Restitution
© Springer International Publishing Switzerland 2015
Javier 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_1414. Restitution
(1)
University of Valencia, Valencia, Spain
Abstract
The restitution of benefits is one of the effects of avoidance or termination of the contract, along with the extinguishment of the obligation. The CESL contains, in Chapter 17, arts. 172–177, some rules on the scope and manner of exercising a restitution claim of whatever was supplied under a contract that has been subsequently avoided or terminated. The CESL regulates jointly restitution arising from avoidance and termination; an approach which is new compared to the different European legal systems, although these two remedies do not arise from an identical basis. The aim of this commentary is to analyse the most relevant aspects of this proposal, highlighting certain gaps in the text that could cause problems of interpretation and application.
Keywords
RestitutionAvoidanceTerminationNatural fruitsLegal fruitsFull restorationUnreturnable goodsDigital contentsPayment for use and interestCompensation for expenditure14.1 Restitution Effect of Avoidance and Termination
Where avoidance or termination of a contract has occurred, art. 172.1 CESL provides the typical effect of returning the benefits received by the parties under the contract.
Amendment 224 approved by the Legal Affairs Committee of the European Parliament (published at 24.9.13 A 170301/2013) proposed a modification of the title to art. 172, which also now includes restitution in the event of the contract being invalid or not binding for reasons other than avoidance (by mistake, fraud , threats or unfair exploitation) or termination, thereby expanding the initial scope of art. 172. Indeed, under the text of the amendment, art. CESL 172.1 expressly refers to restitution being the remedy for invalid or non-binding contracts—the justification for the amendment—in those cases where the seller has not complied with certain additional obligations, or where a specific requirement has not been fulfilled. Examples of this can be found: in art. 19(4), in respect of a signed offer or written consent sent by the consumer to a distance contract concluded by telephone; art. 25(2) concerning the obligation of the trader, in distance contracts concluded by electronic means, to use unambiguous words by which the consumer recognises that placing the order entails an obligation to pay; art. 71(2), relating to additional payments expressly allowed in consumer contracts, in particular where they have not been incorporated by the use of default options; art. 72(3), providing that a merger clause does not bind a consumer; art. 79(2), relating to unfair terms not being binding; art. 167(3), in respect of interest clauses set in breach of the provisions arts. 166 and 167.2; and, finally, art. 170(1) on unfair terms relating to the rate of interest payable for delay. In all these cases, the breach of the duties specifically imposed on the trader, or the presence of unfair terms, implies that the consumer may recover the amount paid under the contract or that part of contract that is not binding. European Parliament legislative resolution of 26 February 2014 on the proposal for a regulation of the European Parliament and of the Council on a Common European Sales Law [P7_TA-PROV (2014) 0159] has adopted its position at first reading taking over the report of the Committee on Legal Affairs. It is to be hope that the Council will eventually give a similarly positive reaction.
It is questionable whether restitution could also be applied to cases of invalidity for reasons other than the defects in consent caused by mistake , fraud , threats or unfair exploitation, such as invalidity based on illegality or immorality of the contract, or the incapacity of one of the parties, which are not covered by the CESL. The answer must be in the negative (Lehmann 2012, p. 682), which has been justified in relation to the PECL, given the diversity of assumptions and differences of treatment among the legal systems of Member States, and considering that invalidity for lack of ability is more a matter of the Law of Persons than of Contract (Lando and Beale 1995, p. 227; Morales Moreno 2003, p. 371).
Unlike some other European legislation and harmonising texts, CESL regulates restitution for the effects of both avoidance and termination of the contract together, which can sometimes cause a disturbing effect. The restitution, following termination for non-performance, is the result of considerations of fairness: if the defaulting party would not have to repay what they received, they would be unjustly enriched. At the same time, restitution is a natural consequence of the avoidance of the contract. An avoided contract should return the parties to their pre-contractual situation (status quo ante), either as if the contract had never been made or as a result of the retrospective effect of the avoided contract. Article 54.3 CESL, which includes the effects of avoidance , refers to the rules on restitution under Chapter 17 of the CESL; as does art. 8.3 CESL for the effects of termination of the contract with regard to the refund of the price and the return of the goods or digital content as well as its other effects.
