varela II 173). This latter rule is expressly laid down in ITALY (CC art. 1197(1) sent. 2), where the creditor may refuse payment in such form unless it has been accepted on a previous occasion (Cass. 13 June 1980, no. 3771, Giur. it. 1981 I, I 1984). The rule is also confirmed by case law in GREECE (AP 1209/1963, NoB 11 (1963) 1050). For FINLAND see Wilhelmsson, Sevón 150.

In some countries, commercial practice and case law turn the condition precedent of factual honouring into a condition subsequent: payment is regarded as effected by handing over the substituted form of payment, unless it later turns out that the instrument is not in fact honoured (FRENCH Cass. Civ. I, 2 Dec. 1968, JCP 1969.II.15775; banking practice in GERMANY and AUSTRIA).

Unidroit art. 6.17 is similar to Article 7:107.[page 343]

(1) The parties may agree that payment shall be made only in a specified currency.

(2) In the absence of such agreement, a sum of money expressed in a currency other than that of the place where payment is due may be paid in the currency of that place according to the rate of exchange prevailing there at the time when payment is due.

(3) If, in a case falling within the preceding paragraph, the debtor has not paid at the time when payment is due, the creditor may require payment in the currency of the place where payment is due according to the rate of exchange prevailing there either at the time when payment is due or at the time of actual payment.

Comment

A. Definitions

Three different currencies may be involved in an international contract.

The currency of account indicates in which currency the primary payment obligation, i.e. typically the price, is measured. The parties or the circumstances usually clearly indicate this currency. Doubts may, however, arise, as to the currency of account of damages; this problem is addressed by Article 9:510.

The agreed currency of payment may and often does, on grounds of convenience, differ from the currency of account. It is one agreed upon by the parties (paragraph (1)). Absent such an agreement, the currency of account will normally be the currency of payment.

The currency of the due place of payment may differ from the agreed currency of payment and become relevant under certain circumstances (paragraphs (2)-(3)).[page 343]

B. Payment in the agreed currency of payment

The rule of Article 7:108 starts from the assumption that in the first place the creditor may require and the debtor must make payment in the agreed currency of payment, i.e. the currency in which the obligation to pay is expressed. This is but a consequence of the creditor's right to require performance, as laid down in Article 9:101(1). Whether the courts at the place of payment or elsewhere are willing to give judgment in a currency which is foreign to them, is a matter of procedure; it is not affected by these Principles. This provision also does not state how the money of payment has to be ascertained, if this is doubtful.

C. Payment in the currency of the due place of payment

If a monetary obligation is expressed in another currency than that of the due place of payment, the debtor may wish to make payment in the local currency; usually this is also in the creditor's interest. The rule of Article 7:108(2) presupposes that the agreed currency of payment and the currency of the due place of payment differ.

Two basic issues arise: First, does either party have the right to effect such a conversion, or does only one have such a right or even a duty to effect the conversion? Second, if so, which rate of exchange is to apply? The latter question is of special interest if the debtor delays payment and the currency of account, the agreed currency of payment or the currency of the due place of payment has depreciated in the meantime.

D. Right of conversion

The Principles adopt the widely accepted rule that the debtor has the option of effecting payment in the currency of the due place of payment rather than in the currency of payment (see Comment A). This is usually practical for both parties.

If the creditor wants to avoid this result, it must stipulate that payment be made only in the currency of the money of account (or in the agreed currency of payment). This right of the parties to agree on a different solution is stated expressly in paragraph (1).[page 344]

E. Rate of exchange

The debtor's right of conversion must not be allowed to diminish the extent of its monetary obligation. Consequently, the rate of exchange for the conversion into the currency of payment must be that prevailing at the due place of payment at the date of maturity (paragraph (2)).

This rule also covers the case where payment is made before the date of maturity (cf. Article 7:103).

Difficulties arise where the debtor pays after the date of maturity and in the meantime either the currency of account, the agreed currency of payment or the currency at the due place of payment has depreciated. Should the date of maturity or the date of actual payment determine the rate of exchange? Neither solution is fully satisfactory. If after maturity the currency of account has depreciated, the creditor would be disadvantaged if the rate of exchange on the date of payment were selected. If, on the other hand, after maturity the agreed currency of payment or the currency of the due place of payment has depreciated, the creditor would be injured if the debtor were to be allowed to convert at the rate of exchange of the date of maturity, because this exchange rate places the risk of depreciation of the local currency on the creditor.

