Breach of Contract
© Springer International Publishing Switzerland 2015Javier Plaza Penadés and Luz M. Martínez Velencoso (eds.)European Perspectives on the Common European Sales LawStudies in European Economic Law and Regulation410.1007/978-3-319-10497-3_7
7. Breach of Contract
University of Bayreuth, Bayreuth, Germany
Martin Schmidt-Kessel (Corresponding author)
Historically, the notion of breach of contract was by no means clear and coherent within European Private Law and even less so in the field of sales law in Europe. In this area of law many European national legal systems are influenced by the legacy of Roman sales law, in particular the claims regarding defective goods (actio redhibitoria and actio quanti minoris). For most continental legal systems this Roman heritage led to a diffuse structure of legal rules for breach of contract. Starting with the Hague Sales Law and the CISG, on which Art. 1:301(4), 8:101 PECL were based, the notion of non-performance has become foremost the term used when describing breach of contract in European Private Law. Today the standard is set by Art. III.–1:102(3) DCFR as complemented by Art. III.–3:101 DCFR. It was adopted by the European Commission in Art. 87 CESL. Art. III.–1:102(3) DCFR reads: “Non-performance of an obligation is any failure to perform the obligation, whether or not excused, and includes delayed performance and any other performance which is not in accordance with the terms regulating the obligation.”
Furthermore, the law of defences and excuses for breach of contract is by no means coherent, neither on most national levels nor on the European level, and that includes notions of force majeure and change of circumstances; of impossibility and frustration; of hardship and imprévision; of fault, culpa and Verschulden. Here, a general solution is established in Art. III.–3:104 DCFR, containing a kind of force majeure clause, which was derived from Art. 79 CISG and Art. 8:108 PECL and has now been used by the European Commission in Art. 88 CESL.
The same holds true for remedies for breach of contract: Neither the kind nor the system of remedies is agreed upon among European Member States nor is the answer to the question whether specific performance is a remedy or a kind of self-evident element of the concept of obligation, in the sense of the famous saying by Ernst Rabel, referring to the “Rückgrat der Obligation” (spinal column of the obligation); (Rabel 1936). The right to cure, first formulated as a separate defence in Art. III.–3:201 to Art. III.–3:205 DCFR, was adopted by the European Commission in Art. 109 CESL.
All these incoherences and uncertainties regarding concepts, notions and structures as well as to basic policy decisions are—as mentioned earlier—reflected in the Commission’s proposal for a Common European Sales Law. One could and should read this proposal and its predecessors in the Draft Common Frame of Reference on the Principles of European Contract Law as a mirror of the development of contract law, and sales law in particular, in Europe.
KeywordsBreach of contractFaultForce majeureHardshipChange of circumstancesFaultSpecific performanceRight to withhold performanceTermination of the contractPrice reductionDamages
7.1 Breach of Contract
The Commission’s draft proposal for a Common European Sales Law now contains in Art. 87 general definitions of the notions of “non-performance” and “fundamental non-performance”. Art. 87(1) CESL reads: “Non-performance of an obligation is any failure to perform that obligation, whether or not the failure is excused …”. This constitutes a unitary concept of breach of contract and, therefore, sticks to the European standard based on CISG , PECL and DCFR .
A non-exhaustive list of six cases of breach of contract is added to this definition, symptomatic of the not particularly concise drafting style of the whole proposal, which is strongly influenced by the plain and clear language movement.1 This list again reflects the diverging approaches of national legal systems of the European Member States to the notion and the concept of breach of contract. Furthermore, it has to be analysed as the result of a development of uniform law starting with the Hague Sales Law and ending so far with the notion of breach of contract in the Draft Common Frame of Reference. The solution proposed now for the Common European Sales Law by the European Commission has to be analysed by the light of both the diverging approaches of the national legal orders and the history of emergence of what now becomes a common European notion of breach of contract in a legal sense .
