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GUIDE TO ARTICLE 7

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Article 7 with PECL Articles 1:106, 1:107, 1:201, 1:202
CISG Article 7

(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.

(2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

PECL Article 1:106 [Interpreting and Supplementation]
(complete and revised version 1998)

(1) These Principles should be interpreted and developed in accordance with their purposes. In particular, regard should be had to the need to promote good faith and fair dealing, certainty in contractual relationships and uniformity of application.

(2) Issues within the scope of these Principles but not expressly settled by them are so far as possible to be settled in accordance with the ideas underlying the Principles. Failing this, the legal system applicable by virtue of the rules of private international law is to be applied.

PECL Article 1:107 [Application of the Principles by Way of Analogy]

These Principles apply with appropriate modifications to agreements to modify or end a contract, to unilateral promises and to other statements and conduct indicating intention.

PECL Article 1:201 [Good Faith and Fair Dealing]

Each party must act in accordance with good faith and fair dealing. (2) The parties may not exclude or limit this duty.

PECL Article 1:202 [Duty to Co-operate]

Each party owes to the other a duty to co-operate in order to give full effect to the contract.


To examine CISG provisions displayed in their context, go to the full text of the CISG || To examine PECL provisions displayed in their context, go to the full text of the PECL


Definitions

"Reasonableness" has been said to be a general principle of both the CISG and the PECL. For the PECL definition of "reasonable", go to PECL Article 1:302 [Reasonableness] and the comment and notes that accompany this definition.]


Editorial remarks

Remarks on good faith and fair dealing

John Felemegas [*]
October 2001

1. General scheme of interpretation and supplementation in the CISG and PECL

The nature and content of PECL article 1.106, as well as its function within the instrument to which it belongs, are very similar to those of article 7 CISG. In both cases, the respective provisions provide the built-in interpretation and supplementation mechanism that the drafters have embedded to their corresponding instruments. The relevant provisions provide that the interpretation of the law in both instruments must pay regard to the concept of good faith.[1]

The Notes to article 1.106(1) PECL confirm that the basic elements found in the structure of art. 1.106 either are virtually identical or express similar ideas to the ones of the corresponding provision in article 7(1) CISG.[2]

2. Good faith and fair dealing in the interpretation of the contract

The concept of "good faith and fair dealing" does not operate merely as a rule of interpretation of each PECL article. The duty of good faith, as this is embedded in PECL article 1.201, is mandatory on the parties.[3]

In contrast to article 7(1) CISG (or any other CISG provision), article 1.201 PECL imposes upon each party a positive duty of good faith and fair dealing in exercising its rights and performing its duties under the contract. The PECL Comments to article 1.201 not only refer to good faith as "a basic principle running through the Principles," but also expressly state that "[g]ood faith and fair dealing are required in the formation, performance and enforcement of the parties' duties under a contract, and equally in the exercise of a party's rights under the contract." (See PECL Comment A.)

On the other hand, the Vienna Convention does not contain any express provision that the individual contract has to obey the maxim of good faith.[4] The text of article 7(1) CISG covers only the application of the Convention, rather than the parties' rights and obligations and their exercise and performance directly. The wording was agreed upon only after lengthy deliberations and it was meant as a final rejection of more far-reaching proposals to apply the principle of "good faith and fair dealing" to the obligations and the behavior of the parties themselves.

There is, however, a strong body of academic opinion holding that the evaluation of the relations, rights and remedies of the parties, could also be subject to the principle of good faith and fair dealing. In accordance with this view, additionally to its interpretative role on the CISG provisions, good faith has at times been recognized as one of the general principles laid down by the Convention [5] and, further, it has found its way into operation of article 7(2) CISG.[6]

The concept's innate definitional difficulties are accentuated by the maxim's suggested dual role in the CISG -- i.e., the concept's operation in the Convention's interpretation (in the context of article 7(1) CISG) and in its gap-filling mechanism (in the context of article 7(2)), respectively.

3. Examples of specific manifestations of good faith in the CISG and PECL

The Convention provides that a contract may usually be concluded, modified or terminated without any formal requirements (see articles 11, 29(1) CISG; cf. articles 12, 96 CISG). The PECL also have a similar regime (see art. 2.101(2) PECL).[7]

Both instruments allow for an exception to this regime, based on the principle of good faith. A party may be precluded by his conduct from asserting such a clause to the extent that the other party has reasonably relied on that conduct. One of the general principles upon which the Convention is based relates to the duty of cooperation, according to which the parties must cooperate "in carrying out the interlocking steps of an international sales transaction."[8] This duty is closely related to the principle that a party can not contradict a representation on which the other party has reasonably relied [9] -- i.e., that the parties must not act venire contra factum proprium.[10]

However, unlike the Convention, the PECL also provide stringent rules on pre-contractual negotiations -- emanating from the concept of good faith -- not to continue or break off pre-contractual negotiations "contrary to good faith", making the offending party liable for losses caused to the other party (art. 2.301(2) PECL).[11]

In addition to the negotiation and pre-contractual stage, the concept of good faith in the PECL also manifests itself prominently in the manner that the PECL deal with issues of material validity [12] that the Convention leaves untouched (see art. 4(a) CISG). Elements of good faith can be found in the operation of certain Convention provisions.[13] For instance, the parties' express contractual obligations contain elements that can be identified as manifestations of a broader principle of good faith.[14]

The PECL are "… intended to be applied as general rules of contract law" (article 1.101(1) PECL), and thus they contain no comparable express obligations. Conversely, the PECL expressly state that contractual obligations may be implied under the concept of good faith and fair dealing (article 6.102(c) PECL), whereas there is no comparable rule in the Convention's provisions.

The argument in favor of extending the scope of good faith to the behavior of the parties and attributing to it the quality of a "general principle" of the CISG [15] runs the risk of being driven to the conclusion that, as such, the principle of good faith in Article 7(2) may even impose on the parties "additional obligations of a positive character."[16]

The possibility of imposing on the parties additional obligations is clearly not supported by the legislative history of the CISG.[17] Article 7(1), as it now stands in the CISG's text, is the result of a drafting compromise between two diverging views, which reflects the political and diplomatic maneuvering necessary for the creation of an international convention. It cannot now be given the meaning originally suggested by those advocating the imposition of a positive duty of good faith on the parties (i.e., the role of good faith under article 1.201 PECL), as this runs contrary to the letter of the law and its legislative history.[18]

4. Conclusions

Good faith occupies an integral position in the interpretation and supplementation of the CISG and the PECL. The concept of good faith is called upon in the CISG to guide the interpretation of the unified law text itself, whereas in the PECL it prescribes the behavior of the parties in every specific contract.

