Non-Performance

From Max-EuP 2012

by Florian Faust

1. Subject matter and purpose

a) Basic principles

In principle, legal systems may follow three different approaches to the non-performance of an obligation: they may tie remedies to the non-performance itself, they may tie remedies to a breach of duty, or they may refrain from a general rule (and therefore from a general term as well) and instead define different types of breach (such as delay or impossibility) and assign specific remedies to each of them.

The first approach, which ties remedies to non-performance, looks at breaches from the perspective of the result owed, ie from the creditor’s point of view: a breach is committed if the result is not achieved. The nature of the breach is irrelevant. The term ‘non-performance’ covers not only a complete failure to perform, but also delayed performance and defective performance. The reason why the result is not realized is also irrelevant—at least initially. Hence, non-performance is characterized by the fact that the creditor does not receive what he is entitled to, regardless of whether the debtor is unwilling to perform or incapable of performance, and whether he acted correctly or not.

In contrast, the second approach, which ties remedies to a breach of duty, looks at breaches from the perspective of the conduct required of the debtor: a breach is committed if the debtor does not act as he should. The crucial point is not whether the result owed is achieved, but rather how the debtor has acted.

The first approach is not limited to obligations under which the debtor has to assure a certain outcome, such as the acquisition of ownership or possession by the creditor (obligations de résultat). The result, the non-occurrence of which constitutes non-performance, may also consist in the proper execution of an act, such as the administration of a medical therapy. Therefore, the concept of non-performance serves its function also in case of obligations to perform certain acts (obligations de moyen) and even in case of incidental duties.

Conversely, the approach that ties the remedies to a breach of duty can, in principle, also be followed in case of obligations de résultat: the breach of duty is that the debtor does not bring about the outcome he promised to achieve. However, this approach reaches its limits in cases of impossibility. If it is impossible to achieve the result owed and the debtor therefore need not achieve it, it is somewhat peculiar to claim that he breached his duties by not achieving it. In case of subsequent impossibility the problem can be solved by seeing the breach of duty in the causation of the impossibility rather than in the failure to attain the result; but such a view may affect the burden of proof. In case of initial impossibility, however, this concept fails as the circumstances causing the impossibility occur at a point in time at which no contractual obligations exist.

b) The importance of exemptions

As non-performance takes place irrespective of the reason why the debtor does not perform, the concept of ‘excused non-performance’ is of great importance: it allows taking into account the reasons for non-performance. The exemption typically excludes the claim for specific performance and the claim for damages, but not any remedies that lead to the extinction or to a reduction of the reciprocal obligation. In contrast, under the concept of breach of duty, the behaviour that is expected from the debtor is already taken into consideration in determining the content of his duties. The less one is prepared to typify and the more the examination is focused on the individual debtor in question, the smaller the importance of exemptions becomes, at least with regard to damages. With regard to claims for specific performance, exemptions nevertheless are highly important if one considers (as in Germany) the claim for specific performance not as a remedy for a breach of duty, but as intrinsically related to the contract itself, and thus as not presupposing a breach of duty.

c) Differentiation according to the severity of the breach

For remedies that lead to the contract not being carried out and, if it has already been carried out, to its being unwound (in particular, termination (unwinding of contracts); in Germany also damages in lieu of complete performance), more stringent requirements are often established than for remedies under which the contract is sustained (in particular supplementary performance, price reduction and damages in lieu of the missing or defective part of performance). The reason is that the termination of the obligations may frustrate the—often extensive—expenses incurred by the debtor in order to perform; the unwinding of the contract itself may also be costly. The criterion is the severity of the breach. Such a differentiation is possible under both approaches; the former, which ties remedies to non-performance, as well as the latter, which ties remedies to breach of duty. It would be consistent with the first approach to only ask to what extent the result achieved deviates from what is owed and completely to disregard the debtor’s behaviour. Under the second approach, one should conversely ask how far the debtor’s actual behaviour deviates from the behaviour owed, irrespective of to what extent the creditor receives what he is entitled to. Most legal systems, however, combine elements that refer to the result and elements that refer to the behaviour.

In many legal systems the creditor has the option to terminate the contract even in case of a minor non-performance/breach of duty if the debtor has not performed within an additional period of time that has been granted to him. This is consistent with both a performance-based and a behaviour-based approach: breach in respect of an extended period of time increases both the deviation from what was owed and the severity of the breach of duty.

