8

The Performance of a Contract

1. INTRODUCTORY REMARKS

The section of the BGB dealing with the ‘extinction of obligations’ (Erlöschen der Schuldverhältnisse) enumerates four different ways of extinguishing a debt, ‘performance’ (Erfüllung) being the normal way in which this result is achieved (§§ 362–71). Paragraph 362 I BGB states the general rule that an obligation owed to the creditor comes to an end if the debtor performs it. The remaining three ways are substitutes for performance (Erfüllungssurogate). They are: deposit (Hinterlegung, §§ 372–86), set-off (Aufrechnung, §§ 387–96) and release (Erlaß, § 397). The manner in which an obligation is performed raises a number of questions. In this chapter we will limit our observations to three main points: the relationship between performance and counterperformance (below, section 2); time and place of performance (below, section 3); and performance through third parties (below, section 4). In actual legal practice the most important among the ‘substitutes’ for performance is set-off which will be discussed in the remainder of the chapter (below, section 5). At the same time, the conditions of performance determine the background against which irregularities of performance must be understood, so these conditions form a key thread that runs through this and the next two chapters.

2. PLEA OF UNPERFORMED CONTRACT

(EINREDE DES NICHTERFÜLLTEN VERTRAGES)

Brox, Die Einrede des nichterfüllten Vertrages beim Kauf (1948); Bydlinski, ‘Die Einrede des nichterfüllten Vertrages in Dauerschuldverhältnissen’ in Festschrift für Steinwenter (1958) 140; Jahr, ‘Die Einrede des bürgerlichen Rechts’ JuS 1964, 125, 218, 293; Keller, ‘Das Zurückbehaltungsrecht nach § 273 BGB’ JuS 1982, 665; Kirn, ‘Leistungspflichten im gegenseitigen Vertrag’ JZ 1969, 325.

(a) Classification of Contracts

Before discussing the problems which in German law are regulated by §§ 320–2 BGB, it may be helpful to recall briefly the classification of contracts.

In common law systems the most significant classification is that which distinguishes between, on the one hand, offers in which the offeror seeks to obtain a promise, ie an obligation of the offeree in exchange for his own promise (bilateral or

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synallagmatic contract) and, on the other hand, offers in which the offeror does not seek a promise, but merely an act or result on which his own promise is conditioned, ie a promise in return for what common lawyers would call executed consideration (unilateral contract). In German law almost all offers, including those calling for an act, are capable of acceptance by any expression of assent on the part of the offeree. Therefore, when A has made an offer to B, and such offer is one calling for an act, B’s act of performance will normally be regarded as expression of assent to the offer as well as performance of the contract concluded by such assent. (See also, § 151 BGB: acceptance without declaration to the offeror.) However, the classical example of a unilateral contract in common law systems, the offer to the public of a reward for the doing of some act, is treated as a ‘one-sided legal transaction’ (einseitiges Rechtsgeschäft). (For more details see our discussion of this topic in chapter 2, section 2(g), p 67). It is distinguished from a contract because no agreement is necessary. Therefore, the actor is entitled to the reward even though he had no knowledge of the promise (§ 657 BGB: Auslobung). This avoids the difficulty, if not impossibility, of explaining that, in a situation like this, a contract has come about. It follows from what has been said that unilateral contracts, as understood in the common law, have no parallel in German law. All contracts are ‘bilateral’ in the sense that they are conceived of as ‘bilateral legal transactions’ (zweiseitige Rechtsgeschäfte). But this broad category is subdivided into two main groups of ‘bilateral’ contracts. Thus, we can have (a) contracts obliging one party only (einseitig verpflichtende Verträge) such as a promise to make a gift, here only the promisor incurs an obligation (§ 516 BGB) (other examples would be a gratuitous loan (§ 607 BGB) and a gratuitous deposit for safekeeping (§ 688 BGB)). Alternatively, (b) we have synallagmatic (from the Greek word ‘synallagma’, which means exchange) contracts where the performance promised by one party is to be exchanged for that of another (gegenseitiger Vertrag or synallagmatischer Vertrag). For the sake of clarity, however we must hasten to add that this classification is not yet complete.

