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RIGHT TO AVOIDANCE (TERMINATION):

Perspectives from the CISG, UNIDROIT Principles and PECL

[2nd edition: Case annotated update (May 2005)]

Chengwei Liu

LL.M. of Renmin University of China; E-mail: <lexway@mail.com>.

  1. General
  2. Basic Characteristics of the Remedy
    2.1  No automatic or ipso facto avoidance
    2.2  Self-help remedy
    2.3  Available regardless of exempting impediments
  3. Grounds for Avoidance

Key provisions at issue

1. General

Whether the aggrieved party should have the right to avoid the contract in the case of a non-performance by the other party depends upon a weighing of conflicting considerations. On the one hand, the aggrieved party may desire wide rights of avoidance. It will have good reasons for avoiding the contract if the performance is so different from that for which it bargained that it cannot use it for its intended purpose, or if it is performed so late that its interest in it is lost, or the behavior of the non-performing party may in other respects be such that the aggrieved party should be permitted to avoid the contract. In some situations, avoidance will be the only remedy which will properly safeguard its interests, for instance when the defaulting party is insolvent and cannot perform its obligations or pay damages.[2]

The aggrieved party may also wish to be able to avoid in less serious cases. A party which fears that the other party may not perform its obligations may wish to be able to take advantage of the fact that the threat of avoidance is a powerful incentive to the other to perform to ensure that the other performs every obligation in complete compliance with the contract.[3] In particular, there may be cases, for instance, where the avoidance makes it possible for the aggrieved party to clarify his situation by reselling or repurchasing the goods required by the initial contract. The aggrieved party may not mind in such a detrimental situation, whether the non-performing party changes his mind and fulfils the contract.[4]

On the other hand, however, avoidance (termination) will often cause serious detriment to the non-performing party whose expenses in preparing and tendering performance may not be recovered. In attempting to perform, the non-performing party may have incurred expenses which are now wasted. Thus it may lose all or most of its performance when there is no market for it elsewhere. When other remedies such as damages or price reduction are available these remedies will often safeguard the interests of the aggrieved party sufficiently so that termination should be avoided.[5] Nevertheless, under the United Nations Convention on Contracts for the International Sale of Goods (1980; "CISG" or "Convention"), Art. 49/64 contains the most drastic of all the remedies of the aggrieved party - avoidance of the contract. In this respect, both the UNIDROIT Principles of International Commercial Contracts (1994; "UNIDROIT Principles") and the Principles of European Contract Law (1998; "PECL") provide a similar remedy, in Art. 7.3.1 and Art. 9:301, respectively.

It must, however, be emphasized that avoidance ("termination", in the context of the UNIDROIT Principles or PECL) of the contract is normally the most extreme measure a party may take in response to a breach ("non-performance", in the context of the UNIDROIT Principles or PECL) of contract. Avoidance puts a stop to any future performance, except for contractual performances designated to take effect upon avoidance, such as dispute resolution clauses or liquidated damages. (Any restitution following avoidance is not, properly speaking, a contractual performance, but a statutory or common-law requirement, as the case may be).[6] That is to say, the avoidance of the contract is "a constitutive right" of the aggrieved party, "which changes the contractual relationship into a restitutional [winding-up] relationship (Arts. 81-84 CISG)."[7] Any declaration of avoidance leads to the restitution of the parties' performances under their contract. And such restitution may be always quite burdensome within the context of international trade.[8]

Therefore, as the CISG practice evidently evidences, avoidance in an international sales context is regarded as a particular severe -- and therefore "exceptional" -- remedy, and many courts have indeed showed great reluctance to allow a party injured by a breach to avoid and thus put an end to the whole CISG contractual relationship.[9] For instance, the Court in [Germany 27 February 2002 [District Court] München] recently holds that:[10]

"It is hereby important that one of the underlying principles for the implementation of the CISG is that a declaration of avoidance of a sales contract should be the mere ultima ratio, i.e., last resort."

