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Reprinted with permission from New York International Law Review, Vol. 10, No. 1, 7-57 (Winter 1997), published by the New York State Bar Association, One Elk Street, Albany, New York 12207.

Declaring the Contract Avoided:
The U.N. Sales Convention in the Chinese Context [*]

Jianming Shen [**]

I. Introduction

II. Avoidance of the Contract Under the Convention
     A. Circumstances Giving Rise to Avoidance
          1. Fundamental breach of contract
               (1) "Fundamental breach" as defined in Article 25
               (2) Fundamental breach of contract by the seller
               (3) Fundamental breach of contract by the buyer
          2. Avoidance based on noncompliance with a Nachfrist ultimatum
               (1) Nachfrist ultimatum under Articles 47 and 63
               (2) Seller's noncompliance with the buyer's Nachfrist ultimatum
               (3) Buyer's noncompliance with the seller's Nachfrist ultimatum
          3. Anticipatory fundamental breach
               (1) Anticipatory breach and its consequences
               (2) Anticipatory fundamental breach as a ground for avoidance under Article 72
               (3) Grounds for avoidance of future installments under Article 73(2)
     B. Limitations on the Avoidance Remedy
          1. Article 26: The notice requirement
          2. The pending grace period limitation
          3. Article 48: The seller's proposal to cure
          4. Articles 49(2) and 64(2)(a): Time limits in late performance
          5. Articles 49(2)(b) and 64(2)(b): Time limits in defective performance
          6. Article 39: "Notice of defects" and time limits
          7. Article 43: Notice of third-party claim and time limits
          8. Article 82: Inability to make restitution
          9. Articles 46 and 62: Prohibition of concurrent resort to specific performance and the avoidance remedy
     C. The Effects of Avoidance of the Contract
          1. Relief of contractual obligations
          2. Continuing right to claim damages
          3. Continuing binding force of clauses on dispute resolution
          4. Continuing binding force of contractual provisions on post-avoidance rights and obligations
          5. The right to claim and the duty to make restitution
          6. Other unaffected obligations after avoidance

III. The Cancellation Remedy Under Chinese Law
     A. Grounds for Cancellation of the Contract
          1. Grounds for cancellation under the FECL
               (1) "Serious breach" of contract
               (2) Failure to perform within a grace period
               (3) Force majeure events
               (4) The occurrence of contractual conditions for cancellation
          2. Grounds for cancellation of the contract under the ECL system
               (1) The ECL as compared with the FECL and the Convention
               (2) The notice-response requirement
               (3) Inquiries for clarification to cure delay in delivery
               (4) Avoidance due to late delivery: Criteria compared
               (5) Two cancellation cases
     B. Limitations on the Cancellation Remedy
     C. The Effects of Cancellation of the Contract

VIII. Conclusions


I. Introduction

Since the United Nations Sales Convention on Contracts for the International Sale of Goods [1] (hereinafter CISG or the Convention) went into force nearly nine years ago, the number of [page 7] disputes before domestic courts involving provisions of the Convention, in particular those provisions relating to the remedy of contract avoidance, has been increasing.[2] The Convention, which applies where: 1) a sales contract is between parties from two different Contracting States, or 2) the rules of private international law call for the application of the law of a Contracting State, [3] is gaining increasing importance in the continuing unification and harmonized interpretation of the rules and practices governing international commercial transactions. The Convention is now in force in some fifty-five countries, including the People's Republic of China as one of the Contracting States.[4] [page 8]

Although the lack of a case-reporting system in China makes it difficult to gather data on the application or interpretation of the Convention by Chinese courts, it is clear that: 1) the Convention has governed a significant number of Sino-foreign sales contracts that have been entered into and executed since 1988; and 2) disputes arising out of those post-1988 Sino-foreign contracts governed by the CISG have been, and will continue to be, resolved by Chinese courts and arbitral organizations in accordance with the provisions of the Convention. It should be noted that China's adherence to the Convention is made subject to two reservations, one of which will significantly reduce, at least for now, the number of cases involving the application of the Convention. One of these reservations is discussed in the paragraph below.

Upon ratifying the Convention on December 11, 1986, China declared [5] that it would not be bound by Article 1(1)(b), which provides that the Convention applies where rules of private international law lead to the application of the law of a Contracting State.[6] The effect of this declaration is that the Convention applies and replaces or modifies applicable Chinese domestic law only where a contract of sales is between a Chinese party and a party of another Contracting State. Due to this non-applicability of Article 1(1)(b) to China, Chinese domestic laws, instead of Convention provisions, will govern international sales contracts between a Chinese party and a party of a non-Contracting State when the rules of private international law lead to the application of Chinese law.

It should also be noted that the number of States that have ratified or acceded to the Convention, although growing, is still relatively small.[7] Thus, there still are sales transactions between parties from two different countries one or both of which may not be a Contracting State. Moreover, the Convention permits parties to a sales contract that would have otherwise been governed by the Convention to: 1) retain their freedom to exclude the application of the Convention, or 2) to derogate from or vary the effect of any of the Convention provisions other than Article 12.[8] Chinese domestic rules will thus apply when the parties, regardless of their [page 9] nationality, have chosen only Chinese law as the governing law.[9] Therefore, it is important for Chinese importers, exporters, and their foreign counterparts to become familiar with both the rules of the Convention and relevant Chinese legal provisions and practices. This article examines specifically the Convention rules and Chinese domestic rules governing the premature termination of a contract when one of the parties has breached.

In general, when one party to an international sales transaction breaches its contract, the other party may refuse to proceed further with the contract, reject the goods delivered and terminate the contract without resorting to the courts. The issues surrounding unilateral discontinuance of a contract are treated differently by the various legal regimes. In particular, the CISG applies the notion of "avoidance," [10] while Chinese law, under the Foreign Economic Contracts Law (FECL), applies the notion of "cancellation." [11] Other legal systems adopt the concepts of "rescission," "termination" and the like.[12]

Under either the Convention or Chinese law, the party intending to exercise his right to avoid or cancel the contract must simply provide a "notice of declaration" to the other party -- no court procedure or further step is necessary.[13] Avoidance or cancellation [page 10] of the contract relieves both parties from their contractual obligations, so long as there is no effect on: 1) a party's right to claim damages, or 2) contractual provisions covering the settlement of disputes or post-avoidance rights and obligations.[14] Moreover, the remedies of avoidance and cancellation are not available for every breach.[15] Thus, the greatest concern for traders is when and how a non-breaching party may unilaterally declare a contract avoided or canceled.

This article focuses on the Convention regime of avoidance of the contract and the Chinese regime of cancellation of the contract. It examines and compares the circumstances which permit a party to avoid or cancel a contract under the Convention and Chinese law, respectively. It discusses the limitations on the right to avoid or cancel the contract under each system and addresses the effects of avoidance or cancellation within each legal framework.

II. Avoidance of the Contract Under the Convention

A. Circumstances Giving Rise to Avoidance

Under the Convention, a non-breaching party to a contract is given a broad right, subject to certain conditions, to have the contract avoided even if performance of part or whole of the contractual obligations has been tendered. The major grounds for a party's right to avoid the contract under the Convention include the following: (1) a fundamental breach of contract by a party, (2) a failure or refusal to perform within a reasonable grace period, and (3) an anticipatory breach that is or will become a fundamental breach.[16]

1. Fundamental Breach of Contract

The concept of "fundamental breach" is the most important means of avoidance under the Convention. This concept is not paralleled in Chinese law or in the domestic legal systems of many other countries. Under the Convention, once a party to a CISG contract "fundamentally" breaches the contract, the other party may choose the avoidance option.[17] It follows that if the contract has been breached, but the breach is not "fundamental," the innocent party may only resort to non-avoidance remedial measures such as a demand for specific performance and/or a claim for damages.

(1) "Fundamental Breach" As Defined in Article 25

Article 25 of the Convention defines a "fundamental breach" as follows: [page 11]

"A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result." [18]

This definition includes two tests or standards for determining whether a breach is fundamental: 1) substantiality and 2) foresight or foreseeability.[19] The substantiality test is satisfied if the aggrieved party can prove that a substantial deprivation of his expectation from the performance of the contract has occurred or will occur because of the breach.[20] The emphasis of Article 25 is "on the degree of the detriment resulting from the breach" rather than on the degree of substantiality of the performance itself.[21] "Temporal or physical deviations . . . have no significance apart from the extent of the loss or detriment they cause to the other party." [22]

The foresight or foreseeability test dictates that even if the breach is material or substantial it will not to be considered "fundamental" unless the detrimental effect of the breach was foreseen by the breaching party or was foreseeable by any reasonable person in the same circumstances.[23] Article 25 does not specify when the result of a fundamental breach should be or [page 12] should have been foreseen.[24] In fact, foreseeability can be determined at any time up to the point of breach, and not only at the time of contract formation.[25]

It should also be noted that when the breach relates to "minor details" which the non-breaching party considers particularly important, if the information regarding the importance of such "minor details" is communicated to the breaching party "too late to affect performance," Article 25 would be inapplicable, because:

"[T]he foreseeability principle presumably is designed to give [the breaching party] an opportunity to give special attention to minor details of performance the importance of which he could not otherwise have anticipated." [26]

The concept of "fundamental breach of contract," as defined under Article 25 of the Convention, is unparalleled in the domestic law of any existing legal system(s).[27] In fact, no domestic law was employed in drafting Article 25. Its provenance was the definition of "fundamental breach" in the Uniform Law on the International Sale of Goods of 1964 (ULIS).[28] It should be noted, however, that although the corresponding article of the ULIS, Article 10, employs the phrase "fundamental breach," this phrase is defined and operates differently in the ULIS.

Article 10 of the ULIS provides that: [page 13]

"[A] breach of contract shall be regarded as fundamental wherever the party in breach knew, or ought to have known, at the time of the conclusion of the contract, that a reasonable person in the same situation as the other party would not have entered into the contract if he had foreseen the breach and its effects." [29]

That is, the ULIS's definition of "fundamental breach" requires actual knowledge of the consequence of the breach at the time of the conclusion of the contract.[30] In contrast, the Convention's definition of "fundamental breach" requires foresight or foreseeability of the consequence of the breach at any time prior to the breach.[31] In addition, under the ULIS, it is the innocent party, or a reasonable person in the same position as the innocent party, [32] that must have foreseen the detrimental effects of the breach.[33] Moreover, unlike the Convention which emphasizes the degree of detriment of the breach, the ULIS emphasizes the probability or improbability of entering into transactions if the innocent party or a reasonable person similarly situated had foreseen the breach and its effects.[34]

(2) Fundamental Breach of Contract by the Seller

Under Article 49(1)(a) of the Convention:[page 14]

"(1) The buyer may declare the contract avoided: . . . (a) if the failure by the seller to perform any of his obligations under contract or this Convention amounts to a fundamental breach of contract. . . ." [35]

In other words, the buyer is authorized to avoid the contract [36] if the effects of the seller's breach are such that they would substantially deprive the buyer of "what he is entitled to expect under the contract," provided that neither the defaulting seller foresaw, nor "a reasonable person of the same kind in the same circumstances" would have foreseen, the consequences of the breach.[37] Moreover, unlike under some legal systems, there is no need to apply to a court for avoidance under the Convention.[38] The buyer's entitlement to declare the contract avoided under Article 49(1) may be illustrated by the following example.

HYPOTHETICAL CASE 1: A contract concluded on February 1 between Rohm and Haas International Trading Co. (Rohm & Haas), a hypothetical subsidiary of chemical giant Rohm and Haas Company, and China National Chemical Import and Export Corporation (ChemImpex), a Chinese importer, for the sale of pesticides urgently needed in China, calls for the buyer to open a letter of credit (L/C) by April 1 and the seller to complete delivery by June 1. ChemImpex notified Rohm & Haas that the particular type of pesticides ordered were to be used to eliminate a particular type of insect in certain agricultural areas in China during the season immediately following delivery. ChemImpex timely opened a letter of credit, and Rohm & Haas delivered the goods on May 25. Upon their arrival and inspection, however, the pesticides did not conform to the specifications of the contract. The effect of the lack of conformity was such that the delivered pesticides would not be suitable for eliminating the particular type of insect pest prevalent. On June 1, ChemImpex notified Rohm & Haas of the serious discrepancy and declared the contract avoided.

In Hypothetical Case 1, ChemImpex's avoidance of the contract would be justified and would satisfy the "fundamental breach" test of the Convention for two reasons. First, ChemImpex was entitled to expect the specified pesticides to help eliminate a particular type of insect pest in certain areas of China, but the non-conforming pesticides delivered by Rohm & Haas would completely deprive ChemImpex of its contractual expectations.[39] Second, Rohm & Haas knew that the pesticides were needed urgently for the purpose of combating a particular [page 15] insect pest.[40] Rohm & Haas could foresee, and any reasonable chemical company in a similar position could have foreseen, that the delivery of the non-conforming pesticides would not help ChemImpex and its Chinese end-users combat the particular insect.[41] In other words, both substantiality and foreseeability were established before ChemImpex's declaration of cancellation of the contract.[42]

(3) Fundamental Breach of Contract by the Buyer

Under the Convention, the seller's entitlement to avoidance is generally similar to that of the buyer. Article 64(1)(a), using language which is almost identical to that of Article 49(1)(a), permits a seller to avoid the contract when the buyer's failure to perform any of his contractual obligations amounts to a "fundamental breach of the contract." [43] The standards for determining whether a buyer's breach is fundamental are essentially the same as those used for a seller's breach: 1) substantial deprivation of "what [the seller] is entitled to expect under the contract," and 2) the foresight or foreseeability of "such a result" by the defaulting buyer "and a reasonable person of the same kind in the same circumstances." [44] For example, if ChemImpex, in Hypothetical Case 1, failed to open a L/C or make payment through another arrangement within the time for performance, Rohm & Haas could rely on the "fundamental breach" theory to refuse delivery and avoid the contract.[45] [page 16]

2. Avoidance Based on Noncompliance with a Nachfrist Ultimatum

(1) Nachfrist Ultimatum under Articles 47 and 63

Article 47 of the Convention provides:

"(1) The buyer may fix an additional period of time of reasonable length for performance by the seller of his obligations.

"(2) Unless the buyer has received notice from the seller that he will not perform within the period so fixed, the buyer may not, during that period, resort to any remedy for breach of contract. However, the buyer is not deprived thereby of any right he may have to claim damages for delay in performance." [46]

Article 63 of Convention, using virtually the same language as Article 47, entitles the seller to "fix an additional . . . period of time . . . for performance by the buyer of his obligations. . . ." [47] The demand by the aggrieved party, under Article 47, demanding the defaulting party to perform within a grace period of reasonable length, [48] is known as a Nachfrist notice, declaration or ultimatum, or simply a notice of avoidance. This Nachfrist concept was borrowed from German law.[49] Under the concept, the party who gives the Nachfrist declaration may withdraw from, and therefore avoid, the contract at the expiration of the grace period given, provided that this period is of a reasonable length.[50] [page 17]

Article 47 of the Convention suggests that: 1) the buyer may fix an additional period for the seller to perform any of his obligations, and 2) after the expiration of the period, or where the seller has notified the buyer that he will not perform within the grace period, the buyer may resort to any remedy for breach of contract in addition to a claim for damages.[51] However, the seemingly broad effect of Article 47 is limited by: 1) Article 49(1)(b), which permits the buyer to use Article 47 to avoid the contract only if the seller fails to deliver, [52] and 2) Article 46(1), which does not permit the performance remedy where the buyer declares the contract avoided.[53] Similarly, the seller's remedy under Article 63 is limited by: 1) Article 64(1)(b), which permits avoidance of the contract based on a notice under Article 63 only where the buyer has failed within the additional final period to pay the price or take delivery of the goods, and 2) Article 62, which prohibits a party from invoking both the avoidance and specific performance remedies.[54]

(2) Seller's Noncompliance with the Buyer's Nachfrist Ultimatum

In the case of non-delivery by the seller, Article 49(1)(b) of the Convention states that:

"The buyer may declare the contract avoided . . . (b) . . . if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of Article 47 or declares that he will not deliver within the period so fixed." [55]

In keeping with the German concept of Nachfrist notice, Article 49(1)(b) of the Convention provides that if the seller fails to perform within the additional grace period for performance, the buyer may declare the contract avoided.[56] Article 49(1)(b) also provides an [page 18] alternative condition under which the buyer may avoid the contract, which is a declaration or indication by the seller that he will ignore the Nachfrist final notice.[57] The test of fundamental breach is not required under Article 49(1)(b).[58] Any failure to deliver the goods by the seller, even an insignificant breach, may entitle the buyer to declare the contract avoided under Article 49(1)(b). The following example illustrates this.

HYPOTHETICAL CASE 2: Assume the same basic facts as Hypothetical Case 1, except for the following. ChemImpex did not inform Rohm & Haas that the pesticides were urgently needed and necessary for the elimination of the insect pest in certain agricultural areas in China for the season immediately following delivery. Rohm & Haas failed to deliver the pesticides by June 1. On June 2, ChemImpex informed Rohm & Haas, in writing, of the following: "We hereby grant you a two month period of grace. You may complete delivery by August 1. No delivery after August will be accepted." Rohm & Haas, however, failed to deliver the goods by the end of the grace period. Although Rohm & Haas's failure to deliver did not amount to a fundamental breach, ChemImpex notified Rohm & Haas on August 5 that it considered the contract canceled.