First, the German concept of gratuitous agency or mandate (Auftrag) does not fit into these two main categories of contract. ‘By the acceptance of a mandate the mandatary binds himself gratuitously to take care of some matter for the mandator entrusted to him by the latter’ (§ 662 BGB). But the mandator is under an obligation to reimburse the mandatary if he incurs expenditure which he may regard as necessary under the circumstances (§ 670 BGB). This being so, mandate is neither a purely gratuitous transaction nor can it be regarded as a synallagmatic contract, for the mere reimbursement of outlays is no counter-performance. Therefore mandate is classified as ‘imperfectly bilateral’ (unvollkommen zweiseitig).

Secondly, the brokerage contract (Mäklervertrag) yields a close analogy to the unilateral contract as defined in common law systems. In the normal case of a simple brokerage contract, a fee is promised for an act, the requested act being the supply of information concerning the opportunity to make a contract (§ 652 BGB). The broker is under no obligation to perform the requested act and the promisor may withdraw his promise. Thus, at least at the outset, the situation is comparable to the typical factsituations giving rise to a unilateral contract in common law systems. However, it must be borne in mind that supplying the information does not make the promise binding at that point because the promisor still remains entirely free to enter or not to enter into the contract the conclusion of which is suggested by the broker’s information. The bro-

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ker is not entitled to his fee if the principal’s decision is negative. Freedom of contracting does of course permit a contrary stipulation. Where this has been done, the contract is synallagmatic (so-called Maklerdienstvertrag or Maklerwerkvertrag, as the case may be). But the simple brokerage contract would thus have an even less binding effect than a unilateral contract in common law systems. Nevertheless, the brokerage contract must be regarded as a contract which is concluded at the moment when the parties agree on its terms. The consideration doctrine being unknown in German law, there is no conceptual barrier to the recognition of a ‘contract’ that creates obligations only on a condition the occurrence of which depends on the will of the promisor. (In the common law systems the estate agency contract is another type of unilateral contract; but some of its unusual features are best studied in specialist works.)

Thirdly, the mandate to grant a credit (Kreditauftrag) is functionally related to the common law concept of unilateral contract. The relevant Code provision deals with the case where A asks B to grant a credit to C. If B grants the credit in his own name and on his own account, the mandator (A) becomes liable to the mandatary (B) as a guarantor for the obligation of the third party (C) arising from the giving of credit (§ 778 BGB). Again, the similarity between German law and common law systems is limited, for A’s promise of guarantee may be accepted by B’s counter-promise, ie his promise to grant the requested credit to C. In spite of the power to revoke vested in each party (§ 671 I BGB), a consensual contract has come about by B’s acceptance. (For more details of these types of obligations with a close affinity to the unilateral contract of the common law systems, see W Lorenz, ‘Acceptance by Performance’ in: RB Schlesinger (ed), Formation of Contract II (1968), pp 1256–64.)

(b) Plea of Unperformed Contract (Einrede des nicht erfüllten Vertrages)

The aim of this brief introduction to the classification of contracts in German law has been to show that those sections of the BGB which deal with the exceptio non adimpleti contractus (§§ 320–2) are applicable only if the obligation which the claimant has failed to perform is synallagmatically related to the obligation that he seeks to enforce. In other words, these provisions are concerned with the fulfilment of the main obligations embodied in a synallagmatic contract. In a wider sense, the exceptio may be regarded as granting a right of retention (Zurückbehaltungsrecht), though a warning must be added not to confuse the exceptio with the general right of retention (the so-called allgemeines Zurückbehaltungsrecht) laid down in § 273 BGB, which is in the nature of a lien. It will be necessary to come back to this legal institution at a later stage of this discussion (below, section 2(c)).

Unless the parties to a synallagmatic contract, for instance a contract of sale, have agreed that one of them has to render performance before that of the other, the rule laid down in § 320 I 1 BGB is that performances must be exchanged contemporaneously or concurrently. Leaving aside the dogmatic differences existing in this area of the law between common law systems and the civil law, this statement is, at least in its essentials, in conformity with the formulation used in section 28 of the Sale of Goods Act 1979, which says that delivery of the goods and payment of the price are concurrent conditions and which presupposes that the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer must be ready and willing to pay the price in exchange for possession of the

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goods. The policies behind these two rules are the same, that is to say, to protect the party from whom performance is claimed against the risk of having to make performance without being sure that the agreed counter-performance will be forthcoming. The claimant, on the other hand, must be ‘willing and capable to render the performance incumbent on him,’ for otherwise the other party cannot be considered to be in default in performing his obligation (see RGZ 126, 280, 285).

