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4. TERMINATION

Gaier, ‘Das Rücktritts(folgen)recht nach dem Schuldrechtsmodernisierungsgesetz’ WM 2002, 1; Gsell, ‘Das Verhältnis von Rücktritt und Schadensersatz’ JZ 2004, 643; Jaensch, ‘Der Gleichlauf von Rücktritt und Schadensersatz’ NJW 2003, 3613; Kaiser, ‘Die Rechtsfolgen des Rücktritts in der Schuldrechtsreform’ JZ 2001, 1057; Kamanabrou, ‘Haftung des Rücktrittsberechtigten bei Untergang der empfangenen Leistung’ NJW 2003, 30; Kohler, ‘Rücktrittsausschluß im Gewährleistungsrecht bei nachträglicher Nacherfüllungsmöglichkeit—Wiederkehr der §§ 350, 351 BGB a.F.?’ AcP 203 (2003) 539; Perkams, ‘Die Haftung des Rücktrittsberechtigten im neuen Schuldrecht’ Jura 2003, 250; Treitel, ‘Remedies for Breach of Contract’ in

International Encyclopedia of Comparative Law, vol VII, chapter 16 (1976) para 143 et seq.

(a) Preliminary Observations

Termination of the contract must be distinguished from what we referred to as ‘rescission’ of the contract. Rescission or Anfechtung (§ 142 BGB) operates to negative retroactively (ex tunc or ab initio) the validity of the contract (see chapter 6, p 286 ff). As a result, the parties are treated as if there never had been an agreement between them. Consequently, in the absence of a causa, any performance that has been exchanged must be reversed according to the rules of unjustified enrichment (Leistungskondiktion: § 812 I 1 Alt. 1 BGB). The rationale of this drastic consequence is that the agreement between the parties was flawed, ie, affected by a defect in the contracting process that the law recognises as a ‘vitiating’ factor. That is not the issue now under consideration; and this is best reflected if a distinct term is used for the right to avoid the contract. ‘Termination’, in the sense in which we use the term here, presupposes that there has been a perfectly valid agreement. (In German two terms are used depending on whether the contract is a ‘continuing contract’ or not; in the first Kündigung is the relevant term, in the second Rücktritt is used.) A clearly different reason justifies ‘termination’ and introduces yet another exception to the principle of pacta sunt servanda, releasing the parties from the obligation undertaken in the contract. In the words of Treitel (Encyclopaedia, para 16-143):

A party who is aggrieved as a result of not obtaining the performance for which he bargained may wish, in a general sense, to put an end to further performance of the contract and also as far as possible to put matters back into the position in which they were before performance on either side was begun.

The main aim of termination is to allow the innocent party to withdraw from the contract if the guilty party committed a breach of contract. The objection of the innocent party against hanging on to the contract is not that the contract is flawed but that the performance is not forthcoming and that the creditor ought therefore to be released from the obligation of counter-performance. (See Ernst in Münchener Kommentar, vol 2a, § 323 Rn. 13.) Since the purpose of termination concerns the effect of a breach of contract on the obligation of counter-performance, the central provisions (§§ 323, 324 BGB) on termination are confined to reciprocal contracts

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(gegenseitige Verträge) or, in the terminology of the common law, contracts supported by consideration. While the obligation breached must not be the main obligation, it must as a general rule be synallagmatic, ie concern the promise of something that constitutes the reason for entering into the bargain.

The reason for termination is the breach of contract. Termination is a remedy for breach of contract. Termination is (and always has been in German law) effected by a declaration of will by the innocent party (§ 349 BGB). Termination is therefore a power (Gestaltungsrecht) of the innocent party to change, by a unilateral act, the content of the contractual obligations.

Once the contract is terminated, the parties may—as a consequence of termination— refuse any further performance and claim any performance back that may already have been rendered according to the rules of restitution laid down in § 346 et seq BGB. Termination does not therefore negative consent. Indeed, there would be no reason to do so. Nor does termination have any retroactive effects so far as the validity of the contract is concerned: it operates ex nunc. The rules of unjustified enrichment (§ 812 BGB) do not apply. Rather, the effect of termination is to bring the obligations of the parties to an end from the moment that the innocent party terminates the contract. If performance has not yet commenced, the only necessary rule is one that releases the parties from their reciprocal obligations. However, in most cases the parties will have already effected part of the performance. In order to restore the position of the parties before performance was begun, it is necessary to attribute ‘restitutionary’ consequences to termination (discussed in detail below). This is achieved in German law by actually reversing the contractual obligations and transforming the contract into a ‘relationship of obligation for restitution’ or Rückgewährschuldverhältnis. Any performance already effected must be returned, according to § 346 et seq BGB. Since this sweeping regime of restitution would cause difficulties if applied to long-term or ‘continuing’ contracts, a different approach to termination is adopted in relation to these contracts (§ 314 BGB, discussed below).

Note that the right of cancellation of certain consumer transactions (Widerruf, § 357 BGB, discussed in chapter 6, p 270) is—for entirely pragmatic reasons—also ascribed the effect of termination as laid down in § 346 BGB. This should not give rise to the misunderstanding that in those cases the ‘guilty party’ also breached the contract: that is not the case. The right of cancellation is derived from the contracting process and operates irrespective of performance.

It would serve no practical purpose to explain the approach of the old law to termination (for which the previous edition of this book may be consulted). It suffices here to say that it was highly complex and almost impossible to understand fully without reading a few hundred pages of Enneccerus, Larenz or Medicus. As already suggested, the new law is much easier to apply. The reform simplified the law in respect of the conditions of termination as well as the consequences of termination. § 323 BGB is the central provision that establishes a clearly phrased uniform approach to termination and does away with the fragmented previous rules of restitution.

So far as the substance of the new law is concerned two points should be emphasised. Termination is independent of the fault of the ‘guilty party’—another important inroad into the fault principle. This has made it possible to incorporate the various rights of termination in relation to non-conforming performance, which previously had led a life of their own. Termination and damages may be combined (§ 325 BGB).

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This brings German law closer to Anglo-American law, though it should be observed that even before the reform of 2001 the courts had in effect allowed the innocent party to claim the counter-performance back and claim damages at the same time. As a result of the reforms, it has now become much easier to justify this result. It should also be noted that the right to claim damages instead of performance is modelled after the same principles underlying § 323 BGB (except of course for the rule that liability in damages is fault-dependent). This way of proceeding was intended to achieve consistency among the secondary rights and to simplify as much as possible the remedies available in respect of a failure of performance.

Before we examine the right of termination in more detail it is necessary briefly to draw the attention of the reader to two legal instruments which, to varying degrees, play a role similar to the right of termination.

