Draft Common Frame of Reference and Estonian Law of Obligations Act: Similarities and Differences in the System of Contractual Liability

Author:Villu Kõve
Position:Magister iuris, Justice, Supreme Court of the Republic of Estonia

1. Introduction - 2. The general system of the contractual liability provisions of DCFR Book III and the LOA - 3. Breach of obligation as a precondition for liability - 4. Lack of excusability or culpability, and agreements related to restriction of liability - 5. Cure of non-performance and deadlines for remedying lack of conformity - 6. Requirement of real performance - 7. Withholding... (see full summary)


Villu Kõve

Magister iuris, Justice, Supreme Court of the Republic of Estonia

Draft Common Frame of Reference and Estonian Law of Obligations Act: Similarities and Differences in the System of Contractual Liability

1. Introduction

The debate on a further and greater harmonisation of civil law has been going on in the European Union for years. The Principles of European Contract Law (PECL) 1 have been developed and published. This work has been continued by the Study Group on a European Civil Code under the leadership of Professor Christian von Bar2. As the so-called Draft Common Frame of Reference (DCFR), an integral draft model law recently has been published 3 and is being further elaborated, with the promise of publication in full in December 2008. The future of the latter project, however, is a bit unclear. The role of the DCFR presumably may be to serve as a model law used as an example in preparing national and EU legislation, and in theory it may be applied similarly to lex mercatoria subject to agreement of the parties4. It should not be likely to become, in the foreseeable future, a legal instrument in its own right (such as a unified European civil code)5. In all likelihood, the DCFR cannot be capable of harmonising European private law, even on the assumption that a need exists for such a common frame of reference. Nevertheless, the DCFR signifies an important achievement of synthesising European law and employing a modern approach, first and foremost, to contract law6.

Six years have passed since the Estonian Law of Obligations Act (LOA) 7 and the new General Part of the Civil Code Act (GPCCA) 8 entered into force. This is long enough to allow for drawing initial conclusions. As the general part of the LOA and also, in part, the GPCCA make use of several solutions based on the PECL (and by extension the DCFR), it is possible to evaluate, albeit indirectly, the functioning of PECL and DCFR solutions as real and effective law in combination with other acts and regulations. The author shall concentrate in this article on the breach of contract (non-performance) and related liability provisions under the LOA and the new DCFR as these provisions represent a central array of issues in modern contract law. Although the new version of the DCFR also regulates non-contractual obligations, for the sake of brevity and in order to maintain its focus, the paper deals just with the problems related to contracts.

2. The general system of the contractual liability provisions of DCFR Book III and the LOA

Book III, Chapter 3 of the DCFR regulates remedies for non-performance. Chapter 3 is composed of material on the following: general matters (Section 1), cure by debtor of non-conforming performance (Section 2), the right to enforce performance (Section 3), withholding performance (Section 4), termination (Section 5), price reduction (Section 6), and damages and interest (Section 6).

The general system of debtor's liability under the Law of Obligations Act is similar to that of the DCFR. Breach of obligation is regulated by LOA Chapter 5, while general provisions (including liability for breach of obligation) (Division 1) and legal remedies (Division 2) are regulated separately. The legal remedies applicable to breach of obligation are also similar in the DCFR and LOA. The author believes that the LOA is structured somewhat conditionally (e.g., as regards the position of § 105 9 in the LOA), but this has not caused any particular problems in applying the law.

3. Breach of obligation as a precondition for liability

In the LOA, breach of obligation (in Estonian, kohustuse rikkumine) represents the central category of contractual liability; under § 100 of the LOA, breach of obligation may be failure to perform or defective performance of a prestation, including a delay in performance, but also substandard performance. In the DCFR, the same institute is expressed with the term 'non-performance' (täitmatajätmine) (in DCFR article III.-1:101 (3)); however, different terms should not carry a substantial difference. Just as does the DCFR, the LOA recognises a universal category of non-performance and does not separate substandard performance from general liability10. Such an approach should first and foremost prevent differentiation between, for example, substandard performance and non-performance, although this might remain an issue with contracts of sale. The author believes that such an approach is reasonable11.

