1. Before examining the work done by UNIDROIT as embodied in the 2004 revision of the Principles of International Commercial Contracts, it may be worth outlining a few considerations of a general nature on the subject of limitation. Limitation of actions and extinctive prescription,1 although different in meaning, both refer to the loss of a right or a claim by a party by reason of the expiration of a given period of time. For the sake of simplicity, the term 'limitation' will be used in this paper to cover both.

2. It is for both practical and policy reasons that limitation is subject to regulation. The passing of time makes it difficult for the debtor, on the one hand, to defend a claim, and the creditor, on the other hand, cannot be allowed to wait indefinitely before asserting his rights as this might suggest that he is no longer interested in pursuing his claim.

3. For a long time legal systems were reluctant to impose limitation periods, considering that any kind of a limitation amounted to an act of expropriation. The purpose of limitation has however been accepted in most modern legal systems, with the notable exception of some Arab countries where, under Islamic law, extinctive prescription-i.e. the idea that a right may be extinguished merely by the passing of time-is considered as immoral.

Limitation is intended to create certainty in socio-economic relations by providing that claims are barred unless they are raised within a given period of time. Interest rei publicae ut sit finis litium was considered a universal maxim by our Latin ancestors, as indicated in an old English case.2

Although the policy considerations underlying limitation are nowadays widely shared, domestic laws differ significantly over a number of its constituent features.

4. The first is the duration of the limitation period, which may range from six months to thirty years. The starting date also varies: in some jurisdictions it is the date when the claim accrues while in others it is the date on which the creditor knew, or should have known, of the existence of the claim or, in the case of a sales contract, when the goods were delivered.

5. Secondly, a limitation period may be suspended or interrupted if one of a number of events occurs. Upon the disappearance of the event, the limitation period will start to run afresh for the remaining time in the case of suspension, and again for the whole period in the case of interruption.

6. Thirdly, the consequences of the expiry of the limitation period vary. In certain countries, such as France, Germany and Italy, the right is extinguished (so-called 'strong effect'), while in others it is merely barred ('weak effect'). The result is that in the former case the extinction of the right may be declared ex officio and any performance made by the debtor may be recovered as being without legal ground, while in the case of the weak effect an objection based on limitation can only be [Page44:] raised by the debtor and any performance that may have occurred is held to have been made in discharge of a natural obligation (obligation naturelle), which means that it cannot later be recovered.

The above distinction explains the difference in terminology. Extinctive prescription is characteristic of those legal systems (e.g. in continental Europe) that regard it as being of a substantive nature, whereas the English system refers instead to 'limitation of actions', regarding it as being about the ability to pursue the right in court and thus a matter of procedural law. It is worth noting that the 1980 Rome Convention on the Law Applicable to Contractual Obligations goes for substantive characterization by including both prescription and limitation of actions alongside 'ways of extinguishing obligations' in Article 10(1):

1. The law applicable to a contract by virtue of Articles 3 to 6 and 12 of this Convention shall govern in particular:

. . .

(d) the various ways of extinguishing obligations, and prescription and limitations of actions;

. . .

7. Fourthly, a distinction is sometimes made between limitation, as referred to so far, and forfeiture of a right (decadenza, délai préfixe, Auschlussfrist ). The latter refers to a right that must be claimed during usually a short period of time in order for it to be acquired or not lost. Here, limitation starts to run only when the right is so acquired.

8. Finally, but without suggesting that this list is exhaustive, the rules governing limitation, unlike those governing forfeiture, are mandatory in certain legal systems (Egypt, Greece, Italy, Russia, Switzerland) and in the United Nations Convention on the Limitation Period in the International Sale of Goods ('UN Limitation Convention').3 Accordingly, in these cases, the parties cannot modify the duration of the limitation period or any other rules relating to limitation (except that under Article 22 of the UN Limitation Convention the debtor can extend the limitation period).

9. The diversity of domestic rules in this field obviously creates uncertainty whenever transnational transactions are involved. It is widely recognized, therefore, that the adoption of a uniform regime governing limitation would remove one of the many obstacles to the development of international trade.