First, under certain conditions, a party may retain the counter-performance on the ground that (and so long as) he has not yet received the performance. However, this plea of an unperformed contract (§ 320 BGB) is not a remedy for breach of contract for the simple reason that it does not presuppose a breach. Rather, it translates the reciprocal nature of the contract into procedural terms and allows a party who is not required to perform first to insist on a reciprocal or concurrent (Zum um Zug) fulfilment of the obligations of performance. (We therefore discussed this principle in the context of chapter 8, p 349. However, it is readily conceded that the plea may also operate provisionally to protect an innocent party in relation to a claim by a party in breach.)

Secondly, in section 3(e)(ii) on impossibility, p 409, we discussed the rule that if performance is impossible within the meaning of § 275 BGB, the other party is automatically released from the obligation of counter-performance. (§ 326 I 1 BGB; the rule does not apply to non-conforming performance.) This rule, it should be stressed at the outset, has the same purpose as the right to terminate. We will need to return to this rule in the present section (see section 4(b)(iv), below).

(b) Duties of Performance (Leistungspflichten)

The central provision on Rücktritt or termination is § 323 BGB. It entitles the innocent party to terminate the contract if the guilty party failed to perform a reciprocal obligation of performance (Leistungspflicht, § 241 I BGB). This is by far the most important instance of the right to terminate. It is useful to give an overview of the main rules.

Any failure of performance constitutes an (objectively) assessed breach of contract. The right to terminate originates in this breach. It does not presuppose that the ‘guilty’ party was answerable (under the fault principle) for the breach. The objective nature of the breach is relevant, however, for the conditions on which the right can be exercised. If the breach consists in the total absence of (due) performance, the conditions are derived from § 323 I BGB. As a general rule, the debtor is given a second chance to perform. The innocent party is required to set a (reasonable) period for performance and only after the fruitless lapse of that period does the right to terminate arise. § 323 II BGB contains exceptions to this requirement. § 326 V BGB equally dispenses with this requirement if the breach of contract consists in the impossibility of performance. If the breach consists of a partial absence of performance, § 323 V 1

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BGB requires that if the contract as a whole is terminated, the innocent party must not have an interest in the partial performance: ie, it must be reasonable to extend termination to the whole obligation. If the breach consists of a non-conforming performance (Schlechtleistung, literally ‘bad performance’), the further condition of § 323 V 2 BGB must be met for the right of termination to arise: the breach must be serious (erheblich). The problem of anticipatory breach is dealt with in § 323 IV BGB. § 323 VI BGB excludes the right to terminate if the ‘innocent’ party is solely or overwhelmingly responsible for the breach or if the breach occurred while the creditor was in delay of acceptance and the debtor is not answerable for the breach. Finally, the effects of termination are regulated by § 346 BGB (considered separately below, section 4(d)).

It is already apparent from a first reading of the provisions of the BGB that German law (unlike French law) does not put too many obstacles in the way of an innocent party seeking release from the obligation of counter-performance. Generally speaking, so long as performance is still possible the innocent party must give the guilty party a second chance to perform (Nachfrist approach). The breach of contract must not, however, be trivial. This condition is obviously satisfied in the case of a total absence of performance. Where only part of the performance is absent, the innocent party must show that he does not have an interest in partial performance, while in the case of non-conforming performance the breach must be ‘serious’. The same approach is adopted in Directive 1999/44/EC: the innocent party must first require that the goods are brought into conformity with the contract (Article 3(3)) and termination is not available in relation to ‘minor’ defects (Article 3(6)).

The CISG adopts a different approach. It makes it considerably more difficult to ‘avoid’ the contract (referred to in German as Vertragsaufhebung). Accordingly, the right to claim damages plays a more central role. Under the CISG, the innocent party has a right of termination only if the breach is ‘fundamental’. The right to avoid the contract arises on the occurrence of the breach. No further period of grace needs to be fixed. A breach is fundamental if it substantially deprives the other party of what he is entitled to expect under the contract (see Articles 25, 49(1)(a) and 51 (2) CISG). Non-delivery of the goods without more is not regarded as a fundamental breach (see eg, Schlechtriem, UN-Kaufrecht (2nd edn, 2003), Rn. 189). Yet in order to avoid possible argument over whether the non-delivery is a fundamental breach, a period for performance may be fixed. If the seller has still not performed by the end of this period, the buyer is also entitled to avoid the contract (Article 49(1)(b)). This is not possible however in the case of non-conforming goods. The setting of period of performance does not turn a non-fundamental breach into a fundamental breach. (Once more, the Principles follow the lead of the CISG, see Article 9:301 PECL, Article 7.3.1 PICC.)

The approach of English law can hardly be called a ‘model’ approach. It has become rather fragmented and its current state clearly betrays the various concerns of its development throughout its history. (See Treitel’s succinct discussion of the relevant policy considerations concerning the interests of each side in seeking and resisting ‘rescission’, in the sense of the termination of the contract while leaving intact the claimant’s right to seek damages for breach, The Law of Contract, pp 760–1; and more generally, McKendrick, Contract Law, chapter 24 for useful source materials and discussion.) The basic starting point is that a defect in performance must amount to a

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‘substantial failure’ in that performance to entitle the innocent party to rescind. Even the operation of this test is open to a considerable degree of uncertainty, although Treitel suggests that the overriding consideration of the courts is to ensure that the availability of rescission corresponds to the practicalities of the situation in the case at bar (The Law of Contract, pp 770–1). Thus, let us look at two examples. First, where the claimant has received a benefit from the other party’s performance (however defective or incomplete) and refuses to (or cannot) return that benefit, then the courts seem unlikely to grant rescission. Secondly, and by contrast, where damages would not adequately compensate the claimant this is often a ground on which the courts rely to justify allowing rescission (compare Vigers v Cook [1919] 2 KB 475 (rescission granted since the loss—of not being able to get the coffin into the church for the funeral, due to the coffin’s negligent construction—was not one that could be measured in money) with Decro-Wall International SA v Practitioners in Marketing Ltd

[1971] 1 WLR 361 (where small delays in payments by the defendants under an ongoing contract that led to small interest payments by the claimant caused a loss that was easily quantifiable and recoverable in damages from the defendants, so rescission was refused).

The unpredictability of the operation of these principles on substantial failure of performance led both the courts and the legislature to take steps to secure greater certainty in the application of the law on termination of contracts. While this area cannot be developed in detail here, some of its basic elements should be noted.