The aforementioned principle is similarly evidenced in [Switzerland 28 October 1998 Bundesgericht [Federal Supreme Court]], where the Court holds that the CISG operates from the principle that the contract shall be avoided only in exceptional circumstances and that the right to declare a contract avoided is the aggrieved party's most serious remedy.[11] It is also the ruling in [Germany 3 April 1996 Bundesgerichtshof [Federal Supreme Court]], recalling the text keyed to supra. n. 1, where the Court finds that, in determining, in the absence of express contractual stipulations, whether the aggrieved party's right to avoidance is justified, "regard is to be had to the CISG's tendency to limit avoidance of contract in favor of other possible remedies, in particular a reduction of the purchase price or a claim for damages (Art. 50, [74] CISG)."[12]

Indeed, not only the CISG but also the UNIDROIT Principles or the PECL offer aggrieved parties less extreme measures to deal with breach or with anticipatory breach, such as suspension of performance and requirement of assurances, requirement of performance, or unilateral price reduction. They likewise contain various cure measures that -- when applied or applicable -- allow for delayed or remedial performance and thus either delay recourse to avoidance or render it unnecessary. In this, both the CISG and the UNIDROIT Principles or PECL manifest a "relational" bias, namely attempting to salvage fractured contractual relations by providing an escalation of remedial measures, whose eventual failure ultimately leads to breaking up of the contractual framework through avoidance.[13]

2. Basic Characteristics of the Remedy

Despite the exceptional nature, that avoidance is a remedy established under both the Convention (Art. 49/64) and the UNIDROIT Principles (Art. 7.3.1) or the PECL (Art. 9:301), provides a solid starting point. And this remedy bears, in the context of the three international instruments, the following basic characteristics:

      2.1 No automatic or ipso facto avoidance

As opposed to its predecessor, the ULIS, the Convention rejected the automatic or ipso facto avoidance and presently only the usual form of avoidance by declaration survives thereunder. In this respect the Convention narrows the rule of Arts. 26, 61 and 62 ULIS, which provided for an automatic or ipso facto avoidance in certain circumstances, in addition to avoidance by declaration of the aggrieved party. Automatic or ipso facto avoidance was not included in the remedial system of this Convention because it led to uncertainty as to whether the contract was still in force or whether it has been ipso facto avoided.[14]

An entire article of the Convention, Article 26, is dedicated to the declaration of avoidance, requiring that it be made by notice to the other party. Excluded are ipso facto avoidance and advance notice.[15] Thus, under Art. 49/64 of this Convention (similarly under UNIDROIT Principles Art. 7.3.1 or PECL Art. 9:301) the contract is still in force unless the aggrieved party has affirmatively declared it avoided.[16] It follows, on the other hand, that avoidance under the Convention has become a single and a real remedy dependent on the aggrieved party's choice.[17] This characteristic will be demonstrated below.

      2.2 Self-help remedy

Contract avoidance is sometimes referred to as a "self-help" remedy. The basic feature of avoidance in the CISG is its autonomous, unilateral character: it requires no court action and may be executed entirely through appropriate declarations.[18]

Under the Convention, the aggrieved party need not apply to a court for relief from the obligation of the contract. Avoidance is effected by a "declaration" which is made "by notice to the other party." (Art. 26) Of course, the attempt to avoid is ineffective if it is not authorized by the Convention. The essential point is that the transfer of responsibility is not delayed pending litigation -- a process that could be particularly awkward in international transactions.[19] As Yovel notes, the PECL (or the UNIDROIT Principles) shares the CISG's approach to contract avoidance as a unilateral act requiring merely a declaration (notice) to the other party. In this, it is "markedly different" from several continental systems, where the general principle is that avoidance requires court proceedings.[20]

However, if the aggrieved party contends that he may declare the contract avoided, he is bound to prove the facts that entitle him to this right.[21] Parties must, of course, be cognizant of the fact that in subsequent litigation courts may disagree with a claim that avoidance was either available or executed properly. Such risk is associated with all self-help measures. In the case of CISG or PECL (or the UNIDROIT Principles) the remedy, however, is especially pronounced by the insistence that only fundamental and tantamount breaches may allow the aggrieved party to declare the contract avoided.[22] Specifically speaking, the aggrieved party who wishes to avoid the contract ahs the burden of proving that the other party's breach of contract was fundamental and substantially deprived it of what it was entitled to expect under the contract.[23] In this sense, it may appear to be a problem for some to see the aggrieved party burdened with the risk of determining whether or not the breach he suffered is fundamental.[24] Thus, a detailed discussion on what constitutes a fundamental breach is necessary and needs to be discussed separately.