The two instruments, apart from a generic textual affinity, have many similarities in origin and substance, as well as a common purpose, which is the unification of international commercial law. Although the PECL could aid the interpretation and application of the CISG where it can be shown that their respective provisions share a common intent, the present writer maintains that the concept of good faith has a different and distinct role in the Convention. As such, good faith in the context of CISG will acquire its own and unique identity with the further development of relevant CISG case law.[19]

Although particular applications of the concept of good faith are present in various settings of the contractual relationship as conceived by the PECL -- and to a lesser extent by the CISG as well -- the definitional and functional parameters of the concept of good faith in the CISG cannot be provided by a simple synthesis of the relevant provisions in these two instruments.[20]

It is submitted that the concept of good faith in the CISG, as it stands presently, is circumscribed to the interpretation of the law and should not be allowed to impose additional duties of a positive nature to the parties, as it does in the PECL. This limited reading of the role of good faith in the CISG is clearly the one supported by the text and the legislative history of the Convention.

[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 268-272.]


FOOTNOTES

* In October 2000 the author was awarded a Ph.D. from the University of Nottingham for his thesis on the interpretative provisions of the United Nations Convention on Contracts for the International Sale of Goods (1980). The author is a Fellow of the Pace Institute of International Commercial Law.

1. See CISG article 7(1); PECL article 1.106(1).

2. Cf. PECL article 1.106 (1), CISG article 7(1). The wording of the two provisions is similar, although article 1.106 PECL, in addition to "good faith" and "uniformity of application" that are also prescribed by article 7 CISG, it includes the promotion of "certainty in contractual relationships" as a further relevant factor in the interpretation of the PECL provisions. See also PECL article 1.106(2) which refers to domestic law as an ultimate source of supplementation; CISG article 7(2). The PECL Notes state that "[t]his is in accordance with CISG art. 7(2)". See PECL Note 4.

3. The PECL Comments make it clear that "good faith" is not confined to specific rules and further elucidate the concept by stating that the concept's purpose is: "to enforce community standards of decency, fairness and reasonableness in commercial transactions […]. It supplements the provisions of the Principles, and it may take precedence over other provisions of these Principles when a strict adherence to them would lead to a manifestly unjust result." (see PECL Comment B). Note, however, that PECL Comment G unequivocally states that the courts may limit this duty in particular cases, in order to preserve the overriding objectives of "certainty and predictability in contractual relationships". As far as the Convention is concerned, the principle of party autonomy (article 6 CISG) is the dominant general principle. See, e.g., John O. Honnold, Uniform Law for International Sales Under the United Nations Convention 47 (2nd ed. 1991); Albert H. Kritzer, Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods 115 (1989).

4. Such a provision was proposed and rejected at the 1980 Vienna Diplomatic Conference; see U.N. Official Records (1981), p. 86.

5. Article 7(1) CISG. See, e.g., Bernard Audit, La Vente Internationale de Marchandises: Convention des Nations Unies du 11 Avril 1980 [The International Sales of Goods, UN Convention of 11 April 1980] 51 (1990), where the author states that good faith is one of the general principles, even though it must be considered a mere instrument of interpretation. See also Enderlein & Maskow, International Sales Law (1992) at 59, where the authors list the good faith principle among those principles "which do not necessarily have to be reflected in individual rules;" Rolf Herber & Beate Czerwenka, Internationales Kaufrecht. Kommentar zu dem Übereinkommen der Vereinten Nationen vom 11 April 1980 überVertrage über den Internationalen Warenkauf [International Sales Law, Commentary on the United Nations Convention on Contracts for the International Sale of Goods 49 (1991), where it is stated that the good faith principle is the only general principle expressly provided for by the Convention.

6. As to the possibility of using the principle of "good faith and fair dealing" on the basis of CISG art. 7(2) as a rule for the contractual relations between the parties, see E. Allen Farnsworth, Duties of Good Faith and Fair Dealing under the UNIDROIT Principles, Relevant Conventions and National Laws, 3 Tul. J. Int'l & Comp. L. (1995), 56. See also Michael Joachim Bonell, General provisions: Article 7, in Commentary on International Sales Law, at 85, stating "[y]et, notwithstanding the language used in article 7(1), the relevance of the principle of good faith is not limited to the interpretation of the Convention ... if during the negotiating process or in the course of the performance of the contract a question arises for which the Convention does not contain any specific provision and the solution is found in applying, in accordance with article 7(2), the principle of good faith."; Joseph Lookofsky, Understanding the CISG in the USA 19, §2-10 (1995), stating "[a]nd since other (very) general CISG principles of loyalty and reliance-protection have also been deduced, the deduction of a general Convention principle requiring the parties to act in good faith seems no great leap, even if it does seem to fly in the face of the traveaux préparatoires." See also Arthur Rosett, Critical Reflections on the United Nations Convention on Contracts for the International Sale of Goods, 45 Ohio St. L.J. 265 (1984).

7. However, note that according to PECL article 2.106(1), a written modification clause establishes "only a presumption that an agreement to modify or terminate the contract is not intended to be legally binding unless it is in writing" (emphasis added). On the other hand, CISG article 29(2) states that contracts containing written modification clauses "may not be otherwise modified or terminated by agreement …".

8. Kritzer, op.cit., at 115. See also CISG arts. 32(3), 48(2), 60(a), 65. Cf. PECL article 1.202, which expressly imposes on the parties a duty to cooperate with each other in order to give full effect to the contract. It is stated in the Notes to the PECL that the duty to cooperate is derived from the principle of good faith and fair dealing (see PECL Note 1).

9. On contractual formation, both the CISG and the PECL provide that an offer is irrevocable once the offeror has created a situation in which the offeree reasonably relied on the offer as irrevocable and acted in reliance on the offer; cf. PECL article 2.202(3); CISG article 16(2)(b). Cf. also PECL article 2.106(2); CISG article. 29(2) CISG -- which provide a different illustration of the same point for contractual modification or termination.

10. For similar affirmations, see, e.g., Gyula Eörsi, General Provisions, in International Sales: The United Nations Convention on Contracts for the International Sale of Goods, ch. 2, at 2-12 (Nina M. Galston & Hans Smit eds., 1984); Rolf Herber, Article 7, in Commentary on the UN Convention on the International Sale of Goods 9, 99 (Peter Schlechtriem ed., 1998); Dietrich Maskow, The Convention on the International Sale of Goods from the Perspective of the Socialist Countries, in La Vendita Internazionale, La Convenzione di Vienna dell' 11 Aprile 1980 41, 57 (1981).

11. PECL article 2.301(3) states: "It is contrary to good faith and fair dealing, in particular, for a party to enter into or continue negotiations with no real intention of reaching an agreement with the other party." See also PECL article 2.302, which provides a remedy for breach of confidentiality in the course of negotiations. For comments on pre-contractual liability under the CISG, refer to "Pre-Contract Formation", A.H. Kritzer ed., available at <http://www.cisg.law.pace.edu/cisg/biblio/kritzer1.html>.