In Hypothetical Case 2, ChemImpex could hardly avoid the contract on the ground of "fundamental breach" under the Convention, because Rohm & Haas was not informed of the purpose of the purchase.[59] Rohm & Haas could not foresee, nor could a similarly situated third party have foreseen, the detrimental result of its delay in delivery.[60] However, since Rohm & Haas was given a reasonable additional period of grace in which to effect delivery, its failure to deliver within this grace period, even if still not amounting to a "fundamental breach," would entitle ChemImpex to avoid or cancel the contract simply on the ground of non-compliance with the Nachfrist notice.[61] ChemImpex could have also avoided or canceled the contract if Rohm & Haas had announced that it would not deliver the goods within the grace period.[62]

(3) Buyer's Noncompliance with the Seller's Nachfrist Ultimatum

Under Article 64(1)(b), the seller may avoid the contract if the buyer fails to comply with a Nachfrist ultimatum.[63] More specifically, the seller may do so, pursuant to Article 64(1)(b), if: [page 19]

"[T]he buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of Article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed." [64]

Article 63(1) of the Convention provides that "the seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations." [65] In terms of the use of the Nachfrist mechanism, the language of and rationale behind Articles 63 and 47 are essentially the same.[66]

Suppose that the contract in Hypothetical Case 1 was on Ex Works terms [67] and called for the goods to be picked up by ChemImpex at Rohm & Haas's warehouse by June 1. Also, assume that ChemImpex failed to pick up the goods by June 1. On June 2, Rohm & Haas sent a cable to ChemImpex: "As a courtesy, we hereby give you thirty days of grace period. You may pick up the pesticides until July 1, after which we reserve the right to dispose of the goods." Further assume that ChemImpex failed to take delivery of the goods by July 1. As a result, Rohm & Haas could rely on the noncompliance with its Nachfrist notice to declare the contract avoided, even if neither of the above failures amounted to a fundamental breach of contract.

3. Anticipatory Fundamental Breach

Besides actual fundamental breach of contract and failure to comply with a Nachfrist notification under Articles 49 and 64 of the Convention, "anticipatory" fundamental breach constitutes another ground for avoidance of the contract under Articles 72 and 73(2) of the Convention.

(1) Anticipatory Breach and Its Consequences

Anticipatory breach denotes situations where: 1) one of the parties will not or will not be able to perform the contract prior to the performance date, or 2) a party has declared that he will not perform a substantial part or all of his obligations within the time for performance. The usual remedy for anticipatory breach under some legal systems is temporary "suspension" of [page 20] performance by the innocent party, subject to certain conditions or limitations.[68] Article 71 of the Convention provides the grounds and conditions for suspending performance by any party due to the other party's anticipatory breach, and resembles the domestic rules of numerous countries.[69] Yet, if the anticipatory breach amounts to a "fundamental" breach, [70] the Convention provides an additional remedy: early avoidance of the contract.

(2) Anticipatory Fundamental Breach as a Ground for Avoidance under Article 72

Article 72 of the Convention states:

"(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.

"(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.

"(3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations." [71] [page 21]

The criteria for early avoidance of the contract under Article 72 are harsher than those for temporary suspension under Article 71.[72] In order for a party to avoid the contract prior to the date for performance, the detriment of the other party's anticipatory breach must substantially deprive the party of what he is entitled to expect under the contract.[73] It also must be "clear" and not merely "apparent" that the fundamental breach will occur.[74] The remedy of early avoidance of the contract is further limited by paragraph (2) of Article 72, which requires the giving of "reasonable notice," "if time allows," for the purpose of permitting the anticipatorily breaching party to provide adequate assurance of performance.[75] If such assurance is promptly secured, the party which intends to avoid the contract then loses the right to do so, unless the anticipatory breaching party has declared that he will not perform.[76]

Thus, in a sales transaction governed by the CISG, the seller may declare the contract avoided: (1) if, prior to the date for performance, the buyer has declared that he will not take delivery of, and/or pay for, the goods to be delivered in accordance with the terms of the contract and will therefore clearly commit a fundamental breach of the contract or (2) if it has otherwise become clear, prior to the date for payment or taking delivery, that the buyer will fundamentally breach the contract.[77] Moreover, the buyer may also exercise his right to declare the contract avoided prior to the date for delivery wherever: 1) "it is clear that [the seller] will commit a fundamental breach of contract," or 2) the seller "has declared that he will not perform his obligations" and will therefore "fundamentally" breach the contract.[78] Below is an example of how Article 72 operates.

HYPOTHETICAL CASE 3: Assume the same basic facts as in Hypothetical Case 1 except for the following: On March 1, Rohm & Haas informed ChemImpex that it would not start delivery [page 22] until August 1. After a few unsuccessful attempts by ChemImpex to persuade Rohm & Haas to complete delivery by June 1, it became clear that: 1) Rohm & Haas would not perform by June 1 and 2) ChemImpex would be substantially deprived of its expectation under the contract: to supply the pesticides to end-user farms and forestry centers to seasonably combat the insect pest. On March 15, ChemImpex notified Rohm & Haas that it would consider the contract avoided as of that date, and would look to other potential sellers.

In Hypothetical Case 3, ChemImpex's avoidance of the contract, prior to the fixed date for performance, would be justified even if: 1) it was two and a half months before the completion date for delivery, and 2) ChemImpex itself had not performed its own obligations under the contract, namely, opening a letter of credit by April 1.[79] The hypothetical facts made it clear that Rohm & Haas would commit a fundamental breach, thereby entitling ChemImpex to terminate the contract by exercising its right under Article 72(1) and (3) of the Convention.

(3) Grounds for Avoidance of Future Installments under Article 73(2)

In terms of the early avoidance of an installment contract, Article 73(2) provides that:

"(2) If one party's failure to perform any of his obligations in respect of any installment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future, provided that he does so within a reasonable time." [80]

The above paragraph provides three inseparable conditions under which the non-breaching party may declare the contract avoided with respect to future installments: 1) a breach by the defaulting party with respect to any of the installments has occurred, 2) such breach "gives the [non-breaching] party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments," and 3) the declaration of avoidance must be made "within a reasonable time of the failure to perform." [81] The crucial condition is the second one, which concerns anticipatory fundamental breach.

Under Article 72(1), it must be clear that the other party will commit a fundamental breach of contract.[82] However, under Article 73(2), the defaulting party's breach in respect to any of the installments must only give the non-breaching party "good grounds" to fear that a fundamental breach will occur to future installments.[83] Moreover, the standard under Article 73(2) is: [page 23]

"[L]ess strict and more subjective than grounds . . . for avoidance under Article 72. This may be explained by the fact that in the setting of Article 73(2) . . . a breach of contract has already occurred." [84]

The breach that has occurred does not have to be serious or fundamental. What is important is the seriousness of the anticipatory breach as to future installments that the non-breaching party fears will occur in view of the current breach.[85] Furthermore, Article 73(2) is particularly significant in cases:

"[W]here a series of breaches, none of which in itself is fundamental or would give good reason to fear a future fundamental breach, taken together does give good reason for such a fear." [86]

B. Limitations on the Avoidance Remedy

Under the United Nations Convention, there are certain circumstances in which the buyer or the seller is not allowed to exercise the right to avoid the contract. Article 49(2) spells out certain situations where the buyer may not resort to the avoidance remedy even if the criteria under Article 49(1) [87] are met. Similarly, right to avoid the contract under Article 64(1).[88] Article 82, which applies to buyers and sellers, sets forth limitations on the avoidance remedy.[89] Article 26 operates to nullify any declaration of avoidance made without a notice to the other party.[90] Moreover, certain other Convention provisions also have the effect of limiting or depriving the buyer or seller of his entitlement to avoid the contract. These limitations are based on the assumption that the conditions permitting avoidance have been satisfied.[91]

1. Article 26: The Notice Requirement

The most important limitation on the right to avoid the contract is perhaps the notice requirement of Article 26, which expressly provides that "[a] declaration of avoidance of the contract is effective only if made by notice to the other party." [92] That is, a non-breaching party's avoidance will be successful and recognized by a court only if a notice of avoidance is communicated to the breaching party.[93] The non-breaching party therefore cannot effectively [page 24] exercise the right to declare the contract avoided if he fails or refuses to give notice to the other party.[94]

2. The Pending Grace Period Limitation

When one party has fixed an additional period of time for performance by the other party, the former generally may not resort to the avoidance remedy during that period. Article 47 of the Convention provides that unless the buyer "has received notice from the seller that he will not perform" within the grace period fixed by the buyer, "the buyer may not, during that period, resort to any remedy for breach of contract." [95] This includes the right to avoid the contract. A conceivable scenario is as follows: Seller fails to deliver the goods and this non-delivery constitutes a fundamental breach of contract, thereby entitling Buyer to declare the contract avoided. Instead of declaring the contract avoided, Buyer fixes an additional period of time during which Seller must deliver. Buyer, then, may not exercise the right to avoid the contract during the additional period of time for delivery, unless Seller declares that he will not deliver within such period.[96] Similarly, under Article 63(2), in the case of a failure to take delivery of the goods and/or pay for goods by the buyer, the seller may not exercise the right to avoid the contract during the reasonable Nachfrist grace period of time he has fixed for taking delivery and/or making payment by the buyer, unless the buyer has declared that he will not comply with such Nachfrist notice.[97]

3. Article 48: The Seller's Proposal to Cure

Under Article 48, particularly paragraphs (2) and (3), of the Convention, in the case of any type of breach by the seller, including non-delivery, the seller may cure the consequence of his breach on his own, and propose to perform or perfect performance within a specified time period, expressly or impliedly demanding the buyer to decide whether he will accept performance within the proposed time period.[98] The buyer cannot exercise his right to avoid the contract during the performance period specified by the seller in his proposal if the buyer: (1) has agreed to the seller's proposal or (2) fails, within a reasonable time, to reject or otherwise respond to the seller's notice for delayed performance.[99] In order to demonstrate how Article 48 operates, suppose, for example, that in Hypothetical Case 3 Rohm & Haas, after failing to [page 25] make delivery by June 1, notified by ChemImpex on June 2 that it would "complete delivery by August 1." On June 4, ChemImpex agreed to Rohm & Haas's proposal to complete delivery by August 1. Although Rohm & Haas's failure to perform before June 1 amounted to a fundamental breach, ChemImpex, after having consented to Rohm & Haas's notice of June 2, would not be permitted to declare the contract avoided within the additional performance period.[100] ChemImpex would be able to avoid the contract only after the expiration of the period requested by Rohm & Haas and agreed to by ChemImpex.[101]

When the seller proposes to cure his breach, the buyer [102] may be subject to the following additional limitation: if "the seller has delivered the goods" (1) after the expiration of the additional performance period specified by the seller or (2) after the buyer has rejected the seller's proposal, the buyer must avoid the contract "within a reasonable time." [103] The following hypothetical illustrates this. Suppose that Rohm & Haas failed to deliver the goods within the promised additional period and instead forwarded a telegram on August 5 to ChemImpex which stated: "We dispatched the goods today." On August 7, ChemImpex telegraphed the following message to Rohm & Haas: "Due to your failure to deliver by August 1, your promised delivery date, we declare that the contract is hereby avoided and terminated. We further reject any delivery or performance made after August 1." This declaration of avoidance would be effective, because it was made "within a reasonable time," that is, only 7 days after the expiration of the additional period of time Rohm & Hass requested for delayed performance.[104] However, ChemImpex would lose the right to avoid the contract if it failed to do so within a reasonable time after August 1.[105] For example, if ChemImpex's declaration of avoidance was not made until September 15, when the goods arrived in China, the declaration would not have been made "within a reasonable time." [106] [page 26]

4. Articles 49(2)(a) and 64(2)(a): Time Limits in Late Performance

In the case of late performance, the innocent party loses his right to avoid the contract if he fails to do so "within a reasonable time" after learning that the late performance has been made.[107] With respect to the buyer, Article 49(2)(a) states that:

"[W]here the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so: (a) in respect of late delivery, within a reasonable time after he has become aware that delivery has been made. . . ." [108]

With respect to the seller, [109] Article 64(2)(a) provides that in the case of late performance by the buyer, the seller must declare the contract avoided before he learns that the buyer has tendered late performance.[110]

5. Articles 49(2)(b) & 64(2)(b): Time Limits in Defective Performance

Where the breach is other than late performance, if the seller has delivered the goods or the buyer has paid the price, the party intending to declare the contract avoided is also subject to the "within a reasonable time" limitation under Articles 49(2)(b) and 64(2)(b) of the Convention. However, the situations involving these "other" types of breaches are more complex than those involving late performance.

Under Article 49(2)(b), in the case of: 1) premature delivery, 2) delivery of non-conforming goods, 3) partial delivery or 4) delivery partially in conformity with the contract or 5) any nonconforming performance by the seller other than late delivery, the buyer loses the right to avoid the contract if he fails to do so "within a reasonable time":

(i) after he became aware or ought to have become aware of the breach of the contract; [111] [page 27]

(ii) after the additional period of time fixed by the buyer for perfecting performance by the seller of his obligations has expired, or after the seller has declared that he will not perform within such additional period; [112]

(iii) after the additional period of time the seller requested for perfecting performance of his obligations has expired;

(iv) after the buyer has declared that he would not accept the cure or perfection of performance by the seller within that additional period of time.[113]

HYPOTHETICAL CASE 4: Assume the same facts as Hypothetical Case 1, except for the following: Rohm & Haas delivered the pesticides by June 1, but the goods were so defective that ChemImpex could, "within a reasonable time" after discovering the defect, reject the goods and avoid the contract under Articles 49(1)(a) and 49(2)(b)(i). Nevertheless, ChemImpex did not immediately avoid the contract. Instead, ChemImpex granted Rohm & Haas a two-month grace period for delivering substitute pesticides that would conform to the contract. When the grace period expired on August 1, however, Rohm & Haas failed to replace the defective goods. ChemImpex did not declare the contract avoided until October 1, by which time Rohm & Haas had already shipped the substitute pesticides.

In Hypothetical Case 4, ChemImpex may have difficulty in avoiding the contract two months after the expiration of the grace period, because a period of that length under the circumstances would hardly be considered a reasonable time. Under Article 49(2)(b)(ii) of the Convention, ChemImpex could have exercised its right [114] to avoid the contract "within a reasonable time," such as within a week or ten days, after the expiration of the Nachfrist grace period for substitute delivery.[115]

In terms of the seller's rights and limitations thereon, Article 64(2)(b) provides: [page 28]

". . . [I]n cases where the buyer has paid the price, the seller loses the right to declare the contract avoided unless he does so:

(b) in respect of any breach other than late performance by the buyer, within a reasonable time:

(i) after the seller knew or ought to have known of the breach; or

(ii) after the expiration of any additional period of time fixed by the seller in accordance with paragraph (1) of article 63, or after the buyer has declared that he will not perform his obligations within such an additional period." [116]

The following example illustrates the effects of Article 64(2)(b).

HYPOTHETICAL CASE 5: The sales contract between ChemImpex and Rohm & Haas in Hypothetical Case 1 required ChemImpex to open a letter of credit by May 1. ChemImpex opened a letter of credit on April 20. When Rohm & Haas received the L/C on April 29, however, Rohm & Haas discovered that the L/C did not conform to the contract terms. This lack of conformity constituted a fundamental breach. On May 1, instead of avoiding the contract "within a reasonable time" after learning about the discrepancy, Rohm & Haas allowed ChemImpex to amend the L/C by June 1. On May 3, ChemImpex replied by cable: "Sorry, we cannot and will not open another letter of credit in your favor by June 1." On June 12, after not having received an amended L/C from ChemImpex's bank, Rohm & Haas notified ChemImpex of its decision to avoid the contract.

Here, Rohm & Haas may find it difficult to avoid the contract forty days after ChemImpex's declaration that it would not open an amended L/C by June 1.[117] Article 64(2)(b)(ii) requires Rohm & Haas to avoid the contract "within a reasonable time," such as within a few days after it received ChemImpex's May 3 cable indicating ChemImpex's decision to not comply with the Nachfrist ultimatum.

6. Article 39: "Notice of Defects" and Time Limits

Article 39 of the Convention, which imposes further limitations on the buyer's right to avoid the contract, states that:

"(1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.

"(2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed [page 29] over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee." [118]

Thus, in cases of non-conforming delivery by the seller, the buyer may no longer exercise his right to avoid the contract if he fails to notify the buyer of the nature of nonconformity within: 1) "a reasonable time after he has discovered it or ought to have discovered it" or 2) "a period of two years" after taking delivery of the goods, even if the defects are discovered after or shortly before the end of the two-year period and unless "a contractual period of guarantee" provides otherwise.[119]

7. Article 43: Notice of Third Party Claim and Time Limits

Article 43 of the Convention provides that in the case of a delivery of goods involving a third party's claim [120] or intellectual property rights, [121] the buyer loses the right to rely on Articles 41 and 42 of the Convention if he fails to give the seller notice:

"[S]pecifying the nature of the right or claim of the third party within a reasonable time after he has become aware or ought to have become aware of the right or claim." [122]

In certain circumstances, third party claims may indicate the seller's breach of warranty or guarantee of title.[123] Thus, the buyer's failure to notify the seller of third party claims or rights within a reasonable time may deprive the buyer of his right to avoid the contract.[124]

8. Article 82: Inability to Make Restitution

A buyer who is otherwise entitled to avoid the contract may find himself unable to do so, because he might not be able to return the goods in the same condition as when he received them. This situation is regulated by Article 82 of the Convention, which reads as follows: [page 30]

"(1) The buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them.

"(2) the preceding paragraph does not apply:

(a) if the impossibility of making restitution of the goods or of making restitution of the goods substantially in the condition in which the buyer received them is not due to his act or omission;

(b) if the goods or part of the goods have perished or deteriorated as a result of the examination provided for in article 38; or

(c) if the goods or part of the goods have been sold in the normal course of business or have been consumed or transformed by the buyer in the course of normal use before he discovered or ought to have discovered the lack of conformity." [125]

The hypothetical case below illustrates Article 82.

HYPOTHETICAL CASE 6: In the transaction between ChemImpex and Rohm & Haas, as in Hypothetical case 1, Rohm & Haas delivered the pesticides on June 1. Surveys conducted by both Chinese and American inspectors revealed that the goods were so defective that the lack of conformity constituted a fundamental breach. On June 10, ChemImpex declared the contract avoided by dispatching a cable to Rohm & Haas. However, due to improper storage and preservation by ChemImpex, the defective pesticides were destroyed by heavy rains and flooding on June 15.