Restitution of benefits is one of the consequences of avoidance, invalidity or termination of contracts in European legal systems, and there exists harmonisation texts in European contract law, although these contain differences in scope, conditions and the precise content of restitution. In many European legal systems (e.g. French 1, Italian 2 or Spanish 3), when dealing with single performance contracts that have been executed by one or both of the parties, the termination and invalidity have retroactive effect, “ex tunc”. This retroactive effect does not occur when either party has executed its performance, or where a contract for performance in successive parts or instalments is terminated or avoided after some parts of it have been performed [art. 172(3) CESL]. In these cases, the solution is that it may be terminated with regard to future obligations without affecting, in principle, what has already been completed by each party.4
On the other hand, the rule in English law is that termination of the contract has no retroactive effect, since this contemplates contracts in which neither party has performed, as well as contracts for successive performances. As discussed below, this is the same in the regulation of termination in the PECL where, in general, there is no retroactive effect. This can be distinguished from invalidity of the contract, where, as in English law, restitutio in integrum does exist (in the case of “ab initio rescission” by misrepresentation or mistake) . From the perspective of English law, the non-performance of one party entitles the other to extinguish the relationship for the future only “ex nunc”. However, when single performance contracts have been performed by one of the parties, termination is not only prospective in effect, but also “ex tunc”, either through the exercise of a restitutory remedy,5 or through compensation for damages accompanying the termination .
The starting point in the CESL is different. Restitution after termination or avoidance is the natural consequence when one or both parties have received a benefit from the other and is obliged to return what was received. Therefore, when only a part of a contract is avoided or terminated by one of the parties, each party is obliged to return what the recipient has received under the part affected by the avoidance or termination.
Restitution , as rule, does not depend on the reason for the avoidance or termination, no matter the parties have acted in good or bad faith; although the scope and precise content of the obligation to return may be affected by the occurrence of these circumstances.
14.1.1 Legal Antecedents
14.1.1.1 The Regulation in the UN Convention on Contracts for the International Sale of Goods, in the UNIDROIT Principles and in PECL
Just as in art. 172(1) CESL, the Vienna Convention on the International Sale of Goods (CISG) , in art. 81-2 first paragraph, provides, as a result of the termination, the right to claim the other party has supplied or paid under the contract. If both or either of the parties have carried out their performance, they may require restitution. Also, if both parties are bound to make restitution , this must be performed simultaneously (art. 81-2, second paragraph), and the buyer loses his right to terminate if, by his own actions, he cannot return the goods (cf. art. 82). However, the CISG does not deal with the invalidity of the sale by vitiated consent, nor its consequences.
The Principles of International Commercial Contracts UNIDROIT provides two restitution regimes dealing with the situation after a contract has been avoided (art. 3.2.15) or has been terminated (art. 7.3.5–7.3.7). The overall effect of the termination is in accordance with art. 7.3.5(1) in that the parties are relieved of the obligation to accept any future benefits (releasing effect).
In addition, under art. 7.3.6(1) “On the termination of a contract to be performed at one time either party may claim restitution of whatever it has supplied under the contract, provided that such party concurrently makes restitution of whatever it has received under the contract”. It is established, therefore, that restitution can be claimed by either party, not only the aggrieved party, and reciprocity or interdependence between restitution obligations of each party are also available for contracts to be performed at one time.
However, unlike English law and the CISG , termination of contract is possible, even though restitution in kind is not possible. In fact, art. 7.3.6(2) provides: “If restitution in kind is not possible or appropriate, an allowance must be made in money whenever reasonable.” It seems, therefore, that there will always be restitution, if not in kind, by paying money. Even when restitution in kind is possible, but is not appropriate, it can be possible to substitute the pay of money; so if the aggrieved party has received a benefit, he could choose to pay the monetary value in restitution.
This conclusion is apparently inconsistent with the provision of art. 7.3.6(1), which determines that the restitution claim means the return whatever was received. These two rules can be interpreted as meaning the impossibility of restitution in kind prevents the restitution claim only but does not prevent the termination of the contract. So, if a party who terminates and claims restitution can return in kind, but the other party cannot, he will have to repay the equivalent in money (Clemente Meoro 1998). As an exception, the party benefited by compliance is not required to compensate the other party in money if the impossibility of making restitution in kind is attributable to the other party (art. 7.3.6(3)).
In the case of contracts under which the characteristic performance is to be carried out over a period of time, the effect of restitution occurs only for the period after the termination, not for performances that have been carried out over a period of time before the contract is terminated (art. 7.3.7). In this way, successive goods delivered in instalments and payments made on a regular basis, do not affect the termination of the contract. Restitution will only operate with respect to that given and received after termination and will not have retrospective effect. Where restitution is appropriate, the provisions of art. 7.3.6. will apply.
With regard to avoidance , art. 3.2.15 UNIDROIT provides identical rules for the restitution of benefits delivered under the contract, or the part of contract that has been avoided; in accordance with paragraph (1) the restitutory claim means that party can return whatever he has received under the contract or the part of it that has been avoided. Article 3.2.15(2) contains the same rule as art. 7.3.6(2), that the impossibility of restitution in kind does not prevent avoidance, but if the party to whom restitution is claimed cannot do so, or it is not appropriate to do so, compensation in money has to be made “whenever reasonable”. Finally, the recipient of a performance, which cannot be returned, does not have to make an allowance in money if the impossibility of restitution in kind is attributable to the other party.