10. Whatever the source of this uniform regime, its various components should be considered not in isolation but as interrelating with each other. Thus, the duration of the limitation period must be considered in conjunction with the moment at which the period begins to run and the events suspending or interrupting it. If knowledge of the claim by the creditor is accepted as the starting time, a reasonably short limitation period may be acceptable. Also, a uniform period of limitation will be more acceptable if parties are able to extend or reduce it according to the needs of their particular contractual relations. Making the limitation regime non-mandatory would appear to better satisfy the need for flexibility in international trade.

11. Any limitation regime should strive to achieve a fair balance between the interests of the debtor and the creditor. The creditor should be given a reasonable chance to pursue his claim but not allowed to sit on it for too long as this might lead the other party to think that the claim will not be pursued. However, the creditor cannot be considered to have waited too long unless he has actually had a [Page45:] chance to pursue his claim, which presupposes that he has become aware of its existence. On the other side, the debtor should not be permitted to defeat a well-founded claim by resorting to the defence of limitation if the relevant period is too short, while such a defence should be available to a debtor when the length of the limitation period is such that it would be extremely difficult, or even impossible, to defeat the claim due to the disappearance of evidence previously available.

12. An attempt to bring a measure of uniformity into this field was made by the UN Limitation Convention, to which twenty-five States are parties.4 However, the results are limited, given that the Convention is confined to the international sale of goods (albeit one of the most important kinds of contract in international trade, although not the only one) and has a relatively small number of contracting States. More recently, reforms relating to limitation have been carried out in Quebec, the Netherlands, Russia, Belgium and Germany (by the BGB amendments of 2002) and proposed in England. These various initiatives have shown a tendency towards shorter periods of limitation (four years under the UN Limitation Convention) and a broad application (Dutch Code and UN Limitation Convention), while the idea that a limitation period should not run unless the creditor knew, or ought to have known, about his claim has been gaining ground.

13. At transnational level, in addition to the UN Limitation Convention and the UNIDROIT Principles, mention may be made of the work of the Lando Commission, which produced the Principles of European Contract Law, known as the European Principles.5 These Principles, which aim to lay down rules of general contract law within the European Union, contain provisions on limitation similar to those of the UNIDROIT Principles.

14. This overview of the main ingredients of limitation regimes allows a better evaluation to be made of the rules adopted by UNIDROIT in this field in Chapter 10 of the 2004 version of the Principles.6 It may be asked to what extent the new rules have succeeded in striking the kind of balance between the parties' conflicting interests that was mentioned above. In so doing, consideration will be given to the following aspects of any limitation regime:

· whether different limitation periods should apply to different claims;

· length of the limitation period;

· suspension and interruption of the period;

· whether a strong or weak effect should be contemplated;

· the mandatory character of the rules.

15. The UNIDROIT Principles do distinguish between different kinds of claims when setting limitation periods. By providing that limitation applies to '[t]he exercise of rights governed by these Principles', Article 10.1(1) limits the applicability of the new regulation to international commercial contracts. Tort claims and consumer transactions are thus excluded.

The new rules would therefore apply to:

a. claims for specific performance (Article 7.2.5);

b. actions for damages (Chapter 7, Section 4);

c. requests to renegotiate a contract because of hardship (Article 6.2.3),

d. rights to avoid the contract for mistake, fraud, threat or gross disparity (Articles 3.5-3.10);

e. right to terminate the contract (Article 7.3.1). [Page46:]

The Principles thus wisely avoid the complexity that would have resulted from varying the regime according to the type of claim - in itself a potential source of additional dispute. A greater degree of certainty and predictability is therefore ensured for transnational contractual relations.