12. See, e.g., PECL article 4.109, providing that a party may avoid the contract if the other party takes unfair advantage of the former party's dependence, economic distress or other weakness.

13. There are numerous applications of the good faith principle in particular provisions of the Convention; see the examples offered in the Secretariat Commentary to the Draft Convention as manifestations of the concept (e.g. CISG articles 16(2)(b), 21(2), 29(2), 37, 38, 40, 85-88); Text of Secretariat Commentary on article 6 of the 1978 Draft [draft counterpart of CISG article 7(1)], available at: <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-07.html>. Note also, that the Secretariat Commentary states: "The principal of good faith is, however, broader than these examples and applies to all aspects of the interpretation and application of the provisions of this Convention", id. at 4.

14. See article 35(3) CISG, which provides that the seller is not liable for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of the non-conformity.

15. See Isaak I. Dore & James E. De Franco, A Comparison of the Non-Substantive Provisions of the UNCITRAL Convention on the International Sale of Goods and the Uniform Commercial Code, 23 Harv. Int'l. L.J. 49, 61 (1982), where the authors state that the good faith provision does not constitute a mere instrument of interpretation, but rather, it "appears to be a pervasive norm analogous to the good faith obligation of the U.C.C." Id.

16. Bonell, op.cit., at 85. According to Bonell, "this will be the case, if during the negotiating process or in the course of performance of the contract a question arises for which the Convention does not contain any specific provision and the solution is found in applying, in accordance with Article 7(2), the principle of good faith." Id.

17. Cf. Ruling c-529/00 of the Constitutional Court of Colombia (10 May 2000). In that case, the Constitutional Court of Colombia established the validity of the CISG in Colombia by declaring valid Colombia Law Number 518 of 1999, which approved the Convention. In regards to good faith, in the course of its opinion the court stated: "[T]he exercise of the commercial activity that the individuals develop with other citizens of different States must fit the principle of good faith, just as the Convention stipulates in paragraph number one of article 7. This principle should not only be observed in the contractual relationships or negotiations, but in the relationships between individuals and the State and in the procedural performances."; at V. Considerations and Foundations, 3. Constitutionality of the Convention, Ibid. In other words, the Colombian court, in accordance with the good faith postulate found in article 83 of the Constitution of Colombia, appears to have treated the concept of good faith as expansively as it is treated under the PECL. See <http://cisgw3.law.pace.edu/cases/000510c7.html>.

18. See also Disa Sim, The Scope and Application of Good Faith in the Vienna Convention on Contracts for the International Sale of Goods (Sept. 2001), at <http://www.cisg.law.pace.edu/cisg/biblio/sim1.html>. The author provides a thorough discussion of the scope and application of the doctrine of good faith in the CISG, concluding that "… good faith can be said to play two roles in the Convention. Firstly, it is a compendious term for the collection of more specific "good faith" principles that can be used to resolve matters governed by the Convention but not expressly resolved by it. Secondly, these very same principles can be used to resolve questions of textual ambiguity. There does not exist, however, a general doctrine of good faith that can serve as a fount of additional rights and obligations."

19. Professor Schlechtriem has commented that the importance of the general principle of "good faith and fair dealing" and the details developed out of it depend on the structure and content of the specific legal system in which they are implemented, and on the concrete and specific contract in question. See Peter Schlechtriem, Good Faith in German Law and in International Uniform Laws, in Saggi, Conferenze e Seminari No. 24 (Centro di studi e ricerche di diritto comparato e straniero & Michael Joachim Bonell eds., 1997), available at <http://soi.cnr.it/~crdcs/crdcs/frames24.htm>.

20. Contra Ulrich Magnus, Editorial Remarks, in Guide to Article 7 (available on the Pace website: <http://www.cisg.law.pace.edu/cisg/principles/uni7.html>). Professor Magnus' analysis relates to a comparison between article 7 CISG and corresponding articles 1.6, 1.7 of the UNIDROIT Principles. However, the value of that analysis is pertinent to our own comparative study, as both the UNIDROIT Principles of International Commercial Contracts (1994) and the Principles of European Contract Law (PECL) (complete and revised version 1998) are in the form of international Restatements of Contracts and as such they can be regarded as companions to the CISG. Professor Magnus is of the opinion that the UNIDROIT Principles can aid in the interpretation of the Convention's provisions and states that "the Principles can help to clarify the actual object of the good faith principle contained in the CISG." Id., at para. 10.


Comment and notes on PECL 1:106, 1:107 and 1:201, 1:202

Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 108-121.


COMMENT AND NOTES: PECL Article 1:106: Interpretation and Supplementation

(1) These Principles should be interpreted and developed in accordance with their purposes. In particular, regard should be had to the need to promote good faith and fair dealing, certainty in contractual relationships and uniformity of application.

(2) Issues within the scope of these Principles but not expressly settled by them are so far as possible to be settled in accordance with the ideas underlying the Principles. Failing this, the legal system applicable by virtue of the rules of private international law is to be applied.

Comment

A. The aim of Article 1:106

The aim of the Article is to lay down guidelines for the interpretation and supplementation of the Principles. Interpretation is the ascertainment of the meaning of the Article in question when it is applied to an issue covered by the Principles. Supplementation is needed when an issue to be decided is not covered by the language of the Principles but is within their scope, see paragraph 2.

B. The purposes of the Principles

Article 1:106(1) lays down that the interpretation and the development of the Principles are to be guided by their purposes. These purposes are derived from the Articles and the comments to the Articles. One of the aims of paragraph (1) is to avoid a strict and narrow interpretation.

C. Development of the Principles

The "liberal" interpretation has a static and a dynamic aspect. The first envisages situations which may occur today but which have been overlooked or omitted, the second situations which we cannot imagine today, as the authors of the French civil code could not imagine an industrialized society. In both kinds of situations the Principles should be applied in accordance with their purposes. See also paragraph (2) on supplementation.

D. Good faith and fair dealing

Article 1:201 imposes upon each party a duty of good faith and fair dealing in exercising its rights and performing its duties under the contract. Good faith and fair dealing also operates as a rule of interpretation of each Article, see as an example Comment F. to Article 9:102.

E. Certainty in contractual relationships

The text of each Article should be interpreted so as to promote certainty, which is very important in contractual relations. [page 108]

F. Uniformity of application

It is one of the main purposes of rules provided for international application that they should be given a uniform interpretation. This aim has been expressed in several uniform laws and reflects the purpose of establishing these Principles, see the Preface and Article 1:101. In case of doubt an interpretation which is in accordance with the general ideas on which these Principles are based should be preferred to one which would be in harmony with the national law otherwise applicable, see paragraph (2) on supplementation.

G. Supplementation

Issues which fall within the scope of these Principles but which are not expressly settled by them are, as far as possible, to be settled in accordance with the ideas underlying the Principles, see Comment C.

