Performance and its Modalities

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by Yeşim M Atamer

1. Determination of the content of the duty to perform

An obligation is discharged when the debtor has satisfied the creditor’s interest in performance (discharge by performance). Therefore, defining the precise content of the obligation is crucial. This will, in the first instance, be ascertained by reference to the express or implicit agreement between the parties, if the obligation is a contractual one (interpretation of contracts). But given the fact that parties often focus their attention on the substantial terms and omit to provide details, many European legal systems have dispositive statutory rules on standby that serve to determine the content of different obligations and the modalities of their performance. When it comes to non-contractual obligations, these default rules have direct application. Principles of European Contract Law (PECL), UNIDROIT Principles of International Commercial Contracts (PICC) (both of them merely relating to contractual obligations) and Draft [[Common Frame of Reference (DCFR) include corresponding default provisions. The present entry concentrates on these provisions.

The extent to which the obligation must be defined so that a contract comes into being is not set out in detail in the relevant provisions. It is only stated that a ‘sufficient agreement’ must be achieved (Art 2:101/103 PECL; Art II.-4:101/103 DCFR contract). Such an agreement is certainly reached if the essential aspects of the contract (essentialia negotii) such as performance and counter-performance have been agreed upon. That said, all three sets of rules facilitate the conclusion of a contract even where neither a price nor the method of determining it is fixed. In such a case, according to Art 6:104 PECL, the parties are treated as if they had agreed on a reasonable price. In contrast, the DCFR and the UNIDROIT PICC envisage the price that would normally have been charged for such performance under comparable circumstances at the time of the conclusion of the contract (Art II.-9:104 DCFR/Art 5.1.7 UNIDROIT PICC). Only when such a price is not ascertainable is reliance on the concept of a reasonable price provided for.

All three sets of rules recognize a default provision with respect to the quality of performance where this cannot be determined from the terms agreed upon by the parties (a parallel rule can be found only for obligations relating to generic objects in Germany, France, Greece, Holland, Poland and Switzerland). A party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances (Art 6:108 PECL, Art 5.1.6 UNIDROIT PICC). Under the DCFR, the quality may not be lower than the level that the other party could reasonably expect in the circumstances (Art II.-9:108).

The determination of performance can, by agreement, be left to one of the contracting parties or to a third party (contractual terms, subsequent determination). In this case, the model laws are only applicable insofar as they set the limits of this empowerment and its exercise.

2. Modalities of performance

Chapter 7 PECL, book III, ch 2 of the DCFR and ch 6 of the UNIDROIT PICC contain rules on the modalities of performance, which find application where there is a lack of contractual agreement on these modalities. The solutions set out in the model laws are broadly similar.

a) Place of performance

The place of performance is the place at which the debtor has to perform the acts necessary for honouring his obligation in order for his promise to be fulfilled. In all three sets of rules, the place of performance depends on the type of duty involved (Art 7:101 PECL; Art III.-2:101 DCFR; Art 6.1.6 UNIDROIT PICC). With respect to monetary debts, it is the place of business of the creditor. For all other obligations, it is the place of business of the debtor. Many European legal systems share the debtor-friendly approach and define the debtor’s place of business as the default place of performance (eg Germany, France, Greece, Italy, Austria, Portugal and Switzerland). However, the exception for monetary debts does not enjoy such popularity (it exists eg in Greece, Italy, Holland, Portugal and Switzerland). Some countries, for instance, do not differentiate between monetary and non-monetary promises at all, so that the place of performance is always that of the debtor’s business (eg Germany, France, Austria, Spain—this solution was also favoured in Roman law). An exception regarding the place of performance for non-generic objects (as recognized in France, Holland, Switzerland, and Roman law: ibi dari debet ubi est), whereby delivery has to be effected at the place where the object was located at the time of conclusion of the contract, is not existent in the model laws.

In the UNIDROIT PICC and the DCFR the place of business at the time of performance is determinative, so that this can be altered after the conclusion of the contract. However, the additional costs, which stem from such an alteration, are to be borne by the party causing them. The PECL, on the other hand, prefer the immutability of the place of performance, linking it to the time of the conclusion of the contract. If the debtor or creditor has no place of business, pursuant to the PECL and DCFR recourse can be had to the habitual residence. In the case of multiple places of business, that to which the relevant party has the closest relationship is decisive, having regard to the circumstances known to or contemplated by the parties at the time of conclusion of the contract.

b) Time of performance

The debtor must perform at the time or within the period of time that is set out in the contract or that can be determined by reference to the contract (Art 7:102 PECL; Art III.-2:102 DCFR; Art 6.1.1 UNIDROIT PICC). In the case of a period of time, the debtor can in principle choose when to perform during this period, insofar as it is not obvious from the circumstances that the creditor may choose the time for performance.