Forfeiture of rights is excluded from the new regulations as being different in purpose from limitation:

This Chapter does not govern the time within which one party is required under these Principles, as a condition for the acquisition or exercise of its right, to give notice to the other party or to perform any act other than the institution of legal proceedings. [Article 10.1(2)]

This choice is to be approved, as all systems that recognize forfeiture of rights, as distinct from limitation of rights, leave the parties free to regulate it. Also, the UN Limitation Convention does not deal with forfeiture of rights.7

17. As for the ideal duration of the limitation period, in view of the diversity of domestic rules, the Principles adopt a two-tier system,8 providing first of all for a relatively short period of three years as a general limitation period, running from the date when the creditor 9 knows or should have known the facts as a result of which a right could be exercised:10

The general limitation period is three years beginning on 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. [Article 10.2(1)]

A longer period of ten years, beginning when the right could be exercised, regardless of the creditor's knowledge, is also provided as the maximum limitation period:

In any event, the maximum limitation period is ten years beginning on the day after the day the right can be exercised. [Article 10.2(2)]

18. A brief comparison with the UN Limitation Convention shows the solution adopted by the UNIDROIT Principles to be more balanced. The Convention provides for a single limitation period of four years (Article 8), commencing on the date when the claim accrues, irrespective of the creditor's knowledge (Article 9), while the UNIDROIT Principles limit the period to three years, triggered by the creditor's knowledge (Article 10.2(1)). This difference in approach is explained by the fact that the UN Limitation Convention deals specifically with sales contracts, where non-conformity of goods may be determined fairly easily upon delivery, whereas the UNIDROIT Principles apply more generally, so the discoverability test was felt more appropriate.11 The shorter duration in the UNIDROIT Principles is mitigated through a longer maximum period of ten years from the date the right can be exercised, regardless of knowledge. Ten years would appear to be a reasonable choice in view of the fact that it is the period most frequently found or proposed in modern legislation. It is also the period mentioned in Article 23 of the UN Limitation Convention after which a claim becomes unenforceable notwithstanding any extension of the limitation period under any other provisions of the Convention.

19. Rules on suspension and interruption are intended to mitigate the harshness of limitation periods. It would be unfair to the creditor if the limitation period were to continue to run while judicial or arbitral proceedings are pending, especially in view of the lengthiness of court proceedings in many jurisdictions. The UNIDROIT Principles provide that judicial proceedings are suspended until a [Page47:] final decision is issued or the proceedings are otherwise terminated. Article 10.5 reads as follows:

(1) The running of the limitation period is suspended

(a) when the obligee performs any act, by commencing judicial or in judicial proceedings already instituted, that is recognised by the law of the court as asserting the obligee's right against the obligor;

(b) in the case of the obligor's insolvency when the obligee has asserted its rights in the insolvency proceedings; or

(c) in the case of proceedings for dissolution of the entity which is the obligor when the obligee has asserted its rights in the dissolution proceedings.

(2) Suspension lasts until a final decision has been issued or until the proceedings have been otherwise terminated.

20. Suspension is also provided in the case of arbitral proceedings until a binding decision is issued or the proceedings have been terminated. Article 10.6 reads as follows:

(1) The running of the limitation period is suspended when the obligee performs any act, by commencing arbitral proceedings or in arbitral proceedings already instituted, that is recognised by the law of the arbitral tribunal as asserting the obligee's right against the obligor. In the absence of regulations for arbitral proceedings or provisions determining the exact date of the commencement of arbitral proceedings, the proceedings are deemed to commence on the date on which a request that the right in dispute should be adjudicated reaches the obligor.

(2) Suspension lasts until a binding decision has been issued or until the proceedings have been otherwise terminated.

21. Suspension also applies if the parties request a third person to assist them to try to reach an amicable settlement of their dispute. Article 10.7 reads as follows:

The provisions of Articles 10.5 and 10.6 apply with appropriate modifications to other proceedings whereby the parties request a third person to assist them in the attempt to reach an amicable settlement of their dispute.