If this way of solving a problem is not possible because it is one to which the ideas underlying the Principles cannot be applied, the legal system applicable under the conflict of law rules of the forum is to be applied. Such rules are found in the Rome Convention on the Law Applicable to Contractual Obligations of 19 June 1980 (O.J.E.C. No L 266/1 of 9 October 1980). An arbitrator may hold other choice of law rules applicable, see UNCITRAL MODEL LAW ON INTERNATIONAL ARBITRATION of 21 June 1985, Article 33(1).

It follows from Article 1:105 that a usage which is applicable to the contract will supplement the Principles.

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

1. Interpretation and supplementation in civil and common law

The methods of interpretation to be followed under Article 1:106 are similar to those expressed in CISG art. 7. In several aspects the Article corresponds with the maxims of interpretation adopted by the CIVIL LAW countries, see Zweigert & Kötz 265 ff.; AUSTRIAN ABGB §§ 6,7; ITALIAN Disposizioni sulla legge in generale art. 12; SPANISH CC arts. 3, 1258 and 1281 ff. and SWISS CC art. 1.

     (a) It is in harmony with the canons of interpretation in the CIVIL LAW countries that statutory provisions are interpreted in accordance with the purposes of the statute and the general principles underlying it. In the civil law countries the courts often extract general principles of law from statutes.

This idea was alien to the ENGLISH tradition which was to interpret the statutes narrowly and to find the general principles in the unwritten common law, though now the English courts regularly interpret legislation in the light of its purpose: see Zweigert & Kötz, loc. cit.

In the UNITED STATES, however, the civil law approach is adopted under the UCC, see § 1.102(1): "This Act should be liberally construed and applied to promote its underlying purposes and policies".

     (b) Likewise the idea of supplementation is accepted in the CIVIL LAW countries where the general principles laid down in the statutes may be applied to situations not covered by the language of the statutory provisions. This, however, is not in accordance with the ENGLISH, IRISH and SCOTTISH tradition. English, Irish and Scottish courts will generally not extend statutory provisions by analogy to deal with situations not covered by the words of the statute, see Zweigert & Kötz, loc. cit.

2. Good faith and fair dealing

More controversial, even in the CIVIL LAW countries, is the question whether the statute should be interpreted in accordance with good faith and fair dealing. A similar provision is found in CISG art. 7 (1) and in the U.C.C. § 1.203, see also Article 1:201 of the present Principles. Several authors in [page 109] the Civil Law countries have maintained that judges should, and in fact do, interpret statutes in accordance with good faith, see Zweigert & Kötz, loc. cit. See also the DUTCH BW art. 6:2(2), which reads:

"A rule binding upon [the creditor and debtor] by virtue of law, usage or a juridical act does not apply to the extent that, given the circumstances, this would be unacceptable according to criteria of reasonableness and equity". 3. Certainty and uniformity

Certainty in contractual relationships and uniformity of application mentioned in Article 1:106(1) express the same idea which, as far as the uniformity of application is concerned, is found in CISG art. 7(1) and in UCC § 1.102(2)(c).

4. National law as source of supplementation

For the cases where the ideas underlying the Principles do not give any guideline for the supplementation of the Principles, national law must be applied. This is in accordance with CISG art. 7(2).[page 110]

Go to PECL Abbreviations || Go to PECL Bibliography || Go to full texts of Parts I & II of Principles of European Contract Law


COMMENT AND NOTES: PECL Article 1:107: Application of the Principles by Way of Analogy

These Principles apply with appropriate modifications to agreements to modify or end a contract, to unilateral promises and to other statements and conduct indicating intention.

Comment

A. General

The Principles have been developed to govern contracts, that is to say, agreements intended to create obligations. They also apply to agreements which are intended to alter or to put an end to obligations. Many of the rules may also apply to declarations of will by one party alone, whether these are promises which are binding without acceptance, see Article 2:107, or other forms of voluntary declaration or communications which have legal consequences, such as offers or acceptances; appropriation of payments; the various notices which may be given in case of change of circumstance; notices of termination of a contract; renunciations of rights; and so on.

The rules concerned are many: for example, on intention to be bound and the sufficiency of the terms (Articles 2:101 and 2:102); the various rules on consent and the vitiating factors (mistake, threat, fraud; see Chapter 4); those concerning performance (a party make seek specific performance of a unilateral promise of a reward, which may be governed by the Principles); non-performance; and also interpretation. Certainly many of the rules will need to be adapted to the circumstances, to take account of the fact that these may not involve any assumption that the parties have a common intention (though this will not always matter: for example, a unilateral promise may have been made as the result of fraud).

Thus, in questions of interpretation, it may be necessary to consider just the intention of the party which made the declaration. On the other hand, it will be necessary to consider how the recipient of the declaration understood, or should have understood, it. This will be the case with an offer or a promise of a reward. The guidance given on interpretation by Article 5:103, letters (d), (e) and (f) will be very useful here.[page 110]

B. Validity

Under Article 2:107 a unilateral promise which is intended to be binding without acceptance is treated as a contract. Such a promise may be given as the result of fraud or any of the other grounds of invalidity set out in Chapter 4 (except, perhaps, excessive disparity, since there is no exchange involved). The rules of Chapter 4 therefore apply mutatis mutandis.

Illustration 1: A contract of sale requires the buyer to have an irrevocable letter or credit opened in favour of the seller. The confirming bank is not quite sure of the seller’s address and attempts to contact it. By mistake it in fact contacts a company with a similar name. The director of this company fraudulently states that his company is indeed the seller and the bank notifies it that a credit has been opened in its favour. The bank may avoid the credit. The same is true for other unilateral declarations which have effect on the contract. Illustration 2: A has agreed to perform a service for B by a fixed date. A is late, which amounts to a fundamental non-performance. A does not want to have to perform and tricks B into giving notice of termination by telling B that he can easily find someone else to perform the service in A’s place. A knows very well that this is untrue. B may avoid the effect of his declaration of termination and enforce the contract against A.

Illustration 3: Under an f.o.b. contract B is to nominate a ship which can load the goods during the contract period. The parties have discussed which ships might be available; they agree informally that either the Georgios C or the Evita would be suitable. B intends to nominate the Georgios C but its declaration refers by mistake to the Georgios D which S knows to be a slip, as both know that this ship cannot reach the loading port in time. S cannot treat this declaration as one of the Georgios D.

Application of the rules of Chapter 4 to unilateral declarations, will not always result in the unilateral declaration being avoidable, however, as this may be inconsistent with the implicit allocation of risks under Article 4:103(2). Illustration 4: A seller is contacted by a confirming bank notifying the seller of the opening of a irrevocable credit in its favour. The seller knows that the bank assumes that the buyer and its bank are both solvent and also that in fact both are on the verge of failure. The bank cannot avoid the credit on the ground of mistake.[page 111] Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. A generally accepted rule

It appears to be part of the common core of the legal systems that the rules on formation, validity, authority of agents, interpretation and contents of contracts also apply with appropriate modifications to agreements to modify or end the obligations arising out of a contract, to promises which do not require acceptance (see notes to Article 2:107) and other statements and conduct indicating an intention to establish, modify or extinguish legal relationships.