The guiding principle for an equitable solution ought to be that the defaulting debtor, and not the creditor, must bear the risk if a currency depreciates after the date of maturity of a monetary obligation. If the creditor had been paid in time, it would bear both the chances and the risks of a depreciation; it could have avoided any foreseeable currency risk by converting the money received in a weak currency into money of a strong currency. It is thus the debtor which, actually or in effect, is speculating by delaying payment. Two solutions may be envisaged.

One would be to select the rate of exchange of the date of maturity and to grant, in addition, a claim for those damages that have been occasioned through currency depreciation during the debtor's delay. However, this route relies on two separate remedies and may entail a duplication of proceedings.

It is therefore preferable to allow a choice of the dates for the rate of conversion, and this choice must be the creditor's. It may choose between the date of maturity and the date of actual payment. This rule is laid down in paragraph (3).

Of course, the parties may agree on a fixed rate of conversion, and such an agreement takes precedence.

F. Exchange restrictions

The rules of Article 7:108 may not operate if and insofar as exchange restrictions affect the payment of foreign money obligations. The question as to which country's exchange restrictions must be taken into account is not addressed.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Uniform laws

Article 7:108 has been modelled upon two widely adopted uniform laws: (Geneva) Uniform Law on Bills of Exchange of 1930, art. 41 and (Geneva) Uniform Law on Cheques of 1931, art. 36. Both [page 345] laws are in force in more than 30 continental European countries. (See also Unidroit art. 6.1.9) A closely related, more elaborate model is the European Convention on Foreign Money Liabilities of 1967 (not yet in force).

The national laws are more diversified.

2. Currency clause

Almost all national laws recognize a currency clause, i.e. a stipulation that the debtor must make payment in an agreed currency. While some countries have express provisions (NORDIC Instruments of Debt Act 1938 § 7(1); ITALIAN CC arts. 1270 and 1278; SPANISH CC art. 1170), other laws recognize a currency clause only implicitly (BELGIUM: Cass. 4 Sept. 1975, Pas. I 16 R.W. 1975-76, 1561); GERMAN BGB § 244(1); GREEK CC art. 291; LUXEMBOURG CC art. 1153-1(1); NETHERLANDS BW art. 6:121(2); PORTUGUESE CC art. 558).

Only in FRANCE is such a clause void insofar as payment is to be made in FRANCE (Civ. I, 11 Oct. 1989, J.C.P. 1990 II 21393).

13. Payment in local currency

In the absence of a currency clause, payment in the local currency of the due place of payment, irrespective of the currency of account, is permitted almost everywhere. This rule is based either upon statutory provisions of NORDIC Instruments of Debt Act 1938 § 7(1); GERMAN BGB § 244(1); GREEK CC art. 291; ITALIAN CC art. 1278; NETHERLANDS BW art. 6:121(1) AUSTRIAN law: 4th Introductory Regulation of the Commercial Code (4.EVHGB) Art. 8 No. 8(1) which also applies in matters of civil law; and SPANISH CC art. 1170(1), the meaning of which is debated by scholars, see Diez Picazo II, 278) or upon case law (ENGLAND: Barclays International Ltd. v. Levin Brothers [1977] Q.B. 270, 277 (Q.B.); FRANCE: Cass.req. 17 Feb. 1937, S. 1938.1.140; BELGIUM: Cass. 4 May 1922, Bull. Institut Belge Droit Comparé 1923, 299).

14. Exchange rate

The exchange rate is controversial. If payment is made at maturity, so that the dates of payment and of maturity coincide, the exchange rate of this day applies.

Difficulties appear to exist on late payment. Under one approach, the rate of exchange is that of the day of payment (NORDIC laws: Instrument of Debts Act § 7(1); ENGLAND: Miliangos v. George Frank (Textiles) Ltd. [1976] A.C. 443 (H.L.); AUSTRIAN law, 4. EVHGB Art. 8 No. 8(2); GERMAN BGB § 244(2); GREEK CC art. 291; NETHERLANDS BW art. 6:124). Under another approach, the rate of exchange is that at the date of maturity (FRANCE: case law, Cass. req. 17 Feb.1937, S. 1938 I 140; ITALY: CC art. 1278; also BELGIUM, LUXEMBOURG and PORTUGAL).