7.1.1 The Different Approaches to Breach of Contract in National Legal Orders
By its attempt to bring forward a uniform notion of breach of contract, called “non-performance”, the proposal clearly abandons every idea of a cause approach. Such a cause approach distinguishes between different types of breaching contractual duties and obligations—like impossibility of performance, delay of the debtor, non-conformity, breach of a kind of obligation de sécurité and so forth—and connects these types with diverging remedies and prerequisites for those remedies.2 Until the end of 2001 the former German law could be seen as paradigm for such a cause approach and today it may be found in the Greek civil code. Therefore, the first question under the cause approach is: what kind of breach has happened? Under such a cause approach, for example, the impossibility of performance of contractual obligation becomes the basis of a separate system of remedies, because the impossibility as such is seen as a breach of obligations. The consequences of such a type of breach may result in a claim for damages or termination of the contract or other consequences. These consequences are dealt with by the legal system separately from the same kind of consequences of other types of breach. Thus the kinds of remedies of the types of breach are kept separate.
A more subtle approach is presented by the majority view of French law and legal systems within the French legal family by distinguishing only between the types of duties; (Demogue 1925). However, the French concept of an inexécution is not a uniform one either: The difference between the various types of duties lies in the diverging prerequisites to fulfil the duty or to become excused in case of non-performance. Moreover, French law usually draws a line between cases of non-performance and the breach of a security duty (obligation de sécurité) for which a separate set of remedies applies.
The English common law is characterized by a uniform notion of breach of contract . Such a breach occurs where a person fails to perform his or her side of the contract. Under the English concept of breach of contract the reason for that non-performance is not decisive.3 The most general consequence of such a kind of breach is that it provides the party aggrieved with a claim for damages regardless of the severity of the breach. Therefore, the English concept is usually described as being a unitary rule of breach of contract. This description is correct apart from one rather important exception: The English notion of breach of contract usually does not include the breach of a duty to care for the security of the other contractual party. Such cases of misbehaviour besides the core obligations of the contract are usually dealt with under the auspices of tort law ; contract, where similar duties might be implied by law, is usually not argued. Therefore, it is not entirely clear, whether the unitary notion of breach of contract in the English law is restricted to cases of non-performance in a narrower sense or covers ancillary duties protecting parties’ integrity as well.
The latest reform of the German law of obligations went a step further: In some of the articles—§§ 280, 314 BGB, at least—the legislator brought together the concepts of non-performance and of breach of a duty to care for the integrity of the other party in one concept. This happened by introducing one single notion for breach of contract which was not called Nichterfüllung (non-performance) but rather Pflichtverletzung, which should be translated as “breach of a contractual duty”.4 The German legislator, thereby, merged the two concepts and contractualised large areas of tort law duties emerging in the surroundings of a contract. This merger of the two concepts was heavily discussed when the German law of obligations was reformed and led to diverging models for how to interpret the new system.
7.1.2 The Solution Proposed for the European Common Sales Law
On earlier stages of International Uniform Law several instruments followed the U.S. and the English Common Law by establishing a uniform notion of breach of contract .5 However, this CISG did not contain a true uniform rule, but in Artt. 45, 61 CISG distinguished between breaches by the buyer and breaches by the seller; only for the defences of impediment beyond control (Art. 79 CISG) and the creditor causing the breach (Art. 80 CISG) and in the general definition of fundamental breach in Art. 25 CISG did a more general approach also became visible in the text of the Convention.
The Principles of European Contract Law and the Draft Common Frame of Reference consolidated the different concepts in one article respectively. However, Art. 8:101 PECL and Art. III.-3:101 DCFR established another distinction instead: Both articles distinguish between “excused” and “not-excused” non-performance.6 Both texts thereby established the excused non-performance as a separate category or a separate type of breach. This type of breach differs from the non-performance not-excused, as the debtor is able to “excuse” him- or herself by proving an impediment, which is beyond their control in the sense of Art. 8:108 PECL or Art. III.-3:104 DCFR. This dogmatic category is connected with the exclusion of the remedies of specific performance and damages .7
The draft Common European Sales Law now goes an important step further: Art. 87(1) CESL only defines a uniform notion of non-performance, without referring to any excuse either for impediment beyond control or for the creditor’s misbehaviour.8 The consequences of an excuse under Art. 88 CESL are only dealt with in the rules on remedies, Artt. 106(4), 131(2), 167(1), 168(1) CESL. Therefore, there is a significant dogmatical shift between the DCFR and the Commission’s proposal for a Common European Sales Law: Whereas the DCFR (as the PECL) establishes two separate categories of excused non-performance and non-performance not-excused, the CESL simply proposes a uniform category of non-performance and is distinguishing between excused and not-excused non-performance only on the level of remedies.9 From a pragmatic point of view this difference may be seen as minor, however, for dogmatically trained continental lawyers this shift is of an importance which should not be underestimated. The text and the structure of the Commission’s proposal prevents or, at least, should help to prevent dogmatic national lawyers from raising systematical arguments based on two different types of breach. Coming from a legal system with a bad experience with cause approaches and their necessities to draw lines between the types of breach, this solution proposed by the Commission to us seems an important and innovative progression in the formulation and structuring of European Contract Law.