2. Tendencies in legal development

a) Reform of the German law of obligations in 2002

The German Civil Code of 1900 followed the third of the approaches mentioned above: it did not contain an overall concept for breach. Rather, it distinguished between impossibility, delayed performance and defective performance, to each of which a special set of rules applied; the remaining gaps were filled by the positive Forderungsverletzung (‘positive’ breach of contract), a concept ‘discovered’ by Hermann Staub and developed in detail by the courts.

It was the pivotal concern of the reform of 2002 to reduce this (seemingly) non-transparent diversity by introducing Pflichtverletzung (breach of duty) as a uniform concept (see § 280(1) Bürgerliches Gesetzbuch (BGB)). This was seen as ‘development and generalization of the liability for positive Forderungsverletzung’ (Printed Matters of the German Parliament 14/6040, 92). However, this concept could not be realized in pure form. Because—as explained above—the initial impossibility cannot be covered by the concept of breach of duty, a special provision had to be introduced, which does not require a breach of duty (§ 311a(2) BGB). As to subsequent impossibility, the concept of breach of duty was adhered to. According to the explicit will of the drafters, the breach of duty does not lie in the causation of impossibility, but in the non-performance, although the obligation to performance has been extinguished under § 275 BGB (Printed Matters of the German Parliament 14/6040, 92, 135 f, 142). This would appear to be more consistent with a performance-based than with a behaviour-based approach. The same goes for the fact that the delivery of defective goods is considered a breach of duty, irrespective of whether the seller was able to know of the defect and to cure it.

As to the termination of the contract in case of part performance, German law takes the perspective of the creditor and asks whether he is interested in receiving or keeping the part performance—which is actually more in line with the concept of non-performance. In case of defective performance, in contrast, the test is whether or not the breach of duty is substantial (§§ 281(1)2 and 3, 323(5) BGB).

b) Other legal systems

In contrast to German law, most legal systems do not base these remedies on breach of duty but on non-performance.

Thus, in the French Code civil, non-performance (inexécution) is the central concept (eg Arts 1142, 1144, 1147, 1151 Code civil). The claim for damages is excluded if ‘l’inexécution provient d’une cause étrangère qui ne peut … être imputée [au débiteur], encore qu’il n’y ait aucune mauvaise foi de sa part’ (Art 1147 Code civil) or if the non-performance is due to force majeure or un cas fortuit (Art 1148 Code civil). The concept of substantial non-performance is not used. Unless otherwise agreed upon by the parties, termination of the contract is limited by the fact that it is not effected by a unilateral right of the creditor, but by a decision of the court (Art 1184 Code civil); the judge decides at his discretion whether or not the non-performance is sufficiently serious to justify termination.

The common law has a uniform concept of breach of contract, which means that the result owed is not achieved. The contract is considered as containing implied terms (see ss 12, 14, 51, 53 Sale of Goods Act 1979). If—due to whatever reason—the promised result is not attained, the debtor is liable for damages. Limitations on liability do not arise from the fact that he has used his best efforts but rather from the interpretation of the (implied) terms in question. If the debtor does not promise to achieve a certain result, he only has to use reasonable care and skill (see s 13 Supply of Goods and Services Act 1982). A breach of contract entitles the creditor to treat the contract as repudiated if the stipulation in question is not only an express or implied term, but a condition (see s 11(3) Sale of Goods Act 1979). This depends on whether it is of fundamental importance to the execution of the contract.

3. International uniform law and international model laws

a) CISG

The CISG (sale of goods, international (uniform law)) uses breach of contract (contravention au contrat) as the basis for remedies (Arts 25, 45, 61 CISG). This does not mean the breach of a duty, but rather the non-performance of an obligation (if the seller/buyer fails to perform any of his obligations, si le vendeur/l’acheteur n’a pas exécuté l’une quelconque des obligations). The performance-based approach is in line with the fact that Art 79 CISG establishes an exemption: the debtor is not liable for damages if his failure to perform is due to an impediment beyond his control and he could not reasonably be expected to have taken the impediment into account at the time of concluding the contract or to have avoided or overcome it or its consequences.