As in the UNIDROIT Principles, the Principles of European Contract Law (PECL) 2002 regulate the effects of avoidance and termination in different locations.
With regard to the Termination of Contract (Section 3 Chapter 9 “Private remedies for non-performance”), art. 9:305(1) (ex art. 4.305) provides: “Termination of the contract releases both parties from their obligation to effect and receive future performance, but, subject to Articles 9:306–9:308 does not affect the rights and liabilities that have accrued up to the time of termination”. Therefore, termination of the contract releases both parties from their duty of performance of the future obligations that have not yet expired, but does not, in principle, affect those that were, or should have been, fulfilled before the termination.
As a general rule, termination does not have a retroactive effect because it is not convenient to treat the contract as if it had not been concluded, since this conclusion might not let the aggrieved party claim damages; or might prevent the application of dispute resolution clauses and other clauses that should apply even if the contract were to be terminated (Lando and Beale 1995, p. 420); for example, the liquidated damages clause, and agreed, exclusion or exemption clauses, as referred to in art. 9.305(2) PECL: “Termination does not affect any provision of the contract for the settlement of disputes or any other provision which is to operate even after termination”.
Articles 9.306–9.308 PECL provide, as an exception to the irretroactive effect of the termination, the right to recover performances that can be, or should be, returned. Article 9.306 deals with the aggrieved party who terminates the contract providing that he may reject property previously received from the other party (before termination) if its value has been substantially reduced as a result of the termination, as a result of the other party’s non-performance. The buyer may receive a good that has depreciated substantially because, for example, as a result of a subsequent breach, the purpose for which it was purchased may no longer exist. So, where the contract is terminated, he could restore that benefit to the other party.
Since a party may terminate the contract if the other party’s non-performance is fundamental, it would be inequitable not to allow a claim to recover whatever was paid or delivered to the other party if nothing has been received in return. Therefore, arts. 9:307–9:309 PECL deal with the restoration regime where this is possible. Firstly, art. 9:307 PECL provides: “On termination of the contract a party may recover money paid for a performance which he did not receive or which he properly rejected”.
Secondly, on termination of the contract, where a party has delivered goods or supplied property that can be returned, this party has the right to recover this property if the other party (the recipient) who received it has not paid or made any other counter-performance (art. 9:308 PECL).
Finally, one must bear in mind that in some cases, after a contract has been terminated, one party carries out a performance that cannot be returned and for which it has not received payment or any other counter-performance. Applying art. 9:309, this party may recover a reasonable amount for the value of the performance to the other party (Vaquer 2003, p. 542).
To summarise, where benefits cannot be restored because, for example, it is a service or it has been sold to a third person, one party may require the other party to pay a reasonable amount for the value of the performance, even when the party that has received the benefit is the aggrieved party.
With regard to avoidance , art. 4:115 deals with the restitution effect, providing that either party may claim restitution of whatever it has given to the other based on the contract avoided or partially avoided, if it can return what he had received. If this cannot be returned for any reason, a reasonable sum would have to be paid for what was received. Avoidance means setting aside the contract or part thereof as it never existed. It is a natural consequence of this that the parties mutually return what they have received or its value if it cannot be returned.
This has to be interpreted as in accordance with arts. 7.3.6(1) and (2) and 3.2.15(1) and (2) UNIDROIT: the restitution claim depends on the party being able to repay in kind the equivalent to what he received. However, if the party against whom the restitution is claimed cannot return in kind, he must do so with its pecuniary value. It does not matter whether the impossibility to return in kind is attributable to the party who has to do the returning.
However, there is a difference in the regulation of the UNIDROIT Principles. According to art. 3.2.15(3), where he, who received the benefit of compliance, cannot return in kind, he does not have to pay any monetary sum if the impossibility is attributable to the other party (who is claiming the restitution). In contrast, in PECL, it is irrelevant whether the impossibility to make restitution in kind is attributable or not the other party. That party is still entitled to claim a reasonable sum in payment if the other party cannot return in kind.
14.1.1.2 The Regulation in the DCFR and in Acquis Principles
The principles of the existing EC Contract Law (“Acquis Principles” published in 2009) do not contain specific rules for the restitution of benefits arising from the avoidance of the contract; probably due to this issue not being addressed sufficiently in the European contractual acquis.
The Acquis Principles are limited to the releasing effect of the termination of the contract in art. 8:303(1), so that, from the moment that the termination is effective, both parties are released from the performance of their respective obligations. Moreover, art. 8:303(2) provides, within the effects of termination , that the obligation of each party is to effect restitution of whatever it has fulfilled under the contract. In case of partial termination, each party shall be obliged to return only that which each party received under the part of the contract affected by the termination.