7.1.3 The Undecided Case: Duties to Protect the Other Party’s Integrity
As seen earlier, Member States provide for diverging answers to the question of whether the contract does protect the other party’s integrity beyond the main obligations of the parties. Whereas, English law—having the technical possibility to employ tort law duties of care into the contract as contractual duties—usually does not work with such a concept of contractual protection of other parties’ integrity, French law rather early developed the concept of contractual obligations de sécurité obligating the contractual party to look after the personal integrity of the other party and after the integrity of its property and assets. In German law in 2002 the legislator in § 241(2) Bürgerliches Gesetzbuch approved a long line of court decisions establishing a general concept of contractual duties protecting the other parties’ integrity and property. Both concepts, the French and the German one, are identical only at first sight: While the German approach of Schutzpflichten was developed to fill gaps in the field of tort law (vicarious liability in particular) the French approach on the other hand was developed to limit tort law, with its famous general clause of Art. 1382 Code Civil, by applying the principe de non cumul.10
Neither the uniform sales law nor the Principles of European Contract Law nor the Draft Common Frame of Reference comes up with a clear solution concerning duties to protect the other parties’ integrity. The Vienna Convention in Art. 5 CISG explicitly excludes personal damage from the scope of application of the convention and thereby tries to avoid the issue all together. In contrast, the Principles of European Contract Law do not even mention cases of damages to the other parties’ integrity which are not a consequence of a breach of the main obligations of the contract.
Whether the Commission’s proposal for the CESL also contains rules for ancillary duties to care for the integrity of the other party as part of the contractual regime is still an open question; and this openness also includes the question of which remedies for breach of such duties are applicable under the CESL.11 The proposal does not mention such duties in Artt. 2, 3 CESL—which is not so surprising, given the aforementioned development of European Private Law texts. The only general basis for duties to take care for the other parties’ integrity within the instrument would be the definition of good faith by Art. 2 lit. b CESL-Reg., which refers to “honesty, openness and consideration for the interests of the other party to the transaction or relationship in question”; this definition should include that other party’s personal integrity. At the very least, CESL includes the concept of protection of the other party’s integrity in the concretisation of the quality of goods or digital content owed by the seller or supplier per Art. 99-101 CESL. For the duties of the service provider in the sense of Art. 148 CESL it is impossible to even clearly distinguish between the performance interest of the other party and their interests regarding personal or proprietary integrity—for example, in the case of an agreement for continued maintenance of machinery being sold, the obligation also aims to protect the machinery as part of buyer’s property. And finally, Art. 107 CESL explicitly acknowledges the “donee’s” interests in not suffering loss or damage to property by way of a lack of conformity. Taking all this evidence, the result should be that the Commission’s proposal for the CESL covers all kinds of duties to protect the other party’s integrity as to the person and its property.12
7.2 Defences and Excuses
Within the last four decades European Private Law not only developed a unitarian concept of breach of contract , but additionally a set of defences and excuses has been distilled from the rich stock of solutions in the national legal systems. The decision for the unitarian notion of breach of contract enabled the promoters of the discipline of European Private Law to develop a particular standard of liability and to distinguish that standard from particular defences against the claim for specific performance , like impossibility or impracticability, and from rules of hardship or change of circumstances . This new standard of liability was then amended by a general defence for the misbehaviour of the creditor. What is even more important, however, is the development of a so-called “right to cure” as the second standard defence of the debtor. All these developments now are reflected in the Commission’s proposal for a Common European Sales Law where the Commission took over the dogmatical state of the art of European Private Law for its own proposal.