In the above example, ChemImpex's prior avoidance of the contract may become invalid, because its inability to return the goods, or to return them in substantially the same condition as when they were received would result in the loss of the right to avoid the contract.[126] Article 82(2) provides the following three exceptions to the effects of Article 82(1): 1) where ChemImpex's inability to return the pesticides was not due to its own act or omission, 2) where the pesticides had perished or deteriorated by the time ChemImpex had examined them or 3) if ChemImpex resold the pesticides in whole or in part, or consumed or transformed them in whole or in part, in the normal course of business or "before [it] discovered or ought to have discovered" the defects.[127] None of these exceptions apply to the above hypothetical.[page 31] ChemImpex's avoidance remedy may be barred by its inability to return the goods due to its own failure to properly preserve the unwanted pesticides.[128]

9. Articles 46 and 62: Prohibition of Concurrent Resort to Specific Performance and the Avoidance Remedy

Finally, a party may not resort to the avoidance remedy while he is requesting the other party to tender performance. If the buyer requires the seller to make specific delivery, [129] deliver substitute goods in case of nonconformity [130] or remedy such nonconformity by repair [131] in accordance with Article 46 of the Convention, then the buyer may not resort to the avoidance remedy at the same time.[132] Similarly, under Article 62, the seller is precluded from avoiding the contract when requesting the buyer to take delivery of the goods, make payment therefore or tender any other specific performance, because the avoidance remedy is inconsistent with these measures.[133]

A request for specific performance can be made pursuant to Articles 47(1) or 63(1) and in the form of a Nachfrist ultimatum. In that event, due to the effects of these articles per se and Articles 46 and 62, the party requesting specific performance may avoid the contract only after the expiration of such Nachfrist ultimatum or a declaration by the seller that he would not comply with the request within the Nachfrist period of time.[134]

C. The Effects of Avoidance of the Contract

The declaration of avoidance of the contract by the buyer or the seller under Articles 49, 64 or any other relevant Convention provision both entitles him to a series of rights and restricts [page 32] him to a series of continuing obligations. The effects of contract avoidance are governed by Article 81, which provides that:

"(1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.

"(2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently." [135]

1. Relief of Contractual Obligations

The immediate effect of contract avoidance under Article 81(1) is that both parties are relieved of their respective obligations to perform, without prejudice to any claim for damages and other remedial rights consistent with the avoidance remedy itself.[136] After avoidance of the contract, the seller is relieved of any outstanding performance-related obligations under the contract.[137] For example, he is no longer obligated to deliver the goods, deliver substitute goods in replacement of non-conforming delivery or remedy the lack of conformity.[138] Similarly, the buyer is relieved from performing any outstanding obligations. That is, he is freed from accepting the goods and/or tendering payment for the goods, since the contract no longer binds the parties to perform.[139] For example, ChemImpex, after declaring the contract avoided in Hypothetical Case 3, would not have to open a Letter or Credit, pay the price or perform any other pre-existing obligations.[140] To the extent that the right to claim damages remains unaffected, the effects of contract avoidance are that the parties are deemed to have performed their respective obligations and no further performance remains to be tendered.[141] [page 33]

2. Continuing Right to Claim Damages

Under Article 81(1), the fact that a party has resorted to the avoidance remedy does not deprive him of his right to claim damages that may be due under the Convention or the contract.[142] When the buyer lawfully avoids the contract pursuant to the Convention, he retains the right to claim damages for losses he has sustained as a result of the seller's "fundamental breach." [143] For example, ChemImpex in Hypothetical Cases 1 through 3 would still be entitled to any damages which it might suffer as a consequence of Rohm & Haas' fundamental breach.[144] Avoidance of the contract by the seller entitles the seller to claim damages pursuant to Articles 74, [145] 75, [146] and 76 [147] or based on contractual provisions.[148]

3. Continuing Binding Force of Clauses on Dispute Resolutions

Although avoidance of the contract relieves the parties from their contractual obligations, this does not mean that every clause of the avoided contract ceases to be effective or that all the rights and obligations provided for in the contract automatically come to an end.[149] Generally speaking, dispute resolution clauses always remain binding after the contract ceases to exist by way of avoidance or automatic termination. As stated by Honnold:

"Suppose that a party claims that a contract containing an arbitration clause, is subject to avoidance under the Convention, for example because of serious breach of contract. Does "avoidance" of the contract also nullify the arbitration clause? The Convention says No: 'Avoidance . . . does not affect any provision of the contract for the settlement of disputes.' " [150]

Honnold further notes that the Convention: [page 34]

"[A]lso supports [Article 21(2) of the] UNCITRAL Arbitration Rules which provide[s] that [an] arbitration clause 'shall be treated as an agreement independent of the other terms of the contract.' " [151]

4. Continuing Binding Force of Contractual Provisions on Post-Avoidance Rights and Obligations

Under Article 81(1), if the contract itself provides that a party may exercise various rights and that the other party must fulfill certain obligations after the contract is avoided, these provisions, despite the contract having been avoided, will remain effective until those rights and obligations are fully realized.[152] These contractual rights and the corresponding obligations to honor these rights do not cease to exist simply because the contract is avoided.[153] For example, a contract may contain a liquidated damages clause or clauses providing for the calculation of damages in the event the contract is avoided.[154] These clauses, unlike those that are performance-related, are not avoidable unless the contract itself or a subsequent agreement between the parties indicates otherwise.[155]

5. The Right to Claim and the Duty to Make Restitution

If the contract is avoided after one party has performed his obligations in whole or in part, Article 81(2) entitles that party to claim restitution of what he has supplied or paid and requires the other party to make restitution.[156] The party who is obligated to make restitution after avoidance does not have to be the breaching party.[157] Whoever has received performance [158] must make restitution in accordance with the Convention and/or any contractual provisions.[159] [page 35] If both the seller and the buyer have received performance in whole or in part from one another, then they must make restitution concurrently.[160]

After avoidance by either party, the buyer is entitled to claim a refund of the contract price or deposit paid to the seller and required to return the goods.[161] This can be seen in Hypothetical Cases 1 and 2, where ChemImpex would be entitled to a full refund of the contract price which it had paid by way of letter of credit. Similarly, the seller is entitled to restitution of whatever the seller has supplied to the buyer under the contract.[162] Typically, the seller may claim a return of the goods and documents delivered prior to avoidance.[163] The seller is also under a post-avoidance obligation to refund any payment which the buyer has tendered before cancellation.[164]

6. Other Unaffected Obligations after Avoidance

In addition to Article 81, other articles of the Convention provide post-avoidance rights or impose post-avoidance obligations. Under Article 84(1), the buyer may claim interest on the price or deposit "from the date on which the price [or deposit] was paid." [165] For example, ChemImpex might claim interest on the price it had paid in Hypothetical Cases 1 and 2.[166] The buyer, under Article 86(1), may also claim a reimbursement for reasonable expenses incurred in preserving the goods while in his possession or control.[167] For example, ChemImpex could claim such a reimbursement in Hypothetical Case 1.[168]

Article 86(2) provides that the buyer is still obligated to: 1) take on behalf of the seller possession of the goods delivered by the seller that will be rejected, and 2) take reasonable steps to [page 36] preserve the goods if the seller, or a person taking charge of the goods on the seller's behalf, is not at the point of delivery.[169] For example, in Hypothetical Case 1, ChemImpex would be obligated to take possession of the non-conforming pesticides on behalf of Rohm & Haas and take reasonable measures to preserve them.[170]

Under Article 88(2), if the costs for preserving the goods are unreasonably high or the goods are vulnerable to "rapid deterioration," [171] the buyer is required to "take reasonable measures to sell them." For example, in Hypothetical Case 1, if the non-conforming pesticides were "volatile" and rapidly deteriorating, then ChemImpex would be obligated to sell them locally.[172]

In other instances, the buyer is further obligated to make restitution of the goods by returning them to the seller substantially in the same condition in which they were received.[173] For example, in Hypothetical Case 1, ChemImpex would be bound to return the unwanted non-conforming pesticides to Rohm & Haas substantially in the same condition in which they arrived in China.[174] The buyer may nonetheless retain the goods until he is reimbursed for reasonable expenses incurred on their preservation.[175] If the buyer must sell the goods, then he must also "account to the seller for all benefits which he has derived from the goods or part of them" [176] and "account to the [seller] for the balance" of the proceeds from the sale in an amount equal to the reasonable expenses that were incurred in the preservation and sale of the [page 37] goods.[177] In Hypothetical Case 1, if ChemImpex had to sell the pesticides in China locally, then it would turn over the proceeds of the sale to Rohm & Haas after retaining an amount covering the reasonable preservation and sale expenses.[178]

It should also be noted that the buyer's post-avoidance rights presuppose the seller's post-avoidance obligations, and vice versa. Article 84(2) of the Convention entitles the seller to whatever benefits the buyer "has derived from the goods or part of them," [179] while Article 84(1) requires the seller to pay interest on any price that is refunded.[180]

III. The Cancellation Remedy Under Chinese Law

A. Grounds for Cancellation of the Contract

In sales transactions with parties of non-Contracting States of the Convention, or where the parties have agreed that the Convention does not apply, Chinese law may apply according to the parties' choice of law or due to the operation of rules of private international law. It is therefore important to analyze the grounds for avoiding the contract under China's domestic legal rules.

Under Article 29 of the FECL, the major conditions giving rise to cancellation of a contract are: (1) serious breach, (2) failure to perform within a grace period, (3) force majeure, and (4) the occurrence of agreed upon conditions.[181] Article 29 of the FECL provides, in relevant part, that:

"A party to a contract is entitled to notify the other party to have the contract canceled in [any] on of the following circumstances:

(1) The other party has breached the contract so that the expected economic interests for which the contract is concluded are seriously affected;

(2) The other party failed to perform the contract within the period of time agreed upon in the contract, and has once again failed to perform within a reasonable period of time allowed for delayed performance; [page 38]

(3) A force majeure event has occurred, making it impossible to perform the whole obligations of the contract;

(4) The conditions agreed upon in the contract for the cancellation of the contract have occurred. . . ." [182]

1. Grounds for Cancellation under the FECL

(1) "Serious Breach" of Contract

Perhaps the most important grounds for cancellation of the contract under Article 29 of the FECL is a "serious breach" of contract.[183] The effects of Article 29(1) of the FECL generally parallel those of Articles 49(1)(a) and 64(1)(a) of the Convention.[184] There are also similarities between Article 29(1) of the FECL and Article 25 of the Convention.[185] Both contain the element of expectation and emphasize the effects or results of the breach rather than the nature and seriousness of the breach itself.[186] These similarities indicate that the FECL, which was drafted after the Convention was open for signatures and ratifications, is modeled upon the Convention to a certain degree.

The FECL, however, fails to offer any definition or explanation of the terms "serious breach" or "seriously affected." [187] It simply states that the innocent party may cancel the contract by notification where the other party's breach of contract seriously affects "the expected economic interests for which the contract is concluded." [188] In this regard, much greater certainty [page 39] is provided under the Convention with the "substantial deprivation" test, [189] the "foreseeability" test [190] and the "reasonableness" criterion.[191] Moreover, although the words "are seriously affected" [192] under the FECL and the words "substantially deprive" under the Convention may bring about similar results for an aggrieved party, the absence of the word "fundamental" and the lack of a "foreseeability" and "reasonableness" requirement in the FECL may render more contracts avoidable under the FECL.

(2) Failure to Perform within a Grace Period

The FECL is the first Chinese statute that uses a grace period notice-cancellation procedure akin to the Convention's Nachfrist ultimatum mechanism.[193] Article 29(2) of the FECL, which provides that a non-breaching party may cancel the contract if the breaching party "has once again failed to perform within [the] reasonable period of time allowed for delayed performance," is analogous to the relevant provisions in Articles 49(1)(b), 47(1), 64(1)(b) and 63(1) of the Convention.[194] The key similarity between these provisions of the FECL and Convention is that the party seeking to avoid the contract does not have to prove the seriousness and effects of the breach.[195]

However, the Nachfrist ultimatum under the FECL is not the same as that of the Convention. In the first place, the FECL does not specify whether the grant of an additional period of time of reasonable length for delayed performance is optional or mandatory.[196] Article 29(2) of the FECL refers to an additional period for delayed performance that is to be given as a Nachfrist ultimatum, but its ambiguity leads to two different interpretations: 1) in case of late performance, the defaulting party must be allowed a reasonable extra period for performance after the [page 40] expiration of the original contractual time period, or 2) the granting of a Nachfrist grace period is solely up to the non-breaching party where the breaching party fails to perform within the contractual time period, and only if such a grace period is given may the non-breaching party avoid the contract.

Some commentators believe that Article 29(2) of the FECL departs significantly from Article 47 of the Convention and is open to the interpretation that an extension must be given.[197] In contrast, Articles 47(1) and 63(1) of the Convention are clearly permissive.[198]

There is yet another difference between the Convention and the FECL in the sense that Article 29(2) of the FECL deals with non-performance or delay in performance only, whereas Articles 47(1) and 63(1) of the Convention, when not limited by Articles 49(1)(b) and 64(1)(b), authorize a Nachfrist ultimatum for compliance with performance in the case of any type of failure to perform.[199] That is, the Convention rules on Nachfrist notices deal with any type of breach.

The remaining difference between the FECL and Convention is as follows. The FECL fails to address the situation where a breaching party notifies the other party or otherwise declares that he will not perform within the additional period of time permitted for delayed performance.[200] This situation is specifically addressed in Convention Articles 49(1)(b) and (2)(b)(ii), and 64(1)(b) and (2)(b)(ii), which enable the aggrieved party to avoid the contract if the breaching party expressly ignores the Nachfrist ultimatum.[201]

(3) Force Majeure Events

Under Article 29(3) of the FECL, a party may cancel the contract when "[a] force majeure event has occurred, making it impossible to perform the whole obligations of the contract." [202] It is interesting to note that under the Dalian FEC Procedures, [203] a party may seek to cancel the contract "[i]f part or whole of [the] contract cannot be performed due to force majeure." [204] [page 41] Article 29(3) of the FECL applies a harsher standard, which is that a party may cancel the contract only when the whole obligation cannot be performed.[205]

Some standard contracts used by Chinese companies provide that where the impediment to performance lasts for more than a specified period of time, the non-defaulting party may seek to cancel the contract.[206] Mitchell and Stein observe that:

"Virtually all FTC contracts provide that continuation of the force majeure for an extended period (usually one hundred twenty days or ten weeks) gives the buyer the right to cancel the contract." [207]

Articles 25 and 29(3) of the FECL, and the force majeure clauses in these standard FTC contracts all require the party [208] whose performance is impeded by a force majeure event to give the other party a timely notification.[209]

Article 79 of the Convention deals more fully with exemption from liability to pay damages for failure to perform any obligations due to the effects of force majeure events.[210] Article 29(3) of the FECL does not have exactly the same effect as Article 79 of the Convention, but the two provisions bear a degree of similarity.[211] This similarity is that both articles relieve the parties from contractual obligations for the period during which the force majeure event or its effect exists.[212] [page 42]

The difference between Article 79 of the Convention and Article 29(3) of the FECL is that Article 79 of the Convention does not expressly authorize contract avoidance when an impediment occurs, whereas Article 29(3) of the FECL does.[213] Although paragraph (5) of Article 79 of the Convention states that nothing "prevents either party from exercising any right other than to claim damages," a party's ability to avoid the contract in case of a force majeure event is in fact limited by the "fundamental breach" test and other limitations provided in the Convention. The contract may also not be avoidable merely in the presence of an uncontrollable impeding event.[214]

Thus, it appears that the only way both parties under the CISG may be relieved completely from contractual obligations in the case of force majeure is where the parties agree to a "termination" of the contract pursuant to Article 29(1) of the Convention.[215] The language of CISG Article 79(5), however, indicates that: 1) the remedy of avoidance and its effects are still available to a party in the event the performance is obstructed by impeding events such as "exchange restrictions" or "export controls"; [216] and 2) "exempting a party from damages does not prejudice the other party's right to avoid the contract," because, for example, "a buyer is not required to pay for goods the seller cannot deliver." [217] Indeed, "when Article 79 exempts a party from damages for failure to perform, the appropriate remedy is usually avoidance of the contract." [218] [page 43]

Nevertheless, when a contract cannot be performed because of an impediment beyond expectation, control and avoidability, as long as the effects of such impediment are not transient, any of the parties should be allowed to inform the other party that he considers the contract avoided, canceled or terminated due to the impeding event(s). It should further be recognized that contract avoidance on the grounds of force majeure is more of a self-help device than a remedial measure for breach of contract.

(4) The Occurrence of Contractual Conditions for Cancellation

As mentioned previously, under Article 6 of the Convention the parties may agree to derogate from or vary the effect of any of the provisions of the Convention, [219] including provisions concerning the grounds and conditions for avoidance of the contract.[220] The validity and enforceability of contractual provisions concerning the conditions for avoidance of the contract are governed by domestic law.[221]

Article 29(4) of the FECL not only permits the parties in a Sino-foreign commercial contract to provide contractual conditions under which a party may have the contract avoided, but also gives effect to such contractual provisions by expressly allowing avoidance of the contract when the conditions agreed upon for cancellation of the contract arise.[222]

For example, the "Claims" clause in a typical FTC standard Purchase Contract [223] provides for "rejection of the goods" [224] in the case of nonconformity. Such a clause may read:

"In case that the Sellers are liable for the discrepancies and a claim is made by the Buyers within the time-limit of inspection and guarantee period as stipulated in Clauses 15 and 16 hereof, the Sellers shall settle the claim upon the agreement of the Buyers in one or the combination of the following ways:

a. Agree to the rejection of the goods and refund to the Buyers the value of the goods so rejected in the same currency as contracted herein, and to bear all direct losses and expenses in connection therewith, including interest accrued, banking charges, freight, insurance premium, inspection charges, storage, stevedore charges and all other necessary expenses required for the custody and protection of the rejected goods. . . ." [225]

The grounds for avoidance of a "Claims" clause are neither listed in the FECL nor provided for in the Convention. Under the FECL, the lack of conformity must "seriously affect" the economic interests which the buyer expects under the contract.[226] Similarly, the buyer under the CISG may reject the goods by declaring the contract avoided only if the nonconformity [page 44] constitutes a "fundamental breach of contract." [227] In addition, the buyer must avoid the contract within a reasonable time after he discovered or ought to have discovered the discrepancy.[228]

A "Claims" clause may also be styled in a "Confirmation of Order" format, wherein the clause would read as follows:

"[I]n the event of the Sellers' failing to make delivery or effect shipment within the stipulated time . . . the Buyers shall have the right to cancel the Order and withdraw the Letter of Credit, if opened." [229]

Such a clause would also require the Sellers to "reimburse the Buyers for all the losses and expenses incurred directly attributable to the non-delivery/non-shipment." [230] Once again, the buyer does not have to: 1) show the seriousness of the consequences of the late delivery or non-delivery, or 2) prove a substantial deprivation of what he is entitled to expect under the contract.