In AUSTRIA this result follows from the general principle of analogous application of the Civil Code, see ABGB § 7.

The COMMON LAW is thought to be broadly the same in so far as it recognises unilateral legal acts as affecting contractual rights; thus a notice of withdrawal of a ship under a charterparty was treated as analogous to acceptance of an offer in Brinkibon Ltd v. Stahag Stahl und Stahlwarenhandelsgesellschaft mbH (The Brimnes) [1983] 2 A.C. 34, H.L.

2. Agreements to modify or end the contract

Some systems treat the agreements to modify or end a contract as conventions not contracts, see on FRENCH law Ghestin, Formation p. 1 ff. The same holds true of BELGIAN and PORTUGUESE law. Other systems consider these agreements, unilateral promises and other statements and conduct indicating an intention to establish, modify or extinguish legal relationships as “legal acts”, e.g. GERMAN BGB §§ 116-144 and see Larenz/Wolff, AT § 22; DANISH retshandel, and SWEDISH and FINNISH, rättshandling, Nordic Act on Contracts and other Legal Acts; and for GREECE, CC art 127 f. Also DUTCH law uses the term rechtshandeling, BW art. 3:32 ff., and provides in BW art. 6:126 that the rules on contracts apply to agreements other than contracts. For unilateral acts the same rules is adopted in the legal writing, see Asser-Hartkamp, Algemene leer nr 83 ff.).

3. Unilateral promises

FRENCH and BELGIAN law apply the rules on contracts by way of an analogy to statements and conduct indicating an intention to establish legal relationships. See also PORTUGESE CC art. 295.[page 112]

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COMMENTS AND NOTES: PECL Article 1:201: Good Faith and Fair Dealing

Each party must act in accordance with good faith and fair dealing. (2) The parties may not exclude or limit this duty.

Comment

A. Good faith and fair dealing

This Article sets forth a basic principle running through the Principles. Good faith and fair dealing are required in the formation, performance and enforcement of the parties’ duties under a contract, and equally in the exercise of a party’s rights under the contract. Particular applications of this rule appear in specific provisions of the present Principles such as the duty of a party not to negotiate a contract with no real intention of reaching an agreement with the other party (Article 2:301), not to disclose confidential information given by the other party in the course of negotiations (Article 2:302), and not to take unfair advantage of the other party’s dependence, economic distress or other weakness (Article 4:109). Good faith and fair dealing are an important factor when implied terms of a contract are to be determined (Article 6:102); and they give a debtor a right to cure a defective performance before the time for performance (Article 8:104) and to refuse to make specific performance of a contractual obligation if this would cause the debtor unreasonable effort and expense (Article 9:102).

B. Not confined to specific rules

The concept is, however, broader than any of these specific applications. It applies generally as a companion to Article 1:104 on Usages. Its purpose is to enforce community standards of decency, fairness and reasonableness in commercial transactions, see Article 1:108 on Reasonableness. It supplements the provisions of the Principles, and it may take precedence over other provisions of these Principles when a strict adherence to them would lead to a manifestly unjust result. Thus, even if the non-performance of an obligation is fundamental because strict compliance with the obligation is of the essence of the contract under Article 8:103, a party would not be permitted to terminate because of a trivial breach of the obligation.[page 113]

The principle of good faith and fair dealing also covers situations where a party without any good reason stands on ceremony.

Illustration 1: In its offer to B, A specifies that in order for B’s acceptance to be effective B must send it directly to A’s business headquarters where it must be received within 8 days. An employee of B overlooks this statement and sends the acceptance to A’s local agent who immediately transmits it to A’s headquarters where it is received 4 days later. A cannot avoid the contract. The principle covers a party’s dishonest behaviour. Illustration 2: The contract between A and B provides that A must bring suit against B within two years from the final performance by B if A wants to make B liable for defects in B's performance. Some time before the expiration of this time limit A discovers a serious defect in B's performance and notifies B that it intends to claim damages. B uses dilatory tactics to put A off. On several occasions it assures A that A has no reason for concern. B undertakes to look into the matter, but insists that it will have to investigate it carefully.

When after the expiration of the two years's time limit, A loses patience and sues B, B invokes the time limit. Not having acted in good faith, B is estopped from relying on the time limit.

In relationships which last over a period of time (Dauerschuldverhältnisse) such as tenancies, insurance contracts, agency and distributorship agreements, partnerships and employment relationships, the concept of good faith has particular significance as a guideline for the parties' behaviour. Illustration 3: In 1945 A, a car manufacturer in country Y, appoints B its sole distributor of automobiles for country X. The contract takes effect on January 1, 1946, and runs for one year. It provides that A, though not obliged to do so, may give B a one month notice if A does not wish to renew the contract. On this condition one year contracts are issued by A and signed by B during the following years. A does not wish to renew the contract for 1999 and so informs B on November 30, 1998. Considering that a contractual relationship between the parties has lasted for 51 years, B, despite the provision on notice in the contract, is entitled to damages because in the circumstances the notice is too short. C. Inconsistent behaviour

A particular application of the principle of good faith and fair dealing is to prevent a party, on whose statement or conduct the other party has reasonably acted in reliance, from adopting an inconsistent position. This translates directly into a number of provisions of the Principles, e.g. Article 2:202(3), which provides that a revocation of an offer is ineffective if it was reasonable for the offeree to rely on the offer as being irrevocable, and the offeree has acted in reliance of the offer, and Articles 2:105(3) and 2:106(2), under which a party by its statement or conduct may be precluded [page 114] from asserting a merger clause or a no-oral-modification clause to the extent that the other party has reasonably relied on them. See also Article 3:201(3), which lays down that an apparent authority of an agent that has been established by a principal’s statements or conduct will bind the principal to the acts of the agent, and compare Article 5:101(3), which provides that if a common intention of the parties as to the interpretation of a contract cannot be established, the contract is to be understood according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

The rule is, however, broader than any of these specific provisions. It is a general principle that a person should not be allowed to set up the invalidity of an act or another reason for its not being binding upon him when he has induced another person to alter his position on the faith of the act.

Illustration 4: An importer asked its bank to collect on a negotiable instrument. The bank mistakenly reported to the customer that the money had been paid and paid the customer its value. When it was discovered that the amount had not been paid, the importer had irrevocably credited the amount to its foreign business partner. The bank is estopped from reclaiming the payment. D. Mutual consideration

Article 1:201 imposes upon each party a duty to observe reasonable standards of fair dealing and to show due regard for the interests of the other party. This applies, inter alia, to their handling of contingencies which were not contemplated in their agreement or in the rules of law governing the contract.