First, where the contract expressly provides for the availability of rescission after some particular and specified failure to perform by the defendant, then as a general rule the courts will enforce that provision. (See eg, The Laconia [1977] AC 850 and Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514—in the latter, the contract was declared to be rescinded a mere one minute after the specified time had passed, so that an attempt to enforce the contract by tendering the purchase price ten minutes late was rejected: ‘the parties should know with certainty that the terms of the contract will be enforced’ (at 519).) However, this may be subject to exceptions where the assumption that the parties bargained on equal terms to agree the contract is displaced: such cases commonly concern stringent forfeiture clauses in leases (eg, breach of any covenant entitling the landlord to forfeit) and normally only amount to the provision of extra time to perform. (See eg, Nutting v Baldwin [1995] 1 WLR 201.) Similar bargaining considerations apply in the consumer sphere under the Unfair Terms in Consumer Contracts Regulations 1999 (see regs 5(5) and 8(1) and Schedule 2, para 1(g)). See however the broader statements of the House of Lords on this area in The Scaptrade [1983] 2 AC 694, suggesting that these exceptions might apply in any case where the literal enforcement of the contract would deprive the defendant of ‘proprietary or possessory rights’ (at 702). This possibility was taken to quite an extreme in the case of On Demand Information plc v Michael Gerson (Finance) plc

[2003] 1 AC 368 and has been criticised by Treitel as contrary to commercial certainty, since ‘the policy stated . . . of giving effect to commercial agreements between parties bargaining on equal terms . . . has in effect been subordinated to the legal technique used . . . to give effect to that policy’ (ie, the distinction between ‘proprietary/possessory’ and ‘merely contractual’ rights) (emphasis in the original).

Secondly, if an obligation can be characterised as an ‘entire obligation’, then failure to perform it in its entirety can entitle the claimant to refuse to pay and can treat the

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contract as terminated. For (in)famous examples see Cutter v Powell (1795) 6 TR 320 and Sumpter v Hedges [1898] 1 QB 673, which raise the spectre of the unjust enrichment of the claimant, if he is to be permitted to rescind and not be forced to pay the defendant some reasonable remuneration for the performance that has been tendered. This problem can be avoided where the contract and the facts allow a different interpretation to be placed on the nature of the obligation entered into. Thus, Hoenig v Isaacs [1952] 2 All ER 176, where finishing the furnishing job could be characterised as an entire obligation, while the quality of that performance fell to be assessed under the basic rules on substantial failure—this allowed the claimant to recover the full contract price for the furnishings, less the cost of making good the defects identified. However, it will not always be possible to analyse the case at hand in this fashion, suggesting that the doubts about the restitutionary consequences of this area are well founded. (See Treitel, The Law of Contract, pp 782–7 and 825–6, Law Commission,

Pecuniary Restitution on Breach of Contract (Law Com No 121, 1983) and McFarlane and Stevens, ‘In Defence of Sumpter v Hedges’ (2002) 118 LQR 569. Jacob and Youngs v Kent 230 NY 239, 129 NE 889 (1921), is the classic American counter-example. The contract specified Redding pipe. The builder used Cohoes, which was precisely the same as Redding. The court over-looked language of condition to hold the contractor was entitled to be paid. More generally, a party who substantially performs is entitled to be paid the contract price. Plante v Jacobs 10 Wis 2d 567, 103 NW 2d 296 (1960) (holding misplaced living room wall is substantial performance).)

Thirdly, and most importantly, as a further exception from the requirement to show substantial failure of performance, English law has long recognised a classification of contract terms into ‘conditions’ and ‘warranties’. While the former entitles the innocent party to immediate termination regardless of the severity and/or relevance of the breach (alongside which termination he may also sue for damages), a breach of the latter only gives rise to a claim for damages (see section 61(1) of the Sale of Goods Act 1979). The difficulty with this analysis is that it enables the innocent party to avoid the contract for what appears to be a mere technicality because he regrets the contract. (See the well known case of Arcos Ltd v Ronaasen [1933] AC 470: timber bought to make cement barrels was said to be ‘half an inch thick’ in the contract, but on delivery most of it was in fact 9/16 of an inch thick. It could still be used to make perfectly satisfactory cement barrels, but since the half inch stipulation was held to be a condition, the buyers were entitled to reject the timber delivered, even though the actual motivation appeared to be to avoid paying more for the timber since the market price for the timber had fallen by the time of delivery.) This ‘all-or- nothing’ solution could at least be said to have had the merit of certainty, by relieving the innocent party of the often dificult task of establishing whether the breach was sufficiently serious to amount to a substantial failure of performance. However, the extent to which this approach could also cause serious hardship to the party in breach prompted the courts to adopt a less restrictive attitude to the classification of terms. One device has been the courts’ reluctance to categorise terms as conditions; but the perhaps better known approach has been the recognition of what have been called ‘intermediate or innominate terms,’ the breach of which will give rise to a right to terminate the contract only if the consequences are sufficiently serious.

The basic distinction between a condition and a warranty was that a condition was said to go ‘to the very root of the contract’ (and thus failure to fulfil it would amount

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to a ‘serious failure in performance’), whereas a warranty related to less important or subsidiary elements of the contract: ie, requiring the claimant to accept something seriously different from that expected under the contract, would not be acceptable, but more minor defects in performance could be satisfied in the form of money (ie, damages). This approach to defining a condition would seem to cohere with the basic starting point discussed above. However, the House of Lords made clear in Bunge Corp v Tradax Export SA [1981] 1 WLR 711 that some terms have been held to be conditions, even where such substantial deprivation of the benefit expected by the innocent party had not occurred. Further, the parties may expressly classify terms as conditions and the courts will give effect to such intentions, subject to certain limitations that may be derived from the context of the use of the term ‘condition’. See the important case of Wickman Ltd v Schuler AG [1974] AC 235, where the House of Lords held that the parties probably intended ‘condition’ in a non-technical sense, especially since breach of the term was possible in a very minor way causing little or no loss at all. For a further restriction on the literal approach to the construction of such contract terms, see also Reardon Smith Line Ltd v Hansen Tangen [1976] 1 WLR 989. In that case, Lord Wilberforce focused on the key elements of the ‘description’ of the tanker to be delivered and this approach allowed the House of Lords to rule that a tanker built elsewhere than ‘Yard No 354 at Osaka’ (as stated in the contract) was not a breach of condition, while still acknowledging the force of the implied condition that the goods delivered must conform with their (now more narrowly drawn) contractual description. Finally, statutes may classify a particular term as a condition rather than a warranty: see sections 12–15 of the Sale of Goods Act 1979, which are mainly concerned with implied conditions (rather than warranties) in contracts for the sale of goods. (Note also that the right to rescind for breach of these conditions is subject to specific statutory defences in the 1979 Act: see sections 15A and 48A–48C (the latter implementing Directive 1999/44/EC).)

