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Contract Law in International Commercial Arbitration: The Case of Suspension of Performance

Published online by Cambridge University Press:  21 October 2009

Joshua Karton
Joshua Karton
Affiliation:
Faculty of Law, University of Cambridge.
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Abstract

Despite much attention to the controversial lex mercatoria, international commercial arbitration remains underanalysed as a venue for contract law unification. This article considers a specific case of substantive contract law in arbitration, the remedy of suspension of performance: When will one party's non-performance enable the other party to withhold performance without terminating the contract? In domestic laws, suspension of performance is governed by clearly-defined doctrines; however, it remains unclear whether it constitutes a general principle of international law. This article places suspension in a comparative context, then analyses the published arbitral awards for indications of arbitrators' preferences.

Type
Article
Information
International & Comparative Law Quarterly , Volume 58 , Issue 4 , October 2009 , pp. 863 - 896
Copyright
Copyright © 2009 British Institute of International and Comparative Law

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References

1 D Nyer, ‘Withholding Performance for Breach in International Transactions: an Exercise in Equations, Proportions or Coersion?’ (2006) 18 Pace Intl L. Rev 30.

2 J Crawford and S Olleson, ‘The Exception of Non-Performance: Links between the Law of Treaties and the Law of State Responsibility’ (2001) 21 Aust YBIL 55.

3 Here, I use ‘international private law’ to mean the law governing international contractual relationships, as opposed to ‘private international law’, which is the conflict of laws rules of a State. Lex mercatoria, a controversial topic, purports to constitute an autonomous of transnational commercial principles deriving from practices that have evolved in international commerce, public international law and legal principles common to trading nations.

4 GH Treitel, Remedies for Breach of Contract: A Comparative Account (Clarendon, Oxford, 1988) 310–11 (emphasis in the original).

5 Debate also exists as to whether the exceptio forms a general principle of public international law. See Crawford and Olleson (n 2).

6 U Draetta, RP Lake and VP Nanda, Breach and Adaption in International Contracts: An Introduction to Lex Mercatoria (Butterworths, Salem, 1992) 163; see also PD O'Neill Jr and N Salam, ‘Is the Exceptio non adimplenti contractus Part of the New Lex Mercatoria?’ in E Gaillard, Transnational Rules in International Commercial Arbitration (ICC, Paris, 1993).

7 It should be noted that, in a variety of decisions dating back to the 19th century, the Cour de Cassation has found a general right to suspend performance under the Code Civil. See eg Req, 28 April 1862, D 1863.I.250; Req, 17 May 1938, D.H. 1938.419; Civ. 1re, 20 June 1995, Revue de Jurisprudence de Droit des Affaires, 1995, no 1361. Commentators have supported this position. R Cassin, De l'exception tirée de l'inexécution dans les rapports synallagmatiques (exception non adimplenti contractus) et de ses relations avec le droit de retention, la compensation et la résolution (Thèse, Paris 1914); J-F Pillebout, Recherches sur l'exception d'inexécution (Thèse, Paris, 1971); E Raynaud, L'exception tirée de l'inexécution dans les contrats synallagmatiques (Thèse, Paris, 1906).

8 See eg Farnsworth, EA, ‘An International Restatement: the UNIDROIT Principles of International Commercial Contracts’ (1997) 26 U Balt L Rev 1, 2Google Scholar; Marella, F, ‘Choice of Law in Third-Millennium Arbitrations: The Relevance of the UNIDROIT Principles of International Commercial Contracts’ (2003) 36 Vanderbilt J Transnatl L 1137, 1142Google Scholar; Berger, KP ‘The Lex Mercatoria Doctrine and the UNIDROIT Principles of International Commercial Contracts’ (1997) 18 Law & Pol Int Bus 943Google Scholar.

9 Treitel (n 4) 306. The exceptio can be found in jurisdictions that are part of the English legal family but have a civil law heritage, such as South Africa and Scotland.

10 ibid.

11 This usage appears to be falling into disfavour.

12 The presumption of concurrent conditions in sales contracts has been codified. In England, Sale of Goods Act 1979 s 28; in the United States, Uniform Commercial Code (‘UCC’) §§ 2–507(1), 2–511(1).

