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Unwinding Failed Contracts: New European Developments

Document Cited in Related
Vincent
Date01 January 2017
Pages1-29
DOI10.3366/elr.2017.0387
Author
Published date01 January 2017
TWO RECENT REFORM PROJECTS

Comparative lawyers have recently been faced with two important European reform projects: the Swiss draft Obligationenrecht 2020 and the French reform of the law of obligations in the Code Civil. This essay focuses on a common element of both reform projects, namely rules for the unwinding of invalid and failed contracts.

The Swiss draft <italic>Obligationenrecht 2020</italic>

In Switzerland, the law of obligations is contained in a single code called Obligationenrecht, which, in English, rather unoriginally translates to “law of obligations”. The original code was passed in 1882, but it was revised on the occasion of the introduction of the Swiss Civil Code in 1911. Although the Obligationenrecht was formally incorporated into the Swiss Civil Code, it has mostly been viewed and used as an independent code, which, having undergone various changes over the years, celebrated its 100th anniversary some years ago. In the wake of this anniversary, a group of Swiss legal academics presented, in 2013, a draft for a new law of obligations.1 The draft, the so-called Obligationenrecht 2020, contains 220 articles with explanations. It is an academic project involving over 25 law professors and a considerable number of advisors and assistants. The intention of the drafters is to modernise the existing code, to adapt its rules to modern developments, to close gaps in the law and to remove discrepancies.2 The simple and clear language of the Swiss code, which is intended to be comprehensible even for laymen, has been retained in the draft. The drafters want to start a discussion and hope that, perhaps in 2020, the draft will be become law.3 However, the chances of implementation seem to be rather small, at least for the moment.

Some of the draft's articles merely codify case-law, for example the article dealing with the effect of a change of circumstances on the contract.4 But the draft also contains substantial innovations, such as rules on the incorporation and control of standard terms.5 The provisions on breach of contract are organised in a way that mirrors the Vienna Sales Law.6 The law of limitation of actions has been substantially modernised.7 The proposed chapter on delict contains important innovations that take up ideas of former reform proposals, including a general clause for delictual liability following the French model, and a rule imposing strict liability for dangerous activities.8

 Reform of the French law of obligations

In France, the year 2004 marked the 200th anniversary of the Code Civil and also saw the beginnings of a broad reform debate. After 200 years, the Code Civil had become somewhat outdated and did not seem to accurately represent the modern French law of contracts and obligations anymore. This first led to two academic reform drafts: the Catala draft, published in 2005, and the Terré draft from 2008.9 The first legislative step was a reform of the law of limitation of actions in 2008. Now, the general law of obligations is being reformed on the basis of a draft by the Chancellerie, the Ministry of Justice. The first version was presented to the public in spring 2015.10 A slightly modified version of the rules was passed in form of an ordonnance in February 2016 and became law on 1 October this year.11 The reform amounts to nothing less than a fundamental – and perhaps overdue – modernisation of the French law of obligations and a radical change of the Code Civil.

The new Code will contain a chapter on the conclusion of contracts, including rules on offer and acceptance, standard terms and duties during negotiations.12 The cause will not be a requirement of a valid contract anymore.13 Regarding contractual mistakes, the present case law, which differs considerably from the rules of the Code Civil, will be incorporated into the new Code.14 There will be detailed rules on capacity, agency and contracts for the benefit of third parties, on assignment, the substitution of debtors and the transfer of the whole contract to another party.15 The remedies for breach of contract are listed and arranged in a similar way to the Swiss draft and the Vienna Sales Law.16 Termination of a contract will be possible by simple declaration, without the help of a court, if there is a resolutive clause in the contract or if the creditor has set a time limit for performance.17 A substantial reform will be the introduction of a rule on imprévision, that is, the modification or termination of a contract due to changed circumstances.18 Legislative intervention has been made necessary by the refusal of French courts to introduce such a remedy on their own initiative. Last, but not least: the law of unjustified enrichment, which up until now has been judge-made law outside the Code, will be codified.19

 A unified regime for the unwinding of failed contracts?