As suggested above, the other device used by the courts to restrict the potentially harsh consequences of strict adherence to the classification of contract terms as either conditions or warranties has been to acknowledge that there are other terms that fall into neither of these categories—known as ‘intermediate or innominate terms’. (For example, Bunge Corp v Tradax Export SA, cited above, at 714.) For the claimant to be able to assert a right to rescind for a breach of such a term, he must show that a substantial failure of performance has occurred (see, for a good illustration, The Hansa Nord [1976] QB 44, helpfully noted by Reynolds (1976) 92 LQR 17 and Weir [1976] CLJ 33). The identification of this category raises the key question: which terms fall into which of the three categories? Once again, the competing policy considerations (of restricting the right to rescind to cases of serious injury to the claimant’s rights and of securing sufficient commercial certainty) pull in different directions and the cases reflect this balance. Thus, in the Bunge Corp case (above), their Lordships were careful to stress that ‘the courts should not be too ready to construe terms as conditions unless the contract clearly requires the court to do so’ (per Lord Wilberforce at 715), yet on the facts applied the commercial certainty standard to allow rescission when notice was given 5 days after the final date specified in the contract. The general position would appear to be that stipulations as to time are likelier to be classified as conditions if the commercial context of the contract seems to require this approach; similarly, other terms seen as commercially vital or as clearly intended by the parties

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to have effect as conditions will be enforced as such. Nevertheless, while it can be argued that these developments have moved in an appropriately ameliorating direction, it cannot be said that their application on a case-by-case basis is a matter of the greatest certainty in the current state of the authorities. (For discussion, see Treitel,

The Law of Contract, pp 797–800.)

It is suggested that in developing the law, English courts now have—with the new and improved German Nachfrist-model and the ‘fundamental breach’ model of the CISG—two consistent theories of the right to terminate a contract that may provide some guidance, at the very least as to the viability of alternative ways of balancing the competing interests at stake. (See eg, McKendrick, Contract Law, pp 970–5. See also, Robert A Hillman, ‘Keeping the Deal Together After Material Breach—Common Law Mitigation Rules, The UCC, and the Restatement (Second) of Contracts’ 47 Colo L Rev 553 (1976), for a good but now dated review of the law on the general topic.)

(i) Late Performance

Paragraph 323 I BGB is the starting point for the right of termination, which is then qualified by the other sub-sections of the same paragraph and a special rule for impossibility in § 326 V BGB. Its scope of application is overarching. It includes all kinds of non-performance. The provision encapsulates the basic principle of German law that a failure of performance as such does not entitle the creditor to exercise any secondary rights unless the creditor has demanded performance, fixed a period of grace, and notwithstanding this the debtor has not performed during the period set by the creditor (the Nachfrist requirement.) So let us assume a contract for the sale of goods. If the seller fails to deliver the goods, the buyer needs to set a period for performance and only if the seller fails to perform within that period can the buyer withdraw from the contract. Likewise, if the seller delivers non-conforming goods, the buyer must first set a period for performance, which may consist of curing the defect or delivering conforming goods. As already explained, the right to claim damages instead of performance follows the same pattern (§ 281 I BGB).

We have already discussed the specific requirements as to the setting of a period for performance, above. It suffices here to reiterate the main points. The setting of a period for performance does not make sense if performance is impossible. Consequently, § 326 V BGB dispenses with this requirement. (See § 283 BGB for the right to claim damages instead of performance.) We are dealing here, therefore, first and foremost with cases of late performance. (The reader is once again referred to Figure 1 p 402 for an overview of the consequences and remedies in relation to late performance.) The period for performance must be of reasonable length; however, if it is too short it is not invalid but will be extended ex post by the court. In cases of late performance there are certain further situations in which the creditor may dispense with setting a period for performance. These exceptions are laid down in § 323 II BGB, also discussed above. This duty to give further time to the debtor does not apply where the debtor refuses performance seriously (§ 323 II Nr. 1 BGB), where the contract stipulates that performance must take place by a date determined in the contract and where it is clear that the creditor no longer retains an interest in the performance of the debtor’s performance after that date (§ 323 II Nr. 2 BGB), and where finally,

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special reasons and the interests of both parties, if balanced against each other, justify the immediate termination of the contract (§ 323 II Nr. 3 BGB).

(ii) Non-conforming Performance

Paragraph 323 V 2 BGB makes the Erheblichkeit of the breach of duty the prerequisite of the right to terminate in cases of non-conforming performance (Schlechtleistung or nicht vertragsgemäße Leistung). Hence, a minimum degree of seriousness is required for the right to terminate the contract for non-conforming performance. Of course, since seriousness is a question of degree, it is difficult to define in abstract terms. Judicial discretion thus plays a role in determining the fulfilment of this requirement in each individual case. In this sense, the presentation of English law (above) shows some similarities in that the courts have often been rather creative in exercising their interpretive power over the construction of contractual terms. (See in particular the case of Wickman Ltd v Schuler AG [1974] AC 235, discussed by McKendrick, Contract Law, pp 926–33).

Non-conforming performance is an instance of partial performance. One could therefore conceive a right of ‘partial’ termination. It is important to realise that a partial ‘termination’ is not available in relation to non-conforming performance. The interest of the creditor in being partially released from his obligation of counterperformance is protected by other means. He is granted a right to price-reduction in the special parts of the law of contract (eg, § 441 BGB, contract of sale; cf Article 3(5) of Directive 1999/44/EC and section 48C of the Sale of Goods Act 1979), which if exercised reduces the obligation to pay the price in relation to the extent of the nonconformity. (Further details on this are given in chapter 10.) If the price has already been paid, the creditor is entitled to partial restitution of the counter-performance (§ 441 IV BGB). However, restitution does not extend beyond that. In particular, the performance is not restored to the debtor. This right to price reduction fulfils the same purpose as a right to a partial termination. It accordingly follows the same requirements as the right to termination, except of course that the breach need not be serious. This is expressed in the respective provision by the words: the creditor may ‘instead of termination’ effect a price reduction and the proviso that § 323 V 2 BGB does not apply (eg, § 441 I BGB). It follows that where the breach is serious, the aggrieved party may elect between price reduction and termination.