The two conflicting approaches are, however, mitigated by supplemental rules. Where the exchange rate is that of the date of maturity and the currency of account has been devalued between that date and the time of payment, several countries grant damages to the creditor for delayed payment. These damages are based either on the general rules on late performance (BELGIUM: case law, e.g. Cass. 4 Sept. 1975, Pas. 1976.I.16 (impliedly); Cour d'appel Bruxelles 15 Jan., 5 Feb. 1965, Pas. 1965.II.310 - damages after debtor's default; NETHERLANDS BW art. 6:125; PORTUGAL: Varela I 896; Costa 641); or they comprise the difference between the rates of exchange at maturity and at payment (ITALY: Cass. 12 March 1953 no. 580, Giust.civ. 1953, I 830; LUXEMBOURG: CC art. 1153-1, as inserted by Law of 12 July 1980, with qualifications in favour of the debtor which are in accordance with the general rules as to liability for non-performance).

Conversely, in those countries which use the exchange rate at the date of payment, the debtor has to pay the difference between the exchange rates at the date of payment and a higher rate either at default (AUSTRIA: OGH 10 January 1989, ÖBA 1989, 735; GERMANY: RG 13 May 1935, RGZ 147, 377, 381; GREECE: Athens 3030/1969, Hazm 24 (1970) 409; 1905/1978, NoB 27 (1979) 221, 222, under a theory of damages) or even at the date of maturity (NORDIC countries: Instrument of Debts Act §7(2); ENGLAND: Ozalid Group (Export) Ltd. v. African Continental Bank Ltd. [1979] 2 Lloyd's Rep. 231, 233 (Q.B.)).

An alternative remedy allows the creditor to elect between the exchange rates of the date of payment and of maturity (FRANCE: semble Civ. 2, 29 May 1991, B.II, no. 165, p. 89: creditor allowed to elect the date of mise en demeure; Similarly SPAIN, Law of Exchange art. 1, see Diez Picazo II, 279). This solution corresponds to Article 7:108(3) of the Principles.[page 346]

(1) Where a party has to perform several obligations of the same nature and the performance tendered does not suffice to discharge all of the obligations, then subject to paragraph (4) the party may at the time of its performance declare to which obligation the performance is to be appropriated.

(2) If the performing party does not make such a declaration, the other party may within a reasonable time appropriate the performance to such obligation as it chooses. It shall inform the performing party of the choice. However, any such appropriation to an obligation which [either]: (a) is not yet due, or (b) is illegal, or (c) is disputed, is invalid.

(3) In the absence of an appropriation by either party, and subject to paragraph (4), the performance is appropriated to that obligation which satisfies one of the following criteria in the sequence indicated: (a) the obligation which is due or is the first to fall due; (b) the obligation for which the creditor has the least security; (c) the obligation which is the most burdensome for the debtor; (d) the obligation which has arisen first. If none of the preceding criteria applies, the performance is appropriated proportionately to all obligations.

(4) In the case of a monetary obligation, a payment by the debtor is to be appropriated, first, to expenses, secondly, to interest, and thirdly, to principal, unless the creditor makes a different appropriation.

Comment

A. The problem

Sometimes a party is obliged under a single contract or separate contracts to accomplish two or more performances of the same nature - in particular, to pay money. If the performance tendered does not suffice to discharge all these obligations, the question arises which obligation has been discharged by such performance, i.e. to which obligation such performance is to be appropriated. The question may become relevant if different securities have been created for the different obligations, or if they bear interest at different rates, or if the periods of limitation expire at different dates.

B. Performing party's right to appropriate its performance

The generally accepted principle is that the debtor may at the time of payment expressly or impliedly declare which obligation shall be discharged.

A debtor may distribute a payment among various outstanding obligations, thus liquidating them partially. However, the effects of such partial performance are subject to the general rules on non-performance.