4. Lack of excusability or culpability, and agreements related to restriction of liability

Under the LOA, general liability for breach of contract is similar to that under the DCFR. Subsection 101 (1) of the LOA lists the important legal remedies regulated by law to which the creditor may resort if the debtor does not perform an obligation.

Subsection 103 (1) of the LOA ties liability generally to lack of excusability; i.e., if the conduct of the party who failed to perform an obligation is not excusable, the other party may apply legal remedies against the non-performing party. Thus, the general regulation is essentially the same as under article III.-3:101 (1) of the DCFR. Even if the non-performance is excusable, the other party has under § 105 of the LOA (similarly to article III.-3:101 (2) of the DCFR) the right to resort to such legal remedies as withholding of performance of the obligation, unilateral termination of the contract and reduction of the price, and (in cases of economic transactions) also demanding of a penalty for late payment. Pursuant to § 115 (1) of the LOA, the demanding of compensation for damage is clearly tied to lack of excusability. What is somewhat unclear concerns matters tied to the real performance of an obligation. One can conclude from § 105 of the LOA that, similarly to the situation under article III.-3:101 (2) of the DCFR, here lack of excusability is required in order for one to submit a claim. However, this is not laid down as a prerequisite for a claim in § 108 of the LOA, which regulates requirement of performance of an obligation; subsection 2 of that section sets forth the criteria for applicability of the requirement to perform, and in contracts of sale or for services, excusability should evidently not have any bearing, at least in cases where a substandard product was transferred to the other party. By contrast, the requirement to perform should not be tied to excusability and relief from the obligation to perform should be based not solely on excusability but strictly on the cases listed in § 108 (2) of the LOA (DCFR article III.-3:302 (2))12. The author believes that the DCFR also unnecessarily ties the requirement of real performance to lack of excusability, which causes only confusion. To date, the Supreme Court has held the position that in principle excusability should as a rule be essentially excluded in cases where the payment obligation is not performed13. Similarly to the terms of the DCFR's article III.-3:101 (3), the LOA's § 101 (3) provides that a creditor must not rely on non-performance by a debtor, nor resort to legal remedies arising therefrom insofar as said non-performance was caused by an act of the creditor or by circumstances dependent on the creditor or by an event the risk of which is borne by the creditor.

Article III.-3:102 of the DCFR's material on the possibility of cumulation of legal remedies is matched by § 101 (2) of the LOA; i.e., under Estonian law too, a creditor may simultaneously resort to different legal remedies. In particular, a creditor always has the right to demand compensation for damage. The Supreme Court of Estonia has ruled that, on the basis of that provision, for example, reduction of price and compensation for damage, which are similar in content, must not be used in parallel14. Such a solution concerning the cumulation of legal remedies is optimal and does not excessively restrict the parties. With the LOA, however, it is somewhat unclear whether cumulation also covers, for example, the option to cancel a contract because of error. This should be unambiguously regulated.

Article III.-3:104 of the DCFR, on excuse due to an impediment, is largely paralleled by § 103 of the LOA, under which the liability of a creditor for breach of contract is tied to lack of excusability. Article III.-3:104 (1) of the DCFR is essentially matched by §§ 103 (1) and (2) of the LOA, which provide a definition of force majeure (as the basis of excusability) analogous to that set forth in the DCFR. Both regulations have caused debates regarding how to 'furnish' the criterion of foreseeability in determining excusability and how to distinguish it from wrongful liability15. Probably it would be more reasonable for both instruments, the LOA and DCFR, to further extend liability and thus reduce the theoretical possibility of escaping liability - that is, for the two instruments to extend strict liability. This would make the system clearer. The first sentence of article III.-3:104 (5) of the DCFR is essentially parallel to § 102 of the LOA, under which a debtor must notify the creditor of any impediment to performance by the debtor and of the effect of the impediment on the performance of the obligation immediately after the debtor becomes aware of the impediment.

Unlike the DCFR, the LOA...

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