When, therefore, is the breach sufficiently ‘serious’? Under the old law, the threshold of seriousness affected all rights in respect of the non-conformity. Unsurprisingly, only the most trivial breaches were slotted into this category and did not play any role in actual practice. The present approach is different, for it entitles the creditor to price reduction in cases of minor breaches and to price reduction or termination in cases of serious breaches. The question therefore is whether the distinction is made, between those breaches that entitle the creditor to terminate and those that do not, by following the old criteria. This is a matter of some controversy. (In favour of retaining the old standard, see Faust in Bamberger and Roth (eds), BGB, (2003), § 437 Rn. 25 et seq with references, Bundestags-Drucksache 14/6040, pp 187, 231; preferring the new approach, Ernst in Münchener Kommentar, § 323 Rn. 243; Staudinger-Löwisch, § 323 Rn. C30.) It is interesting to observe that the ECJ will also have something to contribute in this respect. For Article 3(6) of Directive 1999/44/EC entrusts the court

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with the task of defining a ‘European’ threshold for the right of termination (‘minor breaches’ do not entail a right of termination). It was the intention of the legislator, so far as it can be discerned from the preparatory works, that the Directive’s approach to the question of the ‘seriousness’ of the breach was also adopted in § 323 V 2 BGB (Bundestags-Drucksache 14/6040, p 231: ‘geringfügige Vertragswidrigkeit’). This clearly excludes a threshold such as that contained in Article 25 CISG (contra Ernst, cited above). For a breach that substantially deprives the aggrieved party of what he was entitled to expect under the contract cannot be regarded as ‘minor’—indeed, such a breach is rightly termed ‘fundamental’. It therefore seems likely that only trivial breaches will be covered (‘Bagatellfälle’), although where exactly one draws the line will depend on the facts of the individual case.

‘Minor breaches’ may arise if, for instance, defects of goods can be put right without any delay and great effort (see the example provided by Faust, cited above: a car is delivered that has a defective bulb), insignificant diminutions in value, or defects that do not prejudice the utility of the performance for the creditor. If these guidelines were to be adopted, the discretion of the court would be much reduced. Of course, this comes at the price: ‘escaping’ the contract for ulterior motives becomes easier, athough it should be noted that termination would still not be available for purely ‘technical’ breaches, ie, breaches that are insignificant from an overall evaluation of the parties’ obligations. This remains an advantage over the ‘condition’-based approach of English law, although when this is analysed in the light of sections 48A–48C of the Sale of Goods Act 1979 and of the case law discussed above, the English approach is perhaps less consistently wedded to this starting point than it might appear at first sight. Nevertheless, it is certainly the case that where the wording and context of the contract are clear and commercial, the Arcos Ltd v Ronaasen (cited above) result is indeed still the basic position.

(iii) Partial Failure of Performance

Paragraph 323 V 1 BGB deals with partial performance. Partial performance must first be distinguished from non-conforming performance. It is clear from the foregoing section that non-conforming performance is regulated separately by § 323 V 2 BGB, and it is therefore not covered by § 323 V 1 BGB. Generally speaking, this is common ground. At the fringes however differentiation between the two becomes controversial. (For instance, § 434 III BGB treats the delivery of a lesser quantity than promised as a case of non-conforming performance. It is controversial whether (as one would assume at first sight) the application of § 434 III BGB to quantitative partperformance implies the criteria of sentence two of § 323 V BGB; see Münchener Kommentar- Ernst, § 323 Rn. 213 et seq, for a discussion of the different views.)

Partial performance must be further distinguished from total non-performance. This may seem obvious, but the distinction sometimes involves subtle reasoning. In the case of total non-performance, the right of termination of the whole contract follows exclusively from § 323 I BGB, whereas in the case of partial non-performance the innocent party must in addition prove a lack of interest in partial performance. (§ 323 V 1 BGB)

Partial non-performance presupposes, first, that performance can be divided and that dividing performance into several parts does not violate the will of the parties (see

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Ernst in Münchener Kommentar, § 323 Rn. 201 for references). This means that even if a separation of different parts is possible on the facts, it still depends on the intention of the parties whether the performance can be so divided. Compare here the English cases on severable obligations, typically where payment is due from time to time, in return for performance of particular and specified parts of the contract: eg, employment contracts where a periodic wage is paid or building contracts involving progress or stage payments. See Treitel, The Law of Contract, pp 784–7 and note that a claim for breach for failure to render the remainder of the performance may still lie, even though the debtor may claim payment for those parts of performance properly completed: Ritchie v Atkinson (1808) 10 East 295 (re the debtor’s claim) and 530 (sub nom Atkinson v Ritchie, re the creditor’s claim in damages). See also, and Restatement, Second, of Contracts § 240 (Part Performance as Agreed Equivalents). UCC 2-612 has a liberal rule for instalment requirements that says non-conformity of one instalment is grounds for cancelling the whole if the noncomformity substantially impairs the value of the whole. The Bundesgerichtshof applies the criterion of whether the different parts of performance were meant according to the purpose of the contract to have the same fate (‘zusammen stehen und fallen sollen’—literally, ‘shall stand and fall together’). For instance, the delivery of computer software and hardware cannot normally be separated if the contractor promised a unitary solution and the customer sought to avoid having to deal with separate suppliers (eg, BGH NJW 1990, 3011, 3012, the same problem arose under the old § 326 BGB). If that is the case, performance in parts does not constitute ‘partial performance’ in the sense of § 323 V 1 BGB. The creditor does not need to show that he has no interest in partial performance to terminate the whole contract.

Secondly if performance is severable in the sense just indicated, the creditor may reject any part performance, in which case the failure of performance becomes total and § 323 I BGB applies. § 266 BGB stipulates that the debtor is not entitled to perform in part. If part-performance is rejected, then § 323 V 1 BGB does not apply. However, where the creditor has accepted a part performance, he can only withdraw from the contract as a whole if he shows that he has no interest in the partial performance.

When, therefore, does the creditor lack an interest in partial performance?

The test is whether the detriment to the creditor is greater than the outstanding performance. (In this sense eg, BGH NJW 1990, 2549, 2550; Ernst in Münchener Kommentar, § 323 Rn. 203 BGB.) The reason is this. In the case of partial performance, the creditor may declare partial termination. (In the case of non-conforming performance the right to price reduction assumes this role.) The creditor is therefore entitled to be released from the duty of counter-performance insofar as performance is still outstanding. § 323 V 1 BGB clarifies that if the creditor wishes to release himself from the whole obligation of counter-performance, he must show that the right to partial termination would not adequately protect his expectation interest. Hence, the detriment must be more than just the fact that performance is outstanding.

(iv) Performance being Impossible

If performance is impossible, the interest of the creditor (of the obligation to perform) in being released from his obligation of counter-performance is normally adequately

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protected by § 326 I 1 BGB (as to which see above in the section on impossibility (section 3(e)), p 408, see also Figure 2 reproduced there). Any part of the performance already effected may be claimed according to the rules of termination (§ 326 IV BGB). The creditor is automatically released from the obligation to pay the price if performance is impossible in the sense of § 275 BGB and, generally speaking, the creditor is not responsible for the impossibility. This is the old and new general rule of the BGB. Since, as explained, the main purpose of termination is to achieve just that, namely to extinguish the obligation to pay the price and to demand restitution, the question arises whether it is necessary to grant the creditor a right to termination where performance is impossible. The answer of the BGB is ‘yes’ and the relevant right is codified in § 326 V BGB. Sensibly, the provision releases the creditor from the requirement to set a period for performance. The reasons for this approach are threefold (see, eg, Huber and Faust, Schuldrechtsmodernisierung (2002), § 5 Rn. 63 et seq).

