Discharge by Performance and its Surrogates

From Max-EuP 2012

by Yeşim M Atamer

1. Concept and prerequisites

Performance is the typical and intended way of ending an obligation. With the complete satisfaction of the creditor through performance on the part of the debtor, all primary and accessory obligations are extinguished. The duty is fulfilled (solutio). Until today, it remains a matter of contention in German and French literature whether the mere factual fulfilment of the acts required for performance is sufficient to extinguish the obligation or whether some further subjective factor need be present, eg the agreement of the parties regarding performance or at least the intention of the debtor to perform. The codifications have abstained from ruling on this point. Similarly, international instruments like the Principles of European Contract Law (PECL), Draft Common Frame of Reference (DCFR) and UNIDROIT Principles of International Commercial Contracts (PICC) leave this question open which, in any event, only has little significance in practice.

The objective element of performance is an act or omission corresponding to the content and scope of the obligation (performance and its modalities). The specific content of the duty is determined primarily according to express and implicit agreement by the parties and secondarily according to dispositive law.

Any deviation from the content of the obligation, insofar as it is not negligible, results in non-performance and gives the creditor access to legal remedies. The debtor is not justified in unilaterally changing the content of the duty, eg by attempting to liberate himself from a duty to perform through payment of damages (cf England specific performance). But European legal systems allow for a few other ways to satisfy the creditor’s interest in performance through equivalent means (surrogates). Generally acknowledged surrogates are deposit and set-off. With respect to monetary debts, the question arises whether the issuance of a cheque, transfer to a bank account, or some other form of payment can be a replacement for cash payment and whether therefore the debtor has the right to make use of such alternatives. In many European legal systems, this question is answered in the negative. Cash payment is the rule (eg Germany, England, France, Portugal, Switzerland and Spain) and any other payment modality must emanate from an agreement between the parties. Nevertheless, the PECL, DCFR and the UNIDROIT PICC take another approach: payment can be made by any method used in the ordinary course of business. Thus, the debtor is free to pay in any customary form other than cash. The creditor is then bound to accept the surrogate form of payment.

The legal obligation becomes extinct with the satisfaction of the creditor’s interest in performance. The DCFR speaks in this context of full performance (Art III.-2:114). Thus, in a case in which there is a time gap between the last act required for performance on the part of the debtor and the satisfaction of the creditor, fulfilment of the promise and extinction occur only at the latter moment. If, for example, a sales contract involves carriage of the goods and the seller is only under an obligation to dispatch the goods, he will have performed when handing over the goods to an independent carrier, but the obligation will become extinct at the moment the goods reach the creditor. Therefore, a distinction must be made between the timeliness of performance (performance and its modalities) and the moment of discharge. Whether the debtor has performed in a timely fashion is ascertained by reference to whether he has rendered the required performance at the right place and the right time. That the result and therefore discharge by performance occurs only at a later point in time is not of importance. For monetary debts for instance, the PECL and the DCFR determine the place of performance (performance and its modalities) as the place where the creditor is resident at the time of conclusion of the contract. The debtor has performed in time if, instead of making cash payment, he issues a cheque and this arrives within the allotted time for performance with the creditor. But the obligation is not extinguished until the cheque has been cashed at a later point. In the case of a payment through credit transfer, the time when performance occurs and when the obligation becomes extinct is contentious in many legal systems and is not settled in the PECL or the DCFR either. Directive 2007/64 on payment services in the internal market (bank transfers (cross-border)) adds no clarity. In contrast, the UNIDROIT PICC determine for the case of payment by fund transfer that the obligation of the debtor is discharged when the transfer to the creditor’s financial institution becomes effective (Art 6.1.8 (2)).

The person performing can in principle be someone other than the debtor, insofar as the duty is not a personal one (see performance and its modalities). If, exceptionally, the creditor brings about the performance himself, this does not count as discharge by performance.

2. Systematic classification

The obligation becomes extinct as a result of full satisfaction of the creditor through a performance on the part of the debtor that conforms to the agreement of the parties and the law. In this respect, the term performance is ambiguous: it can refer both to the acts required for performance and to the legal consequences of these acts. Therefore, in German legal terminology, a distinction is made between the concept of Leistung/Leistungshandlung, which deals with the acts required for performance and with the modalities of performance (what, when, where and by whom the act must be performed; performance and its modalities) and Erfüllung, which pertains to the consequences or effects of these performance oriented acts.

A comparable conceptual distinction can only rarely be found in other European legal systems. The structure of the German Civil Code—where performance and its modalities, on the one hand, and the effect of such performance, on the other hand, are dealt with in different titles of the code—has not found many followers (but cf Greece). It is more common to consider the requirements regarding the correct content of performance and the effects of such a performance on the obligation together in one section under the umbrella term of ‘performance’. That section on performance can then either be found together with the other reasons for extinction of an obligation (France, Portugal, Spain), or it is placed before the consequences of non-performance (Italy, the Netherlands, Poland, Switzerland). In English law, it is difficult to find an equivalent for the German terms of Leistung and Erfüllung; they are generally paraphrased by using the term of performance. Presenting performance and discharge together, along with some aspects of performance modalities (such as time and place of performance) is very common for English textbooks.