Articles 49(1)(a), 51(2), 64(1)(a) CISG allow the creditor to declare the contract avoided only if the debtor’s failure to perform amounts to a fundamental breach of contract within the meaning of Art 25 CISG; the buyer’s claim for delivery of substitute goods is subject to the same restriction (Art 46(2) CISG). A breach of contract is fundamental if the creditor is substantially deprived of what he is entitled to expect under the contract and if the debtor has foreseen or should reasonably have foreseen such a result. Thus Art 25 CISG combines elements related to the non-performance (detriment to the creditor) and elements related to the debtor’s behaviour (foreseeability). If the breach of contract is not fundamental, but the debtor does not perform within an additional period of time fixed by the creditor, the CISG allows avoidance of the contract only if the seller does not deliver (Art 49 (1) (b) CISG), or if the buyer does not pay or take delivery (Art 64(1)(b) CISG); avoidance is not allowed if the seller delivers non-conforming goods.

b) PECL

The Principles of European Contract Law (PECL) tie remedies to non-performance (Arts 8:101 ff PECL). According to Comment A to Art 8:101 PECL, this applies to all contractual obligations; the non-performance may also consist of a defective performance, a performance at the wrong time or the violation of an accessory duty (such as the duty not to disclose the other party’s trade secrets).

If non-performance is excused under Art 8:108 PECL, the creditor may claim neither performance nor damages, but may withhold payment/counter-performance, terminate the contract, or reduce the price; if the debtor is excused as a result of a total and permanent impediment, the contract is terminated automatically (Art 9:303(4) PECL). The requirements for an excuse correspond to those of Art 79(1) CISG.

According to Art 9:301(1) PECL, the creditor may terminate the contract only if the debtor’s non-performance is fundamental. In this respect, Art 8:103 PECL lists three cases: (i) a case identical to Art 25 CISG, (ii) strict compliance with the obligation being of the essence of the contract, and (iii) intentional non-performance which gives the creditor reason to believe that he cannot rely on the debtor’s future performance. Articles 9:301(2), 8:106(3) PECL also allow the debtor to terminate the contract in the case of a non-fundamental delay if an additional period of time of reasonable length, fixed by the creditor, has elapsed. According to Comment C to Art 8:106 PECL, this does not apply to a defective performance; therefore, in this respect the PECL correspond to the CISG.

c) UNIDROIT PICC 2010

The UNIDROIT Principles of International Commercial Contracts (PICC) 2010 also tie remedies to non-performance, which they define as the failure by a party to perform any of its obligations under the contract, including defective performance or late performance (Art 7.1.1 UNIDROIT PICC 2010).

As to the non-performance being excused, the same rules apply as in the PECL: only claims for performance and for damages are excluded, and the grounds for excuse, which are referred to as force majeure in the Article’s heading, correspond to those in Art 79(1) CISG (Art 7.1.7 UNIDROIT PICC 2010).

The requirements for termination of the contract also correspond to those in the PECL and in the CISG: according to Art 7.3.1 UNIDROIT PICC 2010 the right to terminate requires that the non-performance is fundamental or that—in case of delay—an additional period of time has expired (Art 7.1.5(3) UNIDROIT PICC 2010). In contrast to the CISG and the PECL the expiry of an additional period of time does not always entitle the creditor to terminate the contract; instead termination is allowed only where the unperformed obligation is more than a minor part of the debtor’s contractual obligation. Contrary to the CISG and the PECL, ‘fundamental non-performance’ is not defined by describing different kinds of such non-performance. Rather, Art 7.3.1 UNIDROIT PICC 2010 enumerates different factors to which, in particular, regard is to be had in determining whether a failure to perform amounts to fundamental non-performance. They include the foreseeable effects of non-performance on the creditor, found also in the CISG and the PECL, and the question whether strict compliance with the obligation that has not been performed is of essence under the contract, found in the PECL. Furthermore it is to be taken into account whether the non-performance has been intentional or reckless and whether it gives the creditor reason to believe that he cannot rely on the debtor’s future performance; both factors are also relevant under the PECL (which, however, do not mention recklessness in addition to intention), although there they are combined to form one kind of fundamental non-performance. Unlike the CISG and the PECL, the UNIDROIT PICC 2010 also look at the debtor’s interest, as regard is to be had to whether he will suffer disproportionate loss as a result of preparation or performance if the contract is terminated.