If nothing can be ascertained from the contract, the debtor must perform within a reasonable time. This approach is also that of English law, whilst continental European law requires immediate performance (eg German, Greek, Italian, Dutch, Swiss and Roman law). However, the concept of immediate performance is often interpreted in the light of the good faith principle and trade usages so that the results are not far apart. When precisely the reasonable time period begins to run is determined differently in the various sets of rules. Surprisingly, the PECL and UNIDROIT PICC take their guidance from the parallel regulation of the CISG and establish the conclusion of the contract as the starting point, which only suits contracts for a once-off performance. The approach of the DCFR, which provides for performance of the obligation within a reasonable time after it has arisen, seems more suitable since it is also applicable to non-contractual relations as well as to contractual obligations only coming into being after the conclusion of the contract.

Although many European codes (eg in Belgium, Germany, France, Greece, Italy, Holland, Switzerland and also Roman law) assume that in case of doubt the determination of the time for performance works in favour of the debtor, so that while the obligation does not become due prior to the relevant time it can be performed before that time, the three sets of model rules do not adopt this approach. The creditor is allowed to refuse a premature performance. The only exception is where the acceptance of the offered performance would not unreasonably prejudice the interests of the creditor. Where this exception applies, and the creditor must accept early performance or does so voluntarily, this does not alter the time for his own obligation. In addition, exceptions provided in the acquis communautaire, for instance in relation to consumer credit (consumer credit (regulatory principles)), also have to be taken into account. Here the consumer is granted a right to early repayment based on legal policy considerations.

A last provision with potential significance for the time of performance concerns the sequence of performances in synallagmatic obligations (Art 7:104 PECL; Art III.-2:104 DCFR; Art 6.1.4 UNIDROIT PICC): The parties are obliged to perform simultaneously so far as possible and provided that nothing else appears from the circumstances. All three sets of rules presume that the reciprocal obligations must be exchanged concurrently (do ut des) and that no party is obliged to perform in advance. This rule must be regarded as lex specialis with respect to the determination of the time for performance of a reciprocal obligation. If a contract only specifies a time for performance of one of the obligations, the time for performance for the dependent reciprocal obligation will be governed by the simultaneity rule. The general dispositive norm, which provides for performance within a reasonable time, finds no application here.

c) Partial performance

Parallel to the approach of many European laws (eg Germany, France, Italy, Holland, Austria and Switzerland) the UNIDROIT PICC grants the creditor the right to refuse partial performance, unless he has no legitimate interest in so doing. In the exceptional case that he must accept partial performance, any additional costs which arise as a result of this are to be borne by the debtor. Although a parallel provision is missing in PECL and DCFR, partial performance obviously constitutes non-performance also under these model rules and triggers the corresponding legal remedies.

d) Performance by a third person

Persons other than the debtor can in various ways participate in the process of performance. The use of auxiliaries, on the part of the debtor, is regarded by most European legal systems, and also the model rules, as unproblematic, except in areas where the debtor has to perform in person. However, the debtor remains himself responsible to the creditor for the satisfaction of the obligation (see explicitly, Art III.-2.106 DCFR).

Whether it is permitted for a third person to perform the obligation of its own volition, without instigation from the debtor, is not uniformly regulated. According to Art 7:106 PECL, the creditor is in principle not obliged to accept a third party’s performance, ie refusal to accept has no legal consequences (this is different, eg, in Germany, Italy, the Netherlands and Switzerland). This rule is absolute where the identity of the debtor is vital to the performance of the obligation. Whether such personal obligation exists is determined by reference to the agreement between the parties, the nature of the obligation or dispositive law. Where there is no obligation to perform in person, performance by a third party must exceptionally be accepted if the debtor has consented to it, or if the third party has a legitimate interest in performance, and either the debtor has not fulfilled his promise when it fell due or it is obvious that it will not be fulfilled at that date. In such exceptional situations, acceptance on the part of the creditor will discharge the debtor. A refusal to accept may trigger remedies for breach, and a right to deposit might be given (discharge by performance and its surrogates).

The DCFR has taken over the rules of the PECL with respect to third-party performance but has supplemented them (see Art III.-2:107). Thus, under the DCFR, performance by a third person discharges the debtor even in cases where none of the exceptions apply. This means that the obligation can in principle be extinguished against the will of the debtor. But given the inherent risks of such discharge for the debtor, the creditor is held liable for any loss suffered by the debtor as a result of a third party performance. The DCFR thus clearly inclines towards the solution preferred in some civil law systems while the PECL seem to favour the solution of English law, which fundamentally rejects the notion of liberating the debtor by third party performance.

Unlike PECL, the DCFR mentions subrogation and assignment as exceptions where, in spite of performance by a third party, the obligation is not extinguished. Nevertheless, there are no precise indications as to the prerequisites of a subrogation.