7.2.1 Fault, Force Majeure and Change of Circumstances
The first success of the discipline of European Private (or Contract) Law has been the rationalisation of prerequisites and effects of impediments excusing the debtor’s non-performance. In this process it has become most helpful to accept that a claim for specific performance is by no means a self-evident consequence of a non-performance, but only one of the whole set of remedies. This dogmatical progress was connected to the recognition that the scope of application of the claim for the damages for non-performance is usually broader than the scope of claims for performance in kind. These two developments made it possible to bring the several topics concerning defences into a new systematical order.
184.108.40.206 “Unmöglichkeit”, Force Majeure and Frustration
The topics or notions of Unmöglichkeit, force majeure and frustration all have in common, that they refer to impediments preventing the debtor from the fulfilment of the obligation. However, the function of the three topics within their respective legal systems differs from one system to the other. The German Unmöglichkeit, dealt with in § 275(1) BGB was originally seen as a type of breach of contract. This breach, if excused, brought the contract to an end or, if not excused, gave the creditor a right to terminate the contract and claim for damages. The effects on the claim for specific performance were much debated in theory while the text of the BGB was quite clear in saying that only an excused Unmöglichkeit would free the debtor from the claim for specific performance. In 2002 the legislator tried to unwind the bundle of legal consequences of Unmöglichkeit by reducing it to a defence against the claim for specific performance with some consequences as to the counter-performance and right to terminate the contract. However, the difficult drafting of the new texts invited German lawyers to underlie the new rules with the old concepts and, therefore, the significance of Unmöglichkeit for German contract law is heavily debated even today.
The French concept of force majeure may be found in Artt. 1147, 1148, 1722 Code Civil. The concept shows its effects mainly where the debtor owes an obligation to reach a specific result (obligation de résultat). Where one party owes such a duty to achieve a specific result, it may evade its liability only by successfully pleading force majeure (or cas fortuit). The core elements of force majeure have been developed by French jurisprudence and legal writers as being a fact which is imprévisible and irresistible and which is a kind of exterritorial. The classical consequence of force majeure under the French law is the exclusion of the claims for specific performance and damages . Moreover, the creditor may ask the court to declare the contract as being terminated under Art. 1184 Code Civil.13
English law on the other hand developed its doctrine of frustration only in the second half of the nineteenth century.14 Starting from the idea of absolute contracts and a most strict liability (Paradine v. Jane  EWHC KB J5) the English courts developed a general doctrine of frustration of contract starting with the famous decision of Taylor v. Caldwell from 1860. It was continued in the coronation cases of 1902 and 1903 of which (Krell v. Henry  2 KB 740) is the leading case. The later so-called “doctrine of frustration” was then developed mainly with cases of the two world wars and other cases of international crises after the Second World War. The core element of frustration is the impossibility of performance which may be a factual or a legal impossibility. The event bringing about such impossibility must be supervening, unforeseeable and external. As a consequence the courts decided to discharge both parties from the whole contract and this discharge was amended later on by a limited right to get restitution under the Law Reform (Frustrated Contracts) Act 1943. This rather radical doctrine was amended by some limits of frustration referring to a diverging contractual distribution of risks and cases of frustration self-induced by the debtor (or the creditor). However, this doctrine has always been restricted to cases of distortions of the contract which are so serious that the contract has to fall away all together. Only in some cases of liability for breach of covenant (which strictly speaking does belong to contract) English courts also accepted an excuse of one or more duties of one party without cancelling the whole relationship. The answer of practicing lawyers has been the development of so-called force majeure clauses which until today are a standard element of contracts under English law. These force majeure clauses usually work like the force majeure defence under French law.