13 Crawford and Olleson (n 2) 67.

14 B Nicholas, The French Law of Contract (2nd edn, Clarendon, Oxford, 1992) 213–214.

15 Legrand, P Jr, ‘Judicial Revision of Contracts in French Law: A Case-Study’ (1988) 62 Tul L Rev 963, 1028Google Scholar, citing Cassin (n 7) 633.

16 Perhaps surprisingly, given its broad acceptance in civil law jurisdictions, the exceptio and the wider maxim inadimplenti non est adimplendum have no roots in Roman law. They were extrapolated by the medieval glossators from a variety of Roman law principles applicable to specific instances, such as the exceptio mercis non traditae, and from the general principle of good faith. R Zimmerman, The Law of Obligations: Roman Foundations of the Civilian Tradition (OUP, Oxford, 1996) 801.

17 M Müller-Chen, ‘Article 50’ in P Schlechtriem and I Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG) (2nd English edn, OUP, Oxford, 2005) 596; J Lookofsky, ‘Remedies for Breach Under the CISG’ in CL Knapp, Commercial Damages: A Guide to Remedies in Business Litigation (Matthew Bender, New York, 1989) 42–43. In England, consumers may require a seller to reduce the purchase price on defective goods. Sale and Supply of Goods to Consumers Regulations 2002, S1 2002/3045.

18 English translation from the Institute of European and Comparative Law at the University of Oxford <http://www.iuscomp.org/gla/>accessed 8 September 2009.

19 In the common law, no distinction is made between synallagmatic and non-synallagmatic bilateral contracts. In a synallagmatic contract, such as any contract for the sale of goods, the parties' obligations are exchanged for each other and are contingent upon each other. Delivery of goods is contingent upon payment of the price and vice versa. In a bilateral but non-synallagmatic contract, each party takes on obligations but the two performances are not exchanged for each other. The classic example of a bilateral but non-synallagmatic contract is one where an agent has a duty to act and the principal has a duty to reimburse the agent for his expenses. The agent's duty to act is enforced by the contract but is not contingent upon reimbursement of his expenses, while the principal's duty to reimburse is not contingent upon the agent successfully completing his performance. Treitel (n 4) 249.

20 ibid 287.

21 RH Christie, The Law of Contract in South Africa (4th edn, Butterworths, Durban, 2001) 468.

22 D Coester-Waltjen, ‘The New Approach to Breach of Contract in German Law’ in N Cohen and E McKendrick, Comparative Remedies for Breach of Contract (Hart, Oxford, 2005) 141.

23 Treitel (n 4) 303.

24 Y-M Laithier, ‘Rights and Remedies’ in Cohen and McKendrick (n 22) 118. The Cour de Cassation has upheld the right of a creditor to terminate unilaterally if the breaching party's conduct is egregious but has cautioned that such unilateral action is at the terminating party's risk. Civ 1ère, 28 octobre 1998, Bull I, no 211.

25 Treitel (n 4) 311.

26 An échange is a barter contract, where one physical thing is exchanged for another.

27 A dépôt is a deposit contract, where the subject matter of the contract is kept by one party and later returned in kind.

28 Official English translation available at <http://www.legifrance.gouv.fr>accessed 3 September 2009.

29 PDV Marsh, Comparative Contract Law: England, France and Germany (Gower, Aldershot, 1994) 325.

30 Treitel (n 4) 286–288.

31 Cass. 1e civ., Oct. 19, 1999, RJDA No 1290; see also J Ghestin, C Jamin and M Billiau, Traité de droit civil, vol. 5—Les obligations (3rd edn, Librarie Générale de Droit et de Jurisprudence, Paris, 2001) 441.

32 Nyer (n 1) 51.

33 Marsh (n 29) 324.

34 Cass soc, Oct 21, 1954, JCP 1955, II, 8563, note P Ourliac and M de Juglart, cited and translated in Legrand (n 15) 1029. Some cases do go the other way. See eg Cass req, Apr 20, 1921, D.P. 1922, I, 181. (Tenant was justified in withholding rent in its entirety after owner refused to make repairs.)

35 Cass com, Jan 30, 1979, D.S. 1979, Inf. rap. 317. In that case, the Cour de Cassation ruled that a lessee of computer disks that turned out to be defective could not suspend performance. Although the disks did not perform as well as advertised, they were viable for the lessee's purposes.

