1. Relation to the PICC

C1 The approach taken in Article 3.1 largely follows the one in Chapter 7 PICC. However, the rule on termination in paragraph (2) deviates from and takes precedence over Article 7.3.1 PICC.

C2 Article 3.1 uses the term “breach of contract” rather than the term “non-performance”. The term “breach of contract” clearly includes defective performance and late performance as well as a total failure to perform, whereas it is doubtful as a matter of linguistics that the term “non-performance” would include defective and late performance. Considering the way in which Article 7.1.1 PICC defines the term “non-performance”, it is synonymous with the term “breach of contract”.

C3 The provisions contained in Chapter 7, Sections 2 and 4 PICC are set forth in Annex 1 (Chapter 7, Section 2 PICC) and Annex 2 (Chapter 7, Section 4 PICC) to these Comments.

2. Remedies in general

C4 Article 3.1 does not distinguish between different types of breaches. Hence, the remedies provided govern any breach of contractual duties stipulated by the PRICL and the contract itself.

C5 Article 3.1 does not provide remedies for breaches of pre-contractual duties. Remedies for breach of the pre-contractual disclosure duty (Article 2.2.1) are provided in Article 3.2. Remedies for breach of other pre-contractual duties are provided by the PICC, e.g. Article 2.1.15 PICC (concerning the duty to negotiate in good faith), Article 2.1.16 PICC (concerning the duty of confidentiality), Article 7.4.1 PICC (concerning the right to damages in general and including damages for breach of pre-contractual duties).

C6 In contrast to Article 3.2, the remedies provided in Article 3.1 are available to both the reinsurer and reinsured, depending on which party is aggrieved.

C7 Paragraph (2) is based on the assumption that both parties to the contract have an interest in upholding it despite the breach. The contract shall only be terminated where the breach is such that the other party cannot reasonably be expected to uphold the contract.

C8 Article 3.1 does not provide the aggrieved party with a right to adjust the contract. An adjustment can be made according to the terms of the contract if the contract provides for such a right or by an ad hoc agreement of the parties.

C9 The list of remedies provided in Article 3.1 is comprehensive and binding upon a court or an arbitral tribunal, as the case may be. The parties may deviate from Article 3.1 in the contract or allow for deviations by the arbitral tribunal (e.g. by agreeing on an ex aequo et bono element in an arbitration clause).

C10 The remedies provided in Article 3.1 are not mutually exclusive and need not be pursued in any particular order. The aggrieved party may rely on one remedy exclusively, e.g. when it claims damages only. It may also combine remedies in an appropriate manner, e.g. when it claims specific performance as well as damages to compensate for the delay prior to performance.

C11 In accordance with the principle of good faith under Article 1.7 PICC and the principle of utmost good faith under Article 2.1.2, a party entitled to a remedy under Article 3.1 may be restricted in exercising such right. For example, a party may not be able to terminate the contract pursuant to paragraph (2) if it has not pursued that right within a reasonable time. Generally speaking, the concept of inconsistent behaviour (venire contra factum proprium; cf. Article 1.8 PICC) applies to the exercise of remedies. For example, a party may not exercise a remedy for breach to the extent that such breach was caused by its act or omission or by another event for which it bears the risk (see Article 7.1.2 PICC (Interference by the other party)).

C12 Questions concerning limitation are governed by Chapter 10 PICC. In particular, the general limitation period of three years under Article 10.2(1) PICC applies to all remedies.

3. Paragraph (1)(a): Right to performance

C13 Subparagraph (a) grants the right to performance, the details of which are governed by Chapter 7, Section 2 PICC. In contracts of reinsurance, the main duties of the parties are of a monetary nature. Accordingly, Article 7.2.1 PICC (Performance of monetary obligation) grants a claim for payment. Non-monetary obligations, such as a duty to grant inspection of records (Article 2.3.3), are governed by Article 7.2.2 PICC (Performance of non-monetary obligation).

4. Paragraph (1)(b): Right to damages

C14 The right to damages under subparagraph (b) is generally governed by Chapter 7, Section 4 PICC.

C15 Article 7.4.2 PICC follows the principle of full compensation. Courts and arbitral tribunals have no discretion to reduce the amount of damages (cf. Article 7.4.2 Comment 1 PICC). Full compensation is subject to the need to prove damages with reasonable certainty under Article 7.4.3 PICC. Losses recoverable include loss of profits (cf. Article 7.4.2 Comment 2 PICC).

C16 Interest must be paid in case of delay in the payment of a sum of money in accordance with Article 7.4.9 PICC.

C17 The PICC provide for additional requirements concerning the right to damages which also apply to contracts governed by the PRICL. These include inter alia the requirement of a causal link between the breach and the harm incurred (Article 7.4.2(1) PICC) as well as the foreseeability of the harm at the time of contract formation (Article 7.4.4 PICC).

5. Paragraph (2): Right to terminate the contract

C18 The contract may only be terminated where the breach is such that the other party cannot reasonably be expected to uphold the contract. Thus, termination under paragraph (2) requires that the breach is fundamental. Particular regard shall be given to whether the breach goes “to the root of the contract” or substantially deprives the aggrieved party of the benefit under the contract (cf. Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111, [2013] 1 CLC 662, 87). These and further important factors are set forth in a non-exhaustive list in Article 7.3.1(2)(a)–(e) PICC which reads:

[…] regard shall be had, in particular, to whether

(a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result;

(b) strict compliance with the obligation which has not been performed is of essence under the contract;

(d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance;

(e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated.