3. Particular types of performance

a) Monetary obligations

Cash payment of monetary debts is the general rule in European legal systems (eg Germany, England, France, Italy, Portugal, Spain, and Switzerland). Cashless payment methods can only be used if an express or implied agreement between the parties exists; only more recent codes such as, for example, the Dutch one also give the debtor the right to effect payment by money transfer. All three sets of model rules have abandoned this meanwhile obsolete approach and allow the debtor to pay the debt by any method used in the ordinary course of business (Art 7:107 PECL; Art III.-2:108 DCFR; Art 6.1.7 UNIDROIT PICC). This means that, even when no corresponding contractual agreement exists, recourse can be had to alternative payment methods such as money transfer or the issuing of a cheque (discharge by performance and its surrogates). The only prerequisite is that the payment method is used in the ordinary course of business, which is obviously important for the protection of the creditor. The UNIDROIT PICC refer here to the method of payment common at the place for payment, a provision that is missing in (but appears to be implicit in) the PECL and the DCFR.

All three soft law instruments contain provisions about liabilities in foreign currency (currency). They agree that such a liability in principle can be extinguished by way of substitute payment in the currency of the place of payment (facultas alternativa) (as is the case also in Germany, Greece, Italy, Holland and Switzerland). But the debtor enjoys no option to pay in a replacement currency whenever the parties have contracted for the currency of account to be exclusive (effectivo clause). According to the UNIDROIT PICC, limited convertibility of the currency of the place of payment is also a ground affecting the option to pay in a replacement currency. In both cases, payment must be made in the agreed currency. If neither of these exceptions applies, and the debtor wishes to discharge his liability in the currency of the place of payment, the applicable rate of exchange prevailing at this place when payment is due will be determinative. If the debtor fails to pay his foreign currency debt on time, all three sets of rules acknowledge that the creditor may now choose between the exchange rates at the time when payment is due and at the time when payment is actually made. They thereby attempt to prevent the creditor from having to bear the risk of changes in the exchange rate after the due date for payment. But this protection is insufficient under the UNIDROIT PICC, as the debtor retains his option to choose between the currencies although being in default (Art 6.1.9(4)). For this reason, he can still prefer to perform in the agreed currency with the result that the creditor’s right of choice with respect to the relevant exchange rate becomes obsolete. Article 7:108 (3) PECL and Art III.-2:109(3) DCFR, in turn, also grant the creditor the right, where payment is outstanding, to demand payment in the currency of the place of payment instead of payment in the agreed foreign currency.

b) Alternative performances

Where a contract provides for at least two alternative performances, or for a choice between the modalities of performance, it must be determined who may exercise the right of choice. Where nothing else emerges from the circumstances, the choice belongs according to Art 7.1.5 PECL and Art III.-2:105 DCFR to the party who is to perform. A parallel, subsidiary rule, which can be traced back to the Roman law provision that an ambiguity with respect to the performance should be resolved in favour of the debtor (favor debitoris), can be found in many continental European laws (eg Germany, France, Greece, Italy, Poland, Switzerland and Spain).

Less uniform are the solutions for the case of a delay of the debtor in making use of his right to choose. In some countries, the normal legal consequences of non-performance are triggered (eg Switzerland), others give the creditor the right to fix a period after which the right to choose passes to the creditor (eg Poland), others require a court to fix the time (eg Italy), and again others provide for the automatic passing of the choice to the creditor after a certain time (eg with the commencement of enforcement procedures in Germany and Greece). The PECL and DCFR also transfer the choice to the creditor, but the relevant point in time differs. According to the PECL, the expiry of the contractually fixed time is relevant, while the DCFR prefers the (often later) moment at which performance becomes due. In both sets of rules, the fundamentality of the delay is crucial. Where it is fundamental, the choice passes immediately to the creditor. Where it is not fundamental, first an additional period of reasonable length must be fixed, after the expiration of which the right to choose passes to the other party.

None of the soft law instruments contains a rule regarding the initial or subsequent impossibility of one of the alternatively owed performances, although such provisions can be found in the French and German jurisdictions.

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; Helmut Koziol and Rudolf Welser, Grundriss des Bürgerlichen Rechts, vol II (12th edn, 2001) ch 3; 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; Arianna Pretto-Sakmann and Valentina M Donini, ‘Performance’ (Art 7:101–105 and Art 7:106–112) in Luisa Antoniolli and Anna Veneziano (eds), Principles of European Contract Law and Italian Law (2005) 317; Ewan McKendrick, ‘Performance and Discharge’ in Hugh Beale (ed), Chitty on Contracts (30th edn, 2008) ch 21; 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 6–10.

Retrieved from Performance and its Modalities – Max-EuP 2012 on 18 August 2022.

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