Another typical FTC Sales Contract "Claims" clause may similarly allow the foreign buyer to avoid the contract in whole or in part in the case of delay in delivery or non-delivery, regardless of how serious the Chinese seller's breach and its consequences are.[231] Such a clause would provide that:

"In case the Sellers fail to ship the whole lot or part of the goods within the time stipulated in this Contract, the Buyers shall have the right to cancel the part of the Contract which has not been performed 30 days following the expire of the stipulated time of shipment, unless there exists a Force Majeure cause or the contract stipulation has been modified with the Buyers' consent." [232]

This same "Claims" clause would further provide that the Chinese seller may also avoid the contract if the foreign buyer fails to open a letter of credit or open a conforming letter of credit within the time fixed in the contract irrespective of the degree of detriment of the buyer's breach. This would be written as follows:

"In case the Letter of Credit does not reach the Sellers within the time stipulated in the Contract, or if the Letter of Credit opened by the Buyers does not correspond to the Contract terms and that the Buyers fail to amend [page 45] thereafter its terms in time, after receipt of notification by the Sellers, the Sellers shall have the right to cancel the contract or to delay the delivery of the goods and shall have also the right to claim, for compensation of losses against the Buyers." [233]

Article 29(4) of the FECL recognizes the validity of contractual clauses, such as those quoted above, by providing that the occurrence of contractual conditions for cancellation of the contract entitles a party to notify the other party that the contract is canceled.[234]

Even where the Convention governs, since the parties are the masters of their contract, the parties can provide conditions or grounds for avoidance other than those specified by the Convention.[235] Thus, clauses in form and non-form contracts used by Chinese FTCs and non-FTCs providing conditions for cancellation or avoidance of the contract are generally valid and enforceable under Chinese law as well as under the Convention.

In any event, the right to cancel a contract due to the occurrence of contractual conditions permitting avoidance, for example force majeure events, is similarly more a self-help measure than a remedy for breach of contract.

2. Grounds for Cancellation of the Contract under the ECL System

(1) The ECL as Compared with the FECL and the Convention

In 1981, the Chinese National People's Congress enacted the Economic Contracts Law (ECL), which went into effect in 1982 and was recently amended in 1993.[236] The ECL mainly regulates transactions between or among Chinese domestic parties, but the ECL also applies to: 1) contracts between a Chinese enterprise and Sino-foreign joint venture or wholly-owned foreign company, and 2) contracts among foreign-funded enterprises in China.[237]

A series of detailed rules and regulations have been promulgated separately for the implementation of the ECL. They include the Regulations on Contracts for the Purchase and Sale of [page 46] Industrial and Mineral Products (Industrial Sales Contracts Regulations) [238] and the Regulations on Contracts for the Purchase and Sale of Agricultural and other Related Products (Agricultural Sales Contracts Regulations).[239] The ECL and these implementing rules and regulations form the ECL system.[240] While the ECL itself has been amended, most of the implementing regulations promulgated before the 1993 amendment to the ECL have not undergone any changes and remain in force. This complicates the ECL system.

The grounds for cancellation or avoidance of the contract under the ECL system are quite different from those under the Convention and are even different from those under the FECL.[241] Article 27 of the original ECL provided that "an Economic Contract" could be modified or canceled when:

". . . (2) the State plan on which the Economic Contract is based has revised or canceled; (3) one of the concerned parties closes down, stops production or changes its line of production and is actually incapable of performing the Economic Contract; . . . [or] (5) one party has breached the Contract making it unnecessary to perform the Economic Contract . . . [provided that the party requesting cancellation of the contract] . . . promptly notif[ies] the other party." [242]

Grounds such as changes in state plans or changes in production were, at least until 1993, unique to Chinese domestic transactions under the ECL and "outlandish" to transactions governed by the Convention and/or the FECL.[243] The amended text of the ECL, in Article 26,[page 47] now no longer contains changes in State plans or in production as grounds for cancellation.[244] However, it remains to be seen how and when the state council is to make corresponding changes in the various implementing regulations.

Furthermore, the pre-1993 ECL test that the effect of the breach must render performance unnecessary, which may be called the "non-necessity" approach, bears no similarity to the FECL concept of "serious breach" or the Convention concept of "fundamental breach." [245] Moreover, this "non-necessity" test would be rather subjective and vulnerable to different interpretations.[246] For example, who were to decide when the performance would become unnecessary? The innocent party requesting cancellation, the breaching party, or the higher level government department in charge of both parties? These differing interpretations might well make the "non-necessity" test either more or less vigorous than the "serious breach" and "fundamental breach" approach under the FECL and Convention, respectively.[247] The 1993 amendment even deleted the minimum requirement of non-necessity by providing that the contract may be canceled or changed if one of the parties did not "perform the contract within the time limit specified in the contract." [248] The effect of this change alone is that under the ECL as amended, late delivery, late payment or any late performance may entitle the non-breaching party to cancel the contract even if the breach neither is "serious" or "fundamental," nor renders performance "unnecessary." More contracts would thus be cancelable or avoidable under the ECL than under the FECL or the Convention.

(2) The Notice-Response Requirement

Although the ECL system's "prompt notice" requirement is similar on its face to Article 26 of the Convention, its effect clearly differs from that of the Convention.[249] In this respect, Article 8(2) of the 1984 Industrial Sales Contracts Regulations provides that:

". . . [T]he party requesting the . . . termination of the contract shall promptly notify the other party, who shall respond to such notice within fifteen (15) days of its receipt thereof . . .; failure to respond within the time limit shall be deemed tacit consent." [250]

The counterpart of Article 8(2) in the Agricultural Sales Contracts Regulations is Article 11(2), which also requires the avoiding party to notify the other party of its intention to cancel the contract and the breaching party to make a response within fifteen days upon receipt of the [page 48] former's notice.[251] It is not clear whether Article 8(2) of the Industrial Regulations and Article 11(2) of the Agricultural Regulations apply to cancellation of the contract by way of agreement [252] only or to other modes of cancellation, such as one party's unilateral cancellation where the other party's breach makes it unnecessary to keep the contract [253] or where the other party fails to perform within contractual time limit regardless of the degree and effect of such breach.[254]

These implementing rules may: 1) enable a party to cancel a contract that is not avoidable under the FECL or Convention or 2) abort an attempt to cancel a contract that is otherwise avoidable under the FECL or Convention. For example, if the party who commits a "fundamental breach" under the Convention standard or a "serious breach" under the FECL standard refuses to have the contract canceled within fifteen days, [255] then the injured party will have to find ways to effectuate his unilateral cancellation under the ECL system. Alternatively, if the alleged breach is neither "fundamental" nor "serious," or, if there is no breach at all, then the party requesting cancellation by notification may still enforce his notice of cancellation where the other party fails to respond within the fifteen day time limit.[256] Under the Convention, although a declaration of avoidance is effective only if given with notice, [257] this requirement does not permit the notified party to rebut the avoiding party's right to avoid the contract if a "fundamental breach" or non-compliance with a Nachfrist ultimatum test is present.[258] The 1993 Amendment to the ECL no longer requires "prompt notice." It simply provides that "a party shall have the right to notify the other party of the cancellation of the contract" in the event of force majeure or non-performance by the other party within time limit.[259] Nor does it require any response to the notice. The notice itself appears sufficient to effectuate cancellation. However, since the Industrial and Agricultural Regulations are still in force, the difficulty of reconciling the amended ECL and the Regulations remains.[page 49]

(3) Inquiries for Clarification to Cure Delay in Delivery

The concept of a Nachfrist declaration was unknown in China prior to the adoption of the FECL.[260] There is, however, a provision in the Industrial Sales Contracts Regulations which is similar to the seller's notice to the buyer that he will perform within a reasonable period of time. Article 27(2) of the Industrial Sales Contracts Regulations states that:

"For late deliveries, the Supplying Party shall consult with the Demanding Party before dispatching the goods, if the Demanding Party still wants them, the Supplying Party shall deliver the contracted quantity, and shall bear liability for late delivery; if the Demanding Party no longer wants the goods, it must so notify the Supplying Party within fifteen (15) days following its receipt of notice from the Supplying Party, and then go through the procedures for terminating the contract; if it does not respond within this time limit it will be deemed to have approved the dispatch of the goods." [261]

Article 17 of the Agricultural Sales Contracts Regulations is analogous to the above provision.[262] In addition, Article 17 specifically provides that if the buyer no longer needs the goods because the seller has exceeded the time limit for delivery, then the seller must dispose of the goods ordered and pay a breach of contract penalty to the buyer ranging from 1% to 20% of the total value of the goods.[263] Thus, although the two sets of regulations do not expressly authorize the buyer to fix a Nachfrist, they do enable the buyer, in the case of late delivery only, to: 1) reject a notice from the seller inquiring whether the buyer would accept late delivery, and 2) have the contract canceled.[264]

(4) Avoidance Due to Late Delivery: Criteria Compared

It appears that the conditions under the ECL, Industrial Regulations and Agricultural Regulations for avoiding a contract by the buyer due to late delivery are less demanding than those under the Convention and the FECL. Unlike the Convention and FECL, the ECL and the Industrial and Agricultural Regulations do not require the proof of "fundamental breach" or "serious breach." The ECL and the Industrial and Agricultural Regulations do not require the buyer to rely on the expiration or rejection of a Nachfrist ultimatum, as well. Under the ECL and the Regulations, the buyer is also not required to effectuate his avoidance of the contract within a reasonable time after learning about the seller's late delivery.[265] In contrast, prompt [page 50] action is required under Article 49(2)(a) of the Convention.[266] Furthermore, the Industrial Sales Contracts Regulations do not specify the rights of the buyer in the event that he agrees to the seller's request to deliver the goods late but the seller fails to perform within the extended time limit.[267] The Regulations do not even require the seller, in requesting that the buyer indicate whether he will accept late delivery, to provide a reasonable time period for delivery.[268]

Under the Regulations, the buyer has the right to: 1) reject further performance after the seller fails to deliver the goods for the second time, and 2) terminate the contract. Yet, it is not clear when the buyer may do so under the Regulations. In contrast, the Convention specifically provides that: 1) the seller may notify the buyer that "he will perform within a specified period of time," and 2) the buyer must communicate his decision "within a reasonable time." [269] In that event the buyer could avoid the contract [270] only after: 1) the expiration of the additional time period specified by the seller or 2) the buyer, within a reasonable time upon receipt of such notice, rejects the seller's request to perform within such additional time.[271] Moreover, the buyer's failure to respond "within a reasonable time" to the seller's proposal for making a late delivery may cause the buyer to lose "any right he might have had to avoid the contract." [272] It makes more sense to require the buyer to respond to a request to cure "within a reasonable time" than within a statutorily fixed time limit. For example, it is not advisable to provide a given length of time, such as fifteen days, for response by the buyer when dealing with a complicated international sales transaction. A "reasonable time" for response in specific circumstances may be either shorter or longer than fifteen days.

(5) Two Cancellation Cases

In what is known as the Dry Peppers Case, the seller had inquired into whether the buyer would accept delivery of dry peppers within an additional month, but the buyer rejected such proposal.[273] Consequently, the buyer was allowed to cancel the contract.[274] [page 51] The Chinese court did not require the buyer to demonstrate the seriousness of the consequences or the degree of detriment posed by the prospective late delivery.[275] If the transactions in this case were governed by the Convention or FECL, the contract could not have been avoided unless the buyer could establish that the proposed delay in delivery would result in a detriment to the buyer so as to substantially deprive the buyer of his contractual expectations.[276]

A more rational ground for cancellation can be found in a case concerning the sale of construction material, the Red Bricks Case.[277] There, a machinery factory [278] contracted to purchase 3.5 million pieces of red bricks in order to build a new assembly workshop by the end of the year.[279] Delivery was to be made in three installments and completed by the end of August.[280] The first batch of 1,000,000 bricks delivered was seriously defective.[281] The buyer notified the seller of the defects and requested that it enhance the quality of the goods.[282] The second shipment of 1,000,000 bricks, however, also failed to conform to the contract specifications.[283] In order to avoid any greater economic loss, the buyer notified the seller that it was canceling the contract and would be looking to other suppliers for substitute goods.[284] In the latter part of the year, the seller requested the buyer to take delivery of the remaining 1,500,000 bricks, but by that time, the buyer's workshop had been completed with the substitute bricks.[285] In a suit initiated by the seller, the Chinese court held that the buyer's cancellation of the contract was justified, because the defects in the first two installments significantly affected the construction of the workshop.[286] If the Convention or FECL governed the contract, the court might have ruled the same way, because of the seriousness and detrimental consequences of the nonconformity in the first two installments and high likelihood that the seller would deliver more defective bricks.[287]

B. Limitations on the Cancellation Remedy

As discussed earlier, the Convention contains a series of limitations on the right to avoid the contract. Some of the Convention's limitations are also found in Chinese law, as well. These limitations will be briefly discussed below.[page 52]

The Notice Requirement. The "notification" requirement of Article 29 of the FECL [288] is similar to that of Convention Article 26.[289] Some FTC form contract clauses also require notice.[290]

Pending Grace Period. Article 29(2) of the FECL, which provides a pending grace period for performance, is similar in effect to Articles 47(2) and 63(2) of the Convention, [291] but is also less specific.[292] The ECL and its implementing Regulations have no comparable provision. Some FTC form contracts contain clauses that provide for a contractual grace period for performance within which the contract may not be canceled.[293]

Seller's Proposal to Cure. The FECL and ECL do not contain a provision similar to Article 48 of the Convention, which limits the cancellation remedy where there is a proposal to cure.[294] The Industrial Sales Contracts Regulations and Agricultural Sales Contracts Regulations, however, contain a device which is similar to Article 48, but this device deals with late delivery only and is quite different from Article 48 of the Convention in a number of aspects.[295]

Prompt Action after Late or Defective Performance. As noted earlier, Articles 49(2) and 64(2) of the Convention limit a party's right to avoid the contract by requiring him to act "within a reasonable time" in case of late or defective performance.[296] However, current Chinese statutes and regulations do not contain a "within a reasonable time" requirement.[297] Therefore, in a Sino-foreign transaction governed by Chinese law only, there would be more opportunities for a party to cancel or avoid the contract in this regard.[page 53]

Prompt Notice of Defects. Neither the FECL nor the ECL contains provisions that parallel Article 39 of the Convention, which governs the consequences of failing to give prompt notice of defects.[298] On the other hand, Article 15 of the Industrial Sales Contracts Regulations provides a general time limitation that requires the buyer to submit "written objections" to the seller within ten days after delivery or the time limit agreed upon by the parties.[299] The written objection must specify, among other things, "circumstances of the inspection and inspection certificates for the non-conforming items." [300] Failure to provide this objection in a timely manner may deprive the buyer of his right to cancel the contract or resort to other remedies, because "the delivered products would then be deemed to conform to contract stipulations." [301] In terms of Sino-foreign sales contracts, this issue is regulated by contractual provisions. For example, a form contract used by Chinese FTC's: 1) specifies an eighteen month quality guarantee which runs ". . . from the date on which the commodity arrives at the port of destination,"[302] and 2) provides that:

"If any discrepancies are found by the [China Commodity Inspection] Bureau regarding specifications or the quantity or both, except when the responsibilities lie with insurance company, the Buyers shall within sixty (60) days after arrival of the goods at the port of destination, have the right to reject the goods or to claim against the Sellers." [303]

Prompt Notice of Third Party Claim. The FECL and other relevant Chinese statutes and regulations do not contain provisions analogous to Article 43 of the Convention, which requires prompt notice of third party claims.[304]

Ability to Make Restitution. Article 82 of the Convention, which governs the inability to make restitution, has no counterpart in relevant Chinese statutes and regulations.[305]

Prohibition of Concurrent Resort to the Cancellation Remedy and the Performance Remedy. Under Articles 46 and 62 of the Convention, a party may not avoid the contract while he is demanding performance from the other party.[306] Chinese law is silent in this area, but the prohibition [page 54] of concurrent application of the cancellation remedy and the performance remedy may be implied. The reason is obvious: it is unimaginable for an aggrieved buyer to demand the defaulting seller to deliver the goods while also requesting cancellation of the contract. Article 34 of the FECL states that the cancellation of the contract does not affect any claim for damages, [307] but it does not mention the effects of cancellation on the performance remedy.[308] This indicates that a cancellation of the contract may not co-exit with an exercise of the right to specific performance.