C19 In determining whether the aggrieved party can reasonably be expected to uphold the contract, both an objective and a subjective standard need to be applied. These standards are met when neither a reasonable person in the position of the aggrieved party (objective standard) nor the aggrieved party itself (subjective standard) would uphold the contract. This two-fold approach ensures that far-fetched assertions are not considered sufficient to satisfy the requirement.

C20 If the requirements of paragraph (2) are met, the aggrieved party is entitled to terminate the contract, even in case of force majeure (cf. Article 7.1.7 Comment 2 PICC).

C21 Neither the PRICL nor the PICC equates delay in performance alone with fundamental breach. However, Article 7.3.1(3) PICC additionally entitles the aggrieved party to terminate in case of mere delay in performance, provided that an additional period of time as set forth in Article 7.1.5 PICC has expired. This possibility to allow an additional period of time for performance also applies to contracts governed by the PRICL. However, failure to cure the breach within the additional period of time provided does not necessarily establish a right to terminate the contract. Rather, such failure will be considered an additional factor in determining whether a breach is fundamental as described in Article 7.3.1(2) PICC.

C22 Avoidance in case of breach of the pre-contractual disclosure duty is not subject to paragraph (2) but is specifically governed by Article 3.2(3). However, Article 3.1(2) may be applied by analogy to a breach of other pre-contractual duties, provided that the aggrieved party cannot reasonably be expected to uphold the contract and could not have been aware of the breach when entering into the contract.

C23 Paragraph (2) solely governs termination of the breached contract. Yet, there may be extraordinary cases where the breach of one contract creates a situation in which the aggrieved party cannot reasonably be expected to uphold other affected contracts because it can no longer trust the other party. In such cases, a court or arbitral tribunal may consider applying paragraph (2) by analogy. This may, however, be done only in severe cases in which the fundamental breach permeates the entire relationship between the parties and affects other contracts among the parties. This will not be the case where a breach of contract only deprives the aggrieved party of what it was entitled to expect under the particular contract (cf. Article 7.3.1(2)(a) PICC). This will also not be the case merely because strict compliance with the breached obligation was of the essence under this particular contract (cf. Article 7.3.1(2)(b) PICC). However, where the reinsured defrauds the reinsurer in a systematic manner, such as repeatedly falsifying claims, or where the reinsurer methodically and unreasonably withholds payment, all affected contracts may be terminated.

C24 The right to terminate the contract does not foreclose pursuit of other remedies provided under paragraph (1), such as damages or performance of a duty that arose prior to termination.

C25 Termination under paragraph (2) requires notice being given pursuant to Articles 7.3.2–7.3.5 PICC. Termination is effective as of the date of the notice. It does not have retroactive effect.

6. Annex 1 (Chapter 7, Section 2 PICC)

Article 7.2.1 PICC (Performance of monetary obligation): Where a party who is obliged to pay money does not do so, the other party may require payment.

Article 7.2.2 PICC (Performance of non-monetary obligation): Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless (a) performance is impossible in law or in fact; (b) performance or, where relevant, enforcement is unreasonably burdensome or expensive; (c) the party entitled to performance may reasonably obtain performance from another source; (d) performance is of an exclusively personal character; or (e) the party entitled to performance does not require performance within a reasonable time after it has, or ought to have, become aware of the non-performance.

Article 7.2.3 PICC (Repair and replacement of defective performance): The right to performance includes in appropriate cases the right to require repair, replacement, or other cure of defective performance. The provisions of Articles 7.2.1 and 7.2.2 apply accordingly.

Article 7.2.4 PICC (Judicial penalty): (1) Where the court orders a party to perform, it may also direct that this party pay a penalty if it does not comply with the order. (2) The penalty shall be paid to the aggrieved party unless mandatory provisions of the law of the forum provide otherwise. Payment of the penalty to the aggrieved party does not exclude any claim for damages.

Article 7.2.5 PICC (Change of remedy): (1) An aggrieved party who has required performance of a non-monetary obligation and who has not received performance within a period fixed or otherwise within a reasonable period of time may invoke any other remedy. (2) Where the decision of a court for performance of a non-monetary obligation cannot be enforced, the aggrieved party may invoke any other remedy.

7. Annex 2 (Chapter 7, Section 4 PICC)

Article 7.4.1 PICC (Right to damages): Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the non-performance is excused under these Principles.

Article 7.4.2 PICC (Full compensation): (1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm. (2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.

Article 7.4.3 PICC (Certainty of harm): (1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty. (2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence. (3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.

Article 7.4.4 PICC (Foreseeability of harm): The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion [formation] of the contract as being likely to result from its nonperformance.

Article 7.4.5 PICC (Proof of harm in case of replacement transaction): Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm.

Article 7.4.6 PICC (Proof of harm by current price): (1) Where the aggrieved party has terminated the contract and has not made a replacement transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further harm. (2) Current price is the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at such other place that appears reasonable to take as a reference.

Article 7.4.7 PICC (Harm due in part to aggrieved party): Where the harm is due in part to an act or omission of the aggrieved party or to another event for which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties.

Article 7.4.8 PICC (Mitigation of harm): (1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.

Article 7.4.9 PICC (Interest for failure to pay money): (1) If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused. (2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment. (3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm.

Article 7.4.10 PICC (Interest on damages): Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of nonperformance.

Article 7.4.11 PICC (Manner of monetary redress): (1) Damages are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate. (2) Damages to be paid in instalments may be indexed.

Article 7.4.12 PICC (Currency in which to assess damages): Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate.

Article 7.4.13 PICC (Agreed payment for non-performance): (1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such nonperformance, the aggrieved party is entitled to that sum irrespective of its actual harm. (2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.