In any event, under the Convention (similarly under the UNIDROIT Principles or PECL), the power to avoid (terminate) a contract belongs to the (entitled) parties. It does not have to be asked before a judge or an arbitrator.[25] By way of contrast with the approach of some civil law jurisdictions, there is no requirement that the party avoiding the contract obtain judicial approval or confirmation.[26] That is to say, termination may be effected by the act of the aggrieved party alone; it does not have to bring an action in court in order to have the contract avoided. If the specified requirements are satisfied, neither the Convention, nor the UNIDROIT Principles nor the PECL provides for any period of grace to be granted to the defaulting party by a court or an arbitral tribunal.[27] This is consistent with the rule, shared by CISG and PECL (and the UNIDROIT Principles), under which the aggrieved party need not serve the non-performing party with notice to put the latter into breach (such as a mise en demeure or Mahnung). However, both treat the matter of a cure (e.g., CISG Art. 48) or remedial period set or allowed by the aggrieved party (e.g., CISG Art. 47/63) as a special case during which the power to avoid is suspended.[28]

At the same time, it should be pointed out that if the required conditions are given, the aggrieved party "can, but does not have to, declare a contract avoided."[29] That is to say, if the specified conditions are met, the aggrieved party is authorized (but not obliged) to declare the contract avoided. He may even in this case require the non-performing party to perform his obligation and sue him for performance (CISG Art. 46/62), or invite him to perform his obligation within an additional period of time (CISG Art. 47/63). By doing so he, of course, does not lose his right to declare the contract avoided (CISG Art. 49/64) (unless after such subsequent performance, the avoidance is not necessary or the circumstances do not any more meet with the conditions specified for avoidance).[30]

      2.3 Available regardless of exempting impediments

CISG Art. 49/64 bases the right to avoid the contract on a failure by the other party to perform its obligations under the contract; avoidance does not depend on liability to pay damages for breach. CISG Art. 79 in specified circumstances (cf. force majeure) provides that a party is exempt from damages for "failure to perform" its obligations but adds (paragraph (5)): "Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention." In other words, exempting a party from damages does not prejudice the other party's right to avoid the contract. Indeed, when CISG Art. 79 exempts a party from damages for failure to perform, the appropriate remedy is usually avoidance of the contract.[31]

The same idea underlies both the UNIDROIT Principles and the PECL that the right to avoid the contract remains unimpaired even in case of impediments where the non-performing party is excused. Since, arguably, the objective character of breach of contract is not affected by the presence of impediments which exempt the breaching party from only certain legal consequences, leaving others untouched; the right to avoid the contract is intended to "apply both to cases where the non-performing party is liable for the non-performance and to those [in which] the non-performance is excused so that the aggrieved party can claim neither specific performance nor damages for non-performance."[32] In a word, whether or not the non-performance was excused; the aggrieved party may give notice of avoidance.[33]

But it has to be stressed that the aggrieved party has the right to avoid a contract only under specific conditions.[34] Such conditions have been specified in the relevant rules and are summarized in an overview below.

3. Grounds for Avoidance

Under the Convention, Art. 49 offers a clear, narrow definition of when the buyer has the right to avoid the contract, specifying in paragraph (1) two different situations: The first covers the situation when any non-performance of the seller's obligations amounts to a fundamental breach of contract. The second covers the case of non-delivery not amounting to a fundamental breach of contract in which an additional period for performance fixed according to Art. 47(1) -- the Nachfrist notice -- has not prompted the seller to perform. Similarly, paragraph (1) of CISG Art. 64 (a mirror image of Art. 49) states two alternative grounds for seller's avoidance: (a) Fundamental breach of contract by the buyer; and (b) Failure by the buyer "to pay the price or take delivery" within an additional final period fixed by the seller under Art. 63(1) -- the Nachfrist notice. The similar two grounds are also specified in either UNIDROIT Principles Art. 7.3.1 or PECL Art. 9:301.