Illustration 5: Constructor C, whose employees have fallen ill in great numbers, has asked Owner O for the time agreed for C's completion of O's liquor store to be extended by one month. O has refused to grant the extension. After that a licence to sell liquor which O expected to get as a routine matter is held up due to a long lasting strike among civil servants which means that O will not be able to use the building until three months after the agreed completion time. Good faith requires that O notify C that it will not need to have the building completed on time. See also Article 1:202. Good faith and fair dealing is required of the party which is to perform its obligations under a contract and of a party which wishes to have the contract enforced when the other party has failed to perform. Good faith and fair dealing require, for instance, the aggrieved party to limit as far as possible the loss which it will suffer as a result of a breach by the other party, thereby reducing the amount of damages, see Article 9:505.

E. Good faith and fair dealing distinguished

"Good faith" means honesty and fairness in mind, which are subjective concepts. A person should, for instance, not be entitled to exercise a remedy if doing so is of no benefit to him and his only purpose is to harm the other party. "Fair dealing" means [page 115] observance of fairness in fact which is an objective test, see as an example illustration 3. In the French language both these concepts are covered by the expression "bonne foi" and in German by "Treu und Glauben".

The notion of good faith (bonne foi) as set out in Article 1:201 is different from the "good faith" of a purchaser who acquires goods or documents of title without notice of third-party claims in the goods or documents. Article 1:201 does not deal with bona fide acquisitions. The notion of good faith in this Article is also different from that used in Article 3:201(3) under which a principal is treated as having granted authority to an agent when its conduct induces the third party in good faith to believe that the agent has authority.

F. Good faith presumed

Good faith is to be presumed. The party which alleges that the other party has failed to observe good faith and fair dealing has to prove it.

G. Limitations of Article 1:201

Sometimes there is a conflict between a legal rule and justice. The law or an otherwise valid contract term may under the circumstances lead to a manifestly unjust result. Whether in such cases the court should let justice prevail will depend, inter alia, upon to what extent certainty and predictability in contractual relationships would suffer by letting justice get the upper hand.

H. Article 1:201 is mandatory

Paragraph (2) provides that the parties cannot by their agreement exclude the duty of good faith and fair dealing as provided in paragraph (1). Nor can they vary its effects.

What is good faith will, however, to some extent depend upon what was agreed upon by the parties in their contract. Thus, parties may agree that even a technical breach may entitle the aggrieved party to refuse performance, when, for instance, its agents can ascertain a technical breach but not whether it is a trifle or not.

However, a party should not have a right to take advantage of a term in the contract or of one of these Principles in a way that, given the circumstances, would be unacceptable according to the standards of good faith and fair dealing. Contract language which gives a party such a right should not be enforced.

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

1. Survey of the laws

The principle of good faith and fair dealing is recognised, or at least appears to be acted on as a guideline for contractual behaviour, in all Member States. There is, however, a considerable difference between the legal systems as to how extensive and how powerful the penetration of the principle has been. At the one end of the spectrum figures a system where the principle has revolutionized the contract law (and other parts of the law as well) and added a special feature to the style of that system (GERMANY). At the other end we find systems which do not recognize a general obligation of the parties to conform to good faith, but which in many cases by specific rules reach the results which the other systems have reached by the principle of good faith (ENGLAND and IRELAND).[page 116]

The other systems in the European Union range between these two opposites. They recognize a principle of good faith and fair dealing as a general provision, but have not given it the same degree of penetration into their law of contract as has German law.

2. Germany

(a) In general

In GERMANY § 242 BGB has been used to make possible what has been called a "moralization" of contractual relationships. § 242 states in general terms that everyone must perform his contract in the manner required by good faith and fair dealing (Treu und Glauben) taking into consideration the general practice in commerce.

The provision has been used to qualify a rigorous individualism of the original contract law of the BGB. It has operated as a "superprovision" which may modify the effect of other statutory provisions. Based on BGB § 242, German courts have developed new institutions (see (b) below), and have created a number of obligations to ensure a loyal performance of a contract such as a duty of the parties to co-operate, to protect each others' interests, to give information and to submit accounts.

There is, however, one important limit to the operation of the good faith principle. It does not permit the courts to establish a general principle of fairness and equity. A court may not replace the effects of a contract or of a statutory provision by an outcome which it believes to be more fair and equitable (see Staudinger § 242 no. 4).

(b) The institutions

Among the institutions created by the courts relying on the good faith principle the following should be mentioned:

     - a change of circumstances (Wegfall der Geschäftsgrundlage) which makes the performance of the contract extremely onerous for one party may lead to the modification or termination of his contractual obligation. See also Article 6:111 of these Principles;

     - a party's right may be limited or lost if enforcing it would amount to an abuse of right. Abuse of right is found in the following typical cases: (1) A party cannot acquire a right through dishonest behaviour (exceptio doli specialis); this rule bears some resemblance with the concept of "unclean hands" in English equity (see Palandt (-Heinrichs) § 242 no. 4 B.a.). (2) A party will lose a right by breach of his own duty (Verwirkung - equitable estoppel). (3) A party cannot claim a performance which he will soon have to give back to the debtor (dolo facit, qui petit, quid statim redditurus est). (4) A party may not pursue an interest which is not worth protecting. (5) A party may not rely on a behaviour which is inconsistent with his earlier conduct (venire contra factum proprium);

     - ending of contractual obligations which extend over a period of time. These obligations may be ended for compelling reasons (wichtiger Grund) even though this is not supported by a statutory or contractual provision. The right to end these obligations may be limited by the contract, but it may not be completely excluded (BGH 4 April 1973, BB 1973, 819). See also Article 6:109 of these Principles.