36 [1773] 99 Eng Rep 437 (KB).

37 Restatement (Second) of Contracts § 234 (1979). This section also provides that, where one party's performance requires a period of time to complete, that party must perform first.

38 Nyer (n 1) 61.

39 M Mustill, ‘The New Lex Mercatoria: The First Twenty-Five Years’ (1988) 4 Arb Intl 86, 113 fn 96, citing ICC Case No 2583, (1976) VII Ybk Intl Arbitration 124.

40 Channel Tunnel Group Ltd v Balfour Beatty Contruction Ltd [1992] 749 Q.B. 656.

41 GH Treitel, ‘Some Problems of Breach of Contract’ (1967) 30 MLR 139.

42 [1777] 126 Eng. Rep. 160 (KB).

43 ibid.

44 Treitel (n 4) 281.

45 Marsh (n 29) 325.

46 In particular, ss 10–14.

47 Treitel (n 4) 283.

48 A Ogus, ‘Remedies: English Report’ in D Harris and D Tallon, Contract Law Today: Anglo-French Comparisons (Clarendon, Oxford, 1989) 244–245, citing Sumpter v Hedges [1898] 1 QB 673. However, for a contractor to have the right to suspend work for missed payments, this must be provided in the contract.

49 [1962] 2 QB 26.

50 ibid 72.

51 Sale of Goods Act 1979 s 11. This and the following sections are largely unchanged from the 1893 Act.

52 ibid s 12.

53 ibid s 14.

54 R Goode, Commercial Law (3rd edn, Penguin, London, 2004) 127. The debtor may have the right to cure a breach and thus avoid termination, but this right is not as clearly developed in English law as in the United States. See below.

55 ibid 127–128 (citations omitted).

56 Treitel (n 4) 596–601.

57 Restatement (n 37) § 259; see also EA Farnsworth, Contracts (3rd edn, Aspen Law & Business, New York, 1999) 561–565.

58 Restatement (n 37) § 231.

59 ibid § 237.

60 Farnsworth (n 55) 556.

61 Restatement (n 37) § 259.

62 Restatement (n 37) § 241.

63 MP Gergen, ‘The Law's Response to Exit and Loyalty in Contract Disputes’ in Cohen and McKendrick (n 22) 76.

64 The UCC also contemplates a period between suspension and termination, during which the debtor may cure its breach and thus prevent termination. See UCC § 2-508.

65 Treitel (n 4) 313.

66 Farnsworth (n 55) 525.

67 Gergen (n 61) 84. The two well-known exceptions to this general rule are Jacob and Youngs v Kent, 230 NY 239, 129 N.E. 889 (1921) and Plante v Jacobs, 10 Wis. 2d 567, 103 N.W. 2d 296 (1960).

68 UCC § 2-612(3); the English Sale of Goods Act 1979 s 31(2) contains a similar rule.

69 United Nations Convention on the International Sale of Goods, (adopted 11 April 1980, entered into force 1 January 1988) (CISG) art 1(1).

70 CISG art 3(2).

71 Oberlandesgericht Stuttgart, RIW 1978, 545, 546.

72 Farnsworth (n 8) 3. PECL art 1:103(3) is indicative. It states that the PECL may be applied as the substantive law governing a contract when the parties ‘have agreed that their contract is to be governed by “general principles of law”, the “lex mercatoria” or the like; or have not chosen any system or rules of law to govern their contract’.

73 Convention on the Law Applicable to Contractual Obligations art 4, 19 June 1980 (80/934/EEC).

74 Regulation (EC) 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L 177, 6 ff.)

75 Rome I Regulation art 4.

76 The European Commission proposed that the Rome I Regulation permit the application of ‘rules of law’, but this proposal was not accepted.

77 T Klimas, Comparative Contract Law: A Transsystemic Approach with an Emphasis on the Continental Law (Carolina Academic Press, Durham, 2006) xxvi.

78 ULIS art 17; UNIDROIT Principles art 1.6; PECL art 1:106.

79 Garro, AM, ‘The Gap-Filling Role of the UNIDROIT Principles in International Sales Law: Some Comments on the Interplay Between the Principles and the CISG’ (1995) 69 Tul L Rev 1149Google Scholar.