The performing party's appropriation must, in general, be declared to the other party. Otherwise the latter would not know to which of the several obligations the other party wishes to appropriate the performance. Usually, such a declaration must be express. An implied appropriation may, however, be inferred from the fact that the debtor paid the exact amount of one of the debts or that the other debts are barred by limitation.

The debtor's right of appropriation is limited in two ways. First, where the contract already provides for a mode or sequence of appropriation, such agreement prevails.

This limitation of the debtor's right of appropriation need not be made explicit because agreement prevails over the Principles.

Second, the debtor of a sum of money is in certain cases prevented from appropriating its payment according to its will or interest. Paragraph (4) prescribes that the sequence of appropriation is: expenses - interest - principal; the term "interest" covers both contractual and statutory interest. Such sequence even applies if the creditor has accepted a tender of performance in which the debtor has declared to appropriate differently, unless the creditor has clearly consented to such declaration.

C. Receiving party's subsidiary right to appropriate

Where the contract does not provide a rule of appropriation and the performing party fails to appropriate its performance the law must supply a solution. Basically, there are two different approaches: either the right of appropriation is granted to the receiving party; or objective criteria are fixed for the appropriation. Paragraphs (2) and (3) combine those two approaches but give a preference to the first. According to paragraph (2) the right to appropriate devolves upon the receiving party if the performing party does not appropriate its performance. But the receiving party must [page 348] exercise this right within a reasonable time after receiving the performance; if it fails to do so, the performance is appropriated according to paragraphs (3) and (4).

Appropriation by the receiving party, which must be within a reasonable time, is the decisive act. However, the performing party must know where it stands. Consequently, the receiving party is obliged by the general requirement of good faith to inform the performing party of the appropriation. That notice, however, is merely declaratory. The appropriation is, therefore, not invalidated if the receiving party fails to give notice; but such failure may give rise to a claim for damages.

In order to protect the performing party from being impaired by the receiving party's appropriation the latter's choice is restricted by paragraph (2) sentence 2 sub-paragraphs (a) to (c). Thus, the receiving party cannot appropriate the performance to an obligation which is not yet due (sub-paragraph (a)), which is illegal (sub-paragraph (b)) or which - on whatever grounds - is disputed (sub-paragraph (c)). It is true that the meaning of the term "illegal" differs in the various national legal systems; however, it is not feasible to deal with these variations.

The receiving party is not restricted from appropriation of a performance to an obligation which is already barred by a statute of limitation. This follows from the general rule that the statute of limitation only operates if invoked by the party required to perform; it also avoids uncertainties about the applicable period of limitation.

D. Appropriation by law

Where neither the performing party (under paragraph (1)) nor the receiving party (under paragraph (2)) have validly appropriated the performance, the law determines to which obligation a performance is appropriated.

Under paragraph (3) the performance is appropriated to that obligation which according to the sequence of the criteria is the first to correspond to one of the following criteria:

a) earlier date of falling due;

b) less security - this criterion must be interpreted in accordance with its economic bearing: also a debt for which a third person is liable in solidum or for which enforcement proceedings can already be started offers more security;

c) more burdensome character - e.g. producing interest at a higher rate, a penalty (Article 9:509),

d) earlier date of creation.

This sequence of criteria is considered to correspond to the interests of both parties. If none of the four criteria leads to appropriation of the performance, it is appropriated proportionally.[page 349]

E. Appropriation to part of single obligation

Article 7:109 presupposes that there are several distinct obligations (cf. paragraph (1)). Some rules of Article 7:109 may, however, be extended to cases where partial payment of a single debt needs to be appropriated to a proportion of the debt.