First, the right of termination fulfils a necessary and vital role in relation to nonconforming performance. It will be recalled that § 326 I 2 BGB excludes the application of § 326 I 1 BGB to non-conforming performance, ie, here the creditor is not automatically released from the obligation to pay the price. This concerns, for instance, the situation in sale of goods that a defect of the delivered goods cannot be cured because of impossibility. As we have seen, the debtor has a right to elect between price reduction and termination if the defect is sufficiently serious. It is in order not to prejudice this choice that § 326 I 2 BGB was introduced. As a consequence, it became necessary to grant the innocent party a right to terminate in cases of non-conforming performance where remedying the defect is impossible.

Secondly, where only part of the performance is impossible then only the right of termination in respect of the contract as a whole (§ 323 V 1 in conjunction with § 326 V BGB) ensures that the creditor is released from the obligation to pay the price as a whole.

However, the right of termination in § 326 V BGB is not limited to non-conforming and partial performance. Hence there must be a third reason for granting the right to justify this broader coverage of the right of termination. It is of a pragmatic nature. The provision enables the creditor in cases of doubt—ie, if it is not certain that impossibility releases the creditor according to § 326 I 1 BGB—to eliminate the obligation of counter-performance by setting a period for performance; if the debtor’s failure to perform persists, the right of termination arises in any case. This strategy does not, however allow the creditor to make use of the exception to the requirement to set a period for performance. To be on the safe side, he must nevertheless set a period of grace. If performance turns out to have been impossible, the period of grace was superfluous but the right to terminate follows from § 326 V BGB. If performance was not impossible, the period of grace was essential and the right of termination follows from § 323 I BGB. The broad scope of the right of termination thus ensures that the remedies of the innocent party are, as far as possible, the same regardless of the reason for the absence of performance.

(v) Anticipatory Breach

Anticipatory breach is now expressly regulated in § 323 IV BGB. It entitles the creditor to terminate the contract if it is obvious that a breach of contract will occur that

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would entitle him to termination. The prognosis of breach must be derived from objective factors. (This is dealt with by UCC 2-609.) It is to be expected that the courts will adopt a similar approach to the prognosis as under Article 72 CISG; as to which see, Schlechtriem, UN-Kaufrecht (2nd edn, 2003), Rn. 269 et seq. Unlike the CISG, the anticipatory breach of the BGB need not be fundamental; if a partial nonperformance is to be expected, then the criteria of § 323 V BGB apply.)

The paradigmatic case is a serious and final refusal to perform. This is not to be confused with § 323 II BGB. This provision exempts the creditor from the requirement of setting a period of grace if the debtor refuses to perform. It presupposes however that performance is due. In the case of anticipatory breach, the contract may be terminated before performance is due. (See, also, chapter 8, section 3(a), p 355, on the time of performance.)

On the English law on anticipatory breach, see Treitel, The Law of Contract, pp 857–65 and McKendrick, Contract Law, pp 975–85: rescission is available for anticipatory breach, but must fulfil the criteria for allowing such rescission as discussed above (although apparently not extending to the exception relating to the parties’ express provision for determination in the contract: see The Afovos [1983] 1 WLR 195, at 203: ‘it is to fundamental breaches alone that the doctrine of anticipatory breach is applicable’ (per Lord Diplock). See Treitel’s doubts, p 861). The more striking aspect of the English case law on anticipatory breach, stemming from the well known decision of Hochster v De la Tour (1853) 2 E & B 678, is that the creditor’s acceptance of the anticipatory breach will entitle him to sue for damages immediately, even though the stipulated time for performance has yet to expire. This position has been criticised (for running the risk of an inaccurate quantification of damages and of bringing forward the debtor’s obligation), but also defended. (Eg, for protecting the interest of the creditor who may lack the resources to procure replacement performance in time, in the absence of some compensation for the debtor’s anticipatory breach—see Treitel, The Law of Contract, pp 859–60 and the references therein.)

(vi) Exclusion of the Right of Termination

Finally, § 323 VI BGB excludes the right of termination if the creditor is broadly speaking responsible for the failure of performance. The conditions are parallel to those provided for an automatic release of the obligation to pay the price in cases of impossibility of performance (§ 326 II BGB, see p 409 section 3(e)(ii)). The desire to achieve as much conformity as possible within the remedies available to the innocent party becomes once again apparent.

The first alternative concerns the situation that the creditor/innocent party is answerable or overwhelmingly responsible for the breach of contract by the debtor. This appears contradictory, but it is not if one remembers that breach is defined objectively as the absence or failure of performance. Consider, for instance, the duty of performance to cure defective goods and assume that the buyer has made it impossible to effect such cure (for instance, because he effected the cure himself). The failure to cure the defect constitutes a breach which would in principle entitle the buyer to terminate the contract (irrespective of fault of the seller), but since the creditor is responsible for the breach the right is excluded by § 323 VI BGB. The second alternative concerns the situation that the breach of contract occurred while the

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creditor was in delay of acceptance (mora creditoris, §§ 293 et seq BGB, discussed also above in the context of the effects of impossibility on the counter-performance). The prevailing view recognises a third qualification of the right of termination derived from good faith, § 242 BGB: the right to terminate the contract presupposes that the creditor has himself been on the whole faithful to the contract (vertragtreu). (See Palandt-Heinrichs, § 323 Rn. 29, and Staudinger-Löwisch, § 323 Rn. E11, for details.)

A possible English parallel to the first and/or the third alternatives discussed here may be the case where the creditor wrongfully refuses to allow the debtor to complete performance of the contract: in such situations, it seems that the debtor can claim a quantum meruit for the value of the work he has completed, which is founded not on the creditor’s receipt of any benefit but on the creditor’s wrongful refusal to allow the debtor to complete performance. See the much-discussed case of Planché v Colburn (1831) 8 Bing 14 (and cf Whitaker v Dunn (1887) 3 TLR 602, where very shoddily conducted building work was so bad that the creditor’s refusal to allow the builder to complete was entirely justified and thus not wrongful in the circumstances. And see Restatement, Second, of Contracts 230(2)(a)(excusing non-occurrence of a condition when non-occurrence is a result of obligor’s breach of duty of good faith and fair dealing).

(c) Duties of Protection (Schutzpflichten)

Paragraph 324 BGB entitles the creditor to terminate the contract even though the contract has been adhered to so far as the duties of performance (§ 241 I BGB) are concerned. In exceptional circumstances, the violation of protective duties (Schutzpflichten, § 241 II BGB) not to harm the interest of the other contracting parties may justify termination, provided that it cannot reasonably be expected that the creditor should abide by the contract. It is common ground that this must be limited to truly exceptional cases (eg, Münchener Kommentar- Ernst § 323 Rn. 7). The preparatory works (Bundestags-Drucksache 14/6040, p 141) give the example of a contractor who, while painting a flat as required, constantly and recklessly damaged other objects of the employer. Likewise, persistent or serious defamation of the creditor may also justify the termination of the contract.