3. England and Ireland

As was mentioned above, note 1, the common law of ENGLAND and IRELAND does not recognize any general obligation to conform to good faith and fair dealing. However, many of the results which in other legal systems are achieved by requiring good faith have been reached in English and Irish law by more specific rules: see the judgment of Bingham L.J. in Interfoto Picture Library Ltd. v. Stilletto Visual Programmes Ltd. [1989] Q.B. 433 (C.A.); but contrast Walford v. Miles [1992] 2 A.C. 208 (H.L.). For example, the courts have on occasion limited the right of a party who is the victim of a slight breach of contract to terminate the contract on that ground when the real motive appears to be to escape a bad bargain: see Hoenig v. Isaacs [1952] 2 All E.R. 176 (C.A.), and Hong Kong Fir Shipping Co Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B. 26 (C.A.). Conversely, the victim of a wrongful repudiation is not permitted to ignore the repudiation, complete his own performance and claim the contract price from the repudiating party, unless the victim has a legitimate interest in doing so: see Attica Sea Carriers Corp. v. Ferrostaal Poseidon Bulk Reederei Gmbh [1976] 1 Lloyd’s Rep. 250 (C.A.). There are many examples of the courts interpreting the terms of a contract in such a way as to prevent one party using a clause in circumstances in which it was probably not intended to apply. The clearest examples of this occur in relation to clauses excluding or limiting liability (Treitel, Contract 201-222 and Coote [1970] Cambridge LJ 221) but other terms have been construed similarly: see for example Carr v. JA Berriman Pty Ltd. (1953) 27 A.L.J.R. 273 (High Court of Australia), where it was held that an architect under a construction contract could not exercise a power to order work to be omitted simply in order to give the same work to another contractor who was prepared to do it for less. Thus to some extent Article 1:201 merely articulates trends [page 117] already present in English law. But the English approach based on construction of the agreement is a weak one as it cannot prevail against clear contrary provisions in the agreement (see Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827 (H.L.), clauses excluding or limiting liability) or even clear implication from the circumstances (Bunge Corporation v. Tradax SA [1981] 1 W.L.R. 711 (H.L.): right to terminate for breach which might not have any serious consequences). Thus Article 1:201 represents an advance on English and Irish law.

3. The other EU systems

(a) Sources

Provisions laying down a principle of good faith in the performance of the contract are found in BELGIUM, FRANCE and LUXEMBOURG, see CC arts. 1134(3); GREECE: CC art. 288; ITALY: CC art. 1375, and see also art. 1175; THE NETHERLANDS: BW arts. 6:2 and 248; PORTUGAL: CC art. 762(2); and SPAIN: CC arts. 7 and 1258 and Commercial Code art. 57.

In the NORDIC countries the principle is recognized by the courts and the legal writers. Although it has not been expressed in the statutes in the same general terms as it has in the countries mentioned above, several statutory provisions presuppose its existence, see for instance Contract Acts § 33 (on validity) and § 36 (see also Ussing, Alm. Del. 23; Telaranta 344; Ramberg, Avtalsrätt 239). In AUSTRIA the good faith principle is a generally acknowledged ethical rule (cf. OGH 29 April 1965, SZ 38/72), which is derived from the Imperial Decree of 1 June 1811, introducing the General Civil Code, where “the general principles of justice” are recognized as basis of civil law (cf. OGH 7 October 1974, SZ 47/104) and expressly mentioned as “fair dealing” in the Code: see ABGB §§ 863, 914. Therefrom it is clear that performance of contractual obligations are subject to “good faith” see Mayrhofer, 20). However, the “good faith requirement” is not as extensively construed as “Treu und Glauben” in BGB § 242.

As has recently been recognised by the House of Lords in Smith v. Bank of Scotland 1997 S.L.T. 1061, there is also an underlying principle of good faith in the SCOTTISH law of contract although it is difficult to find a clear and comprehensive statement of it in modern law. Many particular examples of reference to bona fides can be found apart from the class of contracts uberrimae fidei (see Scottish Law Commission, Defective Consent para. 3.68).

(b) Degree of penetration

It is not easy to measure and compare how deeply into the contract law the good faith principle has been integrated in the various legal systems.

The DUTCH BW art. 6:2 uses strong language. Good faith will not only supplement obligations arising from contract but may also modify and extinguish them. Under art. 6:2(2) a rule which binds the parties by virtue of law, usage or legal act does not apply to the extent that under the circumstances this would be unacceptable under the standards of reasonableness and equity, see also art. 6:248 (see Hartkamp, Civil Code XXI). In some ways the BW goes further than German law: under exceptional circumstances arts. 6:2 and 6:248(2) allow the court to replace the effects of a contract or of a statutory provision by an outcome which it believes to be more fair and equitable.

Extensive application of the good faith principle is also found in PORTUGUESE and GREEK law. In Portugal the principle is expressed not only generally in the CC art. 762(2), but also in special provisions such as art. 227 on culpa in contrahendo, art. 239 on omitted terms, art. 334 on abuse of rights and art. 437 on change of circumstances. In Greece the courts have given the principle as laid down in CC arts. 200, 281, 288 and 388 a broad application, see Full Bench of AP 927/1982, NoB 31 (1983) 214 and AP 1537/1991, Hell, Dni 34 (1993) 318 on the courts' power to change the terms of the contract, and AP 433/1953, NoB 1 (1953) 747-748, note Sakketas, on adaptation of money obligations.

Several provisions of the ITALIAN CC refer to good faith and fair dealing, see on good faith arts. 1337 (negotiation of contracts), 1366 (interpretation) and 1375 (performance). Art. 1175 dealing with obligations in general provides that the debtor and creditor shall behave in accordance with the rules of fair dealing (correttezza). The writers point out that good faith and fair dealing are objective concepts which refer to the behaviour of the honest businessman (Betti 65 ff.). They operate as a limitation on a party's exercise of his rights and protect the other party's interests in matters other than the main performance: Castronovo, Protezione passim.

Arts. 1134 of the FRENCH, BELGIAN and LUXEMBOURG CC provide that contracts must be performed in good faith, and the principle has been extended to the formation and the interpretation of contracts. The French courts have not given the rule the same importance as have the courts of Germany and other countries mentioned above in the determination of the parties' obligations. However, similar results have often been obtained without reference to [page 118] good faith, for instance by using the well-established theory of abuse of rights (see Malaurie & Aynès, Obligations 50 ff.) and apparence. In the last two decades the courts have frequently and openly used the good faith principle in the determination of the parties' obligations. The writers invoke the principle in order to impose upon the parties a duty of mutual loyalty, of information and co-operation and to restrict the operation of clauses exempting a party from liability for breach of contract, etc., see Malaurie & Aynès, Obligations no. 622; Marty & Raynaud, Obligations I no. 246; and Cass. com. 22 October 1996, D. 1997 121 (SA Banchereaus v. Sté Chronopost). In BELGIUM the courts have used good faith extensively to supplement contractual obligations but have used it to limit obligations only in cases of disproportion and abuse of rights (e.g. Cass. 17 Sept. 1983, R.W. 1983-84, 1482, R.C.J.B. 1986, 282). The principle is also applied to contract formation (Cass. 7 February 1994, JTT (1994) 208, RW (1994-95) 121). Some of the German ideas described earlier have been accepted. See van Ommeslaghe, TBBR/RGDC 1987, 101; Fagnart, R.C.J.B. 1986, 285; Dirix TBH/RDC 1988, 660; M.E.Storme, Invloed; van Gerven & Dewaele 103. The same is true of SPANISH law. Art 7 of the CC imposes a duty to act in good faith when exercising one’s rights. Futhermore, as the FRENCH, BELGIAN and LUXEMBOURG CCs art. 1135, art. 1258 of the SPANISH CC provides that once a contract has come into existence the obligations of the contract extends not only to what is expressly stipulated but also to everything that by the nature of things, good faith, usage and law is considered as incidental to the particular contract or necessary to carry it into effect. The Spanish Commercial Code art. 57 requires the parties to execute commercial contracts in accordance with the standards of good faith (see Lacruz (-Rams), II, 11, § 69, 534).