The UNIDROIT PICC and the PECL also prefer to examine all questions that arise in relation to satisfaction through performance in the section ‘performance’ (ch 6 section 1 UNIDROIT PICC; ch 7 PECL) followed by the detailed provisions on non-performance. In the English versions, it catches the eye that, throughout, only the term performance is used, which in the German versions appears sometimes as Erfüllung, and sometimes as Leistung. A separate section on extinction of obligations is not contained in either set of rules. The only reason other than performance provided in the UNIDROIT PICC and PECL for the extinction of an obligation is set-off.

The DCFR, too, follows the scheme set out in the PECL: Book 3 ch 2 deals with performance, ch 3 with non-performance and remedies for non-performance. But unlike its forerunners, it includes at the end of the chapter on performance an additional article according to which performance corresponding to the contractual or statutory provisions extinguishes the obligation. Thus, in the DCFR, the preconditions and the effects of performance are seen in a holistic manner. Another improvement compared to PECL and UNIDROIT PICC is the introduction of merger as a new ground for the extinction of the obligation apart from set-off.

Although the European and international soft law instruments consider satisfaction through performance, its preconditions and its effects as a whole, a separation of the themes is undertaken, in line with the German approach, in the present work. All questions which pertain to the acts required for performance are found under the heading performance and its modalities, whereas questions that are concerned with the extinguishing effect of performance are dealt with here. The following explanations are based on the provisions of PECL and DCFR, which very largely correspond to each other.

3. Provisions relevant to discharge by performance in the PECL and DCFR

a) Imputation of performance

Whenever a creditor has several independent claims of the same nature against the same debtor, and the performance rendered is inadequate to satisfy all claims, an order of imputation must be determined. Such a provision appears in many European civil codes and is also found in PECL and DCFR (Art 7:109 PECL, Art III.-2:110 DCFR). Both sets of rules privilege the debtor, so that he may decide first about the imputation without having to consider the interests of the creditor (as also Germany, England, France, the Netherlands and Roman law). The free choice of the debtor is only limited in respect of the imputation concerning primary and accessory obligations: payment of a sum which is not sufficient to cover the principal and the accessory debts together first discharges expenses, then interest due, and ultimately the principal sum.

The debtor has to specify at the time of performance (at the latest) his intention regarding the imputation of his payment. There is no required form; the declaration can be express or implied and is, as in most European legal systems, unilateral (but cf Austria). Absent a declaration on the part of the debtor, the right to determine the imputation shifts to the creditor, who must make his decision known within a reasonable time. Some European countries share this approach but demand that the imputation must be recorded on a receipt made out by the creditor (eg France, Italy and Switzerland). Other countries prefer to provide directly for a statutory order of imputation in the event the debtor does not make use of his right (eg Germany and the Netherlands). In any case, under the PECL and the DCFR an imputation on the part of the creditor is not effective if it relates to an obligation which is not yet due, is illegal or is disputed.

In case both parties fail to make use of their right to determine the order of imputation, statutory rules of imputation come into play. The order established by the PECL and the DCFR is the same: performance is imputed first to the obligation which is due, or will first fall due, then to that with the least security, thereafter to that which is most burdensome for the debtor, and lastly to that which has arisen first. If none of these criteria are applicable, performance is imputed proportionally to all obligations. Many European legal systems share this imputation order insofar as appropriation must first be made to the obligation which is due and as pro rata imputation is the last resort rule. But the steps in between often vary.

b) Deposit and self-help sale

PECL and DCFR, like many European legal systems (eg Germany, France, Switzerland and the Netherlands) contain provisions for cases in which the creditor refuses to accept tangible property or money and thereby impedes the rendering of performance. Both sets of rules give the debtor the right to discharge his obligation independent of the creditor (Art 7:110/111 PECL; Art III.-2:111/112 DCFR) based on the concept of protection of the debtor. But also third parties who want to perform on behalf of the debtor enjoy such rights if they have an interest in performance (performance and its modalities), where either the debtor has not performed, or it is clear that he will not perform in time. A prerequisite for the debtor or a third person to make use of the right of deposit or self-help sale is the refusal on the part of the creditor to accept performance. Uncertainty as to the identity of the creditor or other grounds present in the person of the creditor which impede the performance of the debtor are not mentioned as grounds for discharge by depositing the property or the money (but cf Switzerland).