This being so, one would have thought that synallagmatically-related obligations are subject to the restriction that each party must frame his action so as to demand only Erfüllung Zug um Zug (contemporaneous performance). However, the BGB has adopted a different method, for it merely speaks of a ‘right’ of the defendant to refuse to perform his part until the plaintiff has performed his part (§ 320 I 1 BGB). This countervailing right (Gegenrecht) provides the basis for his defence (Einrede); but this defence must be pleaded by the defendant. Therefore the judge will not take notice of it ex officio nor will he ask the plaintiff whether he has performed his part of the bargain. The practical consequence of this so-called ‘defence theory’ (Einredetheorie) may be tested by looking at the case where the defendant has failed to appear in court. In such an event, the plaintiff need not allege that he has performed his obligation and a judgment by default will be entered against the defendant (Versäumnisurteil, see § 331 Code of Civil Procedure, ZPO) provided of course that the plaintiff has convincingly established his claim.

English law can be contrasted with the position under § 320 I 1 BGB: except where legislation specifically provides otherwise (and even section 28 of the Sale of Goods Act 1979 is ‘only’ ius dispositivum), the question of the accepted order in which the parties are to perform their synallagmatically related obligations is dependent on the construction of the contract and the nature of the promise that each has made to the other. Express provision in the contract that one party’s performance is a condition precedent to that of the other is a relatively straightforward case, although even here the interpretive question may arise whether such a condition is one on which the existence of the contract is itself contingent or whether A has promised B that A will bring about that stipulated event: see Trans Trust SPRL v Danubian Trading Co [1952] 2 QB 297 and the discussion in Treitel, The Law of Contract, pp 762. Equally, the contract could be construed to require concurrent (or simultaneous) performance: indeed, in the absence of express contractual provision to the contrary, this would appear to be the default position for the delivery of goods and payment of freight (respectively) under a charterparty (see Paynter v James (1867) LR 2 CP 348, at 355). (See further, China Offshore Oil (Singapore) International Pte Ltd v Giant Shipping Ltd (‘The Posidon’) [2001] 1 Lloyd’s Rep 697, especially at 701–2.) If however the parties’ promises are construed as operating independently each of the other, then each can enforce the other’s promise even if he has yet to perform his own: in this circumstance, the other party must then bring a counterclaim to enforce the performance of the first party’s promise. (On this, see Leiston Gas Co v Leiston-cum-Sizewell Urban District Council [1916] 2 KB 428, at 434, Aegnoussiotis Shipping Corporation of Monrovia v A/s Kristian Jebsens Rederi of Bergen, (‘The Aegnoussiotis’) [1977] 1 Lloyd’s Rep 268, at 276 and Treitel, The Law of Contract, pp 763–6.)

If the defendant raises the defence under § 320 I 1 BGB, it is up to the plaintiff to show that he has either performed his part or that the contract imposes on the defendant a duty to perform first (Vorleistungspflicht). Such a duty may result from a term

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in the contract or it may be imposed on that party by law. In contracts where the performance of one party extends over a period of time, the BGB lays down a duty to perform in advance; but it must be emphasised that these rules are not mandatory (but ius dispositivum). In practice, stipulations to the contrary are regularly made.

The Code contains many illustrations of this rule. Thus, according to § 579 I BGB, the rent is payable at the end of the term of lease of an object other than residential property (for which see § 556 b I BGB: rent is due at the beginning of the respective period of time). If the rent is measured in periods of time, it is payable after the expiry of each of the periods. In contracts for service (§ 611 BGB) the remuneration is payable after the performance of the service (§ 614 sentence 1 BGB). Again, if the remuneration is measured in periods of time, it is payable at the end of the periods (§ 614 sentence 2 BGB). In contracts for work on goods and building contacts (§ 631 BGB) the remuneration is payable at the time of acceptance of the work; but if the work is to be accepted in parts then the remuneration for each part is payable at the time of its acceptance (see § 641 I BGB). ‘Acceptance’ of the work is usually defined as ‘the act of physical reception of the contractor’s performance by the customer, accompanied by the express or tacit declaration of the customer that, in substance, he acknowledges the work as a performance conforming with the contract’ (RGZ 110, 404, 406–7). Where the nature of the work is such that ‘acceptance’ is impossible, the completion of the work takes the place of acceptance (§ 646 BGB). It should however be borne in mind that the general conditions of building contracts most widely used in Germany contain detailed rules governing the acceptance of the work (Verdingungsordnung für Bauleistungen = VOB [B] § 12 and § 13 no 4). In this context, the German VOB (B) provides that acceptance of construction work is to take place in stages and the remuneration is usually apportioned to each stage (BGH NJW 1982, 2494, case no 108, concerning the retention of a certain percentage of the remuneration as security).