C. The Effects of Cancellation of the Contract

The effects of cancellation under the FECL are similar to those of avoidance under the Convention.[309] Under the FECL, cancellation or modification of a contract does not affect the right to claim damages, [310] nor does it nullify "clauses agreed to in [the] contract on the settlement of disputes" [311] or "clauses agreed to in [the] contract on the settlement of account and winding-up." [312] The FECL rules, however, are far less detailed and comprehensive than those of the Convention.[313] Furthermore, the FECL system has left many gaps for future legislation to fill. For example, no provision in the FECL covers the right to require and the obligation to make restitution of the goods or payment where performance has been made wholly or in part, due to a cancellation on the grounds of a breach which "seriously" affects the expected economic interests under the contract. The FECL also does not address the issue of relief of obligations after cancellation. It should be noted that under the Common Rules of Civil Law, an aggrieved party may resort to "the taking of remedial measures [such as cancellation of the contract] and claim compensation for its losses" and may adopt different remedial measures either "exclusively or concurrently." [314] This indicates that cancellation of the contract has no effect on the innocent party's right to damages. Similarly, the ECL provides that if the cancellation "causes a party to suffer losses, the responsible party shall be liable" to pay damages, unless its liability may be exempted in accordance with the law.[315] However, neither the Common Rules of Civil Law nor the ECL contains anything further on the effects of cancellation of the contract.[page 55]

IV. Conclusions

The fact that Chinese law and/or the Convention may apply to Chinese-foreign sales transactions mandates an examination and comparison of the rules governing avoidance of the contract under both legal systems.[316] The Convention and applicable Chinese statutes both provide criteria for avoidance of a sales contract. Although the "fundamental breach" approach of the Convention [317] and "serious breach" approach of the FECL [318] are not exactly the same, they are comparable and often result in identical or similar outcomes.[319]

The mechanism of a Nachfrist grace period is adopted by both the Convention [320] and the FECL, [321] but it is unclear whether an FECL Nachfrist grace period is mandatory or optional. The Nachfrist mechanism adopted in the FECL is also less restrictive than the Convention [322] on the right to avoid the contract, because the FECL Nachfrist limitation only applies to non-performance or delay in performance. In all other breach situations, such as non-conformity, the injured party is not required to notify the other party of his decision to cancel within a reasonable time after the expiration or rejection of a Nachfrist ultimatum. Instead, the injured party merely needs to prove that the breach "seriously" affects his expected economic interests under the contract.

In terms of other relevant Chinese statutes and regulations, differences far outweigh any similarities with corresponding Convention provisions. For example, Article 27(2) of the Industrial Sales Contracts Regulations is similar to Article 48 of the Convention in the sense that both provide a mechanism authorizing the seller to cure his breach through a request for clarification or proposal to tender a late delivery. The mechanism under the Regulations is narrower in scope [323] and less restrictive [324] than that of Convention Articles 48(2), 48(3) and 49(2)(b)(iii). The amended ECL, while having made significant improvements by, e.g., removing changes in State Plans and/or in the production of one party as grounds for the cancellation of the contract,[page 56] continues to render more contracts cancelable than the Convention and the FECL do by providing that the mere non-performance or late performance would entitle the aggrieved party to notify the breaching party of unilateral cancellation of the contract -- the aggrieved party neither needs to prove the seriousness or degree of detriment caused by the breach, nor to wait until the expiration of an additional period for late performances by the breaching party.[325]

Finally, the FECL and other relevant Chinese statutes and regulations provide two grounds for avoidance of the contract which are absent in the Convention: a force majeure event and the occurrence of contractually agreed to conditions calling for cancellation.[326] These two grounds for avoidance are useful and practical where those circumstances arise. Moreover, these two grounds should be included in or recognized by the Convention system. Nevertheless, avoidance of the contract because of a force majeure event or the occurrence of contractual conditions calling for avoidance is more of a self-help device than a statutory remedial measure for breach of contract. It is therefore necessary to be aware of all these grounds when considering avoidance of a sales contract in the Chinese context.[page 57 ]


FOOTNOTES

* Copyright 1996, Jianming Shen.

** Kenneth Wang Research Professor of Law, St. John's University School of Law. S.J.D., 1994, University of Pennsylvania; LL.M., 1988, University of Pennsylvania; M.A., 1984, University of Denver; LL.B., 1983, Peking University. Former faculty member, International Law Institute and Faculty of Law, Peking University, Beijing, China. The author is grateful to Neil Axelrod for his research and editing assistance.

1. United Nations Convention on Contracts for the International Sale of Goods, U.N. Doc. A/Conf.97/18 Annex I (1980) [hereinafter CISG or the Convention], reprinted in U.N. Conference on Contracts for the International Sale of Goods, Vienna, Mar. 10-Apr. 1980, Official Records, U.N. Doc. A/Conf./97/19, U.N. Sales No. E.81.IV.3 (1981) [hereinafter O.R.] 178-199, John O. Honnold, Documentary History of the Uniform Law for International Sales: The studies, deliberations and decisions that led to the 1980 United Nations Convention with introductions and explanations (Deventer/Boston: Kluwer, 1989) [hereinafter Doc. Hist.] 766-778, 19 I.L.M. 668 (1980).

Article 99(1) of the CISG provides that it becomes effective:

"[O]n the first day of the month following the expiration of twelve months after the date of deposit of the tenth instrument of ratification, acceptance, approval or accession." CISG, art. 99(1).

China was the tenth Signatory State to deposit the instrument of ratification of the Convention, which deposit occurred in December 1986 as stated above, making the Convention effective on January 1, 1988.

For a general treatment and commentary on the U.N. Sales Convention, see John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (Deventer/Boston: Kluwer Law and Taxation Publishers, 2d ed., 1991) [hereinafter as Honnold, 2d ed.]; John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (Deventer/Boston: Kluwer, 1st ed. 1982) [hereinafter Honnold, 1st ed.]. See also Commentary on the International Sales Law: The 1980 Vienna Convention (C. Bianca & M. Bonnell, eds., 1987) [hereinafter Commentary]; International Sales: The United Nations Convention on Contracts for the International Sale of Goods (N. Gaston & H. Smit, eds., Matthew Bender, 1984) [hereinafter International Sales]; Albert H. Kritzer, Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (Deventer: Kluwer Law and Taxation Publishers, 1987); P. Schlechtriem, Uniform Sales Law: The U.N.-Convention on Contracts for the International Sale of Goods (Manzsche Verlags und Universitätsbuchhandlung, 1986); Daniel B. Macgraw and Reed R. Kathrein, The Convention for the International Sale of Goods: A Handbook of Basic Materials (2d ed. 1990); Henry Gabriel, Practitioner's Guide to the Convention on Contracts For the International Sale of Goods (CISG) and the Uniform Commercial Code (UCC) (1994). See also Kevin Bell, The Sphere of Influence of Application of the Vienna Convention on the Contracts for the International Sale of Goods, 8 Pace Int'l L. Rev. 237 (1996).

The bracket phrase followed by a number is used to identify the page number of the original publication.

2. See, e.g., Interpretive Decision Applying CISG, Journal of Law & Commerce Case I: Oberlandesgericht, Frankfurt am Main, January 18, 1994, 5 U15/93, 14 J.L. & Com. 201 (1995); Eva Diederichsen, Recent Development: CISG: Commentary to Journal of Law & Commerce Case I: Oberlandesgericht, Frankfurt am Main, 14 J.L. & Com. 177 (1995); LG BADEN-BADEN 4 O 113/90, August 14, 1991, translated by Vivian Curran, 12 J.L. & Com. 277, 278-281 (1993) (holding that the defendant buyer was justified to partially avoid the contract by refusing to pay the sales price where the plaintiff seller had failed to deliver goods fit for the purposes for which goods of the same kind would ordinarily be used, and further that such partial avoidance of the contract did not preclude the buyer from claiming damages); LG FRANKFURT/MAIN3/11 O3/91, September 16, 1991, excerpted in Interpretive Decision Applying CISG, Appendix Survey of Previous Decisions by German Courts Applying the CISG: Selected Passages, 14 J.L. & Com. 225 (1995) (stating that where the defendant buyer could avoid the contract if there was fundamental breach under Article 49(1) of the CISG, he could validly do so only if through notification or declaration). See also Jelena Vilus, Provisions Common to the Obligations of the Seller and the Buyer in International Sale of Goods: Dubrovnik Lectures 239-240 (Peter Sarcevic & Paul Volkens eds., 1986); Peter Winship, Changing Contracts Practices In Light of the United Sales Convention: A Guide for Practitioners 29 Int'l Law 525 (Fall 1995) (explaining all aspects of the United Nations Sales Convention as well as what connection must exist between the sales transaction and the contracting state).

3. See CISG, arts. 1(1)(a)-(b). See Bell, supra note 1, at 245-246 ("Article 1(1)(a) attempts to create a bright line, an area of certainty. If the two states in which the parties have their relevant place of business are contracting states, the convention applies. Article 1(1)(a) is to eliminate the need to go through a conflict of law analysis, since under these circumstances the rules of private international law are irrelevant.").

4. As of November 1, 1996, there are 45 Signatory States of the Convention. Further information on the status of the Sales Convention may be obtained by contacting the U.N. Treaty Section: Office of Legal Affairs, Treaty Section, United Nations Plaza, New York, NY 10017 (212) 963-5047.

See Wang Jun, Punitive and Compensatory Contract Damages: A Comparative Study of the Uniform Commercial Code, Chinese, and International Law, 29 Loy. L.A. L. Rev. 1071, 1079 (1996).

5. Pursuant to Article 95 of the Convention.

6. See 1987 Zhongguo Falu Nianjian (Chinese Annual of Law) 540 (Beijing: Falu Chuban She (Law Publishing House, 1987); [1] 5 China Law and Practice 25 & 49 (May 1987). See also ST/LEG/SER.E/10, X.10, pp. 364-66, at 365. The second reservation, which is irrelevant here, relates to contract formalities. Id. See also Jun, supra note 4, at 87. But see Lester Ross, Force Majeure and Related Doctrines of Excuse in Contract Law of the People's Republic of China, 5 J. Chinese L. 58, 88 (Spring 1991) ("Because China attached no reservations to its accession to CISG, CISG apparently applies in all aspects even though CISG contains no provision for certification of force majeure events and adheres to a broader doctrine of excuse then apparently exists in Chinese Statutory Law"). What Ross states is apparently incorrect because China did attach two permissible reservations.

7. See supra note 4.

8. See CISG, art. 6. See Bell, supra note 1, at 254 ("The Convention applies to contracts for the sale of goods within its application, unless, the parties exclude its application in whole or in part. A party's freedom to contract is a uniformly recognized principle of contract law, and Article 6 Ôembodies a vigorous affirmation of this principle'."). See also J.D. Feltham, The United Nations Convention for the International Sales of Goods, J. Bus. L. 346, 354 (1981); Francis A. Gabor, Emerging Unification of Conflict of Laws Rules Applicable to the International Sale of Goods: UNCITRAL and the New Hague Conference on Private International Law, 7 Nw. J. Int'l L. & Bus. 696, 697 (1986).

9. See Robert S. Rendell, The New UN Convention on International Sales Contracts: An Overview, 15 Brook. J. Int'l L. 23 (1989) ("The nationality of the parties is not relevant in determining the applicability of the Sales Convention . . .").

10. See CISG, arts. 49, 64.

11. Law of the People's Republic of China on Economic Contracts Involving Foreign Interest [hereinafter FECL], adopted Mar. 21, 1985 at the 10th Sess. of the Standing Committee of the 6th National People's Congress, effective July 1, 1985, translated & reprinted in 1 China L. for Foreign Bus. & 5-550, art. 29. See Paul B. Birden, Jr. Esq., Technology Transfers to China: An Outline of Chinese Law, 16 Loy. L.A. L. Rev. 413, 431 (1983).

12. See Honnold, 2d ed., supra note 1, at 253. See also "Termination Issues" in Appraisal of the March 1, 1990 Preliminary Report of the Commercial Code Article 2 Study Group, 16 Del. J. Corp. L. 981, 1079 (1991) (Prepared by Task Force of the ABA subcommittee on General Provisions, Sales, Bulk Transfers, and Documents of Title, Committee on the Uniform Commercial Code).

13. See CISG, art. 26; FECL, art. 29. David J. Weiler, Drafting International Sales and Agent/Distributor Agreements, 789 PLI\Corp. 899, 901, 915 ("Article 26: A declaration of avoidance of the contract is effective only if made by notice to the other party"); Andrew Babiak, Defining "Fundamental Breach" Under the United Nations Convention on Contracts for the International Sale of Goods, 6 Temp. Int'l & Comp. L.J. 113, 133 (Spring 1992) ("In cases where the buyer has not paid the contract price and a fundamental breach has occurred, the injured seller may unequivocally avoid the contract; the seller need not give the buyer a second opportunity.").

14. See CISG, art. 81; FECL, arts. 34-36. See Joanne Darkey, A United States Court's Interpretation of Damage Provisions Under the United Nation Convention of Contracts for the International Sale of Goods: A Preliminary Step Towards an International Jurisprudence of CISG or a Missed Opportunity, 15 J.L. & Com. 139, 144 (Fall 1995).

15. Under the CISG, a "fundamental" breach is necessary for a declaration of avoidance; a simple breach does not support such a declaration unless it is accompanied with a non-compliance with a Nachfrist notice. See infra note 49, and accompanying text; CISG, arts. 49, 64. See, e.g., Delchi Carrier v. Rotorex Corp., 71 F.3d 1024 (2d Cir. 1995). In Delchi, Delchi sued for damages arising from a breach of contract to supply him with compressors which he planned to use to produce air conditioners. Rather than employ the language of the CISG, such as "avoidance" of contract or "fundamental breach," the court utilized language from the Uniform Commercial Code (U.C.C.). Id.

16. See CISG, art. 49(1)(a), 64(1)(a).

17. See id.; Babiak, supra note 13, at 114 (stressing that contract avoidance is a powerful remedy, releasing both parties from their contractual obligations, subject to any damages).

18. CISG, art. 25.

19. See id. The foreseeability requirement of Article 25 may be analyzed in conjunction with that of Article 74 of the Convention. Darkey, supra note 14, at 145 (urging that remedy provisions of CISG cannot be fully comprehended without taking into consideration such basic concepts as fundamental breach, reasonable notice and time to cure). See also Vilus, supra note 2, at 240. Article 25 defines "fundamental breach" and Article 37 delineates the seller's right to cure non-conformity within the time limit for delivery in order to avoid committing a "fundamental breach." CISG, arts. 25, 37.

20. See CISG, art. 25.

21. See Honnold, 2d ed., supra note 1, at 256. The Convention's tests for "fundamental breach" are more demanding than the tests for "substantial performance" in the common law. Babiak, supra note 13, at 118-22.

22. See Honnold, 2d ed., supra note 1, at 256; Michael Rustad & Lori E. Eisenschmidt, The Commercial Law of Internet Security, 10 High Tech. L.J. 213, 269 (1995) (arguing that basis of liability could be similar to the express and implied warranty obligation of the U.C.C.). See also Vilus, supra note 2, at 240.

23. See CISG, art. 25; Diederichsen, supra note 2, at 178 (Article 25 "states that a breach of contract is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."). See also Babiak, supra note 13, at 120 (discussing the legislative history behind Article 25 of the CISG).

The buyer's right to avoid a contract is limited to where the seller's breach is fundamental. The buyer may also declare a contract avoided if prior to the date set for the performance it becomes clear that the seller will commit a fundamental breach. CISG, arts. 49(1)(a), 72, 73. See Eric C. Schneider, The Seller's Right to Cure Under The Uniform Commercial Code and the United Nations Convention on Contracts for the International Sale of Goods, 7 Ariz. J. Int'l & Comp. L. 69, 87, 88 (1989).

24. See id.; Schneider, supra note 23, at 88; see also Darkey, supra note 14, at 143 ("The meaning of Ôfundamental breach' under CISG was not analyzed in Delchi, and it has yet to be addressed by a U.S. court"); Babiak, supra note 13, at 122 (Article 25 does not specify from what point the question of foreseeability is measured).

25. The point at which foreseeability is determined could be when: 1) the contract is concluded, 2) performance begins or 3) the defaulting party decides to breach. Unlike Article 74, which deals with damages, Article 25 was never drafted with the following words: "at the time of the conclusion of the contract." CISG, arts. 25, 74. The absence of such words was not due to an inadvertent omission, because the drafters specifically rejected a proposal to make the "vantage point" for foreseeability only at the time of contracting. See Honnold, 2d ed., supra note 1, at 256-58 (discussing the relevant legislative history of Article 25). This clearly indicates that the point for foreseeability is not limited to when the contract is formed. See Babiak, supra note, 13 at 139. See also Alejandro Garro, The Gap Filling Role of the UNIDROIT Principles in International Sales Law: Some Comments on the Interplay Between the Principles and the CISG, 69 Tul. L. Rev. 1149, 1179 (1995) (noting how the rules for UNIDROIT Principles are consistent with those of the CISG).

26. See Honnold, 2d ed., supra note 1, at 258. See also Babiak, supra note 13, at 143.

27. Although the words "fundamental breach" are occasionally seen in English law, they are used only to nullify contract provisions, such as exemption clauses, which restrict the rights of the buyer. They have never been used in English law to authorize a party to avoid or cancel a contract. See P.S. Atiyah, The Sale of Goods 212-16 (8th ed. 1990).

In the United States, instead of "fundamental breach," the concept of "substantial performance" or "material failure to perform" prevails. See Restatement 2d of Contracts 237 & comment d (1981). The criteria for this concept is not the same as that for "fundamental breach" under the Convention. Id. Under the U.C.C., the buyer may "cancel" the contract in addition to effecting other recoveries where the seller is in breach. U.C.C. 2-711. The seller's breach does not even need to be fundamental, substantial or material. Id. See also Schneider, supra note 23, at 71 ("The seller's right to prevent the buyer from rejecting the goods and the buyer's right to avoid a contract were in the past dependent on the domestic law, of either the buyer's or the seller's country, as determined by uncertain conflict of law rules.").

28. See Honnold, 2d ed., supra note 1, at 254; Babiak, supra note 13, at 115 (discussing the background and historical development of the CISG).

29. Uniform Law on the International Sale of Goods (1964) [ULIS], Annexed to the Convention Relating to a Uniform Law on the International Sale of Goods, July 1, 1964, 1 Diplomatic Conference on the Unification of Law Governing the International Sale of Goods, The Hague, Apr. 2-25, 1964, Records and Documents of the Conference 333-348 (The Hague: Ministry of Justice of the Netherlands, 1966), 834 U.N.T.S. 107, reprinted in Honnold, 2d ed., supra note 1, pp. 667-691, as Appendix E, art. 10. For a discussion on the ULIS provisions, see Honnold, ULIS: The Hague Convention of 1964, 30 Law & Contemp. Prob. 326, 344 (1965).