Uniform sales law and the Principles of European Contract Law and the Draft Common Frame of Reference have taken over this idea of force majeure as a defence restricted to obligations. Therefore, force majeure in this international and European sense does not necessarily bring the contract to an end, but only excludes the claim for damages and, following the majority view, the claim for specific performance . The topic of impossibility on the other hand remained important as a defence against the claim for specific performance, however, restricted to such claims and without any necessary consequences concerning counter-performance. Therefore, the force majeure defence against claims for specific performance or damages has been, as a standard, been separated from impossibility as a pure defence against claims for specific performance. Moreover, with Art. 79 CISG, which has been more or less copied in Art. 8:108 PECL and Art. III.–3:104 DCFR international and European uniform law developed a standard formulation for the force majeure defence referring to an impediment beyond control which is unforeseeable and may not be overcome by alternative means.15
220.127.116.11 Hardship and “Imprévision”
Sanctity of contract is one of the basic principles in contract law throughout the western world. The binding force of contracts is, therefore, the starting point for all considerations regarding every instrument to enable contracts to react flexibly to cases of change of the circumstances under which the contract was originally concluded. In this sense Art. 6:111(1) PECL and Art. III.–1:110(1) DCFR emphasise the binding effect of the contract prior to formulate exceptional cases in which the general principle does not apply. Both articles refer to the onerosity of performance caused by the increase of the cost of performance or the diminishment of the value of the price . However, the criteria for the relevance of such onerosity differ: Under Art. 6:111(2) PECL the onerosity needs to be excessive, while Art. III.–1:110(2) DCFR refers to the consequence of the onerosity, which has to be that holding the debtor to the contract would be manifestly unjust. On the contrary, the CISG does not provide for a kind hardship clause (as opposed to the force majeure clause in Art. 79 CISG). However, many German authors have argued, that Art. 79 CISG also provides for a kind of Opfergrenze (“limit of sacrifice”), which is politically reasonable.16
The findings in uniform law reflect the situation under the national laws: Whereas all Member States to a certain extent provide for such exceptions to the binding force of the contract, most of them do not accept an aggregation of such exceptions under one general principle. French law traditionally refuses any general rule providing the judge with a possibility to intervene a binding contract. However, this general refusal by the civil courts is not shared by the administrative courts deciding on long term contracts with public utilities like contracts for the supply of gas or electricity.17 English courts refused to adapt the contract in case of change of circumstances ; moreover, the doctrine of frustration does usually not apply to simple cases of change of circumstances.18 On the other hand, Italy codified the principles of eccessiva onerosità (excessive onerosity) in Art. 1467 Civil Code and German law even broader refers to change of circumstances in § 313 BGB, which is even not restricted to economic onerosity. Other Member States, e.g. Spain, absorbed this general idea.
German law also demonstrates that it is necessary to separate ideas of hardship , change of circumstances and imprévision from all cases of non-performance: While non-performance and the reasons for such non-performance only refers to the level of performance of an existing contract and sanctions in case of breach, the instruments here under consideration intervene one important step earlier in modifying or ending the contractual duties and obligations. Between such a modification of the contract and the legal reactions to breaches of contract a significant and even categorical difference has to be stated. Moreover, the idea of a duty to renegotiate the contract—however useful it may be in practice—should be analyzed under this more basic approach going to the root of the contract and not being restricted to the realm of remedies for non-performance of a contractual obligation (may it be excused or not excused).
18.104.22.168 Fault, “Faute” and “Verschulden”
As to the topics, fault , faute and Verschulden the general principles of European contract law have emerged in a spectrum between the English idea of an absolute obligation and the Germanic fault principle in its subjective version advocated in the past by a minority of writers. The German idea of fault analyses the topic as a separate prerequisite to rules providing for remedies for breach of contract . Today the relevance of this principle has mainly being reduced to the remedy of damages for breach of contract while in the past other remedies and the right to terminate the contract in particular was also dependent on the fault of the debtor. This fault principle in its German or Germanic version presupposes an ethical responsibility of the party in breach. Coming from this rather extreme starting point, the principle has been made workable by the reference to objective standards of care combined with the explanation that the party, which is not able to meet such a standard of care, is responsible for taking over an obligation which he or she could not fulfil (so-called Übernahmeverschulden). Moreover, a basic capacity to act responsibly forms a (theoretically) important element of fault; this element is missing in case of minors below 7 years and restricted for the older group of minors up to 18.