d) DCFR

The Draft Common Frame of Reference (DCFR) contains two slightly different definitions of non-performance in Art III.-1:102(3) and in the Annex, which, however, do not differ in substance: non-performance is ‘any failure to perform the obligation, whether or not excused’. It includes delayed performance and (according to the Annex) defective performance or (according to Art III.-1:102(3) DCFR) any other performance that is not in accordance with the terms regulating the obligation. The pre-contractual breach of a duty is not non-performance because the DCFR does not consider such duties as obligations. According to the Annex, ‘duty’ is the broader term; it is not necessarily owed to a specific creditor, is not necessarily an aspect of a legal relationship, and its breach does not always result in a sanction. Therefore, with regard to pre-contractual duties (eg information and confidentiality duties), the DCFR does not refer to non-performance, but to breach (Arts II.-3:109, II.-3:302, II.-3:501 DCFR).

The requirements for non-performance to be excused correspond to those of the PECL and the UNIDROIT PICC 2010 (Art III.-3:104(1) and (2) DCFR). As under the other model laws, in case of excuse only claims for performance and for damages are excluded (Art III.-3:101(2) DCFR). Similarly to the PECL, a permanent excuse leads to the automatic extinction of any reciprocal obligation (Art III.-3:104(4) DCFR).

The requirements for the termination of the contract are also the same as under the other model laws: either the non-performance has to be fundamental (Art III.-3:502 DCFR) or, in case of delay in performance, an additional period of time of reasonable length, fixed by the creditor, must have expired (Art III.-3:503 DCFR). As under the CISG and the PECL (and in contrast to the UNIDROIT PICC 2010), after expiration of the additional period of time, the creditor may terminate the contract in any case; and as to whether an instance of non-performance is fundamental the DCFR does not just give criteria, but enumerates the different kinds of fundamental non-performance. In this respect the DCFR strikes a balance between the CISG and the PECL. As in both other sets of rules, one finds included the case of the creditor being substantially deprived of what he was entitled to expect under the contract and this result being foreseeable to the debtor. In addition, as under the PECL, intentional or reckless non-performance is fundamental if it gives the creditor reason to believe that the debtor’s future performance cannot be relied on. The third case of fundamental non-performance under the PECL—strict compliance with the obligation being of the essence of the contract—is not mentioned.

e) Summary

The different sets of rules closely correspond to each other. All of them tie their remedies to non-performance. The grounds for excuse are identical, and in case of excuse, only claims for performance and for damages are excluded. The creditor may terminate the contract if the non-performance is fundamental or, in case of delay, if an additional period of time has expired; however, substantial differences exist as to when non-performance is fundamental.

Literature

Ulrich Huber, ‘Leistungsstörungen’ in Bundesminister der Justiz (ed), Gutachten und Vorschläge zur Überarbeitung des Schuldrechts, vol I (1981) 647, 699 ff; Bundesminister der Justiz (ed), Abschlußbericht der Kommission zur Überarbeitung des Schuldrechts (1992) 29 f; Tony Weir (tr), Konrad Zweigert and Hein Kötz, Introduction to Comparative Law (3rd edn, 1998) chs 36 and 37; Ulrich Huber, ‘Das geplante Recht der Leistungsstörungen’ in Wolfgang Ernst and Reinhard Zimmermann (eds), Zivilrechtswissenschaft und Schuldrechtsreform (2001) 31, 93 ff; Claus-Wilhelm Canaris, ‘Die Reform des Rechts der Leistungsstörungen’ (2001) JZ 499, 512, 522 f; Ole Lando, ‘Non-performance (Breach) of Contracts’ in Arthur S Hartkamp and others (eds), Towards a European Civil Code (3rd edn, 2004) 505; Martin Josef Schermaier, ‘Vor § 275. Leistungsstörungen’ in Mathias Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-kritischer Kommentar zum BGB, vol II/1 (2007) nn 3 ff; Martin Josef Schermaier, ‘§§ 280–285. Schadensersatz wegen Pflicht-verletzung’ in Mathias Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-kritischer Kommentar zum BGB, vol II/1 (2007) nn 1 ff; Florian Faust, ‘Remedies for Breach of Contract in the DCFR’ in Gerhard Wagner (ed), The Common Frame of Reference: A View from Law and Economics (2009) 19.

Retrieved from Non-Performance – Max-EuP 2012 on 25 May 2022.

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