Whether Article 7:109 applies directly if payment is made on a current account being in debit depends on the nature of the current account, which must be determined under the applicable law. The rule applies directly and fully if the (negative) current account is not regarded as an integration (novation) for the individual obligations constituting the account; in this case, the current account in law still consists of the original number of several obligations towards the creditor. If, by contrast, the negative balance of the current account is regarded as constituting an integrated single obligation, Article 7:109 does not apply.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Performing party's choice

The principle expressed in Art. 7:109(1) is generally accepted (cf. BELGIUM, FRANCE and LUXEMBOURG: CC art. 1253; DENMARK: Ussing, Alm. Del. 25 and 309), but there are certain restrictions: of FRANCE, cf. Couturier, J.Cl.civil art. 1253-1255, fasc. 84-85 nos. 21-30; BELGIUM: De Page III no.488; ENGLAND: Chitty § 21-046 et seq.; FINLAND: Commercial Code of 1793 Chapter. 9 § 5 and Consumer Protection Act Chapter. 7 § 15; GERMANY: BGB § 366(1); GREECE: CC art. 422 sent. 1; ITALY: CC art. 1193 (1); NETHERLANDS: BW art. 6:43 (1); PORTUGAL: CC arts. 783-785; SCOTLAND: Walker no. 31.36; SPAIN: CC art. 1172 (1); SWEDEN: Rodhe, Obligationsrätt USA: Restatement of Contracts 2d s. 258(1), but with a restriction for cases where the debtor is obliged to a third party to devote the performance to the discharge of another obligation, cf. § 258(2). In AUSTRIA, ABGB § 1415 requires the creditor's consent to debtor's choice.

Illustration 1 is based on French Cour de cassation Civ. I, 4 Nov. 1968, Bull. civ. I no. 261 p. 199.

2. Express provision in contract

It is probable that a contractual stipulation prevails (cf. FRANCE: Couturier, J. Cl. civil art. 1253-1255, fasc. 84-85 no. 15; GERMANY: Reichsgericht 25 April 1907, RGZ 66, 54, 57-59, but see Enneccerus & Lehmann s. 62 I pr. with note 1).

3. Debtor has not appropriated payment

If the debtor has not declared any appropriation, the laws show two different approaches:

Like Article 7:109(1) sent. 1, the COMMON LAW, SCOTTISH, BELGIAN, DANISH and SWEDISH law devolve the right to appropriate to the creditor if the debtor has not made an appropriation (ENGLAND: Chitty § 21-046, but s. 81 of the Consumer Credit Act 1974 deviates from the general rule; USA: Restatement of Contracts 2d § 259; SCOTLAND: Walker no. 31.36; BELGIUM and FRANCE: CC art.1255 (in effect: see note 4 below); DENMARK: Ussing, Alm. Del. 310; SWEDEN, Rodhe, Obligationsrätt and Handelsbalken; but cf. also the ius commune, Windscheid & Kipp § 343). But there are restrictions to the accepting party's right to appropriate: he may not appropriate a performance to an obligation which is not yet due if there are debts which are already due (USA: 15 Williston § 1797 with note 8, Restatement of Contracts 2d § 259 comment a); to an obligation which is illegal (ENGLAND: Chitty § 21-049; SCOTLAND: Walker no. 31. 36; USA: 15 Williston para. 1797 with note 7, cf. also Restatement of Contracts 2d §259(2) lit. c); or to an obligation which is disputed (Scotland: Walker no. 31. 36; USA: Restatement of Contracts 2d § 259(2) lit. c, 15 Williston § 1797 with note 6). Restatement of Contracts 2d § 259(2) lit. b contains a special rule precluding the accepting party from appropriating a performance to another obligation if failure to appropriate it to a specific debt would cause a forfeiture. However, the fact that an obligation is barred by the statute of limitation does not hinder appropriation to such obligation by the accepting party (England: Chitty § 21-050; USA: 15 Williston [page 350] § 1797 with note 7, Restatement of Contracts 2d § 259 comment a; to the contrary: SCOTLAND: Walker no. 31. 36). In BELGIUM the accepting party may not make an appropriation in which he has no legitimate interest, De Page III p. 494; van Ommeslaghe, R.C.J.B. 1988, p. 110 no. 203.

By contrast, most Continental legal systems lay down objective criteria (cf. AUSTRIA: ABGB § 1416; GERMANY: BGB § 366(2); GREECE: CC art. 422 sent. 2; ITALY: CC art. 1193(2); NETHERLANDS: BW art. 6:43(2); PORTUGAL: CC art. 784; SPAIN: CC art. 1174). Even systems following the first approach are forced to fall back on objective criteria if the accepting party also fails to appropriate (cf. SCOTLAND: Walker 31. 36; for FRANCE and LUXEMBOURG cf. CC art. 1256, which - as Illustration 4 shows - is somewhat different; USA: Restatement of Contracts 2d § 260; for the ius commune of Germany before 1900 cf. Windscheid & Kipp § 343; BELGIUM CC art. 1256). Article 7:109(3) is the consequence thereof.