30. ULIS, supra note 29, at art. 10; Babiak, supra note 13, at 115 ("The second part of Article 25 is its foreseeability component. The foreseeability component developed out of the former Article 10 of ULIS which completely based fundamental breach on the foreseeability of events"); see also Schneider, supra note 23, at 72.

31. See CISG, art. 25. See C.M. Bianca, et al., Commentary on the International Sales Law 3 (1987). Bianca suggests that whether a breaching party actually failed to foresee the substantial detriment caused to the non-breaching party will be evaluated in light of Article 74. Article 74 deals with monetary damages for breach of contract and basically limits damages to those which were foreseeable at the time of the conclusion of the contract. Id.

32. See Franco Ferrari, Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing, 15 J.L. & Com. 1, 107 (Fall 1995) ("As far as the standard for inspection is concerned, it has also been suggested that the buyer does not have to make extraordinary efforts; it is sufficient that in inspecting the goods he employs the skills of a reasonable person of the same type in the particular trade concerned"). See also Babiak, supra note 13, at 114 (explaining that the question of forseeability is a question of the knowledge of the breaching party or whether a reasonable person of the same kind in the same circumstances would not have foreseen such a result).

33. See ULIS, supra note 29, at art. 10. See Schneider, supra note 23, at 86. See also Babiak, supra note 13, at 114.

34. See Honnold, 2d ed., supra note 1, at 256; Schneider, supra note 23, at 86 (discussing how the Convention focused on the issue of the degree of detriment); see also Babiak, supra note 13, at 118 (noting how Article 25 of the CISG focuses on the degree of detriment required to establish the fundamental breach).

35. CISG, art. 49(1)(a).

36. According to the definition of "fundamental breach" under Article 25. See Diederichsen, supra note 2, at 178. See also David A. Levy, Financial Leasing Under the UNIDROIT Convention and the Uniform Commercial Code: A Comparative Analysis, 5 Ind. Int'l & Comp. L. Rev. 267, 279 (Spring 1995)

37. See supra notes 14-36 and accompanying text (discussing the concept of "fundamental breach" under the Convention).

38. The Convention simply requires a "declaration" by an appropriate notice to the breaching party. CISG, art. 26; see also infra notes 92-94 and accompanying text (discussing the notice requirement); Weiler, supra note 13, at 915 (Article 26 requires notice to other party for an effective declaration of avoidance of the contract).

39. See Babiak, supra note 13, at 127 (outlining a rights and remedies of buyers injured by fundamental breach). See also Rendell, supra note 9, at 32 ("A buyer who receives non conforming goods may lose his rights to assert that lack of conformity if he does not satisfy his duty to examine the goods"). See supra notes 18-27, 35-38 and accompanying text (discussing Convention Articles 25, 49(1)(a) and 26).

40. See Rendell, supra note 9, at 32. These damages, however, are limited to the extent that the loss suffered was reasonably foreseeable to the breaching party at the time of the conclusion of the contract or up to the point of the breach. Id. What was actually foreseeable or reasonably foreseeable will depend on the actual knowledge of the breaching party and what objective merchants in the breaching party's position would have known. See Babiak, supra note 13, at 138. The Convention defines "fundamental breach" in terms of the materiality and foreseeability of its consequences; that is, a breach is fundamental if it results in such detriment to the other party as to substantially deprive him of what he is entitled to expect under the contract, provided this result is foreseeable. Henry M. Flechtner, Remedies Under the New International Sales Convention: The Perspective From Article 2 of the U.C.C., 8 J.L. & Com. 53, 56 (1988).

41. See Flechtner, supra note 40, at 74 (a buyer can revoke acceptance of non-conforming goods only if the breach "substantially impairs" value of the contract); Babiak, supra note 13, at 127 (listing the options a buyer has when he or she is injured by a fundamental breach).

42. See supra notes 39-41.

43. See CISG, art. 64(1)(a); Weiler, supra note 13, at 922 (discussing various aspects of Article 64 and how the seller is also allowed to declare the contract avoided). See also Babiak, supra note 13, at 143 n.13 (comparing the similarity in the wording of Article 64 and Article 49); see also Rendell, supra note 9, at 35 (listing the remedies under Article 64 for breach of contract available to the aggrieved seller).

44. CISG, art. 25. See Vivica Pierre, What do Farmers Impliedly Warrant When they Sell Their Livestock: A Comparison of the Uniform Commercial Code, The Louisiana Civil Code, and the Vienna Convention on Contracts for the International Sale of Goods, 19 S.U. L. Rev. 357 (1992). See also Babiak, supra note 13, at 132 (discussing the seller's guide to fundamental breach).

45. CISG, arts. 25, 64(1)(a).

46. CISG, art. 47.

47. CISG, art. 63. Compare CISG, art. 63 with CISG, art. 47. See Gabrielle S. Brussel, The 1980 United Nations Convention on Contracts for the International Sale of Goods: A Legislative Study of the North-South Debates, 6 N.Y. Int'l L. Rev. 53 (Winter 1993) (discussing the opposing concerns between developed and developing countries which resulted in producing ambiguous CISG articles). If the buyer has not performed his obligations to pay the price of the goods, the seller may under Article 63(1) fix an additional reasonable period of time for the performance by the buyer. Rendell, supra note 9, at 37. See also Graeme S. Cooper, The Reclamation Rights of Unpaid and Unsecured Sellers in International Trade 1987, Colum. Bus. L. Rev. 17, 32, 33 (1987) (describing when a contract can be declared avoided under Article 64(1)).

48. See Vivian Grosswald Curran, The Interpretive Challenge to Uniformity, 15 J.L. & Com. 175, 199 (1995); Weiler, supra note 13, at 919-20 (No performance will generally be accepted after the duration of the grace period).

49. Article 326 of the German Civil Code states that when one party is in breach: "[T]he other party may give him a reasonable period within which to perform his part with a declaration that he will refuse to accept the performance after the expiration of the period." Honnold, 2d ed., supra note 1, at 371 (quoting BGB, art. 326).

Article 35, one of the most important in the Convention, provides that the seller must deliver goods which are of the quantity, quality and description required by the contracts and which are contained or packaged in the manner required by the contract. See Rendell, supra note 9, at 35.

Article 49(1) of the Convention permits a buyer to avoid the contract whenever the seller commits a fundamental breach or fails to deliver in response to a Nachfrist Ultimatum under Article 47. A buyer that has received delivery of less than the required amount of goods cannot use the Nachfrist procedure to avoid the entire contract. See Flechtner, supra note 40, at 63, 66, 71.

50. See BGB, art. 326; Flechtner, supra note 40.

51. See CISG, art. 47.

52. See CISG, art. 49(1)(b); Honnold, 2d ed., supra note 1, at 368-69 (observing that "[t]he notice-avoidance procedure. . . applies only to non-delivery"). See also Henry Gabriel, Mark Wessman, Gabriel's Global Guide to Goods: Practitioners Guide to the Convention on Contracts for the International Sale of Goods (CISG) and the Uniform Commercial Code (UCC), 70 Tul. L. Rev. 1783, 1793 (1996). In the case of the seller's failure to effect delivery on time, the buyer has the option to fix an additional reasonable period of time for performance by the seller. Rendell, supra note 9, at 33.

53. See CISG, art. 46(1). The buyer loses his right to require performance by declaring the contract avoided under Article 49 of the CISG, or by declaring a reduction of the price under Article 50 of the CISG. Article 46 grants the buyer what seems to be an election to seek specific performance or damages, provided the buyer has not resorted to a remedy which is inconsistent with this right. See Pierre, supra note 44, at 390.

54. See CISG, arts. 62, 64(1)(b). Article 62 grants the injured seller the right to require the buyer to perform both the contractual obligations as well as the obligations imposed by the CISG. Babiak, supra note 13, at 133. Despite the broad language of Article 46(1) and 62 of the CISG, an aggrieved party's right to demand actual performance of the other side's obligations is subject to several limitations. The most important derives from Article 28 of the convention, which provides that a court is not bound to enter a judgment for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by the convention. See Flechtner, supra note 40, at 108.

55. CISG, art. 49(1)(b).

56. See id.; Schneider, supra note 23, at 83, 86 (discussing provisions contained in Article 49(1)(b)).

57. See CISG, art. 49(1)(b). Article 49(1) of the Convention permits a buyer to avoid the contract whenever the seller commits a fundamental breach or fails to deliver in response to a Nachfrist Ultimatum under Article 47. Flechtner, supra note 40, at 62-73. See also J. Honnold, 2d ed. supra note 1, at 65, 305.

58. See CISG, art. 49 (1)(b); Schneider, supra note 23, at 86 (discussing seller's right to cure under the U.C.C.). Only in the case of nondelivery is the test for a fundamental breach unnecessary. Id. See also Flechtner, supra note 40, at 70.

59. See supra notes 18-25, 35-38 and accompanying text (discussing Convention Articles 25, 49(1)(a) and 26). A breach of contract committed by one of the parties is fundamental . . . unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. See also Babiak, supra note 13, at 114.

60. See id.

61. See CISG, art. 49(1).

62. See id.

63. See id., art. 64(1)(b). Article 64(1)(b) permits the seller to avoid if the buyer fails "to pay the price" within the period fixed by a Nachfrist notice, a standard that could be construed to permit the seller to avoid the contract on this set of facts. See Flechtner, supra note 40, at 71.

64. CISG, art. 64(1)(b). It should be noted that Article 49(2)(b) contains a provision, which deals with the buyer's right to avoid the contract after the additional period of time for performance indicated by the seller expires. Id. at art. 49(2)(b). Article 64(2)(b), however, does not provide for the seller's right to avoid the contract after the expiration of an additional period of time indicated by the defaulting buyer himself. CISG, arts. 64(2)(b), 49(2)(b). Furthermore, no article comparable to Article 48, which deals with the seller's proposal to cure, is included in the section dealing with the seller's remedies for the buyer's breach of contract. CISG, art. 48.

65. See CISG, art. 63(1). If the buyer has not performed his obligations to pay the price or take delivery of the goods, the seller may, under Article 63(1), fix an additional reasonable period of time for performance by the buyer. See Rendell, supra note 9, at 56.

66. Compare CISG, art. 63 with CISG, art. 47.

67. An Ex Works contract requires the buyer to pick up the goods at the seller's warehouse or designated place and assume all risks and expenses thereafter. Paul H. Vishny, Notes on Trade Terms, SB04 ALI-ABA 27, 33 (1996); S. Linn Williams, Developing an Export Trade Business: Export Contracts for the Sale of Goods, 458 PLI/Comm 183,192 (1988).

68. See, e.g., FECL, supra note 11, art. 17 (providing that if it is conclusively evident that one party cannot perform, the other party may resort to temporary suspension of performance until full guarantee of performance is provided); U.C.C. 2-609 (allowing, where "reasonable grounds for insecurity arise with respect to the performance of either party," suspension of "any performance for which [the suspending party] has not already received the agreed return" while awaiting the receival of "adequate assurance of due performance"); The British Sale of Goods Act 41(1)(c) (seller's right to retain possession of the goods, i.e., to suspend delivery, if the buyer is insolvent); BGB, art. 321 (permitting a party "to refuse to perform his part" in case the other party's counter-performance is endangered by his deteriorated financial position, "until the counter-performance is made or security is given for it").

69. See CISG, art. 72.

70. As defined by Article 25 of the Convention.

71. CISG, art. 72.

72. See CISG, art. 71. Article 71 reads as follows:

"(1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of:

(a) a serious deficiency in his ability to perform or in his creditworthiness; or

(b) his conduct in preparing to perform or in performing the contract.

"(2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller.

"(3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance." Id.

73. See id., art. 25.

74. See id., art. 71-72.

75. See CISG, art. 72(2).

76. See id., art. 72(3).

77. See id.

78. See CISG, art. 72.

79. See id.

80. See CISG, art. 73(2).

81. Commentary prepared by the United Nations Secretariat on the 1978 Draft Convention on Contracts for the International Sale of Goods [hereinafter U.N. Secretariat's Commentary], A/CONF.97/5, art. 12, paras. 11 & 12, reprinted in O.R. 14-66, at 54, Doc. Hist. 404-456, at 444.

82. See CISG, art. 72(1).

83. See id.

84. See Honnold, 2d ed., supra note 1, at 501.

85. CISG, art. 72(1).

86. U.N. Secretariat's Commentary, supra note 81, at 444.

87. See supra notes 38-48, 58-93 and accompanying text (discussing Article 49(1)).

88. See supra notes 46-48, 58-93 and accompanying text (discussing Article 64(1)).

89. See CISG, art. 82.

90. See id., art. 26.

91. See Flechtner, supra note 40, at 70 (discussing prerequisites to avoidance). The innocent party must establish: 1) lack of compliance with a Nachfrist ultimatum or 2) the commission of a "fundamental breach." Id.

92. CISG, art. 26.

93. See id.

94. See id. Article 26 applies to both the buyer and the seller. But see ULIS, supra note 29, arts. 25, 26(1)-(2), 30(1)-(2), 61(2), 62(1) (authorizing ipso facto avoidance in certain circumstances). For a brief discussion on the departure of CISG Article 26 from the ULIS, see Honnold, 2d ed., supra note 1, at 262-63.

95. See CISG, art. 47(2).

96. See id. Cf. CISG, arts. 49(1)(b) and 49(2)(b)(ii).

97. See id., art. 63(2). Cf. CISG, arts. 64(1)(b) and 64(2)(b)(ii). See Flechtner, supra note 40, at 70 (1988). The Nachfrist procedure is the only way to achieve avoidance when the other party's breach is not fundamental. Id.; see also Babiak, supra note 13, at 133 (stating that by fixing a reasonable date by which the buyer must perform, a seller retains the right to avoid the contract if the buyer fails to perform by that date).

98. See CISG, art. 48; Rendell, supra note 9, at 31; Babiak, supra note 13, at 127; Compare Richard E. Speidel, The Revision of UCC Article 2, Sales in Light of the United Nations Convention on Contracts For the International Sale of Goods, 16 Nw. J. Int'l L. & Bus 165 176 (1995) (discussing differences between CISG and U.C.C. Article 2).

99. See CISG, art. 48 (2)-(3); Flechtner, supra note 40, at 63; Babiak, supra note 13, at 130-31.

100. See CISG, art. 48(2)-(3).

101. See id.

102. See id., art. 49(2)(b)(iii).

103. See id. See infra note 110 and accompanying text (providing the text of Article 49(2)(b)(iii)); Rendell, supra note 9, at 34-5 (setting forth buyer's limitations); Flechtner, supra note 40, at 84 (discussing buyer's limitation under Art. 49(2)(b)(111); see also Babiak, supra note 13, at 128 (referring to buyer's limitations).

104. See CISG, art. 48(2)-(3); Schneider, supra note 23, at 87-88 (cautioning that additional time does not convert a minor delay or non-conformity into a fundamental breach, but rather limits the available remedies during the period).

105. See CISG, art. 48(2)-(3).

106. See id.

107. See id., arts. 49(2)(a), 64(2)(a); Flechtner, supra note 40, at 84. The language of Article 49(2)(a) suggests that the "reasonable time" for avoidance starts running only upon buyer's actual subjective awareness of delivery. Id. at 108 n.149. See generally Honnold, 2d ed., supra note 1, at 317, for a fuller discussion on the reasonable time requirement.

108. CISG, art. 49(2)(a); see Rendell, supra note 9, at 34; see Flechtner, supra note 40, at 86.

109. That is, with respect to the seller's right to avoid the contract where the buyer has already paid.

110. See CISG, art. 64(2)(a); Babiak, supra note 13, at 132-33 (setting out buyer's guide to "fundamental breach"); Flechtner, supra note 40, at 86 (explaining reference to "fundamental breach").

111. CISG, art. 49(2)(b)(i). See Babiak, supra note 13, at 130; Flechtner, supra note 40, at 63, 84-85.

112. CISG, arts. 49(2)(b)(ii), 47(2). See Babiak, supra note 13, at 130; see also Flechtner, supra note 40, at 108 n.150. ("If the buyer has used the Nachfrist procedure, however, the reasonable time to avoid for breach other than late delivery begins to run after the date for performance set in the Nachfrist notice.").

113. CISG, arts. 49(2)(b)(iii), 48(2). Article 49(2)(b) reads as follows:

"(2) . . . [I]n cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so: . . . (b) in respect of any breach other than late delivery, within a reasonable time:

(i) after he knew or ought to have known of the breach;

(ii) after the expiration of any additional period of time fixed by the buyer in accordance with paragraph (1) of article 47, or after the seller has declared that he will not perform his obligations within such an additional period; or

(iii) after the expiration of any additional period of time indicated by the seller in accordance with paragraph (3) of article 48, or after the buyer has declared that he will not accept performance." Id. at art. 49(2)(b).

114. See id. at art. 49(2)(a).

115. See id. at art. 49(2)(b)(ii).

116. CISG, art. 64(2)(b). See Babiak, supra note 13, at 133; Rendell, supra note 9, at 36.

117. See CISG, art. 64(2)(b)(ii).

118. Id. at art. 39; Flechtner, supra note 40, at 85 ("In the case of non-conforming goods, . . . the buyer must give notice specifying the defects within a reasonable time."); Rendell, supra note 9, at 32 ("Failure to provide this notice will result in the loss by the buyer of his right to rely on lack of conformity in a contract dispute with the seller.").

119. See CISG, art. 39. For further discussion on Article 39, see Honnold, 2d ed., supra note 1, at 332-37; Babiak, supra note 13, at 130.

120. See CISG, art. 41. See, e.g., Rendell, supra note 9, at 43 n.57 ("An example of such a third party is a person disputing the seller's ownership or a secured creditor.").