4. Mandatory

In GERMANY and in the systems mentioned in note 4 above the good faith rule is mandatory.

Illustration 4 is based on Deutsche Bank v. Beriro (1895) 73 I.T 669, cited in Zweigert & Kötz 586.[page 119]

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COMMENT AND NOTES: PECL Article 1:202: Duty to Co-operate

Each party owes to the other a duty to co-operate in order to give full effect to the contract.

Comment

A. The duty to co-operate

Each party has a duty to co-operate with the other to secure full performance of the contract. This includes a duty to allow the other party to perform its obligations and thereby earn the fruits of performance stipulated in the contract.

Illustration 1: S in Hamburg agrees to sell goods to B in London at a stated price f.o.b. Hamburg. B fails to nominate a vessel to carry the goods. Such failure constitutes non-performance of B's obligations under the sales contract and also infringes this Article by preventing S from performing its own obligation to ship the goods and thereby earn the contract price. S is excused from performance under Article 8:101(3) and can terminate the contract and recover damages.

Illustration 2: B contracts to erect an office building for O. As the result of O's failure to apply for a building licence, which would have been granted, B is unable to proceed with the building works. O thereby infringes the requirements of this Article, whether or not its contract with B imposed on it an express obligation [page 119] to apply for the licence. O has no remedy against B for failing to build and is itself liable to B for breach of contract.

A party has to inform the other party if the other party in performing the contract may not know that there is a risk of harm to persons or property. Illustration 3: Subcontractor S of country A is about to send some of its staff to perform its duty to Contractor C, also from A, to assist in building a dam in country Y. C learns that the government of Y intends to detain any citizens from A who are found in Y as hostages, in order to exert pressure on the government of A to release some of Y's citizens who have been detained in A charged with terrorism. C has a duty to inform S of the risks involved in sending its staff to Y. B. Non-performance of a collateral duty

Obstruction of performance may result either from non-performance of a correlative obligation imposed on a party by the contract or from some other act which, though not in itself constituting a failure to perform, has the effect of preventing or inhibiting performance by the other party. For example a party's failure to accept a tender of performance constitutes a breach of the duty to co-operate where the other party has an interest in having such tender accepted.

Illustration 4: S contracts to sell goods to B and tenders delivery in conformity with the contract. B refuses to accept delivery. This constitutes non-performance by B, whether or not it has paid for the goods, for S is entitled to have them taken off its hands by B, thereby avoiding the expense and inconvenience of disposing of them elsewhere. Under these Principles failure to co-operate is a breach of a contractual duty, see Article 1:301(4), and attracts the various remedies prescribed for non-performance of contract. The debtor also enjoys the rights and immunities conferred by Articles 7:110 and 7:111.

C. Duty to co-operate limited to acts in the performance of which the other party has an interest

The duty to co-operate is imposed only for the purpose of giving full effect to the contract. Accordingly a party does not infringe the duty to co-operate by failing to perform an act which it has not undertaken to perform and is of no interest to the other party, for example, a failure to accept a tender of performance by the other party where that failure is of no consequence to it.

Illustration 5: B buys a theatre ticket from the S Theatre and pays for it in advance by credit card. He does not collect the ticket or attend the performance. This does not constitute a failure to co-operate or any other non-performance of the contract, for S Theatre, having been paid for the ticket, has no interest in its collection.[page 120] D. Right to withhold co-operation

By Article 9:201(1) a party may refuse to co-operate where its co-operation is dependent on an unfulfilled obligation by the other party, or in cases within Article 9:201(2) (anticipated non-performance by the other party).

Illustration 6: The facts are as in Illustration 1 except that S is given the right to ship the goods at any time during July or August. B is under no duty to nominate a vessel until it has received notification from S of the time at which S intends to ship the goods. Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Civil law countries

In the CIVIL LAW systems the duty to co-operate is derived from the principle of good faith and fair dealing, see Article 1:201.

Thus under the GERMAN BGB § 242 the debtor and the creditor have a duty to co-operate in the performance of the contract. For instance, they must both help to obtain a permission from a third party or a government authority, where this is required (see Palandt (-Heinrichs) § 242 no. 3 B b). The duty to co-operate may also oblige a party to support the other party to a contract when a third party may threaten his rights, but § 242 BGB does probably not entail a duty to safeguard the other party's interests in general, see Staudinger (- J Schmidt) § 242, no. 754 with references. Under AUSTRIAN law, it follows from the requirement of fair dealing (ABGB § 1914) that the partners to a contract are subject to a collateral contractual duty to take the necessary efforts to make sure that the contract is correctly performed.

A similar duty to assist the other party in the performance of the contract, and derived from the good faith principle, is to be found in GREECE, AP 179/1956, NoB 4 (1956) 707, see Tsirintanis II/1 art. 288 no. 6 (1949); ITALY, CC art. 1175, (see Breccia 413, with references) and Bianca, Il contratto 471- 493; THE NETHERLANDS, BW arts. 6:2, 6:248, see also 6:58 on mora creditoris; PORTUGAL, Varela II 13, Costa, Obrigações 872, see also CC arts. 762(2) and 813; and SPAIN, Diez-Picazo I 733; Lacruz(-Rams), II, 1 Obligaciones, §69, no. 320, 534).

In FRANCE the duty to co-operate has recently been accepted as flowing from the principle of good faith. The courts have applied it to contracts for the supply of sophisticated products such as computer software, see Picod JCP 1988 I 3318. In BELGIUM also good faith has been used as the basis for a duty to co-operate: see references in note to Article 1:201 above, para. 4(b).

NORDIC statutes do not provide a general duty to co-operate in the performance of the contract, but this duty pervades the provisions of the Sale of Goods Acts (DENMARK, 1906; FINLAND and SWEDEN 1987-1990) which in many respects are considered to provide general principles of contract law. See also the emphasis on the duty to co-operate in authors such as Taxell, Avtalsrättens normer II and Wilhelmsson, Perspectives 21.

2. The United Kingdom

ENGLISH law will impose an implied duty to co-operate where this is necessary in order to give business efficacy to the agreement: see The Moorcock (1889) 14 P.D. 64 (C.A.). Beyond this the attitude of the English courts has not been very consistent. See Burrows (1968) 31 Modern L.R. 390. The strongest recognition has perhaps been in relation to contracts of employment: see Secretary of State for Employment v. ASLEF (No. 2) [1972] 2 Q.B. 455 (C.A.).

In SCOTS law a duty to co-operate may be found in the implied terms of the contract, see Mackay v. Dick & Stevenson (1881) 6 App. Cas. 251 (H.L.), per Lord Blackburn.[page 121]

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