(d) Consequences of Termination (Rücktritt)

Termination has two main purposes: to release the innocent party from the obligation to pay the price, and to put as far as possible matters back into the position in which they were before performance on both sides was begun. Accordingly, the effects of termination are twofold.

First, the duties of performance of the parties come to an end ex nunc (which is the same as the basic position under English law; cf The Dominique [1989] AC 1056 and, for a recent and interesting example, Hurst v Bryk [2002] 1 AC 185). This is not expressly stipulated, but is seen as obvious and clearly implicit in the German termination regime.

Secondly, the duties of performance are transformed or reversed into duties of restitution of performance. A so-called ‘restitutionary relationship of obligation’ arises

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(Rückgewährschuldverhältnis). This regime of restitution makes it unnecessary (and indeed wrong) to fall back on the rules on unjustified enrichment. (§§ 812 et seq BGB do not apply. Note that the validity of the contract is not retroactively affected by termination, thus any performance already effectuated does not lack causa.) As also stated in the outline of the reform above, the effects of termination have been considerably simplified and ‘streamlined’ (Zimmermann, Breach of Contract and Remedies (Sapienza, Rome, 2002), p 42). Restitution is achieved in three steps, each of which corresponds roughly to one of the first three sub-paragraphs of § 346 BGB. In a nutshell: restoration of the performance is owed according to § 346 I BGB; if this is not possible, monetary compensation takes its place according to § 346 II BGB, which is itself excluded under certain conditions, § 346 III BGB.

The obligations of the parties pursuing termination to restore performance as far as possible are regulated in §§ 346–8 BGB, which apply to the statutory right of termination (ie, for breach of contract, § 323 BGB) and also to any expressly reserved right of termination. The synallagmatic character of the contract is also retained as far as the restitution of the performance is concerned. § 348 BGB declares the plea of an unperformed contract (§ 320 BGB, see chapter eight) applicable by analogy. According to § 346 I BGB, the general rule is that the parties are under a duty to return in specie whatever they may have already received from the other. For instance, if the seller of a car transferred property in the car and possession of it to the buyer, the latter must re-transfer property and hand over the car to the former. The obligations of § 433 I 1 BGB are thereby reversed.

In addition, the parties must hand over any benefits that they may have derived from the performance in the meantime (§ 346 BGB). What constitutes a relevant benefit is regulated by § 100 BGB. The paradigm case is the benefit of actually using or being able to use the subject matter of performance. § 347 BGB deals with the case where the innocent party failed to derive any of the benefits that a reasonable recipient of the performance would have derived. If the innocent party terminated the contract because of a breach of contract, the standard of liability applied is that of care that he usually uses in his own affairs (diligentia quam in suis, § 277 BGB).

If restitution in specie of the performance is not possible, § 346 II BGB stipulates that the party who cannot fulfil the obligation under § 346 I BGB is to compensate the other party in monetary terms for the value of the performance. The return may be excluded because of the very nature of what has been obtained (§ 346 II 1 Nr. 1 BGB). In our example, the use of a car cannot be returned in specie. Hence, the buyer must compensate the seller for the value of being able to use the car (the seller must do likewise in relation to having been able to use the money paid; ie, he will have to pay interest). The normal method of measuring the use of an object is by applying a linear measure and not by inquiring what the usual rental rate would be. The normal period of use is estimated and the price is then divided by that period (which price may be reduced to take account of a diminution in value of the object in question). The resulting figure is multiplied with the actual time of use of the object. (See for illustrations: BGH NJW 1991, 2484; NJW-RR 1995, 364; NJW 1996, 250.) If, for instance, an electrical appliance normally lasts for five years and the buyer actually used it for one year, he is under an obligation to the seller for one fifth of the contract price (subject to a reduction of that price due to a defect of the appliance). In the end the buyer can claim back only four-fifths of the contract price. However, in relation to the use of

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cars the relevant factor is not the time of being able to use the car, but the actual distance travelled with it. (See Palandt-Heinrichs, § 346 Rn. 10: the courts estimate as the value of the use of a car between 0.4 per cent and 1 per cent of the purchase price per 1000 km.)

Likewise, if the performance has been consumed or transferred (§ 346 II 1 Nr. 2 BGB), has deteriorated or has been destroyed (§ 346 II 1 Nr. 3 BGB), the obligation to compensate for the value of the performance arises. This constitutes a major change of approach by comparison with the old law. The destruction of the subject matter of the contract no longer hinders the exercise of the right of termination. The innocent party may terminate the contract even if in our example the buyer wilfully destroyed the purchased car. However, the buyer may be under a duty to compensate the seller for the value of the car. The price is to be taken into account in measuring the value of the car (§ 346 II 2 BGB; again the diminution in value due to a defect of the object must also be considered). Just as § 346 I BGB entitles the parties to restitution regardless of who committed the breach of contract, or of whether one of the parties was at fault in this respect, § 346 II BGB also imposes the obligation to compensate for the value of the performance regardless of whether the party obliged to return the performance was at fault or otherwise responsible for the deterioration or otherwise of performance. This is because the obligations under § 346 BGB simply represent a reversal of the duties of performance.

§ 346 III BGB contains a number of exceptions from the duty to compensate for the value of performance. The wording of the provision is quite clear. § 346 III 1 Nr. 1 BGB excludes the duty to compensate if the defect founding the right of termination showed itself for the first time while the object was transformed. § 346 III 1 Nr. 2 BGB excludes the duty if the creditor is responsible for the deterioration or if the harm would also have occurred in his hands. Finally, according to § 346 III 1 Nr. 3 BGB in the case of a statutory right of termination (ie, for breach of contract, § 323 BGB), there is no such duty where the deterioration or destruction occurred in the hands of the innocent party but he had observed that care that he usually applied in his own affairs (diligentia quam in suis, defined in § 277 BGB). Any remaining enrichment must be returned notwithstanding, § 346 III 2 BGB.