The key aspect of the entire paragraph, either Art. 49(1) or Art. 64(1), is the notion of fundamental breach, even though it appears only in the text of subparagraph (a).[35] Indeed, in light of the drastic nature of avoidance, it is a general rule that only in tcases where the breach is of a serious nature would the aggrieved party be entitled to avoid the contract.[36] Mere breach of contract does not in itself permit avoidance of the contract, unless otherwise agreed in the contract (cf. CISG Art. 6).[37] The purpose of restricting the aggrieved party's choice of avoidance serves primarily the interests of the non-performing party. Whether the aggrieved party suffers particular hardship by being restricted to fundamental breach situations will depend on the particular kind of breach and all the circumstances involved. Insignificant breaches and those of minor practical importance justify avoiding extremes by maintaining the contract, which more often than not is to the benefit of both buyer and seller. Restricting to a lesser extent the aggrieved party's choice of avoidance would have opened opportunities to use the remedy as a means of speculation when market prices fluctuate. This was not the purpose of the Convention.[38]

In any event, in international sales, particularly far-reaching consequences and extensive waste may follow in the wake of contract avoidance (termination), and so the general Convention rule, as expressly stipulated in Art. 49/64, is that avoidance requires a showing of a particularly serious breach.[39] The framing of this text was based on the conclusion that international contracts usually are of a complexity and importance to the parties that avoidance should not be available for trivial departures that may readily be redressed by damages. The rejection of trivial grounds for avoidance necessarily led to a test that is based on degree. Application of this test requires attention to the aggrieved party's need for this remedy in the light of all the facts.[40]

However, the aggrieved party may have reason to doubt (1) whether a delayed performance will ever arrive and (2) whether a given breach is "fundamental" under Art. 49(1)(a) / 64(1)(a); for these reasons, CISG Art. 47(1) / 63(1) gives it the right to fix an additional period of time, after which the aggrieved party may avoid without having to consider whether the total delay has reached "fundamental" proportions. And if the non-performing party does not then perform within the additional period of time so fixed (or if the non-performing party declares that he will not comply), Art. 49(1)(b) / 64(1)(b) gives the aggrieved party the right to avoid. This second ground is based on a Nachfrist notice. But one point bears emphasis: failure to comply with the Nachfrist notice provides a basis for avoidance only when the notice calls for performance of some basic obligations: avoidance by the buyer based on the seller's failure to comply with a Nachfrist notice is limited to "non-delivery" (Art. 49(1)(b)); on the other hand, in respect of the avoidance by the seller, failure to comply with the Nachfrist notice provides a basis for avoidance only when the notice calls for performance of the buyer's basic obligations "to pay the price or to take delivery of the goods" (Art. 64(1)(b)).

That avoidance based on a Nachfrist-notice is restricted to the non-performing party's failure to perform its basic obligations, is to avoid erosion of the general principle that contracts should not be destroyed on trivial grounds.[41] The double purpose of sub-paragraph (b) of CISG Art. 49(1) / 64(1) became clearly manifest during the Conference: on the one hand, the remedy was to be extended beyond fundamental breach situations under sub-paragraph (a) to non-performance of the essential obligation. Thus, the aggrieved party, by fixing a Nachfrist of reasonable length, is able to emphasize his claim and exert pressure upon a defaulting party. On the other hand, the Nachfrist-avoidance-procedure was not to be extended any further than the essential obligation. This again protects the interests of the non-performing party as it would be too harsh for him to lose the benefits of the whole contract on account of insignificant shortcomings.[42]

In sum, due to its extreme nature, the CISG (similarly the UNIDROIT Principles or the PECL) reserves avoidance to special cases, namely to fundamental breaches (non-performances) of the contract.[43] This restriction, however, can be bypassed (or extended) in the case of failure to perform certain basic obligations (delivery, payment or taking delivery) even without establishing that the failure constitutes a fundamental breach by use of a special mechanism -- the so-called Nachfrist period -- where the breach has continued throughout that period. Thus the CISG allows for an "upgrade" of post-Nachfrist non-fundamental breach of such basic obligations to allow for avoidance.[44]