Illustration 4 is modelled upon French Cour de cassation Civ. I, 29 Oct. 1963, D. 1964.39 (which, however, reached the contrary result).

4. Receipt accepted

Some codes contain express provisions on the effect of the acceptance of a receipt which indicates the appropriation (cf. FRANCE, BELGIUM and LUXEMBOURG: CC art. 1255; ITALY: CC art. 1195; SPAIN: CC art. 1172 (2); in the NETHERLANDS such a provision, previously contained in the old BW art. 1434, was considered to be superfluous for the NBW, cf. Parlementaire Geschiedenis Boek 6, 180 note 1). In France and Belgium it is controversial whether this means that the creditor has the right to appropriate where the debtor has failed to exercise his option (in this sense De Page III no. 489) or whether the rule concerns appropriation by agreement of both parties (Couturier, J.Cl. civil, art. 1253-1255, fasc. 84-85, no. 56; Planiol & Ripert (-Esmein/Radouant/Gabolde) VII no. 1204).

5. Money debts

The rule of Article 7:109(4) is, as far as general private law is concerned, common to Continental legal systems (cf. BELGIUM, FRANCE and LUXEMBOURG: CC art. 1254; AUSTRIA: ABGB § 1416 (interest); FINLAND, Commercial Code chap. 9 § 5 (interest); GERMANY: BGB § 367; GREECE: CC art. 423; ITALY: CC art. 1194; NETHERLANDS: BW art. 6:49; PORTUGAL: CC art. 785; SPAIN: CC art. 1173 (for interest)).

However, in consumer credit legislation special provisions deviating from this rule exist (GERMANY: § 11 (3) Verbraucherkreditgesetz) because the indebted consumer is to be encouraged in his efforts to repay (see reasons for § 11 Verbraucherkreditgesetz, (Deutscher Bundestag, 11. Wahlperiode, Drucksache 11/5462, p. 27 left column); see also DANISH Credit Act § 28 and SWEDISH Consumer Credit Act, § 19. Further, the rules on imputation are subject to a different appropriation declared by the debtor, if the creditor has accepted the performance (FRANCE: Couturier, J.Cl. civil art. 1253-1255, fasc. 84-85 no. 36; GERMANY: Staudinger (-Kaduk) § 367 nos. 7, 8; NETHERLANDS: Parlementaire Geschiedenis Boek 6, 182; GREECE AP 702/1976, NoB 25 (1977) 51).

Illustration 3 is modelled upon Oberlandesgericht Düsseldorf 27 May 1975, RPfleger 1975, 355 (which, however, reached the opposite result).

6. Debt partially secured

Whether the principle of Article 7:109(1) can be applied to partial payment on a debt which is only partially secured is disputed (cf. contra for FRANCE: Couturier, J.Cl. civil art. 1253-1255 nos. 28, 29 with ref.; pro for GERMANY: Bundesgerichtshof 13 July 1973, NJW 1973, 1689). In LUXEMBOURG it has been decided that where the debt is unsecured and another is secured by a guarantee from a third party, partial payment is appropriated to the latter debt: 11 November 1987, Pasicrisie XXVII, p. 319.

7. Current accounts

The rules on appropriation of performance usually are not applied to payments made on a current account (cf. for BELGIUM: Cass. 26 Feb. 1886, Pas. 1886 I 90; ENGLAND: Clayton's case (1816) 1 Mer. 572, 608; 35 E.R. 781, 793; FRANCE: Chavanne & Ponsard no. 46; GERMANY: Reichsgericht 7 Jan. 1916, RGZ 87, 434, 438, Bundesgerichtshof 11 June 1980, BGHZ 77, 256, 261; contra: HGB-RGRK (-Canaris) § 355 nos. 74, 75, 83 and § 356 no. 9; SCOTLAND: Royal Bank v. Christie (1841) 2 Rob. 118 (H.L.)).[page 351]