121. See CISG, art. 42; Rendell, supra note 9, at 43 n.60 (explaining that seller may be in breach if the buyer's use of goods infringes on patent, copyright, or trademark rights).

122. CISG, art. 43(1). See Flechtner, supra note 40, at 103 ("[T]he Convention requires notice specifying the right or claim of the third party.").

123. This includes intellectual property rights.

124. See CISG, art. 43(1); Flechtner, supra note 40, at 108 n.237 ("An aggrieved buyer's failure to give the notice required by Article 43(1) is excused if the seller was aware of that party's right or claim and knew its nature.").

125. CISG, art. 82. See Babiak, supra note 13, at 136 (stating the three exceptions under Article 82: (1) reason for impossibility to return goods in substantially the same condition is not due to buyer's negligence or deliberate actions (2) goods perish because of required examination, or (3) goods have been sold/consumed in the normal course of business before buyer discovered or should have discovered the defect giving rise to the breach).

126. CISG, art. 82(2). See Babiak, supra note 13, at 136 (explaining that buyer loses right to declare the contract avoided in cases where he cannot make restitution of the goods in substantially the same condition in which he received them).

127. See CISG, art. 82(2); Rendell, supra note 9, at 37-38 ("A buyer may lose his right to declare a contract avoided if, under Article 82, it is impossible for him to make restitution of the goods substantially in the condition in which he received them.").

128. By analogy to Article 82(1), the seller may also lose the right to declare the contract avoided if "it is impossible for him to make restitution of the goods substantially in the condition in which he received them." CISG, art. 82. There is, however, no express provision on this point.

129. See CISG, art. 46; Alejandro M. Garro, Reconciliation of Legal Traditions in the U.N. Convention on Contracts for the International Sale of Goods, 23 Int'l Law. 443, 458 (1989) ("Article 46 confers the buyer the right to demand specific performance of the seller's obligations to deliver the goods and the documents and transfer ownership over the goods.").

130. See CISG, art. 46; Schneider, supra note 23, at 80 (CISG allows a buyer to require a seller cure a timely but non-conforming tender by repair or additional delivery if request is not unreasonable).

131. See CISG, art. 46; Rendell, supra note 9, at 33 (stating that the buyer may require the seller to remedy the non-conformity).

132. See CISG, art. 46.

133. See id. at art. 62; Garro, supra note 129, at 458 ("Article 62 entitles the seller to require the buyer to pay the price and take delivery or perform his other obligations.").

134. See supra notes 46-54 and accompanying text (discussing the interplay between Articles 47, 46 and 62). See also Garro, supra note 129, at 483 n.69 (Articles 46 and 62 "expressly limit the right to specific performance to cases of fundamental breach, or where the aggrieved party has resorted to an inconsistent alternative remedy"); Amy H. Kastely, The Right to Require Performance in International Sales: Towards an International Interpretation of the Vienna Convention, 63 Wash. L. Rev., 607, 617-24 (1988) (discussing limitations on right to performance under CISG Articles 42 and 62).

135. CISG, art. 81. See Rendell, supra note 9, at 37 ("Article 81 provides that avoidance of the contract releases both parties from their obligations, subject to any damages that may be due.").

136. See CISG, art. 81(1). See also Babiak, supra note 13, at 136 ("Once the contract is declared avoided, both parties are released from their contractual duties.").

137. See CISG, art. 81(1); Flechtner, supra note 40, at 65 ("If the contract is avoided because the buyer has committed a fundamental breach or has failed to accept or pay in response to a Nachfrist notice, the seller is relieved of responsibility to perform under the contract.").

138. See CISG, art. 81(1); Rendell, supra note 9, at 37 ("Avoidance, . . . does not affect dispute settlement provisions in the contract (e.g., an arbitration clause), or a party's duty to take steps to preserve the goods.").

139. See CISG, art. 81(1). See also B. Blair Crawford et al., New Rules for Contracting in the Global Marketplace: The United Nations Convention for the International Sale of Goods, C395 ALI-ABI 115,132 (comparing avoidance of contracts under the CISG and the UCC; both discharge the buyer, but carry different burdens).

140. See CISG, art. 8; Flechtner, supra note 40, at 79 ("Avoidance releases both parties from their performance obligations under the contract, Ôsubject to any damages which may be due'"). See also Schneider, supra note 23, at 69 (discussing "fundamental breach" under CISG compared with breach under the Uniform Commercial Code).

141. See CISG, art. 81(1); Babiak, supra note 13, at 136 ("If the contract is declared avoided avoidance will not affect contractual provisions specifying the parties remedies available upon avoidance or the setting of their dispute.").

142. See CISG, art. 81(1); Rendell, supra note 9, at 37 ("When a party commits a fundamental breach, the other party does not waive the right to damages under Articles 75 and 76 by avoiding the contract.").

143. See CISG, arts. 81(1), 49(1)(a).

144. But see Rendell, supra note 9, at 38 ("The Convention, however, imposes a duty on the aggrieved party to mitigate the loss. If he fails to mitigate he may suffer a reduction in damages.").

145. See CISG, art. 74 (governing damages in general); Babiak, supra note 13, at 138 ("Article 74 allows an injured party to recover damages equal to the loss suffered as a consequence of the breach plus lost profit.").

146. See CISG, art. 76 (providing that damages are the difference between the contract price and resale price). See, e.g., Rendell, supra note 9, at 38 ("If, following avoidance, the buyer has bought goods in replacement, or the seller has resold the goods, the aggrieved buyer or seller may recover the difference between the contract price and the price in the substitute transaction, including any further damages recoverable under Article 74.").

147. See CISG, art. 76 (providing that damages are the difference between the contract price and market price at the time of avoidance); Flechtner, supra note 40, at 98 ("Article 76 permits a party that has not entered into a substitute transaction to claim damages measured by the difference between the price fixed by the contract and the current . . . market price.").

148. See CISG, art. 81. See, e.g., Rendell, supra note 9, at 37 ("Avoidance . . . does not affect dispute settlement provisions in the contract (e.g., an arbitration clause) or a party's duty to take steps to preserve the goods.").

149. See John O. Honnold, On the Road to Unification of the Law of Sales, Forum International, No. 2, June 1983, 8 (explaining Article 81(1) of the Convention).

150. Id.

151. Id. (emphasis added) (explaining Article 21(2) of the Rules). For the UNCITRAL Arbital Rules, see Pieter Sanders, Procedures and Practices Under the UNCITRAL Rules, 27 Am. J. Comp. L. 453, 461-64 (1979).

152. See CISG, art. 81(1); Babiak, supra note 13, at 136 ("If the contract is declared avoided, avoidance will not affect contractual provisions specifying the parties remedies available upon avoidance or the settling of their dispute.").

153. See CISG, art. 81(1); Flechtner, supra note 40, at 79 ("Avoidance does not invalidate contractual provisions which govern either dispute resolutions or the rights and obligations of the parties consequent upon avoidance of the contract.").

154. See CISG, art. 81(1); Flechtner, supra note 40, at 79 ("Provisions excluding consequential damages, providing for liquidated damages or specifying a limited or exclusive remedy . . . survive avoidance."); see also Babiak, supra note 13, at 139 (citing specific provisions to be used as one of the three formulas to calculate damages; (1) cover damages, (2) market-based damages, and (3) "unique goods" damages).

155. See CISG, art. 81(1); Babiak, supra note 13, at 141 ("When parties choose the CISG to govern their contract, issues with regard to fundamental breach should be specifically addressed in the contract."); Rendell, supra note 9, at 38 (stating that parties are free under Article 6 to "derogate from or vary the effect of any of the Convention's provisions").

156. See CISG, art. 81(2); Babiak, supra note 13, at 136 ("Restitution is available to the party who declares the contract avoided as well as the party alleged to be in breach.").

157. See CISG, art. 81(2); Babiak, supra note 13, at 136 ("each party must give up that which he has received under the contract").

158. Regardless of whether the performance is defective. See, e.g. Flechtner, supra note 40, at 63. "If the seller has delivered goods, an avoiding buyer must preserve and return the goods, although it may retain them until reimbursed for reasonable expenses of preservation." Id.

159. See CISG, art. 81(2).

160. See id.; Rendell, supra note 9, at 37 ("This right of restitution . . . may be exercised by either party to a contract, and is not limited to the aggrieved party.").

161. See id. (stating that if seller has delivered all or a portion of the goods, he may claim restitution for what he has supplied).

162. See id. See also Babiak, supra note 13, at 136 ("[R]estitution may be recovered after avoidance.").

163. See CISG, art. 81(2); Babiak, supra note 13, at 136 (explaining seller's right to have seller's goods returned by buyer).

164. See CISG, art. 81(2); Flechtner, supra note 40, at 82 (stressing the seller's obligation to make restitution of the buyer's prepayment).

165. See CISG, art. 84(1); Babiak, supra note 13, at 136 ("If the contract is declared avoided the seller may be required by the buyer to refund any money the buyer has paid as restitution. In addition, the seller will also have to pay interest on the money paid starting from the date the price was paid."); but see id. at 143 n.70 ("[n]either Article 84 nor any other CISG provision explains what rate of interest is to be paid or how it is to be calculated.").

166. See CISG, art. 84(1); Babiak, supra note 13, at 136 (explaining that for an avoided contract, the buyer may receive interest on the buyer's payment from the seller).

167. See CISG, art. 86(1); Flechtner, supra note 40, at 81 ("An avoiding buyer that has received goods must take reasonable steps to preserve them, although it is entitled to reimbursement for its reasonable expenses.").

168. CISG, art. 86(1); Flechtner, supra note 40, at 81 (urging that there is no requirement to incur potentially uncollectable preservation expenses).

169. See CISG, art. 86(2); Flechtner, supra note 40, at 81 (explaining that seller's actions may constitute an unreasonable delay in taking the goods back, thereby affording the buyer the right to sell the goods for the seller's account).

170. See CISG, art. 86(2); Flechtner, supra note 40, at 108 n.131 (explaining that a buyer must take possession of and preserve the goods which were delivered).

171. See CISG, art. 88(2); Flechtner, supra note 40, at 105 ("Where the goods are subject to rapid deterioration or their preservation would involve unreasonable expense, Article 88(2) requires the seller to take reasonable measures to sell them after giving notice [t]o the extent possible.").

172. See CISG, art. 88(2) ("reasonable measures" would be facilitated by a local sale, where delivery would be immediate and thus preserve the goods). See also Flechtner, supra note 40, at 105.

173. See CISG, arts. 81(1), 82(1); supra notes 125-28 (discussing Article 82).

174. See CISG, art. 86(1); Babiak, supra note 13, at 136 ("A buyer will lose his right to declare the contract avoided . . . if he cannot make restitution of the goods in substantially the same condition in which he received them.").

175. See CISG, art. 86(1); Flechtner, supra note 40, at 81 ("If the seller refuses to make restitution, the buyer can . . . withhold the goods.").

176. CISG, art. 84(2). Article 84 provides that:

"(1) If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid.

"(2) The buyer must account to the seller for all benefits which he has derived from the goods or part of them:

(a) if he must make restitution of the goods or part of them; or

(b) if it is impossible for him to make restitution of all or part of the goods or to make restitution of all or part of the goods substantially in the condition in which he received them, but he has nevertheless declared the contract avoided or required the seller to deliver substitute goods." Id.

177. See CISG, art. 88(3); Flechtner, supra note 40, at 105 ("A nonavoiding seller who has exercised its option to sell under Article 88(1) or who has complied with its obligation to sell under Article 88(2) can sue for the price of the goods, but must Ôaccount' to the buyer for proceeds of the sale which exceed the reasonable expenses of preserving and selling the goods.").

178. See CISG, art. 88(3).

179. Id. at art. 84(2). See Babiak, supra note 13, at 137 ("[I]f the seller has delivered the goods to the buyer and the contract is thereafter declared avoided the buyer may have to account to the seller for all benefits he has derived from the goods.").

180. See CISG, art. 84(1); Flechtner, supra note 40, at 82. (The seller has an obligation to make restitution of the buyer's prepayment.).

181. See supra note 11; see generally Timothy Gelatt & Laurence Bates, Force Majeure, Termination and Dispute Resolution: Contract Issues with a New Relevance, July 1989, at 9 (listing circumstances under which a contract may be canceled).

182. See FECL, supra note 11, art. 29. This translation of Article 29 quoted is the author's own. An alternative translation reads as follows: ". . . (1) The other party has breached the contract, causing the expected economic interests out of the conclusion of the contract to be seriously affected. . . ." Other available translations fail to translate the word "yizhi" between the breach and the consequences. Such an example appears at 1 China L. For Foreign Bus. 5-550, pp.6, 633, reads as follows:

"Article 29. A party is entitled to inform the other party to cancel the contract if one of the following situations occurs:

(1) The expected economic interests are infringed seriously for the breach of the contract by the other party. . . ." Id.

183. See FECL, supra note 182; Zhang Yuqing & James S. McLean, China's Foreign Economic Contract Law: Its Significance and Analysis, 8 Nw. J. Int'l L. & Bus. 120, 139-40 (1987) (discussing the significant changes resulting from the conversion of China's traditional nonmarket economy (NME) to a market economy, particularly China's FECL). See also Babiak, supra note 13, at 139-140 ("The FECL further provides that a party is entitled to inform the other party of what is, in effect, unilateral cancellation of the contract by reason of breach . . .").

184. Compare FECL, art. 29(1) (discussed supra note 182) with CISG, arts. 49(1) (discussed supra 10-17, 55-87 and accompanying text) and 64(1) (discussed supra notes 43-45, 54-88 and accompanying text).

185. See infra notes 189-194.

186. Compare FECL, art. 29(1) (discussed supra at note 182) with CISG, art. 25 (discussed supra at notes 18-38 and accompanying text).

187. See FECL, supra note 182, art. 29.

188. See id.; Gary Dernell, Direct Foreign Investment and Contractual Relations in the People's Republic of China, 6 DePaul Bus. L.J. 331, 354 (1988) (Innocent party can also suspend contract if it has conclusive evidence that other party is not capable, financially or otherwise, of fulfilling the contract.).

189. See CISG, art. 25; Flechtner, supra note 40, at 90 (delay or nonconformity results in such detriment . . . as substantially to deprive [the buyer] of what he is entitled to expect). See also Eva Diederichsen, Commentary, Oberlandesgericht, Frankfurt Am Main, 14 J.L. & Com. 177, 178 ("[Article 25 of the CISG] states that a breach of contract is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.").

190. See CISG, art. 25. See Rendell, supra note 9, at 34 ("A breach . . . will not be considered fundamental if the party in breach did not foresee and should not have foreseen such a result").

191. See CISG, art. 25. See also Rendell, supra note 9, at 34 ("[T]he buyer has the option to fix an additional reasonable period of time for performance by the seller.").

192. See FECL, supra note 182, art. 29; Lester Ross, Force Majeure and Related Doctrines of Excuse in Contract Law of the People's Republic of China, 5 J. Chinese L. 58, 80 (1991) (discussing the party's right to rescission of contract where the other party has breached the contract to the extent that the breach has "seriously affected the economic benefits expected . . .").

193. Compare CISG, arts. 47 and 63 (discussed supra at notes 46-66 and accompanying text) with FECL, art. 29(2) (discussed supra at notes 11 and 182).

194. See FECL, supra notes 11 and 182.

195. See id.; Flechtner, supra note 40, at 62 ("Article 49 [of the CISG] permits a buyer to avoid the contract whenever the seller commits a fundamental breach or fails to deliver in response to a Nachfrist ultimatum"). See also Ross, supra note 192, at 58 ("A party can rescind a contract under the FECL if the other party has not performed within a reasonable time period allowed for delayed performance.").

196. See Ross, supra note 192, at 80 (unclear whether additional time is a mandatory requirement).

197. See, e.g., Editor's notes, [1] 5 China L. & Prac. 34, n. 45 (June 1987).

198. See CISG, arts. 47(1) and 63(1).

199. See supra note 193; Rendell, supra note 9, at 34 ("If the seller does not deliver the goods within this additional time . . . there will be a fundamental breach.").

200. See FECL, supra note 11; Yuqing and McLean, supra note 183, at 137 (stating that the exception is excusable of performance under circumstances of force majeure or "events of an extraordinary character that were unforeseen and unavoidable by the party").

201. See CISG, arts. 49(1)(b)-2(b)(ii) and 64(1)(b)-2(b)(ii).

202. See FECL, supra note 11, art. 29(3); Yuqing & McLean, supra note 183, at 140 ("A party is entitled to inform the other party of unilateral cancellation of the contract by reason of breach, force majeure, or the occurrence of the condition subsequent.").

203. A local promulgation regarding foreign economic contracts.

204. Dalian Economic and Technological Development Zone Procedures for the Administration of Foreign Economic Contracts, issued Oct. 15, 1984 by the City Government of Dalian, reprinted & trans. in China L. for Foreign Bus. & 83-006, WESTLAW7 CHINALAW File No. 0260, art. 35(2).

205. See FECL, supra note 11, art. 29(3).

206. See, e.g., Purchase Contract, in China Trade Agreements 194-199 (Chiu ed. 1987), cl. 18 (providing that "[i]n case the [force majeure event] lasts for more than ten (10) weeks, the Buyers shall have the right to cancel the Contract"); Confirmation of Order, in China Trade Agreements 214-16, cl. (15)(5) (providing that "in case the accident/incident lasts for more than eight weeks, the Buyers shall have the right to cancel the Order").

207. See Mitchell & Stein, United States-China Commercial Contracts, 20 Int'l Law. 897, 911 (1986) (Typically, an FTC contract refers to a standard form contract prepared by a Chinese foreign trading company as a basis for commercial negotiation.).

208. Typically the seller.

209. See FECL, supra note 11, arts. 25, 29(3); Birden, supra note 11, at 430 ("Parties prevented from performing their obligations due to a force majeure event should request that the other party mitigate its damages and they should provide a certificate from a relevant authority within a reasonable period."). But see id. at 453 n.114 ("It is not clear what would happen should the relevant authorities refuse to give such a certificate.").