Generally speaking, however, whether or not this remedy is justified has to be determined by taking into account all of the relevant circumstances of the particular case.[45] Therefore, if a party requires more certainty than that provided by the flexible, gap-filling regime (CISG Art. 49/64, UNIDROIT Principles Art. 7.3.1 or PECL Art. 9:301) which generally conditions avoidance on a "fundamental" breach, then that party would be well-advised to insist on a contractual term which expressly conditions the declaration of an avoidance.


FOOTNOTES

1. See Judgment by Bundesgerichtshof [Federal Supreme Court], Germany, 3 April 1996; No. VIII ZR 51/95. English translation by Dr. Peter Feuerstein; translation edited by Ruth M.Janal; available at: <http://cisgw3.law.pace.edu/cases/960403g1.html>.

2. See Comment and Notes to PECL Art. 9:301: Comment A; available at: <http://www.cisg.law.pace.edu/cisg/text/peclcomp49.html>. See also Comment on Art. 7.3.1 UNIDROIT Principles: Comment 2.

3. Comment A on PECL Art. 9:301, supra. n. 2.

4. See Anna Kazimierska in "The Remedy of Avoidance under the Vienna Convention on the International Sale of Goods": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000), p. 82; available at: <http://www.cisg.law.pace.edu/cisg/biblio/kazimierska.html>.

5. Comment A on PECL Art. 9:301, also Comment 2 on UNIDROIT Principles Art. 7.3.1; supra. n. 2.

6. See Jonathan Yovel in "Comparison between provisions of the CISG (Buyer's right to avoid the contract: Article 49) and the counterpart provisions of the PECL (Articles 9:301, 9:303 and 8:106)", April 2005; available at: <http://www.cisg.law.pace.edu/cisg/biblio/yovel49.html>.

7. See Judgment by Landgericht [District Court] Düsseldorf, Germany 11 October 1995; No. 2 O 506/94. English translation by Dr. Peter Feuerstein, translation edited by Ruth M. Janal; available at: <http://cisgw3.law.pace.edu/cases/951011g1.html>.

8. See Judgment by Landgericht [District Court] München, Germany 27 February 2002; No. 5 HKO 3936/00. English translation by Stefan Kuhm, translation edited by Camilla Baasch Andersen; available at: <http://cisgw3.law.pace.edu/cases/020227g1.html>.

9. See Joseph Lookofsky in "The 1980 United Nations Convention on Contracts for the International Sale of Goods": J. Herbots editor / R. Blanpain general editor, Suppl. 29 International Encyclopaedia of Laws -- Contracts, Kluwer Law International (December 2000), p. 123; available at: <http://www.cisg.law.pace.edu/cisg/biblio/loo49.html>.

10. See Judgment by Landgericht [District Court] München, Germany 27 February 2002; supra. n. 8.

11. See CLOUT Abstract no. 248 (Bundesgericht [Supreme Court], Switzerland 28 October 1998); available at: <http://cisgw3.law.pace.edu/cases/981028s1.html>.

12. See Judgment by Bundesgerichtshof [Federal Supreme Court], Germany, 3 April 1996; supra. n. 1.

13. See Jonathan Yovel; supra. n. 6.

14. See Knapp in Commentary on the International Sales Law: The 1980 Vienna Sale Convention, Cesare Massimo Bianca & Michael Joachim Bonell eds., Milan (1987), pp. 465-466; available at: <http://www.cisg.law.pace.edu/cisg/biblio/knapp-bb64.html>

15. See Will in Commentary on the International Sales Law: The 1980 Vienna Sale Convention, Cesare Massimo Bianca & Michael Joachim Bonell eds., Milan (1987), p. 362; available at: <http://www.cisg.law.pace.edu/cisg/biblio/will-bb49.html>.