If the performance that has been offered is refused, the debtor can deposit the property on reasonable terms with a third person or sell it on reasonable terms and pay the net proceeds to the creditor. In case of depositing property, a subsequent notification of the creditor about the details will suffice. Concerning self-help sale, however, the other party first has to be warned so that he can act upon it and accept the property. In case the property is liable to rapid deterioration or its preservation is unreasonably expensive, the debtor must take reasonable steps to dispose of it. In such case he may discharge his obligation to deliver by paying the net proceeds to the other party. In all of these variants, the debtor is entitled to be reimbursed or to retain out of the proceeds of sale any expenses reasonably incurred. Proper depositing of the property or the proceeds will discharge the debtor from his duty to perform.

When comparing these provisions with their equivalents in other European legal systems, it is conspicuous that they prefer a less formal approach. First of all they avoid introducing any concept such as ‘default by the creditor’ (mora creditoris), as it prevails, for example, in Germany, Italy, the Netherlands and Switzerland. Secondly, in regard to self-help sale, they leave out the requirement for a judicial authorization which is demanded in some countries (eg Italy and Switzerland). No special form has to be observed when notifying the creditor; nor are details in respect of the place of deposit prescribed. Only regarding monetary debts is it set out that the money must be deposited for the benefit of the creditor in accordance with the law of the place where payment is due.

c) Costs of performance

According to Art 7:112 PECL and Art III.-2:113 DCFR, each party must bear the costs of its own performance.

d) Questions left open

Some problems, which are regulated in connection with performance in European codifications find no equivalent in the PECL or the DCFR. An example is the effect of performance on the obligation vis-à-vis a third party. Such performance discharges the debtor in principle only when the third party is empowered to receive such performance either by law or by the creditor. But there are various exceptions in European legal systems such as, for instance, the rule that the debtor is discharged whenever the creditor ‘profits’ from the performance of the obligation vis-à-vis the third party (eg France, Greece, Italy, the Netherlands, Poland and Spain) or where the debtor was acting in good faith when assuming that the third party was authorized to receive performance (France, Italy, the Netherlands and Spain). In these circumstances, performance vis-à-vis a third party can have the effect of discharging the obligation. In the soft law instruments, we only find a special provision in respect of assignment where good faith of the debtor is protected. According to Art III.-5:119 DCFR and Art 11:303–304 PECL, the debtor will be discharged if it could not reasonably be expected of him to recognize that the third person is no longer entitled to receive performance.

Neither PECL nor DCFR contain a rule pertaining to performance by way of datio in solutum, that is, the extinguishing effect of giving and accepting something other than the original obligation (express provisions eg in Germany, France, Greece, Italy, Austria and Poland). It is obvious that the parties can by agreement always vary the duty to perform and can thereby extinguish the principal duty. Whether such an agreement exists must be ascertained by determining the intention of the parties (interpretation of contracts). But assuming a new obligation vis-à-vis the creditor is generally not interpreted as altering or ending the existing obligation. Although a general provision in that regard is missing in the PECL and DCFR, a presumption for the most important cases of application is to be found: If the creditor accepts a cheque or other order to pay, or a promise to pay, he 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 (Art 7:107 PECL, Art III.-2:108 DCFR).

As yet unregulated is also the question whether the debtor is entitled to ask for a receipt and the return of any certificate of indebtedness. Comparable regulations can be found in Germany, France, Greece, Italy, the Netherlands, Austria, Poland, Spain and Switzerland.

Literature

Joachim Gernhuber, Die Erfüllung und ihre Surrogate (2nd edn, 1994); Wolfgang Ernst, ‘Die Verpflichtung zur Leistung in den Principles of European Contract Law und in den Principles of International Commercial Contracts’ in Jürgen Basedow (ed), Europäische Vertragsrechtsvereinheitlichung und deutsches Recht (2000) 129; JGJ Rinkes, ch 7: ‘Performance’ in Danny Bush, Ewoud H Hondius, Hugo J van Kooten, Harriët N Schelhaas and Wendy M Schrama (eds), The Principles of European Contract Law and Dutch Law (2002) 291; Rudolf Reischauer, paras 1412–16 in Peter Rummel, Kommentar zum Allgemeinen bürgerlichen Gesetzbuch, vol 2 (3rd edn, 2002); Valentina M Donini, ‘Performance’ (Art 7:106–112), in Luisa Antoniolli and Anna Veneziano (eds), Principles of European Contract Law and Italian Law (2005) 332; Tilman Repgen, ‘§§ 362–71. Erfüllung’ and ‘§§ 372–86. Hinterlegung’ in Mathias Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-kritischer Kommentar zum BGB, vol II/2 (2007); Dirk Olzen, ‘Das Erlöschen der Schuldverhältnisse’ in von Staudingers Kommentar zum Bürgerlichen Gesetzbuch (2008) 240; François Terré, Philippe Simler and Yves Lequette, Les obligations, vol 2 (10th edn, 2009) ch 2; Ingeborg Schwenzer, Schweizerisches Obligationenrecht, Allgemeiner Teil (5th edn, 2009) paras 73–6; Edwin Peel, Treitel on the Law of Contract (13th edn, 2011) ch 17.

Retrieved from Discharge by Performance and its Surrogates – Max-EuP 2012 on 02 October 2022.

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