210. See, e.g., Jianming Shen, "Lianhe Guo Guoji Xiaoshou Hetong Gongyue" xia de Mianze Wenti (Exemption Issues under the United Nations Convention on Contracts for the International Sale of Goods), 1989 Ch. Y.B. Int'l L. 259-297 (1989) (discussing Article 79 of the Convention).

211. Compare CISG, art. 79(3) with FECL, supra note 182, art. 29(3).

212. See Yuqing and McLean, supra note 183, at 137 ("Party is relieved from the liability for delayed performance during the period of continued influence of the force majeure."). See also Rendell, supra note 9, at 40-41 (explaining that parties can agree to their own force majeure clause which would supersede Article 79 of the CISG).

213. See Rendell, supra note 9, at 40 (Article 79 provides that an event of force majeure only relieves the party in breach from liability for damages, it does not excuse him from performing his contractual obligations); Ross, supra note 192, at 80 (Article 29 permits party to rescind if "an event of force majeure has occurred with the result that none of the contractual obligations can be performed.").

214. See supra notes 70, 71 and accompanying text.

215. See CISG, art. 29(1) (providing that "[a] contract may be modified or terminated by the mere agreement of the parties"). Cf. Jack G. Stern, A Practitioners Guide to the United Nations Convention for the International Sale of Goods, 16 N.Y.U. J. Int'l. L. & Pol. 81, 98 (1983) (noting civil law requires sufficient cause for modification).

216. See Honnold, 2d ed., supra note 1, at 550-51. See also Amy H. Kastely, The Right to Require Performance in International Sales: Toward an International Interpretation of the Vienna Convention, 63 Wash. L. Rev. 607, 621 (1988) ("The effect of Article 29(1) in conjunction with Article 79(5) is to exempt the nonperforming party only from liability damages. All other remedies are available to the other party . . .").

217. See Honnold, 2d ed., supra note 1, at 389. See also Susie A. Malloy, The Inter-American Convention on the Law Applicable to International Contracts: Another Piece of the Puzzle of the Law Applicable to International Contracts, 19 Fordham Int'l L.J. 662, 667 (1995) (comparing international contract law under ICLAIC and the CISG).

218. See Honnold, 2d ed., supra note 1, at 389-90.

219. See CISG, art. 6. Furthermore, ". . . under Article 8, the contract will be interpreted to find the understanding that was reached." Anita Esslinger, Contracting in the Global Marketplace: The UN Conventions on Contracts for the International Sale of Goods and the Limitation Period in the International Sale of Goods, SB04 ALI-ABA 37, 53 (1996).

220. See CISG, art. 6.

221. See CISG, art. 4(a); Kastely, supra note 216, at 644-46 (analyzing the applicability and effect of this exception).

222. See FECL, supra note 11, art. 29(4). See also Dalian FEC Proc., supra note 204, art. 35(4) (providing to the same effect as Article 29(4) of the FECL, except that, under the Dalian FEC Procedures, the occurrence of conditions agreed upon in the contract may call for either alteration or cancellation of the contract).

223. See Purchase Contract, supra note 206, cl. 17(1)(a).

224. That is, avoidance of the contract by the buyer.

225. Purchase Contract, supra note 206, cl. 17(1)(a) (emphasis added).

226. See FECL, supra note 11, art. 29(1).

227. See CISG, art. 49(1)(a) - (2)(b)(i). See also Stephen J. Stein, Sales Contract and the Impact of the UN Convention on the International Sale of Goods on US Business, 592 PLI/Comm 259, 288 (1991) (noting the Convention is unavoidably imprecise in setting forth conditions under which revocation is acceptable).

228. See CISG, art. 49; Babiak, supra note 13, at 128 (additionally, the buyer must determine "whether there is sufficient evidence of a fundamental breach," otherwise, seller may sue to enforce the contract).

229. Confirmation of Order, supra note 206, cl. 15(4).

230. See id.

231. See Sales Contract, supra note 206, cl. 14, para. 1.

232. Id.

233. Id. at para. 3.

234. See FECL, supra notes 11 and 182.

235. By virtue of Article 6 of the Convention, the parties may: 1) exclude the application of, 2) derogate from, or 3) vary the effect of any Convention provision concerning the grounds and conditions for avoidance of the contract. See supra note 219 and accompanying text.

236. Economic Contracts Law of the People's Republic of China, adopted Dec. 13, 1981 by the 4th Sess. of the 5th National People's Congress, effective July 1, 1982, reprinted & translated in 1 China L. for Foreign Bus. & 5-500 [hereinafter ECL (1981 text)]. The ECL was amended at the 3rd Sess. of the Standing Committee of the NPC on September 2, 1993. The amended text of the ECL appears in People's Daily, Sept. 6, 1993, at 2 [hereinafter ECL, (1993 text)].

237. FECL governs contracts made between Chinese and foreigners while ECL will apply to contracts "between equity joint ventures, which are Chinese legal persons, and domestic Chinese suppliers, contractors, purchasers and other entities." Jamie P. Horsley, Investing in China in 1987 and Beyond, 405 PLI/Comm 59, 69 (1986).

238. Regulations on Contracts for the Purchase and Sale of Industrial and Mineral Products [hereinafter Indus. Sales Cont. Reg.], issued Jan. 23, 1984 by the State Council, Guo Fa (84) No. 15, reprinted in Cheng Yuan, Jingi Hetong Shiyong Shouce (Practical Handbook of Economic Contracts) 35-52 (Beijing: Workers' Publishing House, 1985), trans. in Commercial, Business and Trade Laws: People's Republic of China, Booklet 13 33-65 (New York: Oceana Publications, Inc., Aug. 1985). See Wang Jun, Punitive and Compensatory Contract Damages: A Comparative Study of UCC, Chinese, and International Law, 29 Loy. L.A. L. Rev. 1071, 1073 (1996); Perry Keller, Sources of Order in Chinese Law, 42 Am. J. Comp. L. 711, 740, n.142 (1994); Ross, supra note 192, at 76 n.55.

239. See Regulations on Contracts for the Purchase and Sale of Agricultural and other Related Products [hereinafter Agric. Sales Cont. Reg.], issued Jan. 23, 1984 by the State Council, reprinted in Cheng Yuan, supra note 238, at 101-109.

240. See Lucie Cheng & Arthur Rossett, Contract With A Chinese Face: Socially Embedded Factors in the Transformation from Hierarchy to Market, 1978-1989, 5 J. Chinese L. 143, 206 (1991); Jun, supra note 238, at 1073 n.14; Keller, supra note 238, at 740 n.142; Ross, supra note 192, at 76.

241. Compare ECL, supra note 236, art. 27, with CISG, supra note 1, art. 49, and FECL, supra note 11, art. 29. See generally Ning Fu, Remedies Under Chinese Contract Law, 2-SPG Int'l Legal Persp. 1, 18-19 (1990) (listing defenses in an ECL case against party seeking to enforce a contract).

242. ECL (1981 text), supra note 236. See Ross, supra note 192, at 73 (discussing the various subsections of Article 27). Cf. ECL, translated in 2 China L. Rep., 61-82 (1982). According to this translation Article 27(5) states, "[a]n economic contract may be changed or canceled . . . when one party breaks the contract, and it has become impossible to fulfill the economic contract." Id. (emphasis added).

243. See Gary J. Dernelle, Note, Direct Foreign Investment and Contractual Relations in the People's Republic of China, 6 DePaul Bus. L.J. 331, 346 n.109 (1994) ("Because the ECL is applicable to economic relations between Chinese Legal Persons, state planning is a fundamental element of the Economic Contracts Law.").

244. ECL (1993 text), art. 26.

245. See CISG, supra note 1, art. 49(1)(a) ("[t]he buyer may declare the contract avoided: (a) if the failure of the seller to perform any of his obligations under the contract . . . amounts to a fundamental breach of the contract").

246. See supra notes 238, 245.

247. See id.

248. See ECL (1993 text), art. 26(3).

249. Compare CISG, supra note 1, art. 26 with ECL (1981 text), supra note 236.

250. Indus. Sales Cont. Reg., supra note 238.

251. See Agric. Sales Cont. Reg., supra note 239.

252. See ECL, art. 27(1); ECL (1993 text), art. 26(1).

253. See ECL art. 27(5).

254. See ECL (1993 text), art. 26(3).

255. See Agric. Sales Cont. Reg., supra note 239, art. 11(2); Indus. Sales Cont. Reg., supra note 238, art. 8(2).

256. See id.

257. See CISG, supra note 1, art. 26; Babiak, supra note 13, at 126 (discussing what constitutes sufficient notice); Ferrari, supra note 32, at 100 (stating that according to Article 39, it seems that the failure to give proper notice would bar the full range of remedies including avoidance of the contract).

258. Originating from the German law, a Nachfrist is a demand for performance within a set period of time. See Steven Walt, For Specific Performance Under the United Nations Sales Convention, 26 Tex. Int'l L.J. 211, 251 n.37 (1991) ("Such relief is unavailable under German law after the expiration of a Nachfrist."); Schneider, supra note 23, at 89; Stephen E. Camisa, Comment, From Moscow to Moscow: Primary Contractual Considerations for the International Sale of Goods, 27 Idaho L. Rev. 347, 352 (1990) ("The CISG allows time for the seller to cure defects based upon the German concept of ÔNachfrist,' meaning a right to cure.").

259. See ECL (1993 text), art. 26, para. 2.

260. See Gabriel and Wessman, supra note 52, at 1791 (The CISG adopts the Nachfrist concept of notice.).

261. See Indus. Sales Cont. Reg., supra note 238, art. 27(2).

262. Compare Agric. Sales Cont. Reg., supra note 239, art. 17 with Indus. Sales Cont. Reg., supra note 238, art. 27(2).

263. See Agric. Sales Cont. Reg., supra note 239, art. 17(4); Jun, supra note 240, at 1082 (stressing importance of achieving national ecomic goals provides basis for imposing punitive damages as a means of preventing breach of native economic contracts).

264. See Indus. Sales Cont. Reg., supra note 238, art. 27(2).

265. See ECL (1981 text), supra note 236, art. 27; Indus. Sales Cont. Reg., supra note 238, art. 27(2); Agric. Sales Cont. Reg., supra note 239, art. 17(4).

266. See CISG, supra note 1, art. 49(2).

267. See Indus. Sales Cont. Reg., supra note 238, art. 27(2).

268. See id. The Regulations merely give the buyer fifteen days to consider the notice or request of the seller, but provide no "time" to the seller to effectuate dispatch if the buyer agrees to accept delivery or fails to respond within fifteen days. Id.

269. See CISG, supra note 1, art. 48(2),(3); Schneider, supra note 23, at 78.

270. See id. Provided that the contract is avoidable under Article 49 of the Convention.

271. See CISG art. 48(2) ("If the seller requests the buyer to make known whether he will accept performance and the buyer does not comply with the request within a reasonable time, the seller may perform within the time indicated in his request.").

272. See Honnold, 2d ed., supra note 1, at 378-79. Likewise, in the case of late delivery, more contracts will be avoidable under the ECL and Regulations than under the Convention and/or FECL. Id.; Schnieder, supra note 23, at 78. Cf. Indus. Sales Cont. Reg. supra note 238, art. 27(2).

273. Dry Peppers Case (title added), discussed in YT An Shuo" -JingiX Hjtong F" (Law Through the Cases - Economic Contracts Law 68-69 (Beijing: People's Publishing House, 1986).

274. See id.

275. See id.

276. See Rendell, supra note 9, at 31 (The buyer is able to avoid the contract only when the seller's breach is fundamental.); Honnold, 2d ed., supra note 1, at 267.

277. See Red Bricks Case (title added), discussed in Yi An Shuo Fa. supra note 273, at 34-35 (hereinafter cited as Red Bricks Case).

278. See Red Bricks Case, supra note 277.

279. See id.

280. See id.

281. See Red Bricks Case, supra note 277.

282. See id.

283. See id.

284. See id.

285. See Red Bricks Case, supra note 277.

286. See id.

287. See CISG, arts. 51(2), 72(1); FECL, supra note 11, art. 29(1).

288. See FECL, supra note 11, art. 29, para. 1; see also ECL (1981 text), supra note 236, art. 27, para. 2; ECL (1993 text), supra note 236, art. 26, para. 2; Indus. Sales Cont. Reg., supra note 238, art. 8(2); Agric. Sales Cont. Reg., supra note 239, art. 11(2).

289. See supra notes 90-94 and accompanying text (discussing CISG Article 26).

290. See William H. Lawrence & John H. Mihan, The Effect of Abrogating the Holder-in-Due-Course-Doctrine on the Commercialization of Innovative Consumer Products, 64 B.U. L. Rev. 325, 374 n.34 (1984) ("Where the required notice is included, it becomes a part of the contract."); see, e.g., Confirmation of Order, supra note 206, cl. 15(5).

291. Compare CISG, arts. 47(2) and 63(2) (discussed supra at notes 46-54 and accompanying text) with FECL, supra notes 11 and 182, art. 29(2).

292. See FECL, supra note 11, art. 29(2). See also Ross, supra note 192, at 79 (describing the list of circumstance included in Article 29 which provides the right to inform the other party of a recession).

293. See Sales Contract, in China Trade Agreements, supra 206, at cl. 14, para. 1 (providing that the buyers may cancel the contract only at the expiration of the 30 days of contractual grace period following the seller's failure to deliver at the time for performance fixed in the contract). See, e.g., Robert W. Emerson, Franchise Contract Clauses and the Franchiser's Duty of Care Towards its Franchisees, 72 N.C. L. Rev. 905, 951 (1994) (expressing general practice of most franchisers does not permit termination, except for good cause, until after the expiration of the grace period, to allow franchisees to correct a breach).

294. See CISG, art. 48.

295. See Indus. Sales Cont. Reg., supra note 238, art. 27(2); Agric. Sales Cont. Reg., supra note 239, art. 17(4). See also supra notes 258-261 and accompanying text (discussing the implementing Regulations).

296. See supra notes 107-201 and accompanying text (discussing CISG Articles 49(2) and 64(2)).

297. See FECL, supra note 11, art. 29; ECL, supra note 237, art. 27.

298. See supra notes 118-119 and accompanying text (discussing CISG Article 39). Developed States interpret Article 39 to require strict notice of non conformity. See, e.g., Summary Records of the Meeting of the First Committee, 16th mtg., U.N. Doc. A/Conf. 97/C.1/Sr.16, reprinted in U.N. Official Record: Documents of the Conference and Summary Records of the Plenary Meetings and of the Meetings of the Main Committee, at 318, U.N. Doc. A/Conf. 97/19, U.N. Sales No. E.81.IV.3 (1981); Summary Records, 17th mtg., U.N. Doc. A/Conf. 97/c.1/SR.17, reprinted in U.N. Official Records, at 343; Summary Records, 21st mtg., U.N. Doc. A/Conf. 97/C.1/SR.21, reprinted in U.N. Official Records, at 345.

299. See Indus. Sales Cont. Reg., supra note 238, art. 15(1).

300. Id. at art. 15(4).

301. Id. at art. 15(5).

302. Id. at cl. 16(2).

303. See supra notes 120-24, and accompanying text (discussing CISG Article 43).

304. See supra notes 125-28, and accompanying text (discussing CISG Article 82).

305. See supra notes 129-34, and accompanying text (discussing CISG Articles 46 and 62).

306. See FECL, supra note 11, art. 34.

307. See id. at art. 34.

308. See supra notes 136-82, and accompanying text (discussing the effects of cancellation under the CISG).

309. See FECL, supra note 11, art. 34.

310. Id. at art. 35.

311. Id. at art. 36.

312. See supra notes 136-82, and accompanying text (discussing the effects of cancellation under the CISG); FECL, supra notes 11 and 182, arts. 34-36; see also Birden, supra note 11, at 413 (comparing the two distinct sets of nationally-applied contract and technology transfer contract laws (ECL and FECL)).

313. Minfa Tongze (The Common Rules of Civil Law of the People's Republic of China), adopted Apr. 12, 1986 by the 4th Sess. of the 6th NPC, effective Jan. 1, 1987, translated and reprinted in 2 Laws of the People's Republic of China 243 (Beijing: Foreign Languages Publishing House, 1987) (arts. 111-134).

314. ECL (1993 text), supra note 236, art. 26, para. 2; ECL (1981 text), supra note 236, art. 27, para. 2.

315. Resorting to the Chinese laws and regulations may be necessary to understand correctly whether a specific provision is mandatory. Yuqing and McLean, supra note 183, at 130. See, e.g., Nicholas Kristoff, What's The Law in China? It's No Secret (Finally), N.Y. Times, Nov. 20, 1988, at A21, col.1 (stressing that since Chinese statutes and regulations have not been fully assembled and codified, it is necessary to consult many partial and overlapping compendium).

316. See CISG, art. 25.

317. See FECL, supra note 11, art. 29(1).

318. See Yuqing & McLean, supra note 183, at 310 (discussing the "serious breach" approach of FECL). See also B. Blair Crawford and Janet L. Rich, New Rules for Contracting in the Global Marketplace the United Nations Convention on Contracts for the International Sale of Goods ("CISG"), C395 ALI-ABA, 115, 132 (1989).

319. See CISG, arts. 47, 63.

320. See FECL, supra note 11, art. 29(2) (indicating that the injured party can cancel when the breaching party has had the reasonable time that is allowed for delayed performance).

321. See CISG, arts. 49(1)(b), 49(2)(b)(ii), 64(1)(b) and 64(2)(b)(ii) (indicating that the party seeking to avoid the contract does not have to prove the seriousness and effects of the breach).

322. Because it applies only to late delivery.

323. See supra notes 196-201, and accompanying text (explaining that there is no need to establish the seriousness of the breach or noncompliance with a Nachfrist notice).

324. See ECL (1993 text), supra note 236, art. 26, paras. 1(3), 2.

325. See FECL, supra notes 11 and 182, art. 29(3)-(4).


Pace Law School Institute of International Commercial Law - Last updated February 15, 2000
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