The DCFR, in line with the PECL, and unlike the CESL, provides two regimes for the effects of avoidance and the effects of termination of the contract.
The effects of the termination of the contract for non-performance are governed by Book III, particularly in Chapter 3, Section 5, Sub-section 4: “Restitution”. According to art. 3:510: “Restitution of benefits received by performance: (1) On termination under this Section a party (the recipient) who has any benefit received by the other’s performance of Obligations under the terminated contractual relationship or terminated part of the contractual relationship is obliged to return it. Where both parties have obligations to return, the obligations are reciprocal”.
This simultaneity or reciprocal restitution of benefits is expected when both parties have benefits restored; as provided by the Vienna Convention, although the CESL silent on this matter.
The DCFR also provides that the restitution must be made in kind, but if the benefit (not being money) cannot be transferred because it causes an unreasonable effort or expense, the recipient shall pay of a sum of money equivalent to its value (III.-3:510(3)). Here, the impossibility to return in kind does not preclude the restitution claim , unlike the PECL and the UNIDROIT Principles.
The restitution effect of termination does not require that, in the case of contracts for performance in separate parts or otherwise divisible, what was received by each party resulted from the due performance of a part for which counter-performance was duly made (III-.3:512 (I)). By way of exception, paragraph (I) shall not apply and, therefore, the party will be obliged to return (in kind or monetary equivalent) if what was rejected by the terminating party was rejected correctly, in accordance with III.-3:510, or if the value of the non-transferable allowance received by the terminating party had been eliminated or fundamentally reduced as a result of the failure of the other party. In this sense, the CESL simplifies this rule: on the termination of a contract for performance in instalments or parts the party is entitled to recover benefits when the nature of the contract is such that part performance holds no value for the party, who is not necessarily the aggrieved party.
DCFR, in II.-7:212(2), deals with the effects of avoidance, by referring to the rules on unjust enrichment, as to whether each party is entitled to recover whatever has been provided as a result of an avoided contract, or its pecuniary equivalent. According to paragraph 3, the restitution for the owner who correctly transferred the property under the void contract shall be governed by the rules for the transfer of property.
14.1.2 The Regulation in the CESL: Rules and Scope of Restitution
The Proposal for a Regulation on a Common European Sales Law in its Chapter 17 of Part VII regulates restitution ; specifically, art. 172 provides: “Restitution on avoidance or termination
1.
Where a contract is avoided or terminated by either party, each party is obliged to return what that party (‘the recipient’) has received from the other party.
2.
The obligation to return what was received includes any natural and legal fruits derived from what was received.
3.
On the termination of a contract for performance in instalments or parts, the return of what was received is not required in relation to any instalment or part where the obligations on both sides have been fully performed, or where the price of what has been done remains payable under Article 8(2), unless the nature of the contract is such that part performance is of no value to one of the parties”.
Therefore, art. 172 CESL establishes several rules for restitution as a consequence of avoidance or termination of the contract: (1) restitution of benefits in kind, (2) restoration of these benefits to include all legal and natural fruits , and (3) restitution in contracts for performance in instalments or parts.
Amendments 225–228, introduced by the Legal Affairs Committee of the European Parliament, include a new art. 172.2a and a 172.2b, concerning the time and cost of restitution. Article 172.2c, as amended, allows a party to withhold the performance of an obligation to return if he has a legitimate interest in so doing; for instance, where this is necessary in order to ascertain the existence of a lack. Moreover, art. 172.2d, as amended, provides, in the case of non-performance of an obligation, for the return or payment under Chapter 17 by one party, and the right of the other party to claim damages under arts. 159–163. As we have seen the European Parliament has confirmed these amendments by the legislative resolution of 26 February 2014.
a.
Restitution in kind (“in natura”)
Restitution is the main effect of termination and avoidance of the contract. Each party, regardless of who has avoided or terminated the contract or who has caused the avoidance or termination, is required to return whatever he have received under the contract.
In the CESL, the rule is that benefits have to be returned in kind; that is, where avoidance or termination of the contract arises, the parties must have returned to them the same things that each received. This is in contrast to other legal systems, such as English law, where this is always an amount of money (money had and received).
Unlike art. 82-1 CISG, the impossibility of restitution in kind allows the party concerned to terminate the contract; neither is restitution conditional on what can be made in kind, as in the UNIDROIT Principles (art. 7.3.6). So, in the CESL, a party who cannot make restitution in kind is authorised to terminate or void the contract, and to claim restitution of the benefit supplied. Therefore, restitution arises whether or not the obligation of the parties consist in the transfer of any property or money; and the impossibility of returning the goods supplied does not preclude the right to termination or avoidance of the contract, nor the obligation of restitution, as in PECL (art. 9:309) and the DCFR (III.-3: 515 (3)).