Since the party who has to perform in advance is, in essence, giving unsecured credit to the other party, he runs the risk of not receiving the agreed counter-performance. The legislator has alleviated this risk by granting a special defence which is based ultimately on the idea underlying the clausula rebus sic stantibus, ie, that a contract ceases to be binding because ‘matters did not remain the same as they were at the time of contracting.’ Thus, the BGB provides that a person obliged by a synallagmatic contract to perform his part first may refuse to perform it if, after the conclusion of the contract, a significant deterioration in the financial position of the other party occurs which, thereby, endangers the claim for the counter-performance. In such cases, the other party is faced with two alternatives: either he can offer the counter-performance or he can give adequate security for it (§ 321 BGB). In his analysis of English law, Treitel (The Law of Contract) pp 764–6, notes this risk of requiring performance without security for the performance of the other party: if classified as independent promises, each party bears this risk with respect to the other’s performance and this consequence has led the courts to show great reluctance to construe promises as independent (see eg, Jones v Barkley (1781) 2 Dougl 648, at 689; 99 ER 434). This risk is further mitigated in the consumer context by the Unfair Terms in Consumer Contracts Regulations 1999: see its reg 5(5) and Schedule 2, para 1(o), which renders prima facie unfair any term which has not been individually negotiated and which makes the consumer’s promise independent of the other party’s obligations. The risk

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run by the party who is required to perform first (as a condition precedent to the accrual of the other party’s liability to perform) is acknowledged by the US Restatement 2d, Contracts in its § 234(1), by adopting simultaneous performance as the default position where there is any doubt as to the interpretation of the contract. Treitel takes the view that English law should typically adopt the same approach (The Law of Contract, p 764; although cf his subsequent discussion (pp 764–5) of cases where construction of the contract as involving independent obligations would be appropriate).

There are further situations in which a party who is obliged to perform in advance will be relieved of this duty. Suppose the other party is in default of acceptance (mora creditoris) or he refuses to make the counter-performance. This would entitle the party who has to perform first to bring an action for performance after receipt of the counter-performance (§ 322 II BGB). Yet, this is not the only choice open for this party. For he may also decide to treat this as a repudiation of the contract and take the steps provided in § 323 BGB leading to the termination of the contract. Similarly, under English law it is highly likely that such refusal to accept (see Treitel, The Law of Contract, pp 766–8) or to perform would amount to a repudiatory breach of the contract and would entitle the first party to rescind the contract and thus refuse to perform. More generally, at any stage where the other party’s non-performance amounts to a substantial failure to perform (on which see Treitel, The Law of Contract, p 769 ff for detailed discussion), this will usually entitle the first party to rescind the contract and thus refuse (or cease) to render performance himself.

Since clauses stipulating for the advance performance of one party derogate from the principle that performance and counter-performance are concurrent conditions, the legislator takes a critical view of such clauses if they are contained in the general conditions of contract (Allgemeine Geschäftsbedingungen = AGB). Therefore it is laid down in § 309 Nr. 2 (a) BGB that the plea of non-performance (§ 320 BGB) may not be excluded or restricted in such standard form contracts. (See, as to judicial control of standard terms and the scope of application of § 309 BGB, chapter 3, section 5, p 163.) However, so far as clauses stipulating a Vorleistungspflicht are concerned the courts have adopted a flexible attitude because there are numerous situations in everyday life where advance payments are indispensable (BGHZ 100, 158, 161 concerning the general conditions of a travel agency; the relevant case law is listed by Münchener Kommentar- Basedow, § 309 Nr. 2 Rn. 7 et seq).

(c) General Right of Retention (allgemeines Zurückbehaltungsrecht)

As already indicated above (section 2(b)), the legislator has also made provision for a general right of retention which operates in situations where the duties of the parties are not synallagmatically related to each other. If the debtor has a matured claim (einen fälligen Anspruch) against the creditor arising ‘from the same legal relationship’ (aus demselben rechtlichen Verhältnis) on which his own obligation is based, he may, unless a contrary intention appears from the obligation, refuse to render the performance due from him until the performance due to him is effected (§ 273 I BGB). The effect of this right of retention is comparable with the effect of the plea of unperformed contract (§ 322 I BGB), ie the court may order the other party to perform on receipt of the performance due to him (§ 274 I BGB: contemporaneous performance).