The Draft Common Frame of Reference and "Cancellation" of Contracts

• Author: Kåre Lilleholt
• Position: Professor, University of Oslo
• Pages: 111-117

Kåre Lilleholt

Professor, University of Oslo¹

The Draft Common Frame of Reference and "Cancellation" of Contracts

1. Introduction

In February 2008, the "Interim Outline Edition" of the Draft Common Frame of Reference (DCFR) was published under the title "Principles, Definitions and Model Rules of European Private Law"². This version of the DCFR was prepared by the Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group). A final edition, covering some more areas of law and completed with explanatory comments and comparative notes, will be published by the end of 2008³. The DCFR has the formal outline of a civil code, with books, chapters, sections, sub-sections, and articles. General rules on contracts are to found in Book II (Contracts and other juridical acts), covering inter alia rules on formation, validity and interpretation of contracts, and in Book III (Obligations and corresponding rights), dealing with inter alia performance and remedies for non-performance. Book IV - consisting of parts A-G - contains rules on specific contracts⁴.

In this article, I will try to describe the interplay between the general and specific parts of the DCFR by testing the possible outcomes in cases where a party to a contract for one reason or other no longer wishes to receive performance from the other party⁵. The discussion will concentrate on three different types of specific contracts: sales, leases and construction contracts. First, a buyer of a machine does not want to receive the machine, as he has been offered a better and cheaper machine by another supplier; second, a lessee wants to return the leased car before the end of the lease period, as he has lost his driver's license for health reasons; third, the client does not want the constructor to build the contracted warehouse on the client's land, as the business for which the warehouse was intended is no longer profitable. Typically, the buyer, the lessee and the client do this in order to reduce their total liability under the contract.

The term 'cancellation' is used in its broadest sense to cover these three situations. However, it is not employed at all in the DCFR, and it is not suggested here as an exact term.

2. Delimitations

Several situations where a party is entitled to refuse to receive performance will not be dealt with in this article and they will be listed briefly.

We are not dealing with termination for non-performance of the seller's, lessor's or constructor's obligations. We will presuppose that timely and conforming performance is offered or would have been offered had the other party wished to receive it. On the other hand, the desire not to receive performance may well turn out to be a result of the party's inability or unwillingness to perform his own obligations.

Neither are we dealing with the situation in which a party invokes invalidity of a contract. A party that is not bound by the contract may reject performance by the other party, as there is no valid obligation to co-operate (concerning a contract party's obligation to co-operate, see section 3.2 below).

In some situations a party has a right of withdrawal. According to the DCFR, a consumer is entitled - subject to certain conditions - to withdraw from contracts negotiated away from business premises and from timeshare contracts (Book II Chapter 5)⁶. Withdrawal "terminates the contractual relationship and the obligations of both parties under the contract" (II.-5:105 (1)). This right of withdrawal may be exercised without the party having to give any reason and a buyer may well exercise his right of withdrawal just because he has stumbled across a better bargain.

A right of withdrawal or a right of "cancellation", with or without a fee, may follow from the contract itself, e.g. where the booking of hotel rooms for a conference may be changed within agreed deadlines according to the contract.

For some contracts, one or both parties may have a right to terminate the contract "for an extraordinary and serious reason", cf. for mandate contracts, IV.D-6:103 and 6:105. This means that a party may terminate the contract beforehand without having to pay damages, cf. IV.D-6:101 (5)⁷. This right to terminate for an extraordinary and serious reason, without liability in damages, should not be confused with the right to terminate a service contract at any time without giving reason (IV.C-2:111); in the latter cases, the other party may have a claim for damages, see section 6 below.

3. The general rules

3.1. Right to enforce performance of monetary claims

The most important rule concerning a contracting party's ability to limit liability by refusing to receive performance is found in III.-3:301, under the Section entitled "Right to enforce performance". This is a rule concerning the other party's right to enforce performance of payment. In the first paragraph of this Article, it is stated that the creditor is "entitled to recover money payment of which is due". Exceptions are found in paragraph (2):

Where the creditor has not yet performed the reciprocal obligation for which payment will be due and it is clear that the debtor in the monetary obligation will be unwilling to receive performance, the creditor may nonetheless proceed with performance and may recover payment unless:

(a) the creditor could have made a reasonable substitute transaction without significant effort or expense; or

(b) performance would be unreasonable in the circumstances.

The essence of this provision is not easily grasped at first glance. It needs some reasoning based on the DCFR system of remedies. First, when a creditor is not allowed to enforce performance of an obligation, the most important remaining remedy for non-performance is typically a claim for damages (III.-3:701). Second, a claim for damages is normally limited to the extent that the creditor could have reduced his loss by taking reasonable steps (III.-3:705). Third, when the requirements in III.-3:301 (2) (a) and (b) are met, the party to whom the monetary obligation is owed is not allowed to "proceed with performance" of his own obligation. These three steps lead to the rule: when the requirements in (a) and (b) are met, the party to whom the monetary obligation is owed must accept that his claim for payment is converted into a claim for damages and that he is not entitled to damages for loss that could have been reduced by not proceeding with performance of his own obligation. For explanatory purposes, one might call it a "duty to terminate". From the perspective of the party owing the monetary obligation: by making it clear that he does not wish to receive performance, he reduces his liability under the contract by the amount that can be saved by the creditor's not proceeding with performance - when, that is, the requirements in (a) and (b) are met. The provision in III.-3:302 (2) deals not so much with enforcement of monetary obligations as with the creditor's right to compensation for costs that could have been saved by not proceeding with performance. This is not surprising; the right to enforce monetary claims is not in itself an issue calling for much regulation⁸.

The content and effects of the rule just discussed are best explained with the help of some illustrations concerning different specific contracts (sections 4-6 below).

3.2. Obligation to co-operate

Some comments should also be made regarding the character of the duty to receive performance. Under the DCFR, the creditor's duty to co-operate, including the duty to receive performance, is in principle a...