16. See Knapp, supra. n. 14; p. 466.

17. See Will, supra. n. 15; p. 360.

18. See Jonathan Yovel; supra. n. 6.

19. See John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed., Kluwer Law International, The Hague (1999), p. 327; available at: <http://www.cisg.law.pace.edu/cisg/biblio/ho49.html>.

20. See Jonathan Yovel; supra. n. 6.

21. See Judgment by Oberlandesgericht [Court of Appeal] Innsbruck, Austria 1 July 1994; No. 4 R 161/94. English translation by Ruth M. Janal, translation edited by Todd Fox; available at: <http://cisgw3.law.pace.edu/cases/940701a3.html>.

22. See Jonathan Yovel; supra. n. 6.

23. See UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods (8 June 2004), A/CN.9/SER.C/DIGEST/CISG/49: Digest 17; available at: <http://www.uncitral.org/english/clout/digest_cisg_e.htm>.

24. See Will, supra. n. 15; pp. 366-367.

25. See Judgment in ICC Arbitration Case No. 7585 of 1992; available at: <http://www.unilex.info/case.cfm?pid=1&do=case&id=134&step=FullText>.

26. See J. W. Carter in "Party Autonomy and Statutory Regulation: Sale of Goods": 6 Journal of Contract Law, North Ryde NSW, Australia (1993), p. 107; available at: <http://www.cisg.law.pace.edu/cisg/biblio/carter3.html>.

27. Comment B on PECL Art. 9:301, supra. n. 2.

28. See Jonathan Yovel; supra. n. 6.

29. See Fritz Enderlein & Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992), p. 190; available at: <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

30. See Knapp, supra. n. 14; pp. 466-467.

31. See John O. Honnold, supra. n. 19; pp. 333-334.

32. Comment 1 on UNIDROIT Principles Art. 7.3.1; supra. n. 2.

33. Note 2 to PECL Art. 9:301, supra. n. 2.

34. See Fritz Enderlein & Dietrich Maskow, supra. n. 29; p. 190.

35. See Will, supra. n. 15; p. 362.

36. See Ulrich Drobnig in "General Principles of European Contract Law": Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986), p. 328; available at: <http://cisgw3.law.pace.edu/cisg/biblio/drobnig.html>, where it is stated: "Today most lega1 systems agree in effect on the most important condition for allowing the aggrieved party to terminate the contract: The non-performance complained of must be of a serious nature. This criterion is expressed quite differently: English law requires breach of a condition and not of a mere warranty; in France where the contract, unless otherwise provided by the parties, can only be dissolved by judicial decision, the judge will not pronounce the dissolution unless there is a 'grave reason'; in Germany, a main obligation of the contract, and not merely an incidental one, must be violated. The uniform sales laws express the same idea by distinguishing 'fundamental' and other breaches of contract; only the former empower the aggrieved party to terminate the sales contract."

37. See Knapp, supra. n. 14; p. 465.

38. See Will, supra. n. 15; p. 362.

39. See Joseph Lookofsky, supra. n. 9; p. 123.

40. See John O. Honnold, supra. n. 19; p. 327.

41. See John O. Honnold, supra. n. 19; p. 387.

42. See Will, supra. n. 15; pp. 363-364.

43. According to Yovel, "[i]n making avoidance of the contract available only in cases of fundamental breach, both CISG and PECL seem to deviate from commercial practices that allow parties to reject goods -- and more importantly, documents -- that fail to strictly conform with the contractual specifications, even if that discrepancy is of little practical significance. Such practices are prevalent in documentary transactions such as CIF, and in particular such that involve documentary credit such as an L/C or 'unclean' documents such as bills of lading. Under the fundamental breach rule it would seem that such rejection would not amount in itself to avoidance but instead to a demand for cure (see CISG Arts. 30, 34, 47) which, if unmet, may then constitute a breach allowing avoidance, [...]." (See Jonathan Yovel; supra. n. 6.)

44. See Jonathan Yovel; supra. n. 6.

45. See CLOUT Abstract no. 248; supra. n. 11.


Pace Law School Institute of International Commercial Law - Last updated May 23, 2005
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