This provision deserves approval since it acknowledges the widespread use of alternative dispute resolution methods (ADR) for resolving disputes. The definition of alternative dispute resolution methods is taken from the 2002 UNCITRAL Model Law on International Commercial Conciliation.12 However, ADR methods include not only cases where a third party is requested to give assistance to the parties, as mentioned here, but also normally the parties' direct attempt to arrive at a settlement themselves through conciliation. A further snag is that the application, 'with appropriate modifications', of Articles 10.5 and 10.6 providing for suspension of the limitation period in the case of judicial and arbitral proceedings may be insufficient to eliminate uncertainties as to the starting or termination date of the suspension in cases where there is no statutory regulation of ADR to which reference may be made for that purpose.

22. Impediments affecting the creditor, such as force majeure , death, incapacity, or the debtor preventing the creditor from pursuing his rights in court, are additional causes of suspension under Article 10.8. In all these cases, the limitation period cannot expire less than one year after the removal of the impediment. Quite wisely, mere negotiations over the claim have been rejected as an additional cause of suspension in view of the difficulty in defining when negotiations begin and end. This is probably one of the few points on which the European Principles differ: in Article 14:304 they provide for this additional cause of suspension of the 'period of prescription', as they call limitation. [Page48:]

23. Interruption of the limitation period is provided for in Article 10.4 in cases where the debtor acknowledges the creditor's right before the expiration of the three-year general limitation period, as this removes any uncertainty regarding the claim. For it to be a valid cause of interruption, the acknowledgement of the claim should be made vis-à-vis the creditor. A partial payment or payment of interest on the sum due may be held to be an acknowledgement by the debtor.13 Article 10.4 states that a new three-year period starts to run again the day after the acknowledgement is made, which might cause the maximum limitation period of ten years to be exceeded. Unlike the UN Limitation Convention 14 and English law, which both require that the acknowledgement be in writing to ensure legal certainty, the UNIDROIT Principles, like a number of legal systems, do not contain any such requirement. This means that evidence of the acknowledgement of the creditor's right by the debtor will have to be provided by the party relying on such acknowledgment.

24. Faced with the choice of whether to give a strong or a weak effect to the expiration of the limitation period, the UNIDROIT Principles have chosen the latter. The time bar may thus only be used as a defence by the debtor to refuse performance. Article 10.9 reads as follows:

(1) The expiration of the limitation period does not extinguish the right.

(2) For the expiration of the limitation period to have effect, the obligor must assert it as a defence.

(3) A right may still be relied on as a defence even though the expiration of the limitation period for that right has been asserted.

It follows that the right of set-off remains available to the creditor also after the expiration of the limitation period (Article 10.10),15 and that, in the event of performance by the debtor, the creditor is not liable for restitution 'merely because the limitation period has expired' (Article 10.11).

25. Of particular interest is Article 10.3, according to which the parties may modify both the general limitation period of three years and the maximum period of ten years, provided that they do not reduce the former to less than one year and the latter to less than four years, or extend the latter to more than fifteen years.

This provision raises a number of issues, which may be summarized as follows:

i) It appears rather peculiar to prevent the parties from deviating from certain rules when the very application of those rules derives from party autonomy, as confirmed in the Preamble to the Principles. According to Article 1.5,

The parties may exclude the application of these Principles or derogate from or vary the effect of any of their provisions, except as otherwise provided in the Principles.

The fact that some provisions of the UNIDROIT Principles are of a mandatory nature seems to be a real contradictio in terminis given that party autonomy underlies the Principles as a whole.

ii) According to Article 1.4 of the Principles, mandatory rules of national, international or supranational origin prevail over the UNIDROIT Principles. This means that the parties' autonomy under Article 10.3 is excluded or restricted whenever a national law containing mandatory rules on limitation is applicable to their contract.

iii) The new UNIDROIT Principles with their rules on limitation have made it unnecessary to refer to a national law when an arbitral tribunal (rather than a [Page49:] national court) is seized of a case. The Preamble explicitly allows the parties to choose to refer to the UNIDROIT Principles as governing their contract, supplemented, when necessary, by a domestic law if so decided by the parties, or to use the Principles to interpret or supplement the domestic law they have chosen. Whenever their disputes are to be settled by arbitration, the parties are thus advised either to refer to the Principles as governing their contract or to select a domestic law whose provisions on limitation are not mandatory if they seek unrestricted application of the UNIDROIT Principles.