A common element of both the Swiss draft and the new Code Civil is a unified regime for restitution after failed contracts. ‘Failed contracts’ in this sense are contracts that are void or have been avoided, contracts that have come to an end due to a resolutive condition, frustrated contracts and contracts terminated for breach. The notion of “restitution” after failed contracts does not bear its Scots technical meaning, nor does it refer to any substantive category of law like contract or unjustified enrichment. Yet, this is exactly the question that haunts several legal systems: is restitution after failed contracts based on contract or unjustified enrichment or something else? Do we, in this respect, have to distinguish between breach, frustration, avoidance and invalidity?

Both the Swiss draft and the new Code Civil contain a chapter on restitution that applies in all cases of failed contracts alike, whether the reason for the failure is invalidity, a resolutive condition, avoidance, frustration or breach. In the Swiss draft, the chapter is called “liquidation” of contracts.20 In the new Code Civil, it is called restitutions. Its rules shall be applied, not only to failed contracts, but also to other cases of restitution, like the condictio indebiti.21

 RESTITUTION AFTER FAILED CONTRACTS: A COMPARATIVE SURVEY

The fact that there are two recent legislative projects with a uniform restitution regime for all kinds of failed contracts seems to be no coincidence. If we look around Europe we see that nearly everywhere the winding up of failed contracts is fraught with difficulties.22 A major one of these is the co-existence of various different bases for the recovery claim.

Invalid and invalidated contracts

Recovery in case of an invalid contract is often achieved by way of the condictio indebiti.23 In France, Italy and other countries following the Romanist tradition, the condictio indebiti is distinguished from the general enrichment action and subjected to the traditional Roman rules: there is no general loss of enrichment defence, however, where specific property is transferred and cannot be given back, the bona fide recipient is not liable if he was not at fault; in case he sold the property, he is only liable for the proceeds.24 In Germany, Switzerland, Scotland and other countries, the condictio indebiti is part of the law of unjustified enrichment and subjected to the defence of loss of enrichment.25 Regardless of its nature, the condictio may be able to handle unilateral undue transfers, like paying a non-existent debt, but it cannot really cope with the problems of unwinding mutual contracts, where parties exchange performance and counter-performance and where every party is well aware that it received something in exchange for something it gave away. So, in legal systems where restitution after failed contracts is based on the condictio indebiti, the specific rules governing this condictio, in particular the defence of loss of enrichment, are applied only in a modified form, or are not applied at all.26 In Germany, the last 50 years have seen the development of a special set of rules, which deal exclusively with the problems posed by the application of enrichment law to the winding-up of mutual contracts.27

Apart from the condictio indebiti, there are various other actions. Even in Roman law, the condictio indebiti was but one of several ways of recovering a performance when the contract had failed.28 It applied in cases of contracts that were void ab initio. Contracts with minors were not void, but simply not binding on the minor. In case the other party had performed to the minor, he could not use the condictio indebiti. Instead, he could bring a special action directed to the enrichment received – in quantum locupletior factus est.29 Traces of this enrichment-based action can still be found in many European legal systems and even in the common law.30

In other cases the person seeking restitution had to assert the invalidity of the contract by way of a special action. Examples are the Roman actions for fraud and for force and fear.31 It seems that these actions could be used to restore the parties to their original position: restitutio in integrum. However, restitutio in integrum, in Roman law, was also the name of an extraordinary remedy. This ambiguity has had a lasting influence on the civil law. Restitutio in integrum has been used as a remedy in order to invalidate a contract and effect restitution, in particular regarding contracts by minors and cases of laesio enormis, but is has also been used as a general principle in the course of a winding up of a mutual contract: he who seeks to recover his performance has to give back what he himself had received.32

The European ius commune knew a whole range of remedies designed to effect restitution in case of contracts that are not fully valid. In some cases, it was even possible to bring contractual actions. It is therefore not entirely surprising that different bases for restitution can also be found in modern European law. Besides the condictio indebiti, we may...

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