80 Liu, C, ‘The Concept of Fundamental Breach: Perspectives from the CISG, UNIDROIT Principles, PECL and Case Law’ (2005) 9 Vindobona J Intl Commercial L & Arbitration 123, 124Google Scholar.

81 PECL art 7:104.

82 CISG art 58; ULIS art 71.

83 Explanatory Note by the UNCITRAL Secretariat, Part Three, 33 <http://cisgw3.law.pace.edu/cisg/text/secomm/secomm-71.html>accessed 3 September 2009.

84 JO Honnold, Uniform Law for International Sales (3rd edn, Kluwer, The Hague, 1999) 428.

85 11 May 2007 [V CSK 456/06]. English translation available at http://cisgw3.law.pace.edu/cases/070511p1.html.

86 ibid 426.

87 The Austrian Supreme Court, OGH Feb 12, 1998, 2 Ob 328/97t <http://cisgw3.law.npace.edu/cases/980212a3>accessed 3 September 2009, and a district commercial court in Hasselt, Belgium, JPS BVBA v Kabri Mode BV, AR 3641/94, Rechtbank van Koophandel Mar. 1 1995 <http://www. unilex.info>accessed 3 September 2009.

88 Article 3(1), which deals with the CISG's applicability to mixed manufacturing and sales contracts.

89 Honnold (n 84) 428–430.

90 V Heuzé, La vente internationale des marchandises: droit uniforme (Joly Éditions, Paris, 1992) § 393.

91 M Koehler (tr), P Schlechtriem, ‘Auslegung, Lückenfüllung und Weiterentwicklung’ (2003) Symposium zu Ehren von Professor Dr. iur. Dr. h.c. Frank Vischer, 11/5, 2003 17 <http://www.cisg-online.ch/cisg/Schlechtriem-e.pdf>accessed 3 September 2009. Article 50 should not be taken as a specific right of suspension; the travaux make clear that it derives from the remedy of price reduction, not from the exceptio.

92 T Bennett, ‘Article 71’ in C Bianca and M Bonell (eds), Commentary on the International Sales Law (Guiffre, Milan, 1987) 518.

93 CISG art 7(1) states merely that good faith is to be regarded in the interpretation of the convention.

94 Schlechtriem (n 91) § II, 5 (c)(aa).

95 Tribunals so constituted are often referred to in French as ‘amiables compositeurs’ or are said to decide ‘ex aequo et bono’. These terms are synonymous as generally construed.

96 AM Redfern and M Hunter, Law and Practice of International Commercial Arbitration (4th edn, Sweet & Maxwell, London, 2004) 54.

97 Journal du droit international (Clunet), 1981, n° 4, 924.

98 B Goldman, La lex mercatoria dans les contrats et l‘arbitrage internationaux (Clunet, Paris, 1979) 475.

99 Journal du droit international (Clunet), 1981, n° 4, 927 (author's translation).

100 (1993) XVIII Ybk Commercial Arbitration 11.

101 (1994) 2 ICSID Rep 95 (original decision, English translation); (1986) XI Ybk Commercial Arbitration 162 (annulment decision, English translation).

102 The Fertilizer Corporation of India case, published as an annex to J Paulson, ‘Third World Participation in International Commercial Arbitration’ (1984) 2 ICSID Rev 19.

103 [1937] PCIJ (ser A/B), No. 70, 4, 50.

104 There was also a second annulment proceeding, but the opinion has never been published.

105 (1998) XXIII Ybk Commercial Arbitration 128.

106 Available at <http://www.unilex.info>accessed 3 September 2009.

107 P Schlechtriem (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (2nd edn, OUP, Oxford, 1998); Bianca and Bonell (n 87).

108 (2006) XXXI Ybk Commercial Arbitration 148.

109 (2003) XXVIII Ybk Commercial Arbitration 27.

110 Bundesgerichtshof, Case VIII ZR 185/92 (9 March 1994).

111 Tarbert Trading, Ltd v Cometals, Inc, 663 F. Supp. 561, 566 fn 9 (SDNY 1987).

112 (1981) 4 Journal du droit international (Clunet) 914–921. (This award is available in full only in French; translations are the author's own.)

113 Collection of ICC Arbitral Awards (vol 1 1974–1985) 76.

114 This occurred in four of the eight awards, Klöckner and ICC Cases nos 8547, 3540 and 3267.