iv) This result would not be defeated by a mandatory rule of national origin alleged to be applicable irrespective of the law governing the contract, as contemplated in Article 7(1) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations ( normes d'application immédiate, lois de police). There would not appear to be a sufficiently wide international consensus on the mandatory nature of rules relating to limitation to make such nature a part of 'truly international public policy', which alone can compel international arbitrators to disregard the rules of law chosen by the parties.16

26. This being the case, one might question the correctness of the conclusion reached in the illustration to comment 3 on Article 10.1 of the 2004 UNIDROIT Principles. There is no explanation why the five-year mandatory limitation period of Ruritanian law should prevail over the three-year limitation period of Article 10.2 of the UNIDROIT Principles in a case where the parties had chosen the UNIDROIT Principles as the applicable law and arbitration as the method of resolving their disputes.

27. The increasing readiness of parties and international arbitrators to refer to the UNIDROIT Principles will lead to greater uniformity in the rules, including now those on limitation, applicable to the settlement of transnational disputes. This is a major contribution to international trade, for the certainty and predictability of applicable rules are essential to its development.

1
Extinctive prescription is to be distinguished from acquisitive prescription, the usucapio of our Latin ancestors.

2
Cholmondeley v. Clinton (1820), 2 Jac. & W. 139, 37 E.R. 527 at 577.

3
Concluded in New York on 14 June 1974 and subsequently amended by the Protocol concluded in Vienna on 11 April 1980; both entered into force on 1 August 1988 in accordance with Articles 44(1) of the 1974 Convention and IX(1) of the 1980 Protocol.

4
As of 8 April 2004, the Convention was in force in Argentina, Belarus, Bosnia and Herzegovina, Burundi, Cuba, Czech Republic, Dominican Republic, Egypt, Ghana, Guinea, Hungary, Mexico, Moldova, Norway, Paraguay, Poland, Romania, Serbia and Montenegro, Slovakia, Slovenia, Uganda, Ukraine, United States, Uruguay and Zambia.

5
For a comparative analysis of the two sets of rules, see M.J. Bonell, 'Limitation Periods' in A. Hartkamp et al., eds., Towards a European Civil Code, 3d ed. (Kluwer Law International, 2004) 517.

6
Chapter 10, entitled 'Limitation Periods', comprises eleven articles.

7
UN Limitation Convention, Article 1(2): 'This Convention shall not affect a particular time-limit within which one party is required, as a condition for the acquisition or exercise of his claim, to give notice to the other party or perform any act other than the institution of legal proceedings.'

8
A two-tier system is provided by the European directive on product liability, the German Civil Code with respect to limitation of tort claims, the new Dutch Civil Code and the UN Limitation Convention.

9
The UNIDROIT Principles use the term 'obligee' instead of creditor and 'obligor' instead of debtor. In this article the terms 'creditor' and 'debtor' have been preferred.

10
As is the case, for example, with latent damages in construction contracts.

11
See M.J. Bonell, supra note 5 at 16.

12
Article 1(3) of which contains the following wording: '"conciliation" means a process . . . whereby the parties request a third person or persons ("the conciliator") to assist them in their attempt to reach an amicable settlement of their dispute . . .'.

13
A partial payment or payment of interest on the sum due are both causes for interruption under the UN Limitation Convention, Article 20(2).

14
Article 20(1): 'When the debtor, before expiration of the limitation period, acknowledges in writing his obligation to the creditor, a new limitation period of four years shall commence to run from the date of such acknowledgement.' (Emphasis added.)

15
This applies whether the debtor knew that he could have raised this defence or not, as specified in Article 26 of the UN Limitation Convention. The UNIDROIT Principles are silent on this point.

16
Under Italian law, the mandatory nature of the rules on limitation is not considered a principle of international public policy, so there would be no conflict with party autonomy; see Court of Cassation, 10 March 1995, no. 2788, Giustizia Civile 1995, 1453.