Nevertheless, § 346 III 1 Nr. 3 BGB has given rise to controversy following the recent reform. The focus of the controversy is whether it is in fact satisfactory that the innocent party is released from the obligation to compensate. The risk of accidental destruction of the object is thus not, as one would expect, on the owner, but on the ‘guilty’ party. Since it is commonly assumed that with the handing over of the subject matter of the contract to the promisee the risk of accidental destruction is borne by the promisee or owner of the thing, the risk is said ‘to jump back’ to the promisor. In our example, if the buyer terminated the contract for breach by the seller (the so-called ‘statutory’ ground for termination as opposed to an expressly reserved right of termination), the buyer could claim back the purchase price even though the car had been destroyed by accident (fire, lightning etc). On closer analysis, the promisee is privileged even further. For even if he destroyed the car negligently, he may be released if the standard of care shown was that of ‘light’ negligence as occurs also in relation to his own affairs (§ 277 BGB). To come back to our example, if the buyer clumsily, only ‘lightly’ negligently, damaged the car, then he is even released from the obligation to compensate for the deterioration of the car. The ordinary use of the object as such

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does never constitute gross negligence. If on the occasion of such use it is destroyed without fault of the innocent party the privilege of § 346 III 1 Nr. 3 BGB applies with full force (cf eg, Palandt-Heinrichs, § 346 Rn. 13).

The obvious objection to this approach is that the object is in the ‘sphere of influence’ of the innocent party who has complete control over it. (See, for criticism of the rule, eg, Gaier WM 2002, 11; Kaiser JZ 2001, 1057; Kohler AcP 203 (2003) 539. Article 1647 of the French Civil Code, for instance, also establishes a rule different from § 346 III 1 Nr. 3 BGB.) The justification of the approach adopted de lege lata is however easily discerned. After all, the ‘innocent’ party terminated the contract because of a breach of contract of the ‘guilty’ party. This means in our example that the seller has not fully performed his obligations. Therefore, it is considered appropriate that the risk of accidental destruction is to be borne by the ‘guilty’ party rather than the actual possessor of the object. (See Zimmermann, The Law of Obligations (1990), p 330 et seq for the origins in Roman law of this so-called mortuus redhibetur rule.)

Article 82 CISG opts for a more nuanced solution. In a first step, the right of avoidance is excluded if it is impossible for the buyer to make restitution of the goods substantially in the condition in which he received them. However, this exclusionary rule does not apply (ie, avoidance is possible despite the fact that restitution is not possible) if the buyer has not by his own conduct increased the risk of destruction: Article 82(2). Thus, in our example an accidental destruction by lightning would not exclude the right to avoid the contract. (See for details: Schlechtriem, UN-Kaufrecht, Rn. 326 et seq.) This approach was expressly rejected in the preparatory works as it would give rise to difficult distinctions (see Bundestags-Drucksache 14/6040, p 196): provided that the buyer was not at ‘fault’, it was not easy to see why it should matter whether the destruction of the car in our example was due to a traffic accident or a fire in the garage. Applying Article 82 CISG, it appears that in the first case the destruction was due to an act of the buyer while in the latter it was not. § 346 III 1 Nr. 3 BGB was phrased such that the two examples are to be treated in the same way.

An important caveat must be added at this stage. Once the innocent party actually terminates the contract, the situation is different. From the moment termination is declared, the innocent party is bound by the obligation to restitution of § 346 I BGB. If this duty is violated, the innocent party becomes liable in damages according to

§346 IV in conjunction with §§ 280 I, 283 BGB. In our example, if the buyer, after he has declared termination, damages the car negligently in a traffic accident, he is liable in damages to the seller for failing to return the car in the original condition. The standard of care implied by § 280 I 2 BGB is that of the general rule in § 276 BGB. ‘Light negligence’ suffices. Yet, the risk of accidental destruction remains, according to the wording of § 346 III 1 Nr. 3 BGB, on the ‘guilty party.’

It should not be concealed that the rules just described have not escaped criticism and proposals have been made to restrict the scope of application of these provisions. Most of them suggest that once the innocent party knows of the right of termination or could have known of it, the privilege is not appropriate. From then on, the exclusion of the duty to compensate should not apply (eg, Gaier in Münchener Kommentar,

§346 Rn. 59). Hence, the controversies surrounding the mortuus redhibetur rule, which had rendered the previous position of German law so very uncertain, unfortunately, seem to resurface in relation to the new law. This is somewhat surprising given

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the clear wording and unequivocal intention of the legislator. (Such attempts to restrict § 346 III BGB are opposed on this ground by, among others, Lorenz and Riehm, Lehrbuch zum neuen Schuldrecht (2002) Rn. 434; Palandt-Heinrichs, § 346 Rn. 13.)

The English regime that follows rescission does bear some similarities to the German approach set out above. Thus, if the innocent buyer wishes to claim the return of his purchase price, he must return what he has acquired under the contract so as to effect a total failure of consideration and make good his restitutionary claim (see eg, Baldry v Marshall [1925] 1 QB 260; and generally, Treitel, The Law of Contract, pp 1049–57). Further, if it proves impossible to return the benefit received due to the defect that gave rise to the right to rescind (eg, non-conforming goods or goods to which the seller did not have title to sell: see Rowland v Divall [1923] 2 KB 500) or due to a cause beyond the control of either party (Head v Tattersall (1871) LR 7 Ex 7) then there is no duty to return that which was acquired as a precondition for the recovery of the purchase price. However, the major difference is that the basic remedy even on termination is a claim for damages; although it should be noted that the innocent party can elect not to rescind the contract and can instead continue to press for performance, this will most commonly end up in a subsequent action for damages for breach in any case. See generally, Treitel, The Law of Contract, pp 850–5 and chapter 21, section one on ‘Damages’; the instructive judgments of Lord Diplock in both Lep Air Services v Rolloswin Investments Ltd [1973] AC 331 (especially 350–5) and Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 will repay careful reading on these matters. Such damages liability can cover both loss suffered due to breaches prior to rescission and due to the repudiation of subsequent primary obligations, even though those primary obligations of performance are no longer due once rescission has been effected by the innocent party. (An interesting problem that has risen in America is whether an insured may recover premiums on breach (failure to pay a claim) by the insurer without a deduction for the value of insurance coverage received; cf Bollenback v Continental Cas, 243 Or 498, 414 P 2d 806 (1966). The Restatement, Third, Restitution and Unjust Enrichment § 37 permits a restitution claim when performance cannot be returned in kind and even if there is a benefit of inestimable value that cannot be restored.)

(e) Continuing Contracts (Dauerschuldverhältnisse)

A final word must be said regarding so-called ‘continuing contracts’ (Dauerschuldverhältnisse), ie contracts which are not fulfilled by single acts of performance on each side, but which require continuing acts of performance over a period of time, such as leases (Miete), usufructuary leases (Pacht), contracts of partnership (Gesellschaft) and contracts of labour (Dienstvertrag). It is important to observe that these contracts are not subjected to the regime of restitution described in the previous section.

Such long-term relationships may run for a stipulated period of time or for an indeterminate period of time. In the latter case, both parties may terminate the contract with effects for the future by giving notice, provided that certain time limits are observed in providing notice in advance. These time periods for advance notice vary according to the nature of the contract and the party seeking termination. Thus, for