| ||1. No common solution
Although periods of limitation of rights and claims are common to all legal systems, they differ in length. They range from six months or one year for claims for breach of warranties, to up to 15, 20 or even 30 years for other claims. At international level the 1974 United Nations Convention on the Limitation Period in the International Sale of Goods (as amended in 1980) (“UN Limitation Convention”) provides uniform rules but is restricted to the international sale of goods.
2. Relevant factors
The stated length of a limitation period does not always in itself determine the time after which the exercise of rights is barred. That time may be affected by the prerequisites for the starting of the period and by circumstances affecting its running (see Articles 10.4 to 10.9). It may also be affected by the agreement of the parties (see Article 10.3). Party autonomy with regard to limitation periods is of great practical importance, as periods that are either too long or too short may be tolerable if the parties may modify them freely according to their needs.
3. Balance between interests of obligee and obligor
The Principles strike a balance between the conflicting interests of the obligee and the obligor of a dormant claim. An obligee should have a reasonable chance to pursue its right, and should therefore not be prevented from pursuing its right by the lapse of time before the right becomes due and can be enforced. Furthermore, the obligee should know or at least have a chance to know its right and the identity of the obligor. On the other hand, the obligee should be able to close its files after some time regardless of the obligor’s knowledge, and consequently a maximum period should be established. Contrary to the UN Limitation Convention which has only one absolute limitation period of four years which begins on the date of accrual of the claim (see Articles 8 and 9(1)), the Principles provide for a two-tier system.
4. Basic structure of the limitation regime
The two-tier system adopts the policy that the obligee should not be barred before it has had a real possibility to pursue its right as a result of having actual or constructive knowledge of the right. Paragraph (1)
therefore provides for a rather short three-year limitation period starting the day after the obligee knows or ought to know the facts on which its right is based and this right can be exercised. Paragraph (2) provides for a ten-year maximum limitation period, commencing at the time when the right can be exercised, regardless of the obligee’s actual or constructive knowledge.
5. Right can be exercised
The obligee has a real possibility to exercise its right only if it has become due and can be enforced. Paragraph (2) therefore provides that the maximum limitation period starts only at such date.
6. Knowledge of the facts as distinguished from knowledge of the law
The general three-year limitation period starts the day after the day “the obligee knows or ought to know the facts as a result of which the obligee’s right can be exercised”. “Facts” within the meaning of this provision are the facts on which the right is based, such as the formation of a contract, the delivery of goods, the undertaking of services, and non-performance. The facts indicating that a right or claim has fallen due must be known or at least knowable by the obligee before the general limitation period starts. The identity of the obligor may also be in doubt, e.g. in cases of agency, the transfer of debts or entire contracts, the winding-up of companies, or unclear third-party beneficiary contracts. In these cases, the obligee must know or have reason to know whom to sue before it can be blamed for not having pursued the right or claim. Actual or constructive knowledge of “facts”, however, does not mean that the obligee must know the legal implications of the facts. If, despite full knowledge of the facts, the obligee is mistaken about its rights, the three-year limitation period may nevertheless start to run.
1. A designs and builds a bridge under a contract with county B. A’s engineers make a mistake in calculating the strength of some steel girders. Four years later, the bridge collapses due to a combination of the weight of some heavy trucks and a storm. B’s claims for damages are not barred, because the general limitation period started only at the time of the collapse, when B was in a position to discover A’s breach.
2. The facts are the same as in Illustration 1, except that the bridge collapses eleven years after its construction. B’s claims are barred under the maximum limitation period under Article 10.2(2). Parties to such a contract are well advised to adjust the maximum period while remaining within the limits of Article 10.3.
3. A sends B a notice under Article 7.3.2 terminating a sales contract between A and B because B refuses to take delivery of goods tendered by A. Thirty-seven months after receipt of the note of termination, B demands the return of an advance on the purchase price paid prior to the termination, asserting that, due to an error in its bookkeeping, it had overlooked its payment of the advance with the consequence that it had only recently become aware of the claim for restitution it had under Article 7.3.6(1). B’s claim for restitution is barred by the three-year limitation period, as B ought to have known of its payment when the contract was terminated and the claim to repay the advance arose.
4. The facts are the same as in Illustration 1, except that B asserts that it had not realised the legal effects of a notice of termination. B’s claim for restitution is nevertheless barred. An error of law with regard to the legal effects of a notice of termination cannot absolve the obligee since “ought to know” includes seeking legal advice if the party is uncertain about the legal effects of the circumstances.
7. Day of commencement
Since, in the absence of an agreement to the contrary, the obligor can normally perform its obligation in the course of the whole day of the debt’s maturity, the limitation period does not start on that same day but only on the following day.
5. A is obliged to pay a sum of money on 24 November. If A does not pay by that date, the limitation period starts on 25 November.
8. Right must be exercisable
An obligation may exist even if performance cannot as yet be required (see, e.g., Article 6.1.1(a)). While a creditor’s claim to the repayment of a loan is founded on the contract and may therefore arise at the time of the conclusion of the contract or of the payment of the loan to the debtor, the repayment claim will usually fall due much later. Furthermore, a right may not be enforceable if the obligor has a defence.
6. A loan agreement obliges the borrower to repay the loan on 15 November. The lender grants the borrower an extension of the date of repayment until 15 December. The limitation period starts on 16 December.
7. A contracts to build a fertiliser plant for B. The price is to be paid in three instalments, the last instalment being due four weeks after completion of the work as certified by an engineering firm. After certification there are still malfunctionings of the plant. B is entitled to withhold performance of the last instalment under Articles 7.1.3(2) and 7.1.4(4). The limitation period for the claim for payment does not begin until the right to withhold payment is extinguished by cure of the malfunctionings.
9. Maximum period
Under paragraph (2) the obligee is in any event, i.e. irrespective of whether it knew or ought to have known the facts giving rise to its right, prevented from exercising the right ten years after it could have exercised it. The objectives of this maximum period of ten years are the restoration of peace and the prevention of speculative litigation where evidence has faded.
8. B borrows money from A and orders its accountant to repay the loan when repayment falls due in January. Fifteen years later, a dispute arises over whether the loan was repaid fully or only in part as A claims. A’s asserted claim is barred by Article 10.2(2), because the maximum limitation period has expired.
10. Ancillary claims
This Article applies to all rights, including so-called “ancillary claims”.
9. In a loan agreement, the borrower agrees to pay an interest of 0.7% per month if there is default in repayment. Thirty-five months after repayment is due, the borrower repays the principal. The lender need not sue for all successive monthly instalments of interest at once, but can wait up to thirty-six months for each instalment before it is barred.
10. Under the contract of builder A with owner B, A agrees to complete construction by 1 October and to pay EUR 50,000 for every month of delay up to a maximum amount of EUR 2,500,000. Completion is delayed for 40 months. Claims for damages for non-performance or delay are barred 36 months after 2 October. The claim for the penalty for each month of delay is barred 36 months after it arises.
This Article does not provide a definition of “year”, because at international level a reference to “year” is usually understood as being a reference to the Gregorian calendar (see Article 1(3)(h) of the UN Limitation Convention). In any event, calendars deviating from the Gregorian calendar will in most cases have the same number of days per year, with the consequence that they do not influence the length of limitation periods. A different meaning of “year” can be agreed upon by the parties under Article 1.5. Such an agreement may be explicit or derived from an interpretation of the contract.